<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY , 1996
REGISTRATION NO. 333-2162
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PCS DEVELOPMENT CORPORATION
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4812 57-1010782
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
15 SOUTH MAIN STREET, SUITE 810,
GREENVILLE, SOUTH CAROLINA 29601
(864) 235-0940
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CECIL L. DUFFIE, JR.
VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PCS DEVELOPMENT CORPORATION
15 SOUTH MAIN STREET, STE. 810
GREENVILLE, SOUTH CAROLINA 29601
(864) 235-0940
(864) 235-0841 (FAX)
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
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<S> <C>
JEFFREY A. ALLRED, ESQ. VINCENT PAGANO, JR., ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. SIMPSON THACHER & BARTLETT
400 COLONY SQUARE 425 LEXINGTON AVENUE
1201 PEACHTREE STREET NEW YORK, NEW YORK 10017-3954
ATLANTA, GEORGIA 30361 (212) 455-2000
(404) 817-6000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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 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. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Units(3)....................................................... $150,000,000 (2)
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% Senior Discount Notes due 2006(3)....................... -- --
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Warrants to purchase Common Stock(3)......................... -- --
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Common Stock issuable upon exercise of the Warrants.......... -- --
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(1) Estimated solely for the purpose of determining the registration fee.
(2) Calculated pursuant to Rule 457 under the Securities Act of 1933, as amended
(the "Securities Act"). A registration fee of $51,724 was previously paid by
the Company.
(3) Each Unit will consist of Senior Discount Notes Due 2006 and Warrants to
purchase Class B Common Stock. The Senior Discount Notes and Warrants will
be offered only in Units.
---------------------
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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-K
<TABLE>
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ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside front and outside back cover pages
of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary; Risk Factors; Selected
Consolidated Financial Data
4. Use of Proceeds............................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price............ Underwriting
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Not Applicable
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered............................... Outside Front Cover Page; Prospectus
Summary; Description of the Units;
Description of the Notes; Description of
the Warrants; Description of Capital
Stock
10. Interests of Named Experts and Counsel..... Legal Matters
11. Information with Respect to the
Registrant............................... Outside Front Cover Page; Prospectus
Summary; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Principal Stockholders;
Description of the Units; Description of
the Notes; Description of the Warrants;
Description of Capital Stock;
Consolidated Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
<PAGE> 3
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 JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
Subject to Completion, dated May , 1996
PROSPECTUS
UNITS
[PCSD PCS DEVELOPMENT CORPORATION LOGO]
$150,000,000 INITIAL ACCRETED VALUE OF % SENIOR DISCOUNT NOTES DUE 2006
WITH
WARRANTS TO PURCHASE SHARES OF CLASS B COMMON STOCK
---------------------------
PCS Development Corporation ("PCSD" or the "Company") is offering (the
"Offering") Units (the "Units"), each consisting of $1,000 principal
amount at maturity of % Senior Discount Notes due 2006 (the "Notes") and
warrant[s] (the "Warrants") to purchase share[s] of Class B
Common Stock, par value $1.00 per share, of PCSD (the "Class B Common Stock").
The Notes and the Warrants will not be separately transferable until the
Separability Date (as defined herein) which shall be no later than ,
1996. The Units, the Notes and the Warrants are sometimes collectively referred
to as the "Securities."
The Notes will mature on , 2006. The Notes will be issued at a
substantial discount from their principal amount, and interest will not accrue
on the Notes prior to , 2001. Thereafter, interest on the Notes will
be payable in cash semi-annually on and of each year,
commencing , 2001. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after , 2001, at the
redemption prices set forth herein, plus accrued and unpaid interest, if any, to
the date of redemption. Additionally, prior to , 1999, the Company
may on any one or more occasions redeem up to 33% of the aggregate principal
amount of the Notes at a redemption price of % of the Accreted Value (as
defined herein) thereof with the net proceeds of either (i) one or more public
offerings of common stock of the Company registered under the Securities Act of
1933, as amended (the "Securities Act") or (ii) a sale by the Company of at
least $25.0 million of its Capital Stock (as defined herein) to a Strategic
Equity Investor (as defined herein) in a single transaction. The Notes will not
be subject to any mandatory sinking fund. In the event of a Change of Control
(as defined herein), each holder of the Notes will have the right, at such
holder's option, to require the Company to purchase such holder's Notes at a
purchase price equal to 101% of the Accreted Value thereof, plus accrued and
unpaid interest, if any, to the date of purchase.
The Notes will be senior, unsecured indebtedness of the Company, ranking
pari passu in right of payment with all existing and future unsecured,
unsubordinated obligations of the Company and will be senior in right of payment
to all existing and future subordinated indebtedness of the Company. Although
the Notes are titled "senior" securities, the Company has not issued, and does
not have any current firm arrangements to issue, any significant indebtedness to
which the Notes would be senior, other than the issuance of subordinated
indebtedness of the Company upon the conversion of its Series A Preferred Stock.
The Company is a holding company with no material assets other than the capital
stock of its subsidiary. The Notes will be obligations exclusively of the
Company; none of the Company's direct or indirect subsidiaries will have any
obligation to pay any amounts due with respect to the Notes or to make funds
available therefor. As such, the Notes will be structurally subordinated to all
liabilities of the Company's subsidiaries, including trade payables, capitalized
lease obligations and indebtedness that may be incurred by the Company's
subsidiaries under current or future bank credit facilities. The Offering is
conditioned upon the establishment by a subsidiary of the Company of a $225.0
million Credit Facility (as defined herein). At March 31, 1996, the Notes would
have been structurally subordinated to approximately $76.4 million of
liabilities of the Company's subsidiaries, excluding amounts available under the
Credit Facility. See "Description of the Notes -- Ranking."
Each Warrant will entitle the holder thereof to purchase one share of Class
B Common Stock of the Company, subject to adjustment under certain
circumstances, at an exercise price of $0.01 per share. The Warrants will
entitle the holders thereof initially to purchase, in the aggregate,
approximately % of the Common Stock of the Company, on a fully-diluted basis
immediately after the issuance of the Warrants. The Warrants will be exercisable
on or after the occurrence of an Exercise Event (as defined herein), which will
be no later than , 2005, and will expire 180 days after becoming
exercisable, but in any event not later than , 2006.
---------------------------
FOR A DISCUSSION OF CERTAIN RISKS TO BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE 11.
---------------------------
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.
<TABLE>
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Price to Underwriting Proceeds to
Public(1) Discount (2) Company(1)(3)
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<S> <C> <C> <C>
Per Unit.................................... $ % %
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Total....................................... $ $ $
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(1) Plus accreted original issue discount on the Notes, if any, from
, 1996.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $1.5 million.
---------------------------
The Units offered by this Prospectus are offered by the Underwriters subject
to prior sale, withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by the Underwriters and to certain further
conditions. It is expected that delivery of the Units will be made at the
offices of Lehman Brothers Inc., New York, New York, on or about ,
1996.
---------------------------
LEHMAN BROTHERS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CHASE SECURITIES INC.
TORONTO DOMINION SECURITIES
, 1996 (USA) INC.
<PAGE> 4
[INSERT ARTWORK]
The Indenture pursuant to which the Notes will be issued (the "Indenture")
and the Warrant Agreement pursuant to which the Warrants will be issued (the
"Warrant Agreement") will require the Company, and the Company intends, to
distribute to the registered holders of the Notes and the registered holders of
the Warrants annual reports containing audited consolidated financial statements
and a report thereon by the Company's independent public accountants and
quarterly reports containing unaudited condensed consolidated financial data for
the first three quarters of each fiscal year.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, NOTES
AND WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
---------------------
This Prospectus includes product names and trademarks of the Company and of
other organizations.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
references in this Prospectus to "PCSD" and to the "Company" refer to PCS
Development Corporation and its consolidated subsidiaries. This Prospectus
contains certain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
of the factors set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
PCSD intends to become a leading provider of wireless narrowband personal
communications services ("PCS") in the United States. Organized in 1994, the
Company was one of only five bidders in the FCC's 1994 narrowband PCS auctions
that succeeded in acquiring licenses for paired 50 kHz inbound/50 kHz outbound
frequencies covering the entire United States and the U.S. territories,
including Puerto Rico and the U.S. Virgin Islands (the "Licenses"). PCSD intends
to employ the Licenses to offer a full array of two-way wireless advanced
messaging services. These services will include stored voice and data messaging
utilizing state-of-the-art InFLEXion(TM) technology developed by Motorola, Inc.
("Motorola"). The Company believes that its network, utilizing the InFLEXion(TM)
technology, will have significant advantages over traditional one-way paging
networks, including increased capacity, higher transmission speed and two-way
capability (allowing subscriber units to signal their location to the network).
This enhanced technology, in combination with the Company's nationwide coverage,
will enable PCSD to offer stored voice messaging, data messaging and other
services on a local, regional and nationwide basis.
The Company's first service, expected to be commercially available in the
first quarter of 1997, will be a stored voice messaging service. This service
will allow a subscriber to receive a high quality wireless transmission of a
sender's voice on a pager-like subscriber unit where the message can be stored
and retrieved for later playback. No other company currently offers this or any
other type of service commercially using the InFLEXion(TM) technology. Of the
four other companies with licenses for nationwide 50/50 kHz PCS spectrum, only
two, Paging Network, Inc. ("PageNet") and PageMart Nationwide, Inc.
("PageMart"), have announced an intention to offer stored voice messaging
services. Based on industry studies and the Company's proprietary market
research, management believes that stored voice messaging will be one of the
most widely accepted new paging services. A 1994 study conducted by FGI, Inc., a
leading wireless telecommunications market research firm ("FGI"), indicated that
stored voice messaging services could ultimately achieve a 20% penetration of
the U.S. population. Moreover, according to a 1995 Motorola study, approximately
84% of current paging subscribers would consider replacing their existing pager
for a voice messaging unit. A subsequent, more comprehensive market research
study conducted for the Company by FGI in 1996 indicated that 76% of current
paging subscribers are likely (40% somewhat likely and 36% very likely) to
purchase stored voice messaging at costs within the Company's anticipated price
ranges. Finally, management anticipates significant demand for its voice
messaging services based on the growing popularity of answering machines in U.S.
households and voice mail services in office environments. See
"Business -- Potential Market," "Business -- Distribution -- Pricing of Airtime
and Subscriber Units" and "Certain Transactions -- Relationship with FGI."
Following the commercial introduction of its stored voice messaging
service, the Company also plans to introduce in 1997 enhanced InFLEXion(TM) data
services. These services will allow subscribers to receive alphanumeric messages
of up to several thousand characters, compared to the 80 character limit typical
of one-way alphanumeric paging services available today and, eventually, will
enable message recipients to initiate brief alphanumeric responses.
PCSD plans to market local, regional and nationwide services initially
through indirect channels by forming marketing relationships with
telecommunications companies, including established paging companies that have
installed customer bases but that do not have the capability to deliver over
their networks the enhanced services that the Company plans to market. Unlike
the other companies that acquired licenses for
3
<PAGE> 6
nationwide 50/50 kHz PCS spectrum, PCSD does not offer one-way paging services.
Consequently, the Company believes that other paging companies desiring to offer
narrowband PCS services will be more likely to form marketing relationships with
PCSD than with these competitors. Consistent with the Company's indirect
marketing strategy, PCSD has formed marketing alliances with A+ Network, Inc.
("A+ Network") and Arch Communications Group, Inc. ("Arch Communications")
(collectively, the "Paging Company Investors"), which together own 14.5% of the
outstanding capital stock of the Company and have an aggregate of approximately
3 million existing subscribers. In addition, as of May 21, 1996, the Company has
signed memoranda of understanding to form marketing relationships with 17 other
paging companies that have an aggregate of approximately 13 million existing
subscribers. These 16 million subscribers represent approximately one-half of
all pagers currently in service in the United States. In addition, the Company
believes that other telecommunications companies, such as cellular and long
distance service providers, Enhanced Specialized Mobile Radio ("ESMR") operators
and Regional Bell Operating Companies ("RBOCs"), will also distribute the
Company's services together with their existing product offerings.
PCSD is currently designing and constructing its nationwide narrowband PCS
network, and is in the process of securing transmitter and receiver sites and
purchasing network infrastructure equipment from Motorola and Glenayre
Electronics, Inc. ("Glenayre"), two leading providers of paging equipment. The
Company has commenced network buildout in its initial test markets, Boston and
Atlanta, and anticipates that system tests will begin in the third quarter of
1996. The Company expects to have completed the buildout of its InFLEXion(TM)
network in the top ten BTAs (as defined herein) by the time of the commercial
introduction of the Company's stored voice messaging service, which is expected
to occur in the first quarter of 1997, and to have completed its nationwide
network buildout by the end of 1998.
To fund the acquisition of the Licenses, the buildout of its nationwide
narrowband PCS network and the commercial introduction of its services, PCSD
raised approximately $92.7 million in two private equity offerings, obtained
relatively low-cost financing from the Federal Communications Commission
("FCC"), and is in the process of entering into the Credit Facility and issuing
the Units. The Company raised $37.2 million in November 1994 from the sale of
its Common Stock (as defined herein) to the Paging Company Investors and other
financial partners and $55.5 million in November 1995 from the sale of Preferred
Stock (as defined herein) to an investor group which was led by Chemical Venture
Partners and which included several of the Company's initial investors. Because
the Company was considered a "Small Business" for purposes of the FCC narrowband
regional PCS auction, the Company is entitled to pay $72.7 million of the $90.9
million purchase price for the Licenses over ten years at a 7.5% annual interest
rate (the "FCC Obligation"). See "Description of FCC Auction Benefits -- "Small
Business" Status in FCC 900 MHz SMR Auction." In addition, concurrently with the
Offering, the Company will establish a secured Credit Facility in the amount of
$225.0 million. Upon completion of the Offering, the Company believes that its
cash balances, together with available borrowings under the Credit Facility,
will be adequate to fund the Company's expected capital expenditures necessary
to complete the buildout of its nationwide narrowband PCS network, to fund debt
service requirements and to fund other working capital requirements until such
time as the Company generates sufficient positive operating cash flow, which is
not expected to occur prior to 1999. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
PCSD's strategic objective is to become a leading provider of stored voice
and data messaging services in the United States. To achieve this objective, the
Company intends to offer competitively priced, easy-to-use voice and data
messaging services targeted at broad market segments. Key elements of the
Company's strategy include:
Nationwide spectrum position. Upon acquiring the Licenses, the
Company became one of only five companies with nationwide 50/50 kHz PCS
spectrum, thereby positioning itself to create a nationwide network for
wireless stored voice and enhanced data messaging services. The geographic
scope of the system should enable the Company to achieve significant
economies of scale as it attracts a large customer base by offering local,
regional and nationwide messaging services.
4
<PAGE> 7
Services with broad market appeal. The Company's stored voice and
data messaging services will offer the low-cost, long battery life and
portability advantages of current paging services. These services delivered
over the Company's InFLEXion(TM) network will also offer improved
functionality compared to traditional one-way paging such as high quality
transmission of voice messages, confirmation of message receipt to the
network, delivery of significantly longer alphanumeric messages and the
initiation of brief alphanumeric responses.
Established distribution channels. The Company expects to use
existing distribution channels to achieve rapid market penetration and
minimize marketing and selling expenses. PCSD has formed marketing
relationships with established paging companies and cellular operators and
plans to form marketing relationships with (i) other established paging
companies that have installed customer bases, (ii) other telecommunications
companies including cellular and long distance service providers, ESMR
operators and RBOCs, (iii) industry "integrators" such as voice mail and
e-mail system providers, interconnect dealers and computer industry value
added resellers and (iv) consumer mass marketing companies including
national retailers, telemarketing companies and commercial on-line
services.
Rapid network buildout. The Company expects to be among the first to
construct a nationwide narrowband PCS network utilizing InFLEXion(TM)
technology and to offer enhanced stored voice messaging services through
its network on a local, regional and nationwide basis. The Company has
already commenced network buildout in its initial test markets of Atlanta
and Boston and expects to have completed the buildout of its network in the
top ten BTAs by the time of the commercial introduction of the Company's
stored voice messaging service, which is expected to occur in the first
quarter of 1997. The Company plans to complete its nationwide network
buildout in the first quarter of 1998.
Low-cost provider. PCSD's network operation, marketing strategy and
administrative structure have been designed to support the Company's
efforts to be a low cost provider of its services. Management expects that
the capacity benefits of its nationwide network and its use of Motorola's
state-of-the-art InFLEXion(TM) technology will reduce its cost per unit of
network capacity compared to traditional one-way paging. PCSD also expects
its indirect distribution strategy to reduce the costs associated with
recruiting, training, compensating and managing a large in-house marketing
and sales staff. The Company will seek to control administrative costs
through a combination of centralized network management, customer service,
billing, credit, collections and accounting.
The Company has assembled an experienced management team to execute its
business strategy. Members of the senior management team have held managerial
positions with leading wireless telecommunications companies, including AT&T
Corp. ("AT&T"), Dial Page Inc. ("Dial Page"), GeoTek Communications, Inc.
("GeoTek"), MCI Communications, Inc. ("MCI"), Mobile Communications Corporation
of America ("MobileComm"), Motorola, PageNet, RAM Mobile Data, Inc. ("RAM Mobile
Data"), SkyTel Corporation ("SkyTel"), Sprint Corporation ("Sprint") and USA
Mobile Communications Holdings, Inc. ("USA Mobile"). PCSD's executive team
brings to the Company extensive experience in the development, design and
manufacture of wireless products, the construction and operation of wireless
networks and the sale and marketing of wireless services.
The Company's principal executive offices are located at 15 South Main
Street, Suite 810, Greenville, South Carolina 29601, and its telephone number is
(864) 235-0940.
5
<PAGE> 8
THE OFFERING
THE UNITS
Securities Offered......... Units consisting of $ aggregate
principal amount at maturity of % Senior
Discount Notes due 2006 and Warrants to purchase
shares of Class B Common Stock. Each Unit
consists of $1,000 principal amount at maturity of
Notes and Warrants to purchase
share[s] of Class B Common Stock.
Separability............... The Notes and the Warrants will not be separately
transferable until the Separability Date (as
defined herein), which shall be no later than
, 1996.
Use of Proceeds............ The net proceeds from the Offering are estimated to
be $143.2 million and will be used, together with
borrowings under the Credit Facility and existing
cash, principally to fund capital expenditures in
connection with the buildout of the Company's
nationwide PCS network, including the possible
acquisition of additional spectrum, to fund debt
service requirements and to fund other working
capital requirements. See "Use of Proceeds."
THE NOTES
Notes Offered.............. $ aggregate principal amount at maturity
of % Senior Discount Notes due 2006
Maturity Date.............. , 2006
Yield and Interest Rate.... % per annum (computed on a semi-annual bond
equivalent basis) calculated from ,
1996. No interest will accrue on the Notes prior to
, 2001. Commencing , 2001,
interest on the Notes will accrue at the rate of
% per annum and will be payable in cash
semi-annually on and ,
commencing , 2001 to holders of
record on the immediately preceding and
. See "Description of the
Notes -- General."
Optional Redemption........ The Notes will be redeemable, in whole or in part,
at the option of the Company at any time on or
after , 2001, at the redemption prices
set forth herein plus accrued and unpaid interest,
if any, to the date of redemption. Additionally,
prior to , 1999, the Company may redeem
up to 33% of the aggregate principal amount of the
Notes at a redemption price of % of the
Accreted Value (as defined herein) thereof, with
the net proceeds of either (A) one or more public
offerings of Common Stock (as defined in the
Indenture) of the Company or (B) a sale by the
Company of at least $25.0 million of its Capital
Stock (as defined herein) to a Strategic Equity
Investor (as defined herein) in a single
transaction; provided in each case that at least
67% of the original aggregate principal amount of
the Notes remains outstanding immediately after the
occurrence of any such redemption. See "Description
of the Notes -- Optional Redemption."
Mandatory Redemption....... None
6
<PAGE> 9
Ranking.................... The Notes will be senior, unsecured indebtedness of
the Company, ranking pari passu in right of payment
with all existing and future unsubordinated
unsecured indebtedness of the Company and senior in
right of payment to all existing and future
subordinated indebtedness of the Company. Although
the Notes are titled "senior" securities, the
Company has not issued, and does not have any
current firm arrangements to issue, any significant
indebtedness to which the Notes would be senior,
other than the issuance of subordinated
indebtedness of the Company upon conversion of the
Series A Preferred Stock. The Company is a holding
company with no material assets other than the
shares of stock of its direct wholly-owned
subsidiary. The Notes will be obligations
exclusively of the Company; none of the Company's
direct and indirect subsidiaries will have any
obligation to pay any amounts due with respect to
the Notes or to make funds available therefor. As
such, the Notes will be structurally subordinated
to all liabilities of the Company's direct and
indirect subsidiaries, including trade payables,
capitalized lease obligations and indebtedness that
may be incurred by the Company's subsidiaries under
current or future bank credit facilities. At March
31, 1996, the Notes would have been structurally
subordinated to approximately $76.4 million of
liabilities of the Company's subsidiaries,
excluding amounts available under the Credit
Facility. Although the Indenture under which the
Notes will be issued (the "Indenture") contains
certain covenants which limit the ability of the
Company and its subsidiaries to take certain
actions, these covenants permit the Company and its
subsidiaries, in certain circumstances, to incur
additional indebtedness and to grant liens on
certain assets. See "Risk Factors -- Holding
Company Structure; Structural Subordination of the
Notes," "Description of the Notes -- Ranking" and
"Description of the Notes -- Covenants."
Change of Control.......... In the event of a Change in Control (as defined
herein), the holders of the Notes will have the
right to require the Company to purchase their
Notes, in whole or in part, at a price equal to
101% of the Accreted Value thereof, together with
accrued and unpaid interest, if any, to the date of
purchase. See "Description of the
Notes -- Repurchase of Notes upon a Change of
Control."
Certain Covenants.......... The Indenture will contain certain covenants that,
among other things, will limit the ability of the
Company and its Restricted Subsidiaries (as defined
herein) to incur indebtedness, pay dividends, make
investments or other Restricted Payments (as
defined herein), issue or sell stock of Restricted
Subsidiaries, restrict the ability of Restricted
Subsidiaries to pay dividends to the Company,
engage in transactions with shareholders and
affiliates, create liens, sell assets, undertake
sale and leaseback transactions and engage in
mergers and consolidations. All of these
limitations, however, are subject to a number of
important qualifications and exceptions. The term
Restricted Subsidiaries will include initially all
of the Company's subsidiaries on the date hereof.
See "Corporate Reorganization and Structure" and
"Description of the Notes -- Covenants."
Original Issue
Discount................. The Notes will be issued at a substantial discount
from their principal amount and consequently will
be issued at an Original Issue Discount for
7
<PAGE> 10
federal income tax purposes. Consequently,
purchasers of the Notes generally will be required
to include amounts in gross income for federal
income tax purposes in advance of receipt of the
cash payments attributable to such income. See
"Certain Federal Income Tax Considerations."
Book-Entry; Delivery
and Form................. The Notes will initially be issued in the form of
one or more Global Notes held in book-entry form.
The Global Notes will be deposited with or on
behalf of The Depository Trust Company and
registered in the name of Cede & Co., as nominee
thereof. See "Description of the
Notes -- Book-Entry; Delivery and Form."
For additional information concerning the Notes, see "Description of the
Notes."
THE WARRANTS
Securities Offered......... Warrants which entitle the holders thereof
to acquire shares of Class B Common Stock
(the "Warrant Shares"). Upon consummation of the
Offering, the Class B Common Stock issuable upon
exercise of the Warrants collectively will
represent approximately % of the Company's
outstanding Class A Common Stock and Class B Common
Stock (collectively, the "Common Stock") on a
fully-diluted basis. Holders of the Company's Class
B Common Stock are not entitled to vote at any
meeting of stockholders for the election of
directors. The holders of the Company's Class A
Common Stock are entitled to elect 16 of the 17
members of the Company's Board of Directors and,
therefore, exert substantial control over matters
that are subject to the discretion of the Board of
Directors. However, shares of Class B Common Stock
may be exchanged for an equal number of shares of
Class A Common Stock immediately upon and after the
consummation of an Initial Public Offering (as
defined herein). See "Description of Capital
Stock."
Registration Rights........ Following an Exercise Event (as defined herein),
holders of the Warrant Shares will be entitled to
certain demand registration rights. Holders of
Warrant Shares will also have the right to include
such Warrant Shares in any registration statement
under the Securities Act filed by the Company
(other than a registration statement on Form S-4 or
S-8) for sale on the same terms and conditions as
the securities of the Company or any other selling
securityholder included therein. The foregoing
rights will be set forth in the Warrant
Registration Rights Agreement between the
Underwriters and the Company and will be subject to
certain conditions and other provisions.
Separation of Notes
and Warrants; Exercise... The Warrants will not be transferred separately
from the Notes prior to the Separability Date. The
"Separability Date" shall be the earliest of (i)
, 1996, (ii) such earlier date as may be
determined by Lehman Brothers Inc., (iii) in the
event of a Change of Control, the date the Company
mails notice thereof to holders of the Notes and
(iv) in the event of an Offer to Purchase in
connection with any Asset Sale (each as defined
herein), the date the Company mails notice thereof
to the holders of the Notes, at which time the
Notes and the Warrants will become separately
transferable. Each Warrant will entitle the holder
8
<PAGE> 11
thereof to purchase one share of Class B Common
Stock, subject to adjustment upon the occurrence of
certain events, at an exercise price of $0.01 per
share. The Warrants will be exercisable upon the
occurrence of an Exercise Event, which shall occur
on the earliest of (1) the occurrence of a Change
of Control (as defined under "Description of the
Warrants"), (2) the consummation of a Public Equity
Offering (as defined herein) after which there
shall exist a Public Market (as defined herein) and
(3) , 2005. See "Description of the
Warrants."
Expiration Date............ The Warrants will expire 180 days after becoming
exercisable, but in any event not later than
, 2006.
Offer to Repurchase........ Upon the occurrence of an Exercise Event, the
Company shall have the right to make an offer to
purchase all outstanding Warrants and Warrant
Shares in cash at a price equal to the Current
Market Value (as defined herein) thereof.
For additional information concerning the Warrants, see "Description of the
Warrants." For additional information concerning the Class B Common Stock, see
"Description of Capital Stock."
9
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data for the
Company as of the dates and for the periods indicated. The consolidated
financial data as of December 31, 1994 and 1995 and for the period from
September 21, 1994 (date of incorporation) to December 31, 1994 and for the year
ended December 31, 1995 were derived from the audited consolidated financial
statements of the Company. The consolidated financial data for the Company as of
March 31, 1996 and for the three months ended March 31, 1995 and 1996 have been
derived from unaudited consolidated financial statements of the Company. In the
opinion of management of the Company, such unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements referred to above and include all adjustments necessary for
a fair presentation of the financial information for the interim periods.
Results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for fiscal 1996. The
following data should be read in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's consolidated financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS ENDED
SEPTEMBER 21, 1994 MARCH 31,
(DATE OF INCORPORATION) YEAR ENDED ------------------------
TO DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996
------------------------ ----------------- --------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Sales and marketing.......... $ -- $ 796,100 $ -- $ 756,041
Administrative............... 394,918 1,922,163 317,659 1,236,390
Depreciation................. -- 137,374 472 73,217
Amortization................. 4,058 19,479 4,869 4,869
------------------------ ----------------- --------- ----------
398,976 2,875,116 323,000 2,070,517
Interest income(1)............. (23,873) (794,405) (132,613) (414,944)
------------------------ ----------------- --------- ----------
Net loss....................... $ 375,103 $ 2,080,711 $ 190,387 $1,655,573
================= ============= ========= =========
Net loss per common share(2)... $ 10.08 $ 77.34 $ 5.12 $ 81.96
Ratio of earnings to fixed
charges(3)................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, -----------------------------
---------------------------- AS
1994 1995 ACTUAL ADJUSTED(4)
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets..................... $ 786,913 $ 26,783,944 $ 30,882,887 $174,082,887
Total assets....................... 10,053,954 126,698,359 142,099,425 292,099,425
Total debt(5)...................... -- 73,801,260 74,100,260 224,100,260
Redeemable convertible preferred
stock............................ -- 23,112,325 40,107,923 40,107,923
Stockholders' equity............... 9,563,413 28,658,705 25,623,931 25,623,931
</TABLE>
- ---------------
(1) Includes interest income from a related party of $22,190, $526,075, $102,867
and $77,308 for the period from September 21, 1994 (date of incorporation)
to December 31, 1994, for the year ended December 31, 1995 and for the three
months ended March 31, 1995 and 1996, respectively. See "Certain
Transactions."
(2) Net loss attributable to common stockholders of $2,876,910 for the year
ended December 31, 1995 and $3,048,921 for the three months ended March 31,
1996 includes accretion of preferred stock dividends of $796,199 and
$1,393,348, respectively.
(3) Earnings were insufficient to cover fixed charges by $375,103, $7,725,587,
$929,008 and $4,435,788 for the period from September 21, 1994 (date of
incorporation) to December 31, 1994, for the year ended December 31, 1995
and for the three months ended March 31, 1995 and 1996, respectively. The
ratio of earnings to fixed charges is calculated by adding (i) earnings
(loss) before income taxes plus (ii) fixed charges, with the resulting sum
divided by fixed charges. Fixed charges consist of interest on all
indebtedness, accretion of preferred stock dividends, amortization of debt
issuance costs, plus that portion of operating lease rentals representative
of the interest factor.
(4) As adjusted to give effect to the application of the estimated net proceeds
of the Offering prior to allocating the portion of the proceeds of the
Offering attributable to the Warrants. See "Use of Proceeds" and
"Capitalization."
(5) Includes $418,582 and $338,062 at December 31, 1995 and March 31, 1996,
respectively, classified as current portion of long-term debt.
10
<PAGE> 13
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Units
offered hereby.
FUTURE OPERATING LOSSES; NET CASH USED IN OPERATING ACTIVITIES
The Company is a development stage company in a new segment of the wireless
telecommunications industry. It owns five regional narrowband PCS licenses on
the same frequency, having acquired those licenses in an FCC auction. The
Company is now developing a nationwide narrowband PCS wireless network and it
plans to offer wireless stored voice and data messaging services through
existing wireless messaging providers and other channels. At the date of this
Prospectus, however, the Company has not commenced commercial operation. From
its incorporation in 1994 through March 31, 1996, the Company experienced
operating losses and used net cash in operating activities of approximately $5.3
million and $2.5 million, respectively. The Company expects that during the
buildout of its nationwide network and as it seeks market penetration it will
continue to experience operating losses and negative operating cash flow at or
greater than historical levels. The ability to generate positive net income and
operating cash flow in the future is dependent upon many factors, including
general economic conditions, the timely completion of the Company's network
buildout, the level of market acceptance for the Company's services and the
degree of competition encountered by the Company. There can be no assurance when
or if the Company will generate positive operating cash flow or net income. See
"Business -- General," "Business -- Paging Industry Overview" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
IMPLEMENTATION OF NARROWBAND PCS NETWORK SUBJECT TO RISKS OF DEVELOPING
TECHNOLOGY
Much of the technology that the Company intends to use in its nationwide
narrowband PCS network to deliver wireless stored voice and data messaging
services is still undergoing development. While the switches, transmitters and
receivers will be similar to the equipment used in traditional one-way paging,
the InFLEXion(TM) technology and the TENOR(TM) voice messaging unit that the
Company plans to use have never been placed in commercial operation and are
still being tested. There can be no assurance that this technology will be able
to deliver to subscribers marketable wireless stored voice and data messaging
services. In addition, delayed delivery of new technology is not uncommon in the
telecommunications industry. There can be no assurance that the Company's
suppliers will be able to meet their test completion and delivery target dates
for the Company's InFLEXion(TM) infrastructure equipment or TENOR(TM) voice
messaging units. To the extent that technologies required to deliver these
services over the Company's InFLEXion(TM) network are unavailable within the
time frames anticipated by management, the commercial introduction of the
Company's services will be delayed, adversely affecting the Company's financial
condition and results of future operations.
The Company, its distribution partners or their respective subscribers also
might experience technical problems with the system infrastructure or with other
hardware or software, including subscriber units, once the Company's system is
operational. Such problems might discourage customers from using the Company's
services. Extreme problems might require a subscriber unit recall, the cost of
which might be substantial and might be absorbed in whole or in part by the
Company. While management believes that the Company's suppliers have strong
incentives to supply the Company in a timely fashion with reliable technology
and equipment, the Company does not control the performance of its vendors. Any
such untimely delivery or unreliable equipment could adversely impact the
commercial introduction of the Company's services. See "Business -- Network
Buildout."
NETWORK BUILDOUT
The Company is engineering and designing its own network. Part of this
process involves identification of the optimal number of sites to transmit and
receive signals necessary to deliver marketable quality voice and data messaging
services. In this identification process, known as radio frequency ("RF")
propagation analysis, engineers utilize computer software programs to analyze
terrain, topography, building penetration, population concentrations and other
factors. Once sites are identified in the network design process, the Company
must
11
<PAGE> 14
secure leases for the sites upon which it will install antennae, transmitters,
receivers and other infrastructure equipment. The site acquisition process
requires the negotiation of site leases and verification by the Company that the
site owner has obtained the necessary governmental approvals and permits. There
is a limited number of attractive telecommunications sites, particularly in
large metropolitan areas. There can be no assurance that the Company will be
able to secure leases for the sites necessary to construct and operate its
network within its budgeted time frames and costs. In addition to site
identification and acquisition, the implementation of the Company's PCS network
will require equipment installation and systems testing. Each stage involves
various risks and contingencies, many of which are not within the control of the
Company and all of which could adversely affect the implementation of the
Company's proposed PCS network should there be delays or other problems. See
"Business -- Strategy," "Business -- Distribution" and "Business -- Network
Buildout."
UNPROVEN MARKET; DEPENDENCE ON OTHERS FOR MARKETING
The services that the Company intends to offer have not yet been marketed
to the public. With respect to sales of both voice and data services, the
Company intends to target broad market segments with diverse messaging
requirements by providing easy-to-use services at reasonable prices on a local,
regional and nationwide basis. The potential markets for these services include
corporate users, business travelers, portable personal computer users and
household consumers. The Company will employ a variety of direct and indirect
distribution channels to market and sell its PCS services. To speed marketing
and sales and quickly build a broad customer base, the Company intends initially
to distribute its PCS services through its Paging Company Investors and other
distribution partners, which in the aggregate have a significant installed
customer base. The final terms of these arrangements have not yet been
negotiated, although the Company's Common Stockholders Agreement (as defined
herein) with the Paging Company Investors requires them to enter into exclusive
distribution agreements with the Company with respect to those narrowband PCS
services which such Paging Company Investors desire to purchase, provided such
services are competitive in price and quality with similar services that may be
available from others. Failure to negotiate acceptable arrangements, to identify
additional distribution partners or to provide services to the Paging Company
Investors on terms competitive in price and quality with similar services that
may be available from others could adversely affect the Company's financial
condition and results of future operations. See "Business -- Distribution."
INDEBTEDNESS OF THE COMPANY; HIGH DEGREE OF LEVERAGE
After giving effect to the issuance of the Notes, the Company will have a
substantial amount of indebtedness outstanding. After giving effect to the
Offering, at March 31, 1996, total consolidated long-term indebtedness of the
Company would have been approximately $223.8 million, representing approximately
77.3% of the Company's total capitalization. See "Capitalization." In addition,
the accretion of original issue discount on the Notes will cause an increase in
indebtedness of $121.8 million by , 2001 (assuming an interest rate
of 12.25% on the Notes). The Company's subsidiaries also may incur up to $225.0
million of indebtedness under the Credit Facility, subject to the Company's
compliance with certain specified financial and operating covenants. The ability
of the Company and its subsidiaries to make payments of principal and interest
will be largely dependent upon its future performance. Such performance can be
subject to many factors, some of which will be beyond the Company's control,
such as prevailing economic conditions. There can be no assurance that the
Company will be able to generate sufficient cash flow to cover required interest
and principal payments. The level of the Company's indebtedness also could have
other adverse consequences to holders of the Notes including the effect of such
indebtedness on: (i) the Company's ability to fund internally, or obtain
additional debt or equity financing in the future for, capital expenditures,
acquisitions, working capital, operating losses and other purposes; (ii) the
Company's flexibility in planning for, or reacting to, changes to its business
and market conditions; (iii) the Company's ability to compete with less highly
leveraged competitors; and (iv) the Company's financial vulnerability in the
event of a downturn in its business or the general economy. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Description of Other Indebtedness -- The Credit
Facility" and "Description of the Notes."
12
<PAGE> 15
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION OF THE NOTES
The Notes will be obligations exclusively of the Company. The Company is a
holding company with no material business operations, sources of income or
assets of its own other than the shares of its wholly-owned direct subsidiary
PCSD Financial Corp. Upon completion of the Offering, the Company's operations
will be conducted through its wholly-owned indirect subsidiaries. The Company's
cash flow and, consequently, its ability to meet its debt service obligations,
including payments of principal of, premium, if any, and interest on the Notes,
is dependent upon the cash flow of the Company's subsidiaries and the payment of
funds by the subsidiaries to the Company in the form of loans, dividends, fees
or otherwise. The Company's subsidiaries are separate and distinct legal
entities and will have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the Notes or to make any funds available therefor,
whether in the form of loans, dividends or otherwise. Because the subsidiaries
will not guarantee the payment of principal of or interest on the Notes, any
right of the Company to receive assets of its subsidiaries upon their
liquidation or reorganization (and the consequent right of the holders of the
Notes to participate in the distribution of proceeds from those assets) will be
structurally subordinated to the claims of such subsidiaries' creditors
(including tax authorities, trade creditors and lenders). As of March 31, 1996,
after giving effect to the Reorganization, as defined herein, the Company's
subsidiaries had approximately $76.4 million of indebtedness and other
liabilities outstanding, all of which would have been structurally senior to the
Notes. Upon completion of the Offering, the subsidiaries also will have
approximately $75.0 million of immediate availability under the Credit
Agreement, and, upon the achievement and maintenance by the Company of certain
operating results and financial ratios, the Company will have an additional
$150.0 million of availability under the Credit Facility, all of which will be
structurally senior to the Notes. The Credit Facility will limit the ability of
the Company's subsidiaries to pay dividends or make distributions to the
Company. In addition, although the Indenture limits the ability of the Company
and its subsidiaries to incur additional indebtedness and to enter into new
agreements that restrict their ability to pay dividends or make or repay loans
or other payments to the Company, the subsidiaries will be able to incur
substantial additional indebtedness and will likely do so pursuant to the Credit
Facility. See "Corporate Reorganization and Structure" and "Description of the
Notes."
In addition, the Notes will not be secured by any of the Company's assets.
The obligations of the Company's subsidiaries under the Credit Facility will be
secured by a first priority security interest on equipment purchased from
Glenayre and an equal and ratable pledge of all capital stock of PCSD Financial
Corp.'s three subsidiaries. If the Company becomes insolvent or is liquidated,
or if payment under the Credit Facility is accelerated, the lenders under the
Credit Facility would be entitled to exercise the remedies available to a
secured lender under applicable law and pursuant to the terms of the Credit
Facility. Accordingly, any claims of such lenders with respect to such assets
and pledged shares will be prior to any claim of the holders of the Notes with
respect to such assets and pledged shares. See "Corporate Reorganization and
Structure" and "Description of Other Indebtedness -- The Credit Facility."
SUBSTANTIAL CAPITAL REQUIREMENTS; RESTRICTIONS IMPOSED BY LENDERS
Borrowings under the Credit Facility and the proceeds of the Offering will
be used to purchase infrastructure equipment, to fund capital expenditures, to
fund debt service requirements and to fund other working capital requirements,
including the possible acquisition of additional spectrum. The Company believes
that the proceeds of the Offering and the availability under the Credit Facility
together with the Company's existing cash will be sufficient to fund the
construction of the Company's network, the acquisition of additional spectrum
and operating losses until the Company generates positive cash flow. Given the
risks in an undertaking of this nature and scale, no assurance can be given that
actual cash requirements will not materially exceed the Company's estimated
capital requirements and available capital. Moreover, the Company's ability to
access the total availability of the Credit Facility is dependent on maintaining
certain specified financial and operating covenants, which might not occur.
Thus, despite these arrangements, there can be no assurance that the Company
will have sufficient funds to finance the continued development of the Company's
network buildout and operations. In addition, the amount of capital required
will depend upon a number of factors, including capital costs, growth in the
number of subscribers, technological developments, marketing and sales expense
and competitive conditions. No assurance can be given that, in the event the
13
<PAGE> 16
Company were to require additional financing, such additional financing would be
available to the Company or available on terms satisfactory to the Company.
The Credit Facility contains financial and operating covenants including,
among other things, requirements that the Company maintain certain financial
ratios and satisfy certain financial tests and limitations on the Company's
ability to incur other indebtedness, pay dividends, engage in transactions with
affiliates, sell assets and engage in mergers and consolidations and other
acquisitions. If the Company fails to comply with these covenants, the lenders
under the Credit Facility will be able to accelerate the maturity of the
applicable indebtedness. See "Managements Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Description of Other Indebtedness -- The Credit Facility" and "Description of
the Notes."
COMPETITION AND TECHNOLOGICAL CHANGE
Competition in the wireless telecommunications industry is becoming
increasingly intense. The Company will face competition for its services from
other narrowband PCS service providers and, to a lesser extent, from broadband
PCS, ESMR, cellular, paging and other operators. In addition, competition could
come from certain voice mail applications offered by broadband PCS and cellular
providers. Other companies, including AT&T, PageNet, Mobile Telecommunications
Technologies Corp. ("Mtel") and PageMart have acquired, and will acquire,
narrowband PCS licenses in FCC auctions. Accordingly, the Company will face
direct competition in all of the markets in which it intends to operate. The
presence of multiple direct competitors in some or all of the Company's markets
could result in price reductions for its services, which may adversely affect
its financial condition and results of future operations. The industry includes
major telecommunications companies, including long distance carriers AT&T,
Sprint and MCI, national and regional paging companies and RBOCs. Most of these
companies have much greater resources than the Company, have been in operation
for many years and have large subscriber bases. Such companies may be able to
offer wireless service to customers at prices below those offered by the
Company. The Company understands that Motorola has an agreement with PageNet
pursuant to which Motorola has agreed to refrain from delivering its TENOR(TM)
voice subscriber units for commercial use to customers other than PageNet until
six months after Motorola commences commercial production of the units.
Consequently, the Company's commercial introduction of TENOR(TM) voice
subscriber units in Atlanta, Boston and other markets could be delayed if such
markets are ready for commercial service prior to the expiration of Motorola's
agreement with PageNet.
A variety of wireless two-way communication technologies are under
development and could result in increased competition for the Company. There can
be no assurance that additional competitors will not enter markets that the
Company plans to serve or that the Company will be able to withstand the
competition. Moreover, changes in technology could lower the cost of competitive
services to a level where the Company's services would become less competitive
or where the Company would need to reduce its service prices in order to remain
competitive. See "Business -- Competition."
RELIANCE ON LIMITED NUMBER OF SUPPLIERS
The InFLEXion(TM) infrastructure equipment that the Company intends to
purchase is manufactured only by Motorola and Glenayre. As a result, the Company
will rely exclusively on Motorola and Glenayre for the manufacture of a
substantial portion of the equipment necessary to construct its narrowband PCS
network. The Company's ability to develop, construct and implement its network
on the Company's projected schedule may be adversely affected by Motorola's and
Glenayre's development, manufacturing and delivery capabilities. Motorola will
be the only manufacturer of the subscriber equipment necessary to deliver stored
voice messaging services over the Company's InFLEXion(TM) network. While
Motorola has agreed to negotiate to enter into licenses with at least one
alternative manufacturer of subscriber equipment, there can be no assurance that
alternate suppliers of subscriber equipment will be available in the future. The
limited number of suppliers for equipment crucial to the delivery of the
Company's services makes the Company vulnerable to development, manufacturing
and delivery delays, as well as to the lack of competitive pricing. See
"Business -- Network Buildout."
14
<PAGE> 17
POTENTIAL LOSS OF FCC FINANCING AND BIDDING CREDITS
Because the Company qualified as a "Designated Entity" satisfying the
requirements for a "Small Business" and a "Business Owned by Members of Minority
Groups and/or Women" at the time of the FCC's narrowband PCS regional auction,
the Company received bidding credits of approximately $60.6 million toward its
purchase of the Licenses in the auction and became entitled to pay 80% of the
$90.9 million net purchase price for the Licenses over ten years at a 7.5%
annual interest rate, with no payment of principal for the first two years. If
prior to February 3, 2000 the Company ceases to satisfy the criteria applicable
to a Business Owned by Members of Minority Groups and/or Women or transfers
control of the Licenses to an entity which does not qualify as such, then the
Company may be required to pay to the FCC some or all of the $60.6 million in
bidding credits it received. If prior to February 3, 2005, the Company transfers
control of the Licenses to an entity which does not satisfy the Small Business
criteria applicable in the narrowband PCS auction, the Company may be required
to prepay its installment obligation for the Licenses to the FCC. In addition,
if the Company effects an Initial Public Offering (as defined in the Common
Stockholders Agreement) prior to these dates, unjust enrichment payments to the
FCC may be due and installment treatment may be lost unless the Company obtains
a waiver from the FCC. There can be no assurance that such a waiver can be
obtained. See "Principal Stockholders" and "Description of FCC Auction
Benefits -- "Designated Entity" Status in FCC Narrowband PCS Regional Auction."
In order to be considered a Designated Entity in the narrowband PCS
regional auction, the Company was required to have a properly constituted
"Control Group" that owned 50.1% of the voting interests and 25% of the equity
interests in the Company. See "Description of FCC Auction
Benefits -- "Designated Entity" Status in FCC Narrowband PCS Regional Auction."
The Company's Control Group currently consists of Sloan Communications, Inc.
("SCI"), Sloan PCS Limited Partnership ("Sloan LP"), Dobson Family Corp. and the
Sullivan Family Revocable Trust. Upon the issuance of the Company's Series A
Preferred Stock, the Control Group's equity interest was diluted from
approximately 26% to approximately 14.98%, and thus the Company ceased to
satisfy the 25% equity ownership requirement for Designated Entity status. Upon
the issuance of the Units the Control Group's equity interest will be diluted to
approximately %.
In conjunction with the sale of the Company's Series A Preferred Stock, the
Company received the opinion of its special FCC counsel, Lukas McGowan Nace and
Gutierrez, Chartered ("Lukas McGowan"), that, based upon a ruling obtained from
the FCC staff, the dilution of the Control Group's total equity interest in the
Company as a result of the issuance of the Series A Preferred Stock would not
result in the loss of financial benefits that accrued to the Company due to its
status as a "Designated Entity" in the narrowband PCS regional auction. In
connection with the issuance of the Units, the Company has received the opinion
of Lukas McGowan that the dilution of the Control Group's equity interest as a
result of the issuance and exercise of the Warrants will not result in the loss
of the financial benefits that have accrued to it as a Designated Entity in the
narrowband PCS regional auction and that after the issuance of the Units the
Company will continue to be eligible for such benefits. The Company does not,
however, intend to seek a ruling from the FCC staff on the dilution issue in
connection with the issuance of the Units. Both the FCC staff ruling obtained in
connection with the sale of the Series A Preferred Stock and the opinions of
counsel are subject to certain conditions and qualifications, including the
conditions that the Control Group continue to own 50.1% of the Company's voting
rights and that no investor outside of the Control Group own more than 25% of
the total equity, or more than 15% of the voting equity of the Company. Neither
the FCC staff ruling nor the opinions of counsel are binding on the FCC. There
can be no assurance that the FCC will not successfully contend that the dilution
of the Control Group's equity ownership in the Company in connection with the
sale of the Series A Preferred Stock or the issuance of the Units has caused the
Company to cease to qualify for the bidding credits and installment payment
right it received upon acquisition of the Licenses in the narrowband PCS
regional auction. The Common Stockholders Agreement prohibits the transfer of
stock of the Company, requires each stockholder of the Company to prohibit its
stockholders or owners from transferring their interests in such stockholder,
and prohibits the exercise of any other rights under the Common Stockholders
Agreement if the Company's Designated Entity status would be adversely affected.
While the Company believes that it has adequate legal restrictions to ensure a
properly constituted Control Group consistent with the FCC staff ruling and
opinions of counsel, it is possible that the Company could
15
<PAGE> 18
cease to have a properly constituted Control Group with the result that the
Company would no longer qualify for the bidding credits and the installment
payment right it received upon the acquisition of the Licenses in the narrowband
PCS regional auction. See "Description of FCC Auction Benefits -- "Designated
Entity" Status in FCC Narrowband PCS Regional Auction."
In addition to the Licenses, the Company was the winning bidder for
specialized mobile radio ("SMR") frequencies in 25 metropolitan areas in the
FCC's 900 MHz auction completed on April 15, 1996 (the "SMR Auction Spectrum").
Because the Company qualified as a "Small Business" under the SMR auction
criteria, it will be allowed a 10% bidding credit ($1.1 million) and be entitled
to pay 90% of the $9.7 million net purchase price over ten years with interest
at the 10-year Treasury note rate plus 250 basis points, with no payment of
principal for the first two years. The Company anticipates that licenses for its
SMR Auction Spectrum will be granted in July 1996. If the Company assigns or
transfers control of its SMR Auction Spectrum to an entity not meeting the Small
Business criteria applicable in the SMR auction within five years of the date of
grant, it will be subject to unjust enrichment payments with respect to its
bidding credit and installment financing for the SMR Auction Spectrum. See
"Description of FCC Auction Benefits -- "Small Business" Status in FCC 900 MHz
SMR Auction."
The Company may participate in the upcoming FCC narrowband PCS MTA/BTA
auction. Although it is unlikely that the FCC will provide any financial
benefits based upon race or gender classification, the Company currently
anticipates that it may qualify for bidding credits and be permitted to pay for
spectrum acquired at such auction on the installment basis by virtue of the
Company's status as a "Small Business." There can be no assurance, however, that
bidding credits or installment payments will be available to the Company. See
"Business -- Spectrum" and "Description of FCC Auction Benefits -- Status in
Future FCC Narrowband PCS MTA/BTA Auction."
GOVERNMENT REGULATION; POSSIBLE LOSS OF LICENSES
The Company and the wireless telecommunications industry are subject to
federal, state and local legislation, as well as regulations promulgated by the
FCC and various state and municipal regulatory agencies, with respect to
licensing, service standards, land use and other matters. There can be no
assurance that governmental authorities will not propose or adopt legislation or
regulations that would have a materially adverse impact on the financial
condition, results of future operations or business prospects of the Company.
Under existing FCC regulations, nationwide narrowband PCS licensees are
generally required, at the risk of license forfeiture, to construct networks
that serve 37.5% of the U.S. population within five years of the initial license
grant date (February 3, 2000, in the case of the Company) and serve 75% of the
U.S. population within ten years of the license grant date (February 3, 2005, in
the case of the Company). The Company's network buildout plan anticipates that
these requirements will be met well in advance of such dates, but such
compliance cannot be assured. Under existing regulations, operating licenses are
issued for ten-year terms, subject to renewal by application upon expiration of
their initial terms. Renewal is not automatic, although current FCC regulations
provide that renewal applications may be denied only for specific causes. The
exercise of the Warrants (and the ownership of Class B Common Stock issuable
upon the exercise thereof) may also be limited by the Company in order to ensure
compliance with the FCC's rules and regulations, and the Warrants will not be
exercisable by any holder if such exercise would cause the Company to be in
violation of the Communications Act of 1934, as amended (the "Communications
Act") or the FCC rules. See "Regulation."
CHANGE OF CONTROL
A Change of Control, as defined in the Indenture, would entitle the holders
of the Notes to require that the Company offer to purchase the Notes at a
purchase price of 101% of the Accreted Value thereof plus accrued and unpaid
interest, if any, to the date of purchase. The Credit Facility may, however,
prohibit the repurchase of the Notes by the Company in the event of such a
Change of Control, unless and until such time as the borrowings under the Credit
Facility are repaid in full. The inability to repay indebtedness under the
Credit Facility, if required, and to purchase all of the tendered Notes, would
also constitute an event of default under the Indenture, which could have
adverse consequences to the Company and holders of the Notes and
16
<PAGE> 19
the Warrants. Generally, the acquisition by any person or group (other than
companies with debt securities rated investment grade) of beneficial ownership
of capital stock of the Company having a majority of the combined voting power
of the Company's capital stock would constitute a Change of Control under the
Indenture. There can be no assurance that in the event of a Change of Control,
in which the Company was required to repay or refinance its debt obligations,
the Company would have sufficient assets or borrowing ability to satisfy all of
its obligations under the Indenture and the Credit Facility. The Credit Facility
will also contain certain provisions regarding a change of control. See
"Description of Other Indebtedness -- The Credit Facility" and "Description of
the Notes."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Notes will be issued at a substantial discount from their principal
amount at maturity. Although interest will not accrue on the Notes prior to
, 2001, and there will be no periodic payments of interest on the
Notes prior to , 2001, original issue discount (the difference
between the stated redemption price at maturity and the issue price of the
Notes) will accrue from the issue date of the Notes. Consequently, purchasers of
Notes generally will be required to include amounts in gross income for United
States federal income tax purposes in advance of their receipt of the cash
payments attributable to such income. Such amounts in the aggregate will be
equal to the difference between the stated redemption price at maturity
(inclusive of stated interest on the Notes) and the issue price of the Notes.
See "Certain Federal Income Tax Considerations" for a more detailed discussion
of the federal income tax consequences of the purchase, ownership and
disposition of the Notes. See "Certain Federal Income Tax Consequences --
Notes -- Original Issue Discount."
If a bankruptcy case is commenced by or against the Company under the
United States Bankruptcy Code after the issuance of the Notes, the claim of a
holder of Notes may be limited to an amount equal to the sum of (i) the initial
offering price and (ii) that portion of the original issue discount which is not
deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code.
Any original issue discount that was not amortized as of the date of any such
bankruptcy filing would constitute "unmatured interest." To the extent that the
Bankruptcy Code differs from the Internal Revenue Code in determining the method
of amortization of original issue discount, a holder of Notes may realize
taxable gain or loss upon payment of such holder's claim in bankruptcy.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF MARKET PRICE FOR THE NOTES
Prior to the Offering of the Units (including the Notes and the Warrants)
hereby, there has been no existing trading market for the Units, the Notes or
the Warrants, nor has there been any existing trading market for the Company's
Common Stock. The Company does not intend to have the Units, the Notes, the
Warrants or the Common Stock listed for trading on any securities exchange or
quoted on any automated dealer quotation system. Although each Underwriter has
advised the Company that it presently intends to make a market in the Units
(prior to separation), the Notes and the Warrants, it is not obligated to do so
and any such market-making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the prices or liquidity of, or
trading markets for, the Units, the Notes or the Warrants. The offering price of
the Units was determined by negotiations between the Company and the
Underwriters and is not necessarily related to the Company's book value, net
worth or any other established criteria of value. The liquidity of any market
for the Units, the Notes or the Warrants will depend upon the number of holders
of such Units, Notes or Warrants, the interest of securities dealers in making a
market in the Units, the Notes or the Warrants and other factors. The absence of
an active market for Units, the Notes or the Warrants offered hereby could
adversely affect their market price and liquidity. The liquidity of, and trading
markets for, the Notes may also be adversely affected by general declines in the
market for noninvestment grade debt. Such declines may adversely affect the
liquidity of, and trading markets for, the Notes independent of the financial
performance of, or prospects for, the Company.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Notes. There can be no assurance that the market
17
<PAGE> 20
for the Notes will not be subject to similar disruptions. Any such disruptions
may have an adverse effect on the value of the Notes.
LIMITED VOTING RIGHTS OF CLASS B STOCKHOLDERS
If an Exercise Event occurs prior to the Company's consummation of a Public
Equity Offering (as defined in the Warrant Agreement), the Warrants will be
exercisable to purchase shares of the Company's Class B Common Stock. Holders of
the Company's Class B Common Stock are not entitled to vote at any meeting of
stockholders for the election of directors. The holders of the Company's Class A
Common Stock are entitled to elect a majority of the Company's Board of
Directors and, therefore, exert substantial control over matters that are
subject to the discretion of the Board of Directors. Upon an Initial Public
Offering (as defined in the Common Stockholders Agreement), the holders of the
Class B Common Stock may exchange their Class B Common Stock for an equal number
of shares of Class A Common Stock. See "Description of Capital Stock -- Common
Stock."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws, as amended, as well as provisions of the Delaware General
Corporation Law, may have the effect of delaying or preventing transactions
involving a change of control of the Company, including transactions in which
stockholders might otherwise receive a substantial premium for their shares over
then current market prices, and may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests. In addition,
under the Restated Certificate of Incorporation, the Board of Directors is
authorized to issue one or more classes of preferred stock having such
designations, rights and preferences as may be determined by the Board. See
"Description of Capital Stock."
ABSENCE OF DIVIDENDS
The Company has never declared or paid dividends on its capital stock,
including the Class B Common Stock for which the Warrants may be exercised. The
Company currently intends to retain any earnings to finance its operations,
capital expenditures and future growth. No dividends can be paid on the
Company's Common Stock without the consent of the holders of at least 50% of the
Company's Preferred Stock. In addition, the Credit Facility and the Indenture
prohibit or limit the Company's ability to pay dividends. See "Dividend Policy,"
"Description of Other Indebtedness -- The Credit Facility" and "Description of
the Notes -- Covenants -- Limitation on Restricted Payments."
CURRENT REGISTRATION OR EXEMPTION REQUIRED TO EXERCISE WARRANTS
Upon an Exercise Event, purchasers of the Units will be able to exercise
the Warrants at any time that a registration statement relating to the Warrant
Shares is then in effect or if the exercise of such Warrants is exempt from the
registration requirements of the Securities Act, and only if such securities are
then qualified for sale or exempt from qualification under the applicable
securities laws of the states in which the various holders of the Warrants
reside. The Company, however, has no obligation to update this Prospectus; any
offering of Warrant Shares pursuant to the following sentence will be made by a
separate prospectus. Although the Warrant Agreement requires the Company to use
its best efforts to cause to be effective a shelf registration statement
covering the Warrant Shares by the Exercisability Date, there can be no
assurance that the Company will be able to fulfill such obligation or comply
with such agreement. The Company will be unable to issue shares of Common Stock
to those persons desiring to exercise their Warrants if a registration statement
covering the Warrant Shares is not then effective (unless the issuance of shares
upon the exercise of such Warrants is exempt from the registration requirements
of the Securities Act) or if such securities are not qualified or exempt from
qualification in the states in which the holders of the Warrants reside. See
"Description of the Warrants."
18
<PAGE> 21
CORPORATE REORGANIZATION AND STRUCTURE
Immediately prior to the consummation of the Offering, the Company will
effect a corporate reorganization (the "Reorganization") by creating an
intermediate holding company, PCSD Financial Corp., which will, in turn, create
three wholly-owned subsidiaries, PCSD Spectrum, Inc., SGI Communications, Inc.
and PCSD Network, Inc. PCSD Spectrum, Inc. will own all of the FCC Licenses,
subject to the FCC Obligation. SGI Communications, Inc. will acquire and own all
real estate leasehold interests in transmitter and receiver sites for the
network, and PCSD Network, Inc. will own all of the other assets of the Company
and will operate the business of the Company. PCSD Financial Corp. will enter
into the Credit Facility and its three subsidiaries will guarantee its
obligations thereunder. Following the Reorganization, the Notes will be
obligations exclusively of the Company and the Company will not have any other
significant indebtedness to which the Notes will be senior, other than the
subordinated indebtedness of the Company upon the conversion of its Series A
Preferred Stock after November 10, 2004. See "Description of Capital
Stock -- Preferred Stock-Conversion into Subordinated Notes."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby
will be approximately $143.2 million, after deducting estimated discounts,
commissions and offering expenses. The Company intends to use (i) approximately
$32.5 million of the net proceeds from the Offering, together with approximately
$34.2 million of existing cash, to fund capital expenditures in connection with
the buildout of the Company's nationwide PCS network, including the possible
acquisition of additional spectrum, (ii) approximately $29.9 million of the net
proceeds of the Offering to repay amounts due on the FCC Obligation (which is
payable quarterly over ten years at a 7.5% annual interest rate, with no payment
of principal in the first two years) (see "Description of Other
Indebtedness -- FCC Obligation"), (iii) approximately $3.5 million of the net
proceeds of the Offering to repay amounts due on the $8.7 million obligation
which will be due the FCC in connection with the SMR Auction Spectrum (which is
payable quarterly over ten years at an interest rate equal to 10-year U.S.
Treasury note rate plus 2.5% per annum, with no payment of principal in the
first two years) (see "Business -- Spectrum"), (iv) approximately $21.8 million
of the net proceeds of the Offering to repay interest due under the $75.0
million Glenayre Facility (which is payable quarterly at a variable rate which
is not expected to exceed, at the Company's option, 3% per annum over a base
lending rate or 4% per annum over a eurodollar rate) (see "Description of Other
Indebtedness -- Credit Facility"), and (v) approximately $55.5 million of net
proceeds of the Offering, together with approximately $26.1 million of existing
cash, to fund other working capital requirements.
The Company estimates capital expenditures for 1996, 1997 and 1998 in
connection with the buildout of its nationwide PCS network to total
approximately $63.1 million, $77.8 million and $35.8 million, respectively. The
Company estimates debt service requirements on the FCC Obligation, the FCC
obligation with respect to the SMR Auction Spectrum and the Credit Facility will
approximate $12.9 million in 1996, $19.5 million in 1997 and $22.8 million in
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The $225.0 million Credit Facility will consist of a Glenayre Facility
providing for term loans in an amount not to exceed $75.0 million (the "Glenayre
Facility"), a Tranche A Facility providing for revolving loans in an amount not
to exceed $35.0 million (the "Tranche A Facility"), and a Tranche B Facility
providing for revolving loans in an amount not to exceed $115.0 million (the
"Tranche B Facility"). Borrowings under the Glenayre Facility will be used to
acquire equipment and related services from Glenayre in connection with the
buildout of the Company's nationwide PCS network. When available, the Tranche A
Facility will be used principally to fund additional capital expenditure needs
of the Company, and the Tranche B Facility will be used to repay maturing loans
under the Glenayre Facility and the Tranche A Facility and to fund other working
capital and capital expenditure needs.
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<PAGE> 22
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock,
including the Class B Common Stock for which the Warrants may be exercised, and
the Company does not anticipate paying dividends in the foreseeable future. It
is the present policy of the Company's Board of Directors to retain earnings to
finance the Company's operations, capital expenditures and future growth. In
addition, no dividends can be paid on the Company's Common Stock without the
consent of the holders of at least 50% of the Company's Preferred Stock.
Therefore, the payment of dividends on Common Stock in the future will be at the
discretion of the Board of Directors and the holders of the Company's Preferred
Stock. Certain provisions of the Credit Facility and the Indenture will further
prohibit or limit the Company's ability to pay dividends. See "Description of
Other Indebtedness -- The Credit Facility" and "Description of the
Notes -- Covenants -- Limitation on Restricted Payments."
20
<PAGE> 23
CAPITALIZATION
The following table sets forth as of March 31, 1996 the actual
capitalization of the Company and the capitalization of the Company as adjusted
to reflect the sale by the Company of the Units offered hereby and the
application of the net proceeds therefrom. This information should be read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Cash and cash equivalents..................................... $ 29,865,057 $173,065,057(1)
=========== ===========
Long-term debt:
Credit facility(2).......................................... $ -- $ --
% Senior discount notes due 2006.......................... -- 150,000,000(3)
FCC obligation(4)........................................... 72,741,121 72,741,121
Other....................................................... 1,021,077 1,021,077
------------ ------------
Total long-term debt................................ 73,762,198 223,762,198
------------ ------------
Redeemable convertible preferred stock(5)..................... 40,107,923 40,107,923
------------ ------------
Stockholders' equity:
Common stock:
Class A, par value $1.00 per share, 300,000 shares
authorized, 8,718 shares issued and outstanding........ 8,718 8,718
Class B, par value $1.00 per share, 200,000 shares
authorized, 28,482 shares issued and outstanding....... 28,482 28,482
Common stock additional paid-in capital..................... 34,973,253 34,973,253
Deficit accumulated during development stage................ (4,111,387) (4,111,387)
------------ ------------
30,899,066 30,899,066
Less notes receivable from stockholder...................... (5,275,135) (5,275,135)
------------ ------------
Total stockholders' equity.......................... 25,623,931 25,623,931
------------ ------------
Total capitalization................................ $139,494,052 $289,494,052
=========== ===========
</TABLE>
- ---------------
(1) Reflects the net proceeds from the sale of the Units.
(2) Concurrently with the Offering, the Company will establish the Credit
Facility in the amount of $225.0 million, approximately $75.0 million of
which will be available at the closing of the Offering and the balance of
which will be available upon the achievement and maintenance by the Company
of certain operating results and financial ratios. See "Description of
Other Indebtedness -- The Credit Facility."
(3) Reflects the aggregate initial Accreted Value of the Notes prior to
allocating the portion of the proceeds of the Offering attributable to the
Warrants.
(4) See "Description of Other Indebtedness -- FCC Obligation."
(5) Net of approximately $15.1 million of Preferred Stock subscriptions
receivable which have been collected as of April 25, 1996. See "Description
of Capital Stock -- Preferred Stock."
21
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
information for the Company as of the dates and for the periods indicated. The
consolidated financial data as of December 31, 1994 and 1995 and for the period
from September 21, 1994 (date of incorporation) to December 31, 1994 and for the
year ended December 31, 1995 were derived from the audited consolidated
financial statements of the Company. The consolidated financial data for the
Company as of March 31, 1996 and for the three months ended March 31, 1995 and
1996 have been derived from unaudited consolidated financial statements of the
Company. In the opinion of management of the Company, such unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements referred to above and include all
adjustments necessary for a fair presentation of the financial information for
the interim periods. Results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results to be expected for fiscal
1996. The following data should be read in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 21, 1994 THREE MONTHS ENDED MARCH
(DATE OF INCORPORATION) YEAR ENDED 31,
TO DECEMBER 31, DECEMBER 31, ------------------------
1994 1995 1995 1996
--------------------------- ------------ --------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Sales and marketing........... $ -- $ 796,100 $ -- $ 756,041
Administrative................ 394,918 1,922,163 317,659 1,236,390
Depreciation.................. -- 137,374 472 73,217
Amortization.................. 4,058 19,479 4,869 4,869
----------- ------------ --------- ----------
398,976 2,875,116 323,000 2,070,517
Interest income(1).............. (23,873) (794,405) (132,613) (414,944)
----------- ------------ --------- ----------
Net loss........................ $ 375,103 $2,080,711 $ 190,387 $1,655,573
=================== ========== ========= =========
Net loss per common share(2).... $ 10.08 $ 77.34 $ 5.12 $ 81.96
Ratio of earnings to fixed
charges(3).................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1996
-------------------------------- -----------------------------
1994 1995 ACTUAL AS ADJUSTED(4)
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets...................... $ 786,913 $ 26,783,944 $ 30,882,887 $ 174,082,887
Total assets........................ 10,053,954 126,698,359 142,099,425 292,099,425
Total debt(5)....................... -- 73,801,260 74,100,260 224,100,260
Redeemable convertible preferred
stock............................. -- 23,112,325 40,107,923 40,107,923
Stockholders' equity................ 9,563,413 28,658,705 25,623,931 25,623,931
</TABLE>
- ---------------
(1) Includes interest income from a related party of $22,190, $526,075, $102,867
and $77,308 for the period from September 21, 1994 (date of incorporation)
to December 31, 1994, for the year ended December 31, 1995, and for the
three months ended March 31, 1995 and 1996, respectively. See "Certain
Transactions."
(2) Net loss attributable to common stockholders of $2,876,910 for the year
ended December 31, 1995 and $3,048,921 for the three months ended March 31,
1996 includes accretion of preferred stock dividends of $796,199 and
$1,393,348, respectively.
(3) Earnings were insufficient to cover fixed charges by $375,103, $7,725,587,
$929,008 and $4,435,788 for the period from September 21, 1994 (date of
incorporation) to December 31, 1994, for the year ended December 31, 1995,
and for the three months ended March 31, 1995 and 1996, respectively. The
ratio of earnings to fixed charges is calculated by adding (i) earnings
(loss) before income taxes plus (ii) fixed charges, with the resulting sum
divided by fixed charges. Fixed charges consist of interest on all
indebtedness, accretion of preferred stock dividends, amortization of debt
issuance costs, plus that portion of operating lease rentals representative
of the interest factor.
(4) As adjusted to give effect to the application of the estimated net proceeds
of the Offering prior to allocating the portion of the proceeds of the
Offering attributable to the Warrants. See "Use of Proceeds" and
"Capitalization."
(5) Includes $418,582 and $338,062 at December 31, 1995 and March 31, 1996,
respectively, classified as current portion of long-term debt.
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus.
GENERAL
The Company is a development stage company incorporated for the purpose of
establishing, constructing and operating a nationwide network for the delivery
of narrowband PCS wireless telecommunications services. By acquiring five
regional licenses on the same frequency at the FCC's November 1994 narrowband
PCS auction, the Company has strategically positioned itself to develop a
narrowband PCS network covering the entire United States and the U.S.
territories, including Puerto Rico and the U.S. Virgin Islands.
The Company's strategic objective is to become a leading provider of
two-way wireless advanced messaging services in the United States. Based upon
industry surveys and the Company's proprietary research, management believes its
service offerings, which are expected to include stored voice messaging in early
1997 and data messaging in late 1997, will have significant market appeal. The
Company believes that the geographic scope of its network, which will enable it
to offer local, regional and nationwide messaging services, will allow the
Company to attract a broad customer base and that its distribution through
established channels will allow it to achieve rapid market penetration while
minimizing marketing and selling expenses.
The Company's operating losses during the period from September 21, 1994
(date of incorporation) to December 31, 1994 (the "1994 Period"), during the
year ended December 31, 1995 and during the three months ended March 31, 1995
and 1996, respectively, resulted from expenses incurred in connection with its
development stage activities such as the formation of the Company's
administrative structure and management team, market research and the initial
development of its network. The Company reported net losses of $375,000, $2.1
million, $190,000 and $1.7 million, respectively, for the 1994 Period, for the
year ended December 31, 1995 and for the three months ended March 31, 1995 and
1996. The Company has not yet generated operating revenue and, as a result, it
has not generated EBITDA. The degree to which the Company generates revenue and
EBITDA will be dependent on a number of business factors, including future
levels of market demand for the Company's services and future developments in
the telecommunications industry. The Company anticipates that operating expenses
and capital expenditures will increase in connection with the expansion of the
Company's network. Once the Company begins generating revenue, it expects that
average revenue per subscriber will decline over time as a result of increased
competition, which will affect the pricing of its services to its customers,
including the Paging Company Investors and the other established paging
companies. The Company believes the effect of this trend on the Company's
earnings will be mitigated by corresponding increases in the number of
subscribers of narrowband PCS services.
As used herein, "EBITDA" represents earnings before other income (expense),
taxes, depreciation and amortization. Other income (expense) consists primarily
of interest expense. EBITDA is a standard measure of financial performance in
the paging industry and is also similar to one of the financial measures used to
calculate whether the Company and its subsidiaries are in compliance with
certain covenants under the Indenture and the Credit Facility. EBITDA is not a
term defined under generally accepted accounting principles and it should not be
construed as an alternative to operating income, cash flows from operating
activities or other measures of liquidity determined in accordance with
generally accepted accounting principles.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 compared to Three Months Ended March 31,
1996.
Sales and marketing expenses consist of all salaries, benefits, equipment
and costs incurred in developing a marketing staff and the professional fees
associated with market research projects and public relations programs. Sales
and marketing expenses were $756,000 for the three months ended March 31, 1996.
The sales
23
<PAGE> 26
and marketing department had not yet been formed at March 31, 1995; therefore,
no sales and marketing expenses were incurred during the three months ended
March 31, 1995.
Administrative expenses are comprised of all salaries, benefits and
expenses of administrative personnel, including the executive officers, in
addition to the ancillary expenses of the Company such as rent, professional
fees, taxes and general office expenses. Administrative expense increased
$919,000 from $318,000 for the three months ended March 31, 1995 to $1.2 million
for the three months ended March 31, 1996 reflecting additional costs to support
the increased activity of the Company.
Depreciation for the three months ended March 31, 1996 was $73,000. Minimal
depreciation was recorded for the three months ended March 31, 1995 as the
Company had not yet accumulated significant fixed assets.
Interest income increased $282,000 from $133,000 for the three months ended
March 31, 1995 to $415,000 for the three months ended March 31, 1996. Interest
income is comprised of the interest on idle cash and interest received from a
$9.2 million loan to a stockholder who purchased shares of Common Stock of the
Company. Approximately $5.3 million of this loan was outstanding at March 31,
1996. On April 18, 1996 and April 30, 1996, the stockholder made repayments on
this loan aggregating approximately $3.9 million, thereby reducing the
outstanding amount to approximately $1.7 million. The Company expects this
amount, plus all accrued and unpaid interest, to be paid on its due date, April
30, 1997. See "Certain Transactions -- Stockholder Loan." Due to the Preferred
Stock offering in November 1995, the collection of $3.9 million of notes
receivable and the collections of subscriptions receivable throughout 1995, the
average cash balance available to earn interest increased $23.9 million from
$3.3 million for the three months ended March 31, 1995 to $27.2 million for the
three months ended March 31, 1996.
The 1994 Period compared to year ended December 31, 1995.
Sales and marketing expense was $796,000 for the year ended December 31,
1995. No sales and marketing expense was incurred during the 1994 Period.
Administrative expense, which was $395,000 for the 1994 Period, increased by
$1.5 million to $1.9 million for the year ended December 31, 1995, representing
a 36.0% increase over the annualized administrative expense for the 1994 Period.
This increase was primarily due to additional costs to support the formation of
the Company's administrative structure and management team, market research,
development of its network and the administrative costs associated with
increases in the total number of employees. The Company increased total
employees from three at December 31, 1994 to 33 at December 31, 1995.
Depreciation for the year ended December 31, 1995 was $137,000. No
depreciation was recorded for the 1994 Period as the amount was nominal. The
increase in depreciation expense is directly related to capital expenditures of
$2.5 million for the year ended December 31, 1995.
Interest income increased $770,000 to $794,000 for the year ended December
31, 1995 from $24,000 for the 1994 Period. Interest income is comprised of the
interest on idle cash and interest received from a $9.2 million loan to a
stockholder who purchased shares of Common Stock of the Company. Approximately
$5.3 million of this loan was outstanding at December 31, 1995. See "Certain
Transactions -- Stockholder Loan."
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash used in operating activities was $909,000 and $1.6
million for the three month period ended March 31, 1996 and for the year ended
December 31, 1995, respectively, and consisted primarily of operating losses
offset, in part, by increases in accounts payable and accrued liabilities. The
Company's net cash provided by operating activities was $21,000 during the 1994
Period. The Company's net cash used in investing activities totaled $10.3
million for the three months ended March 31, 1996 and primarily related to the
acquisition of several SMR licenses held by third parties. The Company's net
cash used in investing activities totaled $17.6 million for the year ended
December 31, 1995 and consisted of $15.6 million in payments for the Licenses,
including $4.8 million in capitalized interest, $1.5 million in equipment and
fixture
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purchases and $500,000 in deposits placed with the FCC enabling the Company to
participate in radio frequency auctions. The Company's net cash used in
investing activities for the 1994 Period totaled $9.2 million and primarily
related to the down payment made to the FCC for the Licenses acquired in the
November 1994 regional narrowband PCS auctions.
The Company's net cash provided by financing activities was $15.1 million,
$44.4 million and $9.9 million for the three months ended March 31, 1996, the
year ended December 31, 1995 and for the 1994 Period, respectively. The
Company's business strategy requires substantial capital to finance the buildout
of its nationwide PCS network, fund additional purchases of spectrum, fund debt
service requirements on a portion of its indebtedness and fund operating and
working capital requirements. Costs associated with the network buildout include
expenditures on switches, radio frequency controllers, transmitters, receivers
and ancillary equipment such as coaxial cable and antennas. Management estimates
capital and spectrum expenditures relating to the initial buildout of the
network, which is expected to be completed by the end of 1998, will total
approximately $177.0 million (approximately $63.1 million in 1996, $77.8 million
in 1997 and $35.8 million in 1998).
In order to help meet its future capital requirements, the Company has
raised approximately $92.7 million in two private equity offerings. A portion of
the net proceeds from the private equity offerings was used to fund the down
payment on the Licenses and commence development activities for the Company's
business, and the balance will be used to fund capital expenditures, spectrum
acquisitions and working capital needs. The Company has also incurred an
approximately $72.7 million obligation to the FCC, which represents the
remaining unpaid purchase price for the Licenses granted to the Company in
February 1995. The Company expects net proceeds of the Offering to approximate
$143.2 million.
The Company's subsidiary, PCSD Financial Corp., has obtained a commitment
from Chase Securities, Inc. to arrange the establishment of a new Credit
Facility in the aggregate amount of $225.0 million effective upon the closing of
the Offering. PCSD Financial Corp. anticipates having available approximately
$75.0 million of borrowing capacity under the Credit Facility immediately with
the balance available upon the achievement and maintenance by PCSD Financial
Corp. of certain operating results and financial ratios. See "Description of
Other Indebtedness -- The Credit Facility."
The Credit Facility will consist of (i) a Glenayre Facility providing for
term loans in an amount not to exceed $75.0 million (the "Glenayre Facility") to
be made available by Glenayre for the purpose of financing the acquisition of
equipment and technical services from Glenayre, (ii) a Tranche A Facility
providing for revolving loans in an amount not to exceed $35.0 million (the
"Tranche A Facility") to be made available by a syndicate of banks, financial
institutions and other entities (the "Syndicate"), including The Chase Manhattan
Bank, N.A. ("Chase"), for the purpose of financing the working capital and
capital expenditure needs of PCSD Financial Corp. and its subsidiaries in the
ordinary course of business, and (iii) a Tranche B Facility providing for
revolving loans in an amount not to exceed $115.0 million (the "Tranche B
Facility") to be made available by the Syndicate, including Chase, for the
purpose of (x) financing the working capital and capital expenditure needs of
PCSD Financial Corp. and its subsidiaries in the ordinary course of business and
(y) repaying maturing loans under the Glenayre Facility and Tranche A Facility.
Chase has committed to provide the entire $150.0 million of the Tranche A
Facility and the Tranche B Facility. The availability of the Credit Facility
will be conditioned upon among other things PCSD Financial Corp. having entered
into equipment supply contracts with Motorola and Glenayre containing
satisfactory terms and conditions.
Borrowings under the Glenayre Facility and Tranche A Facility will be
available from the closing date of the Credit Facility to the date which is
three and one half years thereafter, at which time all of the loans outstanding
will be repayable in two equal installments on March 31, 2000 and June 30, 2000.
Availability under the Tranche B Facility will commence on the closing date of
the Credit Facility and end on June 30, 2004, except that if the initial
borrowing thereunder is not made on or before June 30, 2000, such facility will
automatically terminate on such date. The Tranche B Facility will be reduced in
fourteen consecutive quarterly installments, beginning on March 31, 2001 and
ending on June 30, 2004.
The making of each loan under the Glenayre Facility will be subject to the
satisfaction of certain customary closing conditions which the Company expects
to satisfy prior to or simultaneously with the
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Offering. The making of each loan under the Tranche A Facility will be subject
to the satisfaction of certain conditions, including expending certain amounts
received from the issuance of common stock by PCSD Financial Corp. to the
Company, borrowing the full amount under the Glenayre Facility, having a minimum
number of "qualified pagers in service" (pagers in service for more than 60
days) and maintaining a minimum level of average monthly revenue per subscriber
unit. The Company expects to satisfy the conditions to the Tranche A Facility by
the third quarter of 1998. The making of each loan under the Tranche B Facility
will be subject to the satisfaction of certain conditions, including expending
certain amounts received from the issuance of common stock by PCSD Financial
Corp. to the Company and maintaining a maximum ratio of total debt to "qualified
pagers in service" and a maximum ratio of total debt to operating cash flow. The
Company anticipates that the conditions to the Tranche B Facility will be met by
the third quarter of 1999. In addition, certain mandatory prepayments of loans
extended under the Credit Facility are to be made from (i) subject to certain
exceptions to be agreed upon, 50% of the net proceeds of any sale or issuance of
equity or incurrence of indebtedness after the closing date of the Credit
Facility by the Company, PCSD Financial Corp. or any of its subsidiaries, (ii)
100% of the net proceeds of (x) certain sales or other dispositions by PCSD
Financial Corp. or any of its subsidiaries of material assets or (y) certain
insurance or condemnation recoveries and (iii) 75% of Excess Cash Flow (as
defined in the Credit Facility) when the Leverage Ratio (as defined in the
Credit Agreement) is greater than 3:1 and 50% of Excess Cash Flow when such
Ratio is less than 3:1 but greater than 2:1, for each fiscal year of PCSD
Financial Corp., commencing with the fiscal year ending December 31, 1998.
PCSD Financial Corp. may elect that all or a portion of the borrowings
under the Credit Facility bear interest at a rate per annum equal to either (i)
Chase's Base Rate plus the Applicable Margin or (ii) Chase's Eurodollar Rate
plus the Applicable Margin. In the case of borrowings under the Glenayre
Facility and the Tranche A Facility, the Applicable Margin will be (a) 3% per
annum when applying the Base Rate, or (b) 4% per annum when applying the
Eurodollar Rate. In the case of borrowings under the Tranche B Facility, the
Applicable Margin will be (x) 2% per annum (when the Debt to Operating Cash Flow
Ratio (as such terms are defined in the Credit Facility) is equal to or greater
than 5:1) or 1 1/2% per annum (when such Ratio is less than 5:1), in each case
when applying the Base Rate, or (y) 3% per annum (when such Ratio is equal to or
greater than 5:1) or 2 1/2% per annum (when such Ratio is less than 5:1), in
each case when applying the Eurodollar Rate. As used herein, "Base Rate" means
the higher of (i) Chase's prime rate and (ii) the federal funds effective rate
from time to time plus 1/2% per annum. As used herein, "Eurodollar Rate" means
the rate at which eurodollar deposits for one, two, three and six months (as
selected by PCSD Financial Corp.) are offered to Chase in the interbank
eurodollar market in the approximate amount of Chase's share of the relevant
loan. At any time when PCSD Financial Corp. is in default in the payment of any
amount due under the Credit Facility, the principal of all loans made under the
Credit Facility will bear interest at 3% per annum above the rate otherwise
applicable thereto.
Upon completion of the Offering, the Company believes that its cash
balances, together with available borrowings under the Credit Facility, will be
adequate (i) to fund the Company's expected capital expenditure requirements of
approximately $176.7 million necessary to complete the buildout of its
nationwide narrowband PCS network and (ii) to fund debt service requirements of
approximately $55.2 million (approximately $12.9 million in 1996, $19.5 million
in 1997 and $22.8 million in 1998) until such time as the Company generates
sufficient positive cash flow from operations, which is not expected to occur
prior to 1999. Management believes the Company will generate positive cash flow
from operations beginning in 1999. However, no assurance can be or is given as
to when or if the Company will generate positive cash flow from operations.
INFLATION
Inflation is not currently a material factor affecting the Company's
business. General operating expenses such as salaries, employee benefits and
occupancy costs are subject to normal inflationary pressures.
ACCOUNTING STANDARDS
In March 1995 the Financial Accounting Standards Board (FASB) issued
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of"
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("SFAS No. 121"). SFAS No. 121, which is effective for fiscal years beginning
after December 15, 1995, requires that certain long-lived assets and intangible
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company is not aware of any events or changes in circumstances that will result
in a material effect on its financial statements upon the Company's 1996
adoption of SFAS No. 121.
In October 1995 the FASB issued Statement No. 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123, which is also
effective for fiscal years beginning after December 15, 1995, allows companies
either to continue to measure compensation cost based on the method prescribed
by Accounting Principles Board Opinion No. 25 ("APB No. 25") or adopt a "fair
value" method of accounting for all employee stock-based compensation. The
Company has elected to continue utilizing the accounting for stock issued to
employees prescribed by APB No. 25 and, therefore, the required adoption of SFAS
No. 123 will have no impact on the financial position or results of operations
of the Company.
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BUSINESS
GENERAL
PCSD intends to become a leading provider of narrowband PCS wireless
telecommunications services in the United States. Organized in 1994 as a
Delaware corporation, the Company was one of only five bidders in the FCC's 1994
narrowband PCS auctions that succeeded in acquiring licenses for paired 50 kHz
inbound/50 kHz outbound frequencies covering the entire United States and the
U.S. territories, including Puerto Rico and the U.S. Virgin Islands. PCSD
intends to employ the Licenses to offer a full array of two-way wireless
advanced messaging services. These services will include stored voice and data
messaging utilizing Motorola's state-of-the-art InFLEXion(TM) technology. The
Company believes that its network, utilizing the InFLEXion(TM) technology, will
have significant advantages over traditional one-way paging networks, including
increased capacity, higher transmission speed and two-way capability. This
enhanced technology, in combination with the Company's nationwide spectrum
coverage, will enable PCSD to offer stored voice messaging, data messaging and
other services on a local, regional and nationwide basis.
The Company's first service, expected to be commercially available in the
first quarter of 1997, will be a stored voice messaging service. This service
will allow a subscriber to receive a high quality wireless transmission of a
sender's voice on a pager-like subscriber unit where the message can be stored
and retrieved for later playback. Of the four other companies with licenses for
nationwide 50/50 kHz PCS spectrum, only PageNet and PageMart have announced an
intention to offer stored voice messaging services. Based on paging industry
studies and surveys of potential subscribers, as well as the popularity of
telephone answering machines in the home and the growth of voice mail in office
environments, the Company believes that there will be significant demand for a
mobile stored voice messaging service when it becomes available. A 1994 study
conducted by FGI indicated that stored voice messaging could achieve a 20%
penetration of the U.S. population. Moreover, according to a 1995 Motorola
survey, approximately 84% of current paging subscribers would consider replacing
their existing subscriber unit with a stored voice messaging unit. A subsequent,
more comprehensive market research study conducted for the Company by FGI in
1996 indicated that 76% of current paging subscribers are likely (40% somewhat
likely and 36% very likely) to purchase stored voice messaging at costs within
the Company's anticipated price ranges. See "Potential Market" and
"Distribution -- Pricing of Airtime and Subscriber Units." Following the
commercial introduction of its stored voice messaging service, the Company also
plans to introduce in 1997 enhanced InFLEXion(TM) data services allowing
subscribers to receive alphanumeric messages of up to several thousand
characters, compared to the 80 character limit typical of one-way alphanumeric
paging service available today, and eventually, enabling message recipients to
initiate brief alphanumeric responses.
PCSD plans to market local, regional and nationwide services initially
through indirect channels by forming marketing relationships with
telecommunications companies, including established paging companies that have
installed customer bases but that do not have the capability to deliver over
their own networks the enhanced services that the Company plans to market.
Unlike the other companies that acquired licenses for nationwide 50/50 kHz PCS
spectrum, PCSD does not offer one-way paging services. Consequently, the Company
believes that other paging companies desiring to offer enhanced PCS services
will be more likely to form a marketing relationship with PCSD than with these
competitors. Consistent with this strategy, PCSD has formed marketing alliances
with its two Paging Company Investors, which together have an aggregate of
approximately 3 million existing subscribers, and through May 21, 1996, has
signed memoranda of understanding to form marketing relationships with 17 other
paging companies, which together have an aggregate of approximately 13 million
subscribers. These 16 million subscribers represent approximately one-half of
all pagers currently in service in the United States.
PCSD is currently designing and constructing its nationwide narrowband PCS
network and is in the process of securing transmitter and receiver sites and
purchasing network infrastructure equipment from Motorola and Glenayre, two
leading providers of paging equipment. By the time the Company anticipates that
its stored voice messaging service will be commercially available in the first
quarter of 1997, the Company expects to have completed the buildout of its
InFLEXion(TM) network in the top ten BTAs, which include New York City, Los
Angeles, Chicago, San Francisco, Philadelphia, Detroit, Dallas, Boston,
Washington, D.C. and
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Houston, and to have completed its nationwide network buildout in the first
quarter of 1998. A BTA or "basic trading area" is one of 493 specified
geographical areas surrounding a city in the United States, its territories and
possessions (as opposed to the 51 MTAs which consist of at least 2 BTAs), as set
forth in the Rand McNally Commercial Atlas & Marketing Guide (124(th)ed. 1993),
which the FCC has recognized in the licensing of PCS radio frequencies.
To fund the acquisition of the Licenses, the buildout of its nationwide
narrowband PCS network and the commercial introduction of its services, PCSD
raised approximately $92.7 million in two private equity offerings, obtained
relatively low-cost financing from the FCC and is in the process of entering
into the Credit Facility and issuing the Units. The Company raised $37.2 million
in November 1994 from the sale of its Common Stock to the Paging Company
Investors and other financial investors and raised $55.5 million in November
1995 from the sale of Preferred Stock to an investor group which was led by
Chemical Venture Partners and which included several of the Company's initial
financial investors. Because it was considered a "Designated Entity" under the
FCC rules applicable to the narrowband PCS regional auction, the Company is
entitled to pay $72.7 million of the $90.9 million purchase price for the
Licenses over ten years at a 7.5% annual interest rate. See "Description of FCC
Auction Benefits -- "Designated Entity" Status in FCC Narrowband PCS Regional
Auction" and "Description of Other Indebtedness -- FCC Obligation." In addition,
concurrently with the Offering, the Company will establish a secured Credit
Facility of approximately $225.0 million. Upon completion of the Offering, the
Company believes that its cash balances, together with available borrowings
under the Credit Facility, will be adequate to fund the Company's expected
capital expenditures necessary to complete the buildout of its nationwide
narrowband PCS network and fund operating requirements, including debt service,
until such time as the Company generates sufficient positive cash flow from
operations, which is not expected to occur prior to 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Other
Indebtedness -- The Credit Facility."
The Company has assembled an experienced management team to execute its
business strategy. Members of PCSD's management team have held managerial
positions with leading wireless and other telecommunications companies,
including AT&T, Dial Page, GeoTek, MCI, MobileComm, Motorola, PageNet, RAM
Mobile Data, SkyTel, Sprint and USA Mobile. PCSD's executive team brings to the
Company extensive experience in the development, design and manufacture of
wireless products, the construction and operation of wireless networks and the
sale and marketing of wireless services and products.
STRATEGY
PCSD's strategic objective is to become a leading provider of stored voice
and data messaging services in the United States. To achieve this objective, the
Company intends to offer competitively priced, easy-to-use stored voice and data
messaging services targeted at broad market segments. Key elements of the
Company's strategy include:
Nationwide spectrum position. Upon acquiring the Licenses, the
Company became one of only five companies with nationwide 50/50 kHz PCS
spectrum, thereby positioning itself to create a nationwide network for
wireless stored voice and data messaging services. The geographic scope of
the system should enable the Company to achieve significant economies of
scale as it attracts a large customer base by offering local, regional and
nationwide messaging services.
Services with broad market appeal. Narrowband PCS stored voice and
data messaging services will offer the low-cost, long battery life and
portability advantages of current paging services. These services delivered
over the Company's InFLEXion(TM) network will offer improved functionality
compared to traditional one-way paging services, such as the high quality
transmission of messages in the sender's own voice and confirmation of
receipt of messages to the network. It is anticipated that InFLEXion(TM)
data services will enable the delivery of significantly longer alphanumeric
messages and the initiation of brief alphanumeric responses. Based on the
growing use of voice mail in office environments and telephone answering
machines in homes, as well as the growing number of one-way paging
subscribers, management expects that the Company's services will generate
demand by offering an attractive, mobile
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alternative to these answering services. Management believes, based on
market research conducted by Motorola, FGI and the Company's own market
research personnel, that enhanced voice messaging will be one of the most
widely accepted new paging services, with the potential to penetrate 20% or
more of the U.S. population.
Established distribution channels. The Company expects to use
existing distribution channels to achieve rapid market penetration and to
minimize marketing and selling expense. Consistent with this strategy,
through May 21, 1996, the Company has formed marketing relationships with
the Paging Company Investors as well as 17 other paging companies, which
together have an aggregate of approximately 16 million subscribers,
pursuant to which these paging companies have indicated their intention to
sell the Company's stored voice messaging services to their customers. The
Paging Company Investors have agreed to contract exclusively with the
Company for the purchase of narrowband PCS services rendered by the Company
which such Paging Company Investors desire to purchase, provided the
Company's services are competitive in price and quality with similar
services that may be available from others. The 17 other paging companies
currently have entered into memoranda of understanding with the Company
pursuant to which they have stated their intentions to sell PCSD's advanced
messaging services to their subscribers, if those services are competitive
in price and quality. These 16 million subscribers represent approximately
one-half of all pagers currently in service in the United States. The
Company believes that other telecommunications companies, such as cellular
and long distance service providers, ESMR operators and RBOCs, will also
package the Company's services with their product offerings.
Rapid network buildout. The Company expects to be among the first to
construct a nationwide narrowband PCS network utilizing InFLEXion(TM)
technology and to offer enhanced stored voice messaging services through
its network on a local, regional and nationwide basis. By utilizing its
proprietary market research, the Company will target initial buildout and
marketing in areas projected to have high demand for stored voice services.
The Company has already commenced network buildout in its initial test
markets, Boston and Atlanta, and anticipates that system tests will begin
in the third quarter of 1996 with commercial introduction of its voice
messaging service beginning in the first quarter of 1997. By this time, the
Company expects to have completed the buildout of its network in the top
ten BTAs, and expects its nationwide network buildout to be completed in
the first quarter of 1998.
Low-cost provider. PCSD's network operation, marketing strategy and
administrative structure have been designed to support the Company's
efforts to be a low-cost provider of its services. Management expects that
the capacity benefits of its nationwide network and its use of Motorola's
state-of-the-art InFLEXion(TM) technology will reduce its cost per unit of
network capacity compared to traditional one-way networks. The Company
intends to maximize the number of subscribers on its network by utilizing
the distribution channels of the Paging Company Investors and other paging
company partners, as well as other existing distribution channels. PCSD
also expects this distribution strategy to reduce the costs associated with
recruiting, training, compensating and managing a large in-house marketing
and sales staff. The Company will seek to control administrative costs
through a combination of centralized network management, customer service,
billing, credit, collections and accounting.
MARKET POTENTIAL
Upon completion of its nationwide narrowband PCS network, the Company
expects to have the capacity to offer a broad variety of advanced messaging
services. Industry sources estimate that customer reception of narrowband PCS
services and traditional paging services will exceed the demand for both
broadband PCS and cellular services. In a 1994 report, the Personal
Communications Industry Association ("PCIA") forecasts 56.2 million narrowband
PCS and traditional paging subscribers in 2000, as compared to 14.8 million and
46.9 million subscribers in 2000 for broadband PCS and cellular services,
respectively. Moreover, industry sources estimate that there were more than 30
million pagers in service at December 31, 1995 and that the number of pagers in
service will grow at an annual rate of approximately 15% for the next five
years, to over
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60 million subscribers by the end of 2000. According to the 1994 PCIA report,
the number of narrowband PCS and traditional paging subscribers will continue to
grow and will total approximately 92 million in 2005.
The Company's first service, expected to be commercially available in early
1997, will deliver stored voice messages wirelessly to a pager-like subscriber
unit. Based on industry studies and the Company's proprietary market research,
management believes that there will be significant demand for such a service. In
1994 FGI conducted a study of 750 households and 500 businesses in order to
assess the demand for voice paging and estimated that stored voice messaging
services could ultimately achieve a 20% penetration of the U.S. population.
Moreover, according to a 1995 Motorola study, approximately 84% of current
paging subscribers would consider replacing their existing pager with a voice
messaging unit. A subsequent, more comprehensive market research study conducted
for the Company by FGI in 1996 indicated that 76% of current paging subscribers
are likely (40% somewhat likely and 36% very likely) to purchase stored voice
messaging at costs within the Company's anticipated price ranges. Finally,
management anticipates significant demand for its voice messaging services based
on the estimated penetration of answering machines in U.S. households of
approximately 63% according to a 1995 International Mass Retail Association
poll, and the popularity of voice mail services in office environments.
Management believes that consumers will view the stored voice product as a
convenient alternative to answering machines and voice mail.
SERVICES
The Company's planned service offerings will be delivered to a pocket-sized
subscriber unit containing a transmitter, enabling it to send a signal
identifying its location to the Company's network. Thus, unlike current one-way
paging in which all transmitters in the coverage area must simultaneously
broadcast the message, PCSD's InFLEXion(TM) network will be able to transmit the
message to the subscriber unit from the network's nearest transmitter, thus
dramatically increasing the network's capacity and efficiency. Management
estimates that the Company's stored voice messaging services and enhanced
alphanumeric services (each of which is described in more detail below) will be
offered to customers at monthly prices competitive with current one-way
alphanumeric paging services in similar service areas. The Company's service
offerings are expected to include:
Voice Messaging. The Company's first major offering will be an
entirely new class of messaging service -- a wireless stored voice
messaging product utilizing Motorola's state-of-the-art InFLEXion(TM)
technology to deliver a high quality stored transmission of the sender's
voice to the subscriber unit. The unit will store up to four minutes of
voice messages, which the subscriber will be able to play, fast-forward,
rewind and delete, much like an answering machine or voice mailbox. If the
subscriber unit is full, the sender's message will be stored in a network
server. The network will then transmit a "message waiting" notification to
the subscriber unit. The subscriber can delete old messages to enable the
unit to receive immediately messages stored by the network. While the
subscriber will not be able to respond directly to the caller by speaking
into the unit, the subscriber unit will acknowledge receipt of the voice
message to the network. The subscriber unit will have a volume control to
allow the subscriber to listen to messages privately, or to play them aloud
for others to hear.
Enhanced Alphanumeric Messaging. The alphanumeric messaging service
which the Company expects to offer will enable the subscriber to receive
alphanumeric messages of up to several thousand characters in length
(compared to the approximately 80 characters in traditional one-way
alphanumeric messaging) which will be input by either a computer or other
device with the proper software and a modem that can access the Company's
network or by a dispatch operator. As in the case of the Company's voice
messaging service, the Company's network will be designed to seek out the
subscriber unit until the subscriber unit acknowledges to the Company's
network that it has received the message.
The Company believes that penetration of alphanumeric service has been
limited to date due to the reluctance of many one-way paging operators to
promote the service because of its relatively high use of system capacity
during transmission. The Licenses and InFLEXion(TM) technology will offer
significant increases in capacity and delivery speed over the spectrum and
technology currently delivering alphanumeric messaging services. The
Company expects that its alphanumeric service will improve upon
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traditional service by permitting longer messages, by guaranteeing and
acknowledging delivery and, eventually, by permitting the subscriber to
initiate limited data responses. Management believes that these service
enhancements, along with its competitive pricing, will appeal to
subscribers of traditional alphanumeric messaging services and to cost
conscious customers who have not previously subscribed to such services.
Other InFLEXion(TM) Services. Over time, the Company intends to
participate in the growth of wireless data messaging services by working
with software companies and electronic component manufacturers in the
development of additional data messaging services. In addition to
pocket-sized pagers, the Company expects that wireless data transmissions
will be received by computers or Personal Digital Assistants ("PDAs")
equipped with two-way radio frequency modems or built-in radio frequency
capability. It is anticipated that a limited response by the computer or
PDA will be possible.
The Company may package one or more of the above services with cellular,
ESMR and broadband PCS applications, as well as with e-mail, facsimile, location
determination, credit card verification, PDA information delivery and broadcast
data applications. The Company also anticipates that future technological
advances will eventually enable the Company's network to deliver both stored
voice and data transmissions to a single subscriber unit.
DISTRIBUTION
The Company intends to offer its services to a broad variety of business
and consumer segments through both indirect and, over time, direct distribution
channels. Distribution support will be tailored to specific distribution
channels and will include market research, product and sales training and
promotional materials. The Company also will have the flexibility to accommodate
bulk billing to resellers, as well as direct billing to end users. Initially,
the Company intends to market its stored voice and data messaging services
indirectly by forming marketing relationships with resellers, such as one-way
paging operators and other third-party distributors. The Company's planned
distribution strategy is detailed below.
Indirect Distribution
The Company believes that utilizing existing distribution channels will be
a rapid and cost-effective method of establishing market share. Management has
identified three indirect distribution channels that together should give the
Company access to the widest possible group of end users.
Established Telecommunications Companies. This category includes
one-way paging operators and other providers of telecommunications
services. PCSD is forming marketing relationships with established paging
companies that have installed customer bases but that do not have the
capability to deliver the Company's wireless stored voice or data messaging
products over their existing networks. Consistent with this strategy,
through May 21, 1996, the Company has entered into arrangements with its
Paging Company Investors as well as 17 other paging companies, which
together have an aggregate of approximately 16 million subscribers,
pursuant to which these paging companies have indicated their intention to
sell the Company's stored voice services to their customers. The Common
Stockholders Agreement (as defined herein) provides that the Paging Company
Investors must enter into exclusive operating agreements with the Company
with respect to those narrowband PCS services rendered by the Company which
such Paging Company Investors desire to purchase, provided such services
are competitive in price and quality with comparable services offered by
others. The Paging Company Investors have indicated that they plan to
market the Company's services directly to their subscribers through their
own sales forces. On May 16, 1996, A+ Network announced that, subject to
certain conditions, it had agreed to be acquired by MetroCall, Inc.
("MetroCall"), one of the other paging companies that has entered into a
memorandum of understanding with the Company. The Company expects that
MetroCall, as the successor to the rights and obligations of A+ Network
under the Common Stockholders Agreement, will enter into an exclusive
operating agreement with the Company as outlined above upon the
consummation of the merger of A+ Network into MetroCall. The 17 other
paging companies currently have nonbinding memoranda of understanding with
the Company pursuant to which
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they have stated their intention to sell PCSD's advanced messaging services
to their subscribers if those services are competitive in price and
quality. The Company is currently in the process of presenting marketing
proposals and definitive contracts to the paging companies and expects
definitive contracts to be concluded by the fall of 1996. The Company
believes that these established paging companies will be likely to offer
stored voice messaging services to their subscribers even though such
services may be viewed as competitive with traditional paging services
because of the expected market demand for stored voice messaging services
by current and future paging subscribers. The Company also believes that
other telecommunications companies, such as cellular and long distance
service providers, ESMR operators and the RBOCs, will package the Company's
services together with their existing product offerings. Management is
currently negotiating with several such providers for the distribution of
the Company's wireless stored voice messaging services.
Industry Integrators. The second indirect distribution channel that
management expects to pursue includes industry "integrators" such as voice
mail and e-mail providers, interconnect dealers and computer industry
value-added resellers. Such companies control access to large, diversified
customer bases and, through this channel, the Company expects to distribute
its wireless stored voice and data messaging services to the mobile
computer user market. Management expects that PCSD's network functions,
such as transmission of e-mail, facsimile, PDA information delivery and
broadcast data applications, will be complementary to many of the
multimedia-based software applications currently being developed. In
addition to the mobile computer user, the Company believes that its
services will also appeal to subscribers of business voice mail services.
Management expects that its stored voice messaging service will enhance
passive voice mail systems by providing immediate notification of receipt
of messages and eliminating the need to call into a fixed voice mail system
to retrieve messages.
Consumer Mass Marketing Companies. The third indirect marketing
channel that the Company expects to utilize consists of a broad array of
consumer mass marketing companies, including national chain retailers,
telemarketing companies and commercial on-line services, among others.
Management expects this channel to be the most cost-effective way to reach
the "retail consumer." The Company expects retailers to sell units to end
users who will call one of PCSD's toll-free operators for service
activation and billing. The Company expects to provide sales incentives and
advertising support, and will emphasize the training of sales personnel to
enhance the retailers' effectiveness and to ensure the customer is well
educated regarding the Company's services. The Company expects to develop a
national "brand name" for use in marketing its services through these mass
retailers.
Direct Distribution
While the indirect distribution channel is expected to account initially
for substantially all of the Company's subscriber additions, the Company is
currently developing direct marketing programs and alliances to supplement its
indirect distribution and to provide customized, higher-value-added products to
select customer segments. The Company will endeavor to sell "applications"
designed to address specific customer segments and needs. These applications
could include multimedia (voice and data) messaging services integrated with
portable computers, digital organizers and other hand-held computing devices.
Successfully selling these applications will require the establishment of
strategic alliances and direct marketing programs with technology partners and
computer industry distribution partners. Management believes that the sale of
applications could generate enhanced margins that would more than offset the
costs associated with direct marketing and sales.
Pricing of Airtime and Subscriber Units
Currently, monthly airtime charges for subscribers to traditional one-way
local paging services range from approximately $8 to $12 for digital service and
$15 to $20 for alphanumeric service. One-way paging subscribers either purchase
their pagers at prices ranging from approximately $50 to $120 for numeric pagers
and $150 to $250 for alphanumeric pagers, or lease their pagers for monthly
charges ranging from approximately $1 to $7 depending on the term of the lease.
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The Company is still developing its airtime pricing strategies and
subscriber unit sale and rental options. As discussed above, the Company's
initial plan is to market its stored voice messaging service indirectly through
resellers. The Company will not control the airtime or subscriber unit prices
charged by its resellers to the end user subscribers. The Company anticipates,
however, that the pricing packages it will offer its volume resellers will
enable them to offer PCSD's local stored voice messaging services, including
subscriber unit rental, at prices ranging from $18 to $20 per month. The Company
anticipates that these pricing packages will enable the Company to generate
positive cash flow from operations beginning in 1999. However, no assurance can
be or is given as to when or if the Company will generate positive cash flow
from operations.
The stored voice messaging subscriber unit is expected initially to cost
approximately $250, with volume purchase discounts potentially available.
Management's present intention is to sell the subscriber units to its resellers
at cost. The resellers will have the flexibility to either resell the units to
the end user subscribers on a customer-owned-and-maintained ("COAM") basis or
lease the subscriber unit. Thus, from the Company's perspective, the majority of
the subscriber units will be COAM but from the resellers' perspective, the units
may be either COAM or leased to the end user. As the Company's direct sales
grow, however, it is likely that the Company will lease an increasing portion of
subscriber units directly to end users. As this occurs, management will attempt
to optimize profitability by determining the proper blend of COAM and leased
subscriber units.
SPECTRUM
The Company's nationwide spectrum consists of five regional 50/50 kHz
narrowband radio frequency licenses acquired at the November 1994 FCC auction
(the "Licenses"). The FCC granted the Licenses to the Company on February 3,
1995, and that grant became nonappealable by final order on March 15, 1995. The
Licenses are on the same frequency, which allows the Company to create a
seamless nationwide network covering the United States and its territories,
including Puerto Rico and the U.S. Virgin Islands.
Management believes that the Licenses give the Company adequate capacity to
execute its business plan for the provision of services on a local, regional and
nationwide basis. If demand for the Company's services exceeds the Company's
expectations, the Company could increase network capacity by adding more
transmitters and receivers or by acquiring additional spectrum. Anticipating
that the acquisition of additional spectrum in major metropolitan areas would be
a cost-effective alternative to adding more network infrastructure, the Company
participated in the FCC's 900 MHz specialized mobile radio ("SMR") auction that
concluded on April 15, 1996 (the "SMR Auction"). The Company was the winning
bidder in the SMR Auction for SMR licenses in 29 major metropolitan areas (the
"SMR Auction Spectrum"). The Company's winning bids (net of a 10% bidding
credit) totaled $9.7 million. Because the Company satisfied "small business"
criteria applicable in the SMR Auction, it was entitled to a 10% bidding credit
and is entitled to pay 90% of the net price for SMR Auction Spectrum over the
ten-year term of the licenses, with interest only payable for the first two
years and the remaining principal and interest payable quarterly over the
remaining eight years. See "Description of FCC Auction Benefits -- "Small
Business" Status in FCC 900 MHz SMR Auction." The Company expects that the
licenses for its SMR Auction Spectrum will be granted in July 1996, which grants
will become nonappealable by final order in September 1996, unless challenged.
The Company is fully qualified to hold the SMR Auction Spectrum and expects that
its applications for this spectrum will be granted in the ordinary course. The
interest rate on the installment payments will be set at 250 basis points in
excess of the 10-year U.S. Treasury note rate as of the date of grant.
In addition to its SMR Auction Spectrum, the Company has purchased or has
an option to purchase from third parties SMR spectrum in several other
metropolitan areas. The SMR spectrum consists of ten channels with 125 kHz
inbound and a 125 kHz outbound capacity. Together with the Licenses, the SMR
Auction Spectrum and the SMR spectrum purchased or under contract with third
parties, the Company's network will have 175 kHz/175 kHz spectrum capacity in 35
of the 50 largest BTAs, including each of the top eight BTAs. The Company
anticipates that it may acquire or may obtain options to acquire additional SMR
spectrum from private owners. Moreover, the Company may acquire additional
narrowband PCS spectrum in the FCC narrowband PCS MTA/BTA auction anticipated to
occur in late 1996 or early 1997. See "Description of FCC Auction
Benefits -- Status in Future FCC Narrowband PCS MTA/BTA Auction."
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In order to utilize SMR spectrum to deliver its stored voice messaging and
other narrowband PCS services over the Company's InFLEXion(TM) network, it will
be necessary for the InFLEXion(TM) infrastructure equipment and TENOR(TM)
subscriber unit to be type-accepted by the FCC for use with SMR spectrum. Such
acceptance, required under Part 15 of the FCC rules, involves routine laboratory
testing of transmission equipment to determine that such equipment operates
within appropriate specifications. Motorola and Glenayre have indicated to the
Company that they will seek such approval from the FCC with respect to the
equipment manufactured by them and that they know of no reason why such approval
cannot be obtained. See "Business -- Network Buildout."
NARROWBAND PCS PROTOCOLS
Paging networks use various "protocols" to provide seamless communication
between the various components which make up a paging network. Protocols
regulate the format and flow of messages which are transmitted over the network.
Motorola has developed, and licensed to Glenayre, several protocols, including
FLEX(TM), ReFLEX(TM) and InFLEXion(TM). Of the three protocols, ReFLEX(TM) and
InFLEXion(TM) both permit two-way alphanumeric messaging, but only InFLEXion(TM)
has the capability to offer cost-efficient stored voice messaging,
very-high-speed data delivery and the transmission of data to the subscriber
unit from the network's nearest transmitter, thus allowing greater "frequency
reuse." AT&T has also developed a proprietary protocol, "Personal Air
Communications Technology," or pACT(TM), for two-way wireless transmission of
voice and alphanumeric messages. Management believes, however, that the
InFLEXion(TM) protocol is superior to pACT(TM) in terms of cost-efficient stored
voice messaging and very-high-speed data delivery.
Various protocols have different transmission speed and capacity
characteristics. Consequently, the ability to deliver various types of wireless
messaging services, including stored voice messaging, on a cost-efficient basis
is dependent upon the protocol used. The following table illustrates certain
characteristics of various protocols based on current publicly available
information.
<TABLE>
<CAPTION>
INFLEXION(TM) REFLEX 50(TM) REFLEX 25(TM) PACT(TM)
<S> <C> <C> <C> <C>
Outbound Transmission Speed per 16,000 bits per 6,400 bits per 6,400 bits per 8,000 bits per
Channel second second second second
Number of Channels(1) 7 4 2 3
Outbound Throughput(1) 112,000 bits per 25,600 bits per 12,800 bits per 24,000 bits per
second second second second
Frequency Reuse Nearest All Regional All Regional Nearest
Transmitter Transmitters Transmitters Transmitter
Message Acknowledgement Yes Yes Yes Yes
Limited Alphanumeric Message Response Yes Yes Yes Yes
Stored Voice Messaging(2) Yes No No Yes
Subscriber Unit Size 5.5 oz 5.5 oz 5.5 oz (3)
Estimated Initial Subscriber Unit
Price $250 $400 $300 (3)
Typical Battery Life 45 days 30 days 30 days (3)
</TABLE>
- ---------------
(1) Based on narrowband PCS networks with 50 kHz outbound frequency.
(2) Though the ReFLEX 50(TM) and ReFLEX 25(TM) protocols technically have the
ability to support these service offerings, management believes that neither
of these protocols can cost-effectively support these service offerings.
(3) Not disclosed in publicly available information.
As indicated in the table above, the InFLEXion(TM) protocol is a superior
alternative to other protocols in terms of transmission speed and network
capacity. The InFLEXion(TM) protocol has the ability to support outbound (i.e.
the message from the sender to the subscriber) transmission speeds of up to
16,000 bits per second, or approximately twice that of its nearest competitor.
Further, its utilization of seven outbound channels allows the InFLEXion(TM)
protocol to maximize the amount of data which can be transmitted over the
network over a given period of time ("outbound throughput"). The InFLEXion(TM)
protocol allows for outbound throughput of up to 112,000 bits per second (or
16,000 bits per second multiplied by seven channels).
Networks utilizing the InFLEXion(TM) protocol are able to realize greater
capacity through the protocol's ability to optimize frequency transmission. With
both ReFLEX(TM) and InFLEXion(TM) protocols, when a caller
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sends a message to a subscriber, the network will broadcast a brief message over
the outbound channel signaling the subscriber unit to register its location on
the network. Once the unit registers its location, the network transmits the
message to the unit. In the case of ReFLEX(TM), the network has the ability to
transmit the message from a regional group of transmitters. In the case of
InFLEXion(TM), however, the network has the ability to transmit the message from
the transmitter closest to the unit. In doing so, the InFLEXion(TM) protocol
frees the other transmitters within a regional group to send and receive other
messages, dramatically increasing network capacity compared to a ReFLEX(TM)
network.
NETWORK BUILDOUT
The Company is designing and constructing its own nationwide narrowband PCS
network and plans to provide coverage in the top ten BTAs by the time of the
commercial introduction of the Company's stored voice messaging service, which
is expected to occur in the first quarter of 1997, and to complete its
nationwide network buildout in the first quarter of 1998. The key elements of
the network buildout are as follows:
Design. The design of the Company's nationwide narrowband PCS network
is based upon Motorola's InFLEXion(TM) technology with its frequency reuse
capability in order to achieve more efficient use of the Company's spectrum
and to accommodate a greater number of subscribers. The design process
requires extensive radio frequency planning, which involves the selection
of specific sites for the placement of transmitters and receivers. As part
of the design process, the Company's engineers are identifying sites using
the Company's proprietary database (as well as other sources), which
contains specific information about available sites throughout the nation.
Sites are chosen on the basis of their coverage and on frequency
propagation characteristics, such as terrain, topography, building
penetration and population density. Radio frequency plans for the initial
implementation of the networks in Atlanta and Boston are substantially
complete and preliminary radio frequency plans are currently being
formulated by the Company's engineers for the buildout of the nation's
largest population centers. The Company's engineers are currently
projecting that the Company's nationwide narrowband PCS network will
consist of approximately 2,000 transmitter/receiver sites and approximately
600 stand-alone receiver sites in 1998 when the network is expected to be
completed.
Site Acquisition. The Company also has commenced its site acquisition
process. The Company is in the process of leasing sites for 5-year terms
with two 5-year renewal options. One of PCSD's objectives is to reduce the
risk of delays during the buildout of the network while maintaining the
integrity of the system design. Where feasible, the Company plans to use
existing site locations occupied by other communications service providers
such as paging, cellular, SMR and radio and television broadcasters, and
other sites where zoning approvals and other necessary permits are likely
to be easily obtained.
Equipment. The infrastructure of the Company's InFLEXion(TM) network
will consist of radio transmitters and receivers, switches, radio frequency
controllers and ancillary equipment, such as coaxial cable and antennae.
The switch is the "keeper" of the core data base which stores subscriber
data, as well as the coordination unit for all system parameters and
diagnostics. This infrastructure equipment (other than the ancillary
equipment) which the Company intends to purchase is manufactured only by
two industry leaders, Motorola and Glenayre. Management expects that each
component of the network infrastructure will be available for purchase from
either technology vendor and that these components will be interchangeable.
The Company is negotiating purchase agreements covering the
acquisition of infrastructure equipment and TENOR(TM) subscriber units from
Motorola and infrastructure equipment from Glenayre. The Company expects
that the purchase agreements will require each manufacturer to assist the
Company in the buildout and testing of its network in the Company's initial
over-the-air test markets with a view to supplying the Company with the
infrastructure equipment for the construction of its nationwide network.
Glenayre is expected to finance the acquisition of equipment and related
services by the Company. See "Description of Other Indebtedness -- The
Credit Facility."
The Company expects that the purchase agreement with Motorola will
cover the acquisition and testing of both infrastructure equipment and
TENOR(TM) subscriber units. Motorola is expected to provide
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<PAGE> 39
infrastructure equipment and TENOR(TM) subscriber units to the Company for
initial over-the-air testing in metropolitan Atlanta to commence in
mid-1996. Until testing has been successfully completed, the Company would
not expect to purchase the equipment or pay for Motorola's installation
services for the Atlanta test system. The Company anticipates that Motorola
will advance the Company funds to cover its monthly costs for site leases,
telco lines, ancillary equipment and similar costs for the Atlanta test
system until testing of the Atlanta system has been completed and Motorola
has delivered to the Company its initial order of TENOR(TM) subscriber
units. In consideration of Motorola's advance of funds and delayed payment
terms on the over-the-air test site equipment, the Company would agree to
purchase from Motorola at least 25% of its infrastructure equipment
requirements through the end of 1998; provided that Motorola is competitive
on price, quality and delivery (and assuming initial testing is
successfully completed).
The Company expects to commit to an initial order of commercial
quantities of TENOR(TM) subscriber units, which Motorola has indicated
should be deliverable to the Company in late 1996. See "Competition." The
Company expects that Motorola will agree that upon the issuance of
irrevocable purchase orders by the Company, Motorola will dedicate solely
to the Company sufficient manufacturing capacity to satisfy the Company's
TENOR(TM) subscriber unit orders during 1997 and 1998. The purchase
agreement is expected to provide that Motorola will license an alternative
provider of subscriber units. Motorola and potential Motorola licensees
will be the only providers of TENOR(TM) subscriber units.
Pursuant to the Glenayre purchase agreement, the Company expects to
purchase from Glenayre infrastructure equipment and that Glenayre will
cooperate in over-the-air testing of its equipment in metropolitan Boston
scheduled to commence in mid-1996. Because Glenayre has committed to
provide $75.0 million of financing for the purchase of its equipment, it is
likely that at least $75.0 million of the Company's anticipated
infrastructure equipment purchases will be from Glenayre.
The Company anticipates that both Glenayre and Motorola will agree to
provide the Company with pricing on its infrastructure equipment, which is
no less favorable than prices provided to other customers purchasing the
same equipment in similar quantities. The Company expects both Motorola and
Glenayre will cooperate with the Company to confirm the compatibility of
each manufacturer's equipment with the other for use on the Company's
network. Motorola and Glenayre also have committed to pursue FCC
type-approval of their equipment for use with the SMR spectrum.
The design of the Company's alphanumeric data messaging subscriber
unit has not yet been determined, but it is expected that such data will be
delivered over the Company's InFLEXion(TM) network utilizing a pager-like
device similar to the TENOR(TM) unit.
System Testing. While the switches, transmitters and receivers will
be similar to the equipment used in traditional one-way paging, Motorola is
conducting over-the-air testing of its InFLEXion(TM) technology,
infrastructure equipment and TENOR(TM) subscriber units in its factory in
Fort Worth, Texas. While the tests do not take into account certain factors
prevalent in the design of the Company's network such as terrain,
topography, building penetration and population density, Motorola expects
to establish that the technology and equipment can deliver a wireless voice
message to a TENOR(TM) subscriber unit under controlled circumstances.
The Company has selected metropolitan Atlanta and Boston for initial
over-the-air tests of its wireless stored voice messaging service. These
test markets reflect management's view of the optimal mix of three factors:
variety of technical characteristics, population density and proximity to
customers of the Company's Paging Company Investors. The Company has
substantially completed the initial system design phase for the buildout of
its Atlanta and Boston test network systems and is currently acquiring
transmitter/receiver sites and installing ancillary equipment.
Management plans to conduct over-the-air testing with Motorola
infrastructure equipment in Atlanta and Glenayre infrastructure equipment
in Boston in mid-1996. Motorola has agreed to provide a sufficient number
of TENOR(TM) subscriber units to complete these tests notwithstanding
Motorola's agreement with PageNet. Motorola has also indicated that
commercial quantities of TENOR(TM) sub-
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scriber units will be deliverable to PCSD in late 1996. Thus, PCSD's
commercial introduction of wireless voice messaging services is planned for
early 1997. See "Competition."
PAGING INDUSTRY OVERVIEW
Industry sources indicate that, as of December 31, 1995, there were
estimated to be over 30 million pagers in service in the United States, which
represents a penetration rate in excess of 10% of the population, and that the
number of pagers in domestic service has grown at an annual rate of
approximately 20% since 1989. This growth is expected to continue at a rate of
15% for the next five years. Factors contributing to historical and projected
growth include: (i) a continuing shift toward a service-based economy; (ii)
increasing awareness of the benefits of mobile communication among the
population at large; (iii) the relatively high cost of traditional two-way
mobile communication, such as cellular telephone service; (iv) significant
price, performance and coverage area improvements in paging services; (v)
improved paging product functionality; and (vi) proliferation of retail
distribution outlets. While paging subscribers have traditionally been business
users, pager use among other consumers is increasing.
The paging industry has existed since 1949, when the FCC allocated a group
of radio frequencies for use in providing one-way mobile communication service.
Historically, the industry has been highly fragmented, being characterized by a
large number of small, local operators. During the 1990's, however,
consolidation increased significantly as some paging companies grew rapidly,
either internally or by acquisition. As a result, industry sources have reported
that over 50% of the estimated number of pagers in service in the United States
are now provided by the five companies with the largest subscriber bases.
Several hundred small licensed domestic paging companies nevertheless remain in
existence. Many of them provide only local paging service.
Basic Paging Service. Paging is a method of wireless communication that
uses an assigned radio frequency to contact a subscriber virtually anywhere
within a local, regional or nationwide service area. The subscriber carries the
pager, which receives messages by the broadcast of a one-way radio signal. To
page a subscriber, a caller first dials the subscriber's designated telephone
number. The call is routed to a central paging terminal, which prompts the
caller to enter a message (usually a telephone number) with a tone (usually a
series of "beeps"). After hearing the tone, the caller uses the key pad of a
touch-tone phone to enter the message (telephone number) into the paging
terminal. Within seconds, the paging terminal sends the caller's input to radio
transmitters in the subscriber's service area. Depending upon the topography of
the service area, the operating radius of a typical paging transmitter is from 3
to 20 miles. Each of the transmitters in the service area simultaneously
broadcasts the signal to the pager. As the pager receives the broadcast from the
nearest transmitter, it alerts the subscriber with a beep or vibration and
simultaneously displays and stores the broadcast message.
The Company believes that paging is the most cost-effective form of mobile
wireless communication. The equipment and "air time" required to transmit an
average message cost much less than the equipment and air time required for
cellular telephone calls. The majority of paging subscribers in the United
States pay $13.00 or less for virtually unlimited monthly local numeric service,
while cellular telephone subscribers pay multiples of this amount for limited
monthly service. Some consumers use pagers in lieu of, or in conjunction with,
cellular telephones in order to screen incoming calls and thereby lower or
eliminate the expense of cellular telephone service. Pagers also are smaller and
lighter and have longer battery lives than cellular telephones.
Advanced Messaging Services. While paging has historically been a one-way
communications service, technological advances are now providing a two-way
capability for wireless messaging. In 1994 the FCC enhanced the potential for
two-way messaging by allocating and auctioning new frequencies for two-way
paging services. By the end of 1994 the FCC had successfully auctioned
frequencies for both nationwide and regional two-way services. With the advent
of two-way narrowband PCS technology, management believes that it will be able
to provide its customers with inexpensive voice and/or data acknowledgement
paging services complementary to cellular, broadband PCS and ESMR.
The newly-auctioned narrowband PCS spectrum is expected to allow greater
functionality than traditional paging spectrum because it has broader bandwidth
and offers both "inbound" and "outbound" spectrum, allowing efficient two-way
communication. With two-way transmission capability, a subscriber unit
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will be able to indicate its location to the network. As a result, the message
can be broadcast from the closest transmission site, rather than from all
transmission sites in the entire national, regional or local network, as is the
case with existing paging systems. This should enable more efficient use of the
spectrum in a given geographic area and should greatly increase overall system
capacity.
Advanced messaging services are likely to be delivered through several
kinds of subscriber equipment and technology such as Motorola's voice messaging
product (which will deliver voice messages to a pocket-sized pager-like device),
enhanced alphanumeric subscriber units, PC plug-in cards for laptop computers,
palmtop computers and PDAs allowing these devices to receive and acknowledge
data messages. Eventually these capabilities may be "built in," obviating the
need to purchase add-on devices such as PC cards. In addition, it is expected
that the enhanced functionality of two-way messaging will attract new
subscribers through value-added services such as voice messaging, wireless
origination and delivery of e-mail, integration of wireless devices into
corporate wide area and local area networks, database access and transaction
services.
COMPETITION
The Company expects competition from several direct and indirect sources,
including: other companies that won nationwide and regional narrowband PCS
licenses in the FCC's 1994 auctions; local service providers who may obtain
MTA/BTA licenses in subsequent FCC auctions of narrowband PCS spectrum;
cellular, ESMR and broadband PCS providers; and, to some degree, one-way paging
providers. Management expects to compete on the basis of product quality, price
of service and breadth of geographic coverage.
Other Narrowband PCS Licensees. In addition to the Company, the only
companies that were awarded 50/50 kHz narrowband PCS licenses with nationwide
coverage in the FCC auctions were PageNet, AT&T, Mtel and PageMart. Both PageNet
and AT&T have two nationwide 50/50 kHz narrowband PCS licenses. PageNet,
PageMart and Mtel also have unpaired 50 kHz outbound channels in addition to
their 50/50 kHz paired channels.
PageNet and PageMart have announced their intentions to market voice
messaging products using the same Motorola InFLEXion(TM) technology that the
Company will employ. Mtel has announced that it will use its license for data
products utilizing Motorola's ReFLEX(TM) technology and has introduced its
two-way data product known as "SkyTel 2-Way." AT&T has announced its plans to
introduce a data-oriented system utilizing its proprietary pACT(TM) technology
and a subscriber unit manufactured by Ericsson, Inc. AT&T has not yet announced
plans for a voice messaging product, but no assurances may be given that it will
not compete in that product line. Unlike the other companies that acquired
licenses for nationwide 50/50 kHz PCS spectrum, PCSD does not offer one-way
paging services. Consequently, the Company believes that other paging companies
desiring to offer enhanced PCS services will be more likely to form marketing
relationships with PCSD than with these competitors.
The Company understands that Motorola has an agreement with PageNet
pursuant to which Motorola has agreed to refrain from delivering its TENOR(TM)
voice subscriber units for commercial use to customers other than PageNet until
six months after Motorola commences commercial production of the units. Motorola
has agreed to provide PCSD with TENOR(TM) subscriber units for testing purposes
prior to the expiration of the six month period. Thus, the Company's ability to
complete and test its Atlanta and Boston systems and to complete its buildout in
other cities should not be affected by the PageNet/Motorola agreement. Motorola
has advised PCSD that its TENOR(TM) voice subscriber units should be available
to PCSD for commercial use in late 1996. Management expects that PageNet's
agreement with Motorola will allow PageNet to commence commercial service of its
stored voice product in New York, San Francisco and Dallas prior to the Company
commencing its services; however, the Company anticipates that it will provide
commercial service of its stored voice service in Atlanta and Boston prior to
PageNet and its other competitors and that the Company will be one of the first
to provide commercial service in the other BTAs and throughout the U.S.
In addition to the companies with 50/50 kHz PCS licenses with nationwide
coverage, AirTouch, Mtel, MobileMedia Corporation and Advanced Wireless
Messaging each own 50/12.5 kHz nationwide narrowband PCS licenses. Several other
companies have regional 50/12.5 kHz coverage. The companies that own these
licenses will compete with the Company in enhanced alphanumeric and basic
acknowledgment paging
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services, but the Company does not currently expect those companies to offer
stored voice messaging services unless they acquire more spectrum. This is
because the Company believes that the only currently available technology for
the cost effective delivery of wireless stored voice messaging is the
InFLEXion(TM) protocol utilizing greater spectrum capacity than 50/12.5 kHz.
The FCC is expected to hold auctions for narrowband PCS licenses for 51
MTAs and 493 BTAs in late 1996 or early 1997. Each MTA consists of at least two
BTAs. It is anticipated that in each MTA three 50/12.5 kHz paired licenses, two
50/50 kHz paired licenses and two 50 kHz unpaired licenses will be available. It
is anticipated that in each BTA two 50/12.5 kHz paired licenses will be
available. Management believes that persons acquiring 50/50 kHz paired licenses
in the MTA/BTA auctions could, after building or obtaining access to network
facilities, compete with the Company in the geographic area covered by their
licenses with respect to both voice, enhanced alphanumeric and basic
acknowledgement paging. The Company believes that those persons acquiring
50/12.5 kHz licenses in BTAs or MTAs would be unlikely voice paging competitors
so long as cost effective delivery of such a service requires an InFLEXion(TM)
protocol using greater spectrum capacity than 50/12.5 kHz.
Cellular, ESMR and Broadband PCS. While cellular, ESMR and broadband PCS
networks will offer extensive wireless services, management believes that most
of the Company's service offerings will complement those services rather than
compete directly with them. Cellular, ESMR and broadband PCS have approximately
100 to 300 times the bandwidth of narrowband PCS and therefore can provide
real-time two-way voice communications and long data transmissions with file
transfer capability. The higher broadband PCS infrastructure and spectrum cost,
along with the cost of relocating existing users of the spectrum (as required by
FCC rules), will likely result in higher prices to the end-user of broadband
PCS. In contrast, narrowband PCS will allow providers to offer short stored
voice and data messaging services coupled with message receipt acknowledgement.
Due to the smaller amount of spectrum used in narrowband PCS, there will be a
lower infrastructure cost to cover the same area. Also, unlike broadband PCS,
the narrowband PCS spectrum is clear of existing users, thus eliminating the
need for costly relocation of incumbent users.
During the FCC broadband PCS auctions completed on March 13, 1995, 99
broadband PCS licenses in 51 MTAs were auctioned for a total of approximately
$7.7 billion. These licenses cover approximately 253 million POPs, POPs being
the number of persons within the licensed coverage area based on 1990 U.S.
Census data. The average spectrum cost per POP in the 1995 broadband auctions
was approximately $15.29. On May 6, 1996, the FCC completed an auction of
broadband spectrum in various BTAs to so-called "entrepreneurs" in its "C Block"
auction. At the close of the auction, the net bid price (after allowing for a
25% bid credit) was $39.88 per POP. These broadband spectrum costs compare to
the $90.9 million, or $0.36 per POP, that the Company paid for its nationwide
narrowband PCS spectrum. In addition to the spectrum cost, the estimated cost to
build a narrowband PCS network is significantly lower than the estimated cost to
build a broadband PCS network. Management expects that the cost to build its
nationwide network, including site acquisition, purchase of transmitters and
receivers and other expenditures, will approximate $0.55 to $0.65 per POP,
compared to approximately $25.00 per POP in network buildout costs for broadband
PCS based on recent industry estimates.
Both cellular and broadband PCS networks currently offer voice mail as a
complement to their mobile telephone services. Due to the design characteristics
of an InFLEXion(TM) narrowband PCS network, the Company's management believes
that the stored voice messaging service to be offered by PCSD will be superior
to cellular and broadband voice mail applications in three respects:
Service Cost. Because the spectrum and buildout costs for cellular and
broadband networks are significantly higher than the cost of PCSD's
narrowband spectrum and buildout, management does not believe that cellular
and broadband networks can offer cost-effective alternatives to PCSD's
stored voice messaging service. For example, assuming an average of 100
messages per month and service rates of $0.30 per minute, a cellular or
broadband PCS subscriber would pay $30.00 per month in incremental air time
for stored voice messaging service, which is more than twice what
subscribers to narrowband stored voice messaging services are likely to be
charged to receive up to several hundred messages per month.
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<PAGE> 43
Coverage. PCSD's InFLEXion(TM) network will offer nationwide coverage and
in-building penetration comparable to current one-way paging networks.
Broadband telephone services will be available in BTAs and MTAs, and, like
cellular services, will require roaming agreements with various carriers to
permit subscribers to use their broadband phone outside their home BTA or
MTA. Due to cost considerations, cellular and broadband telephone networks
are not currently designed to achieve in-building penetration comparable to
paging networks. Thus, management does not believe that cellular or
broadband mobile telephone voice mail applications can cost effectively
offer the level and quality of coverage that PCSD's nationwide stored voice
services will offer.
Battery Life. The TENOR(TM) subscriber units that will receive PCSD's
stored voice messages will use disposable nine volt batteries and have an
anticipated battery life of 45 days. Cellular and broadband telephones use
rechargeable batteries which currently offer less than one-tenth of the
battery life anticipated for PCSD's voice subscriber unit before requiring
recharging.
Because of these factors, management does not believe that cellular and
broadband mobile telephone networks will compete with PCSD's stored voice
messaging service to a significant degree. Rather, the Company believes that
PCSD's service offerings will complement cellular and broadband telephone
services and expects that companies offering such services could serve as
additional distribution outlets for PCSD. The Company believes that the number
of large telecommunications companies, including AT&T, AirTouch, Ameritech
Corp., BellSouth Corporation and Telephone and Data Systems, Inc., that have
acquired both broadband and narrowband PCS spectrum demonstrates that narrowband
PCS technologies will offer services quite distinct from cellular and broadband
telephone services.
The Company understands that at least one firm is attempting to develop
technology to utilize excess spectrum capacity on existing cellular systems to
deliver a wireless voice messaging product to subscribers at prices less than
cellular telephone prices. The Company believes that such a system depends on
the efficient and timely capture of cellular spectrum capacity that is not then
being used for cellular telephone communications. Because the Company's
narrowband PCS network spectrum capacity will be devoted entirely to wireless
voice and data messaging, the Company believes that its stored voice messaging
service will offer higher quality and more timely message delivery than services
that depend on finding "excess" spectrum over networks principally devoted to
other uses. Nevertheless, should such a technology be successfully developed and
should the cellular systems used to deliver the product have sufficient spectrum
regularly available, such a service could be competitive with PCSD's two-way
wireless voice messaging product.
One-Way Paging. While management believes that the Company's services will
offer significant functional advantages over existing one-way services,
inevitably PCSD's products will compete to some extent with traditional one-way
paging systems and devices. While price-sensitive customers may continue to use
one-way paging because of its expected lower pricing, management believes that
many or most customers will prefer the convenience and features of the Company's
services. Motorola's market research indicates that approximately 84% of current
one-way paging subscribers would consider converting to voice units when such
units are available, and FGI estimates that stored voice services could achieve
a 20% market penetration of the U.S. population.
REGULATION
The construction, operation and acquisition of PCS systems in the U.S. are
subject to regulation by the FCC under the Communications Act. In addition,
pursuant to congressional authorization granted to the FCC in the 1993 Omnibus
Budget Reconciliation Act (the "Budget Act"), the FCC has been charged with
conducting spectrum auctions to determine how PCS licenses, for which mutually
exclusive applications were filed initially, will be awarded. In preparation for
such auctions, the FCC adopted comprehensive rules that (i) outline the bidding
process, (ii) describe the bidding application and payment process, (iii)
establish penalties for bid withdrawal, default and disqualification, (iv)
establish regulatory safeguards and (v) define the regulatory treatment of
Designated Entities. Designated Entities are entitled to special treatment. See
"Description of FCC Auction Benefits."
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<PAGE> 44
The FCC's national and regional narrowband auctions were completed in 1994.
The Company was awarded the Licenses pursuant to the regional auctions concluded
in November 1994. Other companies obtained narrowband PCS licenses in the
national and regional auctions. See "Competition." The FCC is anticipated to
hold MTA and BTA auctions in late 1996 or early 1997. The Company may
participate in those auctions as well. See "Competition."
The Company was granted its Licenses on February 3, 1995, which grant
became a nonappealable final order on March 15, 1995. Because the Company
qualified as a "Designated Entity" in participating in the regional auctions, it
received certain financial benefits which are subject to repayment if the
Company fails in certain respects to retain that status. See "Description of FCC
Auction Benefits -- "Designated Entity" Status in FCC Narrowband PCS Regional
Auction." In addition, every narrowband PCS licensee must construct facilities
that offer coverage to 37.5% of the population of its service areas within five
years of its initial license grant and to 75% of the population within ten
years. Licensees that fail to meet the coverage requirements will be subject to
revocation of their licenses. The Company's buildout plan is designed to meet
these requirements by the close of 1998.
All narrowband PCS licenses expire automatically ten years after their
initial grant date; thus, the Company's Licenses will expire on February 3,
2005. The Company expects that the FCC will grant it and other licensees
renewals of the narrowband PCS licenses upon their expiration provided such
licensees have complied with the FCC's rules and regulations in all material
respects.
Commercial Mobile Radio Service Regulation
The Company's provision of PCS will be regulated by the FCC as a commercial
mobile radio service, or a CMRS, which is a new class of service created by the
Budget Act. While the FCC's rules relating to certain aspects of the operational
and technical regulation of such services are not yet final, PCS, when offered
as a for-profit interconnected service to the public, will be subject to certain
common-carrier type regulations at the federal level. PCS providers will be
required to provide service upon reasonable request to any customer and are
prohibited from unjust or unreasonable discrimination in charges, practices,
classifications, regulations, facilities or services for or in connection with
like communications services. From time to time, legislation which could
potentially effect the Company, either beneficially or adversely, may be
proposed by federal and state legislators. On February 8, 1996, the
Telecommunications Act of 1996 was signed into law, revising the Communications
Act to eliminate unnecessary regulation and to increase competition among
providers of communications services. The Company cannot predict the future
impact of this or other legislation on its operations.
Commercial Mobile Radio Spectrum Limit
The FCC has imposed a limit on the amount of spectrum certain categories of
CMRS can aggregate in a given geographic area. The total amount of broadband
PCS, cellular and SMR spectrum in which a single entity may have an attributable
interest in a given area is 45 Mhz. Although the Company's interest in its
narrowband PCS spectrum is not included in this spectrum aggregation cap, the
FCC does prohibit a narrowband PCS licensee from holding an ownership interest
in more than three of the 26 channels allocated for narrowband PCS.
Foreign Ownership Restrictions
The Communications Act restricts foreign investment in and ownership of
certain FCC licensees, including common carrier PCS licensees. Among other
things, aliens or corporations otherwise subject to domination or control by
aliens may not own more than 20% of a common carrier PCS licensee directly or
more than 25% of the parent of a common carrier PCS licensee. Aliens may not
serve as officers of a common carrier PCS licensee or as members of a common
carrier PCS licensee's board of directors, although up to one-fourth of the
board of directors of a common carrier licensee's parent may be aliens. The FCC
has authority to permit a licensee to exceed the 25% limit if it finds that the
public interest would be served.
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<PAGE> 45
State Regulations
The FCC has ruled that PCS providers presumptively will be considered CMRS
providers, which are exempt from state rate and entry regulation under the
Budget Act. The Budget Act allows states to seek to initiate rate regulation by
showing that existing market conditions cannot protect consumers from
unreasonable and unjust rates or that the service is a replacement for
traditional wireline telephone service for a substantial portion of the wireline
service within the state. The Budget Act also allows states that regulated CMRS
rates as of June 1, 1993 to petition the FCC to continue such regulation by
making the same showing. States are not, however, prohibited from regulating
other terms and conditions of CMRS. Several states petitioned the FCC to
continue such regulation, but the FCC denied all such petitions. As a result,
appeals are now pending on the FCC's denial of the states' petitions.
International Considerations
The Company's use of spectrum in certain areas of the United States
adjoining Canada and Mexico may be limited pursuant to arrangements between the
FCC and Canadian and Mexican regulatory authorities. In September 1994,
representatives of the FCC and Industry Canada (the Canadian regulatory body)
concluded discussions for an interim sharing arrangement for narrowband PCS in
the Detroit/Windsor and Toronto/Buffalo regions. This arrangement provides for
the use of spectrum for narrowband PCS near the border between the United States
and Canada. Among other things, the arrangement specifies which narrowband
channels are available for use by each of the FCC and Industry Canada within 75
miles of the border. The FCC reached a similar agreement with Mexico's
Secretaria de Communicaciones y Transportes (the Mexican regulatory body) in May
1995. Management is confident that these arrangements will have no material
adverse effect on the Company. One-way paging companies have dealt with this
issue satisfactorily as they built their industry into its present position.
FACILITIES AND EMPLOYEES
The Company currently occupies approximately 13,000 square feet of leased
space and has options to lease an additional 11,000 square feet in Greenville,
South Carolina. All of the Company's management functions occupy this new
facility, which should be adequate for such purposes for the foreseeable future.
Additional facilities will be needed eventually to house customer service and
network monitoring personnel. Management believes that the Company will be able
to lease office space as needed on acceptable terms. The Company also will lease
space for transmitter/receivers as it constructs its nationwide network.
Portions of existing towers and rooftops of buildings will be leased for the
great majority of sites.
At December 31, 1995, the Company employed 33 full-time personnel, none of
whom is represented by a labor union. Management believes that the Company's
employee relations are excellent. The Company anticipates that the development
of its nationwide narrowband PCS system and the delivery of its services will
require the hiring of a substantial number of new employees.
TRADEMARKS
The Company does not currently own any trademarks, service marks or
patents. However, the Company expects to apply for and develop trademarks and
service marks in the ordinary course of business.
LEGAL PROCEEDINGS
The Company has filed a lawsuit seeking specific performance and damages
for breach of a contract it entered into for the acquisition of SMR spectrum.
The Company does not believe the outcome of this litigation will have a material
adverse effect on its financial position or results of operations.
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<PAGE> 46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their positions with the
Company are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ---------------------------------------------------------- ----------------------------------
<S> <C>
Maceo K. Sloan(1)......................................... Chairman of the Board
Cecil L. Duffie, Jr.(1)................................... Vice Chairman of the Board, Chief
Executive Officer and Director
William D. deKay.......................................... President and Director
Harry L. Latham III....................................... Senior Vice President of Sales and
Marketing
Jerome C. Leonard......................................... Senior Vice President for
Engineering and Network
Operations
Mark A. Moore............................................. Senior Vice President of Finance,
Treasurer and Chief Financial
Officer
C.E. Baker, Jr.(1)(2)..................................... Director
Justin F. Beckett......................................... Director
R. Schorr Berman.......................................... Director
James E. Daverman(1)...................................... Director
Richard D. Frisbie........................................ Director
Jeffery C. Garvey(1)...................................... Director
James D. Kallman(1)....................................... Director
Steven J. Lerner.......................................... Director
Malcolmn Pryor............................................ Director
Stan F. Sech.............................................. Director
Pamela R. Simmons......................................... Director
Elliott H. Singer(3)...................................... Director
</TABLE>
- ---------------
(1) Member of Finance Committee. See "Description of Capital Stock -- Common
Stock -- Common Stockholders Agreement -- Finance Committee."
(2) Mr. Baker is Arch Communications' designee to the Board of PCSD. On or about
May 20, 1996, Arch Communications acquired the stock of Westlink Holdings,
Inc. ("Westlink") which owns 49.9% of the outstanding stock of Benbow PCS
Ventures, Inc., ("Benbow"), which owns two 50 kHz/12.5 kHz regional
narrowband PCS licenses. Westlink also has a five-year management agreement
with Benbow under which Westlink is responsible for the day-to-day
operations of Benbow. In addition, Arch Communications has notified the
Company that it plans to transfer all of the Common Stock of the Company
owned by Arch Communications to its wholly-owned subsidiary, Arch
Communications Enterprises, Inc. ("ACE"). As a result of the closing of the
Westlink acquisition and the transfer of the PCSD Common Stock to ACE, Arch
Communications has lost its right to designate a director to PCSD's Board
and Mr. Baker is required to resign from PCSD's Board. Under the Common
Stockholders Agreement, open Board seats created by the termination of a
Paging Company Investor's right to designate a director shall be filled by
an individual designated by the Board who is employed by or associated with
the remaining Paging Company Investor, if any or another person otherwise
experienced in the telecommunications industry.
(3) Mr. Singer is A+ Network's designee to the Board of PCSD. A+ Network has
entered into a definitive agreement to be acquired by MetroCall that will
result in the merger of A+ Network into MetroCall. Under the Common
Stockholders Agreement, a stockholder who has the right to designate a
director and who sells, assigns, conveys or otherwise transfers its Common
Stock by operation of law or otherwise loses its right to designate a
director. Accordingly, upon the consummation of the merger of A+ Network
into MetroCall, A+ Network will lose its right to designate a director to
PCSD's Board. Under the Common Stockholders Agreement, open board seats
created by the termination of a Paging Company Investor's
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<PAGE> 47
right to designate a director shall be filled by an individual designated by
the Board who is employed by or associated with the remaining Paging Company
Investor, if any, or another person otherwise experienced in the
telecommunications industry.
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Maceo K. Sloan, age 46, has been the Chairman of the Board of the Company
since its inception in 1994. He is also Chairman, President and Chief Executive
Officer of SCI and Sloan Financial Group, Inc., a holding company for various
investment advisory, research and financial services organizations. The largest
of these is NCM Capital Management Group, Inc., an SEC-registered investment
advisor that Mr. Sloan founded in 1986 and that currently has more than $3
billion in assets under management. Mr. Sloan serves as Chairman, President,
Chief Executive Officer and Chief Investment Officer of NCM Capital Management
Group, Inc. Before founding NCM Capital Management Group, Inc., Mr. Sloan spent
13 years with North Carolina Mutual Life Insurance Company and its subsidiary,
NCM Life Communications, Inc., which had holdings in cable, cellular and radio
telecommunications.
Cecil L. Duffie, Jr., age 47, has been the Vice Chairman, Chief Executive
Officer and a director of the Company since its inception in 1994. He was a
co-founder of Dial Page Inc. in 1982 and served as a director of Dial Page until
March 1994. Mr. Duffie was the President and Chief Executive Officer of Dial
Page from July 1983 through September 1986 and was Chairman from August 1989
through August 1990. Mr. Duffie provided consulting services to Dial Page from
January 1993 through March 1994 in conjunction with the formation of the Dial
Page subsidiary that merged with Nextel Communications, Inc. His other business
experience includes serving as Chairman, President and Chief Executive Officer
of Beverage Properties, Inc., a producer and distributor of soft drinks, from
1991 through 1994.
William D. deKay, age 40, has been the President and a director of the
Company since its organization in 1994. He joined the Company from Dial Page,
having been employed by Dial Page since 1985, except for one year (January 1988
through January 1989) when he served as Chief Operating Officer of Providence
Journal Telecommunications, Inc., a cellular telephone company. At Dial Page,
Mr. deKay served from September 1990 until July 1994 as Executive Vice President
of Business Development, Vice Chairman of the Board of Directors and Secretary.
From January 1989 to September 1990 he served as Vice President and Chief
Operating Officer of Dial Page, and from October 1985 until January 1988 he was
Vice President of Marketing of Dial Page. Prior to that time, he held various
marketing and sales positions for Sprint and AT&T Long Lines.
Harry L. Latham III, age 35, joined the Company as its Senior Vice
President of Sales and Marketing in April 1995. He served from October 1992 to
April 1995 as Vice President of Marketing at SkyTel, where he was responsible
for Product Development, Marketing Strategy, Marketing Alliances, Distribution
Development and Communications. Prior to joining SkyTel in October 1992, Mr.
Latham spent approximately eight years in the Consumer Package Goods Industry
and brand management with the Nabisco Foods Group and the Quaker Oats
Corporation.
Jerome C. Leonard, age 58, joined the Company as its Senior Vice President
for Engineering and Network Operations in March 1995. For 33 years before
joining the Company he was employed by Motorola, where he served in several key
management positions. From March 1992 until March 1995 he was Motorola's
Corporate Vice President and General Manager of Strategic Programs for the
Messaging, Information and Media Sector, which focused during this period on
narrowband and broadband PCS. From 1981 to 1993 Mr. Leonard held key management
positions in Paging Operations, including six years as General Manager of two
major Paging Products Divisions with responsibilities including manufacturing,
research, design and sales.
Mark A. Moore, age 35, is the Company's Chief Financial Officer and Senior
Vice President of Finance. He served as USA Mobile's Controller from May 1990
through February 1992, as its Vice President of Finance from February 1992
through November 1993 and as its Chief Financial Officer, Vice President of
Finance and Secretary from November 1993 until he joined the Company in May
1995. From 1984 through 1990, Mr. Moore held various management positions with
the Paging Division of Graphic Scanning Corporation.
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<PAGE> 48
C.E. Baker, Jr., age 45, has been a director of the Company since November
1994. He has also served as President, Chief Executive Officer and a director of
Arch Communications since 1988 and became Chairman of the Board of Arch
Communications in May 1989.
Justin F. Beckett, age 32, has been a director of the Company since May
1995. He serves as President and a director of Sloan Communications, Inc., where
he has been employed in various executive capacities during the past five years.
He is also President and Chief Executive Officer of New Africa Advisers, Inc., a
wholly-owned subsidiary of Sloan Financial Group. Mr. Beckett is also Executive
Vice President of Sloan Financial Group.
R. Schorr Berman, age 47, has been a director of the Company since November
1994. He has also been a director of Arch Communications since 1986. Since 1987,
he has been the President and Chief Executive Officer of MDT Advisers, Inc. and
was an investment officer at Memorial Drive Trust from 1984 to 1988.
James E. Daverman, age 46, has been a director of the Company since
November 1994. He has served as Managing General Partner of Marquette Venture
Partners, a venture capital firm, for the past five years.
Richard D. Frisbie, age 46, has been a director of the Company since
November 1994. He has been Managing General Partner of Battery Ventures I, II
and III since he founded it in 1984. He serves on a number of Board of Directors
of privately owned companies.
Jeffery C. Garvey, age 47, has been a director of the Company since
November 1994. He has been General Partner of Austin Ventures during the past
five years.
James D. Kallman, age 33, has been a director of the Company since November
10, 1995. He has been a Principal of Chemical Venture Partners since January 1,
1992. From January 1990 until December 1991, he served as the president of M.H.
Capital Partners, Inc.
Steven J. Lerner, age 41, has been a director of the Company since May
1995. He also serves as Vice President and a director of Sloan Communications,
Inc. He has been the Chairman of FGI and CMS, Inc. since he co-founded them in
1982 and 1990, respectively. FGI and CMS, Inc. are marketing companies
headquartered in Chapel Hill, North Carolina.
Malcolmn Pryor, age 49, has been a director of the Company since November
1995. During the past five years he has served as Chairman of Pryor, McLendon,
Counts & Co., Inc., an investment advisory firm.
Stan F. Sech, age 52, has been a director of the Company since November
1994. Mr. Sech was the President and Chief Operating Officer of USA Mobile
Communications, Inc. from 1990 until September 1995 and continues to be employed
by such company in an executive capacity.
Pamela R. Simmons, age 45, has been a director of the Company since May
1995. She is Vice President and General Counsel of Sloan Financial Group and NCM
Capital Management Group, Inc. and serves as Vice President and Secretary of
SCI. From 1990 until she joined Sloan Financial Group in 1994, she worked as a
Senior Attorney with the Land Loss Prevention Project.
Elliott H. Singer, age 54, has been a director of the Company since
November 1994. He also has been Chairman of the Board and Chief Executive
Officer of A+ Network since its formation in 1985. Mr. Singer was the owner and
Chief Executive Officer of A+ Network predecessor entities, through which he had
been engaged in the telemessaging service business since 1974 and in the paging
business since 1983.
BOARD OF DIRECTORS
All directors hold office by virtue of their designation by certain
stockholders pursuant to the terms of the Common Stockholders Agreement, as
defined herein. There are no family relationships between any of the directors
or executive officers of the Company. See "Common Stockholders
Agreement -- Board of Directors."
The Company's Board of Directors has established a Finance Committee which
is responsible for developing the Company's annual business plans. The Board of
Directors has also established a Compensation
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<PAGE> 49
Committee which is responsible for making recommendations to the Board of
Directors regarding compensation arrangements for key employees of the Company.
See "Common Stockholders Agreement -- Finance Committee."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are R. Schorr Berman, Steven J.
Lerner, Stan F. Sech and Elliott H. Singer, who were also the sole members of
the Compensation Committee during the Company's last fiscal year. No member is
or has ever been an employee of the Company.
DIRECTORS' COMPENSATION
Directors do not receive any compensation or reimbursement of expenses
incurred by them in connection with their attendance at Board meetings.
The Company has issued warrants to Austin Ventures and to Marquette
Ventures and has paid FGI to perform marketing services on the Company's behalf.
None of these arrangements, however, were to compensate Mr. Jeffery Garvey, a
Board designee of Austin Ventures, Mr. James Daverman, a Board designee of
Marquette Ventures, or Mr. Steven Lerner, a Board designee of SCI and Sloan LP,
in connection with their role as directors of the Company. See "Certain
Transactions -- Option Agreements; Warrant Agreements" and "Relationship with
FGI."
EXECUTIVE COMPENSATION
Summary Compensation of Executive Officers. The following table sets forth
certain information regarding the compensation of the Company's Chief Executive
Officer and the Company's three other most highly compensated executive officers
other than the Chief Executive Officer whose total salary and bonus exceeded
$100,000 during the year ended December 31, 1995 (the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION(1)
---------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER(2) OPTIONS (#)
- --------------------------------------------------- -------- ------- ------- ---------------
<S> <C> <C> <C> <C>
Cecil L. Duffie, Jr................................ $122,436 $24,487 $ 3,500 --
Chief Executive Officer
William D. deKay................................... 122,436 24,487 3,500 --
President
Harry L. Latham, III............................... 102,846 18,761 35,500 200
Senior Vice President of Sales and Marketing
Jerome C. Leonard.................................. 184,615 30,011 50,692 400
Senior Vice President for Engineering & Network
Operations
</TABLE>
- ---------------
(1) Options to acquire shares of Class B Common Stock.
(2) Amounts related to the reimbursement of relocation expenses and car
allowances.
47
<PAGE> 50
Option Grants in Last Fiscal Year. The following table summarizes options
to acquire shares of Class B Common Stock granted to the Named Executives during
1995. No options to acquire Class A Common Stock were granted to the Named
Executives in 1995 and no options were granted in the last fiscal year to any of
the Named Executives which are not listed in the following table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS EXERCISE FOR OPTION TERM(1)
OPTIONS GRANTED TO PRICE EXPIRATION -----------------------
NAME GRANTED EMPLOYEES ($/SHARE) DATE 5% 10%
- ---------------------------- --------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Harry L. Latham
III(2)(3)(4).............. 200 2.7 1,000 04/15/2005 125,800 318,800
Jerome C.
Leonard(2)(3)(4).......... 400 5.4 1,000 03/01/2005 251,600 637,600
</TABLE>
- ---------------
(1) Potential realizable value illustrates the respective values that might be
realized upon exercise of the options immediately prior to the expiration
of their term assuming the respective indicated compounded rates of
appreciation of the value of the Company's Common Stock over the term of
the options. The prices of Common Stock at the end of the ten-year term of
the options would be $1,629 assuming 5% annual appreciation and $2,594
assuming 10% annual appreciation. Such amounts represent assumed rates of
appreciation only. Actual gains, if any, on stock option exercises will
depend on the future performance of the Common Stock and overall market
conditions.
(2) All options were granted pursuant to Stock Option Agreements between the
Company and each of the Named Executives. The exercise price is greater
than the fair market value of the Company's Class B Common Stock on the
date of grant. See "-- The Employment Agreements; Option and Warrant
Agreements."
(3) No options may be exercised until the first to occur of several specified
events. See "-- The Employment Agreements; Option and Warrant Agreements."
(4) The options vest 20% on the first anniversary date of employment, and in 5%
quarterly increments thereafter, and thus become fully vested after five
years of employment. All options, unless previously vested, will
automatically vest upon a "Change in Control" of the Company, as defined
below.
Option Exercises and Holdings. During the year ended December 31, 1995, no
stock options were exercised by the Named Executives. The following table sets
forth information with respect to each of the Named Executives concerning the
value of all unexercised options held by such individuals at December 31, 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(A)
- --------------------------------------------- -------------------------- ------------------------------
<S> <C> <C>
Cecil L. Duffie, Jr.......................... 0/2,626 $0/2,232,100
William D. deKay............................. 0/2,626 0/2,232,100
Harry L. Latham III.......................... 0/200 0/170,000
Jerome C. Leonard............................ 0/400 0/340,000
</TABLE>
- ---------------
(a) Represents the difference between the exercise price per share and the
market value of the Common Stock at December 31, 1995.
48
<PAGE> 51
THE EMPLOYMENT AGREEMENTS; OPTION AND WARRANT AGREEMENTS
The Company has entered into an Employment Agreement with each Named
Executive (collectively, the "Employment Agreements"). It also has entered into
an Option Agreement with each Named Executive and with certain other employees
(collectively, the "Option Agreements"). In addition, the Company has entered
into a Warrant Agreement (collectively, the "Warrant Agreements") with each of
Austin Ventures III-A, L.P., Austin Ventures III-B, L.P., Austin Ventures IV-A,
L.P. and Austin Ventures IV-B, L.P. (collectively, "Austin Ventures") and
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund L.P.
(collectively, "Marquette Ventures"). The following summary of these agreements
is qualified in its entirety by reference to the complete texts of such
agreements, copies of which are available from the Company upon request.
Each Employment Agreement provides that the relevant Named Executive will
receive a base salary and bonus to be set by the Board of Directors and contains
certain noncompetition, nonsolicitation and confidentiality covenants. Under the
Option Agreements with Messrs. Duffie and deKay, the Company has granted each of
them options to purchase from the Company up to 2,626 shares of Class B Common
Stock, in each case at an exercise price of $1,000 per share, subject to
adjustments for stock splits and stock dividends. Options held by Messrs. Duffie
and deKay to purchase 1,313 shares of Class B Common Stock are currently vested,
and, subject to certain conditions, the remainder of the options will vest 20%
on each June 1 beginning June 1, 1996 and ending on June 1, 2000, whereupon they
will be fully vested until they expire on October 31, 2004. The Company also has
an Option Agreement with Mr. Latham dated March 31, 1995, as amended, under
which it has granted options covering an additional 200 shares of Class B Common
Stock exercisable at $1,000 per share and 200 shares of Class B Common Stock
exercisable at $1,850 per share. The Option Agreement between Mr. Leonard and
the Company entered into on January 13, 1995 granted options to purchase 400
shares of Class B Common Stock exercisable at $1,000 per share. The options
granted to the Named Executives (other than to Messrs. Duffie and deKay) will
vest 20% on the first anniversary of employment, and in 5% quarterly increments
thereafter, and will expire ten years after the date of commencement of
employment.
Prior to the incorporation of the Company in September of 1994, Messrs.
Duffie and deKay incorporated and organized another corporation ("First Corp.")
in early 1994 to investigate and pursue potential business opportunities in the
advanced wireless messaging industry. Austin Ventures and Marquette Ventures
committed to fund up to $1.2 million of start-up and organizational expenses of
First Corp. with the understanding that they would receive a 58% equity interest
in First Corp. as consideration for their funding. Pursuant to this commitment,
Austin Ventures and Marquette Ventures advanced approximately $232,000 to First
Corp. When additional investors were attracted in the fall of 1994, the Company
was incorporated and organized and acquired the rights, benefits and intangible
value attendant to the start-up activities of First Corp. The acquired assets
included First Corp.'s proprietary business plans, strategies, market research,
furniture and fixtures, and supplies. The Company acquired these assets by
reimbursing approximately $193,000 to First Corp. and by entering into certain
special rights agreements in the nature of stock appreciation rights with Austin
Venture and Marquette Ventures effective October 31, 1994. After receiving the
reimbursement from the Company, First Corp. returned approximately $141,000 to
Austin Ventures and Marquette Ventures. In the summer of 1995, in substitution
for the special rights agreements, the Company granted Austin Ventures and
Marquette Ventures warrants to acquire up to 692 and 621 shares of Class B
Common Stock, respectively, in each case at a price of $1,360.49 per share.
Subject to certain conditions, the warrants will vest over a period beginning on
February 1, 1995 and ending on November 1, 1997, and will expire on October 31,
2004. The warrants granted to Austin Ventures and Marquette Ventures, as well as
the options granted to the Named Executives unless previously vested, will
automatically vest upon a Change in Control of the Company. For purposes of the
Warrant Agreements and the Option Agreements, a "Change in Control" shall be
deemed to have occurred if any person or group of related persons (other than
the stockholders of the Company as of November 10, 1995) shall acquire in any
transaction or series of transactions (X) all or substantially all of the assets
of the Company, (Y) beneficial ownership (within the meaning of Section 13(d) of
the Securities Exchange Act of 1934, as amended) of more than 50% of the sum of
(i) all shares of Common Stock then outstanding and (ii) all shares of Common
Stock then underlying
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<PAGE> 52
outstanding shares of stock (other than Common Stock) or (Z) beneficial
ownership of that number of outstanding stock of any corporate successor to the
Company by merger or consolidation sufficient to elect a majority of the
directors of such successor or sufficient equity interests in any non-corporate
successor to the Company to control its affairs (within Section 13 of the
Securities Act). Pursuant to the terms of the Option Agreements and Warrant
Agreements, the rights to purchase shares do not come into existence, regardless
of whether the rights have otherwise vested, until the first to occur of: (i)
the Company receives an opinion of FCC counsel, in form and substance reasonably
satisfactory to the Company, to the effect that exercise will not result in the
loss of or materially jeopardize the Company's Designated Entity status, (ii)
the Company consummates a public offering at a price of $10.00 or more per share
in an underwritten transaction registered under the Securities Act and realizes
gross proceeds of $10.0 million or more or (iii) the first date after which the
failure of the Company to qualify for "Designated Entity" status as a "Business
Owned by Members of Minority Groups and/or Women" would not result in the loss
of material benefits by the Company, provided, however, if such date is later
than February 3, 2000, the Optionee shall have the right by written notice to
the Company to cause the Company to reinstate the Optionees' special
compensation rights under its Employment Agreement.
CERTAIN TRANSACTIONS
STRATEGIC ALLIANCES WITH CERTAIN STOCKHOLDERS
As part of their strategic alliance with the Company, each of the Paging
Company Investors has entered into a subscription agreement and the Common
Stockholders Agreement with the Company. In particular, while the Paging Company
Investors are not entitled to purchase services from the Company at prices less
than those available to non-stockholders, the Paging Company Investors as well
as the Company's other current stockholders are entitled to the best rates
available to non-stockholders based on comparable type and volume of service and
other contractual provisions. The Paging Company Investors, however, are
required to purchase narrowband PCS services exclusively from the Company,
provided that the Company's services are competitive in price and quality with
comparable services offered by others. The Paging Company Investors and the
Company also have agreed to negotiate in good faith to enter into mutually
acceptable intercarrier network access and similar agreements. The Company has
agreed that, in the event of a merger of the Company or a sale of its assets or
business, any agreements that the Company may have with the Paging Company
Investors that may enable them to offer narrowband PCS services over a broader
geographic area must remain in effect. The details of these strategic alliances
are expected to be documented as the Company develops its business.
OPTION AGREEMENTS; WARRANT AGREEMENTS
The Company has entered into the Option Agreements with the Named
Executives and with certain other management employees and has entered into the
Warrant Agreements with Austin Ventures and Marquette Ventures. Austin Ventures
owns 714, 4,110 and 889 shares of Class A Common Stock, Class B Common Stock and
Series A Preferred Stock, respectively, representing approximately 9.07% of all
classes and series of the Company's capital stock, assuming the exercise of all
outstanding options, warrants and convertible securities. Mr. Jeffery Garvey, a
director of the Company, is a general partner of AV Partners III, L.P. and AV
Partners IV, L.P., the general partners of Austin Ventures.
Marquette Ventures owns 640, 3,685 and 889 shares of the Class A Common
Stock, Class B Common Stock and Series A Preferred Stock, respectively,
representing approximately 8.26% of all classes and series of the Company's
capital stock, assuming the exercise of all outstanding options, warrants and
convertible securities. Mr. James Daverman, a director of the Company, is a
general partner of JED Limited Partnership, which is the general partner of
Marquette General II, L.P., the general partner of Marquette Ventures. See
"Management -- The Employment Agreements; Option and Warrant Agreements."
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<PAGE> 53
STOCKHOLDER LOAN
SCI, one of the Company's original shareholders and a member of its
"Control Group" for purposes of FCC "Designated Entity" status, purchased 4,200
shares of Class A Common Stock and 5,100 shares of Class B Common Stock in the
Company for $9.3 million in October 1994, in part with the proceeds of a $9.2
million loan from the Company (the "Sloan Loan"). Messrs. Sloan and Beckett,
directors of the Company, own all of the outstanding stock of SCI. Each advance
under the Sloan Loan bears interest at 6% per annum for the first year and 10%
per annum thereafter. In the event of a default, the interest rate increases on
all outstanding principal and unpaid accrued interest to 15% for the first six
months of the default, 20% for months seven through 12, and 25% thereafter. The
largest amount due the Company under the Sloan Loan in 1995 was approximately
$9.8 million.
In connection with the formation and capitalization of Sloan LP, a limited
partnership organized in order to own SCI's shares in the Company, SCI
transferred 4,211 shares (1,895 Class A and 2,316 Class B) of the Company's
Common Stock to Sloan LP, and Sloan LP assumed approximately $4.4 million of the
Sloan Loan attributable thereto. Sloan LP repaid that $4.4 million portion of
the Sloan Loan with the proceeds of the sale of limited partnership interests in
Sloan LP. In April 1996, SCI transferred an additional 3,519 shares (1,583 Class
A and 1,936 Class B) of the Company's Common Stock to Sloan LP. Sloan LP assumed
approximately $3.9 million of the Sloan Loan attributable thereto and repaid
that $3.9 million portion of the Sloan Loan with the proceeds of the sale of
additional limited partnership interests in Sloan LP.
As a result of these transactions, the Sloan Loan currently has a principal
balance of approximately $1.7 million and is secured by a pledge of 1,570 shares
of Common Stock. While the Sloan Loan is a recourse obligation of SCI, SCI's
only assets are the pledged shares of Common Stock and its general partner
interest in Sloan LP. The Sloan Loan is due on April 30, 1997.
RELATIONSHIP WITH CHASE
The Chase Manhattan Bank, N.A. ("Chase") has committed to act as the
administrative agent and the manager of the Credit Facility and as a lender
under the Tranche A and Tranche B Facilities (as defined herein). Chase is an
affiliate of Chase Manhattan Capital Corporation and Chase Venture Capital
Associates, L.P. Chase Manhattan Capital Corporation and Chase Venture Capital
Associates, L.P. own 3.60% and 18.02%, respectively, of the Series A Preferred
Stock.
RELATIONSHIP WITH FGI
FGI has been engaged as a marketing consultant to the Company. The Company
has formulated its business plan in reliance upon market research, analysis and
recommendations, some of which has been performed and made by FGI. The Company
paid FGI $69,000 and $116,500 in 1995 and 1996, respectively, for marketing
services rendered. FGI became a stockholder in the Company subsequent to its
1994 study but prior to the 1996 study. See "Prospectus Summary -- The Company,"
"Business -- General" and "Business -- Market Potential." FGI owns 15 and 85
shares of Class A and Class B Common Stock, respectively, of the Company,
representing approximately .14% of all classes and series of the Company's
capital stock, assuming the exercise of all outstanding options, warrants and
convertible securities. Mr. Steven Lerner is the Chairman of FGI and a director
of the Company.
SECURITIES SALES
In October 1994 the Company sold 37,200 shares of Common Stock for $1,000
per share to various parties, including certain executive officers and directors
of the Company and parties who are beneficial holders of more than four percent
of a class of the Company's voting securities. In November 1995, the Company
sold 24,667 shares of Series A Preferred Stock for $2,250 per share to various
parties, including certain executive officers and directors of the Company and
parties who are beneficial holders of more than four percent of a class of the
Company's voting securities. These purchases are reflected in the beneficial
ownership table under "Principal Stockholders."
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<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1996,
regarding (i) the amount and nature of the beneficial ownership of each class of
the Company's equity securities owned by directors, Named Executives and all of
the Company's directors and executive officers as a group, (ii) the ownership of
the Company's Class A Common Stock and Series A Preferred Stock, which are the
only two classes of the Company's securities that have the right to vote for the
election of Directors, by each person or entity known to the Company to be the
beneficial owner of more than five percent of any class of such voting
securities, and (iii) the percent of all of the Company's equity securities
considered as a single class owned beneficially by each person, entity or group
named in the table.
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE PERCENT OF
CLASS A CLASS B ALL EQUITY
COMMON STOCK(1) COMMON STOCK(1) PREFERRED STOCK(1) SECURITIES
-------------------- ----------------------- -------------------- CONSIDERED
NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT AS A SINGLE
OF SHARES OF CLASS OF SHARES OF CLASS(2) OF SHARES OF CLASS CLASS
--------- -------- --------- ----------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SCI(3).................................. 4,200 48.18% -- -- -- -- 15.03%
Sloan LP(4)............................. 3,478 39.89 -- -- -- -- 12.49
Arch Communications(5).................. 962 11.03 -- -- -- -- 10.51
Austin Ventures III-A, L.P.(6).......... 714 8.19 -- -- -- -- 9.23
Austin Ventures III-B, L.P.(6).......... 714 8.19 -- -- -- -- 9.23
Austin Ventures IV-A, L.P.(6)........... 714 8.19 -- -- -- -- 9.23
Austin Ventures IV-B, L.P.(6)........... 714 8.19 -- -- -- -- 9.23
Battery Ventures III, L.P.(7)........... 518 5.94 -- -- -- -- 5.66
Chancellor Capital Management,
Inc.(8)............................... -- -- -- -- 2,223 9.01 3.59
Chase Manhattan Capital
Corporation(9)........................ -- -- -- -- 5,334 21.62 8.62
Chase Venture Capital Associates,
L.P.(10).............................. -- -- -- -- 5,334 21.62 8.62
Eos Partners, SBIC, L.P.(11)............ -- -- -- -- 1,289 5.23 2.08
Fayez Sarofim(12)....................... -- -- -- -- 1,289 5.23 2.08
Kingdon Capital Management Corp.(13).... -- -- -- -- 2,223 9.01 3.59
MVP II Affiliates Fund, L.P.(14)........ 640 7.34 -- -- -- -- 8.43
Marquette Venture Partners II,
L.P.(14).............................. 640 7.34 -- -- -- -- 8.43
Toronto Dominion Investments,
Inc.(15).............................. -- -- -- -- 2,223 9.01 3.59
Maceo K. Sloan(3)(16)................... 4,200 48.18 5,100 17.91 -- -- 15.03
Cecil L. Duffie, Jr.(17)................ 26 0.30 149 0.52 -- -- .28
William D. deKay(17).................... 26 0.30 149 0.52 -- -- .28
Harry L. Latham III(17)................. -- -- -- -- -- -- --
Jerry Leonard(17)....................... -- -- -- -- -- -- --
C.E. Baker, Jr.(5)...................... -- -- -- -- -- -- --
Justin F. Beckett(4).................... -- -- -- -- -- -- --
R. Schorr Berman(18).................... 370 4.24 2,825 9.02 695 2.82 5.16
James E. Daverman(14)................... 640 7.34 4,574 15.57 889 3.62 8.43
Richard D. Frisbie(19).................. 518 5.94 2,982 10.47 -- -- 5.66
Jeffery C. Garvey(6).................... 714 8.19 4,999 17.02 889 3.62 9.23
James D. Kallman(20).................... -- -- 5,334 15.77 5,334 21.62 8.62
Steven J. Lerner(21).................... 15 .17 85 .30 -- -- .16
Malcolmn Pryor(22)...................... -- -- -- -- -- -- --
Stan F. Sech(23)........................ -- -- -- -- -- -- --
Pamela R. Simmons(4).................... -- -- -- -- -- -- --
Elliott H. Singer(24)................... -- -- -- -- -- -- --
All directors and executive officers as
a group (17 persons).................. 6,509 71.51 26,197 68.04 7,807 31.65 52.85
</TABLE>
- ---------------
(1) The holders of the Class A shares have the right to elect 16 of the
Company's 17 directors. Pursuant to the Common Stockholders Agreement, such
holders have agreed to elect these directors from designees selected by the
stockholders of the Company as prescribed in the Common Stockholders
Agreement. See "Description of Capital Stock -- Common Stock -- Common
Stockholders Agreement -- Directors." The holders of the Class B shares do
not elect directors of the Company. So long as no less than one-third of
the Series A shares remain outstanding, the holders of the Series A shares
have the right to
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<PAGE> 55
elect one member to the Company's Board of Directors. See "Description of
Capital Stock -- Preferred Stock -- Voting Rights." The holders of the
Class A shares are entitled to one vote for each share held on all matters
as to which stockholders are entitled to vote. Shares of Class B confer on
the holders thereof no right to vote except with respect to each of the
matters listed in the Company's Restated Certificate of Incorporation, as
to which each holder is entitled to one vote for each share held, voting as
a single class with the Class A shares. The holders of the Series A shares
will vote together with the Common Stockholders as though part of such
class on those specific matters as to which the holders of the Class B
shares are entitled to vote.
(2) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table of
any shares of stock if such person has or shares voting power or investment
power with respect to such security, or has the right to acquire beneficial
ownership at any time within 60 days from March 31, 1996. Accordingly, the
table gives effect to (i) the conversion of Series B Preferred Stock held
by Toronto Dominion Investments, Inc. into the Series A Preferred Stock and
(ii) the conversion of Series A Preferred Stock of each Named Executive and
the directors into Class B Common Stock and assumes, for purposes of the
calculations under (ii) above, that the Series A Preferred Stock of the
other holders remain outstanding and are not converted into Class B Common
Stock. Unless otherwise indicated, to the Company's knowledge each of the
shareholders listed above has sole voting and investment power with respect
to the shares beneficially owned.
(3) Includes 3,478 Class A and 4,252 Class B shares owned by Sloan LP, of which
SCI is the general partner.
(4) The address of this person is 103 West Main Street, 4th Floor, Durham, NC
27701-3638.
(5) Arch Communications has advised the Company that Arch Communications
proposes to transfer all of its Class A and Class B shares to its
wholly-owned subsidiary, ACE. The address of this person is 1800 West Park
Drive, Ste. 350, Westborough, MA 01581.
(6) Includes all Class A shares and Series A shares owned by Austin Ventures.
AV Partners III, L.P. is a general partner of Austin Ventures III-A, L.P.
and Austin Ventures III-B, L.P. AV Partners IV, L.P. is a general partner
of Austin Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. All of these
shares are deemed to be beneficially owned by Mr. Garvey because he is a
general partner of AV Partners III, L.P. and AV Partners IV, L.P. Mr.
Garvey disclaims beneficial ownership of these shares. The address of this
person is 114 West 7th Street, Suite 1300, Austin, Texas 78701.
(7) The address of this person is 200 Portland Street, Boston, MA 02114.
(8) Chancellor Capital Management Inc. is the investment manager for various
fiduciary accounts which own Series A shares and it has voting and
dispository power over such shares. The address of this person is 1166
Avenue of the Americas, New York, NY 10036.
(9) Includes 4,445 Series A shares owned of record by Chase Venture Capital
Associates, L.P. The address of this person is 270 Park Ave., 5th Floor,
New York, NY 10017.
(10) Includes 889 Series A shares owned of record by Chase Manhattan Capital
Corporation. The address of this person is 270 Park Ave., 5th Floor, New
York, NY 10017.
(11) The address of this person is 520 Madison Avenue, New York, NY 10022.
(12) Includes 645 Series A shares owned of record by FSI Corporation. Mr.
Sarofim has voting power and investment power over such shares. The address
of this person is Two Houston Center, Ste. 2907, Houston, TX 77010.
(13) Kingdon Capital Management Corp. is a general partner of various fiduciary
accounts which own Series A shares and it has voting and dispository power
over such shares. The address of this person is 152 West 57th St., New
York, NY 10019.
(14) Includes 18 Class A shares owned of record by MVP II Affiliates Fund, L.P.
and 622 Class A shares owned of record by Marquette Venture Partners II,
L.P., both of which Marquette General II, L.P. is a general partner. All of
these shares are deemed to be beneficially owned by Mr. Daverman because he
is a general partner of JED, Limited Partnership, which is the general
partner of Marquette Venture Partners II, L.P. Mr. Daverman disclaims
beneficial ownership of these shares. The address of this person is 520
Lake Cook Rd., Ste. 450, Deerfield, IL 60015.
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<PAGE> 56
(15) Includes 1,067 Series B shares which are convertible into 1,067 Series A
shares at the option of the holder. The address of this person is 31 West
52nd St., New York, NY 10019.
(16) Includes all shares owned of record by SCI, of which Mr. Sloan owns
two-thirds of the equity securities, and all shares owned by Sloan LP, of
which SCI is the general partner. The address of this person is 103 West
Main St., 4th Floor, Durham, NC 27701-3638.
(17) The address of this person is 15 S. Main St., Ste. 810, Greenville, SC
29601.
(18) Includes 370 Class A, 2,825 Class B and 695 Series A shares owned by
Memorial Drive Trust. Mr. Berman is the administrator and Chief Executive
Officer of Memorial Drive Trust. Mr. Berman disclaims beneficial ownership
of the shares owned by Memorial Drive Trust. The address of this person is
125 Cambridge Park Drive, Cambridge, MA 02140-2314.
(19) Includes 518 Class A and 2,982 Class B shares owned of record by Battery
Ventures III, L.P., of which Battery Partners III, L.P. is a general
partner. Mr. Frisbie is a managing partner of Battery Partners III, L.P.
Mr. Frisbie disclaims beneficial ownership of these shares. The address of
this person is 200 Portland Street, Boston, MA 02114.
(20) Includes 4,445 Series A shares owned by Chase Venture Capital Associates,
L.P., and 889 Series A shares owned of record by Chase Manhattan Capital
Corporation. Mr. Kallman is a principal of both of these companies. The
address of this person is 270 Park Ave., 5th Floor, New York, NY 10017.
(21) Includes 15 Class A shares and 85 Class B shares owned by FGI, of which Mr.
Lerner is Chairman. The address of this person is 206 West Franklin Street,
Chapel Hill, NC 27516.
(22) The address of this person is 1515 Market Street, 819, Philadelphia, PA
19102.
(23) The address of this person is 11300 Cornell Park Drive, Suite 200,
Cincinnati, OH 45242.
(24) A+ Network has entered into a definitive agreement to be acquired by
MetroCall. The address of this person is 24165 Hillsboro Road, Nashville,
TN 37212.
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<PAGE> 57
DESCRIPTION OF FCC AUCTION BENEFITS
"DESIGNATED ENTITY" STATUS IN FCC NARROWBAND PCS REGIONAL AUCTION
Because the Company satisfied FCC eligibility requirements for "Designated
Entity" status as both a "Small Business" and as a "Business Owned by Members of
Minority Groups and/or Women," as those terms are defined by the FCC for
purposes of the narrowband PCS regional auction in which the Company acquired
the Licenses, the Company received both bidding credits and installment payment
options that were not available to all auction participants. Thus, while the
Company's winning bids for the Licenses totalled $151.5 million, the total
purchase price was only $90.9 million due to the 40%, or $60.6 million, bidding
credit received from the FCC because of the Company's status as a "Designated
Entity" satisfying the requirements for a "Business owned by Minority Groups
and/or Women." Due to the auction dynamics, however, the bidding credit did not
enable the Company to purchase its Licenses for an amount less than other
companies that acquired nationwide licenses in the auctions. Specifically, in
the narrowband PCS regional auction there were two 50kHz/50kHz radio frequency
licenses auctioned in each of the five regions of the United States (in addition
to four 50kHz/12.5kHz licenses in each region). Designated Entity bidders that
qualified as a "Business Owned by Members of Minority Groups and/or Women" could
bid on either of the two 50/50 licenses, but could use their 40% bidding credits
only on one of the two 50/50 licenses auctioned in each region that was
designated as eligible for the bidding credits (the "Bid Credit License"). Thus,
for example, a bid by a Designated Entity of $30 million for the Bid Credit
License was equivalent to a bid of $18 million for the other 50/50 license. Any
bid by a Designated Entity for the Bid Credit License at a price less than $30
million would attract bids of other Designated Entities who would find the Bid
Credit License (net of the bid credit) less expensive than an $18 million bid
for the other license. Thus, because Designated Entities could bid on both the
Bid Credit Licenses and the other licenses, the bids for the Bid Credit Licenses
net of the bidding credit tended to approximate the bids for the other licenses.
Moreover, the average price paid for nationwide 50kHz/50kHz licenses in the
FCC's narrowband PCS nationwide auction concluded in July of 1994 was $83.4
million, while the Company's net price after bidding credits to acquire the same
coverage in the PCS regional auctions concluded in November 1994 was $90.9
million.
In addition to the bidding credits, as a Designated Entity that satisfied
the requirements for a "Small Business" applicable in the narrowband PCS
regional auction, the Company was entitled to pay the $90.9 million purchase
price for the Licenses through two 10% deposits that were made in late 1994 and
early 1995, with the $72.7 million balance payable to the FCC over ten years at
a 7.5% annual interest rate, with no payment of principal for the first two
years.
In order to be considered a Designated Entity under the rules governing the
narrowband PCS regional auction as both a Small Business and a Business Owned by
Members of Minority Groups and/or Women, it was necessary that the Company have
a "Control Group" that owned at least 50.1% of the Company's voting rights
(including the right to elect a majority of the directors) and at least 25% of
the Company's total equity on a fully diluted basis. In addition, no other
equity investor or related group of investors is permitted to own more than 25%
of the total equity in the Company, or more than 15% of the voting equity of the
Company. The Company's Control Group currently consists of SCI, Sloan LP, the
Sullivan Family Revocable Trust and Dobson Family Corp. Such shareholders
together own approximately 53% of the Company's Class A Common Stock and,
pursuant to the terms of the Company's Common Stockholders' Agreement, are
entitled to designate nine of the Company's 17 directors. Prior to the closing
of the issuance of the Company's Series A Preferred Stock, the members of the
Control Group owned 26% of the Company's total equity on a fully diluted basis.
Upon the issuance of the Series A Preferred Stock on November 30, 1995, the
Control Group's total equity interest in the Company was diluted to
approximately 14.98%. As a result of this dilution PCSD ceased to satisfy the
requirements for Designated Entity status because the members of its Control
Group owned on a fully diluted basis less than 25% of the Company's equity. In
conjunction with the closing of the sale of the Company's Series A Preferred
Stock, the Company, through Lukas McGowan, its special FCC counsel, obtained a
written ruling from the FCC staff that the dilution of the Control Group's
equity interest in the Company as a result of the issuance of the Series A
Preferred Stock would not result in the loss of the financial benefits that
accrued to the Company due to its status as a Designated Entity in the
narrowband PCS regional auction. This finding was based on the assumption that
the Control Group would continue its
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<PAGE> 58
ownership of 50.1% of the voting equity of the Company and that no investor
outside of the Control Group would hold more than 25% of the total equity of the
Company, or more than 15% of the total voting equity of the Company. The members
of the Control Group may transfer their interests in the Company before February
3, 2000 only if no transfer of control of the Company occurs and if the Control
Group continues to satisfy the ownership requirements.
Upon the issuance of the Units, it is anticipated that the Control Group's
equity interest will be further diluted from approximately 14.98% to
approximately %, but that the Company will continue to satisfy the other
three percentage tests. In connection with the issuance of the Units the Company
has received the opinion of Lukas McGowan that the dilution of the Control
Group's equity interest as a result of the issuance and exercise of the Warrants
will not result in the loss of the financial benefits that have accrued to it as
a Designated Entity in the narrowband PCS regional auction and that after the
issuance of the Units the Company will continue to be eligible for the benefits
that have accrued to it as a Designated Entity.
In order to qualify as a "Small Business", the Company and certain of its
owners had to satisfy certain gross income and total asset limitations.
Specifically, neither the Company, any affiliate of the Company, any person with
an attributable interest in the Company, nor any of the affiliates of such
person could have a net worth in excess of $40 million, and those persons taken
together could not have in excess of $40 million in average gross revenues for
the three preceding years. The Company will not lose its Small Business status
if the thresholds are exceeded due to events occurring with respect to those
persons after the grant of the License, including permitted equity investments,
revenue from operations, business development or expanded operations.
Should the Company, prior to February 3, 2000, lose its status as a
Business Owned by Members of Minority Groups and/or Women (other than as a
result of the dilution of the Control Group's equity interest that occurred upon
the issuance of the Series A Preferred Stock or that will occur upon the
issuance of the Units), the Company may be required to make an "unjust
enrichment" payment to the FCC to reimburse the FCC for all or a portion of the
value of the bidding credit received by the Company, plus interest thereon at a
rate of 7.5% per annum. Such a payment would also be due if the Company assigned
or transferred its Licenses prior to February 3, 2000 to another entity that did
not qualify as a Business Owned by Members of Minority Groups and/or Women. The
amount of any penalty depends upon when the status is lost or the transfer
occurs and the value of the bidding credit. A loss of status or transfer in the
first two years of the License term will result in a forfeiture of 100% of the
value of the bidding credit; in year three of the license term, the penalty will
be 75%; in year four the penalty will be 50%; and in year five the penalty will
be 25% of the bidding credit, after which there is no penalty. It is unclear
whether the value of the bidding credit for unjust enrichment purposes will be
the entire amount of the bidding credit ($60.6 million) or some lesser amount
that would take into account that the bidding credit did not permit the Company
to acquire the Licences for a price any less than comparable licenses acquired
by persons who did not receive bidding credits.
Should the Company, prior to February 3, 2005, transfer control of its
Licenses to an entity which does not qualify as a Small Business under the
criteria applicable for the narrowband PCS regional auction, the balance due to
the FCC with respect to the installment financing received by the Company in
connection with the acquisition of the Licenses would then become due and
payable. The FCC conducts random audits to ensure that licensees are in
compliance with the applicable rules. If the Company is unable to make the
unjust enrichment payments or pay the balance of the purchase price in the event
of the loss of installment treatment, the FCC could revoke the Company's
Licenses. Because the regulatory penalty for failure to comply with applicable
Designated Entity rules is the unjust enrichment payment, failure to comply with
the Designated Entity rules will not itself provide a basis for the revocation
of the Licenses, absent aggravating circumstances such as misrepresentation or
bad faith.
In the event of an Initial Public Offering (as defined below under
"Description of the Capital Stock -- Preferred Stock -- Conversion into Class B
Common Stock"), the Common Stockholders Agreement will be terminated and the
Company's Class B Common Stock will be convertible into Class A Common Stock. In
such a case, it is likely that the Company's existing Control Group will cease
to be entitled to elect a majority of the Company's directors. If this occurs
prior to February 3, 2000, the Company will be subject to unjust
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enrichment payments to the FCC with respect to its bidding credits unless it
receives a waiver from the FCC. If this occurs prior to February 3, 2005, the
Company will be required to prepay its FCC installment obligations unless it
receives a waiver from the FCC. There can be no assurance that the Company can
receive such waivers.
Affirmative action programs, such as the one applicable in the narrowband
PCS regional auction in which the Company obtained its Licenses, have come under
increased scrutiny in Congress and in the courts. As a result of the June 12,
1995 decision by the United States Supreme Court in Adarand Constructors, Inc.
v. Pena, which subjected all federal race based classifications to "strict
scrutiny," the FCC eliminated race and gender based preferences in the auctions
of certain broadband PCS licenses that commenced on December 18, 1995. However,
the FCC granted the Licenses to the Company on February 3, 1995 and those grants
became nonappealable by Final Order on March 15, 1995. Thus, the grants of the
narrowband PCS Licenses to the Company are final and those grants are beyond
administrative and judicial review and the Company has been advised by Lukas
McGowan that the Company's ownership and use of the Licenses could not be
adversely affected by the Adarand decision. It is likely, however, that the
Company's Designated Entity status as a "Business owned by Members of Minority
Groups and/or Women" will not provide advantages in any future FCC auctions of
radio frequency spectrum.
"SMALL BUSINESS" STATUS IN FCC 900 MHZ SMR AUCTION
Because the Company satisfied FCC eligibility requirements for a "Small
Business" applicable in the FCC's 900 MHz SMR auction, the Company received a
10% bidding credit, reducing the total cost of its SMR Auction Spectrum from
$10.8 million to $9.7 million. See "Business -- Spectrum." In addition, this
status will permit the Company to pay 90% of $9.7 million net purchase price in
quarterly installments over ten years with interest at the 10-year Treasury note
rate plus 250 basis points, with no payment of principal for the first two
years. The Company qualified as a "Small Business" in the SMR auction because
the Company's average gross revenues for the preceeding three years, together
with the average gross revenues of its affiliates, persons that hold
attributable interests in the Company and affiliates of such persons did not
exceed $15 million. If the Company assigns or transfers control of the licenses
for its SMR Auction Spectrum within the first five years after the licenses are
granted, it will be subject to unjust enrichment provisions similar to those
applicable to its narrowband PCS Licenses requiring prepayment of all or a
portion of the value of its bidding credits and requiring prepayment of its
installment obligations.
There were no race or gender preferences, Control Group requirements or net
worth limitations applicable to the Company in the SMR auction.
STATUS IN FUTURE FCC NARROWBAND PCS MTA/BTA AUCTION
The Company may participate in the FCC's narrowband PCS MTA/BTA auction
anticipated to occur in late 1996 or early 1997. See "Business -- Spectrum."
While the rules for this auction have not yet been issued, the Company
anticipates that there will be no race or gender preferences, but there could
well be bidding credits and installment payment options based on small business
status.
Depending upon the timing of the auction relative to the Company's
generation of revenues and the revenue thresholds that may be applicable in
determining small business status, the Company may qualify for bidding credits
and installment payments that may be available should it choose to participate
in that auction.
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DESCRIPTION OF OTHER INDEBTEDNESS
THE CREDIT FACILITY
The Company's wholly-owned direct subsidiary, PCSD Financial Corp., has
obtained a commitment from Chase Securities Inc., as Arranger, to arrange the
establishment of senior credit facilities in the amount of $225.0 million
effective upon the closing of the Offering (the "Credit Facility"). PCSD
Financial Corp. will have approximately $75.0 million immediately available at
the Closing Date for borrowing under the Credit Facility.
The Credit Facility will consist of (i) a Glenayre Facility providing for
term loans in an amount not to exceed $75.0 million (the "Glenayre Facility") to
be made available by Glenayre for the purpose of financing the acquisition of
equipment and technical services from Glenayre, (ii) a Tranche A Facility
providing for revolving loans in an amount not to exceed $35.0 million (the
"Tranche A Facility") to be made available by a syndicate of banks, financial
institutions and other entities (the "Syndicate"), including The Chase Manhattan
Bank, N.A. ("Chase"), for the purpose of financing the working capital and
capital expenditure needs of PCSD Financial Corp. and its subsidiaries in the
ordinary course of business, and (iii) a Tranche B Facility providing for
revolving loans in an amount not to exceed $115.0 million (the "Tranche B
Facility") to be made available by the Syndicate, including Chase, for the
purpose of (x) financing the working capital and capital expenditure needs of
PCSD Financial Corp. and its subsidiaries in the ordinary course of business and
(y) repaying maturing loans under the Glenayre Facility and the Tranche A
Facility. Chase has committed to provide the entire $150.0 million of the
Tranche A Facility and Tranche B Facility. The availability of the Credit
Facility will be conditioned upon among other things PCSD Financial Corp. having
entered into equipment supply contracts with Glenayre and Motorola containing
satisfactory terms and conditions.
Borrowings under the Glenayre Facility and the Tranche A Facility will be
available from the closing date of the Credit Facility to the date which is
three and one half years thereafter, at which time all of the loans outstanding
will be repayable in two equal installments on March 31, 2000 and on June 30,
2000. Availability under the Tranche B Facility will commence on such closing
date and end on June 30, 2004, except that if the initial borrowing thereunder
is not made on or before June 30, 2000, such facility will automatically
terminate on such date. The Tranche B Facility will be reduced in fourteen
consecutive quarterly installments, beginning on March 31, 2001 and ending on
June 30, 2004. The making of each loan under the Tranche A Facility will be
subject to the satisfaction of certain conditions, including expending certain
amounts received from the issuance of common stock by PCSD Financial Corp. to
the Company, borrowing the full amount under the Glenayre Facility, having a
minimum number of "qualified pagers in service" (pagers in service for more than
60 days) and maintaining a minimum level of average monthly revenue per
subscriber unit. The making of each loan under the Tranche B Facility will be
subject to the satisfaction of certain conditions, including expending certain
amounts received from the issuance of common stock by PCSD Financial Corp. to
the Company and maintaining a maximum ratio of total debt to "qualified pagers
in service" and a maximum ratio of total debt to operating cash flow. In
addition, certain mandatory prepayments of loans extended under the Credit
Facility are to be made from (i) subject to certain exceptions to be agreed
upon, 50% of the net proceeds of any sale or issuance of equity or incurrence of
indebtedness after the closing date of the Credit Facility by the Company, PCSD
Financial Corp. or any of its subsidiaries, (ii) 100% of the net proceeds of (x)
certain sales or other dispositions by PCSD Financial Corp. or any of its
subsidiaries of material assets or (y) certain insurance or condemnation
recoveries and (iii) 75% of Excess Cash Flow (as defined in the Credit Facility)
when the Leverage Ratio (as defined in the Credit Agreement) is greater than 3:1
and 50% of Excess Cash Flow when such Ratio is less than 3:1 but greater than
2:1, for each fiscal year of PCSD Financial Corp., commencing with the fiscal
year ending December 31, 1998.
Borrowings by PCSD Financial Corp. will be unconditionally guaranteed by
each of PCSD Financial Corp.'s three direct subsidiaries, and such borrowings
will be secured by an equal and ratable pledge of all of the capital stock of
such subsidiaries and a first priority security interest on (i) the equipment
purchased from Glenayre with the proceeds of the Glenayre Facility and (ii) all
accounts receivable, inventory and subscriber contracts of PCSD Network, Inc.
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PCSD Financial Corp. may elect that all or a portion of the borrowings
under the Credit Facility bear interest at a rate per annum equal to either (i)
Chase's Base Rate plus the Applicable Margin or (ii) Chase's Eurodollar Rate
plus the Applicable Margin. In the case of borrowings under the Glenayre
Facility and the Tranche A Facility, the Applicable Margin will be (a) 3% per
annum when applying the Base Rate, or (b) 4% per annum when applying the
Eurodollar Rate. In the case of borrowings under the Tranche B Facility, the
Applicable Margin will be (x) 2% per annum (when the Debt to Operating Cash Flow
Ratio (as such terms are defined in the Credit Facility) is equal to or greater
than 5:1) or 1 1/2% per annum (when such Ratio is less than 5:1), in each case
when applying the Base Rate, or (y) 3% per annum (when such Ratio is equal to or
greater than 5:1) or 2 1/2% per annum (when such Ratio is less than 5:1), in
each case when applying the Eurodollar Rate. As used herein, "Base Rate" means
the higher of (i) Chase's prime rate and (ii) the federal funds effective rate
from time to time plus 1/2% per annum. As used herein, "Eurodollar Rate" means
the rate at which eurodollar deposits for one, two, three and six months (as
selected by PCSD Financial Corp.) are offered to Chase in the interbank
eurodollar market in the approximate amount of Chase's share of the relevant
loan. At any time when PCSD Financial Corp. is in default in the payment of any
amount due under the Credit Facility, the principal of all loans made under the
Credit Facility will bear interest at 3% per annum above the rate otherwise
applicable thereto.
PCSD Financial Corp. will pay a commitment fee on the unused amounts under
the Credit Facility calculated at a rate of 1/2 of 1% per annum, payable
quarterly in arrears. PCSD Financial Corp. will also pay to the Arranger a
customary structuring, syndication and agency fee.
The Credit Facility will contain a number of significant covenants that,
among other things, limit the ability to incur additional indebtedness and
guarantee obligations, create liens and other encumbrances, make certain
payments, investments, loans and advances, pay dividends or make other
distributions in respect of common stock, sell or otherwise dispose of assets,
make capital expenditures, merge or consolidate with another entity, make
amendments to the charter and by-laws, transact with affiliates, make certain
sales and leasebacks, change the line of business, or change the holding company
status of the Company. In addition, the Credit Facility will require the
maintenance of certain specified financial and operating covenants, including,
minimum interest and fixed charge coverage ratios, a maximum ratio of total debt
to "qualified pagers in service" and a maximum ratio of total debt to operating
cash flow.
The Credit Facility will contain representations, warranties, covenants and
events of default customary for senior credit facilities of similar size and
nature.
FCC OBLIGATION
As a Designated Entity satisfying the FCC's requirements for a "Small
Business," the Company is entitled to pay the $90.9 million purchase price for
the Licenses through two 10% deposits that were made in late 1994 and early
1995, with the $72.7 million balance payable to the FCC over ten years at a 7.5%
annual interest rate, with no payment of principal the first two years (the "FCC
Obligation").
On , 1996 the Company transferred the Licenses to its
wholly-owned indirect subsidiary, PCSD Spectrum, Inc. following the FCC's grant
of consent to such transfer, which became a nonappealable final order on May 15,
1996. In connection with such transfer, PCSD Spectrum, Inc. assumed all
obligations to repay the FCC Obligation. At March 31, 1996, the FCC Obligation
was $72.7 million.
Should the Company or PCSD Spectrum, Inc., prior to February 3, 2005,
transfer control of the Licenses to an entity that does not qualify as a "Small
Business," the entire principal amount of the FCC Obligation would become
immediately due and payable, together with accrued and unpaid interest thereon.
See "Description of FCC Auction Benefit -- "Designated Entity" Status in FCC
Narrowband PCS Regional Auctions."
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DESCRIPTION OF THE UNITS
Each Unit offered hereby consists of a $1,000 principal amount Note and
Warrant[s] to purchase initially share[s] of Class B Common
Stock. The Notes and the Warrants will not be separately transferable until the
"Separability Date," which shall be the earliest of (i) , 1996;
(ii) such earlier date as may be determined by Lehman Brothers Inc. and
specified to the Company, the Trustee, the Warrant Agent and the Unit Agent in
writing, (iii) in the event of a Change of Control, the date the Company mails
notice thereof to holders of the Notes and (iv) in the event of an Offer to
Purchase in connection with any Asset Sale (each as defined herein), the date
the Company mails notice thereof to the holders of the Notes, at which time the
Notes and the Warrants will become separately transferable.
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DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture, to be dated as of the
Closing Date (the "Indenture"), between the Company and United States Trust
Company of New York, as trustee (the "Trustee"). The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act as in effect on the date of the Indenture. The Notes
are subject to all such terms, and holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Notes and the Indenture does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the Notes and the Indenture, including the definitions of
certain terms therein and those terms made a part thereof by the Trust Indenture
Act.
GENERAL
The Notes will be unsecured senior obligations of the Company, limited to
$ million aggregate principal amount ($150 million aggregate initial
Accreted Value), and will mature on , 2006. Interest on the Notes
will accrue at the rate shown on the front cover of this Prospectus from
, 2001 or from the most recent Interest Payment Date to which
interest has been paid or provided for, payable semiannually (to Holders of
record at the close of business on the and immediately
preceding the Interest Payment Date) on and of each year,
commencing , 2001. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
Although for U.S. federal income tax purposes a significant amount of
original issue discount, taxable as ordinary income, will be recognized by a
Holder of Notes as such discount is amortized from the date of issuance of the
Notes, Holders of Notes will not receive any cash payments of interest on the
Notes until , 2001. See "Certain United States Federal Income Tax
Considerations."
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company (which initially will be the corporate trust office of the Trustee in
New York, New York); provided that, at the option of the Company, payment of
interest may be made by check mailed to the address of the Holders as such
address appears in the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity and any integral
multiple thereof. See "Description of the Notes -- Book-Entry, Delivery and
Form."
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after , 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holders' last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing on
of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------------------------------- ----------
<S> <C>
2001............................................................ %
2002............................................................ %
2003............................................................ %
2004 and thereafter............................................. 100.000%
</TABLE>
Notwithstanding the foregoing, prior to , 1999, the Company may
on any one or more occasions redeem up to 33% of the aggregate principal amount
of the Notes at a redemption price of % of the Accreted Value thereof with
the net proceeds of either (A) one or more public offerings of common stock of
the Company registered under the Securities Act or (B) a sale by the Company of
at least $25.0 million of
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its Capital Stock (other than Redeemable Stock or Preferred Stock) to a
Strategic Equity Investor in a single transaction; provided in each case that at
least 67% of the aggregate principal amount at maturity of the Notes remains
outstanding immediately after the occurrence of any such redemption; and
provided, further, that any such redemption shall occur within 90 days of the
date of the closing of any such public offering of common stock or sale to
Strategic Equity Investor of Capital Stock (other than Redeemable Stock or
Preferred Stock) of the Company, as the case may be.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, on a
pro rata basis or by lot; provided that redemptions shall be made in $1,000
principal amount increments. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
The Notes will not have the benefit of any sinking fund.
RANKING
The Notes will be senior, unsecured Indebtedness of the Company, ranking
pari passu in right of payment with all existing and future unsubordinated
unsecured Indebtedness of the Company and senior in right of payment to all
existing and future subordinated Indebtedness of the Company, but will be
structurally subordinated to all existing and future obligations of the
Company's Subsidiaries. The Company is a holding company with no material assets
other than the shares of stock of its Subsidiary. The Notes will be obligations
exclusively of the Company; none of the Company's Subsidiaries will have any
obligation to pay any amounts due with respect to the Notes or to make funds
available therefor. The Notes will be structurally subordinated to all
liabilities of the Company's Subsidiaries, including trade payables, capitalized
lease obligations and indebtedness that may be incurred by the Company's
Subsidiaries under current or future bank credit facilities. At March 31, 1996,
the Notes would have been structurally subordinated to approximately $76.4
million of liabilities of the Company's Subsidiaries, excluding amounts
available under the Credit Facility. Upon completion of the Offering, the
Company's Subsidiaries also will have approximately $75.0 million of immediate
availability under the Credit Facility, and, upon the achievement and
maintenance by the Company's Subsidiaries of certain operating results and
financial ratios, the Company's Subsidiaries will have an additional $150.0
million of availability under the Credit Facility, all of which will be
structurally senior to the Notes. The obligations of the Company's Subsidiaries
under the Credit Facility will be secured by substantially all of their assets
(other than the Licenses) including the proceeds of any disposition of the
Licenses. In addition, the obligations of PCSD Financial Corp. under the Credit
Facility will be guaranteed by PCSD Operations, Inc. and PCSD Spectrum, Inc. The
Notes will be effectively subordinated to such security interests to the extent
of such security interests. See "Risk Factors -- Financial Leverage" and
"-- Holding Company Structure; Structural Subordination of the Notes."
COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness
Under the terms of the Indenture, the Company will not, and will not permit
any of its Restricted Subsidiaries to, Incur any Indebtedness (other than the
Notes and Indebtedness existing on the Closing Date); provided that the Company
or any Restricted Subsidiary may Incur Indebtedness if, after giving effect to
the Incurrence of such Indebtedness and the receipt and application of the net
proceeds therefrom, the Indebtedness to EBITDA Ratio would be greater than zero
and less than 5.5:1.
Notwithstanding the foregoing, the Company, and (except as specified below)
any Restricted Subsidiary, may Incur each and all of the following: (i)
Indebtedness of the Company or any Restricted Subsidiary under a commercial bank
credit facility in an aggregate principal amount not to exceed at any time $20.0
million,
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less up to an equal amount of Indebtedness permanently repaid as provided under
the "Limitation on Asset Sales" covenant described below; (ii) Indebtedness of
the Company or any Restricted Subsidiary to the Company or any of its Wholly
Owned Restricted Subsidiaries; provided that any subsequent issuance or transfer
of any Capital Stock which results in any such Wholly Owned Restricted
Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Wholly Owned
Restricted Subsidiary) shall be deemed, in each case, to constitute an
Incurrence of such Indebtedness not permitted by this clause (ii); (iii)
Refinancing Indebtedness; (iv) Indebtedness of the Company or any Restricted
Subsidiary (A) in respect of performance, surety or appeal bonds provided in the
ordinary course of business, (B) under Interest Rate Agreements; provided that
such Interest Rate Agreements do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in interest rates
or by reason of fees, indemnities and compensation payable thereunder; and (C)
arising from agreements providing for indemnification, adjustment of purchase
price or similar obligations, or from Guarantees or letters of credit, surety
bonds or performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
of the Company (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted Subsidiary
for the purpose of financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by the Company or any Restricted
Subsidiary in connection with such disposition; (v) Indebtedness of the Company
(or of any Restricted Subsidiary to the extent and only to the extent that such
Indebtedness is Spectrum Acquisition Debt and is a direct obligation owing to
the FCC), not to exceed, at any one time outstanding, an amount equal to 2.0
times the amount of Net Cash Proceeds (without duplication with any Net Cash
Proceeds received by the Company from the issuance and sale of such Capital
Stock or rights to purchase such Capital Stock pursuant to clause (viii) below)
received by the Company after the Closing Date from the issuance and sale of its
Capital Stock or rights to purchase its Capital Stock (in each case other than
Redeemable Stock or Preferred Stock) to a Person that is not a Subsidiary of the
Company, less the amount of any Investments made pursuant to clause (vi) of the
second paragraph of the "Limitation on Restricted Payments" covenant; provided
that such Indebtedness (other than Spectrum Acquisition Debt) does not mature
prior to the Stated Maturity of the Notes and has an Average Life longer than
the remaining Average Life of the Notes; (vi) Indebtedness of the Company or any
Restricted Subsidiary (including, without limitation, Indebtedness under the
Credit Facility) Incurred solely for the purpose of financing the cost
(including the cost of design, development, site acquisition, construction,
installation or integration) of PCS systems or other wireless telecommunications
networks for which the Company or any Restricted Subsidiary has obtained the
applicable licenses or authorizations to utilize the radio frequencies necessary
for the operation of such systems or networks; (vii) Spectrum Acquisition Debt
of the Company or any Restricted Subsidiary outstanding at any time in an
aggregate amount not to exceed the sum of (x) $15 million and (y) an amount
equal to one-third of any unused amount permitted to be Incurred pursuant to
clause (viii) below; (viii) Acquired Indebtedness of the Company or any
Restricted Subsidiary outstanding at any time in an aggregate principal amount
not to exceed an amount equal to the lesser of (x) 2.0 times the net proceeds
(including non-cash proceeds, the fair market value of which has been determined
in good faith by the Board of Directors of the Company) received by the Company
after the Closing Date from the issuance and sale of its Capital Stock or rights
to purchase its Capital Stock (in each case other than Redeemable Stock or
Preferred Stock) to a Person that is not a Subsidiary of the Company (without
duplication with any Net Cash Proceeds received by the Company from the issuance
and sale of such Capital Stock or rights to purchase such Capital Stock pursuant
to clause (v) above and reduced by the amount of any Investments made pursuant
to clause (vi) of the second paragraph of the "Limitation on Restricted
Payments" covenant), and (y) $27 million; provided that such Acquired
Indebtedness is a direct obligation owing to the FCC; and (ix) Indebtedness of
the Company or any Restricted Subsidiary outstanding at any time in an aggregate
amount not to exceed $15 million, less up to an equal amount of Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales" covenant
described below.
For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of
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determining compliance with this "Limitation on Indebtedness" covenant, in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described in the above clauses, the Company, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses.
The Indenture further provides that, notwithstanding any other provision of
this "Limitation on Indebtedness" covenant, the Company will not, and will not
permit any Restricted Subsidiary to, Incur any Guarantee of Indebtedness of any
Unrestricted Subsidiary.
Limitation on Restricted Payments
So long as any of the Notes are outstanding, the Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or
pay any dividend or make any distribution on its Capital Stock (other than
dividends or distributions payable solely in shares of the Company's Capital
Stock (other than Redeemable Stock) of the same class held by such holders or in
options, warrants or other rights to acquire such shares of Capital Stock) held
by Persons other than the Company or any of its Wholly Owned Restricted
Subsidiaries (and other than pro rata dividends or distributions on common stock
of Restricted Subsidiaries), (ii) purchase, redeem, retire or otherwise acquire
for value any shares of Capital Stock of the Company or any Subsidiary
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by Persons other than the Company or any of its Wholly Owned
Restricted Subsidiaries, (iii) make any voluntary or optional principal payment,
or voluntary or optional redemption, repurchase, defeasance or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes, or (iv) make any Investment, other than a
Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) being collectively "Restricted Payments")
if, at the time of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing, (B) the
Company could not Incur at least $1.00 of Indebtedness under the first paragraph
of the "Limitation on Indebtedness" covenant or (C) the aggregate amount
expended for all Restricted Payments (the amount so expended, if other than in
cash, to be determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) after the
date of the Indenture shall exceed the sum of (1) the excess of (x) 100% of
Consolidated EBITDA from the first day of the fiscal quarter beginning after the
Closing Date through the last day of the last full fiscal quarter immediately
preceding the Transaction Date for which reports have been filed pursuant to the
"Commission Reports and Reports to Holders" covenant over (y) the product of 2.0
times cumulative Consolidated Fixed Charges from the first day of the fiscal
quarter beginning after the Closing Date through the last day of the last full
fiscal quarter immediately preceding such Transaction Date for which such
reports have been filed, plus (2) the aggregate Net Cash Proceeds received by
the Company after the Closing Date from the issuance and sale permitted by the
Indenture of its Capital Stock (other than Redeemable Stock) to a Person who is
not a Subsidiary of the Company, or from the issuance to a Person who is not a
Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Redeemable Stock or
any options, warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes) plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary
from such Person (except to the extent any such payment is included in the
calculation of Adjusted Consolidated Net Income), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed the amount of
Investments previously made by the Company and its Restricted Subsidiaries in
such Person.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes,
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, permitted Refinancing Indebtedness; (iii) the
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repurchase, redemption or other acquisition of Capital Stock of the Company in
exchange for, or out of the proceeds of a substantially concurrent issuance or
sale of, shares of Capital Stock (other than Redeemable Stock) of the Company;
(iv) the acquisition of Indebtedness of the Company which is subordinated in
right of payment to the Notes, in exchange for, or out of the proceeds of, a
substantially concurrent issuance or sale of, shares of Capital Stock (other
than Redeemable Stock) of the Company; (v) Investments in an aggregate amount
not to exceed $10 million, in any Person the primary business of which is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investments; (vi) Investments in an
aggregate amount not to exceed the Net Cash Proceeds received by the Company
after the Closing Date from the issuance and sale of its Capital Stock or rights
to purchase its Capital Stock (other than Redeemable Stock and Preferred Stock)
to a Person that is not a Subsidiary of the Company, provided that the
Investment is made within 12 months after the sale of such Capital Stock; (vii)
the purchase, redemption, acquisition, cancellation or other retirement for
value of shares of Capital Stock of the Company to the extent necessary, in the
judgment of the Board of Directors of the Company, to prevent the loss or secure
the renewal or reinstatement of any license or franchise held by the Company or
any Restricted Subsidiary from any governmental agency or to retain the
financial benefits of the Company's "Designated Entity" status as a "Small
Business" or as a "Business Owned by Members of Minority Groups and/or Women" as
such terms are defined by the FCC; (viii) the purchase, redemption, acquisition,
cancellation or other retirement for value of shares of Capital Stock of the
Company, or options to acquire shares of such Capital Stock, held by any
employee or former employee of the Company or any of their respective heirs or
administrators or executors of their respective estates, or by any Person
substantially all the beneficial ownership of which is held by members of such
employee's or former employee's family, in each case in connection with such
employee's or former employee's termination of employment with the Company, the
aggregate payments of which shall (A) have been approved by a majority of the
Board of Directors of the Company, including the approval of a majority of the
independent, disinterested directors, as fair to the Company from a financial
point of view and is evidenced by a resolution of the Board of Directors of the
Company and (B) not exceed $1 million in any single calendar year; (ix) the
cancellation and retirement after November 10, 2004, through conversion at the
option of the holders thereof into subordinated Indebtedness of the Company, of
the Company's Series A Preferred Stock in accordance with the terms thereof; and
(x) the purchase for value of the Warrants pursuant to an offer to purchase the
Warrants in accordance with the terms of the Warrant Agreement; provided, that,
except in the case of clause (i) above, no Default or Event of Default shall
have occurred and be continuing or occur as a consequence of the actions or
payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payments referred to in clauses (ii) and (ix)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clause (iii), (iv) and (vi) shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
So long as any of the Notes are outstanding, the Company will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary, (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary or (v) make any payments to the Company for the
purpose of satisfying any tax liabilities or obligations of the Company.
The foregoing provisions shall not apply to any encumbrances or
restrictions: (i) existing on the Closing Date in any agreement in effect on the
Closing Date, including, without limitation, in the Credit Facility, and any
extensions, refinancings, renewals or replacements of such agreements; provided
that the encumbrances and restrictions in any such extensions, refinancings,
renewals or replacements are no less favorable in any
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material respect to the Holders than those encumbrances or restrictions that are
then in effect and that are being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law; (iii) existing with respect
to any Person or the property or assets of such Person acquired by the Company
or any Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired; (iv) in the case of
clause (iv) of the first paragraph of this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or similar
property or asset, (B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted Subsidiary;
or (v) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary. Nothing contained in this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent the Company or any Restricted Subsidiary from (1) creating, incurring,
assuming or suffering to exist any Liens otherwise permitted in the "Limitation
on Liens" covenant or (2) restricting the sale or other disposition of property
or assets of the Company or any of its Restricted Subsidiaries that secure
Indebtedness of the Company or any of its Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary, directly or indirectly, to issue, transfer, convey,
sell, lease or otherwise dispose of any shares of Capital Stock (including
options, warrants or other rights to purchase shares of such Capital Stock) of
such or any other Restricted Subsidiary to any Person (other than to the Company
or a Wholly Owned Restricted Subsidiary) unless (A) the Net Cash Proceeds from
such issuance, transfer, conveyance, sale, lease or other disposition are
applied in accordance with the provisions of the "Limitation on Asset Sales"
covenant and (B) if, immediately after giving effect to such issuance or sale,
such Restricted Subsidiary would no longer constitute a Restricted Subsidiary,
any Investment in such Person remaining after giving effect to such issuance or
sale would have been permitted to be made under the "Limitation on Restricted
Payments" covenant if made on the date of such sale (valued as provided in the
definition of "Investments"). Notwithstanding the foregoing, for as long as any
of the Notes are outstanding the Company will own 100% of the Capital Stock of
PCSD Financial Corp.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company, unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee of payment of the Notes by
such Restricted Subsidiary (a "Subsidiary Guarantee") and (ii) such Restricted
Subsidiary waives and will not in any manner whatsoever claim or take the
benefit or advantage of, any rights of reimbursement, indemnity or subrogation
or any other rights against the Company or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Subsidiary
Guarantee; provided that this paragraph shall not be applicable to any Guarantee
of any Restricted Subsidiary that existed at the time such Person became a
Restricted Subsidiary and was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
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Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon any sale, exchange or transfer, to
any Person that is not an Affiliate of the Company of all of the Company's and
each Restricted Subsidiary's Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture). The release or discharge of the Indebtedness or
the Guarantee which resulted in the creation of such Subsidiary Guarantee will
not release or discharge such Subsidiary Guarantee.
Limitation of Transactions with Shareholders and Affiliates
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, enter into, renew or
extend any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder of 5% or more of any class of Capital
Stock of the Company (or any Affiliate of such holder) or with any Affiliate of
the Company or any Restricted Subsidiary, unless (i) such transaction or series
of transactions is on terms no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained, at the time of such transaction or
at the time of the execution of the agreement providing therefor, in a
comparable arm's-length transaction with a Person that is not such a holder or
an Affiliate and (ii) if such transaction or series of transactions involves
aggregate payments and other consideration having a fair market value at the
time of the transaction or series of transactions in excess of $1 million, (A)
such transaction or series of transactions is approved by a majority of the
Board of Directors of the Company, including the approval of a majority of the
independent, disinterested directors, as fair to the Company from a financial
point of view and is evidenced by a resolution of the Board of Directors of the
Company or (B) the Company shall have obtained and delivered to the Trustee a
written opinion of a nationally recognized investment banking firm stating that
such transaction or series of transactions is fair to the Company or such
Restricted Subsidiary from a financial point of view.
The foregoing limitation does not limit, and shall not apply to, (i) any
transaction between the Company and any of its Wholly Owned Restricted
Subsidiaries or between Wholly Owned Restricted Subsidiaries; (ii) the payment
of reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iii) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; (iv) any Restricted Payment not
prohibited by the "Limitation on Restricted Payments" covenant; (v) any
extension, renewal or modification of the terms and provisions of the Sloan
Loan, which extension, renewal or modification shall have been previously
approved by a majority of the Board of Directors of the Company, including the
approval of a majority of the independent, disinterested directors, as fair to
the Company from a financial point of view and evidenced by a resolution of the
Board of Directors; and (vi) the execution of any reseller agreement, operating
agreement, network build-out agreement, management agreement or joint venture
relating to the telecommunications business with any Person who was a
stockholder on the date of the Indenture, which execution shall have been
previously approved by a majority of the Board of Directors of the Company,
including the approval of a majority of the independent, disinterested
directors, as fair to the Company from a financial point of view and evidenced
by a resolution of the Board of Directors.
Limitation on Liens
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien
on any of its assets or properties of any character, or any shares of Capital
Stock or Indebtedness of any Restricted Subsidiary, without making effective
provision for all of the Notes and all other amounts due under the Indenture to
be directly secured at least equally and ratably with the obligation or
liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens created pursuant to
agreements existing on the Closing Date; (ii) Liens granted after the Closing
Date on any assets or Capital Stock of the Company or its Restricted
Subsidiaries created in favor of the Holders; (iii) Liens with respect to the
assets of a Restricted
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Subsidiary granted by such Restricted Subsidiary to the Company or a Wholly
Owned Restricted Subsidiary to secure Indebtedness owing to the Company or such
other Wholly Owned Restricted Subsidiary; (iv) Liens securing permitted
Refinancing Indebtedness which is Incurred to refinance secured Indebtedness;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens with respect to assets or
properties of any Person that becomes a Restricted Subsidiary after the Closing
Date; provided that such Liens do not extend to or cover any assets or
properties of the Company or any of its Restricted Subsidiaries other than the
assets or properties of such Person subject to such Liens on the date such
Person becomes a Restricted Subsidiary; and provided further that such Liens are
not incurred in contemplation of, or in connection with, such Person becoming a
Restricted Subsidiary; or (vi) Permitted Liens.
Limitation on Sale and Leaseback Transactions
Under the terms of the Indenture, neither the Company nor any Restricted
Subsidiary will, directly or indirectly, enter into any Sale and Leaseback
Transaction, except that the Company or any Restricted Subsidiary may enter into
a Sale and Leaseback Transaction if (i) immediately prior thereto, and after
giving effect to such Sale and Leaseback Transaction (the Indebtedness
thereunder being equivalent to the Attributable Value thereof), the Company
could Incur at least $1.00 of additional Indebtedness under the first paragraph
of the "Limitation on Indebtedness" covenant and (ii) the Sale and Leaseback
Transaction constitutes an Asset Sale effected in accordance with the
requirements of the "Limitation on Asset Sales" covenant.
Limitation on Asset Sales
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, consummate any Asset Sale, unless (I) the
consideration received by the Company or such Restricted Subsidiary is at least
equal to the fair market value of the assets sold or disposed of and (II) at
least 80% of the consideration received consists of cash or Temporary Cash
Investments or the assumption of unsubordinated Indebtedness of the Company to
the extent that the Company or such Restricted Subsidiary is released from all
liability on such unsubordinated Indebtedness. In the event of an Asset Sale,
the Company shall or shall cause the relevant Restricted Subsidiary to (i)
within nine months after the date the Net Cash Proceeds are received either (A)
apply an amount equal to such Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company (other than the Notes), or
Indebtedness of any Restricted Subsidiary, in each case owing to a Person other
than the Company or any of its Restricted Subsidiaries or (B) invest an equal
amount, or the amount not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to invest, and actually invest, such Net Cash
Proceeds within one year of the receipt of such Net Cash Proceeds), in property
or assets (other than current assets) of a nature or type or that are used in a
business (or in a company having property and assets of a nature or type, or
engaged in a business) similar or related to the nature or type of the property
and assets of, or the business of, the Company and its Restricted Subsidiaries
existing on the date of such investment (as determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) apply (no later than the end of the nine-month or
one-year period, as the case may be, referred to in clause (i)) such Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraph of this "Limitation on Asset Sales" covenant. The amount of
such Net Cash Proceeds required to be applied (or to be committed to be applied)
during such nine-month or one-year period, as the case may be, as set forth in
clause (i) of the preceding sentence and not applied as so required by the end
of such period, as the case may be, shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds totals at least $10 million, the Company must commence, not
later than the fifteenth Business Day of such month, and consummate an Offer to
Purchase from the Holders on a pro rata basis an aggregate Accreted Value of
Notes equal to the Excess Proceeds on such date, at a purchase price equal to
the Accreted Value of the Notes, plus, in each case, accrued interest (if any)
to the date of purchase. To the extent that the Accreted Value of Notes tendered
pursuant to such Offer to Purchase is less than the Excess Proceeds, the Company
may use such
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deficiency for general corporate purposes. If the Accreted Value of Notes
validly tendered and not withdrawn by Holders thereof exceeds the Excess
Proceeds, Notes to be purchased will be selected on a pro rata basis. Upon
completion of such Offer to Purchase, the amount of Excess Proceeds will be
reset to zero.
Activities of the Company and Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, engage in any business other than the
telecommunications business and related activities and services.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States or any jurisdiction thereof
and shall expressly assume, by a supplemental indenture executed and delivered
to the Trustee, all of the obligations of the Company in respect of all of the
Notes under the Indenture; (ii) immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Company, or any Person becoming the successor obligor of the
Notes, as the case may be, could Incur at least $1.00 of Indebtedness under the
first paragraph of the "Limitation on Indebtedness" covenant; and (iv) the
Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clause (iii)) and an
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; provided that the provisions of clause (iii) shall not apply
to transactions described above which are between or among two or more Wholly
Owned Subsidiaries of the Company.
Notwithstanding the immediately preceding paragraph, this covenant shall
not prohibit a transaction the sole purpose of which (as determined in good
faith by the Board of Directors of the Company) is to change the state of
incorporation of the Company.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase in respect of all Notes then
outstanding, at a purchase price equal to 101% of the Accreted Value thereof,
plus accrued interest (if any) to the date of purchase. The failure by the
Company to repurchase Notes at the conclusion of the Offer to Purchase will
constitute an Event of Default without any waiting period or notice
requirements.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
any that may be contained in other securities of the Company which might be
outstanding at the time). The above covenant requiring the Company to repurchase
the Notes will, unless any required consents are obtained, require the Company
to repay all indebtedness then outstanding which by its terms would prohibit
such Note repurchase, either prior to or concurrently with such Note repurchase.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder, to the extent such laws and
regulations are applicable, in the event that the Company is required to
repurchase Notes pursuant to an Offer to Purchase.
Other than the requirement to make an Offer to Purchase upon a Change of
Control, the Indenture will not contain any provisions which afford holders of
the Notes specific protection in the event of a highly leveraged transaction
which results in a Change of Control. Further, other than the "Limitation on
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Indebtedness" covenant described above, the Indenture will not contain any
provisions which afford holders of the Notes specific protection in the event of
a highly leveraged transaction which does not result in a Change of Control. The
Company does not have the ability to waive either the requirement to make an
Offer to Purchase or the provisions of the "Limitation on Indebtedness"
covenant.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable, whether at maturity, upon
acceleration, redemption or otherwise; (b) default in the payment of interest on
any Note when the same becomes due and payable, and such default continues for a
period of 30 days; (c) default in the payment of principal (or premium, if any)
and interest on Notes required to be purchased pursuant to an Offer to Purchase
as described under the "Limitation on Asset Sales" covenant and under
"Repurchase of Notes upon a Change of Control" when due and payable; (d) failure
to perform or comply with the provisions described under the "Consolidation,
Merger and Sale of Assets" covenant; (e) default in the performance of or breach
of any other covenant or agreement of the Company in the Indenture or under the
Notes and such default or breach continues for a period of 60 consecutive days
after written notice by the Trustee or the Holders of 25% or more in aggregate
principal amount of the Notes; (f) there occurs with respect to any issue or
issues of Indebtedness of the Company or any Restricted Subsidiary having an
outstanding principal amount of $5 million or more in the aggregate for all such
issues of all such Persons, whether such Indebtedness now exists or shall
hereafter be created, (I) an event of default that has caused the holder thereof
to declare such Indebtedness to be due and payable prior to its Stated Maturity
and/or (II) the failure to make a payment when due of principal, premium, if
any, or interest and such defaulted payment shall not have been made, waived or
extended by the earliest of (x) the expiration of any applicable grace period
and (y) the 30th day after such payment default; (g) any final judgment or order
(not covered by insurance) for the payment of money in excess of $5 million in
the aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) shall
be rendered against the Company or any Restricted Subsidiary and shall not be
paid or discharged, and there shall be any period of 60 consecutive days
following entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $5 million during which a stay of enforcement
of such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (h) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any Restricted
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Restricted Subsidiary or for all or substantially all of the
property and assets of the Company or any Restricted Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any Restricted
Subsidiary and, in each case, such decree or order shall remain unstayed and in
effect for a period of 30 consecutive days; or (i) the Company or any Restricted
Subsidiary (A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any Restricted Subsidiary or for all or substantially all of the property and
assets of the Company or any Restricted Subsidiary or (C) effects any general
assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(h) or (i) above) occurs and is continuing under the Indenture, the Trustee or
the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by written notice to the Company (and to the Trustee if such notice
is given by the Holders), may, and the Trustee at the request of such Holders
shall, declare the Accreted Value of, premium, if any, and accrued interest, if
any, on the Notes to be immediately due and payable. Upon a declaration of
acceleration, such Accreted Value, premium, if any, and accrued interest, if
any, shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (f) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to
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clause (f) shall be remedied or cured by the Company or the relevant Subsidiary
or waived by the holders of the relevant Indebtedness within 30 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (h) or (i) above occurs, the Accreted Value of, premium, if
any, and accrued interest, if any, on the Notes then outstanding shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder. The Holders of at least a majority
in principal amount of the outstanding Notes, by written notice to the Company
and to the Trustee, may waive all past defaults and rescind and annul a
declaration of acceleration and its consequences if (i) all existing Events of
Default, other than the nonpayment of the principal of, premium, if any, and
interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived, and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder. See "Book Entry; Delivery and Form."
The Indenture will require certain officers of the Company to certify,
within 90 days after the end of each fiscal year and within 45 days after the
end of the first, second and third fiscal quarters, whether or not any Default
or Event of Default has occurred, that a review has been conducted of the
activities of the Company and its Restricted Subsidiaries and the Company's and
its Restricted Subsidiaries' performance under the Indenture and that the
Company has fulfilled all obligations thereunder, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
and the nature and status thereof. The Company will also be obligated to notify
promptly the Trustee of any default or defaults in the performance of any
covenants or agreements under the Indenture.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such
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deposit, defeasance and discharge had not occurred, which Opinion of Counsel
must be based upon (and accompanied by a copy of) a ruling of the Internal
Revenue Service to the same effect unless there has been a change in applicable
federal income tax law after the date of the Indenture such that a ruling is no
longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940, as
amended, and after the passage of 123 days following the deposit, the trust fund
will not be subject to the effect of Section 547 of the United States Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately
after giving effect to such deposit on a pro forma basis, no Event of Default,
or event that after the giving of notice or lapse of time or both would become
an Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries is bound and (D) if at such time the Notes are listed on a
national securities exchange, the Company has delivered to the Trustee an
Opinion of Counsel to the effect that the Notes will not be delisted as a result
of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clause (iii) under "--Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "--Covenants,"
clause (e) under "--Events of Default" with respect to such covenants and clause
(iii) under "--Consolidation, Merger and Sale of Assets," and clauses (f) and
(g) under "Events of Default" shall be deemed not to be Events of Default, upon,
among other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes at the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes, (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
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compliance with certain provisions of the Indenture or for waiver of certain
defaults or (viii) following the mailing of an offer with respect to an Offer to
Purchase the Notes as described under the "Limitation on Asset Sales" covenant
and "Repurchase of Notes upon Change of Control," modify the Indenture with
respect to such Offer to Purchase in a manner adverse to such Holders.
COMMISSION REPORTS AND REPORTS TO HOLDERS
So long as any of the Notes are outstanding, the Company will file with the
Commission the annual reports, quarterly reports and other documents which the
Company would have been required to file with the Commission pursuant to Section
13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections
and will also provide to all Holders and file with the Trustee copies of such
reports.
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, shareholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act, incorporated by
reference therein, contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest,
it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York.
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DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms set forth below as well as the
definition of any other capitalized term used herein for which no definition is
provided.
"Accreted Value" is defined to mean, for any Specified Date, the amount
provided below with respect to each $1,000 principal amount at maturity of
Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
---------------------------------------------------------------- ---------
<S> <C>
, 1996................................................ $
, 1997................................................ $
, 1997................................................ $
, 1998................................................ $
, 1998................................................ $
, 1999................................................ $
, 1999................................................ $
, 2000................................................ $
, 2000................................................ $
, 2001................................................ 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the issue price
(as determined for U.S. federal income tax purposes) and (b) an
amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less the original issue price multiplied
by (2) a fraction, the numerator of which is the number of days
from the issue date of the Notes to the Specified Date, using a
360-day year of twelve 30-day months, and the denominator of which
is the number of days from the issue date of the Notes to the first
Semi-Annual Accrual Date, using a 360-day year of twelve 30-day
months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted
Value for the Semi-Annual Accrual Date immediately preceding such
Specified Date and (b) an amount equal to the product of (1) the
Accreted Value for the immediately following Semi-Annual Accrual
Date less the Accreted Value for the immediately preceding Semi
Annual Accrual Date multiplied by (2) a fraction, the numerator of
which is the number of days from the immediately preceding
Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180;
or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by the Company or a Restricted Subsidiary and not incurred in
connection with, or in anticipation of, such Person becoming a Restricted
Subsidiary or such Asset Acquisition, as the case may be; provided that
Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon consummation of the transactions by
which such Person becomes a Restricted Subsidiary or such Asset Acquisition
shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that
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the following items shall be excluded in computing Adjusted Consolidated Net
Income (without duplication): (i) the net income of any Person (other than net
income attributable to a Restricted Subsidiary) in which any Person (other than
the Company or any of its Restricted Subsidiaries) has a joint interest and the
net income of any Unrestricted Subsidiary, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any of its
Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described above
(and in such case, except to the extent includable pursuant to clause (i)
above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with the
Company or any of its Restricted Subsidiaries or all or substantially all of the
property and assets of such Person are acquired by the Company or any of its
Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar distributions
by such Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) any amount paid or accrued as dividends on
Preferred Stock of the Company or any Restricted Subsidiary owned by Persons
other than the Company and any of its Restricted Subsidiaries; and (vi) all
extraordinary gains and extraordinary losses.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any Restricted Subsidiary; provided that such Person's primary
business is related, ancillary or complementary to the businesses of the Company
and its Restricted Subsidiaries on the date of such investment, or (ii) an
acquisition by the Company or any of its Restricted Subsidiaries of the property
and assets of any Person other than the Company or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person; provided that the property and assets acquired are related,
ancillary or complementary to the businesses of the Company and its Restricted
Subsidiaries on the date of such acquisition.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation, or sale-leaseback transactions) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
of the Indenture applicable to mergers, consolidations, and sales of assets of
the Company; provided that "Asset Sale" shall not include (i) sales or other
dispositions of inventory, receivables and other current assets in the ordinary
course of business, (ii) substantially contemporaneous exchanges by the Company
or any Restricted Subsidiary of property or equipment for other property or
equipment; provided that the property or equipment received in any such exchange
by the Company or such Restricted Subsidiary (A) constitutes Telecommunications
Assets and (B) has at least substantially equal market value to the Company or
such Restricted Subsidiary (as determined by the Board of Directors whose good
faith determination shall be conclusive and evidenced by a board resolution) or
(iii) sales or other dispositions of assets with a fair market value (as
certified in an Officers' Certificate) not in excess of $500,000.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the
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<PAGE> 78
total net amount of rent required to be paid by such Person under such lease
during the initial term thereof as determined in accordance with GAAP,
discounted from the last date of such initial term to the date of determination
at a rate per annum equal to the discount rate which would be applicable to a
Capitalized Lease Obligation with a like term in accordance with GAAP. The net
amount of rent required to be paid under any such lease for any such period
shall be the aggregate amount of rent payable by the lessee with respect to such
period after excluding amounts required to be paid on account of insurance,
taxes, assessments, utility, operating and labor costs and similar charges. In
the case of any lease which is terminable by the lessee upon the payment of a
penalty, such net amount shall also include the amount of such penalty, but no
rent shall be considered as required to be paid under such lease subsequent to
the first date upon which it may be so terminated. "Attributable Value" means,
as to a Capitalized Lease Obligation under which any Person is at the time
liable and at any date as of which the amount thereof is to be determined, the
capitalized amount thereof that would appear on the face of a balance sheet of
such person in accordance with GAAP.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means the Board of Directors of the Company or any
committee of such Board of Directors duly authorized to act under the Indenture.
"Board Resolution" means a copy of a resolution, certified by the Secretary
or Assistant Secretary of the Company to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such certification
and delivered to the Trustee.
"Business Day" means any day except Saturday, Sunday or other day on which
commercial banks in the City of New York, or in the city of the office of the
Trustee at which the corporate trust business of the Trustee shall, at any
particular time, be principally administered, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in the equity of such Person, whether now outstanding or
issued after the date of the Indenture.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means the occurrence of any of the following events:
(i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of
the Exchange Act) becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of Voting Stock having more than 50% of the voting power of
the total Voting Stock of the Company on a fully diluted basis; (ii) individuals
who at the beginning of any period of two consecutive calendar years constituted
the Board of Directors of the Company (together with any new directors whose
election by the Board of Directors or whose nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds of the
members of the Board of Directors then in office who either were members of the
Board of Directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in office;
(iii) the sale, lease, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related transactions, of
all or substantially all of the assets of the Company and its Subsidiaries taken
as a whole to any such "person" or "group" (other than to the Company or a
Wholly Owned Restricted Subsidiary); (iv) the merger or consolidation of the
Company with or into another corporation or the merger of another corporation
with or into the Company with the effect that immediately after such transaction
any such "person" or "group" of persons or entities shall have become the
beneficial owner of securities of the surviving corporation of such merger or
consolidation representing a majority of the combined voting power of the
outstanding securities of the surviving corporation ordinarily having the right
to vote in the election of directors; or (v) the adoption of a
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<PAGE> 79
plan relating to the liquidation or dissolution of the Company; provided, that a
Change of Control will be deemed not to occur pursuant to clauses (i), (ii),
(iii) or (iv) above if either (x) the acquiring "person" is a corporation with
outstanding senior, unsecured debt securities having a maturity at original
issuance of at least one year and such debt securities are rated Investment
Grade (without giving effect to any third-party credit support or enhancement)
by S&P or Moody's for a period of at least 90 consecutive days, beginning on the
date of such event (which period will be extended up to 90 additional days for
as long as the rating of such debt securities is under publicly announced
consideration for possible downgrading by the applicable rating agency), or (y)
in the event that the acquiring "person" is a corporation that either (1) does
not have any outstanding senior, unsecured corporate debt securities that are
rated by S&P or Moody's at any time during a period of 90 consecutive days
beginning on the date of such event (which period will be extended up to an
additional 90 days for as long as any such rating agency has publicly announced
that such debt securities will be rated), or (2) after the date of such event
but during such 90 day period, has outstanding senior, unsecured debt securities
having a maturity at original issuance of at least one year that have been rated
Investment Grade (without giving effect to any third-party credit support or
enhancement) by S&P or Moody's which rating continues in effect for the
remainder of the period specified in clause (x) above, the Notes shall be rated
Investment Grade immediately upon such Change of Control.
"Closing Date" means the date on which the Units are originally issued
under the Unit Agreement.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on such automated quotation system, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any New York Stock Exchange member firm that is selected from time
to time by the Company for that purpose and is reasonably acceptable to the
Trustee.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of the Indenture, including, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash
charges (excluding any such non-cash charge to the extent that it represents an
accrual of or reserve for cash charges in any future period) of such Person and
its Subsidiaries for such period to the extent that such other non cash charges
were deducted in computing such Adjusted Consolidated Net Income, less (vii) all
non-cash items increasing Adjusted Consolidated Net Income for such period
(excluding any such non-cash income to the extent it represents an accrual of
cash income to be received in any future period), in each case on a consolidated
basis and determined in accordance with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1)
the number of outstanding common shares of such Restricted Subsidiary not owned
on the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of outstanding common shares of
such Restricted Subsidiary on the last day of such period.
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"Consolidated Fixed Charges" of any Person means for any period (i)
Consolidated Interest Expense of such Person plus (ii) Preferred Stock dividends
declared and payable in cash in such period by such Person or any of its
Restricted Subsidiaries, other than any such dividends payable by a Restricted
Subsidiary of such Person to such Person or one of its Wholly Owned Restricted
Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate of the
following amounts for such period determined on a consolidated basis (without
taking into account Unrestricted Subsidiaries) in accordance with GAAP: the
amount of interest in respect of Indebtedness (including amortization of
original issue discount on any Indebtedness, the interest portion of any
deferred payment obligation and any premiums, fees and expenses (and any
amortization thereof) payable in connection with Indebtedness; all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing; the net costs associated with Interest Rate
Agreements; interest on Indebtedness that is Guaranteed or secured by the
Company or any of its Restricted Subsidiaries; and amounts paid to repurchase
the Warrants to the extent such amounts have been expensed for purposes of
determining Adjusted Consolidated Net Income) and all but the principal
component of rentals in respect of Capitalized Lease Obligations paid, accrued
or scheduled to be paid or to be accrued by the Company and its Restricted
Subsidiaries during such period; excluding, however, any amount of such interest
of any Restricted Subsidiary if the net income of such Restricted Subsidiary is
excluded in the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof (but only in the same proportion as the
net income of such Restricted Subsidiary is excluded from the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof).
"Consolidated Net Worth" means, at any date of determination, shareholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP.
"Credit Facility" means the credit agreement to be entered into prior to or
simultaneously with the completion of the Offering of the Units, as such credit
agreement may be amended, modified, supplemented, restated or replaced from time
to time.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"FCC" means the Federal Communications Commission or any successor
governmental authority.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession.
"Guarantee" means, with respect to any Person, any obligation, contingent
or otherwise, of such Person directly or indirectly guaranteeing any
Indebtedness or other obligation of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Indebtedness or other obligation of such other
Person (whether arising by virtue of partnership arrangements, or by agreements
to keep-well, to purchase assets, goods, securities or services, to take-or-pay,
or to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided that the term "Guarantee"
shall not include endorsements for collection or deposit in the ordinary course
of business. The term "Guarantee" used as a verb has a corresponding meaning.
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"Holder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including Acquired Indebtedness; provided that neither the accrual of interest
nor the accretion of original issue discount shall be considered an Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (other than the Company's Series
A Preferred Stock) (iii) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except trade
payables, (v) all obligations of such Person as lessee under Capitalized Leases,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; provided
that the amount of such Indebtedness shall be the lesser of (A) the fair market
value of such asset at such date of determination and (B) the amount of such
Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such Person
to the extent such Indebtedness is Guaranteed by such Person and (viii) to the
extent not otherwise included in this definition, obligations under Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
provided (i) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the accreted value of such Indebtedness, (ii)
that Indebtedness shall not include any liability for federal, state, local or
other taxes (iii) that Indebtedness shall not include any liability under
health, life, accident or disability plans for employees of the Company or any
Restricted Subsidiary generally, and (iv) Indebtedness shall not include any
commitment for the purchase by the Company or any Restricted Subsidiary of
equipment or telecommunications services requiring the Company or such
Restricted Subsidiary to purchase minimum quantities to achieve discount pricing
prior to the time the Company or such Restricted Subsidiary is required pursuant
to GAAP to record a liability on its balance sheet under such commitment to pay
increased prices.
"Indebtedness to EBITDA Ratio" means, as at any date of determination (the
"Determination Date"), the ratio of (i) the aggregate amount of Indebtedness of
the Company and its Restricted Subsidiaries on a consolidated basis
("Consolidated Indebtedness") at the Determination Date to (ii) the product of
four times the Consolidated EBITDA of the Company for the most recent full
fiscal quarter for which reports have been filed pursuant to the "Commission
Reports and Reports to Holders" covenant described above (such full fiscal
quarter being referred to herein as the "Most Recent Quarter"); provided that
(x) pro forma effect shall be given to (A) any Indebtedness Incurred during the
period commencing on the first day of the Most Recent Quarter through the
Determination Date (the "Reference Period"), including any Indebtedness Incurred
on the Determination Date, to the extent outstanding at the close of the
Determination Date, and (B) the discharge of any other Indebtedness permanently
retired, repaid, repurchased, defeased or otherwise discharged with the proceeds
of such new Indebtedness, in each case as if the Incurrence or retirement of
such Indebtedness had occurred on the first date of such Reference Period, (y)
if during the Reference Period, the Company or any of its Restricted
Subsidiaries shall have engaged in any Asset Sale, Consolidated EBITDA for such
period shall be decreased by an amount equal to the portion thereof (if
positive), or increased by an amount equal to the portion thereof (if negative),
directly attributable to the assets which are the subject of such Asset Sale
(including, as part of the amount directly attributable to such Asset Sale, any
transfer, retirement or other satisfaction of Indebtedness of the Company or any
of its Restricted Subsidiaries as part of the consideration for such Asset Sale)
as if such Asset Sale and related retirement of Indebtedness had occurred on the
first day of such Reference Period or (z) if during such Reference Period the
Company or any of its Restricted Subsidiaries shall have made any Asset
Acquisition, the Consolidated EBITDA of the
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Company shall be calculated on a pro forma basis as if such Asset Acquisition
and any related financing had occurred on the first day of such Reference
Period.
"Interest Payment Date" means each semiannual interest payment date on
and of each year, commencing , 2001.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement designed to protect the Company or any of its
Subsidiaries against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) to, capital
contribution (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others) to, or
any purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include the designation of
a newly formed or newly acquired Subsidiary as an Unrestricted Subsidiary. For
purposes of the definition of "Unrestricted Subsidiary", the "Limitation on
Restricted Payments" covenant and the "Limitation on the Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant described above, (i)
"Investment" shall include (a) the fair market value of the assets (net of
liabilities) of any newly formed or newly acquired Subsidiary of the Company at
the time that such newly formed or newly acquired Subsidiary is designated an
Unrestricted Subsidiary and (b) the fair market value, in the case of a sale of
Capital Stock in accordance with the "Limitation on the Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant such that a Person no longer
constitutes a Restricted Subsidiary, of the remaining assets (net of
liabilities) of such Person after such sale, and shall exclude the fair market
value of the assets (net of liabilities) of any Unrestricted Subsidiary at the
time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of
the Company and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined by the Board of Directors in good faith.
"Investment Grade" shall mean BBB- or higher by S&P or Baa3 or higher by
Moody's.
"L.A. Note" means the $500,000 aggregate principal amount promissory note
or notes of the Company issued to the seller in connection with the acquisition
of radio frequency licenses in Los Angeles, California.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof, any sale with recourse
against the seller or any Affiliate of the seller, or any agreement to give any
security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary of the Company)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes
will actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of the Company and its
Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters
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and liabilities under any indemnification obligations associated with such Asset
Sale, all as determined in conformity with GAAP and (b) with respect to any
issuance or sale of Capital Stock, the proceeds of such issuance or sale in the
form of cash or cash equivalents, including payments in respect of deferred
payment obligations (to the extent corresponding to the principal, but not
interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary of the Company) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest (or accrete original issue
discount) on and after the Payment Date; (v) that Holders electing to have a
Note purchased pursuant to the Offer to Purchase will be required to surrender
the Note, together with the form entitled "Option of the Holder to Elect
Purchase" on the reverse side of the Note completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the Business
Day immediately preceding the Payment Date; (vi) that Holders will be entitled
to withdraw their election if the Paying Agent receives, not later than the
close of business on the third Business Day immediately preceding the Payment
Date, a telegram, facsimile transmission or letter setting forth the name of
such Holder, the principal amount of Notes delivered for purchase and a
statement that such Holder is withdrawing his election to have such Notes
purchased; and (vii) that Holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples thereof.
On the Payment Date, the Company shall (i) accept for payment on a pro rata
basis Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii)
deposit with the Paying Agent money sufficient to pay the purchase price of all
Notes or portions thereof so accepted; and (iii) cause the Paying Agent to
deliver to the Trustee all Notes or portions thereof so accepted together with
an Officers' Certificate specifying the Notes or portions thereof accepted for
payment by the Company. The Paying Agent shall promptly mail to the Holders of
Notes so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new Note equal in
principal amount to any unpurchased portion of the Note surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or integral multiples thereof. The Company will publicly announce the
results of an Offer to Purchase as soon as practicable after the Payment Date.
The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company
will comply with Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Company is required to repurchase Notes
pursuant to an Offer to Purchase.
"Officer" means, with respect to the Company, (i) the Chairman, the Chief
Executive Officer, a Vice Chairman, the President, any Vice President and (ii)
the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant
Secretary.
"Officers' Certificate" means a certificate signed by one Officer listed in
clause (i) of the definition thereof and one Officer listed in clause (ii) of
the definition thereof, provided, however, that any such certificate may be
signed by any two of the Officers listed in clause (i) of the definition thereof
in lieu of being signed by one Officer listed in clause (i) of the definition
thereof and one Officer listed in clause (ii) of the definition thereof. Each
Officers' Certificate (other than certificates provided pursuant to TIA Section
314(a)(4)) shall include the statements provided for in TIA Section 314(e).
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"Opinion of Counsel" means a written opinion signed by legal counsel who
may be an employee of or counsel to the Company. Each such Opinion of Counsel
shall include the statements provided for in TIA Section 314(e).
"Permitted Investment" means (i) an Investment in a Restricted Subsidiary
or a Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided that, such Person's primary business is related, ancillary or
complementary to the businesses of the Company and its Restricted Subsidiaries
on the date of such Investment; (ii) a Temporary Cash Investment; (iii) payroll,
travel and similar advances to cover matters that are expected at the time of
such advances ultimately to be treated as expenses in accordance with GAAP; and
(iv) loans or advances to employees made in the ordinary course of business in
accordance with past practice of the Company or its Restricted Subsidiaries and
that do not in the aggregate exceed $500,000 at any time outstanding.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (ii) statutory
Liens of landlords and carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen or other similar Liens arising in the ordinary course of
business and with respect to amounts not yet delinquent or being contested in
good faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of any
Telecommunications Subsidiary individually or the Company and its Restricted
Subsidiaries taken as a whole; (vi) Liens upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred in accordance with the
"Limitation on Indebtedness" covenant described above, (1) to finance the cost
(including the cost of improvement or construction) of the item of property or
assets subject thereto and such Lien is created prior to, at the time of or
within six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property or (2) to
refinance any Indebtedness previously so secured, (b) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such cost and (c)
any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (vii) leases,
subleases, licenses or sublicenses granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements (or substantially equivalent filings
outside of the United States) regarding leases; (xi) Liens on property of, or on
shares of stock or Indebtedness of, any corporation existing at the time such
corporation becomes, or becomes a part of, any Restricted Subsidiary; provided
that such Liens do not extend to or cover any property or assets of the Company
or any Restricted Subsidiary other than the property or assets acquired or
property or assets of the corporation that becomes a Restricted Subsidiary;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary of the Company that does not give rise to an Event of
Default; (xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (xv) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the
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importation of goods; (xvi) Liens encumbering customary initial deposits and
margin deposits, and other Liens that are either within the general parameters
customary in the industry and incurred in the ordinary course of business, in
each case, securing Indebtedness under Interest Rate Agreements; (xvii) Liens
arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business of the Company and
its Restricted Subsidiaries; (xviii) Liens on or sales of receivables; (xix)
Liens securing Indebtedness permitted to be Incurred pursuant to clause (vi) of
the second paragraph of the "Limitation on Indebtedness" covenant (including,
without limitation, Indebtedness under the Credit Facility permitted to be
Incurred pursuant to such clause (vi)); provided, however, that any such
Indebtedness shall not be secured by any property or assets of the Company or
any Restricted Subsidiary of the Company other than the Telecommunications
Assets so constructed or acquired with the proceeds of such Indebtedness or by
the stock of any Restricted Subsidiary, the assets of which consist solely of
such Telecommunications Assets so constructed or acquired; (xx) Liens on
licenses granted by the FCC to utilize narrowband radio frequency or on the
interests in any entity, the assets of which consist solely of such licenses to
the extent they secure Indebtedness permitted to be Incurred under clauses (v),
(vii) and (viii) of the second paragraph of the "Limitation on Indebtedness"
covenant, provided that the aggregate amount of Indebtedness secured by any such
Lien shall not at any time exceed the amount of Indebtedness permitted to be
Incurred pursuant to such clauses (v), (vii) and (viii); (xxi) Liens (including
Liens on Capital Stock of any Restricted Subsidiary) to the extent they secure
Indebtedness outstanding under the Credit Facility, provided that the aggregate
amount of Indebtedness secured by any such Lien (without duplication of any
Indebtedness secured by Liens pursuant to clause (xix) above) shall not at any
time exceed the amount of Indebtedness permitted to be Incurred under any such
facility pursuant to the terms of the Indenture; (xxii) Liens (including Liens
on Capital Stock of any Restricted Subsidiary) to the extent they secure
Indebtedness outstanding permitted to be Incurred under clause (i) or (ix) of
the second paragraph of the "Limitation on Indebtedness" covenant, provided that
the fair market value, as determined by the Board of Directors of the Company in
good faith, of the property and other assets subject to such Liens (determined
at the time such Liens are granted) does not exceed an amount equal to 150% of
the amount of such Indebtedness; and (xxiii) any extension, renewal or
replacement, in whole or in part, of any Lien described in clauses (i) through
(xxii); provided that any such extension, renewal or replacement shall not
extend to any additional property or assets.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described above and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the expiration of the
Company's Offer to Purchase Notes as required pursuant to the "Limitation on
Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants
described above.
"Redemption Date," when used with respect to any Note to be redeemed, means
the date fixed for such redemption by or pursuant to the Indenture.
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"Refinancing Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary issued in exchange for, or the net proceeds of which are
used to refinance or refund, then outstanding Indebtedness of such Person, other
than Indebtedness Incurred under clause (i), (v) or (ix) of the second paragraph
under the "Limitation on Indebtedness" covenant, and any refinancings thereof in
an amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the Notes or Indebtedness that is pari
passu with, or subordinated in right of payment to, the Notes shall only be
permitted if (A) in case the Notes are refinanced in part or the Indebtedness to
be refinanced is pari passu with the Notes, such new Indebtedness, by its terms
or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is outstanding, is expressly made pari passu with, or subordinate
in right of payment to, the remaining Notes, (B) in case the Indebtedness to be
refinanced is subordinated in right of payment to the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is issued or remains outstanding, is
expressly made subordinate in right of payment to the Notes at least to the
extent that the Indebtedness to be refinanced is subordinated to the Notes and
(C) such new Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness
to be refinanced or refunded and the Average Life of such new Indebtedness is at
least equal to the remaining Average Life of the Indebtedness to be refinanced
or refunded; and provided further that in no event may Indebtedness of the
Company (other than the L.A. Note) be refinanced by means of any Indebtedness of
any Restricted Subsidiary pursuant to this definition.
"Regular Record Date" for the interest payable on any Interest Payment Date
means the or (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party providing for the leasing
to the Company or a Restricted Subsidiary of any property, whether owned by the
Company or any Restricted Subsidiary at the Closing Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"Security Register" means the register of the Notes and of their transfer
and exchange to be kept by the office or agency maintained by the Company where
Notes may be presented for registration of transfer or for exchange.
"Series A Preferred Stock" means the Series A Preferred Stock of the
Company outstanding on the date of the Indenture and any Series B Preferred
Stock of the Company issuable upon the exchange of such Series A Preferred
Stock.
"Sloan Loan" means the promissory notes in favor of the Company issued in
connection with the original issuance of the Company's Capital Stock, of which
approximately $1.7 million was outstanding on the date hereof.
"Specified Date" means any redemption date, any date of purchase for any
purchase of Notes pursuant to the covenants described under "Limitation on Asset
Sales" or "Repurchase of Notes upon a Change of Control" above or any date on
which the Notes first become due and payable after an Event of Default.
"Spectrum Acquisition Debt" means Indebtedness Incurred solely for the
purpose of financing the costs of licenses or other rights granted by the FCC to
utilize radio frequency and which is either a direct obligation owing to the FCC
or recourse solely to such licenses or to the Capital Stock of a Restricted
Subsidiary which has no material assets other than such licenses.
"S&P" means Standard & Poor's Corporation and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with
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respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Strategic Equity Investor" means any Person the common stock of which is
publicly traded that, both as of the Trading Day immediately before the day of a
sale and the Trading Day immediately after the day of such sale, has Total
Common Equity of at least $400 million and is engaged in the business of (a)
providing emission, transmission or reception of signs, signals, writing,
images, sound, data or video; (b) the sale, resale, lease or provision of
cellular services, PCS, dispatch services, paging services, telephone services
and other telecommunications or radiocommunications services; (c) the operation
of PCS networks and other telecommunications or radiocommunications networks;
(d) the provision of telecommunications or radiocommunications facilities or
equipment; or (e) any business ancillary or directly related to the businesses
referred to in clauses (a), (b), (c) or (d) above.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the outstanding
Voting Stock is owned, directly or indirectly, by such Person and one or more
other Subsidiaries of such Person.
"Telecommunications Assets" means (i) any entity or business which holds
telecommunications or radiocommunications licenses, or a substantial portion of
the revenues of which are derived from (a) providing emission, transmission or
reception of signs, signals, writing, images, sound, data or video; (b) the
sale, resale, lease or provision of cellular services, PCS, dispatch services,
paging services, telephone services and other telecommunications or
radiocommunications services; (c) the operation of PCS networks and other
telecommunications or radiocommunications networks; (d) the provision of
telecommunications or radiocommunications facilities or equipment; or (e) any
business ancillary or directly related to the businesses referred in clauses
(a), (b), (c) or (d) above and (ii) any assets used primarily to provide such
products or services or to conduct such businesses, including licenses or other
rights to use radio frequency.
"Telecommunications Subsidiary" means (i) PCSD Financial Corp., SGI
Communications, Inc., PCSD Spectrum, Inc., PCSD Network, Inc. and their
respective successors and (ii) any other Subsidiary of the Company that holds
more than a de minimis amount of Telecommunications Assets.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully and
unconditionally guaranteed by the United States or any agency thereof, (ii) time
deposit accounts, certificates of deposit and money market deposits maturing
within 365 days of the date of acquisition thereof, bankers' acceptances with
maturities not exceeding 365 days, and overnight bank deposits, in each case
issued by or with a bank or trust company that is organized under the laws of
the United States or any state thereof and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $500 million and
has outstanding debt which is rated "A" (or such similar equivalent rating) or
higher by at least one nationally recognized statistical rating organization (as
defined in Rule 436 under the Securities Act), or any money market fund
sponsored by a registered broker dealer or mutual fund distributor, (iii)
repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) commercial
paper, maturing not more than 365 days after the date of acquisition, issued by
a corporation (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States with a rating at the time as
of which any investment therein is made of "P-l" (or higher) according to
Moody's Investors Service, Inc. or "A-l" (or higher) according to Standard &
Poor's and (v) securities with maturities of twelve months or less from the date
of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States, or by any political subdivision
or taxing authority thereof, and rated at least "A" by Standard & Poor's or
Moody's Investors Service, Inc.
"Total Common Equity" of any Person means, as of any day of determination,
the product of (i) the aggregate number of outstanding shares of Common Stock of
such Person on such day (which shall not include any options or warrants on, or
securities convertible or exchangeable into, shares of Common Stock of such
person) and (ii) the average Closing Price of such Common Stock over the 20
consecutive Trading Days
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immediately preceding such day. For purposes of calculating Total Common Equity
on the Trading Day immediately following an event described under "Change of
Control," the average closing price shall be equal to the Closing Price on such
Trading Day. If no Closing Price exists with respect to shares of any such
class, the value of such shares for purposes of clause (ii) of the preceding
sentence shall be determined by a nationally recognized independent investment
banking firm.
"Trading Day" with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended (15 U.S. Code sec.sec. 77aaa-77bbb), as in effect on the date the
Indenture was executed.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of such
an Unrestricted Subsidiary. The Board of Directors may, at the time of
acquisition or formation, designate any Subsidiary of the Company which has been
either newly acquired or newly formed after the date of the Indenture to be an
Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or
owns or holds any Lien on any property of, the Company or any Restricted
Subsidiary; provided that (i) either (A) the Subsidiary to be so designated has
total assets of $1,000 or less or (B) if such Subsidiary has assets greater than
$1,000, that such designation would be permitted under the "Limitation on
Restricted Payments" covenant described above and (ii) the holders of any
permitted Indebtedness of such Subsidiary do not have direct or indirect
recourse against the Company or any Restricted Subsidiary of the Company and
neither the Company nor any Restricted Subsidiary of the Company otherwise has
any liability for any payment obligations in respect of such Indebtedness. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company; provided that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
the first paragraph of the "Limitation on Indebtedness" covenant described above
and (y) no Default or Event of Default shall have occurred and be continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Notes, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specified payment of interest on or principal of any
such U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt; provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of interest on
or principal of the U.S. Government Obligation evidenced by such depository
receipt.
"Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by
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foreign nationals mandated by applicable law) is owned by such Person or one or
more Wholly Owned Subsidiaries of such Person.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Notes will initially be issued in the form
of one or more Global Notes (the "Global Note") held in book-entry form. The
Global Note will be deposited on the Closing Date with, or on behalf of, The
Depository Trust Company ("DTC" or the "Depository") and registered in the name
of Cede & Co., as nominee of the Depository (such nominee being referred to
herein as the "Global Note holder").
DTC has advised the Company that it is a limited-purpose trust company that
was created to hold securities for its participating organizations
(collectively, the "Participants" or the "Depository's Participants") and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts of its
Participants. The Depository's Participants include securities brokers and
dealers (including the Underwriters), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depository's system
is also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants" or the "Depository's
Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Persons who are not
Participants may beneficially own securities held by or on behalf of the
Depository only through the Depository's Participants or the Depository's
Indirect Participants.
The Company has been advised by the Depository that (i) upon deposit of the
Global Note, the Depository will credit the accounts of Participants designated
by the Underwriters with portions of the principal amount of the Global Note and
(ii) ownership of the Notes evidenced by the Global Note will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by the Depository (with respect to the interests of the Depository's
Participants), the Depository's Participants and the Depository's Indirect
Participants. Prospective purchasers are advised that the laws of some states
require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer Notes evidenced
by the Global Note will be limited to such extent.
So long as the Global Note holder is the registered owner of any Notes, the
Global Note holder will be considered the sole holder under the Indenture of any
Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the
Global Note will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of the Depository or for maintaining, supervising or reviewing
any records of the Depository relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Note holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note holder in its capacity as the registered holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names the Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of the Notes (including principal,
premium, if any, or interest). The Company believes, however, that it is
currently the policy of the Depository to immediately credit the accounts of the
relevant Participants with such payments, in amounts proportionate to their
respective holdings of beneficial interests in the relevant security as shown on
the records of the Depository. Payments by the Depository's Participants and the
Depository's Indirect Participants to the beneficial owners of the Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depository's Participants or the Depository's Indirect
Participants.
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CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Notes. Upon any such issuance,
the Trustee is required to register such Certificated Notes in the name of, and
cause the same to be delivered to, such person or persons (or the nominee of any
thereof). In addition, if (i) the Company notifies the Trustee in writing that
the Depository is no longer willing or able to act as a depository and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of Notes in the form of Certificated Notes under the Indenture,
then, upon surrender by the Global Note holder of its Global Note, Notes in such
form will be issued to each person that the Global Note holder and the
Depository identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note holder or the Depository in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note holder or the
Depository for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes (including
principal, premium, if any, and interest) be made in immediately available
funds.
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DESCRIPTION OF THE WARRANTS
GENERAL
The Warrants are to be issued under a Warrant Agreement (the "Warrant
Agreement") between the Company and United States Trust Company of New York, as
Warrant Agent (the "Warrant Agent"). The following summaries of certain
provisions of the Warrant Agreement do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Warrants and the Warrant Agreement.
Each Warrant initially will entitle the registered holder thereof (the
"holder"), subject to and upon compliance with the provisions thereof and of the
Warrant Agreement, at such holder's option, prior to 5:00 P.M., New York City
time, on the Expiration Date, to purchase at a price of $0.01 per Warrant (the
"Exercise Price") from the Company one (or such other number as may result from
adjustments as provided in the Warrant Agreement) share of Class B Common Stock.
The Class B Common Stock issuable upon exercise of the Warrants collectively
will represent approximately % of the Company's outstanding Common Stock on
a fully diluted basis. As of May 21, 1996, the Company had issued warrants to
acquire 1,313 shares of the Class B Common Stock.
Subject to the terms and conditions established in the Warrant Agreement,
unless exercised the Warrants will expire at 5:00 p.m., New York time, on the
earliest to occur of (i) 180 days after an Exercise Event (as defined below) and
(ii) , 2006 (the "Expiration Date"). Each Warrant may be exercised on
any business day on or after the Exercisability Date (as defined below) and on
or prior to the Expiration Date. Any Warrant not exercised before the close of
business on the Expiration Date shall become void, and all rights of the holder
under the Warrant Certificate evidencing such Warrant and under the Warrant
Agreement shall cease. The Warrants will entitle the holders thereof to
purchase, in the aggregate, initially approximately % of the Class B Common
Stock, on a fully diluted basis immediately after the issuance of the Warrants.
Subject to the terms of the Warrant Agreement, the Warrant Certificates
evidencing the Warrants may be surrendered for exercise or exchange, and the
transfer of Warrant Certificates will be registrable, at the office or agency of
the Company maintained for such purpose, which initially will be the corporate
trust office of the Warrant Agent in New York, New York. The Warrant
Certificates will be issued either in global form or physical form as definitive
Warrant Certificates. No service charge will be made for any exercise, exchange
or registration of transfer of Warrant Certificates, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
In general, holders of Warrants will not be entitled, by virtue of being
such holders, to receive notice of any meetings of stockholders or otherwise
have any rights of stockholders of the Company. However, if at any time the
Company (i) grants, issues or sells options, convertible securities, or rights
to purchase stock, warrants or other securities pro rata to the record holders
of the Common Stock (the "Distribution Rights") or (ii) without duplication,
makes any dividend or otherwise makes any distribution (a "Distribution") on
shares of the Common Stock, then the Company will grant, issue, sell or make to
each registered holder of Warrants the aggregate Distribution Rights or
Distribution, as the case may be, which such holder would have acquired if such
holder had held the maximum number of shares of Common Stock acquirable upon
complete exercise of each holder's Warrants immediately before the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Distribution Rights or Distribution, as the case may be.
The number of shares of Common Stock issuable upon exercise of a Warrant
(the "Exercise Rate") is subject to adjustment from time to time upon the
occurrence of certain events, including certain (a) subdivisions, combinations
or certain reclassifications of the Common Stock and (b) sales by the Company of
Common Stock or of securities convertible into or exchangeable or exercisable
for Common Stock (other than (1) pursuant to the exercise of the Warrants, (2)
any security convertible into, or exchangeable or exercisable for, Common Stock
as to which the issuance thereof has previously been the subject of any required
adjustment pursuant to the Warrant Agreement and (3) grants to employees of
options to purchase shares of Common Stock in the ordinary course of business in
accordance with past
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practice) at a price per share less than the Current Market Value (as defined
below) at the time and date of the determination of stockholders entitled to
receive such rights (the "Time of Determination").
The Warrant Agreement permits the Company voluntarily to increase the
Exercise Rate from time to time for a period of time not less than 20 business
days.
If the Company is a party to a consolidation, merger or binding share
exchange, or certain transfers of all or substantially all of its assets occur,
the right to exercise a Warrant for Class B Common Stock may be changed into a
right to receive securities, cash or other assets of the Company or another
person which such holder would have received immediately after such transaction
if such holder had exercised the Warrant immediately before the effective date
of such transaction.
The Warrant Agreement permits, with certain exceptions, the amendment
thereof and the modification of the rights and obligations of the Company and
the rights of the holders of Warrant Certificates under the Warrant Agreement at
any time by the Company and the Warrant Agent with the consent of the holders of
Warrant Certificates representing a majority in number of the then outstanding
Warrants.
WARRANT EXERCISE
Warrants may be exercised on or after the Exercisability Date and on or
prior to the Expiration Date by surrendering the Warrant Certificate evidencing
such Warrants with the form of election to purchase Class B Common Stock set
forth on the reverse side thereof duly completed and executed by the holder
thereof and paying in full the Exercise Price for such Warrant at the office or
agency designated for such purpose, which will initially be the corporate trust
office of the Warrant Agent in New York, New York. Each Warrant may only be
exercised in whole and the Exercise Price may be paid only in cash or by
certified or official bank check or through the surrender of unexercised
Warrants.
Upon the occurrence of an Exercise Event, the Company shall (i) send
promptly to each holder of Warrants, by first class mail at the addresses
appearing on the Warrant Register, a notice of such Exercise Event, which notice
shall describe the type of Exercise Event and the date of the occurrence thereof
and (ii) cause a notice of such Exercise Event to be published in the Wall
Street Journal, National Edition, for two consecutive business days, which
notice shall identify the Warrants, describe the type of Exercise Event and the
date of the occurrence thereof.
Fractional shares of Common Stock are not required to be issued upon
exercise of Warrants, but in lieu thereof the Company will pay a cash
adjustment.
NOTWITHSTANDING THE FOREGOING, THE EXERCISE OF THE WARRANTS (AND THE
OWNERSHIP OF CLASS B COMMON STOCK ISSUABLE UPON THE EXERCISE THEREOF) MAY BE
LIMITED BY THE COMPANY IN ORDER TO ENSURE COMPLIANCE WITH THE FCC'S RULES, AND
THE WARRANTS WILL NOT BE EXERCISABLE BY ANY HOLDER IF SUCH EXERCISE WOULD CAUSE
THE COMPANY TO BE IN VIOLATION OF THE COMMUNICATIONS ACT OR THE FCC'S RULES,
REGULATIONS OR POLICIES. SEE "RISK FACTORS -- GOVERNMENT REGULATION."
"Common Stock" means both the Class A Common Stock, par value $1.00 per
share, and the Class B Common Stock of the Company, par value $1.00 per share,
and any other capital stock of the Company into which such Common Stock may be
converted or reclassified or that may be issued in respect of, in exchange for,
or in substitution for, such Common Stock by reason of any stock splits, stock
dividends, distributions, mergers, consolidations or other like events.
"Exercisability Date" is defined in the Warrant Agreement as the date of
occurrence of any Exercise Event, provided that if an Exercise Event occurs
prior to the Separability Date, the Separability Date shall instead be the
Exercisability Date.
"Exercise Event" means, with respect to each Warrant as to which such event
is applicable, the date of the earliest of: (1) the occurrence of a Change of
Control (which definition is identical to the definition of "Change of Control"
set forth above under "Description of the Notes -- Definitions", except that the
proviso
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to such definition under "Description of the Notes" is not included in such
definition), (2) the consummation of a Public Equity Offering (as defined
herein) after which there shall exist a Public Market (as defined herein) and
(3) , 2005.
"Separability Date" is defined in the Warrant Agreement to mean the
earliest to occur of: (i) , 1996, (ii) such earlier date as may be
determined by Lehman Brothers Inc. and specified to the Company, the Trustee,
the Warrant Agent and the Unit Agent in writing, (iii) in the event of a Change
of Control, the date the Company mails notice thereof to holders of the Notes
and (iv) in the event of an Offer to Purchase in connection with any Asset Sale
(each as defined herein), the date the Company mails notice thereof to the
holders of the Notes, at which time the Notes and the Warrants will become
separately transferable.
"Public Equity Offering" means a primary public offering (whether or not
underwritten, but excluding any offering pursuant to Form S-4 or S-8 under the
Securities Act) of Common Stock of the Company pursuant to an effective
registration statement under the Securities Act.
"Public Market" means any time after (x) a Public Equity Offering has been
consummated and (y) at least 20% of the total issued and outstanding Common
Stock of the Company has been distributed by means of an effective registration
statement under the Securities Act.
The Company has agreed to file and to use its best efforts to make
effective by the Exercisability Date a shelf registration statement on an
appropriate form covering the issuance of the Warrant Shares, unless an
exemption from the registration requirements under the Securities Act is then
available for the issuance of such Warrant Shares. The Company will keep such
registration statement effective until the Expiration Date of the Warrants.
OFFER TO REPURCHASE
Upon the occurrence of an Exercise Event, the Company shall have the right
to make an offer to purchase all outstanding Warrants and Warrant Shares in
cash, within 120 days after such Exercise Event, at a price equal to the Current
Market Value thereof. In the event the Company makes any such offer the Company
shall have selected an Independent Financial Expert reasonably satisfactory to a
majority of the holders of Warrants and Warrant Shares prior to 90 days before
the Expiration Date. If the Company has not selected an Independent Financial
Expert prior to 90 days before the Expiration Date, then a majority of the
holders of Warrants and Warrant Shares shall have the right to select one at the
expense of the Company.
"Current Market Value" per share of Class B Common Stock or any other
security at any date means (1) if the security is not registered under the
Exchange Act, the value of the security determined as of such date by such
Independent Financial Expert and approved by the Board of Directors of the
Company, or (2) if the security is registered under the Exchange Act, the
average of the daily closing bid prices for each business day during the period
commencing 15 business days before such date and ending on the date one day
prior to such date or, if the security has been registered under the Exchange
Act for less than 15 consecutive business days before such date, then the
average of the daily closing bid prices for all of the business days before such
date for which daily closing bids prices are available. If the closing bid price
is not determinable for at least 10 business days in such period, the Current
Market Value of the security shall be determined as if the security was not
registered under the Exchange Act. Current Market Value with respect to a
Warrant means the Current Market Value of a Warrant Share and all other property
acquirable upon exercise in full of such Warrant. Current Market Value shall be
determined without any discount for lack of liquidity, the amount of Class B
Common Stock proposed to be sold or the fact that the Warrant Shares or Class B
Common Stock held may represent a minority interest in a private company.
"Independent Financial Expert" means a nationally recognized investment
banking firm which is not an affiliate of the Company.
REGISTRATION RIGHTS
The Company and the Underwriters will enter into a Class B Common Stock and
Warrant Registration Rights Agreement (the "Warrant Registration Rights
Agreement") with respect to the Warrant Shares. The
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Warrant Registration Rights Agreement will provide among other things, that the
Underwriters and persons to whom Warrant Shares are transferred will have the
registration rights with respect to the Warrant Shares described below.
Holders of Warrant Shares will have the demand registration rights
described in this paragraph only following the occurrence of an Exercise Event.
After the occurrence of an Exercise Event, the holders of at least 25% of the
outstanding Warrant Shares will be entitled to require the Company to use its
best efforts to effect one registration under the Securities Act of such Warrant
Shares (a "Demand Registration"), subject to certain limitations, unless an
exemption from the registration requirements of the Securities Act is then
available for the sale of the Warrant Shares. Upon a demand, the Company will
prepare, file and use its best efforts to cause to be effective within 120 days
of such demand a registration statement in respect of all of the Warrant Shares;
provided, that in lieu of filing such registration statement the Company may
make an offer to purchase all of the Warrant Shares at the Current Market Value
per share thereof.
Holders of Warrant Shares will also have the right to include such Warrant
Shares in any registration statement under the Securities Act filed by the
Company for its own account or for the account of any of its securityholders
(other than a registration statement on Form S-4 or S-8) for sale on the same
terms and conditions as the securities of the Company or any other selling
securityholder included therein (a "Piggy-Back Registration"), unless an
exemption from the registration requirements of the Securities Act is then
available for the sale of the Warrant Shares. In the case of a Piggy-Back
Registration, the number of Warrant Shares requested to be included therein is
subject to reduction to the extent that the Company is advised by the managing
underwriter therefor that the total number of shares proposed to be included
therein is such as to materially and adversely affect the success of the
offering.
The Warrant Registration Rights Agreement will include customary covenants
on the part of the Company and will provide that the Company will indemnify the
holders of Warrant Shares included in any registration statement and any
underwriter with respect thereto against certain liabilities.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
General
The Company is authorized to issue two classes of Common Stock, designated
"Class A Common Stock" and "Class B Common Stock". The Company is authorized to
issue up to 500,000 shares of Common Stock in the aggregate. Of that amount, up
to 300,000 shares may be shares of Class A Common Stock, par value $1.00 per
share, and up to 200,000 shares may be shares of Class B Common Stock, par value
$1.00 per share. As of May 21, 1996, there were issued and outstanding 8,718
shares of Class A Common Stock and 28,482 shares of Class B Common Stock each
held of record by 26 stockholders.
The holders of shares of Class A Common Stock are entitled to one vote for
each share held on all matters as to which stockholders are entitled to vote.
Shares of Class B Common Stock confer on the holders thereof no right to vote
except with respect to each of the matters listed in items (i) through (xiv)
below, as to which each holder is entitled to one vote for each share of Class B
Common Stock held, voting together with the holders of the Class A Common Stock
as a single class with respect to each such matter. The affirmative vote or
consent of the holders of two-thirds or more of the outstanding shares of Common
Stock is required to:
(i) alter or change the rights, preferences or privileges of the Class
A Common Stock or Class B Common Stock or increase the authorized number of
shares thereof;
(ii) authorize or issue any Common Stock, any debt or equity security
convertible into Common Stock or any rights or options to purchase Common
Stock or any debt or equity securities convertible into Common Stock (other
than (i) pursuant to or as permitted by the Common Stockholders Agreement
or (ii) pursuant to rights generally granted to employees, either directly
or pursuant to employee benefit plans, in each case, with the approval of
the Board of Directors and a two-thirds vote of the holders of the Class A
Common Stock and, if applicable, in accordance with waivers obtained from
the FCC with respect to the application to such employees of its rules and
regulations pertaining to Designated Entity status);
(iii) authorize or issue any new class or series of stock, any debt or
equity security convertible into any new class or series of stock or any
rights or options to purchase the same;
(iv) amend or restate the certificate of incorporation or bylaws of
the Company;
(v) effect the sale, merger, consolidation, recapitalization or
reorganization of the Company or any subsidiary thereof which would result
in a change of control of the Company or a sale of all or substantially all
of the assets of the Company;
(vi) repurchase or otherwise acquire shares of Common Stock or other
securities of the Company (other than (i) pursuant to the Common
Stockholders Agreement, (ii) pursuant to the terms of employee benefit
plans approved by the Board of Directors or (iii) in connection with the
cessation of the employment of employees or former employees of the
Company, in each case not to exceed $500,000 in the aggregate during any
fiscal year);
(vii) change the number of directors prescribed in the bylaws of the
Company;
(viii) effect any issuances of stock or any securities convertible
into or exchangeable for stock by any subsidiary of the Company;
(ix) change the line of business engaged in by the Company or any of
its subsidiaries in any material fashion;
(x) incur any indebtedness for borrowed money or any financing leases
in any fiscal year in excess of $2 million in the aggregate; incur or
approve any capital expenditures in any fiscal year in excess of $2 million
in the aggregate; or pledge, encumber, purchase, sell or otherwise transfer
or dispose of any assets of the Company or any subsidiary (other than in
the ordinary course of business) in any fiscal year
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in excess of $500,000 in the aggregate; provided that nothing shall
restrict the Company from incurring such indebtedness, leases or capital
expenditures or effecting any such transfer or disposition referred to
above if in accordance with a business plan (which business plan shall have
been approved as provided in clause (xii) below) then in effect for such
fiscal year;
(xi) liquidate or dissolve the Company (other than pursuant to the
Common Stockholders Agreement);
(xii) approve the business plan each year and any material changes
during the year as submitted to the Stockholders of the Company by the
Board of Directors in accordance with the Common Stockholders Agreement;
(xiii) create any committees of the Board of Directors that are
delegated power or authority of the Board of Directors except the Finance
Committee, the Compensation Committee and the Corporate Opportunity
Committee; or
(xiv) take any action or cause to suffer the occurrence of any event
which, in the opinion of FCC Counsel to the Company, would result in the
loss of or materially jeopardize the Company's status as a Designated
Entity.
Common Stockholders Agreement
Certain of the rights and obligations of the holders of the Common Stock of
the Company are governed by the Stockholders Agreement dated as of November 14,
1994 and subsequently amended (as amended, the "Common Stockholders Agreement")
among the Company and the holders of the Common Stock party thereto (the "Common
Stockholders"). The shares of Common Stock underlying the Preferred Stock (as
defined below), and the shares of Common Stock for which the Warrants may be
exercised, will be subject, upon issuance, to rights and restrictions set forth
in the Common Stockholders Agreement. The Common Stockholders Agreement is
summarized below, which is qualified in its entirety by reference to the
complete text of the Common Stockholders Agreement.
Stock Transfer Restrictions. A Common Stockholder may transfer his, her or
its Common Stock only if the transfer complies with the provisions in the Common
Stockholders Agreement. If the proposed transferee is a "Permitted Transferee"
(as defined below), then the following requirements apply:
(i) the Common Stockholder proposing to make the transfer must give
written notice to the Company of the proposed transfer, identifying the
proposed transferee;
(ii) in the opinion of counsel satisfactory to the Company, the
proposed transfer must not violate the registration requirements under the
Securities Act or state securities laws;
(iii) the transfer, in the reasonable opinion of special FCC counsel
to the Company, must not result in the loss of or materially jeopardize the
Designated Entity status of the Company;
(iv) the transfer must not cause a transfer of control by the Company
under FCC rules and regulations (other than a transfer specifically
contemplated by the Common Stockholders Agreement); and
(v) the transferee must execute and deliver to the Company a written
instrument, in form and substance reasonably satisfactory to the Company,
acknowledging the receipt of a copy of the Common Stockholders Agreement
and agreeing to comply with and be bound by it.
In the case of a Common Stockholder that is a corporation or partnership, a
"Permitted Transferee" is a general or limited partner, stockholder, beneficial
owner, equity holder or subsidiary or subsidiaries of such Common Stockholder.
For this purpose, a "subsidiary" means any corporation, partnership, joint
venture, trust or estate of which (or in which) the Common Stockholder owns or
controls directly or indirectly 50% or more of (i) the voting stock with power
to elect a majority of the directors, (ii) the capital and profit and loss
interests of a partnership or joint venture or (iii) the beneficial interests of
a trust or estate.
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If the proposed transferee is not a "Permitted Transferee," then, in
addition to the above requirements, the transfer notice must set forth all of
the terms and conditions of the proposed transfer, the transferor and the
transferee must notify the Company of completion of the transfer, and the rights
of co-sale and rights in the case of the sale of the business, as described in
the following two paragraphs, will apply.
Co-Sale Rights and Requirements. If Common Stock is to be transferred to a
Person other than a Permitted Transferee by a holder of 5% or more of the Common
Stock and such stock constitutes one-third or more of the Common Stock owned by
such Person, then the Company shall notify all other Common Stockholders and all
other holders of the Preferred Stock (the "Preferred Stockholders" and
collectively, the "Stockholders") of the transfer. Such other Stockholders shall
then have the option to participate in the contemplated transfer by selling, at
the same price and on the same terms as the proposed transfer, a proportionate
number of their shares of Common Stock based on the relative holdings of those
Stockholders electing to sell (on an as-if-converted basis). The Common
Stockholders and Preferred Stockholders may exercise their options to
participate in such transfer by giving notice to the transferor and to the
Company within thirty days after receipt of notice from the Company.
Notwithstanding the foregoing, no Common Stockholder may obtain a majority of
the Common Stock or of the Class A Common Stock in the Company by acquiring
Common Stock from the other Common Stockholders in a single transaction or
series of related transactions unless the acquiring Stockholder offers to
acquire on identical terms and conditions Common Stock from the other
stockholders in proportion to their relative shareholdings.
In the event that a bona fide offer of any type, other than an offer by a
Common Stockholder or any Permitted Transferee of a Common Stockholder or any
affiliate thereof, is made to purchase the business of the Company, including
without limitation a proposed merger or consolidation, an offer to purchase more
than 50% of the Common Stock or an offer to purchase all or substantially all of
the assets of the Company, then, if Stockholders with an aggregate holding of
two-thirds or more of the Common Stock and Preferred Stock, voting together as a
single class on an as-if-converted basis, approve the offer, all of the Common
Stockholders are required to consent to and participate on a pro rata basis in
the transaction approved by such two-thirds majority.
Conversion of Class B Common Stock. The Common Stockholders Agreement
allows the holders of the Class B Common Stock to exchange such Class B Common
Stock for an equal number of shares of Class A Common Stock immediately upon and
after the consummation of an Initial Public Offering (as defined below).
Voting Requirements. The Common Stockholders Agreement contains provisions
identical to the voting requirements discussed above under "-- General." In
addition, the Common Stockholders Agreement provides that decisions by the Board
of Directors shall be by majority vote, except that not less than two-thirds of
the total number of directors then in office must vote in favor of the following
actions if such actions are to be duly authorized:
(i) hiring, terminating or materially changing the compensation and
benefits of any key employee of the Company;
(ii) engaging in any transactions with a Stockholder or any affiliate
thereof other than pursuant to agreements specifically referenced in the
Common Stockholders Agreement;
(iii) approving and submitting to the Stockholders the business plan
each year and any material changes during the year, as submitted to the
Board of Directors by the Finance Committee or as developed by the Board of
Directors itself absent a timely submission by the Finance Committee all in
accordance with the Common Stockholders Agreement; or
(iv) changing the accounting or reporting systems in any material
manner from that previously approved by the Stockholders.
Directors. The Board of Directors of the Company consists of 17 directors.
The holders of the Class A Common Stock have agreed to elect the directors of
the Company from designees selected by the
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Stockholders as prescribed in the Common Stockholders Agreement. The following
is a list of the present designees of such Stockholders and the number of
directors such Stockholders are entitled to designate:
<TABLE>
<CAPTION>
NUMBER OF
STOCKHOLDER DIRECTORS DESIGNEE
------------------------------------------------------ --------- -------------------
<S> <C> <C>
Paging Company Investors:
A+ Network(1)....................................... 1 Elliott H. Singer
Arch Communications(2).............................. 1 C.E. Baker, Jr.
Board Designee(3)..................................... 1 Stan F. Sech
Venture Capital Funds:
Austin Ventures..................................... 1 Jeffery C. Garvey
Battery Ventures III, L.P. ......................... 1 Richard D. Frisbie
Marquette Venture Partners.......................... 1 James E. Daverman
Memorial Drive Trust................................ 1 R. Schorr Berman
Control Group:
Dobson Family Corp.................................. 1 Vacant
Sloan LP(4)......................................... 8 Maceo K. Sloan
Steven J. Lerner
Cecil L. Duffie
William D. deKay
Malcolmn Pryor
Justin F. Beckett
Pamela R. Simmons
Vacant
Holders of Series A Preferred Stock................... 1 James D. Kallman
--
Total....................................... 17
========
</TABLE>
- ---------------
(1) A+ Network has entered into a definitive agreement to be acquired by
MetroCall that will result in the merger of A+ Network into MetroCall.
Under the Common Stockholders Agreement, a stockholder who has the right to
designate a director and who sells, assigns, conveys or otherwise transfers
its Common Stock by operation of law or otherwise loses its right to
designate a director. Accordingly, upon the consummation of the merger of
A+ Network into MetroCall, A+ Network will lose its right to designate a
director to PCSD's Board. Under the Common Stockholders Agreement, open
board seats created by the termination of a Paging Company Investor's right
to designate a director shall be filled by an individual designated by the
Board who is employed by or associated with the remaining Paging Company
Investor, if any, or another person otherwise experienced in the
telecommunications industry.
(2) On or about May 20, 1996, Arch Communications acquired the stock of Westlink
Holdings, Inc. ("Westlink") which owns 49.9% of the outstanding stock of
Benbow PCS Ventures, Inc., ("Benbow"), which owns two 50 kHz/12.5 kHz
regional narrowband PCS licenses. Westlink also has a five-year management
agreement with Benbow under which Westlink is responsible for the
day-to-day operations of Benbow. In addition, Arch Communications has
notified the Company that it plans to transfer all of the Common Stock of
the Company owned by Arch Communications to its wholly-owned subsidiary,
Arch Communications Enterprises, Inc. ("ACE"). As a result of the closing
of the Westlink acquisition and the transfer of the PCSD Common Stock to
ACE, Arch Communications has lost its right to designate a director to
PCSD's Board and Mr. Baker is required to resign from PCSD's Board. Under
the Common Stockholders Agreement, open Board seats created by the
termination of a Paging Company Investor's right to designate a director
shall be filled by an individual designated by the Board who is employed by
or associated with the remaining Paging Company Investor, if any or another
person otherwise experienced in the telecommunications industry.
(3) Holders of the Class A Common Stock have agreed to vote their shares for an
individual designated by the Company's Board of Directors who shall be
employed by or associated with either Arch Communications, A+ Network or
another company in the wireless telecommunications industry.
(4) These eight directors will be designated by either Sloan LP or SCI, or
jointly by them.
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Except as provided in the following paragraph, the number of directors can be
changed by an amendment to the Company's bylaws. Such amendment requires a vote
of the holders of two-thirds of the outstanding shares of Common Stock and
Series A Preferred Stock, voting together as a single class.
If for any reason a designee is unable to continue serving as a director,
then the Stockholders shall immediately vote their Class A Common Stock, if
necessary, in such a manner as to fill the vacancy with another nominee
designated by the Stockholder who designated the former director. In the event a
Stockholder who has the right to designate a director or directors to the
Company's Board of Directors (1) does not continue to hold at least 1% of the
then total equity of the Company, (2) sells, assigns, conveys or otherwise
transfers the Common Stock by operation of law or otherwise or (3) becomes a
competitor or associated with a competitor, then its right to designate a
director shall cease. Open Board seats created by the termination of a Paging
Company Investor's right to designate a director as described above will be
filled by an individual designated by the Board of Directors who is employed by
or associated with the remaining Paging Company Investor or another person
otherwise experienced in the telecommunications industry. Other vacancies
created by the termination of other Stockholder rights to designate directors
will be filled by a majority of the votes of the Stockholders voting their Class
A Common Stock. In addition, the holders of the Preferred Stock (the "Series A
Preferred Stockholders") will lose their right to designate a director when (i)
less than one-third of the shares of Preferred Stock are outstanding or (ii)
more than 50% of the shares of Preferred Stock become owned, directly or
indirectly, by a competitor or an affiliate of a competitor (as each is defined
in the Certificate of Designations for the Preferred Stock). Upon the occurrence
of either of these events, Sloan LP will also lose the right to designate one of
its eight directors, and the two vacancies on the Board of Directors created
thereby will be filled by a majority of the votes of the Stockholders voting
their Class A Common Stock for persons who are not affiliated with the Company
or any of its Stockholders.
Finance Committee; Annual Business Plan. The Common Stockholders Agreement
provides that the Board of Directors shall establish a Finance Committee
consisting of seven members to be designated as follows:
- One member shall be selected by the designees to the Board of SCI, or of
Sloan LP to extent SCI has transferred its rights to designate directors
of the Company to Sloan LP.
- One member shall be selected by the designees of Arch Communications and
A+ Network.
- One member shall be selected by the Chief Executive Officer of the
Company.
- Two members shall be selected by the designees of Austin Ventures,
Marquette Ventures Partners Battery Ventures III, L.P. and Memorial Drive
Trust.
- Two members shall be selected by the designee of the Series A Preferred
Stockholders.
The Common Stockholders Agreement provides that the Company's annual
business plan is to be developed by the Finance Committee, submitted to the
Board of Directors for approval by a two-thirds vote of the Board of Directors,
and then submitted to the Stockholders (including the Series A Preferred
Stockholders) for approval by a two-thirds vote. If any person or group of
persons loses its right to designate a director of the Company pursuant to the
Common Stockholders Agreement, it will also lose the right to designate a member
of the Finance Committee.
Preemptive Rights. The Common Stockholders Agreement provides that the
Company shall not issue, sell or exchange any shares of Common Stock or any debt
obligation or security convertible into or exchangeable for Common Stock or any
option, warrant or other right to subscribe for, purchase or otherwise acquire
Common Stock or any other equity security of the Company unless, in each case,
the Company first offers to sell to each Common Stockholder such Common
Stockholder's proportionate share of the securities offered at the same price
and on the same terms at which they were proposed to be issued, sold or
exchanged. Such Common Stockholder shall have 30 days after delivery of notice
from the Company to exercise its preemptive rights. If some Common Stockholders
exercise their options, but at least one Common Stockholder does not, then the
Company shall notify the exercising Common Stockholders, who shall have an
additional 15 days to elect to purchase the remaining portion of the securities
offered in proportion to the
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relative shareholdings of the Common Stockholders who have exercised their
options. This procedure shall be repeated until either (i) there is no
additional portion of the securities to be purchased or (ii) no Common
Stockholder elects to purchase the remaining portion of the securities. If the
Common Stockholders fail to exercise their successive rights to purchase all of
such securities, then, within 120 days of such failure, the Company may sell
such securities on the terms and prices specified in the notice of such
offering.
Notwithstanding any other provision of the Common Stockholders Agreement,
the exercise of preemptive rights is forbidden to the extent that, in the
reasonable opinion of special FCC counsel to the Company, it would result in the
loss of or materially jeopardize the Designated Entity status of the Company.
Moreover, the preemptive rights do not apply to the issuance or exercise of
certain options and warrants, the conversion of the Preferred Stock, or the
issuance of stock in an Initial Public Offering or the issuance of the Notes.
Termination. The Common Stockholders Agreement will terminate in the event
that either: (i) the holders of two-thirds of the then outstanding Common Stock
and Series A Preferred Stock, each voting separately as a class, approve
termination or consent to it in writing; or (ii) the Company consummates an
Initial Public Offering. In any event, the provisions of the Common Stockholders
Agreement with respect to voting arrangements and restrictions will terminate no
later than 10 years from the date of the Common Stockholders Agreement in
accordance with applicable law, subject to extension by agreement of the
remaining parties to the Common Stockholders Agreement.
Application to Future Share Issuances. The Common Stockholders Agreement
applies to Common Stock now held and Common Stock that may be acquired in the
future by existing Common Stockholders and their Permitted Transferees,
including Common Stock acquired by existing Common Stockholders and their
Permitted Transferees through the exercise of preemptive rights. The Common
Stockholders Agreement will not apply in any event to additional shares of
Common Stock issued by the Company to Persons other than existing Common
Stockholders and their Permitted Transferees.
The Registration Rights Agreement for Holders of Common Stock
The following is a summary of certain provisions of the Registration Rights
Agreement dated as of November 14, 1994 and subsequently amended (as amended,
the "Common Stockholders Registration Rights Agreement") between the Company and
all of the Common Stockholders of the Company. Such summary is qualified in its
entirety by reference to the complete text of the Common Stockholders
Registration Rights Agreement, a copy of which is available upon request. The
Common Stock underlying the Preferred Stock will be subject, upon issuance, to
rights and restrictions set forth in the Common Stockholders Registration Rights
Agreement.
The Common Stockholders Registration Rights Agreement provides that, on or
after November 14, 1997, the holders of a majority of all shares of the Common
Stock owned by the Common Stockholders and not otherwise registered under the
Securities Act or sold in reliance on an exemption from the registration
requirements of the Securities Act (the "Registrable Securities") may make one
written demand to the Company for registration under the Securities Act of all
or a portion of the Registrable Securities in a public offering that the Company
anticipates will result in gross proceeds to such holders of not less than $10
million and a price of at least $10.00 per share. Upon becoming qualified to use
Form S-3 under the Securities Act, the holders of at least 10% of the
Registrable Securities then outstanding also may make written requests (which
requests may not be made more than once in any twelve-month period) to the
Company for registration of the Registrable Securities on Form S-3 pursuant to
Rule 415 under the Securities Act. The Company must honor these requests, too,
provided that it shall not be required to effect such a registration unless the
holder or holders requesting registration thereunder propose to dispose of
Registrable Securities which they reasonably anticipate to result in gross
proceeds to such holders of not less than $1 million. The holders of the
Registrable Securities also have certain "piggyback" registration rights to
include the Registrable Securities, subject to certain limitations, in other
registration statements filed by the Company.
Whenever the Company effects a registration pursuant to the registration
rights provisions of the Common Stockholders Registration Rights Agreement, the
Company (i) has agreed, and the Common Stockholder parties have agreed if
requested, not to effect any public sale or distribution of securities similar
to
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those being registered, or of any securities convertible into or exchangeable or
exercisable for such securities, for a specified period of time prior to and
after such registration statement becomes effective and (ii) will be required to
pay the cost of such registration of securities, except that each selling
stockholder will bear its pro-rata share of customary underwriting discounts and
commissions, customary fees and expenses of its counsel and applicable transfer
taxes. The Common Stockholders Registration Rights Agreement contains customary
indemnification and contribution provisions relating to the exercise by the
holders of Registrable Securities of their registration rights thereunder. The
Common Stockholders Registration Rights Agreement will apply to the Common Stock
received by holders of the Preferred Stock upon conversion.
PREFERRED STOCK
General
The authorized capital stock of the Company includes 100,000 shares of
preferred stock, par value $1.00 per share. A total of 27,000 of such shares
have been designated "Series A Preferred Stock" and a total of 3,000 of such
shares have been designated "Series B Preferred Stock" (referred to together in
this Prospectus as the "Preferred Stock"). As of May 21, 1996, there were issued
and outstanding 23,600 shares of Series A Preferred Stock held of record by 70
stockholders and 1,067 shares of Series B Preferred Stock held of record by one
stockholder.
The Board of Directors is authorized by the Restated Certificate of
Incorporation of the Company to issue one or more additional series of preferred
stock from time to time, without further stockholder action, in one or more
series and, with respect to each such series, to fix the designation and the
number of shares to be issued, the voting rights of the shares, the dividend
rights, if any, the redemption rights, if any, sinking fund requirements, if
any, rights upon the liquidation, dissolution or winding up of the Company or
upon the distribution of the assets of the Company, the terms of the conversion
or exchange into any other class or series of shares, if provided for, and other
powers, preferences, rights, qualifications, limitations or restrictions
thereof.
The Series A Preferred Stock and Series B Preferred Stock have identical
rights and designations in all respects, except that the holders of the Series B
Preferred Stock shall have no voting rights and their consent shall not be
required for the taking of any corporate action, except to the extent otherwise
required by law. Holders of the Series B Preferred Stock will have the right to
convert any or all of such Series B Preferred Stock into shares of Series A
Preferred Stock on a share-for-share basis upon the occurrence of events
specified in the Certificate of Designations relating to the Preferred Stock.
Conversion into Class B Common Stock
Each holder of shares of the Preferred Stock will have the right,
exercisable at any time and from time to time, to convert all or any such
Preferred Stock into shares of Class B Common Stock, initially on a share-for-
share basis. The conversion ratio of the Preferred Stock is subject to
adjustment in the event of (i) any subdivision or combination of the Common
Stock, (ii) any payment by the Company of a stock dividend to the holders of the
Common Stock or (iii) the issuance of equity or rights to acquire equity at a
price per share less than $2,250 (as adjusted).
If the Company consummates an underwritten public offering of its Class A
Common Stock arranged by a nationally recognized underwriter at a price of at
least $10.00 per share at any time (i) before the fifth anniversary of the
issuance of the Preferred Stock in which the Company receives at least $40
million of net proceeds and reflects at least a $4,500 value per original share
of Preferred Stock, (ii) after the fifth anniversary and prior to the sixth
anniversary of the issuance of the Preferred Stock in which the Company receives
at least $50 million of net proceeds and reflects at least a $5,000 value per
original share of the Preferred Stock, or (iii) at any time after the sixth
anniversary of the issuance of the Preferred Stock in which the Company receives
at least $50 million of net proceeds and reflects a value per original share of
the Preferred Stock equal to the greater of $5,000 or the initial purchase price
plus the Preferred Stock Dividend (each an "Initial Public Offering"), then the
Preferred Stock will be converted automatically into shares of
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the Common Stock which is to be sold in such Initial Public Offering at an
initial conversion rate of one-for-one, subject to adjustment in certain
circumstances.
Liquidation Preference
In the event of any voluntary or involuntary dissolution, winding up, or
liquidation of the Company (including liquidation following the sale or
disposition of substantially all of the Company's assets) or a "change of
control," whether voluntary or otherwise, after payment or provision for payment
of all of the Company's debts and other liabilities, the holders of the
Preferred Stock will be entitled to receive, out of the remaining net assets of
the Company and in preference to the Common Stockholders, the amount of $2,250
for each share of the Preferred Stock, plus the Preferred Stock Dividend, as
defined below (whether or not declared). If, upon any liquidation of the
Company, the assets distributable among the Preferred Stockholders and all other
classes and series of preferred stock ranking (as to any such distribution)
senior to or on a parity with the Preferred Stock are insufficient to permit the
payment in full to the holders of all such shares of all preferential amounts
payable to all such holders, then the entire assets of the Company thus
distributable will be distributed ratably among the Preferred Stockholders and
of all classes and series of preferred stock ranking (as to any such
distribution) on a parity with the Preferred Stock in proportion to the full
preferential amount that would be payable per share if such assets were
sufficient to permit payment in full. If, after payment of a liquidation
preference to Preferred Stockholders and the payment of the per share amount
equal to the liquidation preference on the Preferred Stock to the Common
Stockholders, assets remain in the Company, then all such remaining assets of
the Company shall be distributed to the Preferred Stockholders and the Common
Stockholders on a pro-rata, as-if-converted basis.
The proceeds distributable to the Company's shareholders with respect to a
sale of substantially all of the assets of the Company or a merger or
consolidation of the Company with or into any other entity will be distributed
in the same manner as in a liquidation of the Company unless, with respect to a
merger or consolidation, other arrangements are made in the successor entity for
the protection of the rights granted to the holders of the Preferred Stock.
Conversion into Subordinated Notes
At any time after the ninth anniversary of the issuance of the Preferred
Stock and upon the vote or consent of the holders of not less than 40% of the
shares of the Series A Preferred Stock at the time outstanding all, but not less
than all, of the Preferred Stock shall automatically be converted into
subordinated notes of the Company (the "Subordinated Notes"), provided that the
conversion of the Preferred Stock and the issuance of the Subordinated Notes
does not cause a default or an incipient default under the Indenture. The
Subordinated Notes will be subordinate in right of payment to the prior payment
in full of the Notes and all other indebtedness of the Company that is not by
its terms subordinate to, or pari passu with, the Subordinated Notes and will be
redeemable at the option of the Company in full or in part at any time for the
principal plus accrued interest (and, if redeemed in part, will be acquired from
the holders thereof ratably in accordance with the principal amounts thereof
then held by the holders). The Subordinated Notes will otherwise be payable in
full on , 2007 and will accrue interest at the rate of 10% per
annum, compounded semiannually, payable upon the final scheduled maturity of the
Subordinated Notes.
The only events of default upon the Subordinated Notes will be (i) the
Company's failure to pay principal and interest at their scheduled maturity,
(ii) the occurrence of bankruptcy or certain liquidation events with respect to
the Company and (iii) the declared acceleration of the Notes or other material
indebtedness of the Company following a default thereunder, which acceleration
has not been withdrawn after 10 days.
Upon exercise of this conversion right, each holder will receive, in
exchange for all of the holder's Preferred Stock, Subordinated Notes whose
principal amount will equal the sum of the initial purchase price of the
Preferred Stock plus the Preferred Stock Dividend. This conversion right will
expire upon payment in full of the Notes.
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If and to the extent that the conversion of the Preferred Stock and the
issuance of the Subordinated Notes would cause a default or an incipient default
under the Indenture, then the terms of the Subordinated Notes may be amended
prior to their issuance with the approval of the holders of a majority of the
shares of the Preferred Stock at the time outstanding. Notwithstanding the
foregoing, the Company shall not treat the Preferred Stock as debt (for federal
income tax purposes) so long as the Preferred Stock remains outstanding.
Optional Redemption
The Preferred Stock may be redeemed at the option of the Company, in whole
or in part, on a pro rata basis at any time after the tenth anniversary of the
issuance of the Preferred Stock at a price equal to the purchase price of the
Preferred Stock plus the Preferred Stock Dividend. The holders of the Preferred
Stock may, however, convert the Preferred Stock into Class B Common Stock or
Subordinated Notes prior to redemption but after notice of redemption by the
Company.
Dividend Rights
The Preferred Stock will accrue a 10% per annum dividend, compounded
semiannually, on a liquidation preference of $2,250 per share (adjusted for
certain events) (the "Preferred Stock Dividend"), payable only under the
circumstances described in "Liquidation Preference." If, after receiving the
consent of the holders of at least 50% of the Series A Preferred Stock, the
Company should declare and pay in full a dividend, then holders of all of the
Company's Preferred Stock, Common Stock and all other capital stock not ranking
junior to the Preferred Stock as to payment of dividends would be entitled to
participate in such dividend in equal per share amounts; provided, however,
that, if the Board declares a dividend to the holders of any class of capital
stock of the Company other than stock senior to the Preferred Stock, but is
unable to pay such dividend in full, then such dividend shall be paid first to
the Preferred Stockholders, in preference to the Common Stockholders. No
dividend or distribution on, or purchase or redemption of, any Class A Common
Stock or Class B Common Stock shall be permitted without the affirmative vote or
consent of the holders of at least 50% of the Series A Preferred Stock, other
than the redemption of shares held by employees or former employees in
connection with the cessation of their employment
Voting Rights
The Series A Preferred Stockholders will be entitled to vote together with
the Common Stockholders as though part of such class on those specific matters
as to which the holders of the Class B Common Stock are entitled to vote. Series
A Preferred Stockholders will have the right to that number of votes equal to
the number of shares of Common Stock which would be held by such holders if
conversion of the Preferred Stock were to occur at the close of business on the
day immediately prior to the date of the vote. The Company shall not, without
the affirmative vote or consent of the holders of at least two-thirds of the
number of shares of Series A Preferred Stock outstanding, voting separately as a
class, (i) create any class of capital stock having any preference or priority
as to dividends, or upon liquidation, distribution or winding up, over the
Preferred Stock, (ii) reclassify any shares of capital stock of the Company into
shares of Preferred Stock, (iii) issue or reserve for issuance any security
exchangeable for, convertible into or evidencing the right to purchase Preferred
Stock or (iv) change the preferences, rights or powers with respect to the
Preferred Stock so as to adversely affect the Preferred Stock. So long as no
less than one-third of the shares of Preferred Stock remain outstanding, the
Series A Preferred Stockholders, voting separately as a single class, also have
the right to elect one member to the Company's Board of Directors. If and when
less than one-third of the shares of Preferred Stock are outstanding, the
Preferred Stockholders will be divested of their directorship. In addition, in
the event that more than 50% of the shares of Preferred Stock become owned by a
competitor or an affiliate of a competitor of the Company, the Preferred
Stockholders will be divested of their directorship. Except as provided by law,
the Series B Preferred Stock shall have no voting rights.
Preferred Stockholders Agreement
Certain of the rights and obligations of the Preferred Stockholders will be
governed by a Stockholders Agreement (the "Preferred Stockholders Agreement")
among the Company and all Preferred Stockholders.
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The Preferred Stockholders Agreement is summarized below and is qualified in its
entirety by reference to the complete text of the Preferred Stockholders
Agreement. A copy of the Preferred Stockholders Agreement is available from the
Company upon request.
Stock Transfer Restrictions. A Preferred Stockholder may transfer its
Preferred Stock only if the transfer complies with the following requirements:
(i) the Preferred Stockholder proposing to make the transfer (other
than to Permitted Transferees) must give written notice to the Company of
the proposed transfer, identifying the proposed transferee and all of the
terms and conditions of the proposed transfer;
(ii) in the opinion of counsel satisfactory to the Company, the
proposed transfer must not violate the registration requirements under the
Securities Act or state securities laws;
(iii) if the transferor is a member of the Control Group, then the
transfer, in the reasonable opinion of special FCC counsel to the Company,
must not result in the loss of or materially jeopardize the Designated
Entity status of the Company;
(iv) the transfer must not cause a transfer of control of the Company
under FCC rules and regulations (other than a transfer specifically
contemplated by the Preferred Stockholders Agreement); and
(v) the transferee must execute and deliver to the Company a written
instrument, in form and substance reasonably satisfactory to the Company,
acknowledging the receipt of a copy of the Preferred Stockholders Agreement
and agreeing to comply with and be bound by it.
If Preferred Stock is to be transferred to a Person other than a Permitted
Transferee by a holder of 4.9% or more of the Preferred Stock and such stock
constitutes one-third or more of the Preferred Stock owned by such Preferred
Stockholder, then the Company shall notify all other Preferred Stockholders of
such transfer. Such other Preferred Stockholders shall have the option to
participate in the contemplated transfer by selling, at the same price and on
the same terms as the proposed transfer, a proportionate number of their shares
of Preferred Stock based upon the relative holdings of those Preferred
Stockholders electing to sell. Notwithstanding the foregoing, no Preferred
Stockholder may obtain a majority of the Preferred Stock by acquiring Preferred
Stock from other Preferred Stockholders in a single transaction or series of
related transactions unless the acquiring Preferred Stockholder offers to
acquire on identical terms and conditions Preferred Stock from other
stockholders in proportion to their relative shareholdings.
In the event that a bona fide offer of any type other than an offer by a
Stockholder or any Permitted Transferee of a Stockholder or any affiliate
thereof is made to purchase the business of the Company, including without
limitation a proposed merger or consolidation, an offer to purchase more than
50% of the Common Stock or an offer to purchase all or substantially all of the
assets of the Company, then, if two-thirds or more of the number of shares of
Common Stock and Preferred Stock then outstanding, voting as a single class on
an as-if-converted basis, approve the offer, all of the Preferred Stockholders
are required to consent to and participate on a pro rata basis in the
transaction approved by the two-thirds majority.
Preemptive Rights. The Preferred Stockholders Agreement provides that the
Company shall not issue, sell or exchange any shares of Common Stock or any debt
obligation or security convertible into or exchangeable for Common Stock or any
option, warrant or other right to subscribe for, purchase or otherwise acquire
Common Stock or any other equity security of the Company unless, in each case,
the Company first offers to sell to each Preferred Stockholder and each Common
Stockholder such Stockholder's proportionate share of the securities offered at
the same price and on the same terms at which they were proposed to be issued,
sold or exchanged. Such Stockholder shall have 30 days after delivery of notice
from the Company to exercise its preemptive rights. If some Stockholders
exercise their options, but at least one Stockholder does not, then the Company
shall notify the exercising Stockholders, who shall have an additional 15 days
to elect to purchase the remaining portion of the securities offered in
proportion to the relative shareholdings of the Stockholders who have exercised
their options. This procedure shall be repeated until either (i) there is no
additional portion of the securities to be purchased or (ii) no Stockholder
elects to purchase the remaining
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portion of the securities. If the Stockholders fail to exercise their successive
rights to purchase all of such securities, then, within 120 days of such
failure, the Company may sell such securities on the terms and prices specified
in the notice of such offering.
These preemptive rights shall not apply to the issuance of options or
warrants simultaneously and in connection with the issuance of indebtedness by
the Company.
Notwithstanding any other provision of the Preferred Stockholders
Agreement, the exercise of preemptive rights is forbidden to the extent that, in
the reasonable opinion of special FCC counsel to the Company, it would result in
the loss of or materially jeopardize the Designated Entity status of the
Company.
Information. The Preferred Stockholders Agreement provides that each of
the Preferred Stockholders is entitled to receive financial and other
information regarding the Company, including copies of the Company's business
plans, for so long as such Preferred Stockholder is not a competitor or
affiliated with a competitor of the Company.
Termination. The Preferred Stockholders Agreement will terminate pro tanto
as and when the Preferred Stock is converted into Common Stock or the Company
consummates an Initial Public Offering.
In any event, the provisions of the Preferred Stockholders Agreement with
respect to voting arrangements and restrictions will terminate no later than 10
years from the date of the Preferred Stockholders Agreement in accordance with
applicable law, subject to extension by agreement of the remaining parties to
the Preferred Stockholders Agreement.
Registration Rights Agreement for Holders of Preferred Stock
The following is a summary of certain provisions of the Registration Rights
Agreement (the "Preferred Stockholder Registration Rights Agreement") to be
entered into among the Company and all of the Preferred Stockholders. Such
summary is qualified in its entirety by reference to the complete text of the
Preferred Stockholder Registration Rights Agreement, a copy of which is
available upon request.
The Preferred Stockholder Registration Rights Agreement provides that, on
or after November 14, 1997, the holders of a majority of all shares of the
Preferred Stock may make one written demand to the Company for registration
under the Securities Act of all or a portion of the Common Stock (including
Common Stock which has been issued following the conversion of the Preferred
Stock) not otherwise registered under the Securities Act or sold in reliance on
an exemption from the registration requirements of the Securities Act (the
"Registrable Securities") in a public offering. Upon becoming qualified to use
Form S-3 under the Securities Act, the holders of at least 10% of the Preferred
Stock then outstanding also may make written requests (which requests may not be
made more than once in any twelve-month period) to the Company for registration
of the Registrable Securities on Form S-3 pursuant to Rule 415 under the
Securities Act. The Company must honor these requests, too, provided that it
shall not be required to effect such a registration unless the holder or holders
requesting registration thereunder propose to dispose of Registrable Securities
which they reasonably anticipate to result in gross proceeds to such holders of
not less than $1 million. The holders of the Preferred Stock also have certain
"piggyback" registration rights to include the Registrable Securities, subject
to certain limitations, in other registration statements filed by the Company.
Any Preferred Stock included in any registration pursuant to rights granted
under the Preferred Stockholders Registration Rights Agreement will convert
automatically into shares of Common Stock to be sold in such public offering
immediately prior to the closing.
Whenever the Company effects a registration pursuant to the registration
rights provisions of the Preferred Stockholder Registration Rights Agreement,
the Company (i) has agreed, and the Preferred Stockholder parties have agreed if
requested, not to effect any public sale or distribution of securities similar
to those being registered, or of any securities convertible into or exchangeable
or exercisable for such securities, for a specified period of time prior to and
after such registration statement becomes effective, and (ii) will be required
to pay the cost of such registration of securities, except that each selling
stockholder will bear its pro rata share of customary underwriting discounts and
commissions, customary fees and expenses of its counsel and applicable transfer
taxes. The Preferred Stockholder Registration Rights Agreement contains
customary
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indemnification and contribution provisions relating to the exercise by the
holders of Registrable Securities of their registration rights thereunder.
LIMITATION ON DIRECTORS' LIABILITY
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware Law a director of the Company shall not be liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. Under current Delaware law, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the company
or its stockholders, (ii) for acts or omissions not in good faith or which
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 from which the director derives an improper personal
benefit. The effect of this provision of the Company's Certificate of
Incorporation is to limit or 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 those circumstances described in clauses (i)
through (iv) above. This provision does not limit or eliminate the rights of the
Company or any stockholder to seek nonmonetary relief such as an injunction or
rescission in the event of a breach of a director's duty to care. In addition,
the Company's Certificate of Incorporation and Bylaws as provide that the
Company shall indemnify its directors, officers, employees and agents to the
fullest extent permitted by Delaware law.
DELAWARE TAKEOVER STATUTE
Section 203 of the Delaware Law, as amended ("Section 203"), provides that,
subject to certain exceptions specified therein, an "interested stockholder" of
a Delaware corporation shall not engage in any business combination, including
mergers or consolidations or acquisitions of additional shares of the
corporation, with the corporation for a three-year period following the date at
which the stockholder becomes an "interested stockholder" unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an "interested stockholder," (ii) upon consummation of the transaction
which 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 certain shares), or
(iii) or subsequent to such date, the business combination is approved by the
board of directors of the corporation and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested stockholder."
Except as otherwise specified in Section 203, an "interested stockholder" is
defined to include (x) any person which is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within three years immediately prior to the
relevant date and (y) the affiliates and associates of any such person.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. The Company's stockholders, by adopting an
amendment to its Certificate of Incorporation or Bylaws, may elect not to be
governed by Section 203, effective twelve months after adoption. Neither the
Certificate nor the bylaws presently exclude the Company from the restrictions
imposed by Section 203.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax considerations applicable to an investment in the Notes or Warrants
by U.S. Holders who hold such Notes or Warrants as capital assets. For purposes
of this discussion, the term "U.S. Holder" means a beneficial owner of a Note or
Warrant that is (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized under the laws of
the United States or a political subdivision thereof, (iii) an estate or trust
the income of which is subject to United States federal income taxation
regardless of source or (iv) any other person defined as a United States person
under the Internal Revenue Code of 1986, as amended (the "Code"). The discussion
does not apply to dealers in securities, financial institutions, life insurance
companies, tax-exempt organizations, foreign individuals and entities, persons
whose functional currency is not the U.S. Dollar or to persons that will hold a
Note or Warrant as a position in a "straddle" or "conversion transaction" for
tax purposes, or aspects of Federal income taxation that may be relevant to a
prospective investor based upon such investor's particular tax situation. It
does not address any tax consequences arising under the laws of any state, local
or foreign jurisdiction. This summary is based on the Code, Treasury Regulations
promulgated thereunder, and judicial and administrative interpretations thereof,
all as in effect on the date hereof and all of which are subject to prospective
or retroactive change. PURCHASERS OF UNITS SHOULD CONSULT THEIR OWN TAX ADVISORS
AS TO THE FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES TO THEM OF HOLDING
AND DISPOSING OF UNITS.
NOTES
Original Issue Discount. The Notes will be issued with original issue
discount ("OID") for federal income tax purposes. Accordingly, each U.S. Holder
of a Note generally will be required to include OID in income as it accrues
under a constant yield method in advance of cash payments attributable to such
income (regardless of whether the U.S. Holder is a cash or accrual basis
taxpayer).
The amount of OID with respect to each Note will be the excess of the
"stated redemption price at maturity" of such Note over its "issue price." The
"stated redemption price at maturity" of the Notes will include all cash
payments required to be made on the Notes until maturity, whether denominated as
principal or interest. The issue price of the Notes is the first price at which
a substantial amount of the Notes is sold to the public for money.
Because the original purchasers of the Notes will also purchase Warrants,
each Note will likely be treated by the IRS as having been issued as part of an
"investment unit" consisting of Notes and Warrants. Pursuant to final Treasury
Regulations regarding OID (the "OID Regulations"), the "issue price" of an
investment unit is equal to the first price at which a substantial amount of
Units is sold to the public. For this purpose, the public does not include bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers. The issue price of a Unit, as so
determined, must be allocated between its component parts based on their
relative fair market values. The holder of an investment unit must use the
issuer's allocation unless the holder discloses on its Federal income tax return
for the year that includes the acquisition date of such Unit that it plans to
use an allocation that is inconsistent with the issuer's allocation. The Company
will allocate to each $1,000 principal amount of Notes and $ to the
Warrant comprising each Unit and will use such allocation to determine the
respective "issue prices" of the Notes and the Warrants. Such allocation is not
binding on the IRS.
Each U.S. Holder of a Note will be required to include in gross income an
amount equal to the sum of the daily portions of OID for each day during the
taxable year in which such holder holds the Note ("accrued OID") without regard
to when the cash attributable to such income is received. The daily portions of
OID are determined by allocating to each day in an accrual period the pro rata
portion of the OID that is allocable to that accrual period. The "accrual
period" for a debt instrument may be of any length and may vary in length over
the term of the Note, provided that each accrual period is no longer than one
year and each scheduled payment of principal or interest occurs on the first day
or the final day of an accrual period. The amount of OID that is allocable to an
accrual period will be determined by multiplying the adjusted issue price of the
Note at the beginning of the accrual period by the yield to maturity of such
Note (determined on the basis of compounding at the close of each accrual period
and properly adjusted for the length of the accrual period).
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OID allocable to a final accrual period is the difference between the amount
payable at maturity (other than a payment of qualified stated interest) and the
adjusted issue price at the beginning of the final accrual period. Special rules
will apply for calculating OID for an initial short accrual period. The adjusted
issue price of the Note at the beginning of an accrual period will be equal to
its issue price increased by all previously accrued OID (determined without
regard to the amortization of any acquisition premium, as described below) and
reduced by the amount of all previous payments made on such Note on or before
the first day of the accrual period. The yield to maturity is the discount rate
that, when used in computing the present value of the payments to be made under
the Note, produces an amount equal to the issue price of the Note.
The Company will report annually to the Internal Revenue Service (the
"IRS") and to record U.S. Holders of Notes, other than corporations and other
exempt holders, information with respect to the amount of OID that has accrued
with respect to the Notes during the calendar year. This information will be
based upon the adjusted issue price of the Note as if the holder were the
original holder of the Note. In addition, each Note will bear a legend setting
forth the issue date, the issue price, the total amount of OID, the yield to
maturity and certain other information, or such legend will indicate how a
holder can receive such information.
Subsequent holders who purchase Notes for an amount other than the adjusted
issue price, and/or on a date other than the end of an accrual period, will be
required to determine for themselves the amount of OID they are required to
include in gross income for Federal income tax purposes. The subsequent
purchaser's aggregate amount of includible income may vary depending upon the
amount paid for the Notes. See "Acquisition Premium" and "Market Discount"
below.
Effect of Mandatory Offer to Redeem on Original Issue Discount. In the
event of a Change of Control or in the event of certain asset sales, the Company
will be required, subject to certain conditions, to offer to redeem all of the
Notes. The OID Regulations provide that a required redemption upon the
occurrence of a contingent event such as a change of control or such asset sale
will not affect the yield or maturity date of the Notes and will not affect the
computation of OID unless, based on all of the facts and circumstances as of the
issue date, it is more likely than not that the contingent event will occur. The
Company has no present intention of treating the offer to redeem the Notes as
affecting the computation of the yield to maturity or OID of any Note.
Acquisition Premium. A subsequent purchaser of a Note issued with OID who
purchases the Note for an amount that is less than or equal to the sum of all
amounts payable on the Note after the purchase date but greater than its
adjusted issue price immediately before such purchase (i.e., a purchase at an
"acquisition premium") also will be required to include in gross income the sum
of the daily portions of OID on that Note. In computing the daily portions of
OID for such a purchaser (as well as an initial purchaser that purchases at a
price higher than the adjusted issue price but less than or equal to the stated
redemption price at maturity), however, the daily portion of OID is reduced by a
portion of the acquisition premium equal to the product of (A) the daily portion
of OID for such day (computed in accordance with the rules set forth above) and
(B) a fraction, the numerator of which is the excess of the cost of the Note
over its adjusted issue price, and the denominator of which is the sum of all
amounts payable on the Note after the date of acquisition reduced by the Note's
adjusted issue price.
Disposition of Notes. A U.S. Holder of a Note generally will recognize
gain or loss upon the sale, exchange, redemption, retirement or other taxable
disposition of a Note in an amount equal to the difference between the amount
realized on such sale, exchange, redemption, retirement or other taxable
disposition and the U.S. Holder's adjusted tax basis in the Note. A U.S.
Holder's adjusted tax basis in a Note will generally be equal to the price paid
by such Holder for such Note, increased by the portion of OID previously
included in gross income to the date of disposition (and the accruals of market
discount, if any, which the U.S. Holder has previously elected to include in
gross income on an annual basis as described below) and decreased by any cash
payments, regardless of whether such payments are denominated as interest or
principal. Such gain or loss generally will be capital gain or loss provided the
Note was a capital asset in the hands of the U.S. Holder, and will be long-term
capital gain or loss if the Note has been held for more than one year.
Market Discount. Purchasers of Notes should be aware that a purchase of
Notes in this offering or a subsequent resale of Notes may be affected by the
market discount provisions of the Code. These rules
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generally provide that, subject to a statutorily defined de minimis exception,
if a U.S. Holder of a Note (including a purchaser in this offering) purchases
the Note at a price below its issue price plus the amount of OID includible in
income by all prior U.S. Holders of the Note and thereafter receives a principal
payment on, or recognizes gain upon a disposition of the Note (including
dispositions by gift or redemption), the lesser of such principal payment or of
such gain (or appreciation, in the case of a gift) and the portion of the market
discount that has accrued ("Accrued Market Discount") while the Note was held by
such U.S. Holder will be treated as ordinary interest income at the time of
disposition rather than as capital gain. The market discount rules also provide
that a U.S. Holder who acquires a Note at a market discount may be required to
defer a portion of any interest expense that may otherwise be deductible on any
indebtedness incurred or maintained to purchase or carry such Note until the
U.S. Holder disposes of the Note in a taxable transaction.
"Market discount" generally is the excess of the adjusted issue price of a
Note over the tax basis of the Note in the hands of the U.S. Holder immediately
after its acquisition. Under a de minimis exception, the amount of market
discount is considered to be zero if it is less than 0.25 percent of the Note's
stated redemption price at maturity multiplied by the number of complete years
from acquisition to maturity. Market discount generally will accrue ratably
during the period from the date of acquisition to the maturity date of the Note,
unless the U.S. Holder elects to accrue such discount on the basis of the
constant yield method.
In lieu of including the Accrued Market Discount in income at the time of
disposition, a U.S. Holder of a Note acquired at a market discount may elect to
include the Accrued Market Discount in income currently (either ratably or using
the constant yield method). Once made, such an election applies to all Notes and
other obligations that the U.S. Holder purchases at a market discount during the
taxable year for which the election is made and in all subsequent taxable years
of the U.S. Holder, unless the IRS consents to a revocation of the election. If
an election is made to include Accrued Market Discount in income currently, the
basis of a Note in the hands of the U.S. Holder will be increased by the Accrued
Market Discount thereon as it is includible in income and the rule described
above requiring deferral of interest expense on indebtedness incurred with
respect to the Note will not apply.
High-Yield Discount Obligations. If the yield-to-maturity on the Notes
equals or exceeds the sum of (x) the "applicable federal rate" (as determined
under Section 1274(d) of the Code) in effect for the month in which the Notes
are issued (the "AFR") and (y) 5%, the Notes will be considered "applicable high
yield discount obligations" under Section 163(i) of the Code. Consequently, the
Company will not be allowed to take a deduction for interest (including OID)
accrued on the Notes for U.S. federal income tax purposes until such time as the
Company actually pays such interest (including OID) in cash or in other property
(other than stock or debt of the Company or a person deemed to be related to the
Company under Section 453(f)(1) of the Code).
Moreover, if the yield-to-maturity on the Notes exceeds the sum of (x) the
AFR and (y) 6% (such excess shall be referred to hereinafter as the
"Disqualified Yield"), the deduction for interest (including OID) accrued on the
Notes will be permanently disallowed (regardless of whether the Company actually
pays such interest or OID in cash or in other property) for U.S. federal income
tax purposes to the extent such interest or OID is attributable to the
Disqualified Yield on the Notes ("Dividend-Equivalent Interest"). For purposes
of the dividends-received deduction, such Dividend-Equivalent Interest will be
treated as a dividend to the extent it is deemed to have been paid out of the
Company's current or accumulated earnings and profits. Accordingly, a United
States Holder of a Note that is a corporation may be entitled to take a
dividends-received deduction with respect to any Dividend-Equivalent Interest
received by such corporate holder on such Note.
Backup Withholding. The backup withholding rules require a payor to deduct
and withhold tax if (i) the payee fails to furnish a taxpayer identification
number ("TIN") to the payor, (ii) the IRS notifies the payor that the TIN
furnished by the payee is incorrect, (iii) the IRS has notified the payor that
withholding is required with respect to the payee or (iv) there has been a
failure of the payee to certify under penalty of perjury that a payee is not
subject to withholding under Section 3406 of the Code. If any one of the above
events occurs, the Company, its paying agent or other withholding agent will be
required to withhold a tax equal to 31% of any "reportable payment" made in
connection with the Notes. A "reportable payment" includes, among other things,
OID and amounts paid through brokers in retirement of a Note. Any amounts
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withheld from a payment to a Holder under the backup withholding rules will be
allowed as a refund or credit against such Holder's federal income tax, provided
that the required information is furnished to the IRS. Certain holders
(including, among others, corporations and certain tax exempt organizations) are
not subject to the backup withholding and information reporting requirements,
and no withholding will be imposed on such holders provided that they certify
their exemption from such requirements to the payor in the necessary manner.
WARRANTS
Characterization of Warrants as Stock. The Company believes that the
Warrants are in substance equivalent to stock of the Company, and thus for
federal income tax purposes should be treated as stock because, among other
things, the Warrants are exercisable for nominal consideration and the holders
of the Warrants are entitled to receive certain distributions if the Company
pays a dividend or makes a distribution to holders of the Common Stock. As set
forth in more detail below, the likely federal income tax treatment upon
exercise and sale of the Warrants and the sale of the Common Stock received upon
exercise of the Warrants will be affected by whether the Warrants are treated as
warrants or stock for federal tax purposes. The federal income tax treatment in
the case of lapse or adjustments will likely not be affected.
Exercise -- Payment of Cash. No gain or loss will be recognized for
Federal income tax purposes by holders of the Warrants upon the exercise thereof
in exchange for Common Stock (except to the extent of cash, if any, received in
lieu of the issuance of fractional shares of Common Stock). A holder's tax basis
in the Common Stock acquired upon exercise of a Warrant generally will equal its
tax basis in the Warrant (i.e., generally the portion of the price of a Unit
allocated to the Warrant) plus the amount paid upon exercise. The holding period
of the Common Stock received upon the exercise of the Warrants will begin on the
date of exercise of the Warrant, unless the Warrant is itself treated as stock
for federal income tax purposes (as discussed above). In the event the Warrant
is treated as stock, the holding period of the shares of Common Stock received
upon exercise should include the period during which the Warrants were held by
such holder. If any cash is received in lieu of fractional shares, the holder
will recognize gain or loss, and the character and the amount of such gain or
loss will be determined as if the holder had received such fractional shares and
then immediately sold them for cash.
Exercise -- Payment with other Warrants. If the Warrants are not treated
as Common Stock (as discussed above), a holder who exercises a Warrant by
surrendering Warrants (the "Surrendered Warrants") other than the exercised
Warrant in payment of the exercise price thereof should be treated as disposing
of the Surrendered Warrants in a taxable transaction. Accordingly, a holder
should recognize gain or loss equal to the difference between the exercise price
and the holder's tax basis in the Surrendered Warrants (and taking into account
any cash received by the holder in lieu of the issuance of fractional shares of
Common Stock). Such gain or loss should be capital gain or loss; however, such
gain or loss may be ordinary income or loss on the grounds that the Surrendered
Warrants were not sold or exchanged. A holder's tax basis in the Common Stock
received upon exercise generally will equal its tax basis in the exercised
Warrant (i.e., generally the portion of the price of a Unit allocated to the
Warrant) plus the amount deemed paid upon exercise. However, the IRS may argue
that the holder is deemed to have exercised both the exercised Warrant and the
Surrendered Warrants in exchange for the Common Stock, in which case the receipt
of Common Stock by the holder will not be a taxable transaction (except to the
extent of cash, if any, received in lieu of the issuance of fractional shares of
Common Stock), and such holder's basis in the Common Stock will equal the sum of
its tax basis in the exercised Warrant and its tax basis in the Surrendered
Warrants. The holding period for such Common Stock will begin on the date of
exercise of the Warrant, unless the Warrant is itself treated as stock for
federal income tax purposes (as discussed above). In the event the Warrant
exercised is itself treated as stock, the holding period of the shares of Common
Stock received upon exercise will include the period during which the Warrant
was held by such holder. Moreover, if the Warrants are treated as stock for
federal income tax purposes (as discussed above), the surrender of Surrendered
Warrants in payment of the exercise price of the
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exercised Warrant may be treated as a tax-free recapitalization of stock for
stock under Section 368(a)(1)(E) of the Code or as a tax-free exchange of Common
Stock for Common Stock under Section 1036 of the Code. In such a case, a holder
will not recognize gain or loss upon the surrender of the Surrendered Warrants
(except to the extent of cash, if any, received in lieu of the issuance of
fractional shares of Common Stock), and the holder's tax basis in the Common
Stock received upon exercise will equal the sum of its tax basis in the
exercised Warrant and its tax basis in the Surrendered Warrants, increased by
any gain and decreased by any loss recognized in the transaction. Because of the
uncertain tax consequences of a surrender of Warrants in connection with the
exercise of Warrants, U.S. Holders considering the use of Warrants to pay any
part of the exercise price of a Warrant should consult their own tax advisors.
Sale of Warrants. The sale of a Warrant ordinarily will result in the
recognition of gain or loss to the holder for Federal income tax purposes in an
amount equal to the difference between the amount realized on such sale or
exchange and the holder's tax basis in the Warrant. Such gain or loss will be
capital gain or loss, provided the Common Stock would have been a capital asset
in the hands of the Warrant holder had the Warrant been exercised, and will be
long-term capital gain or loss with respect to Warrants held for more than one
year. However, the IRS might assert that the sale of a Warrant to the Company
does not constitute a sale or exchange and that the holder recognized ordinary
income or loss. In the event the Warrants are treated as stock for federal
income tax purposes (as discussed above), the sale of Warrants to the Company
should be governed by the stock redemption provisions of the Code. In such a
case, redemptions of Warrants by the Company would be treated as a dividend and
taxed as ordinary income to the extent of the Company's current and accumulated
earnings and profits, unless, taking into account certain constructive ownership
rules, the holder terminated his entire equity interest in the Company or the
redemptions were "not essentially equivalent to a dividend." In a published
ruling, the IRS has indicated that a holder whose actual and constructive stock
ownership in an issuer was minimal and who exercised no control over corporate
affairs was generally entitled to capital gain or loss treatment upon the
redemption of his stock so long as his percentage stock ownership was thereby
reduced.
Similarly, gain or loss will generally be recognized upon a sale of the
Common Stock received upon exercise of a Warrant in an amount equal to the
difference between the amount realized on the transfer and the holder's adjusted
tax basis in the Common Stock. Such gain or loss will be capital gain or loss,
provided the Common Stock is held as a capital asset, and will be long-term
capital gain or loss with respect to Common Stock with a more than one-year
holding period. In the event the Warrants are treated as stock for federal
income tax purposes, gain or loss on the sale of the Warrants should be
long-term capital gain or loss with respect to Warrants held more than one year.
Lapse. If the Warrants lapse without exercise, the holder generally will
recognize a capital loss (assuming the sale or exchange of the Warrants by the
holder would have given rise to capital gain or loss) equal to the holder's tax
basis in the Warrants. Any such capital loss would be long-term if the holding
period for the Warrants exceeds one year.
Adjustments. The Exercise Rate of the Warrants are subject to adjustments
under certain circumstances and the Warrant holders may be entitled to certain
distributions in the event of distributions to holders of the Common Stock.
Under Section 305 of the Code and the Treasury Regulations issued thereunder,
holders of the Warrants will be treated as having received a constructive
distribution, resulting in ordinary income (subject to a possible
dividends-received deduction in the case of corporate holders) to the extent of
the Company's current and/or accumulated earnings and profits, if, and to the
extent that, certain adjustments in the Exercise Rate that may occur in limited
circumstances, increase the proportionate interest of a holder of a Warrant in
the earnings and profits of the Company. Thus, under certain circumstances that
may or may not occur, such an adjustment may be treated as taxable distributions
to holders of Warrants, without regard to whether such holders receive any cash
or other property. The Warrant holders may be entitled to receive certain
distributions if the Company pays a dividend or makes a distribution to holders
of the Common Stock, and the Company may waive payment of the exercise price
when a holder exercises a Warrant, in which case it would be deemed to have
distributed cash to the holder in an amount equal to the payments waived by the
Company. Any such distribution or deemed distribution would likely be taxable as
ordinary income to the holder to the extent of the Company's current and/or
accumulated earnings and profits.
109
<PAGE> 112
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the underwriting agreement (the form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part) (the "Underwriting Agreement"), to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the number of
Units set forth opposite their respective names below.
<TABLE>
<CAPTION>
UNDERWRITERS UNITS
----------------------------------------------------------------------- ------------
<S> <C>
Lehman Brothers Inc....................................................
Donaldson, Lufkin & Jenrette Securities Corporation....................
Chase Securities Inc. .................................................
Toronto Dominion Securities (USA) Inc..................................
------------
Total........................................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Units are subject to the approval of certain legal
matters by their counsel and to certain conditions, and that if any Units are
purchased by the Underwriters pursuant to the Underwriting Agreement, all of the
Units agreed to be purchased by the Underwriters pursuant to the Underwriting
Agreement must be so purchased.
The Company has been advised by the Underwriters that they propose to offer
the Units offered hereby 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 Unit. The Underwriters or such selected dealers may reallow a
commission to certain other dealers not to exceed $ per Unit. After the
initial public offering of the Units the public offering price, the concession
to selected dealers and the reallowance to other dealers may be changed by the
Underwriters.
In the Underwriting Agreement, 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 offering price for the Units and the provisions of the Notes and the
Warrants have been determined by negotiations between the Company and the
Underwriters. The material factors considered in such negotiations were
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
which the Company and the Underwriters believed to be comparable to the Company,
estimates of business potential of the Company and the present stage of the
Company's development.
There is no public market for the Units, Notes or Warrants and the Company
has no plans to apply for listing of the Units, Notes or Warrants on any
national securities exchange or for quotation on any automated quotation system.
The Company has been advised by certain of the Underwriters that they currently
intend to make a market in the Units (prior to separation), Notes and Warrants,
as permitted by applicable laws and regulations, however, such Underwriters are
not obligated to do so. Any such market-making may be discontinued at any time,
for any reason, without notice. If any of such Underwriters ceases to act as a
market-maker for the Units, Notes or Warrants for any reason, there can be no
assurance that another firm or person will make a market in the Units, Notes or
Warrants. Accordingly, there can be no assurance as to the liquidity of, or the
existence of trading markets for, the Units, Notes or Warrants.
Certain of the Underwriters have provided certain financial advisory and
investment banking services to the Company in the past. Lehman Brothers Inc. was
the placement agent for the private placement by the Company of the Series A
Preferred Stock in November 1995 for which it received customary commissions.
Lehman Brothers Inc. is presently engaged on a best efforts basis as placement
agent for the private placement by Sloan LP of the remaining limited partnership
interests in Sloan LP, for which Lehman Brothers Inc. will also receive
customary commissions. The Chase Manhattan Bank, N.A., an affiliate of Chase
Securities Inc., is Administrative Agent and a lender under the Credit Facility.
The Chase Manhattan Bank, N.A. and its
110
<PAGE> 113
affiliates may from time to time perform financial and banking services for the
Company. The Chase Manhattan Bank, N.A. is also an affiliate of Chase Manhattan
Capital Corporation and Chase Venture Capital Associates, L.P. Chase Manhattan
Capital Corporation and Chase Venture Capital Associates, L.P. own 3.60% and
18.02%, respectively, of the Series A Preferred Stock.
Toronto Dominion Investments, Inc., an affiliate of Toronto Dominion
Securities (USA) Inc., owns 9.01% of the Series A Preferred Stock and Series B
Preferred Stock, collectively.
Chase Manhattan Capital Corporation, which in the aggregate beneficially
owns 21.6% of the Series A Preferred Stock outstanding as of the date hereof, is
an affiliate of Chase Securities Inc., a member of the National Association of
Securities Dealers, Inc. (the "NASD") and a participant as an underwriter in the
Offering of the Units covered by this Prospectus. As a result of the foregoing,
this Offering is subject to the provisions of Schedule E to the Bylaws of the
NASD. Accordingly, the underwriting arrangements for the Offering will conform
with the requirements set forth in Schedule E. In particular, the price (in the
case of equity) or the yield (in the case of debt) at which such Offering is to
be distributed to the public must be at a price no higher or a yield no lower,
as the case may be, than that recommended by a "qualified independent
underwriter" who has also participated in the preparation of the registration
statement and the prospectus, and who meets certain standards. In accordance
with this requirement, Lehman Brothers Inc. will serve in such role and will
recommend the public offering price in compliance with the requirements of
Schedule E. Lehman Brothers Inc., in its role as qualified independent
underwriter, has performed due diligence investigations and reviewed and
participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part.
LEGAL MATTERS
Certain legal matters in connection with the Units offered hereby are being
passed upon for the Company by Nelson Mullins Riley & Scarborough, L.L.P.
("NMRS"), Charlotte, North Carolina and Atlanta, Georgia. Patrick Daugherty, a
partner of NMRS, beneficially owns 30 shares of the Company's Series A Preferred
Stock. Certain communications-related legal matters are being passed upon for
the Company by Lukas McGowan Nace & Gutierrez, Chartered, Washington, D.C.
("Lukas McGowan"). Gerald S. McGowan, a partner of Lukas McGowan, beneficially
owns 12 shares of the Company's Class A Common Stock and 63 shares of the
Company's Class B Common Stock. Certain legal matters are being passed upon for
the Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York.
EXPERTS
The financial statements included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
111
<PAGE> 114
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Securities offered hereby,
reference is made to the Registration Statement and to the exhibits and
schedules filed as part thereof. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission in Washington, D.C. and
copies may be obtained from the Public Reference Section at the Commission's
principal office, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the Commission's regional offices at Seven World Trade Center, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
upon payment of the fees prescribed by the Commission.
112
<PAGE> 115
PCS DEVELOPMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995............. F-3
Consolidated Statements of Operations for the period from September 21, 1994 (date of
incorporation) to December 31, 1994, for the year ended December 31, 1995 and
cumulative amounts from September 21, 1994 to December 31, 1995..................... F-4
Consolidated Statements of Stockholders' Equity for the period from September 21, 1994
(date of incorporation) to December 31, 1995........................................ F-5
Consolidated Statements of Cash Flows for the period from September 21, 1994 (date of
incorporation) to December 31, 1994, for the year ended December 31, 1995 and
cumulative amounts from September 21, 1994 to December 31, 1995..................... F-6
Notes to Consolidated Financial Statements............................................ F-7
Consolidated Balance Sheets (unaudited) as of March 31, 1995 and March 31, 1996....... F-16
Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31,
1995 and March 31, 1996 and cumulative amounts from September 21, 1994 (date of
incorporation) to March 31, 1996.................................................... F-17
Consolidated Statements of Stockholders' Equity (unaudited) for the period from
December 31, 1995 to March 31, 1996................................................. F-18
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31,
1995 and March 31, 1996 and cumulative amounts from September 21, 1994 (date of
incorporation) to March 31, 1996.................................................... F-19
Notes to Consolidated Financial Statements (unaudited)................................ F-20
</TABLE>
F-1
<PAGE> 116
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
PCS Development Corporation
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of PCS
Development Corporation (a development stage company) as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from September 21, 1994 (date of
incorporation) to December 31, 1994, for the year ended December 31, 1995 and
cumulative amounts from September 21, 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and
1995, and the results of its operations and its cash flows for the period from
September 21, 1994 (date of incorporation) to December 31, 1994, for the year
ended December 31, 1995 and cumulative amounts from September 21, 1994 to
December 31, 1995, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Greenville, South Carolina
February 16, 1996
(except with respect to
Note 12, as to which the date is
April 25, 1996)
F-2
<PAGE> 117
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 763,878 $ 25,947,791
Interest receivable from stockholder (Note 9)............... 22,190 84,343
Prepaid expenses and other current assets................... 845 751,810
------------ ------------
Total current assets................................ 786,913 26,783,944
EQUIPMENT AND FIXTURES -- Net (Note 3)........................ 13,941 2,360,057
INTANGIBLE ASSETS -- Net (Note 4)............................. 9,253,100 97,554,358
------------ ------------
TOTAL............................................... $ 10,053,954 $126,698,359
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 146,379 $ 215,581
Due to related company (Note 6)............................. 193,320 --
Accrued payroll withholdings................................ 39,342 225,416
Other accrued liabilities................................... 111,500 550,502
Current portion of long-term debt (Note 7).................. -- 418,582
------------ ------------
Total current liabilities........................... 490,541 1,410,081
------------ ------------
OTHER LIABILITIES............................................. -- 134,570
------------ ------------
LONG-TERM DEBT (Note 7)....................................... -- 73,382,678
------------ ------------
COMMITMENTS (Note 5)
REDEEMABLE CONVERTIBLE PREFERRED STOCK (Notes 10 and 12)...... -- 23,112,325
STOCKHOLDERS' EQUITY (Notes 9 and 11):
Common stock:
Class A, $1.00 par value, 300,000 shares authorized,
8,718 shares issued and outstanding.................... 8,718 8,718
Class B, $1.00 par value, 200,000 shares authorized,
28,482 shares issued and outstanding................... 28,482 28,482
Common stock additional paid-in capital..................... 37,162,800 36,366,601
Deficit accumulated during the development stage............ (375,103) (2,455,814)
------------ ------------
36,824,897 33,947,987
Less amounts receivable from stockholders................ (23,993,979) (14,147)
Less notes receivable from stockholder................... (3,267,505) (5,275,135)
------------ ------------
Total stockholders' equity.......................... 9,563,413 28,658,705
------------ ------------
TOTAL............................................... $ 10,053,954 $126,698,359
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 118
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 21, 1994
(DATE OF YEAR ENDED CUMULATIVE AMOUNTS
INCORPORATION) DECEMBER 31, FROM SEPTEMBER 21, 1994
TO DECEMBER 31, 1994 1995 TO DECEMBER 31, 1995
--------------------- ------------ --------------------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Sales and Marketing..................... $ -- $ 796,100 $ 796,100
Administrative.......................... 394,918 1,922,163 2,317,081
Depreciation............................ -- 137,374 137,374
Amortization............................ 4,058 19,479 23,537
----------- ------------ -------------
398,976 2,875,116 3,274,092
INTEREST INCOME FROM STOCKHOLDER (Note
9)...................................... (22,190) (526,075) (548,265)
INTEREST INCOME -- OTHER.................. (1,683) (268,330) (270,013)
----------- ------------ -------------
NET LOSS........................ $ 375,103 $2,080,711 $2,455,814
================ ========== ====================
PER SHARE DATA:
NET LOSS........................ $ 375,103 $2,080,711
ACCRETION OF PREFERRED STOCK
DIVIDENDS..................... -- 796,199
----------- ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS.................. $ 375,103 $2,876,910
================ ==========
NET LOSS PER COMMON SHARE....... $ 10.08 $ 77.34
================ ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 119
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM SEPTEMBER 21, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
AMOUNTS
COMMON STOCK DEFICIT ACCUMULATED RECEIVABLE NOTES RECEIVABLE
COMMON STOCK COMMON STOCK ADDITIONAL DURING THE FROM FROM
CLASS A CLASS B PAID-IN CAPITAL DEVELOPMENT STAGE STOCKHOLDERS STOCKHOLDER TOTAL
------------ ------------ --------------- ------------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER
21,
1994...... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
37,200
shares of
common
stock
($1,000
per share)
on October
1, 1994... 8,718 28,482 37,162,800 -- (23,993,979) (3,267,505) 9,938,516
Net loss
from date
of
incorporation
to
December
31,
1994...... -- -- -- (375,103) -- -- (375,103)
------------ ------------ --------------- ------------------- ------------ ---------------- -----------
BALANCE,
DECEMBER
31,
1994...... 8,718 28,482 37,162,800 (375,103) (23,993,979) (3,267,505) 9,563,413
Collection
of amounts
receivable
from
stockholders... -- -- -- -- 23,979,832 (5,932,495) 18,047,337
Collection
of notes
receivable
from
stockholder... -- -- -- -- -- 3,924,865 3,924,865
Preferred
stock
accretion... -- -- (796,199) -- -- -- (796,199)
Net loss.... -- -- -- (2,080,711) -- -- (2,080,711)
------------ ------------ --------------- ------------------- ------------ ---------------- -----------
BALANCE,
DECEMBER
31,
1995...... $8,718 $ 28,482 $36,366,601 $(2,455,814) $ (14,147) $ (5,275,135) $28,658,705
============ ============ ============ ================ ============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 120
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE
SEPTEMBER 21, 1994 AMOUNTS FROM
(DATE OF INCORPORATION) YEAR ENDED SEPTEMBER 21, 1994
TO DECEMBER 31, 1994 DECEMBER 31, 1995 TO DECEMBER 31, 1995
----------------------- ----------------- --------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss.................................. $ (375,103) $ (2,080,711) $ (2,455,814)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization.......... 4,058 156,853 160,911
Changes in assets and liabilities:
Increase in interest receivable from
shareholder....................... (22,190) (62,153) (84,343)
Increase in prepaid expenses and
other current assets.............. (845) (250,965) (251,810)
Increase in accounts payable......... 146,379 69,202 215,581
(Decrease) increase in due to related
company........................... 117,557 (193,320) (75,763)
Increase in accrued payroll
withholdings...................... 39,342 186,074 225,416
Increase in other accrued
liabilities....................... 111,500 420,379 531,879
Increase in other liabilities........ -- 134,570 134,570
----------------------- ----------------- --------------------
Net cash provided by (used in)
operating activities............ 20,698 (1,620,071) (1,599,373)
INVESTING ACTIVITIES:
Purchases of equipment and fixtures....... (3,233) (1,488,351) (1,491,584)
Payments for FCC licenses................. (9,192,103) (15,579,616) (24,771,719)
Increase in accrued interest payable...... -- 18,623 18,623
FCC deposit............................... -- (500,000) (500,000)
----------------------- ----------------- --------------------
Net cash used in investing
activities...................... (9,195,336) (17,549,344) (26,744,680)
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock
and collection of amounts receivable
from stockholders...................... 9,938,516 18,047,337 27,985,853
Proceeds from the issuance of preferred
stock and collection of subscriptions
receivable............................. -- 22,316,126 22,316,126
Proceeds from the issuance of note
payable................................ -- 65,000 65,000
Collection of notes receivable from
stockholder............................ -- 3,924,865 3,924,865
----------------------- ----------------- --------------------
Net cash provided by financing
activities...................... 9,938,516 44,353,328 54,291,844
INCREASE IN CASH AND CASH EQUIVALENTS....... 763,878 25,183,913 25,947,791
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD.................................... -- 763,878 --
----------------------- ----------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.... $ 763,878 $ 25,947,791 $ 25,947,791
================= ============= ===============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING INFORMATION:
Debt incurred to acquire FCC Licenses..... -- $ 72,741,121 $ 72,741,121
Debt incurred to acquire certain fixed
assets................................. -- 995,139 995,139
Issuance of notes receivable to
stockholder for
stock.................................. $ 3,267,505 5,932,495 9,200,000
Preferred stock accretion................. -- 796,199 796,199
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 121
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM SEPTEMBER 21, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION
PCS Development Corporation and its subsidiary (the "Company") is a
development stage company incorporated on September 21, 1994, for the purpose of
establishing, constructing and operating regional narrowband personal
communications systems in the United States.
During 1994, the Company successfully bid on five regional narrowband
licenses, which were officially granted by the Federal Communications Commission
(the "FCC") in February, 1995. The Company plans to employ the licenses to offer
a full array of two-way narrowband wireless voice and data messaging. The
Company is subject to the regulatory authority of the FCC and qualified as a
"Designated Entity" in the FCC narrowband PCS regional auction whereby the
Company received from the FCC certain bidding credits and financing terms as
part of its purchase of the licenses. The Company continues to satisfy the
applicable Designated Entity criteria because it is a small business and it is
controlled by a control group composed of minorities and women.
The Company is in a new segment of the wireless telecommunications industry
and is now developing a nationwide narrowband PCS wireless network. It plans to
offer two-way wireless stored voice and data messaging services through existing
wireless messaging providers and other channels. The development, construction
and initial start-up phase associated with the implementation of the Company's
services will require substantial capital. The Company has experienced operating
losses and negative cash flow from operating activities since its incorporation
in 1994. The Company expects that during the buildout of its nationwide network
and as it seeks market penetration, operating losses and negative cash flow from
operating activities will continue at historical or greater levels. The ability
to generate positive net income and cash flow from operations in the future is
dependent upon many factors, including general economic conditions, attainment
of significant additional financing, the timely completion of the Company's
network buildout, the level of market acceptance for the Company's products and
services and the degree of competition encountered by the Company.
The Company intends to purchase its infrastructure equipment from two
suppliers. As a result, the Company will rely on these suppliers for the
manufacture of a substantial portion of the equipment necessary to construct its
narrowband PCS network. One of these suppliers is the only current manufacturer
of the subscriber equipment necessary to deliver stored voice messaging services
over the Company's network.
No market currently exists for the stored voice messaging services proposed
to be offered by the Company. With respect to sales of both voice and data
services, the Company intends to target broad market segments with diverse
messaging requirements by providing nationwide, easy-to-use services at a
reasonable price. The potential markets for these services include corporate
users, business travelers, portable personal computer users and household
consumers. The Company will employ a variety of direct and indirect distribution
channels to market and sell its PCS products and services. To speed marketing
and sales and quickly build a broad customer base, the Company intends initially
to distribute its PCS services through certain of its investors and other
distribution partners, deriving leverage from their existing customer
relationships.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, SGI Communications, Inc. Significant
intercompany accounts and transactions have been eliminated in consolidation.
F-7
<PAGE> 122
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and cash equivalents consist of cash in banks and short-term, highly
liquid investments purchased with original maturities of less than three months.
Equipment and fixtures are recorded at cost. Equipment and fixtures will be
depreciated using the straight-line method over the lives of the related assets.
The Company capitalizes interest costs related to network buildout, where
activities are in progress, necessary to get the asset ready for its intended
use.
Intangible assets are amortized on the straight-line method over the period
of the related asset. The Company will periodically review the values assigned
to intangible assets to determine whether any impairments are other than
temporary. This assessment is based on the estimated undiscounted future cash
flows from operating activities compared with the carrying value of intangible
assets. Management believes that the intangible assets in the accompanying
balance sheets are appropriately valued.
The Company provides for deferred income taxes for temporary differences
between the tax basis and financial reporting basis of assets and liabilities
pursuant to the requirements of Statement of Financial Accounting Standards No.
109.
Net loss per common share and common equivalent share are computed using
the weighted average number of outstanding common and dilutive common equivalent
shares outstanding. Additionally, net loss per share includes the accretion of
preferred stock dividends for the periods presented.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain 1994 amounts have been reclassified to conform to current
presentation.
3. EQUIPMENT AND FIXTURES
Equipment and fixtures at December 31 is comprised of the following:
<TABLE>
<CAPTION>
USEFUL LIFE 1994 1995
----------- ------- ----------
<S> <C> <C> <C>
Computer Hardware..................................... 5 $ 6,029 $ 323,423
Computer Software..................................... 5 1,057 839,512
Furniture and Fixtures................................ 10 3,862 180,840
Office Equipment...................................... 7 2,993 77,744
Leasehold Improvements................................ 15 -- 192,866
Assets Under Construction............................. -- 883,046
------- ----------
13,941 2,497,431
Less: accumulated depreciation...................... -- (137,374)
------- ----------
$13,941 $2,360,057
======= =========
</TABLE>
F-8
<PAGE> 123
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INTANGIBLE ASSETS
Intangible assets at December 31 is comprised of the following:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Costs of FCC licenses (including deposits with FCC of
$9,092,640 at December 31, 1994 and interest capitalized of
$4,824,081 through December 31, 1995)...................... $9,159,261 $95,817,102
Option to acquire radio spectrum............................. -- 1,656,359
Organization costs........................................... 97,397 97,397
Other........................................................ 500 7,037
---------- -----------
9,257,158 97,577,895
Less: accumulated amortization............................... (4,058) (23,537)
---------- -----------
$9,253,100 $97,554,358
========= ==========
</TABLE>
Amortization recorded in 1994 and 1995 relates to organization costs
consisting of legal fees incurred in organizing and incorporating the Company,
which are being amortized over a five year period. Amortization of FCC licenses
will commence when placed in service, which is expected to be during the first
half of 1997, and will be computed on a straight line basis over a period not to
exceed 40 years.
In December of 1995, the Company acquired an option to purchase radio
spectrum for $1,500,000 and expenses of $156,359. The option is exercisable from
September 14, 1998 to September 14, 2001 for an additional fee of $2,875,000.
Under the terms of the option, the Company can acquire FCC licenses which
provide additional capacity in one of its geographical areas of operation. If
acquired, the FCC licenses will be amortized over their estimated useful life
not to exceed 40 years.
5. COMMITMENTS
Lease Agreements -- In 1995, the Company entered into operating lease
agreements for office space and certain office equipment with noncancelable
lease terms ranging from three months to five years. The office lease has a
seven year term, with an option to terminate the lease at the end of five years.
Rental expense under these leases was $30,745 for the year ended December
31, 1995. Aggregate rental commitments under the noncancelable portion of these
operating leases are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 87,723
1997.............................................................. 131,220
1998.............................................................. 131,220
1999.............................................................. 131,220
2000.............................................................. 71,284
--------
$552,667
========
</TABLE>
6. DUE TO RELATED COMPANY
During 1995, the Company reimbursed certain costs and expenses incurred by
a related company in 1994 totaling $193,320. These reimbursements were primarily
for consulting services and certain organization costs, market research, legal
fees, office fixtures, equipment and supplies, which were incurred prior to the
Company's formation, and certain other operating expenses which were incurred on
its behalf subsequent to the date of incorporation.
F-9
<PAGE> 124
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt at December 31, 1995 is comprised of the following:
<TABLE>
<S> <C>
FCC obligation, maturing December 30, 2004, bearing interest at 7.5%
payable quarterly; principal payments beginning March 30, 1997........ $72,741,121
Equipment financing agreement, maturing July 14, 1998, bearing interest
at 9.5%, collateralized by computer equipment and software, payable
monthly beginning January 14, 1996.................................... 995,139
Note payable to bank, maturing January 1999, bearing interest at 6.55%,
collateralized by a certificate of deposit, payable monthly beginning
February 28, 1996..................................................... 65,000
-----------
73,801,260
Less: current portion................................................... (418,582)
-----------
$73,382,678
==========
</TABLE>
The fair value of the Company's long-term debt is estimated based on the
present value of the future cash payments of the long-term debt at borrowing
rates currently available to the Company for loans with similar terms and
average maturities. The fair value of long-term debt at December 31, 1995 is
$72,290,000.
Maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996................................................................ $ 418,582
1997................................................................ 7,272,269
1998................................................................ 7,648,792
1999................................................................ 8,090,103
2000................................................................ 8,635,332
Thereafter.......................................................... 41,736,182
-----------
$73,801,260
==========
</TABLE>
Total interest paid was $4,830,054 for the twelve month period ended
December 31, 1995.
F-10
<PAGE> 125
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Current tax benefit:
Federal................................................ $(111,117) $(1,275,743)
State.................................................. (13,073) (121,859)
--------- -----------
Total.......................................... (124,190) (1,397,602)
Deferred tax (benefit) provision:
Federal................................................ (16,418) 568,274
State.................................................. (1,932) 52,868
--------- -----------
Total.......................................... (18,350) 621,142
Valuation Allowance...................................... 142,540 776,460
--------- -----------
Income tax expense (benefit)............................. $ -- $ --
========= ==========
At December 31, the Company had deferred tax assets
(liabilities) as follows:
Depreciable assets..................................... $ -- $ (372,000)
Amortizable assets..................................... -- (3,866,000)
--------- -----------
Gross deferred tax liabilities................. -- (4,238,000)
Development stage expenses capitalized for income tax
purposes as start-up expenditures................... 18,350 3,607,000
Net operating loss carryforward........................ 124,190 1,521,000
Other.................................................. -- 29,000
--------- -----------
Gross deferred tax assets...................... 142,540 5,157,000
Valuation allowance.................................... (142,540) (919,000)
--------- -----------
Net deferred tax asset................................. $ -- $ --
========= ==========
</TABLE>
A valuation allowance has been recorded against the deferred income tax
asset as realization of this asset is uncertain as of December 31, 1994 and
1995.
At December 31, 1995, the Company had $4,080,000 of net operating loss
carryforwards available to reduce future taxable income which will expire in
2009 and 2010 if not previously utilized. The net changes in the valuation
allowance for deferred tax assets were increases of $142,540 for the period from
September 21, 1994 to December 31, 1994 and $776,460 for the year ended December
31, 1995, both of which were primarily related to increased net operating loss
carryfowards of the Company.
9. STOCKHOLDERS' EQUITY
On October 1, 1994, the Company and its stockholders entered into Common
Stock Subscription Agreements (the "Agreements") for the issuance of 37,200
shares of common stock in a private placement offering at a price of $1,000 per
share. Common stock consists of two classes. Class A common stock entitles the
holder to one vote for each share on all matters as to which stockholders are
entitled to vote. Class B common stock has no voting rights except with respect
to certain matters as specified in the restated certificate of incorporation. In
accordance with the Agreements, the Company made a capital call prior to the
close of business on November 14, 1994 (First Payment) and prior to the close of
business on the third business day following the day one or more licenses were
granted by the FCC (Second Payment). The balance due was
F-11
<PAGE> 126
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payable at various times according to a board-approved schedule. Amounts
receivable from stockholders collected by the Company in relation to the
Agreements at December 31, 1994 and 1995 were $9,938,516 and $18,047,337,
respectively.
The Company entered into an agreement on October 4, 1994 (as amended
effective December 31, 1994) with Sloan Communications, Inc. ("Sloan") whereby
the Company committed to loan to Sloan up to $9,200,000, subject to certain
limitations on the dollar amount of individual loan/stock purchase transactions.
This loan commitment was made for Sloan to satisfy its obligation to purchase
9,300 shares of common stock under the Agreements. The loan commitment was drawn
under the following promissory notes:
<TABLE>
<CAPTION>
DATE AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
September 30, 1994....................................................... $ 325,000
November 14, 1994........................................................ 2,942,505
January 19, 1995......................................................... 3,311,000
April 20, 1995........................................................... 366,667
June 23, 1995............................................................ 983,333
September 20, 1995....................................................... 1,271,495
----------
$9,200,000
=========
</TABLE>
Interest accrues on the notes at 6% until the first anniversary date of
each note. Thereafter, interest accrues at a fixed, annual rate of 10%. In the
event of default, the interest rate on the principal amount of the notes
increases at the following rate:
<TABLE>
<CAPTION>
PERIOD OF DEFAULT INTEREST RATE
------------------------------------------------------------------------- -------------
<S> <C>
First 6 months........................................................... 15%
After 6 through 12 months................................................ 20%
After 12 months.......................................................... 25%
</TABLE>
Upon repayment of all overdue principal and accrued interest, the interest
rate reverts to 10% prospectively at the next principal due date. Sloan also has
pledged its common stock in the Company as collateral for the notes.
Accrued interest on the unpaid principal balance is payable at each
principal repayment date. During 1995, Sloan repaid $3,924,865 of the
outstanding principal, including a letter of credit in the amount of $750,000
issued in the name of the Company with a maturity date of April 30, 1996, and
$441,732 in interest. The unpaid promissory notes call for repayment of
principal as follows:
<TABLE>
<S> <C>
October 4, 1996.......................................................... $1,595,135
April 30, 1997........................................................... 3,680,000
----------
$5,275,135
=========
</TABLE>
From October 4, 1995 through November 29, 1995, the stockholder notes
receivable were in default resulting in default interest due in the amount of
$126,000. The Company agreed to waive the default interest on the condition that
all notes were repaid in full on or prior to April 30, 1996. Based upon its
contingent nature, no default interest has been recorded. As of December 31,
1995, the Stockholder note receivable was current.
The loan to Sloan is recorded as a reduction in stockholders' equity in the
financial statements. Accrued interest receivable at December 31, 1994 and 1995
was $22,190 and $84,343, respectively.
F-12
<PAGE> 127
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On November 9, 1995, the Company and its stockholders entered into
Preferred Stock Subscription Agreements for the issuance of 24,667 shares of
Series A Convertible Preferred Stock (the "Preferred Stock") in a private
placement offering at a price of $2,250 per share. The Preferred Stock is
convertible, at the option of the holder, into Class B Common Stock at any time
provided that the exercise of the conversion does not adversely impact the
Company's "Designated Entity" status under FCC rules. Additionally, the
Preferred Stock is automatically converted to Class B Common Stock in the event
of a public offering of the Company's common stock sufficient in value to give
the holders of the Preferred Stock certain investment returns as described in
the Preferred Stock purchase agreements. The Preferred Stock has limited voting
rights and grants preferences to the holders regarding dividends, liquidation
and merger. Dividends on the Class A or Class B Common Stock require the consent
of the holders of at least 50% of the Preferred Stock. The Preferred Stock
entitles the holders to participate in cumulative dividends accreting at the
rate of 10% per annum, compounded semi-annually on the anniversary of its
initial issuance. Subsequent to November 10, 2004, the Preferred Stock is
redeemable at the option of the holder by conversion into subordinated notes of
the Company whose principal amount equals the accreted value of the Preferred
Stock at the time of conversion. Upon conversion, the subordinated notes will
bear interest at 10% per annum and will be due in 2007.
The Company incurred $2,790,124 in expenses associated with the offering of
Preferred Stock. The costs associated with the offering include underwriting,
legal and professional fees and were recorded as a reduction of the proceeds
from the offering. The net proceeds of $52,710,626 will be used to construct the
Company's network and for general corporate purposes.
In accordance with the Preferred Stock subscription agreements, the Company
made a capital call prior to the close of business on November 9, 1995. The
balance due is payable at various times according to a board-approved schedule.
Capital subscriptions collected by the Company in relation to the Preferred
Stock subscription agreements at December 31, 1995 were $25,106,250.
Subscriptions receivable in relation to the Preferred Stock subscription
agreement at December 31, 1995 were $30,394,500 and are due in two installments
on February 1, 1996 and May 1, 1996.
11. STOCK OPTIONS AND WARRANTS
Officers -- The Company entered into Employment Agreements with two
principal officers (the "Officers") of the Company effective October 31, 1994.
The Employment Agreements provide the Officers the option to acquire 2,626
shares each of Class B Common Stock at an exercise price of $1,000 per share of
common stock. This exercise price represents the initial subscription price upon
formation of the Company. Half of the options for the Officers (i.e., 1,313
shares each) became fully vested at the effective date of the Employment
Agreements. The remaining options vest in accordance with the following schedule
as long as the respective officer remains employed by the Company:
<TABLE>
<S> <C>
June 1, 1996...................................................... 263
June 1, 1997...................................................... 263
June 1, 1998...................................................... 263
June 1, 1999...................................................... 262
June 1, 2000...................................................... 262
-----
1,313
</TABLE>
Cessation of employment for any reason cancels unvested options. The
Officers may retain vested options after cessation of employment. The vesting
schedule above may be accelerated in certain instances where a change in
ownership occurs of more than 50% of the common stock of the Company.
F-13
<PAGE> 128
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stockholders -- Certain stockholders of the Company were granted warrants
to acquire 1,313 shares of Class B Common Stock at an exercise price of
approximately $1,360 per share in an agreement effective October 31, 1994, which
became vested 31.25% on February 1, 1995 and an additional 6.25% of the warrants
vest every successive three months until fully vested on November 1, 1997.
Vesting of half of the warrants is dependent on the continued employment of one
of the officers and vesting of the other half of the warrants is dependent on
continued employment of the other officer. For the officer options and
stockholder warrants, vested options and warrants become exercisable on the
earlier of the following dates: (1) the date on which the holder provides the
Company with an opinion from the Company's FCC counsel that the exercise of the
option or warrant would not jeopardize the status of the Company as a Designated
Entity, (2) the date the Company consummates a public offering of common stock
at $10 or more per share and realizes gross proceeds of at least $10,000,000, or
(3) the first date after which the failure of the Company to qualify for
"Designated Entity" status as a "Business Owned by Members of Minority Groups
and/or Women" would not result in the loss of material benefits by the Company.
The options and warrants expire ten years from the date of issuance (October 31,
2004).
Other Employee Options -- In 1995, several employees were granted options
to exercise, collectively, 1,200 and 300 shares of Class B Common Shares at an
exercise price of $1,000 and $1,850, respectively, per common share. Vesting
occurs at a rate of 5% per quarter over five years with the initial 20% vesting
at the first anniversary of each employee's employment date.
Cessation of employment for any reason cancels unvested options. The
employees may retain vested options after cessation of employment. The vesting
schedule above may be accelerated in certain instances where a change in
ownership occurs of more than 50% of the common stock of the Company. Provisions
for exercise limitations are similar to those for the Officers.
At December 31, 1994 and 1995, no expense for options or warrants was
recorded as Company management believes that the fair value of the Class B
common stock at the date of issuance of the options and warrants was not in
excess of the exercise price.
Subsequent to December 31, 1995, additional options to acquire up to 700
shares of Class B Common Stock were issued to employees upon approval by a
committee of the Board of Directors.
12. SUBSEQUENT EVENTS
Capital Stock Transactions -- All amounts outstanding relating to the
Preferred Stock Subscription Agreements on December 31, 1995, were collected as
of April 25, 1996. On April 18, 1996, Sloan repaid $2,722,005 of outstanding
principal and $189,079 of interest related to the notes receivable from
stockholders.
Purchase of Radio Spectrum -- In early 1996, radio spectrum was purchased
in two metropolitan areas of the United States for a total of $7,250,000. These
purchases were financed through cash and a $500,000 note payable.
During April 1996, the Company successfully bid, by auction, on radio
spectrum in various metropolitan areas throughout the United States. The Company
qualifies as a "Small Business", and as such was permitted a 10% credit on the
bid price made during the auction. The Company was required to make an advance
payment of 5% of the committed price of the licenses within five business days
of the end of the auction. Another 5% is due within five business days of the
date the licenses are granted (expected to be in July of 1996). The balance of
the committed purchase price is due and payable in accordance with the rules and
regulations of the FCC. This obligation will be incurred on the date the
licenses are granted.
F-14
<PAGE> 129
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total consideration for the licenses is as follows:
<TABLE>
<S> <C>
Deposit paid in 1995..................................................... $ 500,000
Deposit to be paid....................................................... 480,386
Aggregate balance of unpaid FCC obligation............................... 8,722,485
----------
Total purchase price of licenses (after 10% credit)...................... $9,702,871
=========
</TABLE>
The terms of the FCC obligation consist of a fixed interest rate equal to
the ten-year treasury note at the time of license grant plus 2.5%, with
quarterly payments. Interest only payments are required for the first two years
of the ten-year term. Principal and interest payments will commence following
the second anniversary of the obligation and will continue through the final
payment date.
Additional Financing -- The Company is in the process of registering with
the Securities and Exchange Commission for the issuance of approximately $150
million in Senior Discount Notes due 2006 (the "Notes") and Warrants to purchase
Class B common stock (collectively, the "Units"). The proceeds from the issuance
of the Units will be used to fund capital expenditures, general working capital
and debt service requirements, operating losses, future acquisitions of spectrum
and other general corporate purposes. The indenture governing the Notes will
contain covenants that will limit the ability of the Company to incur
indebtedness, pay dividends and dispose of assets, among others.
The Company is negotiating a commitment from an investment advisory firm to
arrange the establishment of senior credit facilities in the amount of $225
million effective upon the closing of the Notes discussed above. The credit
facilities will consist of a $75 million term loan, a $35 million term loan and
a $115 million reducing revolving credit facility. Under the proposed terms, the
Company will have approximately $75 million immediately available for borrowing
under the credit facilities, and the balance will be available upon the
achievement and maintenance of certain operating results and financial ratios.
The credit facilities will be used to fund capital expenditures, working
capital and debt service requirements, operating losses, future acquisitions of
spectrum and other general corporate purposes. Borrowings under the facilities
will bear interest, at the option of the Company, at a maximum rate of the agent
bank's base rate plus 3% or the agent bank's Eurodollar rate plus 4%. Borrowings
under the facilities will initially be available on the closing date of the
facility and end on June 30, 2004. The $75 million and $35 million term loans
will be repayable in two equal installments on March 31, 2000 and June 30, 2000.
The $115 million reducing revolving loans will be retired in quarterly
installments beginning on March 31, 2000 and ending on June 30, 2004.
The $115 million reducing revolving credit facility's availability are
conditioned upon the satisfaction of certain conditions including expending
certain amounts previously received from the issuance of equity by the Company,
borrowing the full amount under the term loan and maintaining certain financial
ratios. The credit facilities will contain covenants that will limit the
Company's ability to incur additional indebtedness, pay dividends and dispose of
assets, among others.
The investment advisory firm and the lender under the $35 million term loan
and the $115 million reducing revolving credit facility are affiliates of two of
the Company's preferred stockholders who own 3.6% and 18.0% of the Company's
Series A Preferred Stock, respectively.
F-15
<PAGE> 130
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1996
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 29,865,057
Interest receivable from stockholder......................................... 161,834
Prepaid expenses and other current assets.................................... 855,996
------------
Total current assets................................................. 30,882,887
DEFERRED OFFERING EXPENSES..................................................... 607,655
EQUIPMENT AND FIXTURES -- Net.................................................. 4,128,866
INTANGIBLE ASSETS -- Net....................................................... 106,480,017
------------
TOTAL................................................................ $142,099,425
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................. $ 499,825
Accrued payroll withholdings................................................. 319,938
Other accrued liabilities.................................................... 1,312,978
Current portion of long-term debt............................................ 338,062
------------
Total current liabilities............................................ 2,470,803
------------
OTHER LIABILITIES.............................................................. 134,570
------------
LONG-TERM DEBT................................................................. 73,762,198
------------
COMMITMENTS
REDEEMABLE CONVERTIBLE PREFERRED STOCK......................................... 40,107,923
STOCKHOLDERS' EQUITY:
Common stock:
Class A, $1.00 par value, 300,000 shares authorized, 8,718 shares issued
and outstanding.......................................................... 8,718
Class B, $1.00 par value, 200,000 shares authorized, 28,482 shares issued
and outstanding.......................................................... 28,482
Common stock additional paid-in capital...................................... 34,973,253
Deficit accumulated during the development stage............................. (4,111,387)
------------
30,899,066
Less notes receivable from stockholder....................................... (5,275,135)
------------
Total stockholders' equity........................................... 25,623,931
------------
TOTAL................................................................ $142,099,425
===========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE> 131
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE AMOUNTS
FROM
SEPTEMBER 21, 1994
THREE MONTHS THREE MONTHS (DATE OF
ENDED ENDED INCORPORATION)
MARCH 31, 1995 MARCH 31, 1996 TO MARCH 31, 1996
-------------- -------------- ------------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Sales and Marketing............................. $ -- $ 756,041 $1,552,141
Administrative.................................. 317,659 1,236,390 3,553,471
Depreciation.................................... 472 73,217 210,591
Amortization.................................... 4,869 4,869 28,406
-------------- -------------- ------------------
323,000 2,070,517 5,344,609
-------------- -------------- ------------------
INTEREST INCOME FROM STOCKHOLDER.................. (102,867) (77,308) (625,573)
INTEREST INCOME -- OTHER.......................... (29,746) (337,636) (607,649)
-------------- -------------- ------------------
NET LOSS................................ $ 190,387 $1,655,573 $4,111,387
=========== =========== ==============
PER SHARE DATA:
NET LOSS................................ $ 190,387 $1,655,573
ACCRETION OF PREFERRED STOCK
DIVIDENDS............................. -- 1,393,348
-------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS.......................... $ 190,387 $3,048,921
=========== ===========
NET LOSS PER COMMON SHARE............... $ 5.12 $ 81.96
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE> 132
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM DECEMBER 31, 1995
TO MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
AMOUNTS
COMMON STOCK DEFICIT ACCUMULATED RECEIVABLE NOTES RECEIVABLE
COMMON STOCK COMMON STOCK ADDITIONAL DURING THE FROM FROM
CLASS A CLASS B PAID-IN CAPITAL DEVELOPMENT STAGE STOCKHOLDERS STOCKHOLDER TOTAL
------------ ------------ --------------- ------------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December
31,
1995...... $8,718 $ 28,482 $36,366,601 $(2,455,814) $ (14,147) $ (5,275,135) $28,658,705
Collection
of
amounts
receivable
from
stockholders... -- -- -- -- 14,147 -- 14,147
Preferred
stock
accretion... -- -- (1,393,348) -- -- -- (1,393,348)
Net loss.... -- -- -- (1,655,573) -- -- (1,655,573)
------------ ------------ --------------- ------------------- ------------ ---------------- -----------
BALANCE,
March 31,
1996...... $8,718 $ 28,482 $34,973,253 $(4,111,387) $ -- $ (5,275,135) $25,623,931
============ ============ ============ ================ ============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 133
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
THREE MONTHS THREE MONTHS SEPTEMBER 21, 1994
ENDED ENDED (DATE OF INCORPORATION)
MARCH 31, 1995 MARCH 31, 1996 TO MARCH 31, 1996
-------------- -------------- -----------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss............................................. $ (190,387) $ (1,655,573) $(4,111,387)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization...................... 5,341 78,086 238,997
Changes in assets and liabilities:
Increase in accrued interest receivable.......... -- (592) (592)
Increase in interest receivable from
shareholder................................... (102,747) (77,491) (161,834)
Increase in prepaid expenses and other current
assets........................................ (5,150) (103,594) (355,404)
(Decrease) increase in accounts payable.......... (89,132) 284,244 499,825
Decrease in due to related company............... (139,333) -- (75,763)
Increase in accrued payroll withholdings......... -- 94,522 319,938
Increase in other accrued liabilities............ 8,096 409,447 941,326
Increase in other liabilities.................... -- -- 134,570
-------------- -------------- -----------------------
Net cash used in operating activities......... (513,312) (970,951) (2,570,324)
INVESTING ACTIVITIES:
Purchases of equipment and fixtures.................. (16,194) (1,842,026) (3,333,610)
Payments for FCC licenses............................ (9,830,761) (8,430,530) (33,202,249)
FCC deposit.......................................... -- -- (500,000)
Increase (decrease) in accrued interest payable...... 738,621 (13,601) 5,022
-------------- -------------- -----------------------
Net cash used in investing activities......... (9,108,334) (10,286,157) (37,030,837)
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock and
collection of amounts receivable from
stockholders....................................... 9,246,257 14,147 28,000,000
Proceeds from the issuance of preferred stock and
collection of subscriptions receivable............. -- 15,602,250 37,918,376
Payments on debt..................................... -- (200,998) (200,998)
Proceeds from the issuance of note payable........... -- -- 65,000
Collection of notes receivable from stockholder...... -- -- 3,924,865
Deferred offering expenses, net of accrued
expenses........................................... -- (241,025) (241,025)
-------------- -------------- -----------------------
Net cash provided by financing activities..... 9,246,257 15,174,374 69,466,218
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (375,389) 3,917,266 29,865,057
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 763,878 25,947,791 --
-------------- -------------- -----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 388,489 $ 29,865,057 $29,865,057
============== ============== =====================
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING
INFORMATION:
Debt incurred to acquire FCC Licenses................ $ 72,741,121 -- $72,741,121
Debt incurred to acquire SMR Licenses................ -- $ 500,000 $ 500,000
Debt incurred to acquire certain fixed assets........ -- -- $ 995,139
Issuance of notes receivable to stockholder for
stock.............................................. $ 3,311,000 -- $ 9,200,000
Preferred stock accretion............................ -- $ 1,393,348 $ 2,189,547
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE> 134
PCS DEVELOPMENT CORPORATION
(A DEVELOPMENT STAGE COMPANY)
MARCH 31, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF INTERIM PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of the Company, all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
and the results of operations for the interim period presented herein have been
included. These unaudited financial statements should be read in conjunction
with the financial statements and the accompanying notes thereto as of and for
the period ended December 31, 1995, included elsewhere in this registration
statement.
F-20
<PAGE> 135
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED 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 OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE
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.......................... 11
Corporate Reorganization and
Structure........................... 19
Use of Proceeds....................... 19
Dividend Policy....................... 20
Capitalization........................ 21
Selected Consolidated Financial
Data................................ 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 28
Management............................ 44
Certain Transactions.................. 50
Principal Stockholders................ 52
Description of FCC Auction Benefits... 55
Description of Other Indebtedness..... 58
Description of the Units.............. 60
Description of the Notes.............. 61
Description of the Warrants........... 89
Description of Capital Stock.......... 93
Certain Federal Income Tax
Considerations...................... 105
Underwriting.......................... 110
Legal Matters......................... 111
Experts............................... 111
Available Information................. 112
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OFFERED HEREBY,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
UNITS
[PCSD LOGO]
$ OF
% SENIOR DISCOUNT NOTES DUE 2006
WITH WARRANTS TO PURCHASE
SHARES
OF CLASS B COMMON STOCK
---------------------------
PROSPECTUS
, 1996
---------------------------
LEHMAN BROTHERS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
CHASE SECURITIES INC.
TORONTO DOMINION SECURITIES
(USA) INC.
------------------------------------------------------
------------------------------------------------------
<PAGE> 136
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of fees and
expenses (other than underwriting discounts and commissions) payable by the
Registrant in connection with the issuance and distribution of the securities
registered hereby.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............................. $ 51,724
Printing and engraving........................................................... 250,000
Accountants' fees and expenses................................................... 100,000
Blue sky fees and expenses....................................................... 8,000
Counsel fees and expenses........................................................ 500,000
Rating services.................................................................. 100,000
Miscellaneous.................................................................... 490,276
----------
Total.................................................................. $1,500,000
=========
</TABLE>
- ---------------
*Estimate
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law (the "Delaware
Law"), a corporation may indemnify its directors, officers, employees and agents
and its former directors, officers, employees and agents and those who serve, at
the corporation's request, in such capacity with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The Delaware Law
provides, however, that such person must have acted in good faith and in a
manner such person reasonably believed to be in (or not opposed to) the best
interests of the corporation and, in the case of a criminal action, such person
must have had no reasonable cause to believe his or her conduct was unlawful. In
addition, the Delaware Law does not permit indemnification in an action or suit
by or in the right of the corporation, where such person has been adjudged
liable to the corporation, unless, and only to the extent that, a court
determines that such person fairly and reasonably is entitled to indemnity for
costs the court deems proper in light of liability adjudication. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Company's Restated Certificate of Incorporation and Restated By-laws,
as amended, provide for mandatory indemnification of directors and officers on
generally the same terms as permitted by the Delaware Law. Under the Restated
Certificate of Incorporation, the Company is required to advance expenses
incurred by an officer or director in defending any such action if the director
or officer undertakes to repay such amount if it is determined that the director
or officer is not entitled to indemnification.
The Underwriting Agreement provides for indemnification by the Underwriters
of the directors, officers and controlling persons of the Company against
certain liabilities, including liabilities under the Securities Act, under
certain circumstances.
II-1
<PAGE> 137
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In October, 1994 the Company sold 8,718 shares of Class A Common Stock and
28,482 shares of Class B Common Stock to its 26 founding stockholders for $1,000
per share. The purchasers were officers and directors of the Company, the Paging
Company Investors, members of the law firm that is the Company's special FCC
counsel, venture capital funds and certain accredited investors. A portion of
the consideration for this Common Stock remains payable by the subscribers upon
a board-approved schedule. The Company simultaneously issued warrants to Austin
Ventures and Marquette Ventures to purchase 692 and 621 shares of Class B Common
Stock, respectively. These issuances of Common Stock and warrants were exempt
from the registration requirements of the Securities Act pursuant to Section
4(2) of the Securities Act.
From October 31, 1994 until the date hereof, the Company has issued to
officers and employees options to purchase an aggregate of 7,452 shares of Class
B Common Stock. These issuances were exempt from the registration requirements
of the Securities Act pursuant to Section 4(2) and Rule 701 of the Securities
Act.
On November 10, 1995 the Company sold 24,667 shares of its Series A
Preferred Stock to 70 accredited investors for $2,250 per share. A portion of
the subscription price for these shares remains payable by the subscribers upon
a board-approved schedule. This issuance was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) and Regulation D of
the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement by and among PCS Development Corporation and Lehman
Brothers Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities,
Inc. and Toronto Dominion Securities (USA) Inc. as Underwriters.*
2.1 Subscription Agreement between PCS Development Corporation and PCSD Financial
Corporation.*
2.2 Subscription Agreement among PCSD Financial Corporation, PCSD Spectrum, Inc. and PCSD
Network, Inc.*
2.3 Application for Assignment of Authorization or Consent to Transfer of Control of
Licensee filed by Registrant with the FCC and FCC Consent to Assignment of Commercial
Radio Station Construction Permit or License with respect to the KNKV213 License.
2.4 Application for Assignment of Authorization or Consent to Transfer of Control of
Licensee filed by Registrant with the FCC and FCC Consent to Assignment of Commercial
Radio Station Construction Permit or License with respect to the KNKV219 License.
2.5 Application for Assignment of Authorization or Consent to Transfer of Control of
Licensee filed by Registrant with the FCC and FCC Consent to Assignment of Commercial
Radio Station Construction Permit or License with respect to the KNKV225 License.
2.6 Application for Assignment of Authorization or Consent to Transfer of Control of
Licensee filed by Registrant with the FCC and FCC Consent to Assignment of Commercial
Radio Station Construction Permit or License with respect to the KNKV231 License.
2.7 Application for Assignment of Authorization or Consent to Transfer of Control of
Licensee filed by Registrant with the FCC and FCC Consent to Assignment of Commercial
Radio Station Construction Permit or License with respect to the KNKV237 License.
3.1 Restated Certificate of Incorporation of PCS Development Corporation dated November
14, 1994.+
3.2 Certificate of Amendment of Restated Certificate of Incorporation of PCS Development
Corporation dated October 30, 1995.+
3.3 Certificate of Designations of Series A Preferred Stock and Series B Preferred Stock
of PCS Development Corporation dated November 9, 1995.+
</TABLE>
II-2
<PAGE> 138
<TABLE>
<C> <S>
3.4 Certificate of Correction of PCS Development Corporation dated January 29, 1996.+
3.5 Amended and Restated Bylaws of PCS Development Corporation.+
4.1 Form of Indenture (including form of Note) between PCS Development Corporation and
United States Trust Company of New York, as Trustee, relating to the Senior Discount
Notes due 2006 of PCS Development Corporation.*
4.2 PCS Development Corporation Stockholders Agreement dated November 14, 1994, by and
among the Registrant and each of the Stockholders.+
4.3 PCS Development Corporation Stockholders Agreement First Amendment dated March 1,
1995, by and among the Registrant and each of the Common Stockholders.+
4.4 Second Amendment to PCS Development Corporation Stockholders Agreement dated June 14,
1995, by and among the Registrant and each holder of Common Stock.+
4.5 Third Amendment to PCS Development Corporation Stockholders Agreement dated October
30, 1995, by and among the Registrant and each holder of Common Stock.+
4.6 Fourth Amendment to PCS Development Corporation Stockholders Agreement dated November
9, 1995, by and among the Registrant and each holder of Common Stock.+
4.7 Fifth Amendment to PCS Development Corporation Stockholders Agreement dated December
5, 1995, by and among the Registrant and each of the Common Stockholders and each
Purchaser of Series A Preferred Stock.+
4.8 Preferred Stockholders Agreement of PCS Development Corporation dated November 10,
1995, by and among the Registrant and each Purchaser of Series A Preferred Stock.+
4.9 PCS Development Corporation Subscription Agreement dated October 1, 1994, by and
among the Registrant and certain holders of the Common Stock.+
5.1 Opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to the Registrant, as
to the legality of the Securities being registered.*
5.2 Opinion of Lukas McGowan Nace & Gutierrez, Chartered, special FCC counsel to the
Registrant ("Lukas McGowan"), as to the dilution of the control group in connection
with the sale of Series A Preferred Stock.*
5.3 Opinion of Lukas McGowan as to the dilution of the control group in connection with
the sale of the Units.*
5.4 Opinion of Lukas McGowan as to certain communications related legal matters.*
8.1 Opinion of Nelson Mullins Riley & Scarborough, L.L.P., with respect to certain tax
matters.*
10.1 PCS Development Corporation Class B Common Stock Warrant Agreement dated October 31,
1994, among the Registrant and Austin Ventures III-A, L.P., Austin Ventures III-B,
L.P., Austin Ventures IV-A, L.P., and Austin Ventures IV-B, L.P.
10.2 First Amendment to PCS Development Corporation Class B Common Stock Warrant Agreement
dated October 31, 1994, between the Registrant and Austin Ventures III-A, L.P.,
Austin Ventures III-B, L.P., Austin Ventures IV-A, L.P., and Austin Ventures IV-B,
L.P.
10.3 PCS Development Corporation Class B Common Stock Warrant Agreement dated October 31,
1994, between the Registrant and Marquette Venture Partners II, L.P. and MVP II
Affiliates Fund, L.P.
10.4 First Amendment to PCS Development Corporation Class B Common Stock Warrant Agreement
dated October 31, 1994, between the Registrant and Marquette Venture Partners II,
L.P. and MVP II Affiliates Fund, L.P.
10.5 Employment Agreement dated October 31, 1994, between the Registrant and William D.
deKay.
10.6 First Amendment to Employment Agreement dated July, 1995, between the Registrant and
William D. deKay.
</TABLE>
II-3
<PAGE> 139
<TABLE>
<C> <S>
10.7 PCS Development Corporation Class B Common Stock Option Agreement dated October 31,
1994, between the Registrant and William D. deKay.
10.8 First Amendment to PCS Development Corporation Class B Common Stock Option Agreement
dated October 31, 1994, between the Registrant and William D. deKay.
10.9 Employment Agreement dated October 31, 1994, between the Registrant and Cecil L.
Duffie, Jr.
10.10 First Amendment to Employment Agreement dated July 25, 1995, between the Registrant
and Cecil L. Duffie, Jr.
10.11 PCS Development Corporation Class B Common Stock Option Agreement dated October 31,
1994, between the Registrant and Cecil L. Duffie, Jr.
10.12 First Amendment to PCS Development Corporation Class B Common Stock Option Agreement
dated October 31, 1994, between the Registrant and Cecil L. Duffie, Jr.
10.13 Employment Agreement dated March 31, 1995, between the Registrant and Harry L. Latham
III.
10.14 First Amendment to Employment Agreement dated July 25, 1995, between the Registrant
and Harry L. Latham III.
10.15 PCS Development Corporation Class B Common Stock Option Agreement dated March 31,
1995, between the Registrant and Harry L. Latham III.
10.16 First Amendment to PCS Development Corporation Class B Common Stock Option Agreement
dated March 31, 1995, between the Registrant and Harry L. Latham III.
10.17 Second Amendment to PCS Development Corporation Class B Common Stock Option Agreement
dated January 1, 1996, between the Registrant and Harry L. Latham III.
10.18 Employment Agreement dated January 13, 1995, between the Registrant and Jerry
Leonard.
10.19 First Amendment to Employment Agreement dated January 13, 1995, between the
Registrant and Jerry Leonard.
10.20 PCS Development Corporation Class B Common Stock Option Agreement dated January 13,
1995, between the Registrant and Jerry Leonard.
10.21 First Amendment to PCS Development Corporation Class B Common Stock Option Agreement
dated January 13, 1995, between the Registrant and Jerry Leonard.
10.22 Preferred Stockholders Registration Rights Agreement of PCS Development Corporation
dated November 10, 1995, by and among the Registrant and each Purchaser of Series A
Preferred Stock.+
10.23 Convertible Preferred Stock Purchase Agreement dated November 10, 1995, by and among
the Registrant and certain Purchasers named therein.+
10.24 First Amendment to Convertible Preferred Stock Purchase Agreement dated December 5,
1995, by and among the Registrant and each of the Purchasers of the Convertible
Preferred Stock.+
10.25 PCS Development Corporation Stockholders Agreement (included in Exhibit 4.2).
10.26 PCS Development Corporation Stockholders Agreement First Amendment (included in
Exhibit 4.3).
10.27 Second Amendment to PCS Development Corporation Stockholders Agreement (included in
Exhibit 4.4).
10.28 Third Amendment to PCS Development Corporation Stockholders Agreement (included in
Exhibit 4.5).
10.29 Fourth Amendment to PCS Development Corporation Stockholders Agreement (included in
Exhibit 4.6).
10.30 Fifth Amendment to PCS Development Corporation Stockholders Agreement (included in
Exhibit 4.7).
10.31 PCS Development Corporation Registration Rights Agreement dated November 14, 1994, by
and among the Registrant and each holder of Common Stock.+
</TABLE>
II-4
<PAGE> 140
<TABLE>
<C> <S>
10.32 First Amendment to PCS Development Corporation Registration Rights Agreement dated
October 30, 1995, by and among the Registrant and each holder of Common Stock.+
10.33 Second Amendment to PCS Development Corporation Registration Rights Agreement dated
November 9, 1995, by and among the Registrant and each holder of Common Stock.+
10.34 Preferred Stockholders Agreement (included in Exhibit 4.3).
10.35 Office Lease Agreement by and between 15 S. Main, Inc. and PCS Development
Corporation dated April 17, 1995, for the premises located at 15 S. Main St., Suite
810, Greenville, S.C. 29601+.
10.36 PCS Development Corporation Subscription Agreement (included in Exhibit 4.9).
10.37 Commitment Letter for $225 million Equipment Financing Credit Facility from The Chase
Manhattan Bank, N.A. as Administrative Agent, and from Chase Securities, Inc. as
Arranger, dated March 29, 1996.*
10.38 FCC Radio Station Authorization granted to PCS Development Corporation on February 3,
1995, for call sign KNKV213, File No. 00013-CN-L-95.+
10.39 FCC Radio Station Authorization granted to PCS Development Corporation on February 3,
1995, for call sign KNKV219, File No. 00019-CN-L-95.+
10.40 FCC Radio Station Authorization granted to PCS Development Corporation on February 3,
1995, for call sign KNKV225, File No. 00025-CN-L-95.+
10.41 FCC Radio Station Authorization granted to PCS Development Corporation on February 3,
1995, for call sign KNKV231, File No. 00031-CN-L-95.+
10.42 FCC Radio Station Authorization granted to PCS Development Corporation on February 3,
1995, for call sign KNKV237, File No. 00037-CN-L-95.+
10.43 Loan Agreement dated October 4, 1994, between the Registrant and Sloan
Communications, Inc.+
10.44 Promissory Note dated September 30, 1994, executed and delivered by Sloan
Communications, Inc. in favor of the Registrant.+
10.45 Promissory Note dated January 19, 1995, executed and delivered by Sloan
Communications, Inc. in favor of the Registrant.+
10.46 Promissory Note dated April 20, 1995, executed and delivered by Sloan Communications,
Inc. in favor of the Registrant.+
10.47 Promissory Note dated June 23, 1995, executed and delivered by Sloan Communications,
Inc. in favor of the Registrant.+
12.1 Statement regarding Computation of Ratio of Earnings to Fixed Charges.**
21.1 Subsidiary of PCS Development Corporation.+
23.1 Consent of Deloitte & Touche LLP.**
23.2 Consent of Nelson Mullins Riley & Scarborough, L.L.P. (included in the legal opinions
filed as Exhibits 5.1 and 8.1 hereto).*
24.1 Powers of Attorney (included on the signature page to the Registration Statement).
25.1 Statement of Eligibility of Trustee on Form T-1 (separately bound).*
99.1 Ruling from the FCC's Commercial Wireless Division dated 10/25/95 as to the dilution
of the control group to an amount less than 25% of the total equity.
</TABLE>
- ---------------
* To be filed by amendment.
** Revised from Exhibit filed on March 8, 1996.
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES. All information required by the
financial statement schedules is included in the notes to the financial
statements.
II-5
<PAGE> 141
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, 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 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, 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 whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that,
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the 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 of 1933, 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-6
<PAGE> 142
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Greenville,
State of South Carolina, on May 24, 1996.
PCS Development Corporation
By: /s/ CECIL L. DUFFIE, JR.
-----------------------------------
Cecil L. Duffie, Jr.
Vice Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on this 24th day of May, 1996.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
* Chairman of the Board
- ---------------------------------------------
Maceo K. Sloan
/s/ CECIL L. DUFFIE, Vice Chairman of the Board and Chief Executive
JR. Officer (principal executive officer)
- ---------------------------------------------
Cecil L. Duffie, Jr.
* President and Director
- ---------------------------------------------
William D. deKay
* Senior Vice President of Sales and Marketing
- ---------------------------------------------
Harry L. Latham, III
* Senior Vice President for Engineering and
- --------------------------------------------- Network Operations Director
Jerome C. Leonard
* Senior Vice President of Finance, Treasurer &
- --------------------------------------------- Chief Financial Officer (principal financial
Mark A. Moore and accounting officer)
* Director
- ---------------------------------------------
C.E. Baker, Jr.
* Director
- ---------------------------------------------
Justin F. Beckett
* Director
- ---------------------------------------------
R. Schorr Berman
* Director
- ---------------------------------------------
James E. Daverman
* Director
- ---------------------------------------------
Richard D. Frisbie
</TABLE>
II-7
<PAGE> 143
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
* Director
- ---------------------------------------------
Jeffery C. Garvey
* Director
- ---------------------------------------------
James D. Kallman
* Director
- ---------------------------------------------
Steven J. Lerner
* Director
- ---------------------------------------------
Malcolmn Pryor
* Director
- ---------------------------------------------
Stan F. Sech
* Director
- ---------------------------------------------
Pamela R. Simmons
* Director
- ---------------------------------------------
Elliott H. Singer
*By: /s/ CECIL L. DUFFIE,
JR.
- ---------------------------------------------
Cecil L. Duffie, Jr.
Attorney-in-fact
</TABLE>
II-8
<PAGE> 144
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------ ----------------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement by and among PCS Development Corporation and
Lehman Brothers Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
Chase Securities, Inc. and Toronto Dominion Securities (USA) Inc. as
Underwriters.*
2.1 Subscription Agreement between PCS Development Corporation and PCSD Financial
Corporation.*
2.2 Subscription Agreement among PCSD Financial Corporation, PCSD Spectrum, Inc.
and PCSD Network, Inc.*
2.3 Application for Assignment of Authorization or Consent to Transfer of Control
of Licensee filed by Registrant with the FCC and FCC Consent to Assignment of
Commercial Radio Station Construction Permit or License with respect to the
KNKV213 License.+
2.4 Application for Assignment of Authorization or Consent to Transfer of Control
of Licensee filed by Registrant with the FCC and FCC Consent to Assignment of
Commercial Radio Station Construction Permit or License with respect to the
KNKV219 License.+
2.5 Application for Assignment of Authorization or Consent to Transfer of Control
of Licensee filed by Registrant with the FCC and FCC Consent to Assignment of
Commercial Radio Station Construction Permit or License with respect to the
KNKV225 License.+
2.6 Application for Assignment of Authorization or Consent to Transfer of Control
of Licensee filed by Registrant with the FCC and FCC Consent to Assignment of
Commercial Radio Station Construction Permit or License with respect to the
KNKV231 License.+
2.7 Application for Assignment of Authorization or Consent to Transfer of Control
of Licensee filed by Registrant with the FCC and FCC Consent to Assignment of
Commercial Radio Station Construction Permit or License with respect to the
KNKV237 License.+
3.1 Restated Certificate of Incorporation of PCS Development Corporation dated
November 14, 1994.+
3.2 Certificate of Amendment of Restated Certificate of Incorporation of PCS
Development Corporation dated October 30, 1995.+
3.3 Certificate of Designations of Series A Preferred Stock and Series B
Preferred Stock of PCS Development Corporation dated November 9, 1995.+
3.4 Certificate of Correction of PCS Development Corporation dated January 29,
1996.+
3.5 Amended and Restated Bylaws of PCS Development Corporation.+
4.1 Form of Indenture (including form of Note) between PCS Development
Corporation and United States Trust Company of New York, as Trustee, relating
to the Senior Discount Notes due 2006 of PCS Development Corporation.*
4.2 PCS Development Corporation Stockholders Agreement dated November 14, 1994,
by and among the Registrant and each of the Stockholders.+
4.3 PCS Development Corporation Stockholders Agreement First Amendment dated
March 1, 1995, by and among the Registrant and each of the Common
Stockholders.+
4.4 Second Amendment to PCS Development Corporation Stockholders Agreement dated
June 14, 1995, by and among the Registrant and each holder of Common Stock.+
4.5 Third Amendment to PCS Development Corporation Stockholders Agreement dated
October 30, 1995, by and among the Registrant and each holder of Common
Stock.+
4.6 Fourth Amendment to PCS Development Corporation Stockholders Agreement dated
November 9, 1995, by and among the Registrant and each holder of Common
Stock.+
</TABLE>
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------ ----------------------------------------------------------------------------- -------------
<C> <S> <C>
4.7 Fifth Amendment to PCS Development Corporation Stockholders Agreement dated
December 5, 1995, by and among the Registrant and each of the Common
Stockholders and each Purchaser of Series A Preferred Stock.+
4.8 Preferred Stockholders Agreement of PCS Development Corporation dated
November 10, 1995, by and among the Registrant and each Purchaser of Series A
Preferred Stock.+
4.9 PCS Development Corporation Subscription Agreement dated October 1, 1994, by
and among the Registrant and certain holders of the Common Stock.+
5.1 Opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to the
Registrant, as to the legality of the Securities being registered.*
5.2 Opinion of Lukas McGowan Nace & Gutierrez, Chartered, special FCC counsel to
the Registrant ("Lukas McGowan"), as to the dilution of the control group in
connection with the sale of Series A Preferred Stock.*
5.3 Opinion of Lukas McGowan as to the dilution of the control group in
connection with the sale of the Units.*
5.4 Opinion of Lukas McGowan as to certain communications related legal matters.*
8.1 Opinion of Nelson Mullins Riley & Scarborough, L.L.P., with respect to
certain tax matters.*
10.1 PCS Development Corporation Class B Common Stock Warrant Agreement dated
October 31, 1994, among the Registrant and Austin Ventures III-A, L.P.,
Austin Ventures III-B, L.P., Austin Ventures IV-A, L.P., and Austin Ventures
IV-B, L.P.+
10.2 First Amendment to PCS Development Corporation Class B Common Stock Warrant
Agreement dated October 31, 1994, between the Registrant and Austin Ventures
III-A, L.P., Austin Ventures III-B, L.P., Austin Ventures IV-A, L.P., and
Austin Ventures IV-B, L.P.+
10.3 PCS Development Corporation Class B Common Stock Warrant Agreement dated
October 31, 1994, between the Registrant and Marquette Venture Partners II,
L.P. and MVP II Affiliates Fund, L.P.+
10.4 First Amendment to PCS Development Corporation Class B Common Stock Warrant
Agreement dated October 31, 1994, between the Registrant and Marquette
Venture Partners II, L.P. and MVP II Affiliates Fund, L.P.+
10.5 Employment Agreement dated October 31, 1994, between the Registrant and
William D. deKay.+
10.6 First Amendment to Employment Agreement dated July, 1995, between the
Registrant and William D. deKay.+
10.7 PCS Development Corporation Class B Common Stock Option Agreement dated
October 31, 1994, between the Registrant and William D. deKay.+
10.8 First Amendment to PCS Development Corporation Class B Common Stock Option
Agreement dated October 31, 1994, between the Registrant and William D.
deKay.+
10.9 Employment Agreement dated October 31, 1994, between the Registrant and Cecil
L. Duffie, Jr.+
10.10 First Amendment to Employment Agreement dated July 25, 1995, between the
Registrant and Cecil L. Duffie, Jr.+
10.11 PCS Development Corporation Class B Common Stock Option Agreement dated
October 31, 1994, between the Registrant and Cecil L. Duffie, Jr.+
10.12 First Amendment to PCS Development Corporation Class B Common Stock Option
Agreement dated October 31, 1994, between the Registrant and Cecil L. Duffie,
Jr.+
10.13 Employment Agreement dated March 31, 1995, between the Registrant and Harry
L. Latham III.+
</TABLE>
<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------ ----------------------------------------------------------------------------- -------------
<C> <S> <C>
10.14 First Amendment to Employment Agreement dated July 25, 1995, between the
Registrant and Harry L. Latham III.+
10.15 PCS Development Corporation Class B Common Stock Option Agreement dated March
31, 1995, between the Registrant and Harry L. Latham III.+
10.16 First Amendment to PCS Development Corporation Class B Common Stock Option
Agreement dated March 31, 1995, between the Registrant and Harry L. Latham
III.+
10.17 Second Amendment to PCS Development Corporation Class B Common Stock Option
Agreement dated January 1, 1996, between the Registrant and Harry L. Latham
III.+
10.18 Employment Agreement dated January 13, 1995, between the Registrant and Jerry
Leonard.+
10.19 First Amendment to Employment Agreement dated January 13, 1995, between the
Registrant and Jerry Leonard.+
10.20 PCS Development Corporation Class B Common Stock Option Agreement dated
January 13, 1995, between the Registrant and Jerry Leonard.+
10.21 First Amendment to PCS Development Corporation Class B Common Stock Option
Agreement dated January 13, 1995, between the Registrant and Jerry Leonard.+
10.22 Preferred Stockholders Registration Rights Agreement of PCS Development
Corporation dated November 10, 1995, by and among the Registrant and each
Purchaser of Series A Preferred Stock.+
10.23 Convertible Preferred Stock Purchase Agreement dated November 10, 1995, by
and among the Registrant and certain Purchasers named therein.+
10.24 First Amendment to Convertible Preferred Stock Purchase Agreement dated
December 5, 1995, by and among the Registrant and each of the Purchasers of
the Convertible Preferred Stock.+
10.25 PCS Development Corporation Stockholders Agreement (included in Exhibit 4.2).
10.26 PCS Development Corporation Stockholders Agreement First Amendment (included
in Exhibit 4.3).
10.27 Second Amendment to PCS Development Corporation Stockholders Agreement
(included in Exhibit 4.4).
10.28 Third Amendment to PCS Development Corporation Stockholders Agreement
(included in Exhibit 4.5).
10.29 Fourth Amendment to PCS Development Corporation Stockholders Agreement
(included in Exhibit 4.6).
10.30 Fifth Amendment to PCS Development Corporation Stockholders Agreement
(included in Exhibit 4.7).
10.31 PCS Development Corporation Registration Rights Agreement dated November 14,
1994, by and among the Registrant and each holder of Common Stock.+
10.32 First Amendment to PCS Development Corporation Registration Rights Agreement
dated October 30, 1995, by and among the Registrant and each holder of Common
Stock.+
10.33 Second Amendment to PCS Development Corporation Registration Rights Agreement
dated November 9, 1995, by and among the Registrant and each holder of Common
Stock.+
10.34 Preferred Stockholders Agreement (included in Exhibit 4.3).
10.35 Office Lease Agreement by and between 15 S. Main, Inc. and PCS Development
Corporation dated April 17, 1995, for the premises located at 15 S. Main St.,
Suite 810, Greenville, S.C. 29601+.
10.36 PCS Development Corporation Subscription Agreement (included in Exhibit 4.9).
</TABLE>
<PAGE> 147
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF EXHIBITS NUMBERED PAGE
- ------ ----------------------------------------------------------------------------- -------------
<C> <S> <C>
10.37 Commitment Letter for $225 million Equipment Financing Credit Facility from
The Chase Manhattan Bank, N.A. as Administrative Agent, and from Chase
Securities, Inc. as Arranger, dated March 29, 1996.*
10.38 FCC Radio Station Authorization granted to PCS Development Corporation on
February 3, 1995, for call sign KNKV213, File No. 00013-CN-L-95.+
10.39 FCC Radio Station Authorization granted to PCS Development Corporation on
February 3, 1995, for call sign KNKV219, File No. 00019-CN-L-95.+
10.40 FCC Radio Station Authorization granted to PCS Development Corporation on
February 3, 1995, for call sign KNKV225, File No. 00025-CN-L-95.+
10.41 FCC Radio Station Authorization granted to PCS Development Corporation on
February 3, 1995, for call sign KNKV231, File No. 00031-CN-L-95.+
10.42 FCC Radio Station Authorization granted to PCS Development Corporation on
February 3, 1995, for call sign KNKV237, File No. 00037-CN-L-95.+
10.43 Loan Agreement dated October 4, 1994, between the Registrant and Sloan
Communications, Inc.+
10.44 Promissory Note dated September 30, 1994, executed and delivered by Sloan
Communications, Inc. in favor of the Registrant.+
10.45 Promissory Note dated January 19, 1995, executed and delivered by Sloan
Communications, Inc. in favor of the Registrant.+
10.46 Promissory Note dated April 20, 1995, executed and delivered by Sloan
Communications, Inc. in favor of the Registrant.+
10.47 Promissory Note dated June 23, 1995, executed and delivered by Sloan
Communications, Inc. in favor of the Registrant.+
12.1 Statement regarding Computation of Ratio of Earnings to Fixed Charges.+
21.1 Subsidiary of PCS Development Corporation.+
23.1 Consent of Deloitte & Touche LLP.**
23.2 Consent of Nelson Mullins Riley & Scarborough, L.L.P. (included in the legal
opinions filed as Exhibits 5.1 and 8.1 hereto).*
24.1 Powers of Attorney (included on the signature page to the Registration
Statement).
25.1 Statement of Eligibility of Trustee on Form T-1 (separately bound).*
27 Financial Data Schedule.
99.1 Ruling from the FCC's Commercial Wireless Division dated 10/25/95 as to the
dilution of the control group to an amount less than 25% of the total
equity.+
</TABLE>
- ---------------
* To be filed by amendment.
** Revised from Exhibit filed on May 2, 1996.
+ Previously filed.
<PAGE> 1
EXHIBIT 12.1
PCS DEVELOPMENT CORPORATION
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
PERIOD
SEPTEMBER 21, 1994 THREE MONTHS ENDED
(DATE OF MARCH 31,
INCORPORATION) YEAR ENDED ---------------------
TO DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996
--------------------- ----------------- -------- ----------
<S> <C> <C> <C> <C>
Earnings:
Net loss............................... $ 375,103 $ 2,080,711 $190,387 $1,655,573
Add:
Interest on indebtedness............. -- -- -- --
Accretion of preferred stock
dividend.......................... -- -- -- --
-------- ---------- -------- ----------
Total Earnings............... $ 375,103 $ 2,080,711 $190,387 $1,655,573
======== ========== ======== ==========
Fixed Charges:
Interest on indebtedness............. -- 4,848,677 738,621 1,386,867
Accretion of preferred stock
dividends......................... -- 796,199 -- 1,393,348
-------- ---------- -------- ----------
Total Fixed Charges.......... $ 0 $ 5,644,876 $738,621 $2,780,215
======== ========== ======== ==========
Deficiency in Earnings................. $ 375,103 $ 7,725,587 $929,008 $4,435,788
======== ========== ======== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement
of PCS Development Corporation on Form S-1 of our report dated February 16, 1996
(except with respect to Note 12, as to which the date is April 25, 1996),
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Deloitte & Touche LLP
/s/ Deloitte & Touche LLP
Greenville, South Carolina
May 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1994
<PERIOD-END> MAR-31-1996 DEC-31-1995 DEC-31-1994
<CASH> 29,865,057 25,947,791 763,878
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 30,882,887 26,783,944 786,913
<PP&E> 4,128,866<F1> 2,360,057<F1> 13,941
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 142,099,425 126,698,359 10,053,954
<CURRENT-LIABILITIES> 2,470,803 1,410,081 490,541
<BONDS> 73,762,198 73,382,678 0
40,107,923 23,112,325 0
0 0 0
<COMMON> 37,200 37,200 37,200
<OTHER-SE> 25,586,731 28,621,505 9,526,213
<TOTAL-LIABILITY-AND-EQUITY> 142,099,425 126,698,359 10,053,954
<SALES> 0 0 0
<TOTAL-REVENUES> 0 0 0
<CGS> 0 0 0
<TOTAL-COSTS> 2,070,517 2,875,116 398,976
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (414,944) (794,405) (23,873)
<INCOME-PRETAX> (1,655,573) (2,080,711) (375,103)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,655,573) (2,080,711) (375,103)
<EPS-PRIMARY> (81.96) (77.34) (10.08)
<EPS-DILUTED> (81.96) (77.34) (10.08)
<FN>
<F1>THE ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
