<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1997
REGISTRATION NO. 333-5829
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NEXTWAVE TELECOM INC.
(Exact name of registrant as specified in its charter)
------------------------
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<S> <C> <C>
DELAWARE 4812 33-0663509
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
6256 GREENWICH DRIVE, SUITE 500
SAN DIEGO, CALIFORNIA 92122
(619) 453-2828
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
NEXTWAVE WIRELESS INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4812 33-0717550
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
6256 GREENWICH DRIVE, SUITE 500
SAN DIEGO, CALIFORNIA 92122
(619) 453-2828
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
Allen B. Salmasi
Chairman, President and Chief Executive Officer
NextWAVE TELECOM INC. AND NEXTWAVE Wireless Inc.
6256 Greenwich Drive, Suite 500
San Diego, California 92122
(619) 453-2828
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C> <C>
SCOTT N. WOLFE, ESQ. FRANK A. CASSOU, ESQ. MATTHEW J. MALLOW, ESQ.
LATHAM & WATKINS SENIOR VICE PRESIDENT AND GENERAL COUNSEL MARK C. SMITH, ESQ.
701 "B" STREET, SUITE 2100 NEXTWAVE TELECOM INC. SKADDEN, ARPS, SLATE,
SAN DIEGO, CALIFORNIA 92101 6256 GREENWICH DRIVE, SUITE 500 MEAGHER & FLOM LLP
(619) 236-1234 SAN DIEGO, CALIFORNIA 92122 919 THIRD AVENUE
(619) 453-2828 NEW YORK, NEW YORK 10022
(212) 735-3000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES 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: [X]
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 of 1933, 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. [ ]
<TABLE>
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE(9)
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Senior Note Units(1)......................................................
Senior Notes due 2007(2)..................................................
Guarantee of Senior Notes due 2007(2)(3)
Warrants to purchase shares of Series B Common Stock, par value $.0001 per
share(2)................................................................
Series B Common Stock, par value $.0001 per share(4)......................
Senior Discount Note Units(5).............................................
Senior Discount Notes due 2007(6).........................................
Guarantee of Senior Discount Notes due 2007(6)(7)
Warrants to purchase shares of Series B Common Stock, par value $.0001 per
share(6)................................................................
Series B Common Stock, par value $.0001 per share(8)......................
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</TABLE>
(1) Each consisting of $1,000 principal amount of % Senior Notes due 2007
and Warrants to purchase one share of Series B Common Stock, par value
$.0001 per share.
(2) Included in Senior Note Units.
(3) The Senior Notes issued by NextWaveTelecom Inc. will be guaranteed by
NextWave Wireless Inc.
(4) This registration statement covers such presently indeterminable number of
shares of Series B Common Stock, par value $.0001 per share, as may be
issued upon exercise of the Warrants.
(5) Each consisting of $1,000 principal amount at maturity of % Senior
Discount Notes due 2007 and Warrants to purchase one share of Series B
Common Stock, par value $.0001 per share.
(6) Included in Senior Discount Note Units.
(7) The Senior Discount Notes issued by NextWave Telecom Inc. will be guaranteed
by NextWave Wireless Inc.
(8) This registration statement covers such presently indeterminable number of
shares of Series B Common Stock, par value $.0001 per share, as may be
issued upon exercise of the Warrants.
(9) $137,932 has been previously paid.
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 1997
PROSPECTUS
$
--------------------
NEXTWAVE TELECOM INC.
SENIOR NOTE UNITS
% SENIOR NOTES DUE 2007 AND
[ ] WARRANTS TO PURCHASE ONE SHARE OF SERIES B COMMON STOCK
SENIOR DISCOUNT NOTE UNITS
% SENIOR DISCOUNT NOTES DUE 2007 AND
LOGO [ ] WARRANTS TO PURCHASE ONE SHARE OF SERIES B COMMON STOCK
------------------------
The Senior Note Units (each a "Senior Note Unit") offered hereby consist of
$ principal amount of % Senior Notes due 2007 (the "Senior Notes")
to be issued by NextWave Telecom Inc. (the "Company") and Warrants (the
"Senior Note Warrants") each Senior Note Unit consisting of $1,000 principal
amount of Senior Notes and Senior Note Warrants to purchase one share of
Series B Common Stock of the Company, par value $0.0001 per share (the "Series B
Common Stock"). The Senior Discount Note Units (each a "Senior Discount Note
Unit" and together with the Senior Note Units, the "Units") offered hereby
consist of $ principal amount at maturity of % Senior Discount Notes
due 2007 (the "Senior Discount Notes" and, together with the Senior Notes, the
"Notes") to be issued by the Company and Warrants (the "Senior Discount Note
Warrants" and, together with the Senior Note Warrants, the "Warrants") each
Senior Discount Note Unit consisting of $1,000 principal amount at maturity of
Senior Discount Notes and Senior Discount Note Warrants to purchase one share
of Series B Common Stock of the Company. The Notes and Warrants will be
separately transferable on the earliest of: (i) days after the date of
original issue of the Notes and Warrants; (ii) in the event of a Change of
Control (as defined herein), the date the Company mails notice thereof; or (iii)
such earlier date as may be determined by CIBC Wood Gundy Securities Corp.
Interest on the Senior Notes will be payable in cash semi-annually on each
and , commencing , 1997. The Company will place
$ of the net proceeds from the sale of the Senior Notes, representing
funds together with the proceeds from the investment thereof that will be
sufficient to pay three years' interest on the Senior Notes, into an Escrow
Account to be held by the Escrow Agent (each as defined herein) for the benefit
of the holders of the Senior Notes to pay interest on the Senior Notes. The
issue price of each Senior Discount Note represents a yield to maturity of %
(computed on a semi-annual bond equivalent basis) calculated from ,
1997. Cash interest will not accrue on the Senior Discount Notes prior to
, 2002. Commencing , 2003, cash interest on the Senior
Discount Notes will be payable on and of each year at
a rate of % per annum. See "Description of the Notes" and "Certain Federal
Income Tax Considerations."
(continued on next page)
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE UNITS.
------------------------
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
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<S> <C> <C> <C> <C>
OFFENSE.
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</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT UNDERWRITING
AT MATURITY OF PRICE TO DISCOUNTS AND PROCEEDS TO
SENIOR NOTES PUBLIC(1) COMMISSIONS(2) THE COMPANY(3) (4)
<S> <C> <C> <C> <C>
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Per Senior Note Unit..................... $ 1,000 $ $ $
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Total Senior Note Units.................. $ $ $ $
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</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT UNDERWRITING
AT MATURITY OF PRICE TO DISCOUNTS AND PROCEEDS TO
SENIOR DISCOUNT NOTES PUBLIC(1) COMMISSIONS(2) COMPANY(3)
<S> <C> <C> <C> <C>
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Per Senior Discount Note Unit............ $ 1,000 $ $ $
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Total Senior Discount Note Units......... $ $ $ $
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(1) Plus accrued interest, if any, in the case of the Senior Notes, and accrued
original issue discount, if any, in the case of the Senior Discount Notes,
in each case from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined herein)
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(3) Before deducting the expenses of the Units Offerings payable by the Company,
estimated to be $ .
(4) Includes $ that will be placed in the Escrow Account, representing
funds together with the proceeds from the investment thereof that will be
sufficient to pay three years' interest on the Senior Notes. See
"Description of the Units."
The Units are offered by the Underwriters named herein, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to certain
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of the Units will be made on or about , 1997
at the offices of CIBC Wood Gundy Securities Corp., New York, New York.
CIBC WOOD GUNDY SECURITIES CORP. SMITH BARNEY INC.
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
ING BARINGS
OPPENHEIMER & CO., INC.
------------------------
The date of this Prospectus is , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 3
(continued from cover)
The offering of the Units (the "Units Offering") is being made concurrently
with an offering by the Company (the "Equity Offering" and, together with the
Units Offering, the "Offerings") of units consisting of one share of
Series B Common Stock and one Contingent Transfer Right (a "CTR"). See
"Description of Capital Stock." Each of the Offerings is conditioned upon the
other.
The Notes will be redeemable at the option of the Company in whole or in
part, on or after , 2002, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon to the date of redemption. In
addition, the Company, at its option, may redeem, at any time and from time to
time prior to , 2000, up to 35% of the originally issued
principal amount of the Senior Notes (including the Senior Notes issued in
connection with the redemption of the Bridge Notes (as defined herein)) at a
redemption price equal to % of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon to the redemption date and up to 35% of the
originally issued principal amount at maturity of the Senior Discount Notes
(including the Senior Discount Notes issued in connection with the redemption of
the Bridge Notes) at a redemption price equal to % of the Accreted Value
(as defined herein) at the redemption date of the Senior Discount Notes so
redeemed, in each case, out of (i) the Net Proceeds (as defined herein) of one
or more Public Equity Offerings (as defined herein) or (ii) a sale of Series B
Common Stock to a Strategic Equity Investor (as defined herein), in either case
for gross proceeds of at least $150 million; provided that not less than 65% of
the originally issued principal amount of Senior Notes (including the Senior
Notes issued in connection with the redemption of the Bridge Notes) and 65% of
the originally issued principal amount at maturity of the Senior Discount Notes
(including the Senior Discount Notes issued in connection with the redemption of
the Bridge Notes) remains outstanding immediately after giving effect to such
redemption.
The Company has the right to prepay an aggregate of $93 million of
principal amount of the Bridge Notes by issuing Senior Note Units and
Senior Discount Note Units. The Company currently intends to do so by issuing
$
aggregate principal amount of Senior Notes and $ aggregate principal amount
at maturity of Senior Discount Notes.
Upon a Change of Control, the Company will be required to make an offer to
purchase all outstanding Notes at a purchase price equal to (i) 101% of the
principal amount thereof, in the case of the Senior Notes, plus accrued and
unpaid interest, if any, thereon to the date of purchase and (ii) (a) 101% of
the Accreted Value thereof, in the case of the Senior Discount Notes, if
purchased on or before , 2002, and (b) 101% of the principal
amount at maturity of the Senior Discount Notes, plus accrued and unpaid
interest, if any, thereon, if purchased after , 2002.
The Company is a holding company with limited assets of its own that
conducts substantially all of its business through its subsidiaries. The Notes
will represent general senior unsecured obligations of the Company except that
the Senior Notes will be secured by a first priority lien on the Escrow Account.
The Notes will be fully and unconditionally guaranteed (the "Guarantees") by
NextWave Wireless Inc. ("Wireless"), as to payment of principal, premium, if
any, and interest. The Guarantees, which will be enforceable only under certain
conditions, will be subordinated to all existing and future Indebtedness (as
defined herein) of Wireless incurred pursuant to Vendor Financing Arrangements
(as defined herein), will be senior in respect of all Subordinated Indebtedness
(as defined herein) of Wireless and will rank pari passu with respect to all
other Indebtedness of Wireless. The Notes will be effectively subordinated to
all liabilities of the Company's operating subsidiaries, including trade
payables and indebtedness that may be incurred under Vendor Financing
Arrangements. In addition, the Company's non-operating subsidiaries will be
obligated for approximately $4.4 billion in U.S. Government Financing (as
defined herein) which will be secured by the Company's licenses. As of
, 1997, after giving pro forma effect to the Offerings and the
U.S. Government Financing and the application of the net proceeds therefrom, but
without giving effect to the indebtedness expected to be incurred by the
Company's subsidiaries under certain vendor and other financing arrangements,
the Company's subsidiaries would have had approximately $ of
indebtedness outstanding, and the holders of the Notes would have been
effectively subordinated in right of payment to $ of such indebtedness.
Such subsidiaries are expected to incur substantial additional indebtedness in
the next several years.
Each Warrant will entitle the holder thereof to acquire, on or after the
Exercisability Date (as defined herein) and prior to , 2007, one
share of Series B Common Stock at a price equal to $ per share, subject
to adjustment in certain circumstances.
<PAGE> 4
[SHADED MAP OF U.S. SHOWING COMPANY'S MARKETS APPEARS HERE]
<TABLE>
<CAPTION>
REGIONS ANCHOR CITIES POPS
- ------------------------------------ ---------------------------------------------------------------- ------------
<S> <C> <C>
Western............................. Los Angeles; San Francisco; San Diego; Sacramento; Las Vegas 28,324,552
New York Metro...................... New York City; Albany; New Haven 20,868,019
Midwest............................. Detroit; Cleveland-Akron; Pittsburgh; Cincinnati; Columbus;
Louisville; Indianapolis; Dayton 20,009,304
Mid-Atlantic........................ Washington, D.C.; Baltimore; Charlotte; Norfolk; Greensboro;
Richmond 16,452,851
Southwest........................... Dallas-Ft. Worth; Houston; San Antonio; Austin 15,441,001
Great Lakes......................... Chicago; Minneapolis-St. Paul; Milwaukee 14,336,451
Mid-America......................... St. Louis; Denver; Kansas City; Salt Lake City; Oklahoma City 12,029,134
Southeast........................... Atlanta; Tampa; Orlando; Jacksonville 11,238,259
Philadelphia........................ Philadelphia 10,120,196
New England......................... Boston; Providence 8,618,385
Northwest........................... Seattle-Tacoma; Portland 5,572,974
------------
163,011,126
==========
</TABLE>
For information regarding the Company's regions and the markets contained
therein, see "Business -- Bidding Strategy and Markets." The table above
reflects markets for which the Company has been awarded licenses by the FCC as
well as markets for which the Company was named the winning bidder in the FCC's
D, E and F-Block Auctions. The licenses for the D, E and F-Block Markets have
not been awarded by the FCC. See "Risk Factors -- Uncertainty of Final Awards of
Licenses from D, E and F-Block Auctions; Litigation."
------------------------
NextWave Telecom(TM) and TELE*Code(TM) are trademarks of the Company. MCI
One(TM) and Network MCI One(SM) are trademarks and service marks, respectively,
of MCI Telecommunications Corporation. Oracle(TM) is a trademark of Oracle
Corporation.
------------------------
IN CONNECTION WITH THE UNITS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE UNITS,
NOTES AND WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER THE COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements (including the notes
thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes no exercise of the over-allotment option
granted in connection with the Equity Offering. Pursuant to an irrevocable
election made by the holders of a majority of the shares of Series A Common
Stock, upon consummation of the Equity Offering each share of Series A Common
Stock (other than 3,000 shares) will be converted into shares of
Series B Common Stock and shares of Series C Common Stock and, for
purposes of this Prospectus, all shares of Series A Common Stock (other than
3,000 shares) are assumed to be so converted (the "Recapitalization"). Pursuant
to the Company's Amended and Restated Certificate of Incorporation, all other
rights to acquire shares of Series C Common Stock will be converted into rights
to acquire shares of Series B Common Stock upon consummation of the Equity
Offering and, for purposes of this Prospectus, all such other rights to acquire
shares of Series C Common Stock are assumed to be converted into rights to
acquire shares of Series B Common Stock. The Series A Common Stock, the Series B
Common Stock and the Series C Common Stock are referred to collectively as the
"Common Stock." Certain statements in this Prospectus that are not historical
fact constitute "forward-looking statements." Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results of the Company to be materially different from results
expressed or implied by such forward-looking statements. As used in this
Prospectus, unless the context otherwise requires, "NextWave" or the "Company"
refers to NextWave Telecom Inc. and its subsidiaries. When used herein with
respect to a given area, the term "POPs" refers to the aggregate number of
persons located in such area, based on the 1996 estimated U.S. population data
prepared by Equifax Marketing Decision Systems, Inc. See "Glossary of Selected
Terms" for definitions of certain terms used in this Prospectus.
THE COMPANY
NextWave Telecom Inc. ("NextWave") was formed in May 1995 to build and
operate Personal Communications Services ("PCS") networks. In January 1997,
NextWave was granted PCS licenses representing approximately 110 million POPs
with respect to 63 Basic Trading Areas ("BTAs") pursuant to the C-Block Auctions
held by the Federal Communications Commission ("FCC"). Upon final award of the
licenses pursuant to the FCC's D, E and F-Block Auctions which were completed in
January 1997, in which the Company was declared the winning bidder by the FCC
for 32 BTAs representing approximately 53 million POPs, NextWave's wireless
national geographic coverage ("footprint") will cover approximately 163 million
POPs in 95 BTAs (collectively the "Markets"). As a result, NextWave believes it
has the third largest number of licensed POPs among cellular and PCS licensees
in the United States after AT&T Wireless Services ("AT&T") and Sprint PCS
("Sprint"). NextWave's aggregate FCC license cost is approximately $4.9 billion.
NextWave intends to operate as a carriers' carrier, building and operating
digital networks utilizing Code Division Multiple Access ("CDMA") technology
through which the Company will provide advanced wireless communications services
to a broad range of customers. The Company has entered into agreements with a
variety of communications providers, including an agreement with MCI
Telecommunications Corporation ("MCI"), pursuant to which MCI has agreed,
subject to certain conditions, to purchase a minimum of 10 billion minutes of
use ("MOUs") over a 10-year term. The Company has raised an aggregate of
approximately $600 million in private capital from over 70 major consumer
electronics and network equipment manufacturers, telecommunications service
providers, financial institutions and others to finance the acquisition of its
PCS licenses and has received over $1.4 billion in vendor financing commitments
to commence the build-out of its PCS network.
NextWave believes that its Markets are among the most attractive markets in
the United States with some of the most densely populated cities, including New
York, Los Angeles, Chicago, Philadelphia, San Francisco, Boston, Washington,
D.C., Dallas, Houston and Detroit. Inclusive of its D, E, and F-Block licenses,
the Company will hold PCS licenses in each of the 10 most populous BTAs, 28 of
the top 30 BTAs and 40 of the top 50 BTAs. The Markets are also generally
characterized by demographics that would suggest higher than average use of
wireless telephony, including high disposable income levels, long average
commute times
3
<PAGE> 6
and significant percentages of dual household wage earners. The Company believes
that the high average population density characterized by NextWave's Markets
should lead to a lower average capital requirement associated with network
deployment relative to competitors that may be awarded licenses covering less
densely populated markets. See "Business -- Bidding Strategy and Markets."
The Company believes the demand for wireless telecommunications will
continue to grow and that PCS will capture a significant share of the wireless
market. Currently, wireless subscriber penetration in the United States is
estimated to be 14% and, according to Paul Kagan Associates, Inc., is expected
to be approximately 54% by 2006. As reported by the Cellular Telecommunications
Industry Association ("CTIA"), the compound annual growth rate of cellular
subscribers exceeded 45% from 1993 through 1995. Despite this rapid growth in
the number of cellular subscribers, wireless MOUs represented approximately 1%
of total telecommunications traffic. The Company believes that demand for
wireless service is highly elastic and that the anticipated lower cost and
higher quality of PCS service will stimulate further growth in the wireless
market.
The Company has targeted several categories of customers, including long
distance companies, local exchange carriers ("LECs"), competitive local exchange
carriers ("CLECs"), other major PCS retailers, cellular service providers,
utilities, cable television system operators and independent resellers, as well
as retailers and manufacturers of mass-market consumer products and services. By
purchasing MOUs from NextWave, these companies will be able to offer
competitively priced wireless services under their own brand names without
substantial capital investment and without purchasing MOUs from direct
competitors. Additionally, customers will retain telephone number ownership and
receive favorable interconnection provisions, both of which are essential to
facilitate the integration of wireless services purchased from NextWave with
their existing platforms to provide seamless services to their customers.
In August 1996, the Company entered into an Airtime Sale Agreement with MCI
(the "MCI Agreement"), pursuant to which MCI has agreed to purchase a minimum of
10 billion MOUs from the Company over the 10-year term, subject to certain
conditions. Under the MCI Agreement, the Company will provide MCI with Full
Mobility Services (mobile wireless service) and Area-Based Services (wireless
local loop). The interconnection of the Company's network with MCI's intelligent
network will enable MCI to integrate or bundle wireless services with other MCI
communications services, such as long distance, local exchange and paging, as
well as other features offered through MCI's intelligent services platform. In
connection with the MCI Agreement, the Company granted MCI warrants to purchase
shares of Series B Common Stock representing up to 12% of the Company's Common
Stock on a Fully-Diluted Basis (as defined in the Warrant Agreement between the
Company and MCI (the "MCI Warrant Agreement")) and has agreed to grant MCI
additional warrants upon MCI's exceeding certain MOU purchase milestones, up to
an aggregate of 25% of the Company's Common Stock on a Fully-Diluted Basis. See
"Description of Capital Stock -- Other Options, Warrants and Convertible
Debt -- MCI Warrants" and "Business -- MCI Agreement."
BUSINESS STRATEGY
NextWave intends to build and operate digital networks through which the
Company will provide advanced wireless communications services. The principal
components of the Company's business strategy are:
- - OPERATE AS A CARRIERS' CARRIER. By operating as a wholesaler, NextWave will
not market directly to consumers, but instead plans to sell MOUs on its
networks to branded wireless service providers, which in turn will sell to
consumers. Thus, NextWave's wholesale penetration of the wireless market will
equal the aggregate airtime purchases from NextWave by multiple branded
retailers. By leveraging the marketing and distribution resources of branded
wireless service providers, NextWave will not have to incur the significant
upfront costs associated with marketing, sales and the establishment of a
consumer brand name. The Company believes that its carriers' carrier strategy
will be attractive to a broad range of potential customers for several
reasons, including:
Minimal Network Capital Costs. Through reselling NextWave's MOUs, the
Company's customers will not be required to purchase licenses or make the
capital investments in network infrastructure equipment required to establish
a digital wireless network.
4
<PAGE> 7
Economies of Scale. The Company believes its customers will be able to
take advantage of the benefits of scale which the Company believes are
inherent in its high volume operating strategy.
Provision of Seamless Network Services. NextWave intends to design its
digital wireless network architecture to allow PCS service providers to
interconnect their networks and existing platforms with the Company's network
and offer seamless service interfaces to their customers. In this
configuration, PCS service providers will be able to retain control over
customer information while providing uniform features and services throughout
their markets.
Leverage Branding and Distribution. By removing the need to build and
operate wireless networks, NextWave will enable its customers to focus their
resources on branding, distribution, billing and customer service. The Company
believes that this will enable and encourage potential wireless resellers with
strong marketing skills and existing customer bases to profitably enter the
wireless resale business where they were previously discouraged by
insufficient margins and the inability to integrate wireless services with
their existing platforms and operations.
NextWave is a Supplier, not a Competitor. NextWave's carriers' carrier
strategy affords its customers the opportunity to purchase services from a
network provider that is not a direct competitor in the branded retail market.
Given the required strategic and financial commitment associated with
interconnection and integration of wireless services, the Company believes
this will be an important distinction between NextWave and its competitors.
Facilitate Integrated, Bundled Service Offerings. The Company intends to
design its digital wireless network architecture to enable its customers to
easily add wireless services to integrated product offerings. The Company
believes that the movement among major branded providers, such as MCI, Sprint
and AT&T, to integrate and bundle their services will accelerate the trend
toward greater product integration and potentially reduce overall churn for
those customers that purchase integrated services.
- - ESTABLISH NATIONAL NETWORK. NextWave believes that its 163 million POPs will
represent the third largest number of licensed POPs among cellular and PCS
licensees in the United States. NextWave's licensed POPs, together with POPs
in BTAs for which the Company was the winning bidder in the D, E and F-Block
Auctions, represent over 65% of the U.S. population. The Company believes that
the breadth of its footprint and the demographics of its Markets enhance its
attractiveness to potential PCS service providers and will reduce expensive
out-of-region roaming charges. Additionally, NextWave intends to selectively
expand its footprint through strategic alliances or resale agreements with
other wireless service providers wherever needed.
- - PROVIDE LOW COST MOUS. NextWave will seek to be a low cost operator of PCS
networks by pursuing a high volume wholesale strategy and by building
efficient PCS networks. By focusing on BTAs with above average population
densities, the Company believes it will incur lower capital expenditures per
POP than those carriers which intend to serve less densely populated areas.
Additionally, the Company intends to (i) implement CDMA technology, which is
expected to require fewer cell sites for a given geographic coverage area than
alternative digital technologies; (ii) organize its Markets into geographic
regions, which the Company believes will result in operational efficiencies
and economies of scale; (iii) perform a significant portion of its own network
engineering and design rather than rely entirely on equipment suppliers to
design its networks; and (iv) sell MOUs to wireless service providers rather
than directly to end-users, significantly reducing the Company's marketing
expenses. NextWave expects its high volume strategy will provide for increased
capacity utilization and customer penetration which should reduce the
Company's average cost per MOU.
- - LEVERAGE TECHNICAL EXPERTISE. The Company has built a management team with
significant experience in designing, deploying and operating sophisticated
wireless networks. Mr. Allen Salmasi, Chairman, President and Chief Executive
Officer of the Company, was integral to the development of CDMA technology and
the adoption by the Telecommunications Industry Association of CDMA as an
international standard (IS-95) while serving as President of the Wireless
Telecommunications Division and Chief Strategic Officer of QUALCOMM
Incorporated ("QUALCOMM"), a leading wireless equipment company. Other members
5
<PAGE> 8
of NextWave management have substantial expertise in network engineering,
planning and operations, as well as business development, regulatory matters
and marketing. The Company believes that management's expertise will allow
NextWave to (i) efficiently design a high quality, low cost digital wireless
network; (ii) incorporate advances in wireless technology in the Company's
networks as appropriate; and (iii) capitalize on emerging trends and
opportunities in the wireless industry by developing new products and services
at a lower cost than if purchased entirely from third-party vendors.
- - OFFER VALUE-ADDED PRODUCTS AND SERVICES. The Company intends to offer
value-added products and services such as wireless local loop services and
wireless PBX applications. The Company believes its networks will also support
advanced wireless services including caller ID, over-the-air activation, short
message services, circuit-switched and packet data, facsimile, integrated
voice mail and paging, call answering and handset-based Internet access. The
Company also plans to develop and market other wireless services, either on
its own or in partnership with other companies, including PCS service
providers. Some of these value-added products and services are under
development by the Company or the manufacturers of CDMA infrastructure
equipment. There can be no assurance if and when such products and services
may be available for sale by the Company.
NETWORK BUILD-OUT
General. The Company intends to launch commercial service in several key
Markets in 1997. The initial Markets that are expected to commence service
include Boston, San Diego, Orlando and San Antonio. The New York City, Los
Angeles, Washington, D.C./Baltimore, and Houston Markets are scheduled to follow
with commercial service anticipated in early 1998. The Company plans to continue
to bring additional Markets into service during 1998, with the majority of
C-Block Markets in service by the end of 1998. The Company intends to commence
service in selected D, E and F-Block Markets within one year of the award of its
licenses. Under its network build-out plan, the Company currently anticipates
that it will complete the build-out of its Markets by the end of 2000, at which
time the Company anticipates that 80% of its licensed POPs will be served.
Unlike many other PCS operators, NextWave will perform a substantial portion of
its own network design and systems engineering, rather than relying
predominantly on equipment vendors to provide such services.
Deployment Status. NextWave has organized its Markets into 11 geographic
regions, which the Company believes will result in operational efficiencies,
lead to lower infrastructure costs and facilitate the network build-out. In
eight of its 11 regions, the Company has assembled deployment teams which are in
the process of selecting and acquiring cell sites and designing the networks.
The Company has completed its radio engineering plans for deployment of CDMA
systems in its New York City, Los Angeles, Boston, Washington, D.C./Baltimore,
Houston, Orlando, San Diego and San Antonio Markets. The Company has also
installed and operated CDMA demonstration systems in its San Diego and
Washington, D.C./Baltimore Markets.
CDMA Technology. The Company has selected CDMA technology as the air
interface protocol for use in its digital wireless networks. PCS service
providers holding licenses covering over 99% of the United States population
have announced an intent to use CDMA technology. Accordingly, CDMA is expected
to be the most widely adopted PCS technology in the United States. The Company
believes that CDMA provides important performance benefits such as high voice
quality, soft hand-off, extended handset battery life, expanded coverage and
capacity and greater security than traditional analog cellular services. The
Company also believes that CDMA will enable the Company to engineer its network
coverage using fewer cell sites than would be required by alternative
technologies. CDMA's widespread coverage should enable NextWave to offer other
CDMA service providers roaming capabilities on the Company's network nationwide,
which should increase the functionality and the marketability of the Company's
MOUs.
Equipment Availability. There are approximately 40 companies worldwide
that are licensed to manufacture and supply CDMA equipment, including Fujitsu
Limited, LG Information and Communications, Ltd. ("LGIC"), Hughes Network
Systems, Inc. ("Hughes"), Lucent Technologies, Inc. ("Lucent"), Motorola Inc.
("Motorola"), Northern Telecom, Inc. ("NorTel"), QUALCOMM, Samsung Electronics
Co., LTD. ("Samsung") and SONY Electronics Inc. ("SONY"). The Company expects to
purchase equipment from
6
<PAGE> 9
multiple vendors. For additional information regarding the Company's network
build-out, see "Business -- Network Build-Out," "-- CDMA Technology" and
"-- Equipment Vendors."
Vendor Financing. NextWave has received financing commitments from a
number of network equipment vendors, including LGIC, Comdisco, Inc.
("Comdisco"), Hughes, Lucent and The Allen Group Inc. ("The Allen Group"). In
the aggregate, these commitments contemplate over $1.4 billion of vendor
financing to the Company, of which up to $1.25 billion could be available to the
Company in 1997. The following table sets forth these vendor financing
commitments:
<TABLE>
<CAPTION>
VENDOR
---------------------------------------------------------- FINANCING COMMITMENT
--------------------
(IN MILLIONS)
<S> <C>
LGIC...................................................... $ 700.0
Comdisco.................................................. 250.0
Hughes.................................................... 245.0
Lucent.................................................... 200.0
The Allen Group........................................... 50.0
-------
Total........................................... $1,445.0
=======
</TABLE>
The Company is also in active discussions with several other vendors for
equipment financing and supply agreements. These financing commitments are
subject to certain conditions, including, among others, the execution and
delivery of definitive documentation. See "Business -- Equipment Vendors."
FCC Requirements. The FCC requires that all C-Block PCS licensees
construct facilities that offer coverage to at least one-third of the population
in their service area within five years from the date of license grant and
two-thirds of the population within 10 years. The FCC requires that all D, E,
and F-Block PCS licensees, including the Company, construct facilities that
offer coverage to at least one-quarter of the population in their service area
within five years from the date of license grant and one-half of the population
within 10 years. See "Risk Factors -- PCS System Implementation and Operation
Risks."
HOLDING COMPANY STRUCTURE
The Company is a holding company with limited assets of its own, and upon
commencement of its operations, the Company will conduct its business through
its various subsidiaries. The Company currently has five wholly-owned
subsidiaries. NextWave Personal Communications Inc. ("NextWave PCI") was formed
to acquire PCS licenses in the FCC's C-Block Auctions. NextWave Power Partners
Inc. ("NextWave Power Partners") was formed to acquire PCS licenses in the FCC's
D, E and F-Block Auctions. NextWave Partners Inc. ("NextWave Partners")
currently owns NextWave's interest in NextWave Power Partners. TELE*Code Inc.
("TELE*Code") was formed to develop CDMA-based products and provide engineering
services to the Company and others. Wireless was formed to act as an operating
company and will form 11 direct, wholly-owned subsidiaries, each of which will
hold the assets used to operate the PCS network in one operating region (a
"RegionalSub"), and 11 additional direct, wholly-owned subsidiaries, each of
which will hold the PCS licenses for one operating region (a "LicenseSub"). See
"Risk Factors -- Holding Company Structure."
FINANCING PLAN
The Company estimates that the aggregate funds required for the
acquisition, development, construction and deployment of PCS networks in its
Markets through December 31, 1997 will total approximately $1.1 billion. This
figure consists of (i) approximately $700 million for capital expenditures; (ii)
approximately $240 million in debt service requirements; (iii) approximately
$100 million to fund operating losses and for working capital needs; and (iv)
approximately $17 million for the acquisition of its D, E and F-Block licenses.
These amounts do not include certain repayments of debt which will be paid upon
consummation of the Offerings. See "Use of Proceeds." In addition, in
conjunction with the award of its licenses, the Company has incurred
7
<PAGE> 10
indebtedness to the U.S. Government for the balance due for its C and F-Block
licenses (the "U.S. Government Financing"). See "Certain Indebtedness."
The Company intends to raise approximately $ million in gross proceeds
from the Units Offering (including approximately $ million which will be
held in escrow to pre-fund interest payments on the Senior Notes, including
those issued in connection with the redemption of the Bridge Notes, for three
years). In addition, the Company expects to raise approximately $ million from
the Equity Offering. Each of the Offerings will be contingent upon the
completion of the other.
The estimated net proceeds from the Offerings, together with the expected
proceeds from committed vendor financings, are expected to meet the Company's
funding requirements through the first quarter of 1998, at which time the
Company intends to have its initial Markets operational. In order to finance the
Company's operations, working capital and debt service through 2000, the Company
will require approximately an additional $ in public or private debt
and equity financings. These financings will be required, in part, to service
the interest requirements of the Units Offering after three years from the
completion of the Units Offering and the U.S. Government Financing and vendor
financing.
Actual amounts of the funds required may vary materially from these
estimates and additional funds would be required in the event of significant
negative departures from the current business plan, unforeseen delays or
expenses, regulatory changes, engineering design changes and other technical
risks.
NextWave was incorporated in Delaware in May 1995, its principal executive
offices are located at 6256 Greenwich Drive, Suite 500, San Diego, California,
92122 and its telephone number is (619) 453-2828.
8
<PAGE> 11
THE UNITS OFFERINGS
Issuer..................... NextWave Telecom Inc.
Securities Offered......... Senior Note Units consisting of (i) $ in
aggregate principal amount of % Senior Notes
due 2007 of the Company and (ii) Warrants to
purchase an aggregate of shares of Series B
Common Stock, representing approximately % of
the Company's common equity outstanding on a fully
diluted basis upon consummation of the Offerings
and Senior Discount Note Units, consisting of
(i) $ gross proceeds of % Senior
Discount Notes due 2007 of the Company and (ii)
Warrants to purchase an aggregate of
shares of Series B Common Stock of the Company
representing approximately % of the Company's
common equity outstanding on a fully diluted basis
upon consummation of the Offerings. The Senior
Notes and the Senior Notes Warrants are being
offered as Senior Note Units, with each Unit
consisting of $1,000 principal amount of Notes and
Warrants to purchase one share of Series B Common
Stock. The Senior Discount Notes and the Senior
Discount Notes Warrants are being offered as Senior
Discount Note Units, with each Unit consisting of
$1,000 principal amount at maturity of Notes and
Warrants to purchase one share of Series B
Common Stock.
Separability............... The Notes and the Warrants will be separately
transferable on the earliest of: (i) days
after the date of original issue of the Notes and
Warrants; (ii) in the event of a Change of Control,
the date the Company mails notice thereof; or (iii)
such earlier date as may be determined by CIBC Wood
Gundy Securities Corp.
Use of Proceeds............ The net proceeds to the Company from the Offerings
are expected to be approximately $ million (net
of approximately $ million which will be held
in escrow to pre-fund interest payments on the
Senior Notes, including those issued in connection
with the redemption of the Bridge Notes). The
Company will use a portion of the net proceeds of
the Offerings to make payments required in
connection with the U.S. Government Financing of
its PCS licenses and will use a portion of the net
proceeds to fund pre-construction activities, such
as site planning and acquisition, system design,
and planning for and implementing relocation of
incumbent fixed microwave licensees. A portion of
the net proceeds of the Offerings also will be used
to repay a $25 million promissory note. In
addition, approximately $37 million of the net
proceeds from the Offerings will be used to redeem
a portion of the Company's Convertible Senior
Subordinated Notes due 2002 (the "Bridge Notes").
The remainder of the net proceeds from the
Offerings will be used to fund the initial costs
associated with construction and operation of the
Company's networks, for possible expansion of the
Company's footprint and for general corporate
purposes, including working capital. See "Use of
Proceeds."
9
<PAGE> 12
THE NOTES
Securities Offered......... $ aggregate principal amount of Senior
Notes. $ gross proceeds of Senior
Discount Notes. The Senior Discount Notes will be
issued at a discount to their principal amount at
maturity and the yield to maturity of the Senior
Discount Notes will be %, computed on a
semi-annual bond equivalent basis, calculated from
, 1997. See "Certain Federal Income
Tax Considerations."
Maturity Date.............. , 2007
Interest Rate The Senior
Notes...................... The Senior Notes will bear cash interest at a rate
of % per annum on their principal amount until
maturity. The Company will place sufficient funds
from the net proceeds of the Senior Notes into the
Escrow Account to pay interest on the Senior Notes
until , 2000.
The Senior Discount
Notes...................... The Senior Discount Notes will bear interest at a
rate of % per annum on their principal amount
until maturity. Cash interest will not accrue on
the Senior Discount Notes prior to ,
2002. Based on the issue price of each Senior
Discount Note, the yield to maturity of the Senior
Discount Notes is % (computed on a semi-annual
bond equivalent basis), calculated from
, 1997.
Interest Payment Dates The
Senior Notes............. Cash interest will accrue on the Senior Notes from
the date of the original issue of the Units (the
"Issue Date") and will be payable semi-annually on
and , commencing
, 1997.
The Senior Discount
Notes...................... Cash interest will not accrue or be payable on the
Senior Discount Notes prior to ,
2002. Thereafter, cash interest will be payable
semi-annually in arrears on each and
, commencing , 2002.
Escrow Agreement........... The Company will place approximately $ of
the net proceeds realized from the sale of the
Senior Note Units, representing funds that together
with the proceeds from the investment thereof will
be sufficient to pay three years' interest on the
Senior Notes (including the Senior Notes issued in
connection with the redemption of the Bridge
Notes), into the Escrow Account to be held by the
Escrow Agent for the benefit of the holders of the
Senior Notes. The Senior Notes will be secured by a
first priority lien on the Escrow Account. Funds
will be disbursed from the Escrow Account only to
pay interest on the Senior Notes. Upon the
acceleration of the maturity of the Senior Notes,
the Escrow Agreement will provide for the
foreclosure by the Senior Notes Trustee (as defined
herein) upon the net proceeds of the Escrow
Account. Pending such disbursement, all funds
contained in the Escrow Account will be invested in
Marketable Securities (as defined herein). See
"Description of the Notes -- Senior
Notes -- Disbursement of Funds -- Escrow Account"
and "-- Security."
Ranking.................... The Notes will represent general unsecured
obligations of the Company, except that the Senior
Notes will be secured by a first priority lien on
the Escrow Account. The Notes will rank senior in
right of payment to all subordinated indebtedness
of the Company and pari passu in right of payment
with all existing and future senior indebtedness of
the Company.
10
<PAGE> 13
The Notes will be effectively subordinated to all
liabilities of the Company's operating
subsidiaries, including trade payables and
indebtedness that may be incurred under Vendor
Financing Arrangements. In addition, the Company's
non-operating subsidiaries will be obligated for
approximately $4.4 billion in U.S. Government
Financing which will be secured by the Company's
PCS licenses.
Wireless Guarantee......... The Notes will be fully and unconditionally
guaranteed by Wireless, as to payment of principal,
premium, if any, and interest. The Guarantees,
which will be enforceable only under certain
conditions, will be subordinated to all existing
and future Indebtedness of Wireless incurred
pursuant to Vendor Financing Arrangements (as
defined herein), will be senior in respect of all
Subordinated Indebtedness (as defined herein) of
Wireless and will rank pari passu with respect to
all other Indebtedness of Wireless.
Mandatory Redemption....... There will be no mandatory redemption requirements
with respect to the Notes.
Optional Redemption........ The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after , 2002 at the redemption
prices set forth herein, together with accrued and
unpaid interest to the redemption date.
In addition, the Company, at its option, may redeem
up to 35% of the originally issued principal amount
of Senior Notes (including the Senior Notes issued
in connection with the redemption of the Bridge
Notes) and up to 35% of the originally issued
principal amount at maturity of the Senior Discount
Notes (including the Senior Discount Notes issued
in connection with the redemption of the Bridge
Notes) at any time and from time to time prior to
, 2000 at a redemption price equal
to % of the Senior Notes so redeemed plus
accrued and unpaid interest, if any, thereon to the
redemption date and % of the Accreted Value
(as defined herein) at the redemption date of the
Senior Discount Notes so redeemed, in each case out
of (i) the Net Proceeds (as defined herein) of one
or more Public Equity Offerings (as defined herein)
or (ii) a sale of Series B Common Stock of the
Company to a Strategic Equity Investor (as defined
herein), in either case for gross proceeds of at
least $150 million; provided that at least 65% of
the aggregate principal amount of Senior Notes
originally issued (including the Senior Notes
issued in connection with the redemption of the
Bridge Notes) and 65% of the originally issued
principal amount at maturity of Senior Discount
Notes (including the Senior Discount Notes issued
in connection with the redemption of the Bridge
Notes) remain outstanding immediately after giving
effect to such redemption.
Change of Control.......... In the event of a Change of Control, the Company
will be required to make an offer to purchase all
outstanding Notes at a purchase price equal to (i)
101% of the principal amount thereof, in the case
of the Senior Notes, plus accrued and unpaid
interest, if any, thereon to the date of purchase
and (ii) (a) 101% of the Accreted Value thereof, in
the case of the Senior Discount Notes, if purchased
on or before , 2002, and (b) 101% of
the principal amount at maturity of the Senior
Discount Notes, plus accrued and unpaid interest,
if any, thereon, if purchased after
, 2002. See "Description of the
Notes -- Offer to Purchase."
11
<PAGE> 14
There can be no assurance that the Company will
have sufficient funds or will be contractually
permitted by outstanding Senior Indebtedness (as
defined herein) to pay the required purchase price
for all Notes tendered by holders upon a Change of
Control.
Original Issue Discount.... The Senior Discount Notes will be issued with
original issue discount and the Senior Notes likely
will be issued with original issue discount. Thus,
for federal income tax purposes, holders of the
Senior Discount Notes and, if applicable, the
Senior Notes, will be required to include amounts
in gross income in advance of receipt of such cash
to which the income is attributable. See "Certain
Federal Income Tax Considerations."
Certain Covenants.......... The Indentures governing the Notes (the
"Indentures") will contain certain covenants which,
among other things, will restrict the ability of
the Company and its Restricted Subsidiaries (as
defined) to: (i) incur additional indebtedness;
(ii) pay dividends or make distributions in respect
of its capital stock or make other restricted
payments; (iii) issue Debt Securities (as defined
herein); (iv) create liens; (v) enter into certain
transactions with affiliates or related persons;
(vi) sell certain assets; (vii) engage in any
business other than the telecommunications
business; or (viii) consolidate, merge or sell all
or substantially all of its assets.
THE WARRANTS
Total Number of Warrants... Warrants, consisting of (i) Senior Note
Warrants, which when exercised would entitle the
holders thereof to acquire an aggregate of
shares of Series B Common Stock, representing
approximately % of the Company's common equity
outstanding on a fully diluted basis immediately
after the consummation of the Offerings and (ii)
Senior Discount Note Warrants, which when exercised
would entitle the holders thereof to purchase an
aggregate of shares of Series B Common Stock
of the Company representing approximately % of
the Company's common equity outstanding on a fully
diluted basis upon the consummation of the
Offerings.
Expiration Date............ The Warrants will expire on , 2007
(the "Expiration Date").
Exercise................... Each Senior Note Warrant will entitle the holder to
acquire, on or after the Exercisability Date (as
defined below) and prior to the Expiration Date,
one share of Series B Common Stock at a price equal
to $ per share, and each Senior Discount
Warrant will entitle the holder to acquire, on or
after the Exercisability Date (as defined below)
and prior to the Expiration Date, one share of
Series B Common Stock at a price equal to
$ per share, in each case subject to
adjustment from time to time upon the occurrence of
certain changes in common equity, certain common
equity distributions, certain issuances of options
or convertible securities, certain dividends and
distributions and certain other increases and
decreases in the number of shares of common equity.
"Exercisability Date" means the first day both (a)
the Warrants are traded separately from the Units
and (b) either of the following has occurred: (i) a
Change of Control or (ii) , 1997.
12
<PAGE> 15
CONCURRENT EQUITY OFFERING
Concurrent with the Units Offering, the Company is offering units (the
"Equity Units") each consisting of one share of the Series B Common Stock and
one CTR. See "Description of Capital Stock." The net proceeds to the Company
from the Equity Offering are expected to be approximately $ million.
Each of the Offerings is conditioned upon the completion of the other.
13
<PAGE> 16
RISK FACTORS
Prospective purchasers of the Units should carefully consider all of the
information contained in this Prospectus before making an investment in the
Units. In particular, prospective purchasers should evaluate the factors set
forth herein under "Risk Factors." These risk factors include, among others, the
fact that the Company is in its development stage and is expected to realize
significant operating losses in its initial stages of operation; that it will be
highly leveraged; that it will require significant additional capital to
complete its network build-out beyond the first quarter of 1998; that although
it has been granted its C-Block PCS licenses from the FCC, such grants are
conditioned upon the Company's satisfying the FCC's foreign ownership
requirements by July 3, 1997, and may be subject to further appellate challenge;
that it is subject to numerous risks associated with the construction and
implementation of its PCS networks; that the Company's wholesale distribution
strategy will likely cause it to be dependent on a limited number of major
customers; and that the initial award and final granting by the FCC of the
Company's D, E and F-Block licenses are subject to completion of the license
application process. For a discussion of these and other risks, see "Risk
Factors."
14
<PAGE> 17
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following data for the period from May 16, 1995 (inception) to December
31, 1995 and the nine months ended September 30, 1996 have been derived from the
Company's audited consolidated financial statements, including the consolidated
balance sheets at December 31, 1995 and September 30, 1996 and the related
consolidated statements of operations and of cash flows for the period from May
16, 1995 (inception) to December 31, 1995 and the nine months ended September
30, 1996 appearing elsewhere in this Prospectus. The summary consolidated
financial data as of and for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for any other interim
period or any future year. The information below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus. Separate financial statements for Wireless have
not been provided because, in the view of the Company, such financial statements
would not present meaningful information for purchasers of the Units.
<TABLE>
<CAPTION>
PERIOD FROM MAY 16,
1995 (INCEPTION) TO NINE MONTHS
DECEMBER 31, 1995 ENDED SEPTEMBER 30, 1996
------------------- ------------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Consulting revenues.............................. $ 173 $ 1,958
Total operating expenses......................... 1,753 14,826
-------- --------
Operating loss................................... (1,580) (12,868)
Other expenses................................... -- (738)
Interest expense, net............................ (314) (995)
-------- --------
Net loss......................................... $ (1,894) $(14,601)
======== ========
PRO FORMA(1):
Net loss per share............................... $ $
Shares used in computing net loss per share......
RATIO OF EARNINGS TO FIXED CHARGES(2).............. -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
AS OF --------------------------------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL PRO FORMA(3) AS ADJUSTED
------------ ---------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $(75,212) $ (46,564) $ (150,169)
Total assets............................... 84,834 451,110 3,370,119
Total U.S. Government Financing............ -- -- 2,799,013
Senior Notes............................... -- -- --
Senior Discount Notes...................... -- -- --
Other long term debt....................... 24 130,845 130,845
Series C Common Stock, mandatorily
redeemable.............................. -- -- --
Total stockholders' equity................. 5,006 246,123 271,449
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for a description
of the computation of pro forma net loss per share and shares used in
computing pro forma net loss per share.
(2) For the purpose of calculating the ratio of earnings to fixed charges as
prescribed by the rules and regulations of the Securities and Exchange
Commission, earnings represent pre-tax income (loss) from continuing
operations plus fixed charges, less interest capitalized. Fixed charges
represent interest (including amounts capitalized), the portion of rent
expense deemed to be interest and amortization of deferred financing costs.
For the period from May 16, 1995 (inception) to December 31, 1995 and the
nine months ended September 30, 1996, earnings were inadequate to cover
fixed charges and resulted in coverage deficiencies of $1,894 and $14,601,
respectively.
(3) The Pro Forma column reflects the effect on the Company's financial position
of: (i) the October 1996 to January 1997 issuances of $69,670 aggregate
principal amount of convertible notes; (ii) the October 1996 to January 1997
issuances of 3,730,000 shares of Series B Common Stock for $18,650; (iii)
the January 1997 receipt of a loan in the amount of $25,000 from a holder of
Series B Common Stock; (iv) the grant of and downpayments on the FCC C, D, E
and F-Block licenses, including the capitalization as an intangible asset of
these licenses and the related long term debt payable to the FCC for an
aggregate purchase price of $4,872,620, net of the aggregate downpayments of
$504,785, and as adjusted to reflect the fair value of the debt of
$2,799,013; and (v) the issuances of warrants to purchase shares of Series B
Common Stock to an equipment vendor and MCI. See Unaudited Note 12 of Notes
to Consolidated Financial Statements and "Capitalization."
15
<PAGE> 18
RISK FACTORS
Prior to making an investment in the Units, prospective purchasers should
carefully consider all of the information contained in this Prospectus and, in
particular, should evaluate the following risk factors. Such risks,
uncertainties and other factors include the following risks:
DEVELOPMENT STAGE COMPANY; FUTURE OPERATING LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS
The Company is at an early stage of development and, as of the date of this
Prospectus, has had no commercial PCS operations and, consequently, has limited
historical financial information upon which a prospective investor could perform
an evaluation. The Company will incur significant expenses in advance of
generating revenues and is expected to realize significant operating losses in
its initial stages of operations. The Company is subject to all risks typically
associated with a start-up entity. These risks will include the Company's
ability to implement its strategic plan in the manner set forth in this
Prospectus, including continuing to attract and retain qualified individuals and
the ability to raise appropriate financing as necessary. As such, no assurance
can be given as to the timing and extent of revenue receipts and expense
disbursements or the Company's ability to successfully complete all of the tasks
associated with developing and maintaining a successful enterprise. In addition,
there can be no assurance that the Company will be able to successfully manage
operations. Management's failure to guide and control growth effectively
(including implementing adequate systems, procedures and controls in a timely
manner) could have a material adverse effect on the Company's financial
condition and results of operations.
The Company believes that its future operating results over both the short
and long term will be subject to annual and quarterly fluctuations due to
several factors, some of which are outside the control of the Company. These
factors include the significant cost of building the PCS networks (including any
unanticipated costs associated therewith), fluctuating market demand for the
Company's services, establishment of a market for PCS, pricing strategies for
competitive services, delays in the introduction of the Company's services, new
offerings of competitive services, changes in the regulatory environment, the
cost and availability of PCS infrastructure and subscriber equipment and general
economic conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company has incurred cumulative net losses through September 30, 1996
of approximately $16.5 million. These losses resulted primarily from
expenditures associated with organizational and start-up activities, research
and development of the Company's products and equipment and the Company's
pursuit of PCS licenses. The Company expects to incur significant operating
losses and to generate negative cash flow from operating activities during the
next several years, while it develops and constructs its PCS network and builds
its customer base. There can be no assurance that the Company will achieve or
sustain profitability or positive cash flow from operating activities in the
future. If the Company cannot achieve operating profitability or positive cash
flow from operating activities in a timely manner, it may not be able to meet
its debt service or working capital requirements and the Notes and the Warrants
may, as a result, have little or no value. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL DEBT OBLIGATIONS TO THE U.S. GOVERNMENT; IMPLICATIONS OF ACCOUNTING
TREATMENT
The Company's debt obligations to the U.S. Government for its C-Block PCS
licenses are approximately $4.3 billion. Although the Company's debt obligations
to the U.S. Government will be recorded on the Company's consolidated financial
statements at their estimated fair market value of $2.7 billion, the amount that
would be owed to the U.S. Government if such debt obligations were declared
immediately due and payable would be $4.3 billion plus accrued interest. As a
result, the Company will incur average annual interest charges of approximately
$153.9 million during the 10-year term of the debt related to this debt
discount. The Company will also incur non-cash annual amortization expenses of
$80.1 million related to the capitalized license costs during the 40-year
estimated useful lives of the licenses, assuming the Company receives three
10-year renewals of the terms of the licenses from the FCC. Pursuant to the
FCC's installment payment plan, the Company will execute a note and security
agreement to the U.S. Government, creating a first priority security interest in
favor of the FCC in the licenses (and the proceeds of any sale thereof).
Correspondingly, the Company is required to make cash interest expense payments
payable quarterly of
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approximately $69.4 million. The Company will be required to make quarterly
payments of interest only for the first six years of the license term and
payments of interest and principal over the remaining four years of the license
term.
In January 1997, NextWave Power Partners was named the winning bidder for
32 BTAs in the D, E and F-Block Auctions with net bids totalling $129 million.
The Company has made a downpayment of $13.5 million for those licenses. Upon
final grant, the Company will be required to make a final downpayment of $16.9
million and will finance the remaining $98.6 million with the U.S. Government
with respect to its F-Block licenses, which will be recorded on the Company's
consolidated financial statements at their estimated fair market value of $68.6
million. As a result, the Company will incur average annual interest charges of
$3 million during the 10-year term of the debt related to this debt discount.
The Company will also incur non-cash annual amortization expense of $2.5 million
related to the capitalized license costs during the 40-year estimated useful
lives of the licenses, assuming the Company receives three 10-year renewals of
the term of the licenses from the FCC. Pursuant to the FCC's installment payment
plan, the Company will execute a note and security agreement to the U.S.
Government, creating a first priority security interest in favor of the FCC in
the licenses (and the proceeds of any sale thereof). Correspondingly, the
Company will be required to make cash interest expense payments payable
quarterly of approximately $1.6 million for the first two years of the license
term and payments of interest and principal over the remaining eight years of
the license term.
While the Company does not anticipate defaulting on any required payment on
the debt obligations to the U.S. Government, in the event the Company were
unable to meet any of its installment payment obligations, the FCC will
entertain a request for a three to six month grace period before the FCC takes
any remedial actions. In the event that the grace period expires and the Company
becomes unable to meet its obligations to the U.S. Government or otherwise
violates regulations applicable to holders of FCC licenses, the licenses will be
automatically cancelled and the FCC will initiate debt collection procedures,
and possibly fine the Company an amount equal to the difference between the
price at which the Company acquired the licenses and the amount of the winning
bid at their reauction (if lower than the Company's winning bid), plus an
additional penalty of 3% of the lesser of the subsequent winning bid or the
Company's bid amount. There can be no assurance that the Company will be able to
meet its debt obligations to the U.S. Government, or, if it fails to meet such
obligations, that the FCC will not require immediate repayment of all amounts
due under the U.S. Government Financing or revoke the Company's C-Block or, as
applicable D, E or F-Block licenses. In either such event, the Company may be
unable to meet its obligations to other creditors, including holders of the
Units.
In addition, there can be no assurance that if the U.S. Government
Financing of the Company's PCS licenses were reflected at its face value of $4.4
billion, the Company's pro forma total debt (as adjusted for the Offerings)
would not exceed the total "enterprise value" of the Company implied by the
initial public offering price of the Equity Units attributable to the Series B
Common Stock (as determined by adding the market value of the Series B Common
Stock, the market value of the debt obligations to the U.S. Government and the
gross proceeds from the Units Offering). See "-- Ability to Service Debt;
Substantial Leverage; Restrictive Covenants" and "Regulation of the Wireless
Telecommunications Industry."
ABILITY TO SERVICE DEBT; SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company's leverage is substantial in relation to its equity. As of
September 30, 1996, on a pro forma basis after giving effect to the Offerings
and the debt obligations to the U.S. Government incurred in connection with the
award of the Company's C-Block and F-Block PCS licenses, the Company's total
indebtedness would have been $ billion ($ billion at face value) and its
stockholders' equity would have been $ million. On a pro forma basis after
giving effect to the Offerings, the Company's deficiency of earnings before
fixed charges to fixed charges for the nine months ended September 30, 1996
would have been $ million. In addition, NextWave has entered into a number
of vendor financing commitments totalling over $1.4 billion to finance the
purchase of PCS infrastructure equipment. See "Business -- Equipment Vendors."
Although the Offerings facilitate the Company's entry into the PCS business and
are expected to improve the Company's financial flexibility, the Company's total
indebtedness and debt service requirements will be substantially increased as a
result of the Units Offering, and the Company will be subject to significant
financial restrictions and limitations.
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<PAGE> 20
Furthermore, the Indentures and the agreements related to the Company's
vendor financing will contain, and any additional financing agreements are
likely to contain, certain restrictive covenants. The restrictions contained in
the Indentures and expected to be contained in the vendor financing agreements
will affect, and in some cases will significantly limit or prohibit, among other
things, the ability of the Company to incur indebtedness, make prepayments of
certain indebtedness, pay dividends, make investments, engage in transactions
with stockholders and affiliates, repurchase capital stock, create liens, sell
assets and engage in mergers and consolidations. If the Company fails to comply
with the restrictive covenants in the Indentures or any similar instruments, the
Company's obligation to repay such obligations may be accelerated. In addition
to the restrictive covenants described above, the vendor financing agreements
may require the Company to maintain certain financial ratios. The failure of the
Company and its subsidiaries to maintain such ratios would constitute events of
default under the vendor financing agreements, notwithstanding the ability of
the Company to meet its debt service obligations. An event of default under the
vendor financing agreements would allow the lenders thereunder to accelerate the
maturity of such indebtedness. In such event, a significant portion of the
Company's other indebtedness (including the securities offered in the Units
Offering) may become immediately due and payable.
The successful implementation of the Company's strategy, among other
things, is necessary for the Company to be able to meet its debt service and
significant capital requirements. In addition, the Company's ability to satisfy
its debt service obligations once its PCS networks are operational will be
dependent upon the Company's future performance, which is subject to a number of
factors that are beyond the Company's control. There can be no assurance that
the Company's PCS networks can be completed or that, once completed, the Company
will generate sufficient cash flow from operating activities to meet its debt
service and working capital requirements. Any failure or delay in meeting these
debt service requirements and, in particular, the requirements of the debt
obligations to the U.S. Government, could have a material adverse effect upon
the Company's business, results of operations and financial condition. See
"-- Substantial Debt Obligations to the U.S. Government; Implications of
Accounting Treatment" and "-- Need for Additional Financing; Status as a Going
Concern."
The Company's leverage could have important consequences on the following:
(i) the Company's vulnerability to general economic and industry conditions;
(ii) the Company's ability to obtain additional financing to fund future unknown
capital requirements, capital expenditures or other general corporate purposes;
(iii) the application of a substantial portion of the Company's cash flow from
operations to the payment of principal of and interest on indebtedness; and (iv)
the possibility that the Company will not have sufficient funds to pay interest
on the indebtedness or to repay the indebtedness at maturity.
NEED FOR ADDITIONAL FINANCING; STATUS AS A GOING CONCERN
The development, construction and initial start-up phase associated with
the construction of the Company's PCS networks will require substantial capital
investment. The Company is offering $ million gross proceeds of Senior Notes
Units and Senior Discount Notes Units in the Units Offering and Equity Units
consisting of shares of Series B Common Stock and CTRs in the Equity Offering,
for estimated aggregate net proceeds to the Company (after escrowing
approximately $ million in pre-funding interest requirements on the
Senior Notes for three years) of $ . The Company anticipates that it
will require significant additional capital to complete its network build-out.
The report of independent accountants with respect to the Company's consolidated
financial statements as of September 30, 1996 contains an explanatory paragraph
stating that the Company's capital requirements raise a substantial doubt about
the Company's ability to continue as a going concern. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Consolidated Financial
Statements."
Sources of additional capital may include additional vendor financing and
public or private debt and equity financings by the Company or its subsidiaries.
The Company currently has limited sources of income. There can be no assurance
that additional financing will be available to the Company or, if available,
that it can be obtained on terms acceptable to the Company and within any
limitations that may be contained in the Indentures, the vendor financing or any
additional financing arrangements. Failure to obtain such financing
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<PAGE> 21
could result in the delay or abandonment of some or all of the Company's
development and expansion plans and could have a material adverse effect on the
Company's financial condition and results of operations.
In addition, the vendor financing commitments which the Company has
obtained to date are subject to a number of conditions. See
"Business -- Equipment Vendors." There can be no assurances that such conditions
will ultimately be satisfied and that such equipment and/or financing will
ultimately be available to the Company.
In the absence of such financing or refinancing, the Company could be
forced to dispose of assets in order to make up for any shortfall in the
payments due on its indebtedness under circumstances that might not be favorable
to realizing the highest price for such assets. A substantial portion of the
Company's assets consist of intangible assets, principally PCS licenses granted
by the FCC, the value of which depends upon a variety of factors. Such licenses
may only be transferred to other entities that meet the FCC requirements for
license applicants during the first five years of the term, which will
significantly impact the ability of the Company to realize the value of such
licenses. Further, transfers to entities not meeting such requirements in years
six through 10 of the initial license terms will subject the Company to
substantial unjust enrichment penalties. In the event of a liquidation, there
can be no assurance that the Company's assets could be sold, or sold quickly
enough, or for a sufficient amount, to enable the Company to meet its
obligations. See "Regulation of the Wireless Telecommunications Industry."
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION OF THE NOTES; ASSET
ENCUMBRANCES
NextWave is a holding company with limited assets of its own, and upon
commencement of its operations, the Company will conduct its business through
its various subsidiaries. The ability of the Company's creditors, including
holders of the Notes, to participate in the assets of any of the Company's
subsidiaries upon any liquidation or administration of any such subsidiary will
be subject to the prior claims of the subsidiaries' creditors, including the
FCC, tax authorities, lenders and trade creditors. In addition, the ability of
the Company's creditors, including the holders of the Notes, to participate in
distributions of assets of the Company's subsidiaries will be limited to the
extent the outstanding shares of any of the Company's subsidiaries are pledged
to secure other creditors of the Company or its subsidiaries.
The Notes will be direct obligations solely of the Company. The ability of
the Company to pay interest on the Notes or to repay the Notes at maturity or
otherwise may be dependent upon the cash flow of its subsidiaries and the
payment of funds by those subsidiaries to the Company in the form of repayment
of loans, dividends or otherwise. Other than pursuant to the Guarantees, which
are subordinated to all existing and future Indebtedness of Wireless incurred
pursuant to Vendor Financing Arrangements, the Company's subsidiaries have no
obligation, contingent or otherwise, to pay amounts due on the Notes or to make
funds available therefor. 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 the
subsidiaries' creditors. The Notes will be effectively subordinated to all
liabilities of the Company's operating subsidiaries, including trade payables
and indebtedness that may be incurred under Vendor Financing Arrangements. In
addition, the Company's non-operating subsidiaries will be obligated for
approximately $4.4 billion in U.S. Government Financing which will be secured by
the Company's PCS licenses. Furthermore, holders of indebtedness of the
Company's subsidiaries may materially limit dividends and payments on
intercompany indebtedness to the Company, including payments necessary to fund
amounts owing under the Notes.
A substantial portion of the indebtedness of the Company and its
subsidiaries (other than the Notes and the Bridge Notes) can be expected to be
secured, which could have material consequences to the holders of the Notes. The
principal fixed assets of the Company and its subsidiaries will consist of
infrastructure equipment. The value of these assets is derived from the
deployment of these assets in the PCS business. These assets are highly
specialized and, taken individually, can be expected to have limited
marketability. Consequently, in the event of a realization by the Company's
secured creditors on the collateral securing the Company's secured debt,
creditors would likely seek to sell the assets as an entirety in order to
maximize proceeds realized. The prices obtained upon any such sale and the
amounts available to satisfy the Company's
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<PAGE> 22
obligations on the Notes could be adversely affected by the necessity of
obtaining FCC approval and by compliance with other applicable governmental
regulations.
UNCERTAINTY REGARDING C-BLOCK LICENSES; LITIGATION
On January 3, 1997, the FCC issued a Public Notice (the "Public Notice")
announcing that NextWave had received a grant of the 63 C-Block PCS licenses for
which it had been declared the winning bidder in the FCC C-Block Auctions,
including 56 BTAs in the C-Block Auction and seven BTAs in the C-Block Re-
Auction. The C-Block licenses were granted subject to the requirement that the
Company demonstrate compliance with FCC foreign ownership regulations by July 3,
1997, and that the Company undertake various reporting obligations to the FCC to
notify the agency of the steps being taken by the Company to ensure regulatory
compliance. NextWave's 56 C-Block applications had been challenged in a joint
petition filed by Antigone Communications Limited Partnership ("Antigone") and
PCS Devco, Inc. ("Devco"). No petitions to deny were filed against the Company's
C-Block Re-Auction applications. In the joint petition to deny filed against the
56 C-Block applications, Antigone and Devco had alleged that NextWave's
applications were defective in three respects: (i) the gross assets and revenues
of Pohang Steel America Corporation ("POSAM") should have been attributed to the
Company as an affiliate, rendering the Company ineligible for entrepreneur's
block licenses; (ii) the Company's foreign ownership exceeded the 25% foreign
ownership benchmarks set forth in Section 310(b) of the Communications Act of
1934, as amended (the "Communications Act"); and (iii) QUALCOMM controls the
Company, so that QUALCOMM's assets and revenues should have been attributed to
the Company, thus rendering it ineligible for an entrepreneur's block license.
NextWave vigorously disputed each of these allegations.
According to the Public Notice, the Wireless Telecommunications Bureau (the
"Bureau"), at a meeting with the parties, raised concerns regarding NextWave's
compliance with the foreign ownership limitations set forth in Section 310(b)(4)
of the Communications Act. After reviewing NextWave's proposal for securing
additional domestic equity financing, reforming certain financial instruments
held by foreign entities or obtaining new debt financing, or any combination of
these measures, along with the responses of Antigone and Devco to NextWave's
proposal, the Bureau determined that NextWave's proposal, if successfully
completed, will assure compliance with Section 310(b) of the Communications Act.
The Bureau also determined that NextWave's proposal and the conditions imposed
on NextWave's licenses eliminate any substantial and material questions of fact
concerning NextWave's qualifications, and that the public interest was served by
conditional grant of NextWave's licenses. The Public Notice also indicates that
the Bureau's Order disposed of all other allegations raised by Antigone and
Devco, finding that there were no substantial and material questions of fact at
issue. Accordingly, the Bureau's Order denied the Antigone/Devco petition to
deny and conditionally granted NextWave's applications.
According to the Public Notice, the licenses are specifically conditioned
on payment within five business days of the Public Notice of the remaining 5% of
the downpayment. That payment was submitted by NextWave on January 9, 1997. In
addition, the licenses are conditioned on the following: (i) that NextWave come
into compliance with Section 310(b) of the Communications Act within six months
of the date of the Public Notice and submit a report documenting how its
ownership and debt structure complies with Section 310(b); (ii) that NextWave
submit reports on a monthly basis regarding the steps it is taking to implement
compliance with Section 310(b); and (iii) that NextWave promptly provide the FCC
with copies of any correspondence to or from the Securities and Exchange
Commission (the "Commission") in connection with its public offering. Upon
consummation of the Offerings, the Company believes that it will satisfy these
conditions.
The text of the Bureau's Order has not yet been released. A C-Block license
grant by the FCC will become effective upon release of the order of license
grant, but will remain subject to petitions for reconsideration or appeal for a
30-day period following the license grant date and, for 40 days from the grant,
subject to review by the FCC on its own motion, after which such order of
license grant is not subject to any FCC staff reconsideration or any petition
for reconsideration or application for review or judicial appeal. Counsel for
Antigone and Devco has publicly stated an intention to seek reconsideration or
appeal of the Bureau's Order. See "-- Government Regulation" and "Regulation of
the Wireless Telecommunications
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<PAGE> 23
Industry." Any preparation for PCS network construction prior to the date on
which the license grant becomes final (e.g., negotiation with incumbent
microwave licensees, site acquisition activities and equipment procurement and
construction) is being performed at the Company's risk and expense. If any PCS
licenses are subsequently revoked or canceled as a result of reconsideration,
appeal or failure to fulfill the license conditions, the FCC could impose
substantial financial and regulatory penalties on the Company, and the Company
would have to attempt to sell the benefits of such activities, to the extent
possible, to the entity that ultimately wins a PCS license for that service
area.
UNCERTAINTY OF FINAL AWARDS OF LICENSES FROM D, E AND F-BLOCK AUCTIONS;
LITIGATION
The Company has been named the winning bidder for 32 BTAs in the D, E and
F-Block Auctions, and it has filed its license applications for such BTAs. The
Company's applications for these licenses may be subject to challenges by
various competing bidders and other interested parties in the D, E and F-Block
Auctions. There can be no assurance that the Company will be successful in
defending any such challenges should they occur and will be finally awarded any
or all of these licenses. Any grant by the FCC of D, E, and F-Block PCS licenses
may be conditioned on the Company's compliance with the FCC's foreign ownership
restrictions within a specified period of time. If the Company were found to be
ineligible or otherwise disqualified from holding D, E and F-Block PCS licenses,
the FCC could impose substantial financial and regulatory penalties on it, up to
and including the refusal to grant such licenses. In the event that the Company
were denied the D, E and F-Block PCS licenses, the Company would not be
authorized to offer PCS services in those BTAs for which it was the winning
bidder in the D, E and F-Block Auctions. See "-- Government Regulation" and
"Regulation of the Wireless Telecommunications Industry."
PCS SYSTEM IMPLEMENTATION AND OPERATIONAL RISKS
Unlike certain other PCS carriers, the Company plans to perform
substantially all of its own network design and systems engineering. The Company
believes it will garner certain competitive advantages by designing its networks
in-house using its proprietary CDMA engineering tools rather than outsourcing
such services from equipment vendors. These advantages include optimizing cell
count in the PCS network (rather than over-installing equipment), lower
engineering costs, customized network management, and implementation of common
engineering guidelines and tools. The Company may face certain disadvantages by
performing its own system design and engineering, including increased potential
for system performance disputes with vendors and the Company's reliance on
recruiting and retaining qualified engineering personnel. There can be no
assurance that the Company's design and systems engineering teams will be
successful in implementing its PCS networks, or that such networks will perform
as well or better than PCS networks designed by infrastructure equipment
vendors. In addition, the Company will need to hire additional engineering
personnel and make extensive use of outside contractors to deploy its PCS
networks. There can be no assurance that the Company will be able to locate and
hire such additional engineering resources. The failure to do so could have a
material adverse effect on the Company's timely deployment of its PCS networks
and its financial condition and results of operations.
The successful construction of the Company's PCS networks will depend, to a
significant degree, on the Company's ability to lease or acquire sites for the
location of its base station transmitter equipment. The site selection process
will require the negotiation of lease or acquisition agreements for
approximately 8,000 sites for the Company's PCS networks, and will likely
require the Company to obtain zoning variances or other governmental approvals
or permits. It is possible that local governmental authorities will adopt
policies or moratoriums on construction of new towers or facilities which will
delay the construction of portions of the Company's network. The Company has
retained consultants to provide site identification and acquisition services in
each of its Markets. The Company expects that the site acquisition process will
continue throughout the construction of the Company's PCS networks. Each stage
of the process involves various risks and contingencies, many of which are not
within the control of the Company and any of which could adversely affect the
construction of the Company's PCS networks.
There can be no assurance that the Company will be able to construct its
PCS networks and billing and provisioning systems in any particular Market in
accordance with its current construction plan and schedule.
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See "Business -- Network Build-Out." Pursuant to FCC regulations, the Company
engaged in pre-construction activities prior to the grant of its PCS licenses on
January 3, 1997, but was not permitted to begin actual construction of its PCS
networks until its PCS licenses were granted. If the Company is not able to
implement its entire construction plan, the Company may not be able to provide
services comparable to those provided by the cellular and other PCS operators in
its Markets, and, as a result, the Company's growth may be limited. In addition,
each of the Company's C-Block licenses is subject to an FCC requirement that the
Company construct network facilities that offer coverage to at least one-third
of the population in each such Market within five years of the grant of the
applicable license and to at least two-thirds of the population within 10 years
of the grant. Each of the Company's D, E and F-Block licenses is subject to an
FCC requirement that the Company construct network facilities that offer
coverage to at least one-quarter of the population in each such Market within
five years of the grant of the applicable license and to at least one-half of
the population within 10 years of the grant. Failure to comply with these
requirements could result in the revocation or forfeiture of the Company's
licenses or the imposition of fines on the Company by the FCC. The construction
of the Company's PCS networks is subject to successful completion of the design
of the networks, site and facility acquisitions, the purchase and installation
of the networks' equipment, testing of the networks and satisfactory relocation
or other accommodation of microwave users currently using the spectrum. Winners
of the A and B-Block PCS licenses, which were granted their licenses in June
1995, have a significant head-start in constructing their networks. Most
cellular licensees have at least a five to 10-year time advantage over PCS
licensees and are currently upgrading their networks to digital technology.
Therefore, delays in any of these implementation areas could have a material
adverse effect on the Company.
In addition, the implementation of the construction plan is subject to the
availability of the CDMA infrastructure equipment that the Company plans to use.
There is considerable demand for PCS infrastructure equipment and manufacturers
of such equipment have substantial backlogs of orders which could cause long
lead times for delivery of such equipment. The Company intends to enter into
additional agreements for the supply of infrastructure and/or subscriber
equipment. However, there can be no assurance that the Company will be able to
purchase equipment on terms favorable to the Company, or at delivery dates
required by the Company to construct its PCS networks in a timely manner. In
addition, there are certain risks in the Company's strategy of building-out its
networks in phases. There can be no assurance that the Company will be able to
successfully deploy its initial networks to achieve maximum population coverage
in its Markets within the expected time frame and an acceptable construction
budget.
The Company's success in the implementation and operation of its system is
subject to other factors beyond the Company's control. These factors include,
without limitation, changes in general and local economic conditions,
availability of equipment necessary to operate the PCS system, changes in
communications service rates charged by others, changes in the supply and demand
for PCS and the commercial viability of PCS systems as a result of competition
with wireline and wireless operators in the same geographic area, demographic
changes that might affect negatively the potential market for PCS, changes in
the federal and state regulatory scheme affecting the operation of PCS systems
(including the enactment of new statutes and the promulgation of changes in the
interpretation or enforcement of existing or new rules and regulations), changes
in technology that have the potential of rendering the Company's technology and
equipment obsolete and MCI's providing the Company with competitive terms for
services to facilitate the build-out of the Company's network. See
"Business -- MCI Agreement." In addition, the extent of the potential demand for
PCS cannot be estimated with any degree of certainty. There can be no assurance
that one or more of these factors will not have an adverse effect on the
Company's financial condition and results of operations.
RELIANCE ON CARRIERS' CARRIER STRATEGY; DEPENDENCE ON MCI AND OTHER MAJOR
CUSTOMERS
The Company's business strategy is to act primarily as a carriers' carrier,
wholesaling MOUs on its PCS networks. The Company expects that a significant
portion of its MOUs will be sold to a limited number of large customers. See
"Business -- Business Strategy" and "Business -- Marketing and Distribution."
The Company, especially in its early years of operation, will be substantially
dependent upon purchases of its MOUs by MCI and other major customers. See
"Business -- MCI Agreement" and "-- Purchase Agreements With Resale Service
Providers." These agreements, however, are subject to various conditions and do
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<PAGE> 25
not contain any minimum purchase obligation per year, and there can be no
assurance that MCI or such other major customers will purchase substantial
volumes of MOUs in the Company's critical early years of operation. See
"-- Conditions to Commitments Under Airtime Agreements." In addition, as a
result of the Company's dependence on MCI and other large customers, these
customers may have significant leverage in negotiating favorable pricing and
other terms with the Company. There can be no assurance that there will be
sufficient wholesale demand for MOUs to fully utilize the capacity of the
Company's networks, and if such demand exists, whether such demand will be at
prices that will permit the Company and its customers to generate operating
profits. While the Company has had discussions with several large potential
customers in addition to MCI, there can be no assurances as to whether
agreements on terms acceptable to the Company can be entered into with such
potential major customers. To the extent that the Company sells a significant
portion of its MOUs to a limited number of customers, the Company will be
reliant upon the continued viability of such customers, and their continuing
purchases of the Company's MOUs. The loss of one or more of these large
customers could have a material adverse effect on the Company's financial
condition and results of operations. To a certain extent, the viability of this
strategy is dependent upon the scarcity of radio spectrum and the lack of
available network infrastructure and handsets at other spectrum frequencies.
Accordingly, the Company's strategy could be adversely affected by a decision by
Congress, the National Telecommunications and Information Administration
("NTIA") or the FCC to allocate additional spectrum for mobile services.
If the Company is unable to sell a substantial amount of MOUs on a
wholesale basis to wireless service providers, the Company may be required to
develop new distribution channels, including retailing PCS services directly to
end-users. The Company would have to incur substantial marketing and sales costs
to develop a significant retail presence. There can be no assurance that the
Company would have the financial and personnel resources to become a significant
retailer of PCS services.
CONDITIONS TO COMMITMENTS UNDER AIRTIME AGREEMENTS
Under the MCI Agreement, MCI's obligation to fulfill its minimum 10 billion
MOU purchase commitment is subject to certain conditions, including: (i) the
Company's not being in material breach of any of its agreements with MCI; (ii)
the Company's provision of Full Mobility Services to at least 70 million POPs by
December 31, 2001; and (iii) the Company's provision of Full Mobility Services
that are fully compatible with MCI's network. In addition, there is no schedule
of minimum purchases by MCI in any given year, although there are incentives
built into the agreement for early use of MOUs and the agreement is designed to
encourage MCI to sell substantial volumes of MOUs in the initial years of the
term of the agreement.
MCI's purchase commitment is also subject to incremental cutbacks in the
event the Company does not provide Full Mobility Services in specified amounts
in accordance with certain milestones set forth in the MCI Agreement. In
addition, the purchase commitment applicable to MCI at any given time may be
reduced proportionally by the percentage of Full Mobility Services or aggregate
licensed POPs affected if: (i) the Company sells, transfers or otherwise loses
control or ownership of any PCS license, and such event results in the loss of a
specified percentage of POPs; (ii) the Company fails to meet certain pricing
criteria in any Market; and (iii) the Company's PCS network in any Market fails
to meet certain service, quality and capacity requirements. The MCI Agreement is
terminable by MCI if its purchase commitment is eliminated due to the occurrence
of any of the events listed above, or if the Company fails to acquire, develop
and maintain commercially available state-of-the-art feature functionality in
its PCS network and, within 60 days of MCI's notice to the Company of such
failure, MCI and the Company are unable to reach an agreement on a technical
solution and implementation schedule relating to such failure. At any time, MCI
may terminate network services in a Market if such Market fails to meet certain
service, quality and capacity requirements.
The MCI Agreement is scheduled to terminate 10 years after the first day of
commercial availability of Full Mobility Service by the Company in any of the
Markets, after which it will be renewable, at MCI's option, for an additional
five-year period, at prices to be agreed upon by the parties. No assurance can
be given that MCI will not terminate the MCI Agreement as scheduled, and any
election by MCI to do so may have a material adverse effect upon the Company's
financial condition and results of operations. See "Business -- MCI Agreement."
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Each of the major agreements with other customers (the "PCS Resale
Agreements") provides for a staggered purchase commitment of five billion MOUs
over the 10-year term of the agreement. Each of these customers has agreed to
purchase: (i) at least 5% of its purchase commitment by the end of three years
from the date the Company first offers Full Mobility Service on a commercial
basis in either the New York City or Los Angeles Market (the "Commercial Service
Date"); (ii) at least 25% of its purchase commitment by the end of five years
from the Commercial Service Date; and (iii) 100% of its purchase commitment by
the end of the term of their respective agreement. For each of the first four
billion MOUs purchased by each of these customers pursuant to their respective
agreements, an additional $0.02 per MOU will be remitted to a third-party escrow
agent by the customer to ensure the purchase of its full purchase commitment.
Under the PCS Resale Agreements, the obligation of each customer to fulfill
its purchase commitment is subject to certain conditions, including: (i) the
Company's provision of Full Mobility Service to at least 40 million POPs by
December 31, 1998, and at least 70 million POPs by December 31, 2001; (ii) the
Company's provision of airtime in its Markets meeting jointly agreed upon
technical specifications, including specifications for availability, capacity,
coverage, hand-off, interconnection and service quality; and (iii) the Company's
interconnection with the major interexchange carriers ("IXCs") such as AT&T,
Sprint and MCI via trunk connections with their points of presence at the
expense of the IXC and with other long distance carriers under similar
conditions.
Each of the PCS Resale Agreements is scheduled to terminate on the date
that is 10 years after the first day of commercial availability of Full Mobility
Service in any of the Markets, provided the conditions to the customer's
obligation to fulfill its purchase commitment have been met, after which such
agreement will be renewable, at the customer's option, respectively, for an
additional five-year period, at prices to be agreed upon by the parties. No
assurances can be given that these agreements will not terminate as scheduled at
the end of their respective 10-year terms, and such termination may have a
material adverse effect upon the Company's financial condition and results of
operations. See "Business -- Purchase Agreements with Resale Service Providers."
Although the Company has executed definitive agreements with MCI and five
other customers for the purchase of substantial amounts of MOUs over the next 10
years, and is currently negotiating similar agreements and terms with other
wireless service providers, the number of MOUs for which the Company currently
has binding commitments does not represent a significant portion of the MOUs the
Company intends to sell under its current business plan. In addition, as
described above, each of these agreements is subject to specific network
build-out requirements and performance standards over the terms of such
agreements. There can be no assurance that the Company will be able to meet such
build-out milestones or performance standards and that the purchase commitments
from such wireless service providers will ultimately be realized by the Company,
or that the Company will be able to obtain definitive agreements and binding
commitments from other PCS service providers to purchase the additional MOUs
necessary for the Company to meet the projections contained in its current
business plan.
CDMA COMMERCIAL OPERATIONS; ABILITY TO OFFER ROAMING SERVICES; HANDSETS
CDMA technology has been implemented on a wide commercial scale in the
United States and certain Asian and South American markets over the last 12
months. CDMA networks are currently operating in such U.S. markets as Los
Angeles, Chicago, Dallas-Fort Worth, Houston and over 40 markets worldwide. The
first commercial use of CDMA began in October 1995 in Hong Kong for 800 MHz
cellular operations. Two cellular networks in Korea began operation using CDMA
technology in April 1996. As of December 1996, these Korean CDMA networks had
over 900,000 subscribers. There can be no assurance that CDMA technology will be
successful in a broader market. In addition, certain networks implementing CDMA
have experienced problems in their early trials including poor hand-offs (the
transfer of a subscriber from one cell to another as the subscriber travels
through geographic areas) and problems with analog interference with dual-mode
CDMA handsets for 800 MHz cellular operations. See "Business -- CDMA Technology"
and "The Wireless Telecommunications Industry -- PCS Technology." While the
Company believes that some of the problems are unique to 800 MHz cellular
operations, and thus will not impact PCS networks, such as that which the
Company proposes to build, which operate in a higher frequency band (1850-1990
MHz) than
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<PAGE> 27
cellular, and that solutions for other problems have been identified and are in
the process of being resolved, there can be no assurance that the Company will
not encounter the same or other technological problems.
A risk associated with the Company's selection of CDMA technology is the
ability of the Company to offer PCS roaming service to its customers'
subscribers when they are in markets other than those operated by the Company.
In order for the Company's customers' subscribers to roam in other wireless
markets (and vice versa), roaming arrangements must be agreed upon between the
Company and PCS licensees in such markets utilizing CDMA technology, or the
subscribers must use a dual-band phone that would permit the subscriber to
utilize the cellular system existing in the other market. The Company has been
advised that such dual-band phones are not expected to be available until late
1997 at the earliest. While PCS service providers holding licenses covering over
99% of the United States population have announced an intent to use CDMA
technology, such PCS licensees are under no regulatory obligation to use any
particular access technology. There can be no assurance that PCS licensees
planning to use CDMA technology will not elect to use Time Division Multiple
Access ("TDMA"), Global System for Mobile Communications ("GSM") or some other
technology in the future.
Although there are currently very few suppliers of CDMA handsets, there are
over 20 companies licensed to manufacture CDMA handsets and additional suppliers
are scheduled to deliver CDMA handsets commencing in the second quarter of 1997.
There can be no assurance, however, that those suppliers will commence
production or, if they do commence production, that they will be able to deliver
quality handsets in sufficient quantities and at desirable prices. Handsets used
for PCS systems cannot currently be used with analog cellular systems and vice
versa. While the Company believes that dual-band handsets that allow a user to
access both PCS systems and analog cellular networks will be commercially
available in late 1997, there can be no assurance that such handsets can be
successfully manufactured or that consumers can obtain such handsets at
competitive prices. In addition, dual-band handsets are expected to be larger
and more expensive than single-mode handsets. The lack of interoperability or
the comparatively higher cost of such handsets may impede the Company's ability
to attract potential new wireless communications service providers.
CONTROL BY CERTAIN STOCKHOLDERS; ANTIDILUTION PROVISIONS FOR CONTROL GROUP AND
MCI
The FCC requires C and F-Block applicants utilizing the equity structure
selected by the Company to have certain investors meeting financial and
regulatory qualifications (the "Control Group") hold no less than 25% of the
Company's total outstanding Common Stock on a fully-diluted basis for a
three-year period from the License Grant Date. Under this 25% Control Group
structure, certain members of the Control Group (the "Qualifying Investors")
(currently there are three -- Navation, Freedom Mobility Inc. and Good News
Communications Company) must hold no less than 15% of the Company's total
outstanding Common Stock on a fully-diluted basis for a three-year period from
the License Grant Date. These same Qualifying Investors can hold no less than
10% thereafter until the Termination Date (a period of up to 10 years from the
License Grant Date). These FCC ownership requirements are hereinafter referred
to as the "Required Ownership Percentage" and are included in the Company's
Amended and Restated Certificate of Incorporation. The Control Group must hold a
majority of the total voting stock and have both de facto and de jure control of
the Company for a period of 10 years from the License Grant Date. The members of
the Company's Control Group are currently the holders of the Company's Series A
Common Stock. As a result of their equity ownership and the corporate governance
provisions regarding voting, the holders of the Series A Common Stock will have
the right until the Termination Date to elect a majority of the Board of
Directors of the Company and will have voting control of the Company and all
matters submitted for stockholder approval, with the exception of certain
extraordinary corporate actions which require approval of a majority of the
outstanding shares of the Series B Common Stock and Series C Common Stock,
voting together as a class. Although the Company believes its structure and
governance fully comply with FCC rules, these rules are new and have not been
tested in any specific case before the FCC or in any court.
In addition, Navation, a corporation owned by Mr. Allen Salmasi, the
Company's Chairman of the Board, President and Chief Executive Officer, and
members of his immediate family, controls more than 50% of the outstanding
Series A Common Stock and will continue to do so after the Recapitalization.
Should Mr. Salmasi die or become incapacitated or ineligible to beneficially own
the Series A Common Stock,
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Mr. Salmasi's wife and children, as the remaining stockholders of Navation,
would then control the Company. During the first five years of the initial
license term, recent revisions to FCC rules permit Navation to transfer its
control of the Company without penalty to another similarly qualified company
after license grant. If Navation were to relinquish control to an entity not
deemed a "Small Business" with respect to the C-Block licenses or a "Very Small
Business" with respect to the F-Block licenses at any time during the initial
10-year license term, the Company could incur substantial unjust enrichment
penalties. See "-- Government Regulation." In addition, the Company's Amended
and Restated Certificate of Incorporation requires the holders of Series A
Common Stock to maintain voting control by electing a majority of the Board of
Directors during the 10-year period following the License Grant Date, which
effectively prohibits members of the Company's senior management team from being
removed or replaced by action of the holders of the Series B Common Stock and
Series C Common Stock.
In the event the Company issues additional equity or certain other events
occur which would otherwise dilute the ownership of the Control Group or the
Qualifying Investors during the period until the Termination Date below the
Required Ownership Percentage, the Required Ownership Percentage will be
maintained by issuing warrants to purchase shares of Series B Common Stock to
the Qualifying Investors at an exercise price equal to the "fair market value"
of the Series B Common Stock at the time of the dilutive issuances ("Control
Group Warrants"). The FCC's rules require the exercise price of convertible
instruments to be less than or equal to the fair market value of such shares at
the time of the C-Block short-form filing date. However, in a published informal
FCC staff interpretation of the applicable FCC rule, the FCC stated that the
exercise price for options and warrants issued subsequent to licensing can be
equal to the current market price at the time of issuance. Informal FCC staff
opinions are not binding on the agency and there can be no assurance that the
FCC will not overturn its staff interpretation. Following consummation of the
Offerings, the Control Group will own an aggregate of 25% of the Common Stock of
the Company on a fully-diluted basis, including the 24% owned by the Qualifying
Investors. Accordingly, in the event of an issuance of Series B Common Stock or
securities convertible or exercisable into Series B Common Stock and in certain
other events during the three years after the License Grant Date, the Company
anticipates that Control Group Warrants will be required to be issued in order
to maintain the Required Ownership Percentage. See "Description of Capital
Stock -- Common Stock -- Control Group Warrants." The Company anticipates
raising additional equity during this period. See "Summary -- Financing Plan."
Pursuant to the MCI Warrant Agreement, the Company initially has granted
MCI warrants to purchase 23,673,284 shares of Series B Common Stock and will
issue additional warrants to purchase shares ( shares if the
over-allotment option granted in connection with the Equity Offering is
exercised in full) of Series B Common Stock at the closing of the Equity
Offering or shortly thereafter. The exercise price of these initial and
additional warrants will be $ per share. Under the MCI Warrant Agreement, in
the event that within 10 years of the date of the MCI Warrant Agreement the
Company issues any capital stock or any options, warrants, convertible
securities or other rights entitling the holder thereof to purchase from the
Company shares of its capital stock, including any Control Group Warrants, the
Company must concurrently issue adjustment warrants to MCI for the purchase of
Series B Common Stock at an exercise price equal to the Market Price (as defined
in the MCI Warrant Agreement) of such securities in an amount necessary to
preserve the aggregate percentage of the outstanding shares of the Company's
Common Stock (up to 12% as of or shortly after consummation of the Equity
Offering), on a Fully-Diluted Basis, in respect of which warrants have been
issued to MCI. In addition, MCI may earn performance warrants if it achieves
certain MOU purchase milestones, which warrants could increase to up to a
maximum of 25% of the outstanding shares of the Company's capital stock, on a
Fully-Diluted Basis, in respect of which warrants (inclusive of warrants
previously issued to MCI) will have been issued to MCI. Thus, the issuance of
equity securities, including the Control Group Warrants, together with the
corresponding issuance of adjustment warrants to MCI, will subject the holders
of Series B Common Stock to a significantly disproportionate amount of dilution
in the event of additional equity financings. The FCC's prohibition against
diluting the Control Group or the Qualifying Investors below the Required
Ownership Percentage and the Company's agreeing to issue adjustment warrants to
MCI concurrently with Control Group Warrants could negatively impact the
Company's ability to obtain additional equity financing. See "Description of
Capital Stock -- Other Options, Warrants and Convertible Debt -- Warrants -- MCI
Warrants."
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Pursuant to the Company's Amended and Restated Certificate of
Incorporation, the various voting restrictions and ownership limitations
relating to the Common Stock (other than the FCC's foreign ownership
restrictions) will be eliminated on the tenth anniversary of the License Grant
Date.
COMPETITION
Competition in the wireless telecommunications industry is intense. There
can be no assurance that the Company will be able to compete successfully or
that new technologies and products that are more commercially effective than the
Company's technologies and products will not be developed. In addition, certain
of the Company's competitors have substantially greater financial, technical,
marketing, sales and distribution resources than those of the Company. Some
competitors are expected to market other services, such as cable television
access, landline telephone service and Internet access with their wireless
telecommunications service offerings. A limited number of the Company's
competitors are operating, or planning to operate, through joint ventures and
affiliation arrangements, wireless telecommunications networks that cover most
of the United States.
Since the Company will primarily provide MOUs to its wholesale customers on
its digital wireless networks, the Company's customers will compete directly
with other PCS providers in each of its Markets, including principal competitors
such as PrimeCo Personal Communications L.P., Sprint and AT&T. The FCC issued
PCS licenses to the A and B-Block license winners in June 1995. Accordingly, the
holders of the A and B-Block PCS licenses in the Company's BTAs have entered the
PCS market earlier than the Company. Since November 15, 1995, Sprint has
operated a commercial PCS operation in the Washington, D.C./Baltimore market,
and had more than 115,000 subscribers as of September 1996. There can be no
assurance that such time-to-market advantage will not have a material adverse
effect on the Company's ability to successfully implement its wholesale
strategy. In addition, the increase in the number of PCS competitors in each of
the Company's Markets is expected to lead to substantial increases in the
capacity of wireless MOUs available in such Markets. Because of government
mandates, some cellular providers are required to sell MOUs on a wholesale basis
to other carriers as well as on a retail basis to consumers. The Company
anticipates that such cellular providers, as well as new PCS providers, will
compete with the Company in the future and may offer wholesale MOUs for digital
wireless services.
The Company also expects that the two incumbent cellular providers in each
Market, all of which have infrastructure in place, a customer base and a brand
name, and have been operational for five to 10 years or more, will upgrade their
networks to provide comparable services in competition with the Company.
The Company expects to compete with other communications technologies that
now exist, such as paging (including two-way digital paging), enhanced
specialized mobile radio ("ESMR") and domestic and global mobile satellite
service ("MSS"). In the future, cellular service and PCS will also compete more
directly with traditional landline telephone service providers, utilities, local
multipoint-distribution service ("LMDS") providers and cable operators. The FCC
is scheduled to begin auctions by April 15, 1997 for 30 MHz of spectrum located
in the 2.3 GHz band, to be known as the Wireless Communications Service ("WCS").
The FCC has proposed that WCS providers be permitted to offer a broad range of
fixed, mobile, radiolocation, and satellite broadcast services, some of which
could be in competition with the Company's service offerings. In addition, the
Company may face competition from technologies that may be introduced in the
future. See "--Government Regulation" and "Business -- Competition."
LIMITED PCS OPERATING HISTORY IN THE UNITED STATES; SIGNIFICANT CHANGE IN THE
WIRELESS INDUSTRY
PCS systems have limited operating history in the United States, and there
can be no assurance that operation of these systems will become profitable. In
addition, the extent of potential demand for PCS in the Company's Markets cannot
be estimated with any degree of certainty. The wireless telecommunications
industry is experiencing significant technological changes, as evidenced by the
increasing pace of digital upgrades in existing analog wireless systems,
evolving industry standards, ongoing improvements in the capacity and quality of
digital technology, shorter development cycles for new products and
enhancements, and changes in end-user requirements and preferences. There is
also uncertainty as to the extent of customer
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demand as well as the extent to which airtime and monthly access rates may
continue to decline. As a result, the future prospects of the industry and the
Company and the success of PCS and other competitive services remain uncertain.
GOVERNMENT REGULATION
The licensing, construction, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by state regulatory agencies, the FCC, Congress and the courts. There
can be no assurance that the FCC, Congress, the courts or state agencies having
jurisdiction over the Company's business will not adopt or change regulations or
take other actions that would adversely affect the Company's financial condition
or results of operations. Many of the FCC's rules for the C-Block Auctions and
the PCS licenses acquired thereunder have not been tested by the courts and are
subject to being changed by Congressional action. In addition, FCC licenses to
provide PCS services are subject to renewal and revocation. The Company's PCS
licenses will have 10-year renewable terms. There can be no assurance that the
Company's licenses will be renewed. See "Regulation of the Wireless
Telecommunications Industry."
Wireless telecommunications carriers such as the Company are regulated
under the Communications Act. The Telecommunications Act of 1996 (the
"Telecommunications Act") amended the Communications Act and mandated
significant changes in existing regulation of the telecommunications industry to
promote competitive development of new service offerings, to expand public
availability of telecommunications services and to streamline regulation of the
industry. Included in these mandates are requirements that the LECs must (i)
permit other competitive carriers, including PCS licensees, to interconnect to
their networks; (ii) establish reciprocal compensation agreements with
competitive carriers to terminate traffic on each other's networks; and (iii)
offer resale of its local loop facilities. The implementation of these mandates
by the FCC and state authorities involves numerous changes in established rules
and policies which could adversely affect the Company's financial condition and
results of operations. See "Regulation of the Wireless Telecommunications
Industry."
The Company's PCS operations are expected to use microwave communications
facilities to backhaul its telecommunications traffic between fixed points in
its service areas. New microwave licenses carry up to 10-year license terms. The
FCC has recently proposed to auction certain fixed microwave licenses, some of
which the Company may seek to use. If adopted, this proposal would increase the
Company's microwave license acquisition costs.
Under Section 310(b)(4) of the Communications Act, the FCC can refuse to
grant or revoke certain licenses, including PCS licenses, if it finds that it
would not be in the public interest for more than 25% of the Common Stock of the
parent of an FCC licensee to be owned, directly or indirectly, or voted by
non-U.S. citizens or their representatives, by a foreign government or its
representatives or by a foreign corporation.
According to the Public Notice, the Bureau raised concerns regarding
NextWave's compliance with the foreign ownership limitations set forth in
Section 310(b)(4) of the Communications Act, but after reviewing NextWave's
proposal for securing additional domestic equity financing, reforming certain
financial instruments held by foreign entities, or obtaining new debt financing,
or any combination of these measures, the Bureau determined that NextWave's
proposal, if successfully completed, will assure compliance with Section 310(b)
of the Communications Act. The Bureau also determined that NextWave's proposal
and the conditions imposed on NextWave's grants eliminate any substantial and
material questions of fact concerning NextWave's qualifications, and that the
public interest was served by conditional grant of NextWave's licenses. Among
the conditions imposed on NextWave's licenses is the requirement that NextWave
come into compliance with Section 310(b) by July 3, 1997, and submit a report
documenting how its ownership and debt structure complies with Section 310(b).
Such compliance could be achieved by raising additional equity from domestic
sources, revising the Company's convertible debt agreements, or demonstrating
that the public interest would be served by allowing NextWave's foreign
ownership to exceed 25% (consistent with the FCC's effective competitive
opportunities ("ECO") test). See "Regulation of the Wireless Telecommunications
Industry -- Foreign Ownership Restrictions."
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Upon consummation of the Offerings, the Company believes it will satisfy
the FCC's foreign ownership requirements. Even if the Company does come into
compliance as required by its license condition, the Communications Act
restrictions on foreign ownership could also adversely affect the ability of the
Company to attract additional equity financing from entities that are, or are
owned by, non-U.S. entities.
MCI/BT. MCI has entered into an agreement with British Telecommunications,
plc ("BT") pursuant to which BT will acquire MCI. Upon consummation of such
transaction. MCI would be a foreign entity for purposes of FCC foreign ownership
rules. Accordingly, MCI would not be able to exercise its warrants to the extent
that such exercise would result in a violation of the FCC foreign ownership
rules, unless MCI was able to obtain a waiver of such rules from the FCC or
demonstrate to the FCC satisfaction of the FCC's ECO test. There can be no
assurance that any such waiver could be obtained. If and to the extent that
there is economic value in the MCI warrants, MCI may be required to sell its
warrants (rather than exercise them) in order to realize such value.
Financial Affiliation Rules. To be financially eligible as an Entrepreneur
and/or Small Business or Very Small Business applicant for C and F-Block PCS
licenses, respectively, the gross revenues and assets of the applicant's
"financial affiliates" are counted towards (or "attributed to") the applicant's
total gross revenues and total assets. Financial affiliation can arise from
common investments, familial or spousal relationships, contractual
relationships, voting trusts, joint venture agreements, stock ownership, stock
options, convertible debentures and agreements to merge. Affiliates of
noncontrolling investors with ownership interests that do not exceed the
applicable FCC "passive" investor ownership thresholds are not attributed to C
and F-Block applicants for purposes of determining whether such applicants
financially qualify for the applicable C and F-Block Auctions preferences. In
the case of the equity structure chosen by the Company, no passive investor can
own more than 25% of the Company's total Common or voting stock on a
fully-diluted basis.
As discussed above, the FCC may consider parties to certain "joint
ventures" (as that term is defined by the FCC from time to time) to be
financially affiliated with each other under certain circumstances. The Company
has entered into certain agreements with several of its noncontrolling
investors, including SONY, QUALCOMM and certain foreign investors, certain of
which have been unsuccessfully challenged in a petition to deny the Company's
PCS licenses filed with the FCC. See "-- Uncertainty Regarding C-Block Licenses;
Litigation." The FCC's application of its financial affiliation rules is largely
untested and there can be no assurance that the FCC or the courts will not treat
the Company's investors that are parties to such relationships as financial
affiliates of the Company.
MANAGEMENT OF GROWTH
As the Company's business expands, the Company is implementing enhanced
operational and financial systems and continues to require additional employees
and management, operational and financial resources. There can be no assurance
that the Company will successfully implement and maintain all such operational
and financial systems or successfully obtain, integrate and utilize all of the
required employees and management, operational and financial resources to manage
a developing and expanding business. Failure to implement such systems
successfully and use such resources effectively could have a material adverse
effect on the Company's results of operations and financial condition.
RAPID TECHNOLOGICAL CHANGE
The PCS industry is in its early stages and, as such, is experiencing very
rapid technological change. To remain competitive, the Company must develop or
gain access to new technologies in order to increase product performance and
functionality and increase cost-effectiveness. Given the emerging nature of the
PCS industry, there can be no assurance that the Company's products or
technology, such as its selection of CDMA, will not be rendered obsolete by
future technologies. The development of new PCS products is highly complex, and
the Company could experience delays in deploying and introducing its chosen
equipment. Alternative technological and service advancements could materialize
in the future which could prove both viable and competitive to those employed by
the Company in offering wireless services.
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DEPENDENCE ON KEY MANAGEMENT
As a result of the experience of the senior management team, the Company
will be highly dependent on the services of these individuals. Consequently, the
loss of the services of one or more of these individuals could have a material
adverse effect on the Company. Although the Company enters into standard
confidentiality and proprietary rights agreements with its employees, the
Company does not presently intend to enter into employment contracts with, or
maintain key man life insurance policies on, any of its key managers.
RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
A portion of the spectrum allocated by the FCC to PCS is currently
populated by previously-licensed entities that operate fixed microwave
facilities. Although FCC rules preclude new fixed microwave operations on PCS
bands, incumbent fixed microwave licensees are entitled to continue operating on
the PCS spectrum for up to five years after the grant of a PCS license. To
secure a sufficient amount of unencumbered spectrum to operate its PCS networks
efficiently, the Company may need to pay to relocate as many as 750 of these
existing licensees to alternate spectrum locations or transmission technologies.
In an effort to balance the competing interests of existing microwave users and
newly authorized PCS licensees, the FCC has adopted (i) a transition plan to
relocate such microwave incumbents and (ii) a cost sharing plan so that if the
relocation of an incumbent benefits more than one PCS licensee, the benefiting
PCS licensees will share the costs of the relocation. Under the cost-sharing
plan, PCS licensees like the Company in many cases may be required to reimburse
A, B and C-Block PCS licensees who have previously cleared microwave incumbents
if it is determined that the later PCS entrant would have posed an interference
problem to the relocated link absent such relocation. The transition and cost
sharing plans expire on April 4, 2005, at which time remaining microwave users
in the PCS spectrum will be responsible for their costs to relocate to alternate
spectrum locations or transmission technologies. There can be no assurance that
the Company will be able to reach timely agreements to relocate these incumbents
on terms acceptable to the Company. Any delay in the relocation of such
licensees may adversely affect the Company's ability to commence timely
commercial operation of its PCS networks. Furthermore, depending on the terms of
such agreements, if any, the Company's ability to operate its PCS networks
profitably may be adversely affected. See "Regulation of the Wireless
Telecommunications Industry."
HEALTH CONCERNS
Allegations have been raised, but not proven, that the use of handheld
phones may pose health risks to humans due to radio frequency ("RF") emissions
from the handsets. Studies performed by wireless telephone equipment
manufacturers have rebutted these allegations, and a major industry trade
association and certain governmental agencies have stated publicly that the use
of such phones poses no undue health risk. Regardless of the truth of these
allegations, they could have an adverse effect on the Company.
Concerns over RF emissions also may have the effect of discouraging the use
of wireless communications devices, such as the PCS phones to be used with the
Company's systems. The FCC recently adopted new guidelines and methods for
evaluating the environmental effects of RF emissions from FCC-regulated
transmitters, including wireless antennas and handsets. The updated guidelines
and methods generally are more stringent than those previously in effect. The
FCC also incorporated into its rules provisions of the Telecommunications Act
which preempt state or local government regulation of personal wireless services
facilities based on RF environmental effects, to the extent such facilities
comply with the FCC's rules concerning such RF emissions. Although CDMA handsets
operate at lower power than other wireless handsets and comply with the new
standards, the concerns about RF emissions remain. These concerns could have an
adverse effect on the Company's financial condition and results of operations.
In addition, digital wireless telephones have been shown to cause
interference to some electronic devices, such as hearing aids and pacemakers.
Industry trade associations, together with the University of Oklahoma Center for
the Study of Wireless Electromagnetic Compatibility and other interested
parties, currently are studying the extent of, and possible solutions to, this
interference.
30
<PAGE> 33
UNCERTAINTY OF PROTECTION OF PROPRIETARY RIGHTS
Although the Company relies on its equipment vendors to provide properly
licensed equipment to provide PCS services, the Company's business relies on a
combination of licensed patents, trademarks and non-disclosure and development
agreements in order to establish and protect its proprietary rights. In
addition, the Company expects to file patent applications relating to certain
products under development by TELE*Code. There can be no assurance that such
patents will be issued, or, if issued, will be sufficiently broad to protect the
Company's technology or that the confidentiality agreements and other methods on
which the Company relies to protect its trade secrets and proprietary
information will be adequate. See "Business -- Intellectual Property Rights." In
addition, there can be no assurance that any patents issued or licensed to the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide proprietary protection to the Company.
Litigation to defend and enforce the Company's intellectual property rights
could result in substantial costs and diversion of resources and could have a
materially adverse effect on the Company's financial condition and results of
operations regardless of the final outcome of such litigation. Despite the
Company's efforts to safeguard and maintain its proprietary rights, there can be
no assurance that the Company will be successful in doing so or that the
Company's competitors will not independently develop or patent technologies that
are substantially equivalent or superior to the Company's technologies.
If existing or future patents containing broad claims are upheld by the
courts, the holders of such patents might be in a position to require the
Company to obtain licenses. There can be no assurances that licenses which might
be required for the Company's products would be available on reasonable terms,
if at all. To the extent that licenses are unavailable, or not available on
acceptable terms, no assurance can be made that the failure to obtain a license
would not adversely affect the Company. See "Business -- Intellectual Property
Rights."
CONSEQUENCES OF ORIGINAL ISSUE DISCOUNT
The Senior Discount Notes will be issued at a substantial discount from
their principal amount at maturity and the Senior Notes will likely be issued at
a discount from their principal amount at maturity. Consequently, purchasers of
the Senior Discount Notes and, if applicable, the Senior Notes, generally will
be required to include amounts in their gross income for federal income tax
purposes in advance of their receipt of the cash payments to which the income is
attributable.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code after the issuance of the Notes, the claim of a holder of the
Notes with respect to the principal amount thereof may be limited to an amount
equal to the sum of (i) the issue price and (ii) that portion of the original
issue discount which is not deemed to constitute "unmatured interest" for
purposes of the U.S. Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest."
See "Certain Federal Income Tax Considerations" for a more detailed
discussion of the United States federal income tax considerations to the holders
of the Notes resulting from the purchase, ownership and disposition of the
Notes.
DILUTION
Holders of the Warrants issued pursuant to the Units Offering would incur
immediate and substantial dilution in net tangible book value per share in the
amount of $ per share if they exercised the Warrants for shares of Series B
Common Stock. In addition, if the Company raises additional capital from the
issuance and sale of equity securities in the future, such capital may
significantly dilute the interests of the existing holders of the Series B
Common Stock. In addition, to the extent outstanding options and warrants to
purchase shares of Series B Common Stock are exercised, or outstanding
convertible debt or notes are converted into shares of Series B Common Stock,
there will be further dilution to holders of Series B Common Stock. Furthermore,
as described above, the issuance of Control Group Warrants and the issuance of
performance-based or additional adjustment warrants to MCI will have a dilutive
effect on the holders of the Series B Common Stock. See "Dilution."
31
<PAGE> 34
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of Equity Units or shares of Series B Common
Stock in the public market following the Offerings could adversely affect the
market prices for the Units and the Warrants, and the Company's ability to raise
capital. Upon completion of the Equity Offering, the Company will have
outstanding shares of Series B Common Stock, assuming no exercise of
outstanding options and warrants and no conversion of convertible notes. The
Company, its officers, directors, certain of its employees, consultants and
stockholders and its affiliates have agreed not to sell, solicit an offer to
buy, contract to sell, grant any option to purchase or otherwise transfer or
dispose of, or register or announce the sale or offering of, any shares of
Series B Common Stock of the Company, or any securities that are convertible
into, or exercisable or exchangeable for, shares of Series B Common Stock, for a
period of 180 days after the date of the Equity Offering without the prior
written consent of Smith Barney Inc., subject to certain limited exceptions. The
holders of shares of Series B Common Stock (including shares
issuable upon conversion of convertible securities and exercise of options and
warrants) have the right, commencing , 1997 (90 days after the
closing of the Equity Offering), to require the Company to file a registration
statement under the Securities Act for the sale of such shares of Series B
Common Stock. The Company is permitted to delay the filing of a registration
statement in connection therewith for up to 120 days, and presently intends to
do so to the extent necessary to avoid having to register any secondary resales
of Series B Common Stock until at least 210 days after the date hereof. Such
holders also have the right to require the Company to include their shares in a
registered offering of securities by the Company for its own account. Beginning
in May 1998, certain shares of Series B Common Stock will become eligible for
sale in the public market subject to the provisions of Rule 144 under the
Securities Act. Such holders also have the right to require the Company to
include their shares in a registered offering of securities by the Company for
their own account. The Company is unable to estimate the number of shares of
Series B Common Stock which will be sold under Rule 144 or pursuant to
registration rights since this will depend upon the market price of the Series B
Common Stock, the individual circumstances of the sellers and other factors. See
"Shares Eligible For Future Sale." The shares of Series B Common Stock held by
members of the Control Group are subject to certain transfer restrictions under
the Amended and Restated Series A Shareholders Agreement. See "Principal
Stockholders."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF PRICES
There is currently no public market for the Units, the Notes or the
Warrants. The Company does not intend to apply for listing of the Units, the
Notes or the Warrants on any securities exchange or for quotation of the Units,
the Notes or the Warrants on The Nasdaq National Market. The Company has been
advised by the Underwriters that they presently intend to make a market in the
Units, the Notes and the Warrants, as permitted by applicable laws and
regulations, after the consummation of the sale of the Units; however, the
Underwriters are not obligated to do so and any such market-making activity may
be discontinued at any time without notice at the sole discretion of each
Underwriter. Accordingly, there can be no assurance as to whether an active
public market for the Units, the Notes or the Warrants will develop or, if a
public market does develop, as to the liquidity of the trading market for the
Units, the Notes or the Warrants. If an active public market does not develop,
the market price and liquidity for the Units, the Notes or the Warrants may be
adversely affected. See "Underwriting."
Prior to the Equity Offering, there has been no public market for the
Series B Common Stock and there can be no assurance that an active public market
will develop or continue after the Equity Offering. The negotiated initial
public offering price of the Equity Units may not be indicative of the market
price for the Series B Common Stock after the Equity Offering. The market price
of the Series B Common Stock after the Equity Offering will be determined by the
marketplace and may be influenced by many factors, including, among others, the
Company's results of operations, differences between actual results and results
expected by investors and analysts, technological innovations affecting the
wireless telecommunications industry, the depth and liquidity of the markets for
the Series B Common Stock and investor perceptions of the Company and the PCS
industry. See "Underwriting."
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<PAGE> 35
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are expected to be $
million ($ million if the over-allotment option granted in connection with the
Equity Offering is exercised in full). The net proceeds from the Units Offering
are expected to be $ million, including $ million in gross proceeds
of Senior Notes Units and $ million in gross proceeds of Senior
Discount Notes Units after deducting underwriting discounts and expenses of the
Units Offering. The Company will place approximately $ million of the
net proceeds from the sale of the Senior Notes representing funds that together
with the proceeds from the investment thereof will be sufficient to pay three
years' interest on the Senior Notes into an escrow account to be held by an
escrow agent for the benefit of the holders of the Senior Notes. The net
proceeds to the Company from the sale of Equity Units offered in the
Equity Offering are estimated to be $ million, assuming an initial public
offering price of $ per Equity Unit and after deducting the
underwriting discount and estimated offering expenses ($ million if the
over-allotment option granted in connection with the Equity Offering is
exercised in full). The Company will use a portion of the net proceeds of the
Offerings to repay a $25 million promissory note held by LG InfoComm, Inc.
("LG"), a subsidiary of LGIC. The note matures on the earlier of July 6, 1997,
or 30 days from the closing of the Equity Offering and bears interest at 9.7%
per annum. Approximately $37 million of the net proceeds from the Offerings will
be used to redeem a portion of the Bridge Notes. An aggregate principal amount
of approximately $130 million of Bridge Notes was issued by the Company in April
and May 1996. The Bridge Notes accrue interest at 2% per annum for a two-year
period (commencing at the time the Company's PCS licenses were awarded) and
thereafter at 12% per annum. The proceeds of the LG note and the Bridge Notes
were used to pay a portion of the FCC license cost for the C-Block licenses. The
Company will use a portion of the net proceeds to make payments required in
connection with the U.S. Government Financing of its PCS licenses and to fund
pre-construction activities related to its PCS networks, such as site planning
and acquisition, system design, and planning for and implementing relocation of
incumbent fixed microwave licensees. The remainder of the net proceeds from the
Offerings will be used to fund the initial costs associated with construction
and operation of the Company's networks, for possible expansion of the Company's
footprint and for general corporate purposes, including working capital.
DIVIDEND POLICY
The Company has not paid or declared any cash dividends on its Common Stock
and does not expect to pay cash dividends in the foreseeable future. The ability
of the Company to pay dividends on the Series B Common Stock will be subject to
restrictions contained in the Indentures and is also expected to be restricted
by other financing agreements. See "Certain Indebtedness." The Company currently
intends to retain any future earnings to develop, construct and operate its PCS
networks (including the payment of debt service to the U.S. Government in
connection with the acquisition of the Company's PCS licenses), for working
capital and for other corporate purposes.
33
<PAGE> 36
DILUTION
Holders of the Warrants issued pursuant to the Units Offering would incur
immediate and substantial dilution in net tangible book value per share if they
were to exercise the Warrants for shares of Series B Common Stock. The net
tangible book value of the Company as of September 30, 1996, was $ million,
or $ per share of Series B Common Stock. Net tangible book value per share
of Series B Common Stock is equal to the Company's total tangible assets less
total liabilities, divided by the total number of shares of Series B Common
Stock outstanding. After giving effect to the sale of the shares of
Series B Common Stock included in the Equity Units offered in the Equity
Offering at an assumed initial public offering price of $ per Equity
Unit, assuming that all of these proceeds are attributable to the Series B
Common Stock included in the Equity Unit and no shares will be issued pursuant
to the CTR included in the Equity Unit, and after deducting the underwriting
discount and estimated offering expenses, the pro forma net tangible book value
of the Company as of September 30, 1996 would have been $ million, or
$ per share of Series B Common Stock. This represents an immediate
increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors purchasing Equity Units in the Equity Offering, and would represent
similar dilution to holders of the Warrants issued pursuant to the Units
Offering if they were to exercise the Warrants for shares of Series B Common
Stock. For purposes of the table, the 3,000 shares of Series A Common Stock
outstanding upon consummation of the Offerings and the shares of Series C Common
Stock to be issued to the Control Group upon consummation of the Offerings are
assumed to be outstanding shares of Series B Common Stock. The following table
illustrates this per share dilution as of September 30, 1996.
<TABLE>
<S> <C>
Assumed initial public offering price per Equity Unit........................ $
Assumed amount of initial public offering price per Equity Unit attributable
to Series B Common Stock................................................... $
Net tangible book value per share of Series B Common Stock................... $
Increase per share of Series B Common Stock attributable to the Equity
Offering................................................................... $
Pro forma net tangible book value per share of Series B Common Stock after
the Equity Offering........................................................ $
Dilution of net tangible book value per share of Series B Common Stock to new
investors.................................................................. $
</TABLE>
Assuming that one share of Series B Common Stock is issued for each CTR
included in the Equity Units offered in the Equity Offering, the pro forma net
tangible book value per share of Series B Common Stock after giving effect to
the Equity Offering and the redemption by the Company from the Control Group of
the number of shares of Series C Common Stock equal to the number of shares
issued pursuant to the CTRs, would be $ per share, and the dilution to
persons who purchase Warrants through the Units in the Units Offering would be
$ per share of Series B Common Stock issuable upon exercise of such
Warrants.
If the over-allotment option granted in connection with the Equity Offering
were exercised in full, the pro forma net tangible book value per share of
Series B Common Stock after giving effect to the Equity Offering would be
$ per share of Series B Common Stock, and the dilution to persons who
purchase Warrants through the Units in the Units Offering would be $
per share of Series B Common Stock issuable upon exercise of such Warrants.
The pro forma net tangible book value per share of Series B Common Stock
after giving effect to the Equity Offering and issuance of the Company's PCS
licenses would be $ per share, and the dilution to persons who purchase
Warrants through the Units in the Units Offering and which exercise the Warrants
for shares of Series B Common Stock would be $ per share of Series B
Common Stock issuable upon exercise of such Warrants.
34
<PAGE> 37
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth the actual, pro forma and as adjusted
capitalization of the Company as of September 30, 1996. This table should be
read in conjunction with the Consolidated Financial Statements and notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
-------- ------------ -----------
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 26,102 $ 17,167 $
===== ======= =====
Debt:
Current portion of convertible notes payable and
capital leases...................................... $ 48,643 $ 146,513
U.S. Government Financing.............................. -- 2,799,013
Senior notes payable and discount notes payable........ -- --
Convertible notes payable and capital leases, less
current portion..................................... 130,845 130,845
----- ------- -----
Total debt.......................................... 179,488 3,076,371
----- ------- -----
Series C Common Stock, mandatorily redeemable, $.0001 par
value; no shares designated, issued or outstanding
actual or pro forma; shares designated, issued
and outstanding as adjusted
Stockholders' equity:
Common Stock, $0.0001 par value, 500,000,000 shares
authorized:
Series A, 60,000,000 shares designated: 47,396,437
shares issued and outstanding actual; 36,245,031
shares issued and outstanding pro forma; and 3,000
shares designated, issued and outstanding as
adjusted.......................................... 5 4 --
Series B, 278,980,556 shares designated: 99,898,262
shares issued and outstanding actual; 125,931,074
shares issued and outstanding pro forma; and
shares issued and outstanding as
adjusted(2)....................................... 10 12
Series C, 1,019,444 shares designated: no shares
issued or outstanding actual, pro forma or as
adjusted(3)....................................... -- -- --
Paid-in capital.......................................... 291,406 331,731
Common Stock notes receivable............................ (2,810) (2,810)
Deferred charges and unearned compensation............... (25,993) (40,993)
Deficit accumulated during development stage............. (16,495) (16,495)
----- ------- -----
Total stockholders' equity..................... 246,123 271,449
----- ------- -----
Total capitalization................................ $425,611 $3,347,820 $
===== ======= =====
</TABLE>
- ---------------
(1) The Pro Forma column reflects the effect on the Company's financial
position of: (i) the October 1996 to January 1997 issuances of $69,670
aggregate principal amount of convertible notes; (ii) the October 1996 to
January 1997 issuances of 3,730,000 shares of Series B Common Stock for
$18,650; (iii) the January 1997 receipt of a loan in the amount of $25,000
from a holder of Series B Common Stock; (iv) the conversion of 11,151,406
shares of Series A Common Stock into 22,302,812 shares of Series B Common
Stock; (v) the grant of and downpayments on the FCC C, D, E and F-Block
licenses including capitalization as an intangible asset of these awarded
licenses and the related long-term debt payable to the FCC for an aggregate
purchase price of $4,872,620 net of the aggregate downpayments of $504,785,
and as adjusted to reflect the fair value of the debt of $2,799,013; and
(vi) the issuances of warrants to purchase shares of Series B Common Stock
to an equipment vendor and MCI. See Unaudited Note 12 of Notes to
Consolidated Financial Statements.
(2) Excludes (i) 18,243,322 shares of Series B Common Stock issuable upon
exercise of options outstanding under the Amended and Restated Stock Option
Plan as of September 30, 1996 (of which options for 1,114,667 shares are
exercisable as of September 30, 1996), (ii) 38,043,088 shares of Series B
Common Stock issuable upon exercise of the warrants outstanding as of
September 30, 1996, (iii) 32,587,000 shares of Series B Common Stock
issuable upon conversion of the Bridge Notes (or up to 32,587,000 shares
issuable upon exercise of warrants to be issued upon repayment of such
Bridge Notes), (iv) 12,970,826 shares of Series B Common Stock issuable
upon conversion of $38,912 of convertible promissory notes as of September
30, 1996, and (v) 2,000,000 shares of Series B Common Stock issuable upon
conversion of a $10,000 convertible note payable as of September 30, 1996.
Also excludes (a) warrants to purchase Series B Common Stock held by
MCI, which were issued subsequent to
35
<PAGE> 38
September 30, 1996, (b) shares of Series B Common Stock issuable upon
exercise of additional warrants to be issued to MCI at the closing of the
Equity Offering or shortly thereafter, (c) 13,830,909 shares of Series B
Common Stock issuable upon conversion of $69,670 of convertible notes
issued subsequent to September 30, 1996, and (d) shares of Series B
Common Stock issuable upon exercise of warrants issued to equipment vendors
subsequent to September 30, 1996.
(3) Excludes 1,019,444 shares of Series C Common Stock issuable upon conversion
of $398 aggregate principal amount of convertible debt held by QUALCOMM.
Pursuant to the Company's Amended and Restated Certificate of
Incorporation, upon consummation of the Equity Offering, all existing
rights to acquire shares of Series C Common Stock will be automatically
converted into rights to acquire an equal number of shares of Series B
Common Stock, except for the rights of the Control Group to receive
shares of Series B Common Stock and shares of Series C
Common Stock in exchange for each share of Series A Common Stock (other
than 3,000 shares) in the Recapitalization. See "Description of Capital
Stock."
36
<PAGE> 39
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following data for the period from May 16, 1995 (inception) to December
31, 1995 and the nine months ended September 30, 1996 have been derived from the
Company's audited consolidated financial statements, including the consolidated
balance sheet at December 31, 1995 and September 30, 1996 and the related
consolidated statements of operations and of cash flows for the period from May
16, 1995 (inception) to December 31, 1995 and the nine months ended September
30, 1996 appearing elsewhere in this Prospectus. The data for the period from
May 16, 1995 (inception) to September 30, 1995 have been derived from unaudited
financial statements which, in the opinion of management, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair statement of the results for the unaudited period. The summary consolidated
financial data as of and for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for any other interim
period or any future year. The information below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto included
elsewhere in this Prospectus. Separate financial statements for Wireless have
not been provided because, in the view of the Company, such financial statements
would not present meaningful information for purchasers of the Units.
<TABLE>
<CAPTION>
PERIOD FROM MAY 16, PERIOD FROM MAY 16,
1995 (INCEPTION) TO 1995 (INCEPTION) TO NINE MONTHS
DECEMBER 31, 1995 SEPTEMBER 30, 1995 ENDED SEPTEMBER 30, 1996
------------------- ------------------- ------------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Consulting revenues....................... $ 173 $ -- $ 1,958
Total operating expenses.................. 1,753 501 14,826
-------- --------
Operating loss............................ (1,580) (501) (12,868)
Other expenses............................ -- -- (738)
Interest income (expense), net............ (314) 1 (995)
-------- --------
Net loss.................................. $ (1,894) $ (500) $(14,601)
======== ========
PRO FORMA(1):
Net loss per share........................ $ $ $
Shares used in computing net loss per
share..................................
RATIO OF EARNINGS TO FIXED CHARGES(2)....... -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
AS OF --------------------------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL PRO FORMA(3) AS ADJUSTED
------------ --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $(75,212) $ (46,564) $ (150,169)
Total assets......................................... 84,834 451,110 3,370,119
Total U.S. Government Financing...................... -- -- 2,799,013
Senior Notes......................................... -- -- --
Senior Discount Notes................................ -- -- --
Other long-term debt................................. 24 130,845 130,845
Series C Common Stock, mandatorily redeemable........ -- -- --
Total stockholders' equity........................... 5,006 246,123 271,449
</TABLE>
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for a description
of the computation of pro forma net loss per share and shares used in
computing pro forma net loss per share.
(2) For the purpose of calculating the ratio of earnings to fixed charges as
prescribed by the rules and regulations of the Securities and Exchange
Commission, earnings represent pre-tax income (loss) from continuing
operations plus fixed charges, less interest capitalized. Fixed charges
represent interest (including amounts capitalized), the portions of rent
expense deemed to be interest and amortization of deferred financing costs.
For the period from May 16, 1995 (inception) to December 31, 1995 and the
nine months ended September 30, 1996, earnings were inadequate to cover
fixed charges and resulted in coverage deficiencies of $1,894 and $14,601,
respectively.
(3) The Pro Forma column reflects the effect on the Company's financial position
of: (i) the October 1996 to January 1997 issuances of $69,670 aggregate
principal amount of convertible notes; (ii) the October 1996 to January 1997
issuances of 3,730,000 shares of Series B Common Stock for $18,650; (iii)
the January 1997 receipt of a loan in the amount of $25,000 from a holder of
Series B Common Stock; and (iv) the grant of and downpayments on the FCC C,
D, E and F-Block licenses including the capitalization as an intangible
asset of these licenses and the related longterm debt payable to the FCC for
an aggregate purchase price of $4,872,620 net of the aggregate downpayments
of $504,785, and as adjusted to reflect the fair value of the debt of
$2,799,013; and (v) the issuances of warrants to purchase shares of Series B
Common Stock to an equipment vendor and MCI. See Unaudited Note 12 of Notes
to Consolidated Financial Statements and "Capitalization."
37
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors are
discussed in the Risk Factors section of this Prospectus.
OVERVIEW
Formed on May 16, 1995, NextWave is a holding company with five
wholly-owned subsidiaries, NextWave PCI, NextWave Power Partners, NextWave
Partners, TELE*Code and Wireless. NextWave PCI was formed to acquire PCS
licenses in the FCC's C-Block Auctions. NextWave Power Partners was formed to
acquire PCS licenses in the FCC's D, E and F-Block Auctions. NextWave Partners
was formed to hold NextWave's interest in NextWave Power Partners. TELE*Code was
formed to develop CDMA-based products and provide engineering services to the
Company and others. Wireless was formed to act as an operating company and will
form the RegionalSubs and LicenseSubs for each of the Company's 11 operating
regions.
NextWave is a development stage enterprise and has incurred net losses
since inception. To date, the Company's revenues have been limited to minimal
TELE*Code consulting services and, consequently, the Company has incurred
expenses in advance of generating revenues from planned PCS operations.
NextWave's strategy is to operate as a carriers' carrier, wholesaling low
cost MOUs to a broad range of customers. The Company has targeted several
categories of customers, including long distance companies, LECs, CLECs, other
major PCS retailers, cellular service providers, utilities, cable television
system operators and independent resellers, as well as retailers and
manufacturers of mass-market consumer products and services. The Company
believes that by purchasing MOUs from the Company, these companies will be able
to offer competitively priced wireless services under their own brand names
without substantial capital investment and without purchasing MOUs from direct
competitors. The Company believes that its strategy will generate a high volume
of MOUs over its networks.
Wireless operators typically experience losses and negative cash flow in
their initial years of operation due to the large capital investments required
for construction of their networks and the significant advertising, marketing,
handset subsidies, commissions and other expenses needed to start the business.
Although the Company does not plan to incur significant marketing expenses due
to its wholesale strategy, like other PCS operators it will have substantial
capital costs associated with its license acquisitions and the build-out of its
networks. The majority of NextWave's operating expenses will be fixed expenses
relating to its capital investment in its networks. The Company believes that
its high volume strategy will provide for increased capacity utilization which
should reduce the Company's average cost per MOU.
RESULTS OF OPERATIONS
The results of operations from inception through December 31, 1995 consist
of $173,000 of consulting contract revenues and $1,753,000 of operating expenses
comprised primarily of formation costs, legal and other professional services
expenses, marketing expenses, employee costs and facilities expenses. The
Company also incurred net interest expense of $314,000, resulting in a net loss
of $1,894,000 for the period ended December 31, 1995.
The results of operations for the nine months ended September 30, 1996
consist of $1,958,000 of consulting contract revenues and $14,826,000 of
operating expenses, similar in nature to those incurred in 1995. The consulting
revenues included $1,914,000 from a related party for a contract related to a
non-recurring consulting arrangement which concluded in April 1996, and there is
no assurance that such revenue
38
<PAGE> 41
will continue at similar levels in the future. The Company incurred $995,000 in
net interest expense and $738,000 in expense associated with converting a debt
security to Series B Common Stock, resulting in a net loss of $14,601,000 for
the nine-month period.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1995, the founders of the Company
contributed $5 million for the purchase of 20 million shares of Series A Common
Stock and raised $81 million in financing from various investors through the
issuance of debt, convertible debt and the receipt of advances for contingent
subscriptions to purchase Series B Common Stock. Through September 30, 1996, the
founders contributed a total of $13.9 million, including approximately $2.5
million in the form of promissory notes, for the purchase of 55.8 million shares
of Series A Common Stock and the investment by outside investors had grown to
$448 million, consisting of approximately $298 million raised in two private
offerings each consisting of Series B Common Stock and convertible promissory
notes, approximately $130 million of Bridge Notes and $20 million in loans and
advances from LG and LG Telecom, Ltd., an affiliate of LGIC ("LGT"). See
"Description of Capital Stock" and "Certain Indebtedness."
A $236 million private equity offering closed on May 6, 1996 and consisted
of 78.5 million shares of Series B Common Stock with detachable warrants to
purchase 14 million shares of Series B Common Stock at $3.00 per share. In
addition, pursuant to Subscription Agreements dated as of May 31, 1996, the
Company sold 4.6 million shares of Series B Common Stock at $5.00 per share for
a total of $23.1 million.
These equity placements, totalling $259 million, included the conversion by
PECO Energy Company ("PECO") of its $20 million 1995 loan and QUALCOMM's
conversion of $15 million of its original $25 million 1995 loan, each at $3.00
per share of Series B Common Stock. All but approximately $398,000 of QUALCOMM's
remaining $10 million balance was paid on June 6, 1996. In connection with its
equity private placements of Series B Common Stock, the Company issued an
additional $38.9 million aggregate principal amount of convertible promissory
notes to certain foreign investors. The convertible promissory notes convert
automatically into shares of Series B Common Stock at a price of $3.00 per share
at such time as conversion is permitted under the FCC's rules and regulations
regarding foreign ownership. In the event the convertible promissory notes are
not fully converted by the first anniversary date of the completion of the C-
Block Auction, each foreign stockholder shall have the right to demand repayment
of the principal balance due under the convertible promissory notes together
with interest due thereon, at a rate of 6% per annum. The convertible promissory
notes otherwise become due upon the fifth anniversary of their issue.
The approximately $130 million gross proceeds of the Bridge Notes were
closed into escrow in a series of closings in April and May 1996 and released to
the Company when the C-Block PCS licenses were granted in January 1997. The
Bridge Notes are unsecured obligations of the Company which mature in 2002. The
Company is obligated to prepay the Bridge Notes in connection with any issuance
of certain high yield debt securities, including the Notes offered hereby.
Holders of an aggregate of $93 million in principal amount of Bridge Notes have
agreed to permit the Company to satisfy its prepayment obligation with cash,
Public Debt Securities (as defined) or any combination thereof. The Company
currently intends to do so by issuing in connection with the Units Offering,
$ aggregate principal amount of Senior Notes and $ aggregate
principal amount at maturity of Senior Discount Notes. See "Use of Proceeds" and
"Certain Indebtedness -- Bridge Notes."
In February 1996, LG entered into a convertible loan agreement with the
Company, pursuant to which LG committed to loan the Company $10 million within
45 days of the completion of the C-Block Auction. The loan was funded in June
1996, bears interest at the prime rate and is convertible into shares of Series
B Common Stock at $5.00 per share. Upon LG's funding of the loan, the Company
issued warrants to purchase 250,000 shares of Series B Common Stock at an
exercise price of $3.00 per share, pursuant to the terms of the convertible loan
agreement. The loan is unsecured and principal and interest is payable on June
4, 1997 if the loan has not been converted by that date. In August 1996, LGT
advanced to the Company $10 million, which is expected to be evidenced by a
convertible promissory note which will convert into 2 million shares of
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Series B Common Stock upon the closing of the Equity Offering. See
"Business -- Equipment Vendors -- LGIC Equipment Procurement and Financing."
Since September 30, 1996, the Company has raised an additional $131 million
in financings from several strategic partners and certain foreign investors,
bringing the total amount of financings raised since inception to approximately
$600 million. On October 25, 1996, the Company entered into a Subscription
Agreement with Hughes, pursuant to which the Company sold a convertible
promissory note to Hughes in the principal amount of $50 million (the "Hughes
Convertible Note"). The Hughes Convertible Note will convert into shares of
Series B Common Stock at a conversion price of $5.00 per share, subject to
adjustment, upon the completion of the Equity Offering and the expiration of the
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended. On January 9, 1997, $35 million of the proceeds from the sale of the
Hughes Convertible Note were released from escrow to finance in part the
Company's payment for the C-Block licenses. The remaining $15 million will be
released to the Company upon the completion of the Equity Offering.
On November 12, 1996, POSAM lent the Company $18 million, secured by funds
on deposit with the FCC related to the D, E and F-Block Auctions. Following the
conclusion of these auctions on January 14, 1997, and the return of NextWave's
excess deposit by the FCC on February 4, 1997, this loan was repaid to POSAM.
Additionally, on January 8, 1997, LG lent the Company $25 million. The loan
bears interest at a rate of 9.7% per annum and will mature upon the completion
of the Equity Offering. From October 1996 through January 1997, prospective
vendors and resellers made equity investments in the Company's Series B Common
Stock at $5.00 per share totalling approximately $19 million. The Company has
also sold convertible promissory notes to several investors totalling
approximately $19 million. These promissory notes convert into Series B Common
Stock at $5.00 per share.
During 1996, NextWave PCI was named the winning bidder in the C-Block
Auctions in 63 BTAS with total net bids (after giving effect to bidding credits
available to all "Small Business" C-Block participants) of $4.7 billion. As of
December 31, 1996, the Company had made deposits and downpayments towards these
licenses totalling $237 million. On January 9, 1997 NextWave made the final
required downpayment on these licenses of $237 million following the FCC's
Notice of Grant which was issued on January 3, 1997. The remaining $4.3 billion
is payable over a 10-year period, with interest only at 6.5% (approximately
$277.5 million per year, payable in quarterly installments) through January 3,
2003, and equal principal and interest payments (approximately $1.2 billion per
year, payable in quarterly installments) from January 3, 2003 through January 3,
2007.
In August 1996, NextWave Power Partners deposited $30 million with the FCC
to participate in the D, E and F-Block Auctions. On January 14, 1997, the D, E,
and F-Block Auctions ended with the FCC naming NextWave Power Partners the
winning bidder for 32 BTAS with net bids totalling $129 million. These licenses
required downpayments of $13.5 million, resulting in a return to the Company of
$16.5 million by the FCC on February 4, 1997. Upon final grant of these
licenses, the Company will make a final downpayment of $16.9 million. The
remaining $98.6 million is payable over a 10-year period with interest only
(approximately $6.4 million per year, payable quarterly) for the first two years
after the grant of the licenses and equal principal and interest payments
(approximately $15.9 million per year, payable quarterly) in years three through
10. The interest rate will be fixed at the 10-year Treasury Note Rate at the
date of license grant (6.5% at December 31, 1996).
The Company has commenced pre-construction activities and currently
estimates the initial build-out of the PCS networks in all of its Markets will
be completed by the end of 2000, at which time the Company anticipates that 80%
of its licensed POPS will be served. The funds required for capital expenditures
relating to this build-out will be approximately $3.5 billion. Of this amount,
approximately $930 million will be incurred for site selection, engineer
consultations, site preparation and construction and microwave relocation. These
expenditures, to ready the PCS networks for service, will be capitalized as
network assets and will be amortized over the network's estimated useful life.
Such costs will be financed primarily through vendor financing arrangements with
the Company. These capital expenditures have been and will continue to be made
pursuant to the Company's business plan, which contemplates the ultimate
resolution of all conditions related
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to the grant of the Company's FCC licenses. In the event the Company does not
satisfy all license conditions set forth by the FCC, assets recorded related to
these capital expenditures could be subject to impairment write-downs, resulting
in significant non-cash charges to the Company's results of operations.
As part of its financing plan, the Company expects to enter into financing
agreements with major vendors for the purchase of infrastructure equipment and
services. On October 25, 1996, the Company entered into a Strategic Supply and
Development Agreement with Hughes (the "Hughes Supply Agreement"), pursuant to
which Hughes has agreed to supply and finance the purchase by the Company of PCS
infrastructure equipment and associated ancillary services, subject to certain
conditions. In connection with the Hughes Supply Agreement, Hughes has made a
binding commitment to provide the Company with a vendor credit facility for 100%
of the purchase price of PCS infrastructure equipment and services from Hughes
in certain Markets pursuant to one or more vendor supply contracts to be entered
into pursuant to the Hughes Supply Agreement, up to an aggregate of $245
million, of which $150 million could be available in 1997, subject to the terms
and conditions set forth therein. In addition, under the Hughes Supply
Agreement, Hughes would have the option to provide a vendor financing facility
to finance the purchase of up to an additional $755 million in PCS
infrastructure equipment and services, such option to commence on June 1, 1998
and continue until December 31, 2002. See "Business -- Equipment Vendors."
On November 15, 1996, the Company and Lucent signed an Agreement for
Procurement of Personal Communications Services Products, Licensed Materials and
Services (the "Lucent Procurement Agreement"), pursuant to which the Company has
agreed to purchase, and Lucent has agreed to finance and supply, up to $200
million of PCS infrastructure equipment for deployment in certain of the
Company's Markets. The Lucent Procurement Agreement also contemplates that
Lucent will have the right to supply equipment for certain other Markets, up to
an aggregate of $1 billion, subject to the agreement by Lucent to provide 100%
financing for such purchases and other mutually agreeable terms and conditions.
In addition, the Company and Lucent are currently conducting a demonstration
trial of a PCS system with MCI.
On November 1, 1996, the Company entered into a Strategic Supply Agreement
with LGIC (the "LGIC Supply Agreement, and together with the Hughes Supply
Agreement and the Lucent Procurement Agreement, the "Vendor Supply Contracts")
pursuant to which LGIC has agreed to provide vendor financing to the Company for
150% of the purchase price of PCS infrastructure equipment and services, subject
to certain conditions, up to an aggregate of $1.2 billion. The LGIC Supply
Agreement provides for the Company to purchase up to $300 million in equipment,
assuming successful completion of a market trial of LGIC equipment in the Denver
BTA. After $700 million of loans have been drawn down by the Company under the
LGIC credit facility, additional financing will become available subject to the
Company raising a target level of capital.
On November 8, 1996, the Company and Comdisco entered into a master lease
agreement providing for a $250 million equipment lease facility to be used to
finance network equipment and associated costs. Under the lease facility, $150
million can be drawn down during the first year and the additional $100 million
may be drawn down in future periods subject to the Company meeting certain
financial and operational milestones.
On November 8, 1996, the Company and The Allen Group signed a purchase and
supply agreement, pursuant to which The Allen Group has agreed to supply and
finance up to $50 million worth of various products and services in connection
with the Company's build-out of its networks.
Pursuant to the terms of an Equipment Requirements Agreement with QUALCOMM,
the Company agreed, under certain conditions, to purchase QUALCOMM
infrastructure equipment for deployment in Markets representing up to 55 million
POPs. The Company is currently negotiating the terms of the definitive agreement
regarding the purchase of infrastructure equipment for San Diego and certain
other Markets.
The Company is also in active discussions with several other vendors for
equipment financing and supply agreements. There can be no assurance that
definitive agreements can be reached between the Company and such vendors. See
"Business -- Equipment Vendors."
To meet its initial stage capital requirements, the Company is offering
$ million in aggregate gross proceeds of Senior Notes Units and Senior
Discount Notes Units in the Units Offering for estimated
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aggregate net proceeds to the Company of , net of the repayment of
approximately $ million of Bridge Notes and of approximately $ million
of the net proceeds from the sale of the Senior Notes Units representing funds
that together with the proceeds from the investment thereof will be sufficient
to pay three years' interest on the Senior Notes to be placed into an escrow
account to be held by an escrow agent for the benefit of the holders of the
Senior Notes. Concurrently with the Units Offering, the Company is offering
Equity Units, each consisting of one share of Series B Common Stock and one CTR,
which is expected to result in aggregate net proceeds to the Company of
$ million. Vendor equipment financing and other financing may contain
debt covenants which restrict the Company's ability to receive funds from its
operating subsidiaries. The Company's independent accountants have included an
explanatory paragraph in their report about the Company's ability to continue as
a going concern pursuant to its business plan based on the significant capital
required to meet its obligations to the FCC, build its PCS infrastructure
necessary to provide service and cover its operational expenses. However, the
Company believes that the net proceeds from the Offerings, together with the
U.S. Government Financing, vendor financing and cash on-hand will be sufficient
to fund its operations, debt service and the initial network build-out of the
San Diego, Boston, Orlando and San Antonio Markets, as well as substantially
complete the build-out of its networks in eight additional Markets.
Assuming the Offerings and committed vendor financings are consummated, in
order to finance the Company's operations, working capital and debt service
through the end of 2000, the Company will require an additional $
billion in public or private debt and equity financings. These financings will
be required, in part, to service the interest requirements of the Units Offering
after three years from the completion of the Units Offering and the U.S.
Government Financing and vendor financing.
The viability of the Company's business plan is dependent upon the
Company's ability to secure additional vendor financing and to successfully
complete either public or private debt and/or equity financings. If the Company
is unable to obtain such financings, then its ability to complete its network
build-out, begin generating revenues and meet its debt obligations to the U.S.
Government will be in jeopardy. Further, the exact amount of the Company's
future capital requirements will depend upon many factors, including the cost of
the development of its PCS networks in each of its Markets, the extent of
competition and pricing of wireless services in its Markets, the acceptance of
the Company's services, and the development of new consumer products.
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THE WIRELESS TELECOMMUNICATIONS INDUSTRY
OVERVIEW
Demand for wireless telecommunications services has grown dramatically
since the commercial introduction of cellular telephony in October 1983. This
demand is largely attributable to the widespread availability and increasing
affordability of mobile telephony, paging and other emerging wireless
telecommunications services. Technological advances and a regulatory environment
more favorable to competition have also served to stimulate market growth.
The Company believes the demand for wireless telecommunications will
continue to grow dramatically and that PCS will capture a significant share of
the wireless market. Currently, wireless subscriber penetration in the United
States is estimated to be 14% and, according to Paul Kagan Associates, Inc., is
expected to be approximately 54% by 2006. As reported by the CTIA, the compound
annual growth rate of cellular subscribers exceeded 45% from 1993 through 1995.
Despite this rapid growth in the number of cellular subscribers, wireless MOUs
represent approximately 1% of total telecommunications traffic. The Company
believes that demand for wireless service is highly elastic and that the
anticipated lower cost and higher quality of PCS service will stimulate further
growth in the wireless market.
Wireless telecommunications service is currently available using either
analog or digital technology. The majority of cellular services transmit voice
and data signals over analog-based networks by varying the amplitude or
frequency of one continuous electronic signal transmitted over a single radio
channel. Although it is more widely deployed than digital, analog technology has
inherent limitations, including limited capacity, inconsistent service quality
(e.g., poor voice quality and dropped calls), lack of effectiveness in
preventing "eavesdropping," susceptibility to fraud and "cloning" and
unreliability in data transfer. Digital wireless telecommunications systems,
such as PCS, overcome the capacity constraints of analog systems by converting
voice or data signals into a stream of digits that is compressed before
transmission, enabling a single radio channel to carry multiple simultaneous
signal transmissions. This increased capacity allows digital-based PCS networks
to offer new and advanced services including greater call privacy, longer
battery life, fraud protection, single number service, integrated voice and
paging and enhanced wireless data transmission services such as e-mail,
facsimile and wireless connections to computer networks.
PERSONAL COMMUNICATIONS SERVICES
PCS is expected to include a number of attractive features, such as (i) the
provision of all services to one untethered, mobile number; (ii) low priced
service options; (iii) in the near future, medium-speed data transmissions to
and from portable computers, advanced paging services and facsimile services;
and (iv) increased security and fraud protection. Although a number of cellular
companies currently offer digital wireless service, the Company believes that
PCS providers will be the first commercial wireless voice telecommunications
providers to offer digital mobile networks on a nationwide basis. In addition,
PCS providers may be the first to offer mass market wireless local loop
applications in the United States, as an extension of and an alternative to,
switched and direct access local telecommunications services.
The Company believes that the experience of international markets where PCS
has already been introduced provides support for the Company's expectation of
rapid growth of PCS in the United States. For example, the successful launch of
PCS networks in the U.K. in a market with two established cellular operators is
generally believed to have stimulated demand and increased penetration rates in
the entire country. In less than two years, the U.K.'s two PCS operators have
gained over 600,000 subscribers, representing approximately a 15.5% share of the
total wireless market and 40% of new wireless subscribers over the same period.
In the Washington, D.C./ Baltimore market, Sprint has operated a commercial PCS
operation since November 15, 1995, with more than 115,000 subscribers as of
September 1996, representing approximately one-third of wireless subscribers in
that market.
PCS differs from traditional cellular in three basic ways: frequency,
bandwidth and geographic service areas. PCS networks operate in a higher
frequency band (1850-1990 MHz) than cellular (800-900 MHz). PCS licenses also
comprise 30 MHz bandwidth (A, B and C-Blocks) or 10 MHz bandwidth (D, E and
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F-Blocks) versus 25 MHz bandwidth for cellular networks. As a result of the
utilization of improved digital technology from inception, PCS will have more
capacity for new wireless services such as data and video transmission than
traditional analog systems. Finally, PCS is geographically segmented among 51
regional service areas based upon Rand McNally's Major Trading Areas ("MTAs")
(comprising the A and B-Blocks) and 493 BTAs based upon Rand McNally's BTAs
(comprising the C, D, E and F-Blocks) as contrasted with the U.S. Census
Bureau's 306 metropolitan statistical areas ("MSAs") and 428 rural statistical
areas ("RSAs") used for cellular licenses.
FORMATION OF PCS INDUSTRY THROUGH FCC AUCTIONS
In order to increase competition in wireless communications and promote the
rapid deployment of advanced technologies, Congress enacted legislation
directing the FCC to assign radio frequency licenses for PCS by competitive
bidding. In March 1995, the FCC completed its first auction, the A and B-Block
Auction, resulting in the award of two licenses for 30 MHz each of spectrum in
each of 51 MTAs. Each licensee must construct networks that serve at least
one-third of the population in its markets within five years of the grant of the
applicable license and at least two-thirds of the population within 10 years. In
May 1996, the FCC completed the C-Block Auction, resulting in the award of one
30 MHz license in each of 493 BTAs with identical network construction
milestones to the A and B-Blocks. While MTAs are generally formed to cover an
area equal to state boundaries, the BTAs establish serving areas generally
aligned with cities and surrounding suburban and rural areas. In January 1997,
the FCC completed the D, E and F-Block Auctions, resulting in the award of three
licenses for 10 MHz of spectrum in each of 493 BTAs. Each licensee must
construct networks that serve at least one-fourth of the population within five
years of the grant of the applicable license and at least one-half of the
population within 10 years.
When Congress granted authority to the FCC to use auctions to award
licenses for broadband PCS, it directed the FCC to create special provisions for
certain groups which might otherwise lack access to capital. Such groups were
statutorily designated as women and minority-owned businesses, small businesses,
and rural telephone companies. To meet this directive, the FCC reserved a
portion of the broadband PCS spectrum available via auction (the C and F-Blocks)
for such designated entities meeting certain financial criteria. In the wake of
certain litigation, however, the FCC eliminated the race and gender-based
preferences for the C and F-Block Auctions. The C-Block represents 30 MHz BTA
licenses and the F-Block represents 10 MHz BTA licenses, with both sets of
licenses being auctioned on a nationwide basis. Together, the two blocks make up
the "Entrepreneurs Blocks." NextWave participated in the C-Block Auctions and
the F-Block Auction as a "Small Business" and a "Very Small Business,"
respectively, under the FCC regulations, and on a selective basis the D and
E-Block Auctions. The FCC has established additional preferences to assist
qualified participants in their efforts to attract capital necessary to obtain a
broadband PCS licenses at auction and build out their networks. These
preferences include bidding credits and installment payments for the C and
F-Block applicants or licensees. "Small Businesses" and "Very Small Businesses"
(as such terms are defined by the FCC rules), received a 25% bidding credit in
both the C and F-Block Auctions. In the C-Block Auctions, the payment terms
required a 5% deposit at the time of notification of being the highest bidder,
an additional 5% at the time of license grant, and the balance financed over 10
years with interest only for the first six years at a fixed rate equal to the
10-Year U.S. Treasury Note Rate applicable at the date of grant of the entity's
licenses (6.50% at time of grant for NextWave's C-Block licenses). In the
F-Block Auction, the payment terms required a 10% deposit at the time of
notification of being the highest bidder, an additional 10% at the time of
license grant, and the balance financed over 10 years with interest only for the
first two years at a fixed rate equal to the 10-Year U.S. Treasury Note Rate
applicable at the date of grant of the entity's F-Block licenses. See "Risk
Factors -- Uncertainty Regarding C-Block Licenses; Litigation" and
"Business -- Markets."
PCS TECHNOLOGY
PCS service areas are divided into multiple regions called "cells," each of
which contains a base station consisting of a low-power transmitter, a receiver
and signaling equipment. The cells are typically configured on a grid in a
honeycomb-like pattern, although terrain factors (including natural and man-made
obstructions) and signal coverage patterns may result in irregularly shaped
cells and overlaps or gaps in coverage. The base
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station in each cell is connected to a base station controller and each base
station controller is connected to a switching office by microwave, fiber optic
cable, telephone wires or a hard-wired interface. The switching office controls
the operation of the wireless telephone networks for its entire service area,
performing inter-base station hand-offs, managing call delivery to handsets,
allocating calls among the cells within the networks and connecting calls to and
from the local landline telephone system or to a long distance telephone
carrier. Wireless service providers have interconnection agreements with various
LECs and long distance carriers, thereby integrating wireless telephone networks
with landline telecommunications systems. Because two-way wireless networks are
fully interconnected with landline telephone networks and long distance
networks, subscribers can receive and originate both local and long distance
calls from their wireless telephones.
The signal strength of a transmission between a handset and a base station
declines as the handset moves away from the base station, so the switching
office and the base stations monitor the signal strength of calls in progress.
In an analog system, when the signal strength of a call declines to a
predetermined level, the switching office may "hand off" the call to another
base station that can establish a stronger signal with the handset. If a handset
leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is available to hand off
the call to an adjacent system.
There are different radio air-interface standards established in the United
States for the provision of PCS to multiple users over the allocated spectrum.
The primary methods of digital wireless communications widely accepted by the
wireless industry are based on TDMA and CDMA. These multiple access techniques
provide for communications over the radio channel either by dividing it into
distinct time slots and transmitting user-specific data in each time slot (a
method known as TDMA) or by assigning specific codes to each packet of user data
that in conjunction with many other users' data comprise a signal (a method
known as CDMA). While the FCC has mandated that licensed cellular networks in
the U.S. must utilize compatible analog signaling protocols, the FCC has
intentionally avoided mandating a universal digital signaling protocol for PCS.
Three principal competing, incompatible digital wireless standards have been
proposed by various vendors for use in PCS networks: CDMA, GSM and TDMA. An
older version of TDMA developed in Europe, GSM constitutes the oldest and most
extensive PCS technology in international markets. TDMA, while currently being
offered by cellular providers in certain U.S. cities, has, in the Company's
opinion, often been associated with poor sound quality and numerous dropped
calls. CDMA is currently being deployed by a number of cellular and PCS
providers in the U.S., and also has been implemented on a commercial basis in
Hong Kong and South Korea. CDMA networks are in operation in over 40 cities
worldwide and at least 100 additional networks are currently under construction.
Although CDMA has only recently been widely deployed in the U.S., it is the most
widely subscribed by PCS service providers and the Company believes that CDMA
technology will be less costly to deploy and will provide better quality,
greater capacity and more flexibility than either GSM or TDMA.
Because these protocols are incompatible with each other as well as with
analog cellular, a subscriber utilizing a GSM handset, for example, will be
unable to use his handset when traveling in an area covered only by a CDMA or
TDMA based network unless he carries a dual-mode/dual-band handset that permits
the subscriber to use the analog cellular networks in that area. For this
reason, the success of each protocol will depend both on its ability to offer
quality wireless service and on the extent to which its users will be able to
use their handsets when roaming outside their service area. PCS service
providers holding licenses covering 99% of the U.S. population have announced an
intent to use CDMA technology, including all of the top 100 markets in the U.S.
The Company believes CDMA networks will offer end-users significant advantages
over other technologies, including increased security when compared to analog
cellular networks, land-line voice quality and fewer dropped calls when compared
to analog and other digital technologies. See "Risk Factors -- Uncertainty of
CDMA Commercial Operations; Ability to Offer Roaming Services; Handsets."
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BUSINESS
GENERAL
NextWave was formed in May 1995 to build and operate PCS networks. In
January 1997, NextWave was granted PCS licenses representing approximately 110
million POPs with respect to 63 BTAs pursuant to the C-Block Auctions held by
the FCC. Upon final award of the licenses pursuant to the FCC's D, E and F-Block
Auctions which were completed in January 1997, in which the Company was declared
the winning bidder by the FCC for 32 BTAs representing approximately 53 million
POPs, NextWave's footprint will cover approximately 163 million POPs in 95 BTAs.
As a result, NextWave believes it has the third largest number of licensed POPs
among cellular and PCS licensees in the United States after AT&T and Sprint.
NextWave's aggregate FCC license cost is approximately $4.9 billion. NextWave
intends to operate as a carriers' carrier, building and operating digital
networks utilizing CDMA technology through which the Company will provide
advanced wireless communications services to a broad range of customers. The
Company has entered into agreements with a variety of communications providers,
including an agreement with MCI, pursuant to which MCI has agreed, subject to
certain conditions, to purchase a minimum of 10 billion MOUs over a 10-year
term. The Company has raised an aggregate of approximately $600 million in
private capital from over 70 major consumer electronics and network equipment
manufacturers, telecommunications service providers, financial institutions and
others to finance the acquisition of its PCS licenses and has received over $1.4
billion in vendor financing commitments to commence the build-out of its PCS
network.
NextWave believes that its Markets are among the most attractive markets in
the United States with some of the most densely populated cities, including New
York, Los Angeles, Chicago, Philadelphia, San Francisco, Boston, Washington,
D.C., Dallas, Houston and Detroit. Inclusive of its D, E, and F-Block licenses,
the Company will hold PCS licenses in each of the 10 most populous BTAs, 28 of
the top 30 BTAs and 40 of the top 50 BTAs. The Markets are also generally
characterized by demographics that would suggest higher than average use of
wireless telephony, including high disposable income levels, long average
commute times and significant percentages of dual household wage earners. The
Company believes that the high average population density characterized by
NextWave's Markets should lead to a lower average capital requirement associated
with network deployment relative to competitors that may be awarded licenses
covering less densely populated markets. See "-- Bidding Strategy and Markets."
The Company believes the demand for wireless telecommunications will
continue to grow and that PCS will capture a significant share of the wireless
market. Currently, wireless subscriber penetration in the United States is
estimated to be 14% and, according to Paul Kagan Associates, Inc., is expected
to be approximately 54% by 2006. As reported by the CTIA, the compound annual
growth rate of cellular subscribers exceeded 45% from 1993 through 1995. Despite
this rapid growth in the number of cellular subscribers, wireless MOUs
represented approximately 1% of total telecommunications traffic. The Company
believes that demand for wireless service is highly elastic and that the
anticipated lower cost and higher quality of PCS service will stimulate further
growth in the wireless market.
The Company has targeted several categories of customers, including long
distance companies, LECs, CLECs, other major PCS retailers, cellular service
providers, utilities, cable television system operators and independent
resellers, as well as retailers and manufacturers of mass-market consumer
products and services. By purchasing MOUs from NextWave, these companies will be
able to offer competitively priced wireless services under their own brand names
without substantial capital investment and without purchasing MOUs from direct
competitors. Additionally, customers will retain number ownership and receive
favorable interconnection provisions, both of which are essential to facilitate
the integration of wireless services purchased from NextWave with their existing
platforms to provide seamless services to their customers.
On August 22, 1996, the Company entered into an Airtime Sale Agreement with
MCI, pursuant to which MCI has agreed to purchase a minimum of 10 billion MOUs
from the Company over the 10-year term, subject to certain conditions. Under the
MCI Agreement, the Company will provide MCI with Full Mobility Services (mobile
wireless service) and Area-Based Services (wireless local loop). The
interconnection of the Company's wireless network with MCI's intelligent network
will enable MCI to integrate wireless services
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with other MCI communications services, such as long distance, local exchange
and paging, as well as other features offered through MCI's intelligent services
platform. In connection with the MCI Agreement, the Company granted MCI (or has
agreed to grant MCI at the closing of the Equity Offering or shortly thereafter)
warrants to purchase shares of Series B Common Stock, representing up to 12% of
the Company's Common Stock on a Fully-Diluted Basis and has agreed to grant MCI
additional warrants upon MCI's exceeding certain MOU purchase milestones, up to
an aggregate of 25% of the Company's Common Stock on a Fully-Diluted Basis. See
"Description of Capital Stock -- Other Options, Warrants and Convertible Debt --
MCI Warrants." See "-- MCI Agreement."
BUSINESS STRATEGY
NextWave intends to build and operate digital networks through which the
Company will provide advanced wireless communications services. The principal
components of the Company's business strategy are:
- - OPERATE AS A CARRIERS' CARRIER. By operating as a wholesaler of MOUs,
NextWave will not market directly to consumers, but instead plans to sell MOUs
on its networks to branded wireless service providers, which in turn will sell
to consumers. Thus, NextWave's wholesale penetration of the wireless market
will equal the aggregate airtime purchases from NextWave by multiple branded
retailers. By leveraging the marketing and distribution resources of branded
wireless service providers, NextWave will not have to incur the significant
up-front costs associated with marketing, sales and the establishment of a
consumer brand name. The Company believes that its carriers' carrier strategy
will be attractive to a broad range of potential customers for several
reasons, including:
Minimal Network Capital Costs. Through reselling NextWave's MOUs, the
Company's customers will not be required to purchase licenses or make the
capital investments in network infrastructure equipment required to establish a
digital wireless network.
Economies of Scale. The Company believes its customers will be able to
take advantage of the benefits of scale which the Company believes are inherent
in its high volume operating strategy.
Provision of Seamless Network Services. NextWave intends to design its
digital wireless network architecture to allow PCS service providers to
interconnect their networks and existing platforms with the Company's network
and offer seamless service interfaces to their customers. In this configuration,
PCS service providers will be able to retain control over customer information
while providing uniform features and services throughout their markets.
Leverage Branding and Distribution. By removing the need to build and
operate wireless networks, NextWave will enable its customers to focus their
resources on branding, distribution, billing and customer service. The Company
believes that this will enable and encourage potential wireless resellers with
strong marketing skills and existing customer bases to profitably enter the
wireless resale business previously discouraged by insufficient margins and the
inability to integrate wireless services with their existing platforms and
operations.
NextWave is a Supplier, not a Competitor. NextWave's carriers' carrier
strategy affords its customers the opportunity to purchase services from a
network provider that is not a direct competitor in the branded retail market.
Given the required strategic and financial commitment associated with
interconnection and integration wireless services, the Company believes this
will be an important distinction between NextWave and its competitors.
Facilitate Integrated Service Offerings. The Company intends to design its
digital wireless network architecture to enable its customers to easily add
wireless services to integrated product offerings. The Company believes that the
movement among major branded providers, such as MCI, Sprint and AT&T, to
integrate their services will accelerate the trend toward greater product
integration and potentially reduce overall churn for those customers that
purchase integrated services.
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<PAGE> 50
- - ESTABLISH NATIONAL NETWORK. NextWave believes that its 163 million POPs will
represent the third largest number of licensed POPs among cellular and PCS
licensees in the United States. NextWave's licensed POPs, together with POPs
in BTAs for which the Company was the winning bidder in the D, E and F-Block
Auctions, represent over 65% of the U.S. population. The Company believes
that the breadth of its footprint and the demographics of its Markets enhance
its attractiveness to potential PCS service providers and will reduce
expensive out-of-region roaming charges. Additionally, NextWave intends to
selectively expand its footprint through strategic alliances or resale
agreements with other wireless service providers wherever needed.
- - PROVIDE LOW COST MOUS. NextWave will seek to be a low cost operator of PCS
networks by pursuing a high volume wholesale strategy and by building
efficient PCS networks. By focusing on BTAs with above average population
densities, the Company believes it will incur lower capital expenditures per
POP than those carriers which intend to serve less densely populated areas.
Additionally, the Company intends to (i) implement CDMA technology, which is
expected to require fewer cell sites for a given geographic coverage area
than alternative digital technologies; (ii) organize its Markets into
geographic regions, which the Company believes will result in operational
efficiencies and economies of scale; (iii) perform a significant portion of
its own network engineering and design rather than rely entirely on equipment
suppliers to design its networks; and (iv) sell MOUs to wireless service
providers rather than directly to end-users, significantly reducing the
Company's marketing expenses. NextWave expects its high volume strategy will
provide for increased capacity utilization and customer penetration which
should reduce the Company's average cost per MOU.
- - LEVERAGE TECHNICAL EXPERTISE. The Company has built a management team with
significant experience in designing, deploying and operating sophisticated
wireless networks. Mr. Allen Salmasi, Chairman, President and Chief Executive
Officer of the Company, was integral to the successful development of CDMA
technology and the adoption by the Telecommunications Industry Association of
CDMA as an international standard (IS-95) while serving as President of the
Wireless Telecommunications Division and Chief Strategic Officer of QUALCOMM,
a leading wireless equipment company. Other members of NextWave management
have substantial expertise in network engineering, planning and operations,
as well as business development, regulatory matters and marketing. The
Company believes that management's expertise will allow NextWave to (i)
efficiently design a high-quality, low cost digital wireless network; (ii)
incorporate advances in wireless technology in the Company's networks as
appropriate; and (iii) capitalize on emerging trends and opportunities in the
wireless industry by developing new products and services at a lower cost
than if purchased entirely from third party vendors.
- - OFFER VALUE-ADDED PRODUCTS AND SERVICES. The Company intends to offer
value-added products and services such as wireless local loop services and
wireless PBX applications. The Company believes its networks will also
support advanced wireless services including caller ID, over-the-air
activation, short message services, circuit-switched and packet data,
facsimile, integrated voice mail and paging, call answering and handset-based
Internet access. The Company also plans to develop and market other wireless
services, either on its own or in partnership with other companies, including
PCS service providers. Some of these value-added products and services are
under development by the Company or the manufacturers of CDMA infrastructure
equipment. There can be no assurance if and when such products and services
may be available for sale by the Company.
BIDDING STRATEGY AND MARKETS
NextWave focused on acquiring licenses in the C-Block Auctions for BTAs
clustered in 11 geographic regions throughout the United States. Additionally,
the Company focused on acquiring licenses in the D, E and F-Block Auctions in
the remaining large cities and those which provided corridor and or
complementary coverage to the licenses obtained in the C-Block Auctions. The
Company believes that this clustering approach will provide for operational
efficiencies, lower infrastructure costs, more efficient network build-out and,
ultimately, lower wholesale prices for the Company's wireless MOUs. The
Company's 11 regions are New York Metro, Western, Midwest, Southwest,
Mid-Atlantic, Mid-America, New England, Southeast, Northwest, Great Lakes and
Philadelphia. Within each region NextWave sought densely populated markets,
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<PAGE> 51
including New York City, Los Angeles, San Diego, San Francisco, Chicago,
Detroit, Atlanta, Washington D.C./Baltimore, Philadelphia, Boston, Seattle,
Portland, Minneapolis-St. Paul, Denver, Cincinnati, Cleveland, Dallas, Houston,
Pittsburgh, Providence, Tampa and Kansas City. NextWave also targeted markets
with favorable demographics, such as higher than average cellular airtime usage,
pricing of wireless services, population growth and household income, including
Austin, Charlotte, Jacksonville, Orlando and San Antonio and smaller markets
that filled-out its geographic regions.
Set forth below is a summary of each of NextWave's 95 Markets. In each
Market there are presently two other PCS licensees who were awarded licenses in
the A and B-Block Auctions and two cellular providers, each of which may compete
against the Company in these Markets. There may be up to three additional PCS
licensees in each Market. Unless otherwise noted, NextWave's Markets were
acquired in the 30 MHz C-Block Auctions.
SUMMARY OF NEXTWAVE'S MARKETS
<TABLE>
<CAPTION>
REGIONS POPS
- ------------------------------------------------------------------------------- -----------
<S> <C>
WESTERN
Los Angeles, California........................................................ 15,679,293
San Francisco, Oakland, San Jose, California................................... 6,842,466*
San Diego, California.......................................................... 2,679,864
Sacramento, California......................................................... 1,832,812*
Las Vegas, Nevada.............................................................. 1,145,084*
El Centro - Calexico, California............................................... 145,033*
----------
TOTAL................................................................ 28,324,552
==========
NEW YORK METRO
New York City.................................................................. 18,400,203
Albany-Schenectady, New York................................................... 1,057,180
New Haven, Connecticut......................................................... 976,729
Poughkeepsie, New York......................................................... 433,907
----------
TOTAL................................................................ 20,868,019
==========
MIDWEST
Detroit, Michigan.............................................................. 4,785,173*
Cleveland-Akron, Ohio.......................................................... 2,940,521
Pittsburgh, Pennsylvania....................................................... 2,517,972
Cincinnati, Ohio............................................................... 2,091,774
Columbus, Ohio................................................................. 1,574,030
Louisville, Kentucky........................................................... 1,428,320
Indianapolis, Indiana.......................................................... 1,420,258
Dayton, Ohio................................................................... 1,218,672
Lexington, Kentucky............................................................ 876,111
Evansville, Indiana............................................................ 515,387
Lafayette, Indiana............................................................. 258,941
Bloomington, Indiana........................................................... 233,015
Columbus, Indiana.............................................................. 149,130
----------
TOTAL................................................................ 20,009,304
==========
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
REGIONS POPS
- ------------------------------------------------------------------------------- ----------
<S> <C>
MID-ATLANTIC
Washington, D.C................................................................ 4,410,587
Baltimore, Maryland............................................................ 2,552,338
Charlotte, North Carolina...................................................... 1,861,677
Norfolk, Virginia.............................................................. 1,785,196
Greensboro, North Carolina..................................................... 1,330,742
Richmond, Virginia............................................................. 1,191,504
Greenville-Spartanburg, SC..................................................... 845,335*
Roanoke, Virginia.............................................................. 644,394
Columbia, South Carolina....................................................... 618,397*
Asheville, North Carolina...................................................... 549,969
Hagerstown, Maryland........................................................... 347,982
Hickory, North Carolina........................................................ 314,730
----------
TOTAL................................................................ 16,452,851
==========
SOUTHWEST
Dallas-Ft. Worth, Texas........................................................ 4,828,566*
Houston, Texas................................................................. 4,598,155
San Antonio.................................................................... 1,728,049
Austin, Texas.................................................................. 1,074,621
El Paso, Texas................................................................. 754,934
McAllen, Texas................................................................. 543,624
Corpus Christi, Texas.......................................................... 541,452*
Temple-Kileen, Texas........................................................... 343,016
Brownsville, Texas............................................................. 334,767
Tyler, Texas................................................................... 292,394*
Las Cruces, New Mexico......................................................... 229,629
Bryan-College Station, Texas................................................... 171,794
----------
TOTAL................................................................ 15,441,001
==========
GREAT LAKES
Chicago, Illinois.............................................................. 8,467,720*
Minneapolis, Minnesota......................................................... 3,063,561
Milwaukee, Wisconsin........................................................... 1,799,556*
Madison, Wisconsin............................................................. 643,605*
Janesville-Beloit, Wisconsin................................................... 230,017*
Kankakee, Illinois............................................................. 131,992*
----------
TOTAL................................................................ 14,336,451
==========
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
REGIONS POPS
- ------------------------------------------------------------------------------- ----------
<S> <C>
MID-AMERICA
St. Louis, Missouri............................................................ 2,807,363*
Denver, Colorado............................................................... 2,386,290
Kansas City, Missouri.......................................................... 1,930,633
Salt Lake City-Ogden, Utah..................................................... 1,497,885*
Oklahoma City, Oklahoma........................................................ 1,368,004
Tulsa, Oklahoma................................................................ 836,559*
Springfield, Missouri.......................................................... 600,376
Provo-Orem, Utah............................................................... 316,483*
Joplin, Missouri............................................................... 227,313
----------
TOTAL................................................................ 12,029,134
==========
SOUTHEAST
Atlanta, Georgia............................................................... 3,763,994*
Tampa, Florida................................................................. 2,394,524
Orlando, Florida............................................................... 1,447,059
Jacksonville, Florida.......................................................... 1,208,139
Sarasota, Florida.............................................................. 563,016
Daytona Beach, Florida......................................................... 456,938*
Melbourne, Florida............................................................. 450,744
Lakeland, Florida.............................................................. 436,578
Gainesville, Florida........................................................... 282,711
Ocala, Florida................................................................. 234,556*
----------
TOTAL................................................................ 11,238,259
==========
PHILADELPHIA
Philadelphia, Pennsylvania..................................................... 5,984,423*
Allentown, Pennsylvania........................................................ 715,191
Harrisburg, Pennsylvania....................................................... 685,936*
Scranton, Pennsylvania......................................................... 680,311
Lancaster, Pennsylvania........................................................ 454,432*
York-Hanover, Pennsylvania..................................................... 448,997*
Reading, Pennsylvania.......................................................... 352,204*
Atlantic City, New Jersey...................................................... 336,738*
Dover, Delaware................................................................ 282,991*
Salisbury, Maryland............................................................ 178,973*
----------
TOTAL................................................................ 10,120,196
==========
NEW ENGLAND
Boston, Massachusetts.......................................................... 4,177,962
Providence, Rhode Island....................................................... 1,505,903
Worcester, Massachusetts....................................................... 722,407
Springfield-Holyoke, Massachusetts............................................. 667,912*
Manchester, New Hampshire...................................................... 564,985
Portland, Maine................................................................ 489,045
New London, Connecticut........................................................ 355,074
Pittsfield, Massachusetts...................................................... 135,097*
----------
TOTAL................................................................ 8,618,385
==========
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
REGIONS POPS
- ------------------------------------------------------------------------------- ----------
<S> <C>
NORTHWEST
Seattle-Tacoma, Washington..................................................... 3,055,225
Portland, Oregon............................................................... 1,945,500
Olympia, Washington............................................................ 322,527
Bellingham, Washington......................................................... 153,686
Longview, Washington........................................................... 96,036
----------
TOTAL................................................................ 5,572,974
==========
TOTAL.......................................................................... 163,011,126
==========
</TABLE>
* Indicates BTAs for which the Company was the winning bidder in the D, E
and F-Block Auctions, all of which are 10MHz licenses. The Detroit, Michigan;
Madison, Wisconsin; El Centro, California; Pittsfield, Massachusetts; and
Springfield-Holyoke, Massachusetts Markets were acquired in the D and E-Block
Auctions.
NextWave will seek to expand the footprint of its wireless networks
throughout the United States through a combination of potential affiliations,
alliances and acquisitions. To cover those areas not served by the Markets, the
Company expects to enter into roaming agreements with other major PCS carriers.
MARKETING AND DISTRIBUTION
NextWave intends to operate as a wholesaler of MOUs to wireless service
providers. This strategy includes favorable pricing for volume-based resale and
integration of network architectures with several strategic, facilities-based
customers, including MCI. Additionally, NextWave intends to provide a package of
wireless products to those customers who prefer an integrated solution. The
Company has established national sales and marketing teams to focus on major
national PCS service providers, in addition to regional sales and marketing
teams which will target the regional reseller market and various industry
niches. The Company believes this approach will allow its sales force to
familiarize itself with the industry participants in a given customer category
and geographic region, as well as to gain expertise in the technical and
business issues facing particular categories of customers. The Company plans to
target several categories of customers, including long distance companies, LECs,
CLECs, other major PCS retailers, cellular service providers, utilities, cable
television system operators and independent resellers, as well as retailers and
manufacturers of mass-market consumer products and services.
To the Company's knowledge, there are no existing cellular or PCS carriers
in the U.S. pursuing a similar wholesale strategy. To the extent that similar
wholesale arrangements for wireless airtime do currently exist, the Company
believes that such arrangements are unattractive to potential PCS service
providers given the cost associated with acquiring such MOUs, as well as the
customers' inability to interface directly into the carrier's network.
Additionally, NextWave believes that PCS service providers will prefer
long-term, strategic relationships with wholesale carriers such as NextWave,
rather than purchasing wholesale MOUs from carriers that are also retail
competitors.
MCI AGREEMENT
On August 22, 1996, the Company entered into the MCI Agreement with MCI,
pursuant to which the Company has agreed to sell PCS services to MCI in each and
every Market for which the Company is awarded or otherwise obtains a PCS
license, or enters into a reciprocal airtime or roaming agreement with any LEC
or local wireless operator. Under the MCI Agreement, the Company will provide
MCI with Full Mobility Services and Area-Based Services. In connection with the
MCI Agreement, MCI has agreed to provide the Company on competitive terms
certain services to facilitate the build-out of the Company's network, including
leasing locations for switch installation, co-location of NextWave cell sites
with MCI facilities and the use of MCI Metro's facilities and MCI's long
distance T-1 and T-3 lines for backhaul to interconnect the NextWave network of
base stations and switches.
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<PAGE> 55
MCI provides a broad range of communications services, including long
distance telecommunications services, local and wireless services and
information technology services. MCI is the second largest carrier of domestic
long distance telecommunication services and the third largest carrier of
international telecommunication services, with publicly reported revenues of $18
billion in 1996. Although MCI's core business is long distance telecommunication
services, MCI offers integrated service packages to consumers and businesses
under the marketing programs MCI OneTM, and Network MCI OneSM, respectively,
which include local, long distance, wireless, voice-mail, paging, Internet and
e-mail options from MCI. The MCI Agreement will allow MCI to include PCS
services as part of its integrated service package. MCI has entered into an
agreement with BT pursuant to which BT will acquire MCI. Upon consummation of
that transaction, the combined entity will be the second largest
telecommunications company in the world.
MCI's Purchase Commitment
Pursuant to the MCI Agreement, Full Mobility Services, which consist of the
provision of services comparable to cellular services currently offered in the
Markets, will be provided to MCI as bulk airtime. The NextWave network will be
interconnected to the MCI network. As a result of such interconnection,
intelligent network services (e.g., customer profile information and
authentication) and enhanced services (e.g., voice mail, call waiting and call
forwarding) will be provided through MCI's intelligent network. Through this
interconnection of networks, MCI will be able to integrate wireless services
intended for MCI's customer base with other MCI communications services offered
through MCI's intelligent services platform. In addition, MCI will be able to
perform a full range of customer service and management actions through a
datalink to NextWave's service management platform.
Purchase Commitment and Pricing. Under the MCI Agreement, MCI has agreed
to purchase a minimum of 10 billion MOUs from the Company over the 10-year term
of the agreement. This commitment may be increased to 12 billion MOUs if, by the
fifth anniversary of the commencement of provision of Full Mobility Service,
NextWave expands the footprint for its network to more than 180 million POPs,
including POPs covered by roaming or other reciprocal airtime arrangements (the
"Purchase Commitment"). In any event, the Purchase Commitment will be deemed
satisfied once MCI has paid an aggregate of $1 billion for Full Mobility
Services. There is no schedule of minimum purchases by MCI in any given year;
however, MCI is required to provide NextWave with MOU purchase forecasts on a
quarterly basis. Pricing for Full Mobility Services is derived from a
volume-based rate schedule or a discount from the prevailing market rates for
wireless mobile services, whichever is lower, subject to certain fixed price
floors. The MCI Agreement also provides for additional pricing incentives if (i)
MCI increases its annual MOU purchases by more than 100% on a year-over-year
basis or (ii) MCI purchases certain minimum percentages of its total Full
Mobility Services usage from NextWave after MCI's total MOU purchases from
NextWave have exceeded 30 billion MOUs.
Conditions to Purchase Commitment. Under the MCI Agreement, MCI's
obligation to fulfill the Purchase Commitment at any time is subject to certain
conditions, including: (i) the Company's not being in material breach of any of
its agreements with MCI; (ii) the Company's provision of Full Mobility Services
to at least 70 million POPs by December 31, 2001; and (iii) the Company's
provision of Full Mobility Services that are fully compatible with MCI's
network.
In the event the Company has not offered Full Mobility Services for a
period of at least six consecutive months in BTAs covering at least 55 million
POPs by December 31, 1998, the Purchase Commitment then in effect will be
reduced by 10% and will be further reduced by an additional 10% for each
subsequent year or portion thereof during which the Company's Full Mobility
Services do not meet such threshold. Further, in the event the Company has not
offered Full Mobility Services for a period of at least six consecutive months
in BTAs covering at least 85 million POPs by December 31, 2001, the Purchase
Commitment then in effect will be reduced by an amount proportionate to the
number of POPs by which the threshold has not been met and will be further
reduced by an additional 5% for each subsequent year or portion thereof during
which the Company's Full Mobility Services do not meet such threshold.
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<PAGE> 56
The Purchase Commitment in effect at any given time may be reduced
proportionally by the percentage of Full Mobility Services or aggregate licensed
POPs affected if (i) the Company sells, transfers or otherwise loses control or
ownership of any PCS license, and such event results in the loss of a specified
percentage of POPs; (ii) the Company fails to meet certain pricing criteria in
any Market; or (iii) the Company's PCS network in any Market fails to meet
certain service, quality and capacity requirements.
Area-Based Services
Under the terms of the MCI Agreement, NextWave has agreed to reserve up to
10% of its network capacity for the provision of Area-Based Services to MCI.
Area-Based Services involve the provision of PCS services in a residential or
business environment, within a particular perimeter, and are intended to be an
alternative or replacement for wireline services. The pricing to MCI for
Area-Based Services MOUs will be established at levels to make prices for the
services competitive with local exchange services offered by LECs, excluding
other charges such as connection and installation fees, wiring and maintenance
fees, equipment charges and taxes and value-added services. Calls will not be
terminated or interrupted as subscribers transition to and from Area-Based and
Full Mobility usage. Area-Based Services are currently planned to be available
on a limited basis at the time NextWave initiates commercial Full Mobility
Services in its Markets.
Purchases of Area-Based Services MOUs do not apply against MCI's Full
Mobility Purchase Commitment. If MCI desires to increase its usage of Area-Based
Services beyond the allocated 10% network capacity, it may do so by financing
100% of the direct costs associated with such capacity increases. Any financing
provided by MCI would bear interest at a rate of prime plus 3%, and would be
repaid through a temporary reduction in the Area-Based Services airtime rate.
The principal terms of the Area-Based Services arrangement, including pricing
and network allocation, are set forth in the MCI Agreement and will be
supplemented by more detailed terms relating to the description of the
Area-Based zones (i.e., perimeter size) designated within Area-Based Services
coverage areas.
Switchless Services
In the event that the Company completes construction of the PCS network and
commences offering network services (e.g., customer profile information and
authentication) or any other enhanced services (e.g., voice mail, call
forwarding and call waiting) in a Market where MCI is unable to connect its
network to the NextWave network, the Company will provide MCI with the
opportunity to sell NextWave network services or any other enhanced services as
a provider of switchless services at prices and on terms and conditions no less
favorable than those offered to any other of the Company's customers, including
any affiliate of the Company.
Term and Termination
The 10-year term of the MCI Agreement commences on the date Full Mobility
Services become available on a commercial basis in the Company's first Market,
and may be renewed at the election of MCI for one additional five-year term, at
prices to be agreed upon by the parties. If MCI notifies the Company of its
desire to renew the agreement, but MCI and the Company are unable to agree upon
the terms and conditions of such renewal as of six months prior to the
expiration of the term of the agreement, the agreement will be extended for two
years on its original terms. If no agreement is reached by the parties during
the two year extension, the MCI Agreement will expire at the end of such
transition period.
MCI may terminate the MCI Agreement if any of the following events, among
others, occur: (i) MCI's obligations to fulfill the Purchase Commitment are
eliminated or (ii) the Company fails to acquire, develop and maintain
commercially available state-of-the-art feature functionality in its PCS network
and, within 60 days of MCI's notice to the Company of such failure, MCI and the
Company are unable to reach an agreement on a technical solution and
implementation schedule relating to such failure. At any time, MCI may terminate
network services in a Market if such Market fails to meet certain service,
quality and capacity requirements.
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<PAGE> 57
Change of Control
If the Company sells or otherwise transfers control of any PCS license to a
third-party, MCI may require that the Company obligate the transferee or
purchaser to continue to provide services to MCI on the terms and conditions of
the MCI Agreement for the remaining term of the MCI Agreement or 30 months after
the consummation of such sale or transfer, whichever is later. In addition, the
Company has granted MCI a right of first refusal on the sale of its PCS license
in any Market during the term of the MCI Agreement, subject to compliance with
FCC rules and regulations. Such right of first refusal does not apply to the
acquisition of all the outstanding shares of the Company, whether by sale of
stock, merger or otherwise, or to a transaction involving the swapping or
exchange of PCS licenses which does not result in a net reduction of more than
1% of the POPs represented by the Company's PCS licenses.
For a description of certain warrants granted or agreed to be granted to
MCI in connection with the MCI Agreement, see "Description of Capital
Stock -- Other Options, Warrants and Convertible Debt -- MCI Warrants."
PURCHASE AGREEMENTS WITH RESALE SERVICE PROVIDERS
The Company has entered into five 10-year PCS Resale Agreements, covering
an aggregate of 25 billion MOUs, with each of Cellexis International
("Cellexis"), an Arizona-based company and one of the nation's largest
distributed prepaid wireless service providers, United Calling Network, Inc.
("UCN"), a Southern California-based LEC, Personal Communications Network, Inc.
("PCN"), a subsidiary of Electronic Communications Corp. which is a master agent
for Bell Atlantic NYNEX Mobile in the New York area, Flagship Wireless Inc., a
San Diego-based wireless service provider ("Flagship") and One Stop Wireless of
America, Inc., a wireless service provider based in Irvine, California ("One
Stop," and together with Cellexis, UCN, PCN and Flagship, the "Resale Service
Providers"). Such agreements are collectively referred to herein as the "PCS
Resale Agreements." Pursuant to the PCS Resale Agreements, the Company has
agreed to sell PCS services to the Resale Service Providers in each and every
Market for which the Company is awarded or otherwise obtains a PCS license, or
enters into a reciprocal airtime or roaming agreement with any local exchange
carrier or any local wireless operator. Under the PCS Resale Agreements, the
Company will provide the Resale Service Providers with Full Mobility Services.
Full Mobility Services will be provided to the Resale Service Providers as bulk
airtime.
Purchase Commitment and Pricing
Under the PCS Resale Agreements, the Resale Service Providers have each
agreed to Purchase, on a take-or-pay basis, a minimum of five billion MOUs from
the Company (the "PCS Resale Purchase Commitment"). The PCS Resale Agreements
each provide for a staggered PCS Resale Purchase Commitment over the 10-year
term of the agreements. The Resale Service Providers have each agreed to
purchase (i) at least 5% of their respective PCS Resale Purchase Agreement by
the end of three years from the date NextWave first offers Full Mobility Service
on a commercial basis in either the New York City or Los Angeles Market (the
"Commercial Service Date"); (ii) at least 25% of their respective PCS Resale
Purchase Commitment by the end of five years from the Commercial Service Date;
and (iii) 100% of their respective PCS Resale Purchase Commitment by the end of
the term of the agreements. Pricing for Full Mobility Services is derived from a
volume-based rate schedule or a discount from the prevailing market rates for
wireless mobile services, whichever is lower, subject to certain fixed price
floors. The PCS Resale Agreements also provide for additional pricing incentives
if the Resale Service Providers increase their respective annual MOU purchases
by more than 100% on a year-over-year basis or achieve certain average monthly
MOU sales per subscriber. In the event that Cellexis purchases in excess of 10
billion MOUs or UCN, PCN, Flagship or One Stop purchases in excess of five
billion MOUs during the 10-year term of their respective agreement, the parties
to such PCS Resale Agreement will meet to determine the pricing for volume
breaks above such MOU thresholds with respect to such party.
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<PAGE> 58
In addition, for each of the first four billion MOUs purchased by any of
the Resale Service Providers pursuant to their respective agreements, an
additional $0.02 per MOU will be remitted to a third party escrow agent by such
Resale Service Provider to ensure the purchase of its full PCS Resale Purchase
Commitment.
Conditions to PCS Resale Purchase Commitments
Under the PCS Resale Agreements, the obligations of the Resale Service
Providers to fulfill their respective PCS Resale Purchase Commitments at any
time is subject to certain conditions, including (i) the Company's provision of
Full Mobility Service to at least 40 million POPs by December 31, 1998, and at
least 70 million POPs by December 31, 2001; (ii) the Company's provision of
airtime in its Markets meeting jointly agreed upon technical specifications,
including specifications for availability, capacity, coverage, hand-off,
interconnection and service quality; and (iii) the Company's interconnection
with IXCs such as AT&T, Sprint and MCI via trunk connections with their points
of presence at the expense of the IXC and with other long-distance carriers
under similar conditions.
Reseller Switch Interface and Enhanced Services
NextWave will make available to the Resale Service Providers network
services (e.g., customer profile information, authentication and, if
practicable, call detail recording access) and other enhanced services (e.g.,
voice mail, call forwarding and call waiting) at mutually agreed upon prices.
NextWave will also make available to the Resale Service Providers a direct
connection interface to a switch owned and operated by each such Resale Service
Provider, as the case may be, for the delivery of such Resale Service Providers
calls, to and from the Public Switched Telephone Network ("PSTN"). In addition,
NextWave plans to offer a family of enhanced services which may include voice
mail, enhanced voice, short messaging, custom calling features (e.g., call
waiting, three-way calling, call forwarding, etc.), single number service,
e-mail, fax store and forward, star features and information services. These
services will be offered to the Prepaid Service Providers on an individual
and/or package basis on terms to be agreed upon. NextWave will also offer each
of the Resale Service Providers the opportunity to provide its own enhanced
services platform, subject to NextWave's right to set the interface standard for
any connection to NextWave's switches. Any costs involved with such interface
will be borne solely by such Resale Service Provider.
Term and Termination
The 10-year term of the PCS Resale Agreements commences on the first day of
commercial availability of Full Mobility Service in any of the Markets, provided
the conditions to the respective Resale Service Provider's obligation to fulfill
its PCS Resale Purchase Commitment have been met, after which such agreement
will be renewable, at such Resale Service Provider's option, respectively, for
an additional five-year period, at prices to be agreed upon by the parties. One
year prior to the expiration of the initial 10-year term, the parties will meet
to determine the pricing of the five-year renewal period. If the parties are
unable to reach an agreement on the pricing at least six months prior to the
expiration of the initial 10-year term of the PCS Resale Agreements, the then
existing terms and conditions, including pricing, will continue for a transition
period of six months after the expiration of the initial 10-year term.
The Company also has entered into other reseller agreements with regional
wireless service providers. These agreements cover the major metropolitan areas
in many of the Company's 11 regions.
PRODUCTS AND SERVICES
NextWave intends to offer a variety of specialized mobile wireless services
through its wireless CDMA networks. In addition to offering low cost MOUs to
mobile wireless resellers, the Company may offer fixed wireless local loop
services as well as support wireless PBX installations for its resellers'
customers. NextWave intends to interconnect its network with its resellers'
networks to provide a host of value-added products and enhanced services
allowing its customers to be more competitive. The Company expects its networks
will
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support features designed to increase usage and provide consumers greater
capabilities in call management, including the following:
Advanced Handsets. CDMA handsets weighing approximately eight ounces will
offer up to two days of standby time and approximately 240 minutes of talk time.
These handsets will be equipped with preprogrammed features such as speed dial
and last number redial. These handsets will be sold under the PCS service
provider's name.
Caller ID. The Company's networks will be capable of displaying the
telephone number of the incoming caller on the customer's handset, allowing the
customer to decide whether or not to accept the call or route to voice-mail.
Over-the-Air Activation. This feature will allow consumers to purchase a
shrink-wrapped handset "off the shelf" at a retail location and at their
convenience, place the first call automatically to an activation center and have
service initiated in a short period of time by programming the handset over the
air. The Company believes over-the-air activation will reduce the PCS service
provider's cost of customer acquisition.
Integrated Advanced Paging. The Company anticipates introducing integrated
advanced paging which will allow the handset to signal the receipt of an
incoming message and provide text messaging via the handset, thereby eliminating
the need for a separate paging unit. The handset will have the capability to
respond to incoming messages through pre-programmed responses or new user
defined messages.
Voice-Mail. This feature operates like an answering machine. A message
waiting indicator on the handset notifies the subscriber of a new message. The
Company plans to introduce the ability to "listen in" as a message is being
left, with the option to take the call or automatically call back.
Custom Calling Features. Additional features which the Company anticipates
offering include call waiting, call forwarding, distinctive ringing and call
blocking.
The Company believes that new features and services will be developed to
take advantage of CDMA technology and intends to offer a portfolio of products
to accommodate the growth in, and the unique requirements of, high speed data
traffic. The Company also plans to address a number of applications for wireless
data services which are currently envisioned (e.g., facsimile, wireless local
area networks, point-of-sale terminal connections). NextWave will implement an
Advanced Intelligent Network ("AIN") platform and integrate it into its service
offering to provide resellers with the capability to customize services and
features for specific customer groups.
The Company, through its subsidiary, TELE*Code, is developing certain niche
applications and products which the Company will offer both to its resellers
and, in certain circumstances, directly to end-users such as hospitals,
universities, banks and utilities. NextWave, in conjunction with a number of
major utilities, intends to implement highly integrated wireless networks in
support of wireless meter reading applications, home automation applications,
demand side management and other consumer and business applications. TELE*Code
has entered into a relationship with SONY to develop niche consumer products,
including certain wireless local loop products and services.
The Company believes that its 30 MHz licenses awarded in the C-Block
Auctions, as well as the 10 MHz licenses for which it was named the winning
bidder in the D, E and F-Block Auctions, will provide sufficient bandwidth to
deploy all of these products and services while meeting its targeted usage
levels for basic wireless services. Upon final grant of the licenses for which
it was named the winning bidder in the D, E and F-Block Auctions, the Company
intends to pursue strategic alliances with certain potential partners in its D,
E and F-Block Markets where it may be helpful to avoid network capital costs
associated with additional base stations that may be otherwise required to
deploy these products and services.
Substantially all of these value-added products and services remain under
development by the Company or the manufacturers of CDMA infrastructure
equipment. There can be no assurance if and when such products and services may
be available for sale by the Company.
NETWORK BUILD-OUT
General. The Company intends to launch commercial services in several key
Markets in 1997. The initial Markets that are expected to commence service
include Boston, San Diego, Orlando, and San Antonio.
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The New York City, Los Angeles, Washington, D.C./Baltimore, and Houston Markets
are scheduled to follow with commercial service anticipated early in 1998. The
Company plans to continue to bring additional Markets into service during 1998,
with the majority of C-Block Markets in service by the end of 1998. The Company
intends to commence service in selected D, E and F-Block Markets within one year
of the award of its licenses. Under its network build-out plan, the Company
currently anticipates that it will complete the build-out of its Markets by the
end of 2000, at which time the Company anticipates that 80% of its licensed POPs
will be served.
In May 1996, the Company began its initial site acquisition for the
build-out of its Markets. The Company rapidly staffed its regional engineering
and implementation personnel to manage and support the national network
deployment. As of January 15, 1997, NextWave employed approximately 240 field
engineering and operations personnel. In addition, approximately 300 contractors
and consultants have been engaged to support the Company's current site
development, microwave relocation and network design activities. To more
efficiently manage network deployment, the Company's Markets are grouped into 11
regions. As of January 15, 1997, 17 regional field implementation offices were
established to direct local buildout activities.
The Company has also installed and operated CDMA demonstration systems in
its San Diego and Washington, D.C./Baltimore Markets. At the Republican National
Convention in San Diego in August 1996, the Company conducted the first C-Block
PCS call under a special temporary authority from the FCC. A second system was
installed and activated in Washington, D.C. in October 1996.
Unlike many other PCS operators, NextWave will perform a substantial
portion of its own network design and systems engineering, rather than relying
predominantly on equipment vendors to provide such services. The Company
believes it will garner certain competitive advantages by designing its networks
in-house using its proprietary CDMA engineering tools rather than out-sourcing
such services from equipment vendors. These advantages include optimizing cell
count in the PCS network (rather than over-installing equipment), lower
engineering costs, customized network management, and implementation of common
engineering guidelines and tools. The Company may face certain disadvantages by
performing its own system design and engineering, including increased potential
for system performance disputes with vendors and the Company's reliance on
recruiting and retaining qualified engineering personnel.
Network Planning and Design. The Company's national network planning and
systems design are being performed by TELE*Code. Through TELE*Code, the Company
is establishing a highly skilled and experienced wireless network engineering
services and software product development organization. TELE*Code is developing
software engineering tools and system designs that are intended to accelerate
the deployment of the Company's PCS networks while at the same time improving
the quality and performance of the networks and reducing costs associated with
the deployment, operation and maintenance of the networks. The Company has
completed its initial regional network engineering plans and is now completing
the review of its network services platform. Switching facilities are now under
development in eight regions with construction at or near completion in three.
Extensive evaluations of network management and operations platforms with
customization to support technical and market trials are underway in the
Company's New York offices. In addition, the Company has initiated preliminary
discussions with CLECs and LECs to establish low cost interconnection with its
network.
Radio Frequency Engineering. Beginning in June 1996, as qualified sites
were identified, the Company conducted extensive RF field measurements and
engineering studies in all of its Markets to optimize the performance of its RF
planning tools and to assess prospective sites for development. During its
initial Market assessments, the Company pre-qualified over 4,000 sites and has
incorporated these sites where practical into its detailed system design.
NextWave has completed its detailed RF engineering plans for deployment of CDMA
systems in its New York City, Los Angeles, Boston, Washington, D.C./Baltimore,
Houston, Cleveland, San Diego, Tampa, San Antonio and Austin Markets. The RF
design process includes cell site coverage and channel capacity planning and
considers both PCS and microwave interference issues.
Site Acquisition and Development. NextWave has deployed regional teams and
has engaged the services of selected consultants to assist it in the location
and development of cell sites. Since May 1996, the Company has initiated 60-90
day bulk site assessments in all nine initial C-Block regions and has completed
these
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activities in eight regions. To date, all field assessments resulted in
cataloging and identifying over 8,000 qualified sites required to support the
detailed RF design. The Company believes that approximately 20% of its initial
sites can be acquired through bulk leasing. NextWave has made substantial
progress in identifying these opportunities and is actively pursuing master
lease agreements. Examples of parties with which the Company may negotiate bulk
site leases include utility companies, port and transit authorities,
transportation and highway departments, large housing projects, and government
agencies. The Company has several hundred leases in review and has control of
approximately 10% of the sites required to be leased in 1997. In connection with
the MCI Agreement, MCI has agreed to provide to the Company on competitive
certain terms services to facilitate the build-out of the Company's network,
including leasing locations for switch installation and co-location of NextWave
cell sites with MCI facilities and the use of MCI Metro's facilities and MCI's
long-distance T-1 and T-3 lines for backhaul to interconnect the NextWave
network of base stations and switches.
Zoning and Permitting. The Company is proactively identifying areas where
zoning delays may impact site development. When such areas are identified,
engineering personnel will seek alternative sites before the core design is
attempted. The Company will review zoning requirements early in the site
development process and identify ways to reduce or eliminate approvals by
modifying designs or adjusting locations to collocate with existing operators
and thereby minimize the necessity of tower construction.
Program/Construction Management. Since May 1996, the Company has completed
detailed requests for quotation for outsourced site acquisition, construction
management, materials and site development services. The Company has entered
into agreements for construction management services with Volt Information
Sciences, Koll Telecom, Black & Veatch, GTE and Stone & Webster to support its
activities. NextWave also has entered into an agreement with LCC International
to provide the Company with no less than $50 million of RF engineering services,
program management services, software and test equipment over a five and one
half year period. The Company has entered into a purchase and supply agreement
with The Allen Group for the purchase by the Company of $50 million worth of
products and services, including test equipment, microwave relocation services,
antennae and other base station materials. The Company is implementing its
network production and staffing plans for each of its 11 regions to identify
resource requirements and establish schedules for site construction, testing and
integration. Network build-out costs will be tracked and captured in the
Company's client/server-based financial accounting systems. A comprehensive
project, location and functional coding structure is in place to capture all
network deployment costs. The Company's financial systems are being extended and
integrated with project cost accounting capabilities, workflow management, asset
tracking and detailed budgeting systems. The Company plans to implement bar
code-based asset tracking to control the placement and location of its assets in
each of the regions.
Incumbent Microwave Relocation. NextWave has performed engineering studies
which indicate that there are approximately 750 microwave links, utilized by
utility companies, public safety agencies, corporations and other carriers
within the Company's C, D, E and F-Block spectrum allocation. The Company's
studies indicate that approximately 75% of these links will require relocation
at an average cost of approximately $250,000 per link to permit the launch of
initial service. Of the approximately 550 links requiring relocation, more than
60% of these have been or will be relocated by A, B and C-Block licensees and
will result in payments by the Company to such licensees under a cost sharing
program established by the FCC. The Company expects to have to relocate fewer
than 100 links in order to establish commercial CDMA service in its initial
markets.
Systems and Operations Management. The Company is implementing advanced
information systems to manage the build-out of the networks and to facilitate
communication between personnel. The Company has completed its initial technical
evaluation of leading network management platforms. The Company will customize
third party systems for network management and provide for integrated dispatch
with field operations to rapidly respond to network faults. NextWave plans to
build regional 24-hour operations centers to effectively monitor network
quality.
During May 1996, NextWave completed the implementation of the Oracle(TM)
Financial Suite software system to manage its purchasing, accounts payable and
general ledger functions. The Oracle fixed assets and project accounting modules
are utilized to manage the operational requirements of the build-out. This
software will allow engineering and operations managers access to costing
information to assist in managing a
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cost-effective PCS network deployment and in pricing the Company's MOUs. In
October 1996, the Company issued its detailed request for quotation regarding
the Company's billing, provisioning and other network interface systems to
support its customer requirements.
CDMA TECHNOLOGY
NextWave believes that CDMA technology is fundamental to accomplishing its
business objective of providing high volume, high quality airtime at a low cost.
CDMA technology has been implemented on a wide commercial scale in the United
States and certain Asian and South American markets over the last 12 months.
CDMA networks are currently operating in such U.S. markets as Los Angeles,
Chicago, Houston, Dallas-Fort Worth and over 40 other markets worldwide. The
first commercial use of CDMA began in October 1995 in Hong Kong for 800 MHz
cellular operations. Two cellular networks in Korea began operation using CDMA
technology in April 1996. As of December 1996, these Korean CDMA networks had
over 900,000 subscribers. The Company believes that CDMA provides important
system performance benefits.
Voice Quality. CDMA systems offer more powerful error correction, less
susceptibility to fading and reduced interference than analog systems. Using the
13 kbps vocoder, CDMA systems achieve voice quality that is comparable to the
typical wireline telephone. This CDMA vocoder technology also employs adaptive
equalization which filters out annoying background noise more effectively than
existing wireline, analog cellular or other digital PCS phones.
Greater Capacity. CDMA technology allows a greater number of calls within
one allocated frequency and reuses the entire frequency spectrum in each cell,
rather than using only one-seventh of the available spectrum in each cell which
is typically the case with analog, TDMA and GSM systems. CDMA systems are
expected to provide capacity gains of up to 10 times over the current analog
system, while TDMA and GSM systems are expected to increase capacity by only two
to three times.
CDMA technology is designed to provide flexible or "soft" capacity which
will permit a system operator to temporarily increase the number of telephone
calls that can be handled within a cell. When capacity limitations in analog,
TDMA and GSM systems are reached, additional callers in a given cell must be
given a busy signal. Using CDMA technology, the system operator will be able to
allow a small degradation in voice quality to provide temporary increases in
capacity. This is expected to reduce blocked calls and increase the probability
of a successful cell-to-cell hand-off.
Soft Hand-off. CDMA systems transfer calls throughout the network using a
technique referred to as a soft hand-off, which connects a mobile customer's
call with a new cell site while maintaining a connection with the cell site
currently in use. CDMA networks monitor the quality of the transmission received
by both cell sites simultaneously to select a better transmission path and to
ensure that the network does not disconnect the call in one cell until it is
clearly established in a new one. As a result, fewer calls are dropped compared
to analog, TDMA and GSM networks which use a "hard hand-off" and disconnect the
call from the current cell site before connecting it with a new one.
Fewer Cell Sites. Because of efficient digital modulation, soft hand-off
capabilities and other technological advantages, networks using CDMA are able to
achieve a greater radius of coverage and therefore require fewer cells than
analog, TDMA or GSM systems. Recent network build-outs indicate that 50% fewer
cells are required for CDMA systems as compared to analog systems. Similarly,
CDMA systems are expected to require 30-50% fewer cells than TDMA or GSM
networks under similar loading conditions. The need for fewer cells results in
significant reductions in overall capital requirements, lower ongoing
maintenance and operating costs, fewer cell sites to be acquired and greater
flexibility in network design.
Advanced Services and Features. CDMA will permit NextWave to offer its
customers advanced features such as simultaneous voice and data transmission
and, ultimately, high-speed wireless applications such as video, multimedia and
ISDN-rate data services.
Privacy and Security. One of the benefits of CDMA technology is that it
combines a constantly changing coding scheme with a low power signal to enhance
security and privacy. Vendors are currently developing additional encryption
capabilities which will further enhance overall network security.
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Simplified Frequency Planning. Frequency planning is the process by which
wireless service providers analyze and test alternative patterns of frequency
use within their systems to minimize interference and maximize capacity.
Currently, cellular service providers spend considerable cost and time on
frequency planning. Because TDMA and GSM based systems have frequency reuse
constraints similar to present analog systems, frequency reuse planning for TDMA
and GSM based systems is expected to be comparable to planning for the current
analog systems. With CDMA technology, however, the same subset of allocated
frequencies can be reused in every cell, substantially reducing the need for
costly frequency reuse patterning and constant frequency plan management.
Longer Battery Life. Due to their greater efficiency in power consumption,
CDMA handsets will provide a longer talk time and standby availability than
those utilizing alternative digital or analog technologies.
EQUIPMENT VENDORS
In connection with the construction of its PCS network and the preparation
for launch of commercial service, the Company has entered into numerous
contracts with various vendors of CDMA infrastructure equipment. The Company has
obtained financing commitments from Hughes, Lucent, LGIC, Comdisco and The Allen
Group providing for up to $1.445 billion of vendor financing facilities for the
purchase of CDMA infrastructure equipment and services, $1.25 billion of which
could become available to the Company in 1997. In addition, LGIC has committed
to provide an additional $500 million of financing subject to the Company
meeting certain milestones. Lucent and Hughes have the option, at their
election, to supply up to approximately $1.6 billion of additional equipment for
the build-out of certain Markets, subject to their agreement to provide the
financing for such purchases. These vendor supply arrangements are described
below.
Hughes
Hughes Supply Agreement. Pursuant to the Hughes Supply Agreement, Hughes
has committed to supply and finance the purchase by the Company of PCS
infrastructure equipment and ancillary services. Hughes will provide $245
million of equipment and services to the Company for deployment pursuant to
vendor supply contracts to be entered into pursuant to the Hughes Supply
Agreement (the "Hughes Initial Equipment"). Pursuant to the Hughes Supply
Agreement, Hughes has the option to provide a vendor financing facility to
finance the purchase of up to an additional $755 million in PCS infrastructure
equipment and services through December 31, 2002 (the "Additional Hughes
Equipment"). Hughes would finance the purchases of the Hughes Initial Equipment
under the Hughes Credit Facility described below.
During the 180-day period following the closing of the Equity Offering,
Hughes may deliver a notice to the Company of the availability of an additional
$245 million in vendor financing to finance the purchase of Additional Hughes
Equipment in certain Markets. During the period from June 1, 1998 through
December 31, 2002, the Company will offer to purchase the remaining portion of
the Additional Hughes Equipment for deployment in certain Markets. The Hughes
Supply Agreement provides Hughes with rights to supply such infrastructure
equipment to the Company in those Markets on favorable terms and at competitive
prices.
In connection with the Hughes Supply Agreement, contingent upon the
conversion of the Hughes Convertible Note, the Company has committed to make
certain research and development funding payments to Hughes in the amount of $8
million, payable in 1997. In the event that the price per share
attributable to the Series B Common Stock in the Equity Offering exceeds $8.00
(calculated by subtracting the value of the CTR from the price per Equity Unit
in the Equity Offering), such $8 million will be payable in two equal
installments in October 1997 and October 1998. In the event the price per share
attributed to the Series B Common Stock in the Equity Offering is less than
$7.00 (calculated by subtracting the value of the CTR from the price per Equity
Unit in the Equity Offering), such amount would be increased pursuant to a
formula based on the public offering price, up to an aggregate of $12 million,
and, subject to certain conditions, would be payable in three installments over
three years.
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Hughes Credit Facility. In connection with the Hughes Supply Agreement,
and pursuant to a term sheet dated October 30, 1996, between the Company and
Hughes, Hughes has committed to provide the Company with a vendor credit
facility (the "Hughes Credit Facility") for 100% of the purchase price of PCS
infrastructure equipment and services provided by Hughes for the Hughes Initial
Equipment up to an aggregate of $245 million (the "Hughes Initial Financing").
Of this amount, $150 million will be available immediately upon the satisfaction
of the conditions precedent to funding under the Hughes Credit Facility, and the
remaining $95 million will be available when the Company is providing service
coverage for at least 70% of the POPS in BTAs having at least 55 million POPs.
Amounts borrowed by the Company under the Hughes Credit Facility will be payable
over an eight-year period following the quarter during which such amounts were
borrowed and will bear interest at the six-month LIBOR rate plus an applicable
margin. The Hughes Credit Facility will terminate if no amounts have been
borrowed thereunder by March 30, 1998, and in any event the right to borrow will
terminate on December 31, 1999.
Hughes will have the right to convert up to 11% of the principal of each
loan made in connection with the Hughes Initial Financing into shares of Series
B Common Stock of the Company for two years following the applicable Conversion
Date (as such term is defined below), at a price per share equal to 90% of the
average closing price of such stock over the 30-day period immediately preceding
the earlier of Conversion Date or , 1997. The "Conversion Date" shall
mean the earlier to occur of (i) the date upon which the purchase price for
equipment or services financed under the Hughes Credit Facility becomes
contractually due and payable by the Company or its subsidiaries under the
applicable vendor supply contract with Hughes and (ii) the date upon which such
equipment is placed in commercial service.
Loans made in connection with the Additional Hughes Equipment will bear
interest at the six-month LIBOR rate plus an applicable margin. Interest will be
payable quarterly and will adjust at the end of each six-month interest period,
provided that the total adjustment over the term of the loan will not exceed 2%.
In addition, 10% of each draw under such additional vendor financing facility
will be convertible into registered Series B Common Stock for a period of two
years following the Conversion Date (as such term is defined above) at a price
equal to the average closing price of the Series B Common Stock over the 30-day
period immediately preceding such Conversion Date. On or after the end of the
13th month after the date of each loan made under the facility, Hughes must
exercise its conversion rights if the average closing price of the Series B
Common Stock for any 30-day period is greater than 120% of the conversion price.
In the event Hughes fails to so exercise its rights, Hughes will forfeit its
conversion rights with respect to the applicable loan.
Lucent Technologies
Lucent Procurement Agreement. Pursuant to the Lucent Procurement
Agreement, the Company has committed to purchase $200 million worth of PCS
infrastructure equipment, software and ancillary services ("Lucent Initial
Equipment") by December 31, 1998, for deployment in certain Markets. The
parties' obligations under the Lucent Procurement Agreement are subject to
Lucent's obligation to make loans under the Lucent Credit Facility (as defined
below) becoming effective on or before , 1997.
The Lucent Procurement Agreement provides for appropriate warranty periods
for new equipment, repaired or replacement equipment or parts and services. The
warranty periods run from delivery or, if installed by Lucent, from final
acceptance by the Company or 30 days from the date Lucent submits its notice of
completion of its installation, whichever is sooner. The Lucent Procurement
Agreement provides the Company with certain remedies for equipment failures
which result in system outages of specified duration which remain uncured by
Lucent. The Lucent Procurement Agreement also provides for cancellation and
other remedies of the Company in the case of continuous late deliveries of
equipment by Lucent.
Pursuant to the Lucent Procurement Agreement, Lucent has the option (the
"Lucent Option") to cause the Company to purchase up to an additional $800
million worth of PCS infrastructure equipment and related software and services
("Additional Equipment"), subject to the provision by Lucent of 100% financing
for such purchases and such purchases and financing being on mutually-acceptable
terms and conditions. The
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Lucent Option may be exercised until May 14, 1997. The right of Lucent to
exercise the Lucent Option is contingent on its committing to provide sufficient
additional equipment and related software and services to satisfy the Company's
continuing build-out requirements in Company Markets where Lucent has deployed
the Lucent Initial Equipment. The purchase and financing of any Additional
Equipment shall be on terms and conditions no less favorable to the Company than
those generally available to the Company in the market place at the time of such
purchases.
Lucent Credit Facility. In connection with the Lucent Procurement
Contract, Lucent has committed to provide the Company with a vendor credit
facility (the "Lucent Credit Facility") and, subject to the conditions of the
Lucent Credit Facility, will fund 100% of the contract price of any equipment
and services that becomes contractually due and payable to Lucent and/or its
affiliates under the Lucent Procurement Contract, up to an aggregate of $200
million. Loans made under the Lucent Credit Facility will be made by book entry
against amounts payable to Lucent under the Lucent Procurement Contract, and no
cash will be advanced to the Company. Amounts borrowed by the Company under the
Lucent Credit Facility will be payable over the last five years of an eight-year
period beginning on the last day of the calendar quarter immediately preceding
the calendar quarter during which such amounts were borrowed and will bear
interest at LIBOR plus an applicable margin.
LGIC
LGIC Supply Agreement. Pursuant to the LGIC Supply Agreement, and subject
to the successful completion of the market trial of LGIC PCS equipment in the
Denver Market (see "-- Market Trials"), the Company will purchase and LGIC will
sell at least $300 million worth of PCS infrastructure equipment and ancillary
services from LGIC (the "LGIC Initial Commitment"). Under the LGIC Supply
Agreement, the parties will enter into definitive purchase and supply agreements
for the LGIC Initial Commitment by February 28, 1997, for equipment to be
delivered over the next three years. In addition to the LGIC Initial Commitment,
the LGIC Supply Agreement provides the Company with the right, subject to LGIC's
acceptance, to purchase (i) up to an additional $400 million worth of
infrastructure equipment and ancillary services through December 31, 2002, and
(ii) up to an additional $500 million worth of equipment and services during the
period from January 1, 2000 through December 31, 2002.
LGIC Credit Facility. In connection with the LGIC Supply Agreement, LGIC
has committed to provide the Company with a vendor credit facility (the "LGIC
Credit Facility") for 150% of the contract price (the "Equipment Value") of PCS
infrastructure equipment and services provided by LGIC under vendor supply
contracts to be entered into pursuant to the LGIC Supply Agreement, up to an
aggregate of $1.2 billion, counting as principal all interest that has been
added to principal. LGIC shall fund, subject to the conditions of the LGIC
Credit Facility, loans in an amount equal to 100% of the Equipment Value of any
equipment that becomes contractually committed for delivery under a vendor
supply contract with LGIC to be purchased under any such vendor supply contract.
In addition, LGIC has agreed to provide NextWave with financing for its soft
costs in an amount equal to 50% of the Equipment Value of the equipment that
NextWave commits to purchase as of the date of the delivery obligation. No more
than $700 million in aggregate principal amount shall be available for funding
during the period commencing January 1, 1997 and expiring December 31, 2002.
Loans in excess of $700 million will be available to NextWave only after January
1, 2000, unless an earlier date is approved by LGIC and NextWave, and only if
NextWave has at the time of any such loan raised an aggregate of at least $1
billion in financing (including equity and debt financings, but excluding vendor
financings) since September 30, 1996.
Amounts borrowed by the Company under the LGIC Credit Facility will be
payable over the last five years of an eight-year period beginning on the last
day of the calendar quarter immediately preceding the calendar quarter during
which such amounts were borrowed and will bear interest at LIBOR plus an
applicable margin.
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Vendor Financing -- General Terms and Conditions
The following is a description of the general terms and conditions that are
common to the Company's vendor financing arrangements with Hughes, Lucent and
LGIC (referred to herein as "Vendor Financing").
Guaranties and Security. All obligations of the Company under the Vendor
Financing will be guaranteed (i) on a senior basis, by the RegionalSubs and
LicenseSubs in those regions where equipment purchased with the Vendor Financing
has been installed; and (ii) on a subordinated basis, by all of the RegionalSubs
and LicenseSubs. The obligations of the Company and such guarantors will be
secured by a perfected lien created pursuant to a collateral trust agreement in
favor of a collateral trustee satisfactory to each of the Company's vendors (the
"Trustee Lien") on substantially all tangible and intangible (including
intellectual property) assets of NextWave Wireless, the RegionalSubs and the
LicenseSubs, including, without limitation, (a) the capital stock of each
RegionalSub or LicenseSub, (b) all right, title and interest of NextWave
Wireless and its subsidiaries under all contracts from time to time in effect
pertaining to the purchase of MOUs (the "MOU Contracts"), (c) to the extent
permitted by law and subject to the terms and conditions under which the C-Block
PCS licenses were granted and any prior lien securing deferred payments due to
the United States government for acquisition of the C-Block PCS licenses and the
interest thereon, the C-Block PCS licenses and the proceeds from the sale or
transfer of such licenses (the collateral listed in clauses (a), (b) and (c),
the "Collateral").
Guarantee of Notes. Pursuant to the Vendor Financing, Wireless may
guarantee the obligations of the Company in respect of any public indebtedness
(such as the Notes) if and only if such guarantee is unsecured and subordinated
to the obligations of Wireless in respect of any indebtedness incurred under the
Vendor Financing. No claim under such subordinated guarantee may be made until
(i) the expiration of 179 days after notice to Wireless from the agent for loans
made pursuant to the Vendor Financing that Wireless is prohibited from paying
dividends (a "Dividend Block") to the Company because of an event of default
under the Vendor Financing, provided that such Dividend Block is continuing at
the end of such period and (ii) the commencement of bankruptcy proceedings in
respect of Wireless.
Conditions to Vendor Financing. The Vendor Financing is subject to certain
conditions, including (i) the execution and delivery of definitive financing
documentation; (ii) the due issuance of the C-Block PCS licenses and the payment
by the Company of all amounts due and payable to the United States Government in
connection therewith; (iii) the receipt by each of Hughes, LGIC and Lucent of a
business plan of the Company and its subsidiaries, prepared on a national and
regional basis, reasonably satisfactory to each of Hughes, LGIC and Lucent; (iv)
the receipt by the trustee of fully executed consents in respect of each MOU
Contract regarding the payment of amounts pursuant to such contracts to the
trustee in accordance with the Trustee Lien; (v) there not occurring any
material adverse condition or material adverse change in or affecting the
business, operations, property condition or prospects of the Company or any of
its subsidiaries or any default or event of default; (vi) the completion of the
Offerings and receipt by the Company of at least $500 million in connection
therewith; and (vii) the repayment in cash of not more than $40 million in
principal amount of the Bridge Notes.
The Hughes Credit Facility is also subject to, among other things, (i) the
execution of vendor supply contracts reasonably acceptable to Hughes providing
for the purchase and financing of the equipment and services necessary to
build-out each of the operating regions not covered by Hughes vendor supply
contracts at the levels specified in the Company's business plan through the
year 2000, and (ii) before , 1997, the CDMA infrastructure
equipment to be deployed by the Company shall have satisfied certain product and
system acceptance testing requirements.
The LGIC Credit Facility is also subject to, among other things, (i) the
execution of a vendor supply contract by the Company or its subsidiaries and
LGIC satisfactory to LGIC and having an aggregate value of not less than $300
million (as contemplated by the LGIC Strategic Supply Agreement), and (ii) the
repayment in full of all loans funded pursuant to the LG Loan Agreement (see
"Description of Capital Stock -- Other Options, Warrants and Convertible Debt").
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The LGIC and Lucent Credit Facilities are further conditioned upon (i) the
receipt by LGIC and Lucent, respectively, of all approvals, consents, permits or
licenses necessary to their respective vendor supply contracts or the LGIC
Credit Facility from the applicable governmental (with respect to LGIC, Korean)
authorities; (ii) the receipt by the Company of all necessary governmental
consents and approvals and the making of all filings required to be made and
notices required to be given under any applicable law; and (iii) the approval by
LGIC and Lucent, respectively, of all material agreements between the Company
and any of its subsidiaries.
The Lucent Credit Facility is also subject to, among other things, (i) the
receipt by Lucent of payment by the Company of all amounts then due to Lucent
under the Lucent Procurement Agreement or any other agreement between Lucent and
the Company or any of its subsidiaries and (ii) the execution by the Company of
definitive agreements for Vendor Financing in an aggregate amount of not less
than $1 billion, including the Lucent Credit Facility, with commitments
reasonably satisfactory to Lucent.
The making of each subsequent loan under the Vendor Financing will be
subject to the satisfaction by the Company of several ongoing conditions,
including the continued truth of all representations and warranties of the
Company, the absence of any defaults or events of default under the Vendor
Financing, the continuation of the Vendor Supply Contracts and, with respect to
the Lucent and LGIC Credit Facilities, the delivery by the Company of a drawdown
notice to such Vendor at least three or 10 business days, respectively, prior to
the disbursement date.
Mandatory Prepayment Under Vendor Financing. If any RegionalSub sells or
otherwise disposes of or suffers a loss with respect to equipment supplied
pursuant to a Vendor Supply Contract or other assets, the aggregate book value
of which is greater than $5 million and fails to reinvest the proceeds of such
sale, loss or disposition within 270 days after the receipt thereof (180 days
with respect to equipment or other assets supplied by Lucent), then such
proceeds must be used to prepay, without premium or penalty and in an order and
amount consistent with the relative priorities of the Shared Lien, the loans
under the Vendor Financing from the Vendor that supplied such equipment, on a
ratable basis, and any other Vendor Financing being provided to such subsidiary
to finance a to-be-agreed-upon amount of infrastructure equipment and other
assets in such subsidiary's region. In addition, under the Lucent Credit
Facility, if the Company wishes to make any voluntary prepayment of any Vendor
Financing or other bank credit facility, the Company must offer to each lender
under the Vendor Financing or other bank credit facility to prepay such loans,
on a ratable basis, with the amount of such intended prepayment. To the extent
such offer is accepted, the amount the Company intended to prepay will be paid
to such accepting lenders on a ratable basis. Mandatory prepayment of the Hughes
Credit Facility is also required (i) if either the FCC license for a BTA or the
stock of the LicenseSub holding such FCC license is sold or otherwise disposed
of by NextWave (in which case the loans under the Hughes Credit Facility whose
proceeds were used to finance equipment installed in such BTA must be prepaid in
full); (ii) if either NextWave or NextWave Wireless sells or otherwise disposes
of any asset or group of assets the book value of which is greater than $5
million (other than assets sold in the ordinary course of business or assets
unrelated to NextWave's PCS network) (in which case a ratable proportion of such
proceeds must be used to prepay loans made under the Hughes Credit Facility); or
(iii) if the Company makes any voluntary or mandatory prepayment of any
indebtedness (other than a mandatory prepayment with the proceeds of
dispositions of assets), the loans made under the Hughes Credit Facility must be
proportionately prepaid.
MOU Contracts. Pursuant to the Vendor Financing, all payments with respect
to the MOU Contracts (and, under the Lucent Credit Facility, other cash
receipts) will be deposited in a cash collateral account to be disbursed
according to certain procedures agreed to by the parties. Each purchaser under
an MOU Contract (and, under the Lucent Credit Facility, other revenue producing
contract) will enter into a consent and acknowledgment with a trustee and
NextWave and its subsidiaries agreeing to such procedures and committing to make
all payments under its respective MOU Contract to the trustee.
Other Terms of Vendor Financing. The Vendor Financing will contain a
number of covenants that, among other things, limit the ability of NextWave
Wireless, the RegionalSubs and the LicenseSubs (to the extent applicable) to
incur additional indebtedness, create liens and other encumbrances, sell or
otherwise
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dispose of assets, make acquisitions, investments, loans and advances, merge or
consolidate with another entity or engage in any business other than the
communications service business and related activities, make distributions to
the Company, or enter into transactions with affiliates. In addition, the Vendor
Financing will require compliance with certain specified financial and operating
covenants, including, without limitation, the maintenance of ratios of total
debt to total capitalization, total debt to EBITDA, EBITDA to cash interest
expense and capital expenditure limitations, which are yet to be determined by
the Company and the respective vendors.
The Vendor Financing will contain representations, warranties, covenants,
and events of default customary for such senior credit facilities of similar
size and nature. Specifically, the Company will be deemed to be in default under
the LGIC and Lucent Credit Facilities if, among other things, the breach of any
term of the PCS licenses would reasonably be expected to have a material adverse
effect on the Company and its subsidiaries or, under the Lucent Credit Facility,
if, among other things, the Company fails to maintain PCS Licenses including at
least 80% of the POPs covered by the PCS Licenses as originally granted. The
Company will be deemed to be in default under the Hughes Credit Facility if any
of the following events, among others, occur: (i) the termination, revocation or
non-renewal by the FCC of the Company's C-Block PCS licenses if, after giving
effect thereto, the aggregate number of POPs which the Company or its
subsidiaries which hold Hughes' supplied equipment then have a right to serve is
less than 90 million or 17 million, respectively; and (ii) the failure of MOU
Contracts representing the sale of at least 20 billion MOUs (including the MCI
Agreement) to be in full force and effect. Hughes, LGIC and Lucent will each be
afforded "most favored lender" status (other than with respect to commitment
availability, pricing and payment provisions) under their respective Vendor
Financings and the Vendor Supply Contracts.
Comdisco Network Equipment Lease Facility
On November 8, 1996, the Company and Comdisco entered into a five-year
Master Lease Agreement (the "Master Lease Agreement") pursuant to which Comdisco
has agreed, subject to completion of the Offerings and receipt by the Company of
at least $500 million in connection therewith, to provide a $250 million
equipment lease facility to be used to finance the purchase of
telecommunications equipment, including switching and base station equipment and
service costs associated with equipment installation and deployment. The
agreement provides for financing for up to $150 million of equipment purchases
from either Lucent or NorTel, with an additional $100 million in financing to be
available upon the Company's achieving certain financial and operational
milestones. Lease payments by the Company under the Comdisco facility will be
based on interest at the five-year treasury rate plus an applicable margin,
subject to a specified maximum interest rate. The Company has the option to
purchase the equipment subject to the Master Lease Agreement during or at the
end of the lease term.
Allen Group Soft Cost Procurement and Financing
On November 8, 1996, the Company executed a Purchase and Supply Agreement
with The Allen Group, an Ohio-based holding company with several subsidiaries
that provide telecommunications products and services, such as Decibel Products,
Comsearch, Grayson Electronics and Antenna Specialists. Pursuant to the
five-year agreement, subject to completion of the Offerings and receipt by the
Company of at least $500 million in connection therewith, The Allen Group will
supply and finance up to $50 million worth of products and services such as
antennas, test equipment and engineering services. Subject to delays in the
Company's build-out of its PCS networks for reasons beyond the Company's
control, the Company will purchase 40% of the products and services within the
first two years of the term of this agreement and 20% over each of the following
three years. The Company may make monthly drawdowns under the facility and
amounts borrowed under the agreement will bear interest at the prime rate plus
an applicable margin for the first three years of the term of the agreement and
at the prime rate for the remaining two years of the term.
With respect to each loan made during the first three years of the term, no
payments will be due from the Company for a period of 18 months after the
drawdown of each such loan, payments will be interest only for the next eighteen
months and a balloon payment of all principal and accrued but unpaid interest
will be due three years after the drawdown of each such loan. With respect to
each loan made during the last two years of
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the term, no payments will be due for a period of 18 months after the drawdown
of each such loan, payments will be interest only for the next six months and a
balloon payment of all principal and accrued but unpaid interest will be due two
years after the drawdown of each such loan. The Allen Group Purchase and Supply
Agreement provides that The Allen Group will hold a purchase money security
interest in the equipment purchased thereunder.
QUALCOMM Equipment Requirements Agreement
Pursuant to the terms of an Equipment Requirements Agreement with QUALCOMM
(the "Equipment Requirements Agreement"), the Company agreed, under certain
conditions, to purchase QUALCOMM infrastructure equipment for deployment in
Markets representing up to 55 million POPs. The Equipment Requirements Agreement
further states that QUALCOMM will offer 100% equipment financing for equipment
purchased under such agreement. The terms of any equipment purchases will be
established in a further agreement under negotiation between the parties.
U.S. GOVERNMENT FINANCING
The Company successfully bid $4.9 billion for its 95 BTA licenses in the C,
D, E and F-Block Auctions. The FCC is providing C and F-Block licensees
favorable financing terms which include downpayments (10% for C-Block licenses
and 20% for F-Block licenses), interest only payments (six years for C-Block
licenses and two years for F-Block licenses) and principal amortization (years
seven through 10 for C-Block licenses and years three through 10 for F-Block
licenses). After the downpayments paid by the Company, the combined C and
F-Block obligation is approximately $4.4 billion. This debt is discounted on the
Company's financial statements at the estimated fair market value of $2.8
billion, when the favorable financing terms are reflected at a net present value
basis. See "Certain Indebtedness -- U.S. Government Financing."
MARKET TRIALS
LGIC Market Trial Agreement. The Company and LGIC have entered into a CDMA
Technical and Market Trial Agreement dated as of October 23, 1996 (the "Market
Trial Agreement"), pursuant to which the parties will institute a four-phase
process governing the testing and validation of certain PCS infrastructure
equipment produced by LGIC (the "Trial"). The Trial is intended to allow the
parties to verify the performance of LGIC's CDMA-based equipment, software,
firmware and any associated services (the "Trial Products") at one or more test
sites in the Denver Market. The Trial will be conducted pursuant to trial
specifications to be developed by the Company subject to LGIC's approval. The
Company is purchasing the Trial Products in contemplation of commercial
implementation of such equipment in the Denver Market upon the completion of the
Trial. To further such intent, the parties have agreed that all Trial Products
will be comprised of equipment released to commercial manufacturing and will not
include any prototype or pre-commercial equipment. In addition, the Trial
Products must meet certain minimum functionality requirements set forth in the
Market Trial Agreement.
Under the Market Trial Agreement, LGIC is responsible for providing certain
Trial services and support at no additional charge to the Company. Such support
includes training at either an LGIC training facility or at the Company's
facilities, as well as operations, technical and maintenance support throughout
the testing and initial operational periods of the Trial. In addition, LGIC
engineers will evaluate any reported defects during the Trial and will ensure
that for the duration of the Trial, all upgrades and enhancements to the
software, if any, are loaded or otherwise applied to the Trial Products and that
copies are promptly distributed to the Company. LGIC will also make its
engineers available to provide off-site training to the Company's engineers at
LGIC's standard prices for any additional support that may be needed in
connection with the use or support of the Trial Products.
Lucent Trial Agreement. Pursuant to the Lucent Procurement Agreement,
Lucent and the Company have agreed to use reasonable and diligent efforts to
negotiate and execute as soon as possible a definitive trial agreement by and
among the Company, Lucent and MCI Communications Corporation regarding the
deployment of products, software and services in the Washington, D.C./Baltimore
Market. Such trial
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agreement will provide that the Company will purchase from Lucent all of the
equipment, software and services required for the trial under the terms and
conditions of the Lucent Procurement Agreement. Pursuant to the Lucent
Procurement Agreement, the Company may purchase from Lucent equipment, software
and services for deployment in the Washington, D.C./Baltimore Market in
connection with the trial prior to the effectiveness of the Lucent Credit
Facility (such purchases, "Gap Purchases"). Gap Purchases will be subject to
pricing and payment terms that are slightly less favorable than those otherwise
provided in the Lucent Procurement Agreement but the Company will be eligible
for purchase credits upon the effectiveness of the Lucent Credit Facility in the
amount that the price for the Gap Purchases exceeded the price the Company would
have paid for such equipment, software and services had the Lucent Credit
Facility been effective.
COMPETITION
The wireless industry is characterized by intense competition between PCS,
cellular and other wireless service providers. Although NextWave does not expect
to compete directly with other PCS licensees, the Company's resellers will
compete directly with as many as five other PCS licensees in each of the
Markets. The A and B-Block licensees in the Markets, which include AT&T, Sprint
and PrimeCo Personal Communications L.P., have substantial financial resources
and have entered the PCS market earlier than the Company. The FCC has also taken
recent action to allow PCS licensees to partition and disaggregate their PCS
licenses into smaller service areas, which could provide new entrants with
further opportunities to enter the PCS market.
NextWave, through its PCS service providers, will also face competition
from the incumbent cellular providers in each of the Markets. The majority of
these incumbents have infrastructure, a customer base and brand-name in place,
as well as substantial financial resources. Many have been operational for at
least 10 years and are expected to upgrade their networks to provide digital
services in competition with the Company. Principal cellular providers in the
Markets are AirTouch Communications, Inc., Ameritech Cellular, AT&T, Bell
Atlantic NYNEX Mobile, BellSouth Mobility, Inc., GTE Mobile Communications
Corporation and Southwestern Bell, Inc. Because of government mandates, some
cellular providers are required to sell MOUs on a wholesale basis to other
carriers as well as on a retail basis to consumers. The Company anticipates that
such cellular providers, as well as new PCS providers, will compete with the
Company in the future and may offer wholesale MOUs for digital wireless
services.
The Company also expects to compete with the specialized mobile radio
("SMR") operator in each of the Markets. The leading national SMR provider is
NEXTEL Communications Inc. SMR systems are capable of delivering dispatch,
paging and traditional voice and data mobile telecommunications services. The
FCC recently completed an auction of 1,020 MTA 900 MHz SMR licenses. In
addition, the FCC is expected to license a new category of 175 licensed service
areas in the 800 MHz SMR spectrum. SMR operators will be capable of delivering
dispatch, paging and traditional voice and data mobile telecommunications
services. The FCC is scheduled to begin auctions by April 15, 1997 for 30 MHz of
spectrum in the 2.3 GHz band, to be known as the Wireless Communications Service
("WCS"). The FCC has proposed that WCS providers be permitted to offer a broad
range of fixed, mobile, radiolocation, and satellite broadcast services, some of
which could be in competition with the Company's service offerings.
NextWave will face limited competition from other types of wireless service
providers, such as paging companies, mobile satellite systems, cable or wireless
cable providers and other wireless providers that may seek to utilize spectrum
allocated by the FCC currently or in the future to a variety of wireless
services. Although a less direct substitute for mobile telephone services,
one-way and two-way paging services, for example, may be adequate for those with
more limited two-way communications needs. The FCC has initiated the adoption of
rules to auction traditional paging licenses. The FCC has also commenced
licensing "narrowband PCS" in the 900 MHz band, which includes, among other
services, data messaging, advanced one-way and two-way digital paging and
facsimile. The messaging and paging services are expected to include electronic
mail, digitized voice messages, and graphic images. In addition, the FCC has
licensed three mobile satellite systems which plan to offer global cellular-type
service from mobile satellites orbiting the earth. The first mobile satellite
launch is expected to occur in 1997. These services, however, are targeted to
more narrow
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customer markets in light of both the expected high price to the customer and
the restricted range of services to be offered, as compared to the services to
be offered by the Company. See "Risk Factors -- Competition."
INTELLECTUAL PROPERTY RIGHTS
The Company's business relies on a combination of licensed patents,
trademarks and non-disclosure and development agreements in order to establish
and protect its proprietary rights. In addition, the Company will file patent
applications relating to certain products developed by TELE*Code. It is the
Company's policy to obtain appropriate proprietary rights protection for any
potentially significant new technology acquired or developed by the Company.
Applications for registrations of the trademarks NextWave Telecom and TELE*Code
have been filed in the United States and certain foreign jurisdictions. In
addition, the Company relies on copyright and trade secret laws to protect its
proprietary rights. The Company attempts to protect its trade secrets and other
proprietary information through agreements with customers and suppliers,
proprietary information agreements with the Company's employees and consultants
and other similar measures. See "Risk Factors -- Uncertainty of Protection of
Proprietary Rights."
EMPLOYEES
As of January 15, 1997, the Company employed 366 persons on a full-time
basis. Of these employees, approximately 240 are dedicated to the build-out of
the Company's network and are managing approximately 300 consultants and
advisers in the Company's network development efforts. None of the Company's
employees is represented by a union or is subject to a collective bargaining
agreement.
PROPERTIES
NextWave's principal executive offices are leased space of approximately
52,000 square feet located in San Diego, expiring January 31, 2004. The Company
also maintains leased space for its corporate offices in Hawthorne, New York
(20,000 square feet, expiring May 31, 1999), and in Anaheim, California (35,000
square feet, expiring October 31, 2006). Additionally, NextWave has regional
offices leased in Akron, Baltimore, Boston, Charlotte, Columbus, Cincinnati,
Cleveland, Dallas, Houston, Jacksonville, Los Angeles, New York, Orlando,
Philadelphia, San Antonio, Tampa and Washington, D.C. Management believes that
these facilities are adequate for the Company's needs at the present time but
will need to be expanded regularly as the Company proceeds with the planned
build-out of its PCS networks.
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REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
As holder of licenses granted by the FCC, the Company's ownership structure
and telecommunications operations are and will be subject to various FCC
regulations and other federal, state and local regulations.
OVERVIEW
FCC Authority. The Communications Act grants the FCC the authority to
regulate the licensing and operation of all non-federal government radio-based
services in the U.S. The scope of the FCC's authority includes (i) allocating
radio frequencies, or spectrum, for specific services; (ii) establishing
qualifications for applicants seeking authority to operate such services,
including PCS applicants; (iii) approving initial licenses, modifications
thereto, license renewals, and the transfer or assignment of such licenses; (iv)
promulgating and enforcing rules and policies that govern the operation of
spectrum licensees; (v) the technical operation of wireless services,
interconnection responsibilities between and among PCS, other wireless services
such as cellular, and landline carriers; and (vi) imposition of fines and
forfeitures for any violations of those rules and regulations. Under its broad
oversight authority with respect to market entry and the promotion of a
competitive marketplace for wireless providers, the FCC regularly conducts
rulemaking and adjudicatory proceedings to determine and enforce rules and
policies potentially affecting broadband PCS operations.
Regulatory Parity. The FCC adopted rules designed to create symmetry in
the manner in which it regulates similar types of mobile service providers.
According to these rules, all "commercial mobile radio service" ("CMRS")
providers that provide substantially similar services are subject to similar
regulation. A CMRS service is one in which the service is provided for a profit,
interconnected to the public switched telephone networks, and made available to
the public. Under these rules, providers of PCS, SMR, and ESMR services are
subject to regulations similar to those governing cellular carriers if they
offer an interconnected commercial mobile service. The FCC announced that it
would forbear from applying several regulations to these services, including its
rules concerning the filing of tariffs for the provision of interstate services.
Congress specifically authorized the FCC to forbear from applying such
regulation in the Omnibus Budget Reconciliation Act of 1993. With respect to
cellular, the FCC has stated its intent to continue monitoring competition in
the cellular service marketplace. The FCC also concluded that Congress intended
to preempt state and local rate and entry regulation of all CMRS providers,
including cellular, but established procedures for state and local governments
to petition the FCC for authority to continue or initiate CMRS rate regulation.
No state has filed successfully for authority to regulate CMRS rates.
Commercial Mobile Radio Source Spectrum Ownership Limit. The FCC has
limited the amount of CMRS spectrum (cellular, PCS and SMR) in which an entity
may hold an attributable interest in a given geographic area to 45 MHz. The
Company's ability to raise capital from entities with attributable CMRS
interests in certain geographic areas is likely to be limited by this
restriction.
Interconnection Requirements. The Telecommunications Act required the FCC
to promulgate rules within six months of the bill's enactment in connection with
a provision of the new act that mandates interconnection with the local
telephone exchange network by all requesting telecommunications carriers,
including PCS companies. The Telecommunications Act also preempted all state and
local legal and regulatory barriers to local exchange competition. On August 8,
1996, the FCC issued a 668-page order providing for local exchange competition
for the first time by mandating interconnection (the "Interconnection Order").
Notably, the Interconnection Order has the potential to substantially change the
relationship between local exchange providers and all wireless networks by
mandating interconnection on much more favorable terms than currently exist.
The Telecommunications Act imposes an affirmative duty upon all
telecommunication carriers, including the Company, to interconnect their
networks to each other, directly or indirectly. The Telecommunications Act
further imposes an affirmative duty on incumbent telephone companies to
negotiate in good faith and requires interconnection at any technically feasible
point of the network on just, reasonable, and nondiscriminatory terms and in a
manner equal in quality to that provided by the incumbent telephone company to
itself
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and any affiliate. The incumbent must also offer access to a minimum number of
unbundled elements of its network necessary for the provision of local service,
which a competitor may select in any combination. The Telecommunications Act
requires the incumbent to resell its local service and to provide for access to
rights-of-way (including poles, ducts, conduits) to carriers seeking to offer a
competitive local service. The FCC's Interconnection Order promulgated rules
that track and elaborate upon these statutory requirements.
The FCC required incumbent carriers to enter into reciprocal compensation
arrangements with wireless providers for the transport and termination of
traffic on each others' networks. The Commission also established a pricing
methodology for interconnection and a default interim price range of
$0.002-$0.004 per minute for switching and end office termination and a default
price ceiling of $0.15 per minute for tandem switching and termination through a
tandem switch for those states that have not imposed their own pricing
methodology. These rates represent a substantial change in most current
compensation arrangements between incumbents and wireless carriers, who have
been charged as much as $0.03 to $0.05 per minute for traffic termination.
Additionally, the Interconnection Order effectively prohibits the current
practice by some incumbent local exchange providers of charging a wireless
provider for termination of the incumbent's traffic on the wireless network.
The Interconnection Order also is noteworthy because of the decisions it
includes concerning the regulatory status of wireless providers. Despite
requests from the state public utility commissions and the wireless resale
community, the FCC refused to treat wireless providers, including PCS companies,
for regulatory purposes, as though they are local telephone exchange companies.
Such treatment could have subjected wireless companies to the strict regulatory
requirements imposed on incumbent telephone companies on issues such as
interconnection, access to unbundled elements and resale. The FCC also at least
temporarily rejected arguments to overturn the 1993 decision of Congress that
preempted state rate regulation of wireless carriers and barriers to market
entry such providers may face. While this decision will be reviewed as part of a
separate proceeding, it is helpful to the wireless industry, generally, and
start-up PCS companies, particularly, to avoid state rate regulation and
potential barriers to entry at this time.
Numerous LECs and state regulatory agencies have petitioned for review of
the FCC's Interconnection Order, which petitions have been consolidated for
review before the United States Court of Appeals for the Eighth Circuit. The
Eighth Circuit has imposed a stay of many of the FCC's interconnection rules
pending resolution of petitions for review of the FCC's order. On October 15,
1996, the court extended the stay indefinitely. In staying the FCC's rules, the
Court has determined that petitioners have demonstrated a likelihood of success
on the merits of their arguments that the FCC is without jurisdiction to
establish pricing regulations for intrastate telephone service. The Supreme
Court of the United States has refused to lift the stay. On November 1, 1996, in
response to an emergency motion filed by AirTouch Communications, Inc., a CMRS
carrier, the Eighth Circuit lifted the stay only with regard to rules that
require LECs to establish reciprocal compensation arrangements for transport and
termination of local telecommunications traffic with any requesting carrier,
including CMRS carriers, and allow CMRS providers to renegotiate, without
termination liability or penalties, any contract with an incumbent carrier
established before August 8, 1996 that does not provide for reciprocal
compensation. The Eighth Circuit heard oral argument in this case on January 17,
1997. At this time it is not possible to predict when or if the interconnection
rules that have been stayed by the court will go into effect. Other FCC
rulemakings implementing the Telecommunications Act are expected to continue
into 1997.
Other FCC Requirements. In August 1996, the FCC revised its rules to
permit CMRS operators, including PCS licensees, to use their assigned spectrum
to provide fixed local loop and other services on a co-primary basis with mobile
services. The FCC is continuing its proceeding to determine the extent to which
such fixed services fall within the scope of CMRS regulation. In June 1996, the
FCC adopted rules governing the availability and implementation of basic 911 and
Enhanced 911 for wireless services. By the summer of 1997, broadband PCS
licensees like the Company will be required to transmit to a Public Safety
Answering Point ("PSAP") 911 emergency calls from a handset that transmits a
Mobile Identification Number ("MIN") (or its functional equivalent) without any
interception by the carrier for credit checks or other validation procedures. By
winter of 1997, the FCC will require broadband PCS licensees to offer certain
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additional 911 enhancements, including the provision of information regarding
the caller's location. The FCC has requested further comment on: (i) the methods
of ensuring that carriers will continue to upgrade and improve 911 service to
increase its accuracy, availability, and reliability; (ii) a consumer education
program to inform the public on the capabilities and limitations of 911 service;
and (iii) a requirement that any wireless call, including a call from a handset
that does not transmit a MIN, will be transmitted to a PSAP.
The FCC also has adopted a rule requiring broadband PCS licensees to
provide "manual" roaming to enable wireless customers to use their phones when
they are traveling outside of their service areas. "Manual" roaming occurs when
a roamer must establish a relationship with the host system (typically by
supplying a valid credit card number) before the customer can make a call, as
contrasted with "automatic" roaming where roamers may make or receive calls
simply by turning on their phones. The FCC has solicited further comment as to
whether it should require providers of CMRS services, including PCS providers,
to offer "automatic" roaming agreements on a nondiscriminatory basis.
The FCC recently imposed requirements relating to number portability on
broadband PCS, cellular and certain SMR providers. By December 31, 1998, such
licensees must provide their customers with the ability to change carriers while
retaining phone numbers. CMRS providers that are subject to the number
portability requirements must have the capability of delivering calls from their
networks to ported numbers anywhere in the United States. By June 30, 1999, such
providers must be able to offer number portability without impairment of
quality, reliability or convenience when switching service providers, including
the ability to support roaming, throughout their networks. The FCC has solicited
further comment on the appropriate cost-recovery methods regarding long-term
number portability.
The FCC recently revised its rules to allow broadband PCS licensees in the
A, B, D and E-Blocks to partition geographically or disaggregate portions of the
spectrum covered by their licenses at any time to entities that meet minimum
eligibility requirements. For C and F-Block licenses, the FCC will allow such
partitioning and disaggregation at any time to entities that qualify as
"Entrepreneurs" and meet minimum eligibility requirements under FCC regulations.
Such entities would take over partitioned service areas subject to separately
established installment payment obligations. The FCC will apply its current
five-year restriction against complete license transfers (as described below) to
partitioning by C-Block and F-Block licensees to a non-Entrepreneur during the
first five years of the license term, with unjust enrichment penalties
applicable after the five year period on a pro rata basis. The FCC has sought
further comment on whether to allow the disaggregation of cellular spectrum.
In August 1996, the FCC adopted new guidelines and methods for evaluating
the effects of radio frequency emissions from transmitters including PCS mobile
telephones and base stations. The new guidelines, which are generally more
stringent than previous requirements, were effective immediately for hand-held
devices and otherwise became effective January 1, 1997.
The Company cannot predict at this time how the above requirements will
affect its business, results of operations or financial condition.
Other Federal Regulations. Wireless networks are subject to certain
Federal Aviation Administration and FCC guidelines regarding the location,
lighting and construction of transmitter towers and antennas. In addition, the
FCC has authority to enforce certain provisions of the National Environmental
Policy Act as they would apply to the Company's facilities. The Company intends
to use common carrier point-to-point microwave and traditional landline
facilities to connect base station sites and to link them to their respective
main switching offices. These microwave facilities are separately licensed by
the FCC on a first-come, first-served basis (although the FCC has proposed to
auction certain such licenses) and are subject to specific service rules.
Wireless providers also must satisfy a variety of FCC requirements relating
to technical and reporting matters. One such requirement is the coordination of
proposed frequency usage with adjacent wireless users, permittees and licensees
in order to avoid electrical interference between adjacent networks. In
addition, the height and power of base station transmitting facilities and the
type of signals they emit must fall within specified parameters.
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State and Local Regulation. The scope of state regulatory authority covers
such matters as the terms and conditions of interconnection between LECs and
wireless carriers under FCC oversight, customer billing information and
practices, billing disputes, other consumer protection matters, certain
facilities construction issues, transfers of control, the bundling of services
and equipment, and requirements relating to making capacity available to third
party carriers on a wholesale basis. In these areas, particularly the terms and
conditions of interconnection between LECs and wireless providers, the FCC and
state regulatory authorities share regulatory responsibilities with respect to
interstate and intrastate issues, respectively.
The Company and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and before state regulatory
authorities. Proceedings with respect to the foregoing policy issues before the
FCC and state regulatory authorities could have a significant impact on the
competitive market structure among wireless providers and the relationships
between wireless providers and other carriers.
GENERAL PCS REGULATIONS
The FCC allocated spectrum for broadband PCS services in June 1994 in the
1850 to 1990 MHz bands. Of the 120 MHz available for licensed broadband PCS
services, the FCC created six separate blocks of spectrum identified as A, B, C,
D, E and F-Blocks. The A, B and C-Blocks are each allocated 30 MHz of spectrum
and the D, E and F Blocks are each allocated 10 MHz. The FCC adopted a 10-year
PCS license term with an opportunity to renew.
The FCC adopted a "rebuttable presumption" that all PCS licensees are
common carriers, subject to Title II of the Communications Act. Accordingly,
each PCS licensee deemed to be a common carrier must provide services upon
reasonable request and the rates, terms and conditions of service must not be
unjustly or unreasonably discriminatory.
Structure of PCS Block Allocations. The FCC defines the geographic
contours of the licenses within each PCS block based on the MTAs and BTAs
developed by Rand McNally. The FCC awarded A and B-Block licenses in 51 MTAs.
The C, D, E and F-Block spectrums were allocated on the basis of 493 smaller
BTAs. In addition, there is a CMRS spectrum aggregation cap limiting all CMRS
licensees to an aggregate of 45 MHz of PCS, cellular and SMR spectrum in any
given market.
All but three of the 51 total A-Block licenses and all 51 B-Block licenses
were auctioned in 1995. Three A-Block licenses were awarded separately pursuant
to the FCC's "pioneer's preference" program. The auctioned A and B-Block
licenses were awarded in June 1995. The C and F-Block licenses are reserved for
"Entrepreneurs." See "-- The Entrepreneurs Block".
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the President signed the Telecommunications Act, which
effected a sweeping overhaul of the Communications Act. In particular, the
Telecommunications Act substantially amended Title II of the Communications Act,
which governs telecommunications common carriers. The policy underlying this
legislative reform was the opening of the telephone exchange service markets to
full competition. The Telecommunications Act requires incumbent wireline LECs to
open their networks to competition through interconnection and access to
unbundled network elements and prohibits state and local barriers, direct and
indirect, to the provision of interstate and intrastate telecommunications
services.
Implementation of the provisions of the Telecommunications Act is the
responsibility of the FCC, the state public utility commissions and a
federal-state joint board. Much of the implementation of the Telecommunications
Act must be completed in numerous rulemaking proceedings with short statutory
deadlines. Some of these proceedings addressed issues that had already been the
subject of pending rulemakings before the FCC and proceedings in several states.
The Telecommunications Act also directs the FCC to initiate rulemaking
proceedings on local competition matters and to preempt all inconsistent state
and local laws and regulations.
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any person from providing interstate or intrastate
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telecommunications services. States retain jurisdiction under the
Telecommunications Act to adopt laws necessary to preserve universal service,
protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers.
Some specific provisions of the Telecommunications Act which will affect
wireless providers are summarized below. There can be no assurance that these
provisions or their implementation by federal or state regulators will not have
a material adverse effect on the Company.
Expanded Interconnection Obligations. The Telecommunications Act
establishes a general duty of all telecommunications carriers, including C-Block
PCS licensees, to interconnect, directly or indirectly, with other carriers. The
FCC has determined that CMRS-to-CMRS interconnection may be accomplished
indirectly through the interconnection of each CMRS provider to an incumbent
LEC's network. The Telecommunications Act also contains a detailed list of
requirements with respect to the interconnection obligations of LECs. These
"interconnection" obligations include resale, number portability, dialing
parity, access to rights-of-way and reciprocal compensation. As mentioned, the
FCC has determined that for now, CMRS providers such as the Company do not meet
the Telecommunications Act's definition of "local exchange carrier."
LECs designated as "incumbents" have additional obligations to other
telecommunications service providers including: to negotiate in good faith; to
interconnect on terms that are reasonable and non-discriminatory; to provide
non-discriminatory access to facilities, equipment, features, functions and
capabilities; to offer for resale at wholesale rates any service that the
incumbent LEC provides on a retail basis; and to provide actual colocation of
equipment necessary for interconnection or access.
The Telecommunications Act establishes a framework for state commissions to
mediate and arbitrate negotiations between incumbent LECs and carriers
requesting interconnection, services or network elements. The Telecommunications
Act establishes deadlines, policy guidelines for state commission decisionmaking
and federal review or intervention in the event a state commission acts
inconsistently with the Telecommunications Act or fails to act.
In its Interconnection Order implementing the interconnection provisions of
the Telecommunications Act, the FCC determined that LECs are required to enter
into reciprocal compensation arrangements with all CMRS providers for the
transport and termination of LEC-originated traffic. The FCC established default
"proxy" rates for interconnection services which must be used unless or until a
state develops rates based on the Total Element Long Run Incremental Cost
("TELRIC") as provided in the order. Although the portions of the order relating
to pricing have been stayed, including the default proxy rates for
interconnection services, the rules requiring LECs to enter into reciprocal
compensation arrangements with CMRS providers are now in effect.
Review of Universal Service Requirements. The Telecommunications Act
contemplates that interstate telecommunications providers, including CMRS
providers, will "make an equitable and non-discriminatory contribution" to
support the cost of providing universal service, although the FCC can grant
exemptions in certain circumstances. In a Recommended Decision adopted by the
Telecommunications Act-mandated Federal-State Joint Board, the Joint Board
rejected arguments that CMRS providers should be exempted from universal service
obligations, and concluded that, to the extent such carriers provide interstate
service, they must contribute to universal service support mechanisms. The Joint
Board also found that states could require CMRS providers to contribute to state
support mechanisms.
Prohibition Against Subsidized Telemessaging Services. The
Telecommunications Act prohibits LECs from subsidizing telemessaging services
(i.e., voice mail, voice storage/retrieval, live operator services and related
ancillary services) from their telephone exchange service or exchange access.
Conditions on RBOC Provision of In-Region InterLATA Services. The
Telecommunications Act generally requires that before engaging in interLATA
(i.e., long distance) landline services in the states where it also provides
local telephone service, either the RBOC must provide access and interconnection
to one or
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more unaffiliated competing providers of telephone exchange service, or 10
months must have passed after enactment of the Telecommunications Act, during
which time no such provider has requested such access and interconnection more
than three months before the RBOC has applied for authority. These restrictions
on RBOCs providing "in-region" long distance service do not extend to long
distance provided by an RBOC in conjunction with CMRS.
The specific interconnection requirements, which the RBOCs must offer on a
non-discriminatory basis, include interconnection and unbundled access; access
to poles, ducts, conduits and rights-of-way owned or controlled by the RBOCs;
unbundled local loops, unbundled transport and unbundled switching; access to
emergency 911, directory assistance, operator call completion and white pages;
access to telephone numbers, databases and signalling for call routing and
completion; number portability; local dialing parity; reciprocal compensation;
and resale.
RBOC Commercial Mobile Joint Marketing. The RBOCs are permitted to market
jointly and sell wireless services in conjunction with telephone exchange
service, exchange access, intraLATA and interLATA telecommunications and
information services.
CMRS Facilities Siting. The Telecommunications Act limits the rights of
states and localities to regulate placement of CMRS facilities so as to
"prohibit" the provisions of wireless services or to "discriminate" among
providers of such services. It also eliminates environmental effects from RF
emissions (provided the wireless system complies with FCC rules) as a basis for
states and localities to regulate the placement, construction or operation of
wireless facilities.
Equal Access. The Telecommunications Act provides that wireless providers
are not required to provide equal access to common carriers for toll services.
The FCC is authorized to require unblocked access to long-distance providers of
the user's choice, subject to certain conditions.
Deregulation. The FCC is required to forebear from applying any statutory
or regulatory provision that it determines is not necessary to keep
telecommunications rates and terms reasonable or to protect consumers. A state
may not apply a statutory or regulatory provision that the FCC decides to
forebear from applying. In addition, the FCC must review its telecommunications
regulations every two years and change any that are no longer necessary.
RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
In an effort to balance the competing interests of existing microwave users
and newly authorized PCS licensees in the spectrum allocated for PCS use, the
FCC has adopted (i) a transition plan to relocate fixed microwave operators that
currently are operating in the PCS spectrum, and (ii) a cost sharing plan so
that if the relocation of an incumbent benefits more than one PCS licensee, the
benefiting PCS licensees will help defray the costs of the relocation. PCS
licensees will only be required to relocate fixed microwave incumbents if they
cannot share the same spectrum. The transition and cost sharing plans expire on
April 4, 2005, at which time remaining microwave licensees in the PCS spectrum
will be responsible for their costs to relocate to alternate spectrum locations.
Relocation generally involves a PCS operator compensating an incumbent
microwave licensee for costs associated with system modifications and new
equipment required to move to alternate, comparable readily available spectrum
or alternate transmission technologies. This transition plan allows most
microwave users to operate in the PCS spectrum for a two-year voluntary
negotiation period and an additional one-year mandatory negotiation period. For
public safety entities dedicating a majority of their system communications for
police, fire, or emergency medical service operations, the voluntary negotiation
period is three years. The FCC currently is considering whether to shorten the
voluntary negotiation period by one year. Parties unable to reach agreement
within these time periods may refer the matter to the FCC for resolution, but
the existing microwave user is permitted to continue its operations until final
FCC resolution of the matter.
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The FCC's cost-sharing plan allows PCS licensees that relocate fixed
microwave links outside of their license areas to receive reimbursements from
later-entrant PCS licensees that benefit from the clearing of their spectrum.
Two non-profit clearinghouses have been established to administer the FCC's
cost-sharing plan. Thus, the Company may be required in certain circumstances to
help defray the cost of earlier relocations by A, B and C-Block licensees.
THE ENTREPRENEURS' BLOCK
Eligibility Requirements. As noted above, the FCC designated frequency
blocks C and F as "Entrepreneurs' Blocks." The Company has been awarded certain
licenses in the C-Block. The FCC requires that all C and F-Block bidders fall
within certain maximum revenue and asset size requirements as measured by gross
revenues and total assets. In order to acquire C or F-Block licenses, the
applicant, together with its affiliates and persons or entities that hold
interests in the applicant and their affiliates, must have gross revenues of not
more than $125 million in each of the last two years and total assets of not
more than $500 million at the time the applicant's Short-Form (FCC Form 175) is
filed.
Under the FCC's rules, the Company also qualifies as a "Small Business",
that is, an entity that, together with its affiliates and persons or entities
that hold interests in the applicant and their affiliates, has average annual
gross revenues of not more than $40 million for the preceding three calendar
years prior to the date that the Short Form is filed. As a result of its
classification as a Small Business for the C-Block Auctions, the Company was
eligible for both a 25% bidding credit and for installment payments of interest
only for the first six years of the license, and payments of interest and
principal amortized over the remaining four years of the license term.
For the F-Block Auction, the FCC created a new category, "Very Small
Business," defined as an applicant that together with its affiliates and persons
or entities that hold interests in the applicant and their affiliates, has
average annual gross revenues of not more than $15 million for the preceding
three calendar years prior to the date the Short Form is filed. As a result of
its classification as a Very Small Business for the F-Block Auction, the Company
was eligible for both a 25% bidding credit and interest-only payments for the
first two years of the license and payments of interest and principal amortized
over the remaining eight years of the initial 10-year term of the license.
If a C-Block licensee maintains an organizational structure in which at
least 25% of its total equity on a fully diluted basis is held by a control
group (the "Control Group") that meets certain requirements (the "Control Group
Requirements"), the FCC excludes certain assets and revenues from such
licensee's total revenues and assets, making it easier for the licensee to meet
the Entrepreneurs Requirements and the Small Business Requirements. The Control
Group Requirements mandate that the Control Group, among other things, have both
actual and legal control of the licensee. Further, the FCC permits licensees to
qualify under the Control Group Requirements pursuant to an alternative
structural option (the "25% Equity Option") in which: (i) an established group
of investors meeting certain financial qualifications, that own at least 15% of
the equity interest on a fully diluted basis and 50.1% of the voting power in
the C-Block licensee and (ii) additional members ("Additional Control Group
Members") that hold at least 10%, on a fully diluted basis, of the equity
interest in the C-Block licensee. Additional Control Group Members must be
either: (a) the same Qualifying Investors in the Control Group, (b) members of
the licensee's management or (c) non-controlling institutional investors,
including venture capital firms. To take advantage of the FCC's 25% Equity
Option, a C-Block licensee must have met the Qualifying Investor Option
requirements at the time it filed its Short Form and must continue to meet the
Qualifying Investor Option requirements for three years following the License
Grant Date. Commencing the fourth year of the license term, the FCC rules (i)
eliminate the requirement that the Additional Control Group Members hold any of
the licensee's equity interest and (ii) allow the licensee to reduce the minimum
required equity interest held by the Qualifying Investors from 15% to 10%.
PCS Auctions. The FCC initiated auctions for the C-Block in December 1995.
On July 1, 1996, Antigone and Devco, each an unsuccessful bidder in the C-Block
Auction, filed a consolidated petition to deny
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the Company's 56 pending C-Block applications filed after the initial C-Block
Auction, or in the alternative, to designate them for a hearing. On January 3,
1997, the FCC issued a Public Notice announcing that NextWave had received a
grant of the 63 C-Block PCS license applications for which it had been the
winning bidder at the FCC C-Block Auctions. The C-Block licenses were granted
subject to the requirement that the Company demonstrate compliance with FCC
foreign ownership regulations within six months from the date of grant. Upon
consummation of the Offerings, the Company believes that it will satisfy those
conditions. For a description of the conditions imposed on the Company relating
to its foreign ownership, see "Risk Factors -- Uncertainty Regarding C-Block
Licenses; Litigation."
License Transfer Restriction and Unjust Enrichment. Within the first five
years of the grant of a C or F-Block license, transfer of the license is
permitted only to another entity eligible for the C or F-Block, such as another
Small Business or Very Small Business. After five years, licenses are freely
transferable, subject to unjust enrichment penalties. If transfer occurs during
years six through 10 of the initial license term to a company that does not
qualify for the same level of auction preferences as the transferor, such a sale
would be subject to full payment of the bidding credit and immediate payment of
the outstanding balance of the government installment payment debt as a
condition of transfer (i.e., the "FCC unjust enrichment" penalties). In
addition, if the Company wishes to make any change in ownership structure
involving the de facto and de jure control of the Company, it must seek FCC
approval and during the initial license term may be subject to the FCC unjust
enrichment penalties.
Build-Out Requirements. The FCC has mandated that recipients of PCS
licenses adhere to five year and 10-year build-out requirements. Violations of
these regulations could result in license revocations, forfeitures or fines or
other sanctions such as reduction in service area. Under the build-out
requirements, all 30 MHz PCS licensees (such as C-Block licensees) must
construct facilities that offer coverage to at least one-third of the population
in their service area within five years from the date of initial license grants.
Service must be provided to two-thirds of the population within 10 years. 10 MHz
PCS licenses (such as F-Block licenses) are required to reach one-quarter of the
population within five years or make a showing of substantial service within
five years.
Foreign Ownership Restrictions. The Communications Act requires that
non-U.S. citizens, their representatives, foreign governments, or corporations
otherwise subject to domination and control by non-U.S. citizens may not own of
record or vote (i) more than 20% of the capital stock of a common carrier radio
licensee directly, or (ii) more than 25% of the capital stock of the parent
corporation of a common carrier licensee if the FCC finds that such ownership
would be contrary to the public interest. Because the FCC classifies PCS as a
common carrier offering, PCS licensees are subject to the foreign ownership
limits. In the Telecommunications Act, Congress eliminated restrictions on
non-U.S. citizens serving as members on the board of directors of a common
carrier radio licensee or its parent. The FCC recently eliminated from its rules
a similar provision restricting non-U.S. citizens from serving as directors or
officers of a common carrier radio licensee. The FCC also recently adopted rules
that, subject to a public interest finding by the FCC, would allow foreign
ownership of common carrier parent companies in excess of 25% to the extent that
the relevant foreign states extend, among other things, reciprocal treatment to
U.S. investors. These rules are referred to as the ECO test.
Failure to comply with these regulations may result in the FCC ordering (i)
divestiture of the non-U.S. parties to bring the entity within compliance of the
Communications Act, (ii) issuance of fines, or (iii) denial of renewal or
revocation of the license(s).
License Conditions and Penalties for Payment Default. The FCC has
reflected licensee installment payment obligations in a Note and Security
Agreement to the U.S. Treasury that must be executed by prospective licensees as
a condition of license grant pursuant to the terms of these instruments and FCC
rules. A C-Block licensee that fails to make timely quarterly installment
payments may incur substantial financial penalties, license revocation or other
enforcement measures at the FCC's discretion. Where a C-Block applicant
anticipates defaulting on any required payment, it may request a three to six
month grace period before the FCC cancels its license. In the event of default
by a C-Block licensee, the FCC could reclaim the
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licenses, reauction them, and subject the defaulting party to a penalty
comprising of the difference between the price at which it acquired its license
and the amount of the winning bid at reauction (if lower than the Company's
winning bid), plus an additional penalty of three percent of the subsequent
winning bid.
D, E, and F-Block Auctions. The FCC completed the auction for its D, E and
F-Block PCS licenses on January 14, 1997. The FCC made several significant
changes to the rules governing F-Block licenses, which now offer less favorable
terms than were applicable to C-Block licenses (though the F-Block terms remain
more favorable than the terms governing the D and E-Block licenses). The F-Block
features an upfront payment requirement of $.06 per MHz-pop; an increased
downpayment requirement of 20% of the winning bid; and revision of the available
installment payment plans and bidding credits. For Small Businesses and Very
Small Businesses that win F-Block licenses, the period during which F-Block
licensees may make interest-only payments is two years (as opposed to six years
for C-Block Small Businesses), with payments of principal and interest amortized
over the remaining eight years of the license term. The interest rate for
outstanding principal will be the 10-year Treasury rate at the time of the grant
of license (6.50% as of December 31, 1996). The installment payment plan for
F-Block licenses has also been amended to include late payment fees that will be
imposed if licensees are more than 15 days late in their scheduled installment
payments. For the F-Block Auction, the FCC also has created a "tiered" bidding
credit of 15% for entities that meet the C-Block definition of "Small Business"
(e.g., average gross revenues of not more than $40 million for the past three
years), and 25% for companies that meet a newly created definition of "Very
Small Business," under which qualifying businesses would need to have average
gross revenues of not more than $15 million for the past three years. The
Company participated in the bidding for F-Block licenses through its subsidiary,
NextWave Power Partners, as a Very Small Business and, as such, is eligible for
the favorable financing provisions described above.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- ---- ------------------------------------------------------
<S> <C> <C>
Allen B. Salmasi(a)....... 42 Chairman of the Board, Chief Executive Officer and
President
Janice I. Obuchowski(a)... 45 Vice Chairman, Executive Vice President and Director
C.J. Waylan............... 55 Executive Vice President
Kevin M. Finn(a).......... 55 Senior Vice President, Business Operations -- West and
Director
Roy D. Berger............. 38 Senior Vice President, Market Planning/Customer
Service
Frank A. Cassou........... 39 Senior Vice President, Corporate Development, General
Counsel
Robert Cymbala............ 59 Senior Vice President, Enhanced Services
Raymond P. Dolan.......... 39 Senior Vice President, Business Operations -- East
Edward M. Knapp........... 36 Senior Vice President, Network Engineering &
Operations, Chief Technical Officer
Richard Kornfeld.......... 36 Senior Vice President, Consumer Products
James S. Madsen........... 37 Senior Vice President, New Business Development, Sales
& Distribution
Raju Patel................ 48 Senior Vice President, Product & Operating Systems --
Management & Development, Chief Strategic Officer
R. Andrew Salony.......... 44 Senior Vice President, Organization
Planning/Facilities/Human Resources
Gene M. Welsh............. 44 Senior Vice President, Finance, Chief Financial
Officer
Mark D. Buckner........... 42 Corporate Treasurer
Norman L. Salvesen........ 44 Corporate Controller
Ha-Young Aum(b)(c)........ 51 Director
Jang-Ho Chung(b)(c)....... 56 Director
Gregory A. Cucchi(b)(c)... 47 Director
Jung-Boo Kim(b)(c)........ 56 Director
Manjin J. Kim(b)(c)....... 60 Director
Muhit U. Rahman(b)(c)..... 40 Director
Nicole N. Salmasi(a)...... 38 Director
Yutaka Sato(b)(c)......... 48 Director
</TABLE>
- ---------------
(a) Elected by holders of Series A Common Stock.
(b) To be elected by holders of Series B Common Stock and Series C Common Stock,
voting separately as a class.
(c) Promptly following the consummation of the Equity Offering, the authorized
number of directors comprising the Company's Board of Directors will be
expanded and the Company's Board of Directors, by a majority vote, will fill
such newly created directorships with certain officers to the Company and
Messrs. Aum, Chung, Cucchi, J. Kim, M. Kim, Rahman and Sato.
ALLEN B. SALMASI has been the Chairman of the Board, Chief Executive
Officer and President of NextWave since its founding. Immediately prior to
founding NextWave in July 1995, Mr. Salmasi served as a member of the Board of
Directors, President of the Wireless Telecommunications Division and Chief
Strategic Officer of QUALCOMM. He joined QUALCOMM as a member of the Board of
Directors and Vice President of Planning & Development in 1988, as a result of
the merger of QUALCOMM and Omninet Corporation. Previously, Mr. Salmasi founded
Omninet Corporation in 1984. At various times, through August, 1988, he served
as Chairman of the Board, President and Chief Executive Officer of Omninet. From
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1979 to 1984, Mr. Salmasi held various technical and management positions at the
National Aeronautics and Space Administration Jet Propulsion Laboratory.
JANICE I. OBUCHOWSKI has been the Vice Chairman, Executive Vice President
and a Director of NextWave since its founding. Ms. Obuchowski is also the
founder and President of Freedom Technologies, Incorporated, a
telecommunications research and consulting firm based in Washington, D.C. From
1989 to 1992, Ms. Obuchowski served as the Assistant Secretary for
Communications and Information for the Department of Commerce and Administrator
for the National Telecommunications and Information Administration ("NTIA"). In
this capacity, she was the principal communications policy advisor to President
George Bush. Previously, Ms. Obuchowski also served as the Senior Advisor to FCC
Chairman Mark Fowler, advising him on all telecommunications policy and
international communications issues before the FCC. Ms. Obuchowski also is a
member of the Board of Directors of Orbital Sciences Corporation.
C.J. WAYLAN has been the Executive Vice President of NextWave since May
1996. For more than the past five years until May 1, 1996, Mr. Waylan was an
executive officer of a subsidiary of GTE. Most recently from February 1993, Mr.
Waylan was Executive Vice President, Product Management and Business Development
for GTE Mobilnet. In this position, he was responsible for managing GTE's PCS
and wireless products and new business initiatives. Prior to this, Mr. Waylan
was president of GTE Spacenet. Mr. Waylan also is a member of the Board of
Directors of Stanford Telecom Inc. and Globecomm Systems Inc.
KEVIN M. FINN has been a Senior Vice President, Business Operations -- West
and Director of NextWave since its founding. From early 1992 until July 1995,
Mr. Finn was President of Marin-Finn Industries, Inc. From August 1988 to early
1992, Mr. Finn was Vice President and General Manager of Densitron. From
September 1986 to August 1988, Mr. Finn served as Executive Vice President of
Omninet Corporation. From 1983 to 1987, Mr. Finn served as Vice President of the
Sony Corporation of America and General Manager of its Component Products
Division.
ROY D. BERGER joined NextWave as Senior Vice President, Market
Planning/Customer Service for NextWave in June 1996. Prior to NextWave, Mr.
Berger held the position of Managing Director-Retail Strategy for the NYNEX
Corporation since December 1995. During his ten years at NYNEX, Mr. Berger
served in a number of different roles in both the telecommunications and
computer retailing/distribution sectors. His positions included Vice
President-Channel Strategy for NYNEX's residential business, Vice
President-Personal Communication Services, and Vice President Marketing for
NYNEX Mobile Communications, prior to joining NYNEX, Mr. Berger held senior
positions with several leading companies in the personal computer retailing and
distribution industry.
FRANK A. CASSOU has been Senior Vice President, Corporate Development and
General Counsel of NextWave since February 1996. Prior to joining NextWave, Mr.
Cassou was a partner at the law firm of Cooley Godward Castro Huddleson and
Tatum, where he practiced corporate law representing telecommunications and
technology companies for the past 13 years. He was outside corporate counsel to
QUALCOMM from June 1991 through February 1996.
ROBERT CYMBALA has been the Senior Vice President, Enhanced Services of
NextWave since May 1996. From October 1993 to April 1996, Mr. Cymbala was
President and Chief Executive Officer of Metro One Telecommunications, a
provider of enhanced directory assistance service. Previously he served Sprint,
as Executive Vice President of Corporate Development and Planning. From August
1995 through May 1996, Mr. Cymbala provided independent consulting services for
telecommunications companies.
RAYMOND P. DOLAN has been the Senior Vice President, Business
Operations -- East of NextWave since May 1996. From July 1995 to May 1996, Mr.
Dolan was Executive Vice President of Marketing of Bell Atlantic NYNEX Mobile.
From May 1988 to June 1995, Mr. Dolan served in numerous technical and marketing
positions for NYNEX Mobile Communications.
EDWARD M. KNAPP has been the Senior Vice President, Network Engineering and
Operations and Chief Technical Officer of NextWave since July 1995. From March
1994 to June 1995, Mr. Knapp was the Executive Director of Technical Services
for NYNEX Mobile Communications. At NYNEX Mobile he was responsible for the
planning, engineering, design, site development and operation of the New York
cellular system. From October 1990 to August 1994, Mr. Knapp held various
technical, engineering and operations
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positions at NYNEX Mobile. Prior to NYNEX Mobile, he held various positions with
Siemens Transmissions Systems and Sperry Defense Products Group.
RICHARD KORNFELD joined NextWave as Senior Vice President, Consumer
Products in January 1996. Prior to joining NextWave, Mr. Kornfeld was employed
by QUALCOMM for 10 years, most recently serving as Vice President of
Engineering, where he led the development and manufacturing efforts of CDMA
subscriber equipment.
JAMES S. MADSEN has been Senior Vice President, New Business Development,
Sales and Distribution of NextWave since October 1995. From 1993 until 1995, Mr.
Madsen was Director of PCS Marketing and Business Development in the Wireless
Telecommunications Division of QUALCOMM. Mr. Madsen managed all PCS business
development, marketing and sales planning for QUALCOMM. From 1992 until 1993,
Mr. Madsen was Director of Marketing for the OmniTRACS business at QUALCOMM
focusing on the cable TV market. After joining QUALCOMM in 1989, Mr. Madsen
assumed responsibility for QUALCOMM's worldwide VLSI components business
development and marketing.
RAJU PATEL has been the Senior Vice President, Product and Operating
Systems -- Management and Development, Chief Strategic Officer of NextWave since
May 1996. From May 1993 to May 1996, Mr. Patel was Senior Vice President and
General Manager of the Wireless Division at Hughes Network Systems, Inc.
Previously, Mr. Patel was President and Chief Executive Officer of NAC Inc., a
company which he founded, until its acquisition by Hughes Network Systems, Inc.
R. ANDREW SALONY has been Senior Vice President, Organization
Planning/Facilities/Human Resources since May 1996. For three years prior to
joining the Company he served the executive search firm of Warren Morris &
Madison, Inc. as Managing Partner of its wireless telecommunications division.
From May 1983 to September 1993, Mr. Salony was General Manager for U S WEST's
Cellular Telephone Division in Southern California.
GENE M. WELSH has been the Senior Vice President, Finance and Chief
Financial Officer of NextWave since May 1996. From July 1991 until May 1996, he
was the Vice President of Finance and Chief Financial Officer of Los Angeles
Cellular Telephone Co. (LA Cellular). From October 1990 until July 1991, Mr.
Welsh was the Vice President of Finance and Chief Financial Officer/Treasurer of
First Cellular Acquisition Corporation, a venture of First Boston Merchant Bank.
MARK D. BUCKNER, Corporate Treasurer, joined NextWave in March 1996 as Vice
President Finance. Mr. Buckner served as Chief Financial Officer for the
telecommunications companies of U.S. Long Distance Corp. from 1988 to 1993 and
WORLDxCHANGE Communications from 1994 to March 1996. He served in the same
position for The Southwest Venture Partnerships, a firm financing high-growth
companies from 1983 through 1988, and for Medical Polymers Technologies from
June 1993 through 1994. Mr. Buckner practiced public accounting with Arthur
Andersen & Co. from 1977 through 1983.
NORMAN L. SALVESEN, Corporate Controller, joined NextWave in November 1996.
From June 1994 to October 1996, Mr. Salvesen was Vice President-Finance and
Controller with House of Fabrics, Inc. From 1983 to May 1994, he held financial
positions with Toshiba America Information Systems, Inc., including Controller
of the Telecommunications Division, Assistant Corporate Controller and Corporate
Controller. Mr. Salvesen was Controller for Rogers Cablesystems of Southern
California from 1980 through 1983 and practiced public accounting with Fox &
Company from 1978 to 1980.
HA-YOUNG AUM has been President of Pohang Steel America Corp., a
wholly-owned subsidiary of POSCO since April 1995. From July 1993 to April 1995,
Mr. Aum served as Managing Director, Export Department of POSCO. From May 1991
to July 1993, Mr. Aum was Assistant Director, Export Department.
JANG-HO CHUNG has been President of LG Information & Communications, Ltd.
since July 1990. LG Information & Communications, Ltd. is a multinational
corporation which specializes in electronic and telecommunications equipment.
GREGORY A. CUCCHI has been Vice President, Corporate Planning and
Development for PECO Energy Company which is a combined electric, gas and
telecommunications company based in Philadelphia,
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Pennsylvania. Prior to that time, starting in March 1990, Mr. Cucchi served as
Director, Transmission and Distribution Services for PECO Energy Company.
JUNG-BOO KIM has been General Manager, Information & Telecommunications
Business Department of Korea Electric Power Corporation since January 1996.
Korea Electric Power Corporation is Korea's electric utility provider. Korea
Electric Power Corporation is a government-owned enterprise established to
promote electric power resource development.
MANJIN J. KIM has served as Executive Vice President, Strategic Planning of
ILJIN Group since January 1996, where he specializes in the initiation of new
business and the negotiation of joint ventures. From January 1987 to February
1996, Mr. Kim was a Project Leader with Philips Laboratories, North America
where he managed research and development programs.
MUHIT U. RAHMAN has, since November 1993, served as Managing Director of
Triumph Capital Group, Inc., a private equity money management firm which,
through its affiliates, manages two private equity funds. From April 1990 to
March 1993, Mr. Rahman was Co-Head of Corporate Finance at Dabney/Resnick, Inc.
of Beverly Hills, California.
NICOLE N. SALMASI has been a Director of NextWave since May 1995. Mrs.
Salmasi served as a mechanical engineering designer at QUALCOMM from 1990 to
1994. Prior to QUALCOMM, from 1983 to 1987 at various times, Mrs. Salmasi was
the Vice President of Business Administration and Director of Engineering
Services at Omninet Corporation.
YUTAKA SATO has been President of Wireless Telecommunications Company, a
subsidiary of SONY Electronics, Inc. since January 1995. From April 1995 to the
present Mr. Sato has served as a director of Qualcomm Personal Electronics, a
joint venture between SONY and QUALCOMM. Before joining Wireless
Telecommunications Company, from October 1991 to March 1995, Mr. Sato was
General Manager of the Wireless Telecommunications Division of Infocom Products
Company, a wholly-owned subsidiary of SONY Tokyo.
There are no family relationships among the Company's directors and
executive officers, other than Allen B. Salmasi and Nicole N. Salmasi, who are
husband and wife.
BOARD OF DIRECTORS
Election of Directors. Under the Company's Amended and Restated
Certificate of Incorporation, until the tenth anniversary of the date of award
of the Company's PCS licenses, the holders of Series A Common Stock have the
right, voting separately as a class, to elect the minimum number of directors
necessary to constitute a majority of the Board of Directors and the holders of
the Series B Common Stock have the right, voting separately as a class, to elect
a number of directors equal to the total number of directors less the number of
directors elected by the holders of Series A Common Stock. Immediately following
the Offerings, the Board of Directors will consist of directors, of which
will have been elected by the holders of Series A Common Stock and of which
will have been elected by the holders of Series B Common Stock.
Pursuant to the Amended and Restated Stockholders' Voting Agreement dated
as of November 30, 1995, as amended (the "Stockholders' Voting Agreement"),
certain holders of Series B Common Stock issued prior to the Equity Offering and
certain holders of warrants, Bridge Notes and Series A Common Stock exercisable
or convertible into Series B Common Stock issued prior to the Equity Offering
have agreed to vote any shares of Series B Common Stock held by them in the
manner set forth below: (a) to elect as a director of the Company one
representative designated by each holder of Series B Common Stock who holds on a
fully diluted basis at least 6% of the outstanding equity of the Company (a "6%
Stockholder") and (b) for a period of three years from the award of the
Company's PCS licenses, to elect as a director of the Company one representative
designated by each of the following stockholders (collectively, "Early
Investors"): ILJIN Group, Korea Electric Power Corporation, LG, PECO Energy
Company, POSAM, QUALCOMM, SONY and Triumph Capital Group, Inc. Immediately
following the Offerings, the Company's Board of Directors will expand the number
of directors and fill the newly-created vacancies with the following directors
at the respective requests of the Early Investors: Ha-Young Aum at the request
of POSAM, Jang-Ho Chung at the
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request of LG, Gregory A. Cucchi at the request of PECO Energy Company, Jung-Boo
Kim at the request of Korea Electric Power Corporation, Manjin J. Kim at the
request of ILJIN America Corp., Muhit U. Rahman at the request of Triumph
Capital Group, Inc. and Yutaka Sato at the request of SONY. QUALCOMM has waived
its rights under the Stockholders' Voting Agreement to have a representative on
the Board of Directors. As of January 15, 1997, there were no 6% Stockholders
other than MCI, which has declined to have a representative on the Board of
Directors. In the event an Early Investor also qualifies as a 6% Stockholder,
such Early Investor has only the right to designate one representative to serve
on the Board of Directors. After the three year period referred to in clause (b)
above, an Early Investor will have the right to a Board designee only if such
Early Investor is a 6% Stockholder at such time. The obligation to vote for
election of the representative of a 6% Stockholder terminates when the
stockholder ceases to be a 6% Stockholder. In addition, the parties to the
Stockholders' Voting Agreement have agreed that no more than 25% of the members
of the Board of Directors of the Company at any time may be foreigners. The
Stockholders' Voting Agreement terminates upon the earlier to occur of (i) the
Company's becoming a party to a merger in which the Company is not the surviving
corporation and the Company's stockholders hold, immediately after the merger,
less than 50% of the equity securities of the surviving corporation or (ii) 10
years from the date of the Stockholders' Voting Agreement. See "Certain
Relationships and Related Transactions" regarding Hughes' right to designate a
representative on the Board of Directors.
Indemnification. The Company's Amended and Restated Certification of
Incorporation eliminates, to the fullest extent permitted by law, the liability
of its directors to the Company and its stockholders for monetary damages for
breach of the directors' fiduciary duty. This provision is intended to afford
the Company's directors the benefit of the Delaware General Corporation Law,
which provides that directors of Delaware corporations may be relieved of
monetary liability for breach of their fiduciary duty of care, except under
certain circumstances involving breach of a director's duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law or any transaction from which the director derived an improper
personal benefit. The Company intends to enter into separate indemnification
agreements with each of its directors and officers to effectuate these
provisions and has also purchased director's and officer's liability insurance.
Committees of the Board of Directors; Compensation Committee Interlocks and
Insider Participation. The Company intends to form an audit committee (the
"Audit Committee") and a compensation committee (the "Compensation Committee")
prior to consummation of the Offerings.
The Audit Committee will review the scope and approach of the annual audit,
the annual financial statements of NextWave and the auditors' report thereon and
the auditors' comments relative to the adequacy of NextWave's system of internal
controls and accounting systems. The Audit Committee will also recommend to the
Board of Directors the appointment of independent public accountants for the
following year. A majority of the members of the Audit Committee will be
"independent directors" as defined under rules of The Nasdaq National Market.
The Compensation Committee will review management compensation levels and
provide recommendations to the Board of Directors regarding salaries and other
compensation for NextWave's officers, including bonuses and incentive programs.
None of the members of the Compensation Committee will be an officer or employee
of the Company. It is not expected that any member of the Compensation Committee
will have any interlocking or other relationships with NextWave that would call
into question his or her independence as a member of the Compensation Committee.
Compensation of Directors. Directors of the Company currently receive no
compensation for serving on the Board of Directors and are not reimbursed for
their out-of-pocket expenses incurred in connection with attendance at meetings
of, and other activities relating to serving on, the Board of Directors and any
committees thereof. The Company may consider alternative compensation
arrangements for its directors from time to time.
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EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company during the period from May 16, 1995 (inception) to December 31, 1995 to
its President and Chief Executive Officer and the Company's four other most
highly compensated officers and key employees (collectively, the "Named
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
---------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- ------------------------------------------------------ --------- -------- ---------------------
<S> <C> <C> <C>
Allen B. Salmasi...................................... 110,577 -- 700,000
Chairman, President, Chief Executive Officer and
Director
Janice I. Obuchowski(1)............................... 34,711 -- 700,000
Vice-Chairman, Executive Vice President and Director
Kevin M. Finn......................................... 5,000 -- 500,000
Senior Vice President and Director
Edward M. Knapp....................................... 65,000 -- 600,000
Senior Vice President, Engineering
James S. Madsen....................................... 30,000 -- 600,000
Senior Vice President, Business Development
</TABLE>
- ---------------
(1) See "Certain Relationships and Related Transactions" for information
regarding certain payments made to a consulting firm owned by Ms.
Obuchowski.
EQUITY INCENTIVE PLANS
Amended and Restated Stock Option Plan; 1997 Equity Incentive Plan
On April 1996, the Company adopted the Amended and Restated Stock Option
Plan (the "Option Plan"), which amended and restated the 1995 Stock Option Plan
under which 20 million shares of Series B Common Stock were reserved for
issuance to certain officers, directors, employees and consultants of the
Company. On February , 1997, the Company adopted the 1997 Equity Incentive
Plan (the "Equity Plan") which shall become effective on the date of this
Prospectus and will replace the Option Plan. Under the Equity Plan,
shares of Series B Common Stock were reserved for issuance upon exercise or
grant of stock options, stock bonuses, restricted stock and stock appreciation
rights granted to employees, directors and consultants of the Company and its
affiliates. The Equity Plan provides for grants of incentive stock options to
employees (including officers and employee directors) of the Company and its
affiliates, and non-statutory stock options to employees (including officers and
employee directors), non-employee directors and consultants of the Company and
its affiliates. The Equity Plan also provides for the grant of stock bonuses,
the sale of restricted stock and the grant of stock appreciation rights (in
tandem with stock option grants or independently) to employees, directors and
consultants of the Company and its affiliates. The Option Plan has been
administered by the Board of Directors, and after the Offerings the Equity Plan
will be administered by the Compensation Committee, which will determine the
recipients and types of awards to be granted, the terms of awards, including the
exercise or sale price, the number of shares subject to the award and the
exerciseability thereof.
Stock Options. The terms of stock options granted under the Equity Plan
may not exceed 10 years. The exercise price of options granted under the Equity
Plan will be determined by the Compensation Committee; provided, however, that
the exercise price of a non-statutory stock option generally cannot be less than
85% of the fair market value of the Series B Common Stock on the date of the
option grant and the exercise price of an incentive stock option generally
cannot be less than 100% of the fair market value of the Series B Common Stock
on the date of grant. The exercise price of an option may be paid in cash or, at
the discretion of the Compensation Committee, in the form of shares of Series B
Common Stock and certain other consideration.
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<PAGE> 87
The Compensation Committee will determine when a stock option (or portions
thereof) becomes vested and exercisable; provided, however, that the vesting
provisions of an option will provide for at least 20% vesting for each year of
service.
No option may be transferred by the optionee other than by will or the laws
of descent or distribution. An optionee whose relationship with the Company or
an affiliate ceases for any reason (other than death or permanent disability)
may exercise options within the three-month period following such cessation
(unless such options terminate or expire sooner by their terms) or within such
longer period as determined by the Compensation Committee.
Stock Bonuses and Restricted Stock. The terms of stock bonuses and
restricted stock granted under the Equity Plan will be determined by the
Compensation Committee. The purchase price for restricted stock will be
determined by the Compensation Committee; provided, however, that the purchase
price generally will not be less than 85% of the fair market value of the Series
B Common Stock on the date of sale. Rights under a stock bonus or restricted
stock purchase agreement may not be transferred by the recipient other than by
will or the laws of descent or distribution. The purchase price of Series B
Common Stock acquired pursuant to a restricted stock purchase agreement may be
paid in cash or in any other form of consideration approved by the Compensation
Committee. Shares of Series B Common Stock awarded or sold pursuant to stock
bonuses or restricted stock sales may be subject to a repurchase option in favor
of the Company in accordance with the vesting schedule determined by
Compensation Committee.
Stock Appreciation Rights. The terms of stock appreciation rights granted
under the Equity Plan will be determined by the Compensation Committee. Stock
appreciation rights may be granted in tandem with the grant of a stock option or
independently. A tandem stock appreciation right will expire upon the exercise
of the corresponding stock option. If a tandem stock appreciation right is
exercised, the corresponding stock option will expire. Independent stock
appreciation rights may be granted without regard to the grant of a stock option
to the recipient. The appreciation distribution on an exercised stock
appreciation right will be payable in cash or an equivalent number of shares of
Series B Common Stock based on the fair market value on the date of exercise.
Other Provisions. Shares subject to options, stock bonuses, restricted
stock and stock appreciation rights which have lapsed or terminated may again be
subject to grants or sales under the Equity Plan. Furthermore, the Compensation
Committee may offer to exchange new options or other awards for existing options
or awards again becoming available for grant or sale under the Equity Plan. In
the event of a decline in the value of the Company's Series B Common Stock, the
Compensation Committee will have the authority to offer recipients the
opportunity to replace outstanding higher-priced options with new lower-priced
options. Upon any merger or consolidation in which the Company is acquired, all
outstanding vested options will either be assumed or substituted by the
surviving entity. If the surviving entity determines not to assume or substitute
unvested options, the unvested options will terminate as of the closing of the
merger or consolidation.
As of September 30, 1996, options to purchase 18,243,322 shares of Series B
Common Stock at exercise prices ranging from $0.25 to $5.00 per share were
outstanding under the Option Plan and 1,756,678 shares remained available for
future option grants. The Option Plan will terminate on April 5, 2005, unless
terminated sooner by the Compensation Committee.
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<PAGE> 88
The following table shows for 1995 certain information regarding options
granted to, exercised by, and held at year end by the Named Officers:
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL GRANT
SECURITIES OPTIONS GRANTED EXERCISE DATE
UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED FISCAL 1995 PER SHARE DATE VALUE(a)
- ---------------------------------- --------------- ---------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Allen B. Salmasi.................. 700,000 16.3% $.275 7/28/00 $161,000
Janice I. Obuchowski.............. 700,000 16.3% $ .25 7/28/05 $161,000
Kevin M. Finn..................... 500,000 11.6% $ .25 12/18/05 $115,000
Edward M. Knapp................... 600,000 14.0% $ .25 7/3/05 $138,000
James S. Madsen................... 600,000 14.0% $ .25 10/9/05 $138,000
</TABLE>
- ---------------
(a) The Grant Date Present Value was computed using the Black-Scholes option
pricing model with the following weighted average assumptions: dividend
yield of 0.00%; expected volatility of 160.0%; a risk-free interest rate of
5.6%; and an expected life of five years.
The following table sets forth information with respect to (i) the exercise
of stock options by the Named Officers during 1995; (ii) the number of
unexercised options held by the Named Officers as of December 31, 1995; and
(iii) the value as of December 31, 1995 of unexercised in-the-money options
calculated on the basis of the $0.25 fair market value ($0.275 in the case of
Allen B. Salmasi) of the underlying securities at December 31, 1995, as
determined by the Company's Board of Directors, minus the respective exercise
price.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NUMBER OF DECEMBER 31, 1995 DECEMBER 31, 1995
SHARES ----------------- -----------------
ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Allen B. Salmasi................. -- -- 0/700,000 --
Janice I. Obuchowski............. -- -- 0/700,000 --
Kevin M. Finn.................... -- -- 0/500,000 --
Edward M. Knapp.................. -- -- 0/600,000 --
James S. Madsen.................. -- -- 0/600,000 --
</TABLE>
Employee Stock Purchase Plan. On February , 1997, the Company's Board of
Directors approved the 1997 Employee Stock Purchase Plan (the "Purchase Plan")
covering an aggregate of shares of Series B Common Stock. The Purchase
Plan is intended to qualify as an employee stock purchase plan within the
meaning of Section 423 of the Code. Under the Purchase Plan, the Board of
Directors may authorize participation by eligible employees, including officers,
in periodic offerings following the adoption of the Purchase Plan. The offering
period for any offering will be no more than 27 months. As of February , 1997,
the Purchase Plan's initial offering period has not commenced and there are no
outstanding rights to acquire Series B Common Stock under the Purchase Plan.
Employees are eligible to participate if they are employed by the Company
or an affiliate of the Company designated by the Board of Directors. Employees
who participate in an offering can have up to 20% of their earnings withheld
pursuant to the Purchase Plan and applied, on specified dates determined by the
Board of Directors, to the purchase of shares of Series B Common Stock. The
price of Series B Common Stock purchased under the Purchase Plan will be equal
to 85% of the lower of the fair market value of the Series B Common Stock on the
commencement date of each offering period or the relevant purchase date.
Employees
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<PAGE> 89
may end their participation in the offering at any time during the offering
period, and participation ends automatically on termination of employment with
the Company.
In the event of a merger, consolidation, dissolution, or liquidation
involving the Company, or the acquisition of beneficial ownership of at least
50% of the combined voting power of the Company by any person, entity or group
(excluding Company employee benefit plan ownership), the Board of Directors has
discretion to provide that each right to purchase Series B Common Stock will be
assumed or an equivalent right substituted by the successor corporation, or the
Board may shorten the offering period and provide for all sums collected by
payroll deductions to be applied to purchase stock immediately prior to such
merger or other transaction. The Purchase Plan will terminate at the Board's
direction. The Board has the authority to amend or terminate the Purchase Plan,
subject to the limitation that no such action may adversely affect any
outstanding rights to purchase Series B Common Stock.
1997 Non-Employee Director Stock Option Plan
On February , 1997, the Board of Directors adopted a 1997 Non-Employee
Director Stock Option Plan (the "Directors' Plan") and which will be
subsequently approved by the stockholders. The total number of shares of Series
B Common Stock to be reserved for issuance under the Directors' Plan is
shares of Series B Common Stock. The Directors' Plan will provide for
the grant of nonstatutory stock options to certain non-employee directors of the
Company. However, non-employee directors either (i) who are serving on the Board
of Directors as the designated representative of a stockholder of the Company or
(ii) who are immediate family members of any individual who is then a member of
the Board of Directors and is providing services to the Company as an employee
or consultant, shall not be eligible to receive option grants under the
Directors' Plan. The Board of Directors (or, if appointed, a committee of
members of the Board of Directors) shall determine the terms and conditions of
each option grant, which must be consistent with the terms of the Directors'
Plan. No eligible non-employee director may receive an option to purchase more
than 150,000 shares of Series B Common Stock in a single calendar year. Each
option will be subject to vesting over three years, with one-third of the shares
subject to such option vesting at the end of each year based on continued
service. The Board of Directors may establish a different vesting schedule for
one or more options. The exercise price of all stock options granted under the
Directors' Plan will be equal to the fair market value of a share of Series B
Common Stock on the date of grant of the option. Options granted under the
Directors' Plan will have a term of 10 years. No option granted under the
Directors' Plan will generally be transferable by the optionee other than by
will or the laws of descent or distribution, and each option will be
exercisable, during the lifetime of the optionee, generally only by such
optionee.
Under certain changes of control of the Company, each non-employee director
will have a reasonable time within which to exercise his or her options,
including any part of an option that would not otherwise be exercisable prior to
the effectiveness of the transaction, after which time the options will
terminate. The Board of Directors may amend or terminate the Directors' Plan or
one or more options granted under the Directors' Plan; provided, however, that
no such action may adversely affect any outstanding option. If not terminated
earlier, the Directors' Plan will terminate upon the occurrence of a change in
control which triggers the acceleration of exercisability and vesting of options
granted under the Directors' Plan.
401(k) Retirement and Savings Plan
Effective as of July 1, 1995, the Board of Directors of the Company adopted
The NextWave Telecom Inc. 401(k) Retirement and Savings Plan (the "Savings
Plan"). The Savings Plan is a profit-sharing plan designed to be qualified under
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). The Savings Plan covers all employees of the Company who have attained
age 21 and have completed 30 days of service, as that term is defined in the
Savings Plan.
A participant in the Savings Plan may contribute up to 15% of his or her
compensation on a pre-tax basis under the Savings Plan. Also, under the Savings
Plan, the Company may, in its discretion, make matching contributions based on
the pre-tax contributions of a participant that are not in excess of 10% of
compensation. The matching contributions may be up to 100% of the pre-tax
contributions subject to matching. In addition,
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<PAGE> 90
participants may make after-tax contributions of up to 10% of compensation under
the Savings Plan. A participant's after-tax contributions are not subject to
matching.
Finally, the Company may make in its discretion, certain additional
contributions that generally will be allocated to participants in proportion to
compensation. Discretionary profit-sharing contributions for any plan year will
be allocated to participants who have been credited with 501 or more hours of
service during the plan year and to participants who terminate employment during
the plan year due to death, disability or retirement. The total annual
contribution for each participant generally may not exceed the lesser of: (a)
25% of the participant's taxable compensation for such year, or (b) the greater
of (i) 25% of the defined benefit dollar limitation then in effect under Section
415(b)(1) of the Code, or (ii) $30,000. The Company made no contributions to the
Savings Plan during the period ended December 31, 1996.
Contributions made by, or on behalf of, a participant, and interest,
earnings, gains or losses on such amounts, are credited to accounts maintained
for the participant under the Savings Plan. A participant under the Savings Plan
is fully vested in his or her pre-tax and after-tax contributions accounts.
Vesting in a participant's remaining account is based upon his or her years of
service with the Company. A participant is initially 20% vested after the
completion of two years of service with the Company. The participant's vested
percentage increases by 20% for each subsequent year of service with the
Company, so that the participant is 100% vested after the completion of six
years of service. In addition, a participant becomes fully vested in his or her
accounts upon retirement due to permanent disability, attainment of age 65 or
death. Finally, the Savings Plan provides that the Board of Directors of the
Company may at any time declare the Savings Plan partially or completely
terminated, in which event, the accounts of each participant with respect to
whom the Savings Plan is terminated will become fully vested.
In the event of a termination, partial termination or a complete
discontinuance of contributions, the accounts of each affected participant will
become fully vested.
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PRINCIPAL STOCKHOLDERS
The following tables set forth, as of December 31, 1996, the amount and
percentage ownership of the Company's Series A Common Stock and Series B Common
Stock beneficially owned by each holder of 5% or more of the Series A Common
Stock or Series B Common Stock, by each director and Named Officer of the
Company and by all officers and directors of the Company as a group. Except as
otherwise indicated, and subject to applicable community property and similar
laws, each of the persons named has sole voting and investment power with
respect to the Series A Common Stock or Series B Common Stock shown as
beneficially owned. An asterisk denotes beneficial ownership of less than 1%.
SERIES A COMMON STOCK
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OF
NATURE OF PERCENTAGE OF AMOUNT AND OUTSTANDING
BENEFICIAL OUTSTANDING NATURE OF SERIES A
OWNERSHIP SERIES A BENEFICIAL COMMON STOCK
PRIOR TO COMMON STOCK OWNERSHIP AFTER THE
THE EQUITY PRIOR TO THE AFTER THE EQUITY
NAME AND ADDRESS(1) OFFERING EQUITY OFFERING EQUITY OFFERING OFFERING(2)
- ---------------------------------------- ---------- ---------------------- --------------- -------------
<S> <C> <C> <C> <C>
Allen B. Salmasi
and Nicole N. Salmasi(3).............. 19,091,435 52.7%
Good News Communications Company,
LLC(4)................................ 11,960,866 33.0%
Janice I. Obuchowski(5)................. 1,896,273 5.2%
James S. Madsen(6)...................... 634,467 1.8%
Kevin M. Finn(7)........................ 556,830 1.5%
Edward M. Knapp......................... 130,003 *
All Directors and Officers as a group
(17 persons, including those named
above)................................ 23,244,495 64.1%
</TABLE>
- ---------------
(1) The address for all persons named above (except Good News Communications
Company, LLC) is c/o The Company, 6256 Greenwich Dr., Suite 500, San Diego
CA 92122. The address for Good News Communications Company, LLC is 7710
Balboa Ave., Suite 227-E, San Diego, CA 92111.
(2) From and after the closing of the Equity Offering, under an irrevocable
election of a majority interest of the holders of Series A Common Stock, all
of the Series A Common Stock (other than 3,000 shares) will convert into
fully paid and nonassessable shares of Series B Common Stock and Series C
Common Stock. See "Description of Capital Stock."
(3) All shares shown are held of record by Navation Inc., a corporation owned
and controlled by Mr. and Mrs. Salmasi and members of their immediate
family.
(4) All shares shown are held of record by Good News Communications Company,
LLC, a limited liability company of which Mr. Stephen Park is the majority
member.
(5) All shares shown are held of record by Freedom Mobility Inc., a corporation
owned and controlled by Ms. Obuchowski and members of her immediate family.
(6) All shares shown are held of record by Jarrah, Inc., a corporation owned and
controlled by Mr. Madsen and members of his immediate family.
(7) All shares shown are held of record by Marin/Finn Industries, Inc., a
corporation owned and controlled by Mr. Finn and members of his immediate
family.
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<PAGE> 92
SERIES B COMMON STOCK
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING PERCENTAGE OF OUTSTANDING
SERIES B COMMON STOCK SERIES B COMMON STOCK
AMOUNT AND NATURE OF PRIOR TO THE AFTER THE
NAME AND ADDRESS BENEFICIAL OWNERSHIP EQUITY OFFERING EQUITY OFFERING(1)
- --------------------------------- -------------------- ------------------------- -------------------------
<S> <C> <C> <C>
MCI Telecommunications
Corporation(2)................. 23,673,284 15.8%
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Hughes Network Systems,
Inc.(3)........................ 10,000,000 7.9%
11717 Exploration Lane
Germantown, MD 20876
QUALCOMM Incorporated(4)(5)...... 8,797,221 6.9%
6455 Lusk Avenue
San Diego, CA 92121
PECO Energy Company(4)........... 7,647,222 6.0%
2301 Market Street
Philadelphia, PA 19101
Pohang Steel America Corp.(6).... 6,666,666 5.3%
300 Tice Blvd.
Woodcliff Lake, NJ 07675
Allen B. Salmasi and
Nicole N. Salmasi(7)(8).......... 20,698,308 16.4%
Good News Communications(9)...... 12,879,868 10.2%
Janice I. Obuchowski(7)(10)...... 2,181,974 1.7%
Kevin M. Finn(7)(11)............. 771,215 *
James S. Madsen(7)(12)........... 825,432 *
Edward M. Knapp(7)............... 139,994 *
All Directors and Officers as a
Group (17 persons, including
those named above)(7)(13)...... 26,039,303 19.9%
</TABLE>
- ---------------
(1) Based on shares of Series B Common Stock outstanding, which does
not include options warrants, convertible debt or other or rights to
purchase shares of Series B Common Stock which have not yet
vested, or are not exercisable or convertible within the next 60 days. For
a description of additional options, warrants and convertible debt, see
"Description of Capital Stock -- Options, Warrants and Convertible Debt."
Assumes the conversion of all outstanding Series A Common Stock (other than
3,000 shares) from and after the consummation of the Equity Offering. See
Note (2) on the previous page.
(2) Includes 23,673,284 shares of Series B Common Stock subject to purchase
within 60 days upon exercise of warrants.
(3) Includes 10,000,000 shares of Series B Common Stock subject to purchase
within 60 days upon conversion of a convertible promissory note held by
Hughes.
(4) Includes shares of Series B Common Stock subject to purchase within 60 days
upon exercise of warrants to purchase shares of Series B Common Stock at
$3.00 per shares (the "Series B Warrants") by the following domestic
investors: QUALCOMM, 1,111,111 and PECO Energy Company, 980,556.
(5) Includes 1,019,444 shares of Series B Common Stock subject to purchase
within 60 days upon conversion of a convertible promissory note held by
QUALCOMM.
(6) Excludes 4,419,582 shares of Series B Common Stock which will become
issuable to POSAM upon exercise of Series B Warrants following additional
issuances of equity interests by NextWave to domestic investors, thereby
permitting additional foreign ownership of NextWave's equity interests
under the FCC's rules.
(7) All amounts shown include shares of Series C Common Stock to be
received by members of the Control Group in the Recapitalization which are
subject to redemption pursuant to the terms of the CTRs. See "Description
of Contingent Transfer Rights." The address for these persons is c/o
NextWave, 6256 Greenwich Drive, Suite 500, San Diego, CA 92122.
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<PAGE> 93
(8) All shares shown are held of record by Navation Inc., a corporation owned
and controlled by Mr. and Mrs. Salmasi and members of their immediate
family. Also includes 140,000 shares of Series B Common Stock issuable upon
the exercise of stock options which are exercisable within 60 days after
the date hereof, at an exercise price of $0.275 per share.
(9) All shares shown are held of record by Good News Communications Company,
LLC, a limited liability company of which Mr. Stephen Park is the majority
member. The address for Good News Communications Company, LLC is 7710
Balboa Ave., Suite 227-E, San Diego, California 92111.
(10) All shares are held of record by Freedom Mobilty Inc., a corporation owned
and controlled by Ms. Obuchowski and members of her immediate family.
Includes 140,000 shares of Series B Common Stock issuable upon the
exercise of stock options exercisable within 60 days after the date
hereof, at an exercise price of $0.25 per share.
(11) All shares shown are held of record by Marin/Finn Industries, Inc., a
corporation owned and controlled by Mr. Finn and members of his immediate
family. Includes 100,000 shares of Series B Common Stock issuable upon the
exercise of stock options exercisable within 60 days after the date hereof,
at an exercise price of $0.25 per share and Series B Warrants to purchase
4,934 shares of Series B Common Stock.
(12) All shares shown are held of record by Jarrah, Inc., a corporation owned
and controlled by Mr. Madsen and members of his immediate family. Includes
120,000 shares of Series B Common Stock issuable upon the exercise of stock
options exercisable within 60 days after the date hereof, at an exercise
price of $0.25 per share and Series B Warrants to purchase 153 shares of
Series B Common Stock.
(13) Includes 877,000 shares of Series B Common Stock issuable upon the exercise
of stock options exercisable within 60 days after the date hereof, at
exercise prices of $0.25 to $0.275 per share and Series B Warrants to
purchase 9,083 shares of Series B Common Stock.
For information regarding the election of directors of the Company, see
"Management -- Board of Directors -- Election of Directors" and "Certain
Relationships and Related Transactions" and for information regarding other
voting provisions of the Company's Amended and Restated Certificate of
Incorporation, see "Description of Capital Stock."
AMENDED AND RESTATED SERIES A SHAREHOLDERS AGREEMENT
Pursuant to the terms of the Amended Series A Shareholders Agreement, the
holders of Series A Common Stock (all of whom constitute members of the Control
Group) are restricted from transferring their shares of Series A Common Stock,
Series B Common Stock and Series C Common Stock until the later of (i) three
years from the License Grant Date or such longer period of time as may be
required to comply with the FCC's rules and regulations or (ii) the trading day
following the CTR Expiration Date. After the initial three-year period and until
the tenth anniversary of the License Grant Date, the holders of Series A Common
Stock that comprise the Qualifying Investors of the Control Group cannot
transfer their shares of Series A Common Stock, Series B Common Stock and Series
C Common Stock unless, after such transfer, the Qualifying Investors continue to
own the Required Ownership Percentage. Any transfer of shares which is otherwise
permitted by the foregoing sentence is subject to a first right of purchase by
the Company and, to the extent not purchased by the Company, by the other
Qualifying Investors. In the event of the death of a Series A shareholder, the
shares of Series A Common Stock, Series B Common Stock and Series C Common Stock
held by such shareholder may be transferred only to such shareholder's spouse or
immediate family unless such transfer violates FCC regulations. If such shares
are not transferred as provided above, the Company and then the remaining Series
A shareholders have the right to purchase the shares at "fair market value" (as
defined in the Amended Series A Shareholders Agreement), with a 25% downpayment
in cash and the remainder in a promissory note. The CTR Agreement will provide
that the Company will enforce all of the Company's rights under the foregoing
provisions of the Amended Series A Shareholders Agreement and will not give to
any other party thereto a waiver of any of its obligations under such provisions
or excuse any breach by such other party of any such obligation thereunder. The
Amended Series A Shareholders Agreement also provides that upon conversion of
shares of Series A Common Stock into Series B Common Stock and Series C Common
Stock, the holders will vote their shares to maintain a representative of SONY
on the Board of Directors.
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<PAGE> 94
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Navation has purchased since inception 29,370,589 shares of Series A Common
Stock from the Company, at a purchase price of $0.25 per share, for an aggregate
consideration of $7,342,647. Mr. Allen Salmasi, the Company's Chairman of the
Board, President and Chief Executive Officer, controls Navation and owns a 20%
interest in Navation, with the remaining interests owned by members of his
immediate family. As payment for 5,340,586 of such shares, Navation paid the par
value in cash and issued a promissory note to the Company in the amount of
$1,334,612, at an interest rate of 6% per annum, which matures upon demand (the
"Navation Purchase Note").
Freedom Mobility Inc. has purchased since inception 2,917,260 shares of
Series A Common Stock, at a purchase price of $0.25 per share, for an aggregate
consideration of $729,315. Ms. Janice Obuchowski, the Company's Vice-Chairman,
owns a majority interest in Freedom Mobility Inc., with the remaining ownership
interests held by members of her immediate family. As payment for 536,244 of the
shares, Freedom Mobility Inc. paid the par value in cash and issued a promissory
note to the Company in the amount of $134,007, at an interest rate of 6% per
annum, which matures upon demand (the "Freedom Purchase Note"). See "Certain
Indebtedness -- Bridge Notes."
Ms. Obuchowski is the principal owner of Freedom Technologies Inc., which
provides consulting services to the Company pursuant to an informal arrangement,
receiving $120,000 and $186,000 for such services in 1995 and for the nine
months ended September 30, 1996, respectively. Ms. Obuchowski is married to Mr.
Albert Halprin, a partner at Halprin, Temple, Goodman & Sugrue. The Company
retained Halprin, Temple, Goodman & Sugrue to perform legal services in 1996 and
intends to continue this relationship in the future.
Upon his joining the Company in May 1996, Mr. Gene Welsh received a
$135,000 loan from the Company. The loan bears interest at 6% per annum and
matures on the earlier of January 15, 1998 or termination of employment, except
that Mr. Welsh is obligated to apply any future bonus amounts (net of applicable
taxes) to repayment of the loan.
Certain stockholders of the Company have entered into the Stockholders'
Voting Agreement, pursuant to which such stockholders have agreed for an initial
period of three years (subject to extension in the event a party is a 6%
Stockholder at the end of the initial period) to elect to the Company's Board of
Directors representatives designated by certain "Early Investors" (as defined in
such agreement). Immediately following the consummation of the Equity Offering,
the Company will appoint the following directors at the request of the Early
Investors: Ha-Young Aum at the request of POSAM, Jang-Ho Chung at the request of
LG, Gregory A. Cucchi at the request of PECO Energy Company, Jung-Boo Kim at the
request of Korea Electric Power Corporation, Manjin J. Kim at the request of
ILJIN America Corp., Muhit U. Rahman at the request of Triumph Capital Group,
Inc. and Yutaka Sato at the request of SONY. See "Management -- Directors and
Executive Officers -- Election of Directors."
Under the terms of the Subscription Agreement (as defined below) between
the Company and Hughes, the Company has agreed upon written notice from Hughes
on or before March 29, 1997, to use its best efforts to cause the appointment of
a Hughes representative to the NextWave Board of Directors. Hughes, the Company
and the Series A stockholders of the Company have also entered into a Special
Voting Agreement pursuant to which such stockholders have agreed for three years
to elect to the Company's Board of Directors a representative designated by
Hughes. See "Business -- Equipment Vendors -- Hughes" and "Description of
Capital Stock -- Other Options, Warrants and Convertible Debt -- Convertible
Debt -- Hughes Subscription Agreement, Convertible Promissory Note and Escrow
Agreement."
During the period from January through April 1996, the Company performed
consulting services for Korean Information and Communications Co., Ltd, the
president and chief executive officer of which is the father of Stephen Park, an
employee of the Company. Stephen Park is the majority member of Good News
Communications Company, LLC, a Series A Common Stockholder of the Company.
During the nine months ended September 30, 1996, the Company recorded consulting
revenues and consulting costs in the amounts of $1,914,000 and $1,832,000,
respectively.
92
<PAGE> 95
In lieu of payment of a $500,000 advisory service fee in connection with a
private placement, Triumph Capital Group, Inc. was issued 100,000 shares of
Series B Common Stock at a price per share of $5.00.
For a description of agreements between the Company and MCI, see
"Business -- MCI Agreement" and "Description of Capital Stock -- Other Options,
Warrants and Convertible Debt -- Warrants -- MCI Warrants."
See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Liquidity and Capital Resources" for information
regarding loans to the Company from POSAM, PECO and LG. See
"Business -- Equipment Vendors" for information regarding a commitment by LGIC,
the parent corporation of LG, to provide PCS infrastructure equipment and
financing to the Company.
DESCRIPTION OF THE UNITS
Each Senior Note Unit offered hereby consists of $1,000 principal amount of
Senior Notes and Senior Note Warrants to purchase one share of Series B
Common Stock. Each Senior Discount Note Unit offered hereby consists of $1,000
principal amount at maturity of Senior Discount Notes and Senior Discount
Note Warrants to purchase one share of Series B Common Stock. The Notes and the
Warrants will not be separately transferable until the "Separability Date,"
which shall be the earliest of: (i) 60 days after the date of original issue of
the Notes and Warrants (the "Issue Date"); (ii) in the event of a Change of
Control (as defined herein), the date the Company mails notice thereof; or (iii)
such earlier date as may be determined by CIBC Wood Gundy Securities Corp. in
its sole discretion.
DESCRIPTION OF THE NOTES
The Senior Notes are to be issued under an Indenture, to be dated as of the
Issue Date (the "Senior Notes Indenture"), among the Company, Wireless and
, as trustee (the "Senior Notes Trustee"). The Senior Discount Notes
are to be issued under an Indenture, to be dated as of the Issue Date (the
"Senior Discount Notes Indenture" and together with the Senior Notes Indenture,
the "Indentures"), among the Company, Wireless and , as trustee (the
"Senior Discount Notes Trustee" and together with the Senior Notes Trustee, the
"Trustees"). The Senior Notes and the Senior Discount Notes are referred to
herein as the "Notes." The terms of the Notes include those stated in the
Indentures and those made part of the Indentures 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 applicable Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
certain provisions of the Notes and the Indentures 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 Indentures (including the definitions of
certain terms therein and those terms made a part thereof by the Trust Indenture
Act) copies of each of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. Whenever particular defined terms
of the Indentures not otherwise defined herein are referred to, such defined
terms are incorporated herein by reference.
GENERAL
Except where otherwise stated to the contrary, references herein to
principal amount of Senior Notes originally issued or principal amount at
maturity of Senior Discount Notes originally issued shall include the principal
amount of Senior Notes issued in connection with the redemption of the Bridge
Notes and the principal amount at maturity of the Senior Discount Notes issued
in connection with the redemption of the Bridge Notes, respectively.
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. Principal or 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
Senior Notes Trustee, in the case of the
93
<PAGE> 96
Senior Notes and the corporate trust office of the Senior Discount Notes
Trustee, in the case of the Senior Discount Notes.
The Notes, including the Notes to be issued in connection with the
redemption of the Bridge Notes, will be senior unsecured obligations of the
Company, except that the Senior Notes will be secured by a first priority lien
on the Escrow Account described under "Disbursement of Funds -- Escrow Account."
The Notes will rank pari passu in right of payment with all existing and future
unsecured, unsubordinated indebtedness of the Company and will be senior in
right of payment to all existing and future subordinated indebtedness of the
Company. The Company is a holding company with limited assets of its own that
conducts substantially all of its business through its subsidiaries. The Notes
will represent general senior unsecured obligations of the Company and will be
effectively subordinated to all liabilities of the Company's operating
subsidiaries, including trade payables and indebtedness that may be incurred
under Vendor Financing Arrangements. In addition, the Company's non-operating
subsidiaries will be obligated for approximately $4.4 billion in U.S. Government
Financing which will be secured by the Company's PCS licenses. As of ,
1997, after giving pro forma effect to the Offerings and the U.S. Government
Financing and the application of the net proceeds therefrom, but without giving
effect to the indebtedness expected to be incurred by the Company's subsidiaries
under certain vendor and other financing arrangements, the Company's
subsidiaries would have had approximately $ of indebtedness
outstanding, and the holders of the Notes would have been effectively
subordinated in right of payment to $ of such indebtedness. Such
subsidiaries are expected to incur substantial additional indebtedness in the
next several years. See "Risk Factors -- Substantial Leverage; Ability to
Service Debt," "-- Holding Company Structure; Structural Subordination of the
Notes; Asset Encumbrances." The operations of the Company are and will be
conducted through its subsidiaries, and the Company is therefore ultimately
dependent on the cash flow of such subsidiaries to meet its obligations,
including its obligations under the Notes.
WIRELESS GUARANTEES
The Notes will be guaranteed by Wireless, which is a direct wholly owned
subsidiary of the Company. Upon issuance, Wireless will fully and
unconditionally guarantee all of the Company's obligations under the Notes and
the Indentures, including its obligations to pay principal, premium, if any, and
interest with respect to the Notes. The Guarantees will be subordinated to all
existing and future Indebtedness of Wireless incurred pursuant to Vendor
Financing Arrangements ("Vendor Financing Indebtedness") permitted by the
Indentures, including without limitation, the Hughes Credit Facility, the LGIC
Credit Facility and the Lucent Credit Facility, will be senior in respect of all
Subordinated Indebtedness of Wireless and will rank pari passu with respect to
all other Indebtedness of Wireless.
Pursuant to the Wireless Guarantees, if the Company defaults in the payment
of any amount owing in respect of any Notes, Wireless will be obligated to duly
and punctually pay the same. Pursuant to the terms of the Indentures Wireless
has agreed that its obligations under the Wireless Guarantees will be
unconditional, irrespective of the validity, regularity or enforceability of the
Notes or the Indentures, the absence of any action to enforce the same or any
other circumstance which might otherwise constitute a legal or equitable
discharge or defense of Wireless.
Notwithstanding the foregoing, the Indentures will provide that the
Trustees thereunder will not enforce the foregoing provisions of the Wireless
Guarantees unless a credit agent for any Vendor Financing Indebtedness has
prohibited the payment of dividends or other distributions to the Company by
Wireless pursuant to the provisions of the Vendor Financing Arrangements
described under "Business -- Equipment Vendors -- Vendor Financing -- General
Terms and Conditions -- Guarantee of Notes," pursuant to which Wireless may
guarantee the obligations of the Company in respect of any public indebtedness
(such as the Notes) if and only if such guarantee is unsecured and subordinated
to the obligations of Wireless in respect of such Vendor Financing Indebtedness.
No claim under such Guarantees may be made until (i) the expiration of 179 days
after notice to Wireless from a credit agent that Dividend Block is in effect,
provided that such Dividend Block is continuing at the end of such period; (ii)
Wireless has failed to pay dividends to the Company at the times and in the
amounts permitted by the provisions of the Vendor Financing Indebtedness
described under "Business -- Equipment Vendors -- Vendor Financing -- General
Terms and
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<PAGE> 97
Conditions -- Guarantee of Notes"; or (iii) a court having jurisdiction in the
premises enters a decree or order for (A) relief in respect of Wireless 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 Wireless or
for all or substantially all of the property and assets of Wireless or (C) the
winding up or liquidation of the affairs of Wireless.
MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR NOTES
The Senior Notes, including the Senior Notes to be issued in connection
with the redemption of the Bridge Notes, will be limited to $ aggregate
principal amount, and will mature on , 2007. Cash interest
on the Senior Notes will accrue at a rate of % per annum and will payable in
arrears on each and , commencing , 1997.
Cash interest will accrue from the most recent interest payment date to which
interest has been paid or, if no interest has been paid, from
, 1997. Interest will be computed on the basis of a 360 day
year comprised of twelve 30-day months.
MATURITY, INTEREST AND PRINCIPAL OF THE SENIOR DISCOUNT NOTES
The Senior Discount Notes, including the Senior Discount Notes to be issued
in connection with the redemption of the Bridge Notes, will be limited to
$ aggregate principal amount at maturity, and will mature on
, 2007. The Senior Discount Notes will be issued at a
discount to their aggregate principal amount at maturity and will generate gross
proceeds to the Company of approximately . Based on the
price thereof, the yield to maturity of the Senior Discount Notes is %
(computed on a semi-annual bond equivalent basis), calculated from
, 1997. 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 Senior Discount Notes as such discount is amortized
from the date of issuance of the Senior Discount Notes, Holders of Senior
Discount Notes will not receive any cash payments of interest on the Senior
Discount Notes until , 2003. See "Certain Federal Income Tax
Considerations." From and after ,2002, interest on the
Senior Discount Notes will accrue at the rate shown on the front cover of this
Prospectus from , 2002 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 or
immediately preceding the Interest Payment Date) on and
of each year, commencing , 2003.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
OPTIONAL REDEMPTION
Optional Redemption of the Senior Notes The Senior 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 , 2002 and prior to maturity, upon
not less than 30 nor more than 60 days' prior notice mailed by first class mail
to each Holder's 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 of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
-------------------------------------------------------------- ----------
<S> <C>
2002.......................................................... %
2003..........................................................
2004..........................................................
2005 and thereafter........................................... 100.00
</TABLE>
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<PAGE> 98
In addition, at any time prior to , 2000, the Company
may redeem up to 35% of the aggregate principal amount of Senior Notes
originally issued with the Net Cash Proceeds of (i) one or more public offerings
of the Company's Common Stock registered under the Securities Act (a "Public
Equity Offering") or (ii) a sale of the Company's Common Stock to a Strategic
Equity Investor in a single transaction or series of related transactions, in
either case for gross proceeds of at least $150 million, at a Redemption Price
equal to % of the principal amount of the Senior Notes (determined at the
Redemption Date), upon not less than 30 nor more than 60 days' notice by first
class mail given within 30 days after (and not before) such sale, provided that
not less than 65% of the aggregate principal amount of the Senior Notes
originally issued, including the aggregate principal amount of Senior Notes
issued in connection with the redemption of the Bridge Notes, remain outstanding
following such redemption.
Optional Redemption of the Senior Discount Notes. The Senior Discount
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 , 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's 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
of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
-------------------------------------------------------------- ----------
<S> <C>
2002.......................................................... %
2003..........................................................
2004..........................................................
2005 and thereafter........................................... 100.00
</TABLE>
In addition, at any time prior to , 2000, the Company
may redeem up to 35% of the aggregate principal amount at maturity of Senior
Discount Notes originally issued with the Net Cash Proceeds of (i) one or more
Public Equity Offerings or (ii) a sale of the Company's Common Stock to a
Strategic Equity Investor in a single transaction or series of related
transactions, in either case for gross proceeds of at least $150 million, at a
Redemption Price equal to % of the Accreted Value of the Senior Discount
Notes (determined at the Redemption Date), upon not less than 30 nor more than
60 days' notice by first class mail given within 30 days after (and not before)
such sale, provided that not less than 65% of the aggregate principal amount at
maturity of the Senior Discount Notes originally issued remain outstanding
following such redemption.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the applicable 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 no Note of $1,000 in
principal amount or less shall be redeemed in part. 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.
DISBURSEMENT OF FUNDS -- ESCROW ACCOUNT
The Senior Notes Indenture will provide that the Company will initially
place approximately $
million of the net proceeds realized from the sale of the Senior Note Units
offered hereby in the Escrow Account held by the Escrow Agent for the benefit of
the Senior Notes Trustee under the Senior Notes Indenture in accordance with the
Escrow Agreement dated as of , 1997 among the Company, the
Senior Notes Trustee and the Escrow Agent. Such funds, together with the
proceeds from the investment thereof, will be sufficient to pay three years'
interest on the Senior Notes (including Senior Notes issued in connection with
the redemption of the Bridge Notes). The Company will enter into the Escrow
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Agreement, which will provide, among other things, that funds may be disbursed
from the Escrow Account only to pay interest on the Senior Notes (or, if a
portion of the Senior Notes has been retired by the Company, funds representing
the lesser of (A) the difference between the funds in the escrow account
(including any investment income) and the interest payments which have not
previously been made on such Senior Notes not so retired for each Interest
Payment Date through the Interest Payment Date to occur on ,
2000 and (B) the interest payments which have not previously been made on such
retired Senior Notes for each Interest Payment Date through the Interest Payment
Date to occur on , 2000, shall be paid to the Company if no
Default or Event of Default then exists under the Senior Notes Indenture). Upon
the acceleration of the maturity of the Senior Notes, the Escrow Agreement will
provide for the foreclosure by the Senior Notes Trustee upon the net proceeds of
the Escrow Account. Pending such disbursement, the Company will cause all funds
contained in the Escrow Account to be invested in Marketable Securities.
Interest earned on these Marketable Securities will be added to the Escrow
Account.
In the event the Company issues less than $ million aggregate principal
amount of Senior Notes in connection with the redemption of the Bridge Notes,
the Escrow Agreement will provide for the release to the Company of funds equal
to the amount placed in the Escrow Account, together with the proceeds from the
investment thereof, sufficient to pay three years' interest in respect of Senior
Notes in an aggregate principal amount equal to $65.2 million less the amount,
together with the proceeds from the investment thereof, sufficient to pay three
years' interest in respect of the aggregate principal amount of Senior Notes
actually issued in connection with the redemption of the Bridge Notes.
The Senior Notes to be issued pursuant to the Units Offering and the Senior
Notes to be issued in connection with the redemption of the Bridge Notes will be
secured by a first priority lien on the Escrow Account. See "-- Security" below.
COVENANTS
The Indentures will contain, among others, the following covenants:
Limitation on Indebtedness
Under the terms of the Indentures, the Company will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness, other than
Permitted Indebtedness; provided that the Company may Incur Indebtedness and
provided, further, that a Restricted Subsidiary may Incur (and the Company may
Guarantee) Secured Credit Agreement Indebtedness if, in either case after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds therefrom, the Consolidated Indebtedness to EBITDA Ratio would be
7.0 to 1, with respect to an Incurrence prior to , 2003, or
6.0 to 1, with respect to an Incurrence on or after , 2003.
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 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 definition of Permitted Indebtedness
or is entitled to be Incurred pursuant to the first paragraph of this
"Limitation on Indebtedness" covenant, 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 or pursuant to the
first paragraph hereof.
The Indentures further provide 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, unless permitted pursuant to the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant.
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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 account of the Company's or any
Restricted Subsidiary's Capital Stock (other than dividends or distributions
payable solely in shares of the Company's or any Restricted Subsidiary's Capital
Stock (other than Redeemable Stock) or in options, warrants or other rights to
acquire such shares of Capital Stock (other than Redeemable Stock)) held by
Persons other than the Company, (ii) purchase, redeem, retire or otherwise
acquire for value any shares of Capital Stock of the Company (including options,
warrants or other rights to acquire shares of such Capital Stock), (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 (other than Permitted 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
Issue Date shall exceed the sum of (1) Cumulative EBITDA less 1.5 times
Cumulative Interest Expense plus (2) the aggregate Net Cash Proceeds received by
the Company after the Issue Date from (x) the issuance and sale of its Capital
Stock (other than Redeemable Stock) to a Person who is not a Subsidiary of the
Company, (y) 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 convertible debt securities or 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) and (z) the issuance and sale by the Company after the Issue Date of
Redeemable Stock or debt securities that have been converted into or exchanged
for Capital Stock of the Company (other than Redeemable Stock) plus (3) an
amount equal to the net cash returned from a Restricted Investment (in an amount
not to exceed the original amount of such Restricted Investment) resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, sales or other transfers of assets, in each case to the Company or any
Restricted Subsidiary (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 Unrestricted Subsidiary; provided, that the sum of the foregoing clauses
(1), (2) and (3) shall be reduced, dollar for dollar, by the amount of any
Investments made in reliance upon clause (vi) of the definition of Permitted
Investment.
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, Refinancing Indebtedness; (iii) the 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 offering of, shares of the Capital Stock (other than
Redeemable Stock) of the Company; (v) payments or distributions, in the nature
of satisfaction of dissenters' rights, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to consolidations, mergers and transfers of all or
substantially all of the property and assets of the Company; (vi) 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 removal or
reinstatement of any license held by the Company or any Restricted Subsidiary
from any governmental agency
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as a result of laws limiting foreign ownership of the Company's Capital Stock or
to retain the financial benefits of the Company's status as a "Small Business"
as such term is defined by the FCC; (vii) the repurchase of Capital Stock of the
Company (including options, warrants or other rights to acquire such Capital
Stock) from departing or deceased directors, officers or employees of the
Company or its Subsidiaries in an aggregate amount not to exceed $5 million in
any fiscal year, provided that the Company may carry forward the unused portion
of the $5 million in any fiscal year to the next fiscal year, and provided
further, that the Company may not carry forward more than $5 million to any
subsequent fiscal year; (viii) the use of a portion of the proceeds of the Units
Offering to redeem the Company's Bridge Notes and (ix) the redemption of the
Bridge Notes for Senior Note Units and Senior Discount Note Units; provided that
except in the case of clause (i) no Default or Event of Default shall have
occurred and be continuing as a consequence of the payment set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payments referred to in clauses (ii), (viii) and (ix)
thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii) or (iv) 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 Issuances of Guarantees by, and Debt Securities of, Restricted
Subsidiaries
The Indentures will provide that the Company will not permit (i) any
Restricted Subsidiary to, directly or indirectly, guarantee any Debt Securities
of the Company or (ii) any Restricted Subsidiary to issue any Debt Securities,
unless in either such case, such Restricted Subsidiary simultaneously executes
and delivers a guarantee (a "Subsidiary Guarantee") of the Senior Notes and the
Senior Discount Notes. Any such Subsidiary Guarantee shall be a senior unsecured
obligation and shall not be subordinate in right of payment to any Indebtedness
of the Restricted Subsidiary providing the Subsidiary Guarantee.
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 or (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Issue Date in the Indentures 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 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; (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
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Subsidiary; or (vi) existing on the Issue Date with respect to Wireless (x)
pursuant to the Vendor Financing Indebtedness as in effect on the Issue Date or
(y) pursuant to any other Vendor Financing Indebtedness permitted by the
Indentures, provided that the encumbrances and restrictions in such other Vendor
Financing Indebtedness are no less favorable in any material respect to the
Holders of the Notes than those encumbrances and restrictions set forth in the
Vendor Financing Indebtedness as in effect on the Issue Date. 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 Issuance and Sale of Capital Stock by Restricted Subsidiaries
The Company will not sell and will not permit any Restricted Subsidiary to
issue or sell any shares of Preferred Stock of a Restricted Subsidiary
(including options, warrants or other rights to purchase shares of such
Preferred Stock) except to the Company or a Wholly Owned Restricted Subsidiary.
The Company will not sell and will not permit any Restricted Subsidiary to issue
any Capital Stock of any such Restricted Subsidiary (including options, warrants
or other rights to purchase shares of such Capital Stock) except to the Company
or a Wholly Owned Restricted Subsidiary unless the Net Cash Proceeds (if any)
from such issuance or sale are applied in accordance with the "Limitation on
Asset Sales" covenant. Notwithstanding the foregoing, Wireless shall at all
times remain a Wholly Owned Restricted Subsidiary of the Company.
Limitation on Transactions with Shareholders and Affiliates
Under the terms of the Indentures, 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 (or any Affiliate of such holder) of
10% or more of any class of Capital Stock of the Company or with any Affiliate
of the Company or any Restricted Subsidiary (in each case, an "Interested
Person"), unless (a) such transaction or series of related transactions is on
fair and reasonable terms no less favorable to the Holders than 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 an Interested Person, as evidenced by an Officers'
Certificate delivered to the Trustees, (b) with respect to a transaction or
series of related transactions involving aggregate payments or value equal to or
greater than $10 million but less than $25 million, such transaction must have
been approved in good faith by a majority of the Company's Board of Directors
and a majority of its Independent Directors (if any), as evidenced by an
Officers' Certificate delivered to the Trustees, and (c) with respect to
transactions or series of related transactions involving aggregate payments or
value equal to or greater than $25 million, the Company has obtained and
delivered to the Trustee a written opinion from a nationally recognized
investment banking, accounting or appraisal firm stating that the transaction is
fair to the Holders from a financial point of view.
The foregoing limitation does not limit, and shall not apply, to (i)
transactions involving aggregate payments and other consideration having a fair
market value at the time of the transaction or series of transactions of
$500,000 or less; (ii) any transaction between the Company and any of its
Restricted Subsidiaries or between Restricted Subsidiaries; (iii) any
transaction in the ordinary course of business between the Company or any
Restricted Subsidiary and an Interested Person that is a vendor or supplier of
assets, goods or services to the Company or any Restricted Subsidiary or a
customer of the Company or any Restricted Subsidiary so long as such transaction
is (a) on fair and reasonable terms no less favorable to the Company or such
Restricted Subsidiary than 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 and (b) is approved by a majority of the
Board of Directors of the Company and a majority of the Independent Directors of
the Company; (iv) the payment of reasonable and customary regular fees to
directors of the Company who
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are not employees of the Company; or (v) any dividends or distributions
permitted by the "Limitation on Restricted Payments" covenant.
Limitation on Liens
The Indentures will provide that the Company will not, and will not permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens
upon any property or assets of the Company or any Restricted Subsidiary securing
either (i) Subordinated Debt Securities unless the Notes and the Subsidiary
Guarantees, as applicable, are secured by a Lien on such property or assets that
is senior in priority to the Liens securing such Subordinated Debt Securities or
(ii) Pari Passu Debt Securities unless the Notes and the Subsidiary Guarantees,
as applicable are equally and ratably secured with the Liens securing such Pari
Passu Debt Securities.
The foregoing limitation does not apply to (i) Liens created pursuant to
agreements existing on the Issue Date; (ii) Liens granted after the Issue 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 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 Restricted Subsidiary; (iv) Liens securing Indebtedness which is
Incurred to refinance secured Refinancing 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 permitted to be subject
to the Liens securing the Indebtedness being refinanced; or (v) Liens with
respect to assets or properties of any Person that becomes a Restricted
Subsidiary after the Issue 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.
Limitation on Asset Sales
Under the terms of the Indentures, 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 75% of the consideration received consists of cash or Temporary Cash
Investments, provided, however, that the amount of (x) any liabilities (as shown
on the Company's or such Restricted Subsidiary's most recent balance sheet or in
the notes thereto, excluding contingent liabilities and trade payables) of the
Company or any such Restricted Subsidiary that are not subordinated by their
terms to the Notes and that are assumed by the transferee of any such assets or
are otherwise no longer the Company's or any of its Restricted Subsidiaries'
liability and (y) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary in connection with such Asset Sale
that are converted by the Company or such Restricted Subsidiary into cash within
60 days of receipt, shall be deemed to be cash for purposes of this provision.
In the event and to the extent that the Net Cash Proceeds received by the
Company or its Restricted Subsidiaries from one or more Asset Sales occurring on
or after the Issue Date in any period of 12 consecutive months exceed $10
million, then the Company shall or shall cause the relevant Restricted
Subsidiary to (i) within 365 days after the date such Net Cash Proceeds are so
received (A) apply an amount equal to such excess Net Cash Proceeds to repay
senior secured Indebtedness of the Company, or Indebtedness of any Restricted
Subsidiary, and, in the case of Indebtedness incurred pursuant to a revolving
credit facility or similar agreement, to permanently reduce the amount available
to be borrowed thereunder by the amount of such repayment, in each case owing to
a Person other than the Company or any of its Restricted Subsidiaries or (B)
apply an equal amount, or the amount not so applied pursuant to clause (A), in
property or assets (other than current assets) that are used or useful in one or
more Permitted Businesses or to the cost of (including the design, development,
improvement, site acquisition, integration, handset manufacture or acquisition
or microwave relocation) Productive Assets (the amounts so applied to be
determined in good faith by an executive officer of the Company and set forth in
an Officers' Certificate delivered to the Trustees) and (ii) apply such excess
Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided
in the following paragraph of this
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"Limitation on Asset Sales" covenant. The amount of such excess Net Cash
Proceeds required to be applied during such 365-day period as set forth in
clause (i) of the preceding sentence and not applied as so required by the end
of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $25 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.
Activities of the Company and Restricted Subsidiaries
The Indentures will provide that the Company will not, and will not permit
any Restricted Subsidiary to, engage in any business other than Permitted
Businesses, except to the extent as would not be material to the Company and its
Restricted Subsidiaries, taken as a whole.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 60 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to (i) 101% of the principal amount thereof, in the case
of the Senior Notes and (ii)(a) 101% of the Accreted Value thereof, in the case
of the Senior Discount Notes, on any date of purchase prior to 2002,
or (b) 101% of the principal amount at maturity of the Senior Discount Notes
plus accrued and unpaid interest, if any, to any date of purchase on or after
2002.
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
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 the consents referred to above 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.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Under the terms of the Indentures, the Company will file with the Trustees
and provide Holders, within 15 days after the filing thereof with the
Commission, copies of its annual report and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may by rule and regulation prescribe) that the Company is required to
file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act.
Notwithstanding that the Company may not be required to remain subject to the
reporting requirements of Section 13(a) or 15(d) of the Exchange Act or any
successor provision thereto, so long as any of the Notes are outstanding, the
Company will be required to continue to file with the Commission and to provide
the Trustee and Holders the annual reports, quarterly reports and other
documents which the Company would have been required to file with the Commission
pursuant to such Section 13(a) or 15(d) or any successor provision thereto if
the Company were subject thereto.
SECURITY
The Senior Notes, including those issued in connection with the redemption
of the Bridge Notes, will be secured, pending disbursement pursuant to the
Escrow Agreement, by a pledge of the Escrow Account, which will initially
contain approximately $ million of the net proceeds from the sale of the
Senior Notes to be
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issued pursuant to the Units Offering (the "Collateral"), representing funds
that together with the proceeds from the investment thereof will be sufficient
to pay three years' interest on the Senior Notes.
The Company will enter into the Escrow Agreement providing for the grant by
the Company to the Senior Notes Trustee for the benefit of the holders of
security interests in the Collateral. All such security interests will secure
the payment and performance when due of all of the Obligations of the Company
under the Senior Notes Indenture and under such Senior Notes, as provided in the
Escrow Agreement. The Liens created by the Escrow Agreement will be first
priority security interests in the Collateral. The ability of holders to realize
upon any such funds or securities may be subject to certain bankruptcy law
limitations in the event of the bankruptcy of the Company.
Funds will be disbursed from the Escrow Account only to pay interest on the
Senior Notes. Pending such disbursements, all funds contained in the Escrow
Account will be invested in Marketable Securities. Upon the acceleration of the
maturity of the Senior Notes or the failure to pay principal at maturity, the
Escrow Agreement will provide for the foreclosure by the Senior Notes Trustee
upon the net proceeds of the Escrow Account. Under the terms of the Senior Notes
Indenture, the proceeds of the Escrow Account shall be applied, first, to
amounts owing to the Senior Notes Trustee in respect of fees and expenses of the
Senior Notes Trustee and second, to the Obligations under the Senior Notes and
the Senior Notes Indenture.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in each of the
Indentures: (a) default in the payment of principal of (or premium, if any, on)
any applicable Note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise; (b) default in the payment of interest on
any applicable Note when the same becomes due and payable, and such default
continues for a period of 30 days; (c) defaults in the performance or breach of
the provisions of the Indentures applicable to mergers, consolidations and
transfers of all or substantially all of the property and assets of the Company
or the failure to make or consummate an Offer to Purchase in accordance with the
provisions of the "Limitation on Asset Sales" covenant or the "Repurchase of
Notes upon a Change of Control" covenant; (d) the Company defaults in the
performance of or breaches any other covenant or agreement of the Company in the
Indentures, the Escrow Agreement (in the case of the Senior Notes Indenture) or
under the applicable Notes (other than a default specified in clause (a), (b) or
(c) above) and such default or breach continues for a period of 60 consecutive
days after written notice by the applicable Trustee or the Holders of 25% or
more in aggregate principal amount of the Senior Notes or Holders of 25% in
aggregate Accreted Value of the Senior Discount Notes; (e) failure to pay when
due (subject to any applicable grace period) the principal of, or acceleration
of, any Indebtedness for money borrowed by the Company or any Restricted
Subsidiary having an outstanding principal amount of at least $25 million; (f)
the rendering of any final unappealable judgment or judgments against the
Company or any Restricted Subsidiary in an amount in excess of $25 million which
remains undischarged or unstayed for a period of 30 days after the date on which
all rights to appeal have expired; (g) 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; (h) 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; (i) the final
determination of the FCC to revoke any PCS License or PCS Licenses held by the
Company or any Restricted Subsidiary that individually or in the aggregate cover
markets with POPs in excess of 10% of the total POPs in all markets covered by
the PCS Licenses then held
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by the Company and its Restricted Subsidiaries; or (j) the Wireless Guarantees
cease to be in full force and effect (other than as expressly provided for in
the Indentures) or are declared null and void, or Wireless denies that it has
any further liability under the Wireless Guarantees, or gives notice to such
effect (other than by reason of the termination of the applicable Indenture or
the release of the Wireless Guarantees in accordance with the applicable
Indenture).
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs and is continuing, the applicable Trustee or the
Holders of at least 25% in aggregate principal amount of the Senior Notes or
Holders of at least 25% in aggregate Accreted Value of the Senior Discount
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 Senior Discount Notes or the principal of, premium, if
any, and accrued interest, if any of all outstanding Senior Notes, as the case
may be, to be immediately due and payable. Upon a declaration of acceleration,
such applicable amount, shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
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 clause (e) shall be remedied or cured by the
Company or the relevant Restricted Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs, the Accreted Value of, premium, if any, and accrued interest, if any, on
the Senior Discount Notes then outstanding or the principal of, premium, if any,
and accrued interest, if any of all outstanding Senior Notes, as the case may
be, shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the applicable Trustee or any Holder.
The Holders of at least a majority in Accreted Value of the outstanding Senior
Discount Notes or Holders of at least a majority in principal amount of the
outstanding Senior Notes, by written notice to the Company and to the applicable
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
applicable 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 Accreted Value of the
outstanding Senior Discount Notes or Holders of at least a majority in principal
amount of the outstanding Senior Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the applicable Trustee or
exercising any trust or power conferred on the applicable Trustee. However, the
applicable Trustee may refuse to follow any direction that conflicts with law or
the applicable Indenture, that may involve the applicable Trustee in personal
liability, or that the applicable 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 applicable
Holder gives the applicable Trustee written notice of a continuing Event of
Default; (ii) the Holders of at least 25% in aggregate Accreted Value of
outstanding Senior Discount Notes or the Holders of at least 25% in aggregate
principal amount of outstanding Senior Notes make a written request to the
applicable Trustee to pursue the remedy; (iii) such Holder or Holders offer the
applicable Trustee indemnity satisfactory to the applicable Trustee against any
costs, liability or expense; (iv) the applicable 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 Senior Notes or the Holders of a
majority in aggregate Accreted Value of the outstanding Senior Discount Notes do
not give the applicable 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.
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<PAGE> 107
The Indentures will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, 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 Indentures 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 the applicable Trustee of any default
or defaults in the performance of any covenants or agreements under the
applicable Indenture.
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 (other than a
consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a
positive net worth; provided that, in connection with any such merger or
consolidation, no consideration (other than Common Stock in the surviving Person
or the Company) shall be issued or distributed to the shareholders of 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 of America or any jurisdiction thereof and shall expressly
assume, by a supplemental indenture executed and delivered to each of the
Trustees, all of the obligations of the Company in respect of all of the Notes
and under the Indentures; (ii) immediately after giving effect to such
transaction on a pro forma basis, 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 Trustees an Officers' Certificate
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.
DEFEASANCE
Defeasance and Discharge. The Indentures will provide that the Company
will be deemed to have paid and will be discharged from any and all obligations
in respect of the Senior Notes or the Senior Discount Notes, as the case may be,
and the provisions of the Indenture will no longer be in effect with respect to
the applicable Notes (except for, among other matters, certain obligations to
register the transfer or exchange of the applicable 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
applicable 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 such Notes on the Stated Maturity
or on the applicable redemption date, as the case may be, of such payments in
accordance with the terms of the applicable Indenture and such Notes, (B) the
Company has delivered to the applicable 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 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, 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
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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 (other than an
Event of Default or event that after the giving of notice or lapse of time or
both would become an Event of Default resulting from the borrowing of funds to
be applied to such deposit), shall have occurred and be continuing on 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 applicable
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
Indentures further will provide that the provisions of the applicable 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 (c) under "-- Events of Default" with
respect to such covenants and clause (iii) under "-- Consolidation, Merger and
Sale of Assets," and clauses (d) and (e) under "Events of Default" shall be
deemed not to be Events of Default, upon, among other things, the deposit with
the applicable 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 applicable Notes
at the Stated Maturity or on the applicable redemption date, as the case may be,
of such payments in accordance with the terms of the applicable Indenture and
the applicable 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 applicable 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 Senior Notes Indenture or the Senior Discount Notes Indenture with respect
to the applicable Notes as described in the immediately preceding paragraph and
the applicable 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 applicable 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 such 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 Indentures may be made by the Company
and the applicable Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding Senior Notes or the
consent of Holders of not less than a majority in aggregate principal amount at
maturity of the outstanding Senior Discount Notes, as the case may be (including
in each case consents obtained in connection with the purchase of or a tender or
exchange offer for the 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
Accreted Value 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 Indentures,
(vi) waive a default in the payment of principal of, premium, if any, or
interest on the Notes, or (vii) reduce the percentage or aggregate principal
amount of outstanding Notes the consent of whose Holders is necessary for waiver
of compliance with certain provisions of the Indentures or for waiver of certain
defaults.
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CONCERNING THE TRUSTEES
The Indentures provide that, except during the continuance of a Default,
the Trustees 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, each of the Trustees 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 Indentures and provisions of the Trust Indenture Act, incorporated by
reference therein, contain limitations on the rights of the Trustees, 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. Each Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest,
it must eliminate such conflict or resign.
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" means, for any Specified Date, the amount provided for
each $1,000 principal amount at maturity of Senior Discount 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>
, 1997.................................................. $
, 1997.................................................. $
, 1998.................................................. $
, 1998.................................................. $
, 1999.................................................. $
, 1999.................................................. $
, 2000.................................................. $
, 2000.................................................. $
, 2001.................................................. $
, 2001.................................................. $
------
, 2002.................................................. $1,000
======
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $ 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 elapsed 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
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(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; provided further, that, notwithstanding the
provisions of clause (i) of the proviso to the definition of Indebtedness, for
purposes of the calculations contemplated by the definitions of Other
Acquisition Indebtedness and Spectrum Acquisition Indebtedness the principal
amount of any PCS License 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 shall be the accreted
value of such PCS License Indebtedness.
"Adjusted Consolidated Net Income" means, with respect to any period, the
net income (loss) of the Company and its Restricted Subsidiaries for such period
as determined on a consolidated basis in accordance with GAAP, and without any
reduction in respect of preferred stock dividends, adjusted, to the extent
included in calculating such net income, by excluding, without duplication, (i)
all extraordinary gains or losses; (ii) the portion of net income (or loss) of
the Company and its Restricted Subsidiaries allocable to interests in
unconsolidated Persons or Unrestricted Subsidiaries, except to the extent of the
amount of dividends or distributions actually paid to the Company or its
Restricted Subsidiaries by such other Person during such period; (iii) for
purposes of the "Limitation on Restricted Payments" covenant only, net income
(or loss) of any Person combined with the Company or a Restricted Subsidiary on
a "pooling of interests" basis attributable to any period prior to the date of
combination; (iv) gains and losses in respect of any Asset Sale or Asset Swap,
on an after tax basis; (v) the net income of any Unrestricted Subsidiary, except
to the extent that cash dividends or distributions have actually been received
by the Company or a Restricted Subsidiary; and (vi) the net income of any
Restricted Subsidiary to the extent the declaration of dividends or similar
distributions by that Restricted Subsidiary is not at the time permitted
directly or indirectly, by the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or regulation applicable to
that Restricted Subsidiary.
"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 or
amalgamated with the Company or any Restricted Subsidiary 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 or unit of business of such
Person.
"Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation, or saleleaseback 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 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 services (including minutes of use),
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inventory, receivables and other assets in the ordinary course of business, (ii)
sales or other dispositions of assets with a fair market value (as certified in
an Officers' Certificate) not in excess of $5 million or (iii) Asset Swaps.
"Asset Swap" means a transaction in which the Company or a Restricted
Subsidiary exchanges assets for consideration at least 90% of which constitutes
one or more of (x) Productive Assets, (y) all or substantially all of the assets
of a Permitted Business or (z) an interest in a Permitted Business which would
be an Investment permitted under the Indenture (without regard to the provisions
of clause (v) of the definition of Permitted Investment); provided that prior to
consummating an Asset Swap involving assets of the Company or any Restricted
Subsidiary with a fair market value in excess of $10 million (as determined by
the Board of Directors in good faith) the Company shall obtain and deliver to
the Trustee a written opinion from a nationally recognized investment banking,
accounting or appraisal firm stating that the transaction is fair to the Holders
from a financial point of view; and provided, further, that any cash or cash
equivalents received by the Company or a Restricted Subsidiary shall constitute
Net Cash Proceeds subject to the provisions of the "Limitation on Asset Sales"
covenant above.
"Average Life" means, when applied to any Indebtedness at any date, the
number of years obtained by dividing (i) the sum of the products obtained by
multiplying (a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including payment at
final maturity, in respect thereof, by (b) the number of years (calculated to
the nearest one-twelfth) that will elapse between such date and the making of
such payment, by (ii) the then outstanding principal amount of such
Indebtedness.
"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.
"Capitalized Lease Obligations" means, the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means the occurrence of any of the following events:
(i) for so long as the Series A Common Stock remains outstanding and the holders
of such Series A Common Stock have the right to elect a majority of the Board of
Directors pursuant to Restated Certificate of Incorporation of the Company, a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), other than an Excluded Person, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of shares of Series A Common Stock
having more than 50% of the total voting power of such shares of Series A Common
Stock; (ii) if there are no shares of Series A Common Stock outstanding or the
Series A Common Stock no longer has the right to elect a majority of the Board
of Directors pursuant to the Restated Certificate of Incorporation of the
Company, a "person" or "group" (as defined above), other than an Excluded
Person, becomes the "beneficial owner" (as defined above) of Voting Stock having
more than 50% of the voting power of the total Voting Stock of the Company;
(iii) individuals who, on the later of the Issue Date and the date occurring two
years prior to the date of determination, constitute the Board of Directors of
the Company (together with any new directors whose election by the Board of
Directors or by the Company's shareholders was approved by the nominating
committee of the Board of Directors, a majority of the members of which were
members of the Board of Directors at the later of the Issue Date and the
beginning of such period and directors whose election was previously so
approved) cease for any reason to constitute a majority of the members of the
Board of Directors then in office; or (iv) the Company consolidates with, or
merges with or into, another Person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
Person, or any Person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which any of the outstanding Voting
Stock of the Company is converted into or exchanged for cash, securities or
other property, other than any such transaction where the outstanding Voting
Stock of the Company is converted into or exchanged for Voting Stock (other than
Redeemable
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Stock) of the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee Person
(giving effect to such issuance).
"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
National Association of Securities Dealers Automated Quotations National Market
System or, if such shares are not listed or admitted to trading on any national
securities exchange or quoted on such automated quotation system but the issuer
is a Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange Act) and the
principal securities exchange on which such shares are listed or admitted to
trading is a Designated Offshore Securities Market (as defined in Rule 902(a)
under the Securities Act), the average of the reported closing bid and asked
prices regular way on such principal exchange, or, if such shares are not listed
or admitted to trading on any national securities exchange or quoted on such
automated quotation system and the issuer and principal securities exchange do
not meet such requirements, 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.
"Consolidated EBITDA" means, for any period, the sum of the amounts for
such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, (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 items reducing Adjusted
Consolidated Net Income (other than items that will require cash payments and
for which an accrual or reserve is, or is required by GAAP to be, made), less
all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP.
"Consolidated 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") as at the Determination Date to (ii) the
Consolidated EBITDA of the Company for the then most recent two full fiscal
quarters for which reports have been filed pursuant to the "Commission Reports
and Reports to Holders" covenant described above multiplied by two (such two
full fiscal quarter period being referred to herein as the "Two Quarter
Period"); provided that if during the Reference Period, the Company or any of
its Restricted Subsidiaries shall have engaged in any Asset Sale or Asset Swap,
Consolidated EBITDA for such period shall be reduced 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 or Asset Swap and any related retirement of Indebtedness as
if such Asset Sale or Asset Swap 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, or the proceeds of the Indebtedness the incurrence
of which gives rise to the calculation contemplated by this definition are
applied to make an Asset Acquisition, the Consolidated EBITDA of the Company
shall be calculated on a pro forma basis as if such Asset Acquisition had
occurred on the first day of such Reference Period.
"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, imputed interest in respect of PCS
License Indebtedness and any similar Indebtedness and the interest portion of
any deferred payment obligation, calculated in accordance with the effective
interest method of accounting); 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
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Agreements and Indebtedness that is Guaranteed or secured by the Company or any
of its Restricted Subsidiaries) 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; and all dividends paid or accrued during such period by the Company and
its Restricted Subsidiaries with respect to any Redeemable Stock (other than by
Restricted Subsidiaries of such Person to such Person or such Person's
Restricted Subsidiaries and other than any dividend paid in Capital Stock (other
than Redeemable Stock)), in each case determined on a consolidated basis in
accordance with GAAP consistently applied.
"Cumulative EBITDA" means Consolidated EBITDA of the Company and its
Restricted Subsidiaries for the period beginning on the first day of the fiscal
quarter immediately following the Issue Date, through and including the end of
the last fiscal quarter (for which reports have been filed pursuant to the
"Commission Reports and Reports to Holders" covenant) preceding the date of any
proposed Restricted Payment.
"Cumulative Interest Expense" means the total amount of Consolidated
Interest Expense of the Company and its Restricted Subsidiaries (less any non
cash charges for imputed interest in respect of PCS License Indebtedness) for
the period beginning on the first day of the fiscal quarter immediately
following the Issue Date, through and including the end of the last fiscal
quarter (for which reports have been filed pursuant to the "Commission Reports
and Reports to Holders" covenant) preceding the date of any proposed Restricted
Payment.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of its Restricted Subsidiaries against fluctuations in currency
values to or under which the Company or any of its Restricted Subsidiaries is a
party or a beneficiary on the Issue Date or becomes a party or a beneficiary
thereafter.
"Debt Securities" means any debt securities (including any guarantee of
such securities) issued by the Company or any Restricted Subsidiary in
connection with a public offering (whether or not underwritten) or a private
placement (provided such private placement is underwritten for resale pursuant
to Rule 144A, Regulation S or otherwise under the Securities Act or sold on an
agency basis by a broker-dealer or one of its affiliates); it being understood
that the term "Debt Securities" shall not include any evidence of indebtedness
under Vendor Financing Arrangements, any commercial bank borrowings or similar
borrowings, recourse transfers of financial assets, capital leases or other
types of borrowings incurred in a manner not customarily viewed as a "securities
offering."
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Excluded Person" means Mr. Allen Salmasi and any Related Person.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time.
"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.
"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,
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such Indebtedness, including Acquired Indebtedness (and "Incurrence,"
"Incurred," "Incurrable," and "Incurring" shall have meanings correlative to the
foregoing); provided that neither the accrual of interest nor the accretion of
original issue discount (including imputed interest in respect of the PCS
License Indebtedness) 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; (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 obligations of such Person in respect
of PCS License Indebtedness; (vii) 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; (viii) all Indebtedness of other
Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed
by such Person; (ix) the maximum fixed redemption or repurchase price of
Redeemable Stock of such Person at the time of determination; and (x) to the
extent not otherwise included in this definition, the amount appearing on a
balance sheet of such Person prepared in accordance with GAAP with respect to
obligations under Currency Agreements and 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 Initial PCS License Indebtedness is the face
amount of such Indebtedness; (ii) the principal amount outstanding of any
Indebtedness issued with original issue discount (other than Initial PCS License
Indebtedness) is the accreted value of such Indebtedness; and (iii) Indebtedness
shall not include any liability for federal, state, local or other taxes.
"Independent Director" means, with respect to any proposed transaction
between the Company and an Interested Person thereof, a member of the Company's
Board of Directors who is not an officer or employee of the Company, would not
be a party to, or have a financial interest in, such transaction and is not an
officer, director or employee of, and does not have a financial interest in such
Interested Person.
"Initial PCS License Indebtedness" means PCS License Indebtedness in
respect of the PCS Licenses for which the Company was named the winning bidder
in (i) the FCC's PCS C-Block Auction that commenced December 18, 1995 and
terminated on May 6, 1996, (ii) the FCC's PCS C-Block Re-auction that commenced
on July 3, 1996 and terminated on July 16, 1996, and (iii) the FCC's PCS D,E,
and F-Block Auction that commenced on August 26, 1996 and terminated on January
14, 1997.
"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 and employees in the
ordinary course of business) 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 Restricted Subsidiary as an
Unrestricted Subsidiary. For purposes of the definition of "Unrestricted
Subsidiary" and the "Limitation on Restricted Payments" covenant described
above, (i) "Investment" shall include the fair market value of the assets (net
of liabilities) of any Restricted Subsidiary of the Company at the time that
such Restricted Subsidiary of the Company is designated an Unrestricted
Subsidiary and shall exclude the fair market value of the assets (net of
liabilities)
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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" means a rating of at least BBB-, in the case of S&P, or
Baa3, in the case of Moody's.
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
"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).
"Marketable Securities" means (i) U.S. Government Securities maturing not
more than three years after the date of acquisition; (ii) any certificate of
deposit maturing not more than 270 days after the date of acquisition issued by,
or time deposit of, an Eligible Institution; (iii) commercial paper maturing not
more than 270 days after the date of acquisition issued by a corporation (other
than an Affiliate of the Company) with a rating, at the time as of which any
investment therein is made, of "A-1" (or higher) according to S&P or "P-1" (or
higher) according to Moody's; (iv) any banker's acceptances or money market
deposit accounts issued or offered by an Eligible Institution; and (v) any fund
investing exclusively in investments of the types described in clauses (i)
through (iv) above.
"Moody's" means Moody's Investors Service, Inc. or if Moody's Investors
Service, Inc. shall cease rating debt securities having a maturity at original
issuance of at least seven years and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if Moody's Investors Service, Inc. ceases rating debt securities having a
maturity at original issuance of at seven years and its ratings business with
respect thereto shall not have been transferred to any successor Person, then
"Moody's" shall mean any other nationally recognized rating agency (other than
S&P) that rates debt securities having a maturity at original issuance of at
least seven years and that shall have been designated by the Company by a
written notice given to the Trustee.
"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; (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 and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with GAAP; and (v) with respect to Asset Sales by Restricted Subsidiaries that
are not Wholly Owned Restricted Subsidiaries, the portion of such proceeds
attributable to Persons holding a minority interest in such Restricted
Subsidiary 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,
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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 applicable 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 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) deliver, or cause to be delivered, to the applicable 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 applicable 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
applicable Trustee shall act as the Paying Agent for an Offer to Purchase.
"Other Acquisition Indebtedness" means Indebtedness (including Acquired
Indebtedness) Incurred to finance the direct or indirect acquisition by the
Company or a Restricted Subsidiary of Productive Assets; provided that (x) the
Company either (A) applies the Net Cash Proceeds from a substantially concurrent
issuance and sale of its Capital Stock (other than Redeemable Stock) to finance
in part such acquisition or (B) issues its Capital Stock (other than Redeemable
Stock) as consideration for such acquisition and (y) the aggregate amount of
Other Acquisition Indebtedness to be Incurred in connection with such
acquisition shall not exceed 2.0 times the Net Cash Proceeds so applied by the
Company or the fair market value of the Capital Stock so issued by the Company.
An issuance and sale of Capital Stock shall be deemed to be "substantially
concurrent" if the Company identifies such acquisition as a use of the Net Cash
Proceeds thereof and if such issuance and sale is consummated within 180 days
prior to the Incurrence of the Other Acquisition Indebtedness. The fair market
value of any Capital Stock issued by the Company as consideration for an
acquisition shall be determined in good faith by the Board of Directors of the
Company and set forth in a Board Resolution delivered to the Trustee.
"Pari Passu Debt Securities" means any Debt Securities (and any guarantee
of any Debt Security) which would not constitute Subordinated Indebtedness.
"PCS Licenses" means licenses awarded by the FCC to provide Personal
Communications Services in the 2 GHz band.
"PCS License Indebtedness" means the principal amount of the deferred
license fee payable to the U.S. Government in respect of PCS Licenses.
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"Permitted Businesses" means the wireless communications business, the
telecommunications business and activities and services that are complimentary,
ancillary or related thereto.
"Permitted Indebtedness" of the Company and any Restricted Subsidiary shall
mean each and all of the following: (i) the Notes (including the Senior Notes
and the Senior Discount Notes issued in connection with the redemption of the
Bridge Notes; (ii) Indebtedness to the Company or any of its Restricted
Subsidiaries; provided, that any subsequent issuance or transfer of any Capital
Stock which results in any such Restricted Subsidiary ceasing to be a 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 (A) in respect of
performance, surety or appeal bonds provided in the ordinary course of business,
and (B) under Currency Agreements and Interest Rate Agreements; provided that
such agreements do not increase the Indebtedness of the obligor outstanding at
any time other than as a result of fluctuations in foreign currency exchange
rates or interest rates or by reason of fees, indemnities and compensation
payable thereunder; (v) PCS License Indebtedness of the Company or any
Restricted Subsidiary in respect of PCS Licenses awarded to the Company or its
Restricted Subsidiaries for which (i) the Company has filed a long-form FCC
application prior to the Issue Date or (ii) the Company, as of the Issue Date,
is bidding in an auction being conducted by the FCC; (vi) Indebtedness of the
Company or any Restricted Subsidiary Incurred under Vendor Financing
Arrangements; (vii) Indebtedness of the Company Incurred for the purpose of
financing the cost of developing, financing, constructing, operating, managing
or improving the Company's Permitted Businesses in the Basic Trading Areas
covered by the Company's PCS Licenses; (viii) Spectrum Acquisition Indebtedness
Incurred by the Company or any Restricted Subsidiary; (ix) Other Acquisition
Indebtedness Incurred by the Company or any Restricted Subsidiary; (x)
additional Indebtedness of the Company or any Restricted Subsidiary outstanding
at any time in an aggregate amount not to exceed $250 million; (xi) additional
Indebtedness of the Company or any Restricted Subsidiary outstanding at any time
in an aggregate amount not to exceed $250 million provided that, at the time
such Indebtedness is incurred the Company's Total Equity Market Capitalization
equals or exceeds $2.5 billion; and (xii) Indebtedness existing on the Issue
Date.
"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 a Permitted Business on the
date of such Investment; (ii) a Temporary Cash Investment; (iii) loans or
advances to employees made in the ordinary course of business; (iv) Investments
for which the sole consideration provided is the Capital Stock of the Company
(other than Redeemable Stock); (v) Investments received as consideration for an
Asset Sale in compliance with the covenant described under the caption
"Covenants -- Limitation on Asset Sales"; (vi) Investments in an aggregate
amount not to exceed the aggregate net cash proceeds, including the fair market
value of property other than cash (as determined in good faith by the Board of
Directors) received by the Company after the Issue Date from the issuance and
sale 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); (vii) advances to customers made in the ordinary course of business,
(viii) investments in Currency Agreements and Interest Rate Agreements permitted
by the definition of Permitted Indebtedness; (ix) Investments in evidences of
Indebtedness, securities or other property received by the Company or any
Restricted Subsidiary from another Person in connection with any bankruptcy
proceeding or by reason of a composition or readjustment of debt or a
reorganization of such Person or as a result of foreclosure, perfection or
enforcement of any Lien in exchange for evidences of Indebtedness, securities or
other property of such Person held by the Company or any Restricted Subsidiary,
or for other liabilities or obligations of such other Person to the Company or
any Restricted Subsidiary that were created in accordance with the terms of the
Indenture, and (x) other Investments (valued as of the date made and without
giving effect to subsequent changes in value), in an aggregate amount not to
exceed $100 million in any Person the primary business of which is a Permitted
Business.
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"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims 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 the Company or any of its Restricted Subsidiaries; (vi)
Liens created solely for the purpose of securing Indebtedness of Restricted
Subsidiaries Incurred in accordance with the "Limitation on Indebtedness"
covenant described above; (vii) leases or subleases 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 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;
(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 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 and Currency Agreements and forward contracts, options, future
contracts, futures, options or similar agreements or arrangements designed to
protect the Company or any of its Restricted Subsidiaries from fluctuations in
the price of commodities; (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 in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Issue Date and (xviii) Liens on or sales of
receivables in the ordinary course of business (including in connection with the
establishment of an accounts receivable facility).
"POPS" means the estimated total population of a Basic Trading Area based
on the most recently available Rand McNally population estimates or, if Rand
McNally no longer publishes such information, another similar market service of
general acceptance in the wireless telephone industry.
"Preferred Stock" means, as applied to the Capital Stock of any person,
Capital Stock of such person of any class or classes (however designated) that
ranks prior as to payment of dividends or as to 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.
"Productive Assets" means assets of a kind used or usable by the Company
and its Restricted Subsidiaries in Permitted Businesses.
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"Redeemable Stock" means (a) any Preferred Stock of any Restricted
Subsidiary and (b) 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 Company's repurchase of such Notes as are
required to be repurchased pursuant to the "Limitation on Asset Sales" and
"Repurchase of Notes Upon a Change of Control" covenants described above.
"Refinancing Indebtedness" means Indebtedness issued in exchange for, or
the net proceeds of which are used to refinance or refund, then outstanding
Indebtedness, other than Indebtedness Incurred under clauses (ii) or (iv) of the
definition of Permitted Indebtedness, 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 constitute
Refinancing Indebtedness 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) if the Average Life of the Indebtedness to be refinanced or
refunded is equal to or greater than the Average Life of the Notes, then such
new Indebtedness shall have no installments of principal (or redemption payment)
scheduled to come due on or prior to the Stated Maturity of the Notes and
provided further that in no event may Indebtedness of the Company be refinanced
by means of any Indebtedness of any Restricted Subsidiary pursuant to clause
(iii) of the definition of Permitted Indebtedness.
"Related Person" means any person who controls, is controlled by or is
under common control with an Excluded Person; provided that for purposes of this
definition "control" means the beneficial ownership of more than 50% of the
total voting power of a person normally entitled to vote in the election of
directors, managers or trustees, as applicable of a person.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Secured Credit Agreement Indebtedness" means secured indebtedness Incurred
pursuant to one or more credit agreements to be entered into by the Company
and/or any of the Restricted Subsidiaries.
"S&P" means Standard & Poor's Ratings Group or, if Standard & Poor's
Ratings Group shall cease rating debt securities having a maturity at original
issuance of at least seven years and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if Standard & Poor's Ratings Group ceases rating debt securities having a
maturity at original issuance of at least seven years and its ratings business
with respect thereto shall not have been transferred to any successor Person,
then "S&P" shall mean any other nationally recognized rating agency (other than
Moody's) that rates debt securities having a maturity at original issuance of at
least seven years and that shall have been designated by the Company by a
written notice given to the Trustee.
"Spectrum Acquisition Indebtedness" means Indebtedness (including Acquired
Indebtedness) Incurred to finance the direct or indirect acquisition by the
Company or a Restricted Subsidiary of (i) additional PCS
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Licenses or (ii) all or substantially all of the capital stock or assets of any
Person whose principal business is the provision of PCS communications services
pursuant to such PCS Licenses (a "Spectrum Acquisition"); provided that (x) the
Company either (A) applies the Net Cash Proceeds from a substantially concurrent
issuance and sale of its Capital Stock (other than Redeemable Stock) to finance
in part such Spectrum Acquisition or (B) issues its Capital Stock (other than
Redeemable Stock) as consideration for such Spectrum Acquisition and (y) the
aggregate amount of Spectrum Acquisition Indebtedness to be Incurred in
connection with such Spectrum Acquisition shall not exceed 3.0 times the Net
Cash Proceeds so applied by the Company or the fair market value of the Capital
Stock so issued by the Company. An issuance and sale of Capital Stock shall be
deemed to be "substantially concurrent" if the Company identifies such Spectrum
Acquisition as a use of the Net Cash Proceeds thereof and if such issuance and
sale is consummated within 180 days prior to the Incurrence of the Spectrum
Acquisition Indebtedness. The fair market value of any Capital Stock issued by
the Company as consideration for a Spectrum Acquisition shall be determined in
good faith by the Board of Directors of the Company and set forth in a Board
Resolution delivered to the Trustee.
"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.
"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 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, with respect to any sale of the
Company's Capital Stock, any Person engaged in the telecommunications business
which, both as of the Trading Day immediately before the day of such sale and
the Trading Day immediately after the day of such sale, has a Total Equity
Market Capitalization of at least $1 billion. In calculating Total Equity Market
Capitalization for the purpose of this definition, the average Closing Price of
the common stock of such Person, solely when calculated as of the Trading Day
immediately after the day of such sale, will be deemed to be the Closing Price
of such common stock on such succeeding Trading Day, subject to the last
sentence of the definition of "Total Equity Market Capitalization."
"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.
"Subordinated Debt Securities" means any Debt Securities (and any guarantee
of any Debt Security) that would constitute Subordinated Indebtedness.
"Subordinated Indebtedness" of any person means any Indebtedness of such
person that is expressly subordinated in right of payment to any other
Indebtedness of such person.
"Telecommunications Assets" means (i) any entity or business which holds
licenses, authorizations or otherwise operates pursuant to the rules and
policies administered by the FCC to provide communications services, or a
substantial portion of the revenues of which are derived from (a) providing
transmission or reception of signs, signals, writing, images, sound, data or
video by aid of radio or wire cable or like connection between points of origin
and reception to such transmission; (b) the sale, resale, lease, operation or
provision of SMR or ESMR services, cellular services, PCS, dispatch services,
paging services, telephone services and other landline and Commercial Radio
Services; (c) the provision of telecommunications or radiocommunications
facilities or equipment; or (d) any business ancillary or directly related to
the businesses referred in clauses (a), (b), or (c) above and (ii) any assets
used primarily to provide such products or services or to conduct such
businesses.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof,
bankers' acceptances with maturities not
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exceeding 360 days, and overnight bank deposits, in each case issued by or with
a bank that is organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America,
and which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $100 million (or the foreign currency equivalent
thereof) 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) (such bank, an
"Eligible Institution"), 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 an Eligible Institution, (iv) commercial
paper, maturing not more than 90 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-1" (or higher) according to Moody's or
"A-1" (or higher) according to S&P, and (v) securities with maturities of six
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
S&P or Moody's and (vi) interests in an investment company that invests at least
95% of its assets in instruments of the types specified in clauses (i) through
(v) above.
"Total Equity Market Capitalization" of any Person means, as of any day of
determination, the sum of (1) the product of (i) the aggregate number of (x)
outstanding primary shares of common stock of such Person on such day plus (y)
the number of shares of common stock of such Person underlying any options or
warrants on, or securities convertible or exchangeable into, shares of common
stock of such Person outstanding on such day with an exercise or conversion
price (determined in accordance with GAAP) less than the Closing Price of such
common stock on such day and (ii) the average Closing Price of such common stock
over the 20 consecutive Trading Days immediately preceding such day, plus (2)
the liquidation value of any outstanding shares of preferred stock of such
Person on such day minus (3) the fair market value of the exercise price in
respect of such options and warrants (determined in accordance with GAAP). If no
such Closing Price exists with respect to shares of any such class, the value of
such shares for purposes of clause (1) of the preceding sentence shall be
determined by the Company's Board of Directors in good faith and evidenced by a
resolution of the Board of Directors filed with the applicable Trustee.
"Trading Day" means, with respect to a securities exchange or automated
quotation system, 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.
"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 an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) 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 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. 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. Notwithstanding the foregoing, in no event shall
Wireless and the RegionalSubs be designated Unrestricted Subsidiaries. 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.
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"U.S. Government Securities" means securities that are (x) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America, the payment 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, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act) as custodian with respect to any such U.S. Government
obligation or a specific payment of principal of or interest on any such U.S.
Government obligation held by such custodian for the account of the holder of
such 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 principal
of or interest on the U.S. Government obligation evidenced by such depository
receipt.
"Vendor Financing Arrangements" means any Indebtedness (including any
credit facility entered into with any vendor or supplier or any financial
institution acting on behalf of such a vendor or supplier); provided that such
Indebtedness is incurred solely for the purpose of financing the cost (including
the cost of design, development, improvement, construction, integration, handset
construction or microwave relocation) of wireless telecommunications networks or
systems or for which the Company or any Restricted Subsidiary has obtained the
applicable licenses or authorization to utilize the radio frequencies necessary
for the operation of such systems or networks; provided, further, that unless
the Company has, at the time such Indebtedness is incurred, other outstanding
debt securities having a maturity at original issuance of at least seven years
that are rated Investment Grade, the Indebtedness permitted to be incurred by
this definition shall be senior in right of payment to all subordinated
Indebtedness of such Restricted Subsidiary.
"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 foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
DESCRIPTION OF THE WARRANTS
The Warrants will be issued under a warrant agreement (the "Warrant
Agreements") between the Company and , as Warrant Agent
(the "Warrant Agent"). The following summary of certain provisions of the
Warrant Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Warrants
and the Warrant Agreement, including the definitions therein of certain terms.
Each Warrant will entitle the registered holder thereof, 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 ,
2007, to purchase at a price of $ per Warrant (the "Exercise Price")
from the Company one share(s) of Series B Common Stock (or such other number as
may result from adjustments as provided in the Warrant Agreement). The number of
shares of Series B Common Stock for which a Warrant may be exercised is subject
to adjustment as set forth in the Warrant Agreement.
Warrants may be exercised on or after the Exercisability Date by
surrendering the Warrant Certificate evidencing such Warrants with the form of
election to purchase shares set forth on the reverse side thereof duly completed
and executed by the holder thereof and paying in full the Exercise Price for
such Warrants 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. "Exercisability Date"
is defined in the Warrant Agreement as the date of occurrence of both an
Exercise Event and the Separability Date. "Exercise
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Event" is defined in the Warrant Agreement as the date of the earlier of: (1)
the occurrence of a Change of Control or (2) , 1997.
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 only in fully registered
form. 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.
Holders of Warrants will not be entitled, by virtue of being such holders,
to receive dividends, vote, receive notice of any meetings of stockholders or
otherwise have any right of stockholders of the Company.
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 (a) dividends or distributions on Common
Stock of the Company payable in the Common Stock of the Company or certain other
Capital Stock of the Company; (b) subdivisions, combinations or certain
reclassifications of the Common Stock of the Company; (c) distributions to all
holders of Common Stock of the Company of rights, warrants or options to
purchase Common Stock of the Company at a price per share less than the Current
Market Value (as defined in the Warrant Agreement) at the Time of Determination
(as defined in the Warrant Agreement); (d) sales by the Company of Common Stock
or of securities convertible into or exchangeable or exercisable for Common
Stock of the Company at a price per share less than the Current Market Value at
the Time of Determination (other than pursuant to (1) the exercise of the
Warrants, (2) any options, warrants or rights outstanding as of the date of the
Warrant Agreement, (3) without limiting any options, warrants or rights
outstanding pursuant to the immediately preceding clause (2), any directors'
plans and employee stock option or purchase plans to the extent that the
aggregate number of shares of Common Stock of the Company (or securities
convertible into or exchangeable or exercisable for the Common Stock of the
Company) distributed under all such directors' plans and employee stock option
and purchase plans does not exceed shares of the Company's Common Stock at any
time, (4) any security convertible into, or exchangeable or exercisable for, the
Company's Common Stock as to which the issuance thereof has previously been the
subject of any required adjustment pursuant to the Warrant Agreement and
exercisable securities of the Company for which the applicable adjustment has
already been made, and (5) the issuance and settlement of the CTRs); and (e)
distributions to stockholders of assets, debt securities or Common Stock of the
Company or certain rights, warrants or options to purchase securities of the
Company (excluding the CTRs and cash dividends or other cash distributions from
current or retained earnings other than any Extraordinary Cash Dividend (as
defined in the Warrant Agreement)).
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 Series B Common Stock of the Company may be
changed by the Company into a right to receive securities, cash or other assets
of the Company or another Person.
In the event of a taxable distribution to holders of Common Stock of the
Company which results in an adjustment to the number of shares of Series B
Common Stock or other consideration for which a Warrant may be exercised, the
holders of the Warrants may, in certain circumstances, be deemed to have
received a distribution subject to United States Federal income tax as a
dividend. See "Certain Federal Income Tax Considerations."
Fractional shares of Series B Common Stock are not required to be issued
upon exercise of Warrants, but in lieu thereof the Company may pay a cash
adjustment.
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.
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The Company has authorized and reserved for issuance such number of shares
of Series B Common Stock as shall be issuable upon the exercise of all
outstanding Warrants. Such shares of Series B Common Stock, when issued, will be
duly and validly issued, fully paid and non-assessable.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Latham & Watkins, the following discussion is a summary
of the material United States federal income tax considerations relevant to the
purchase, ownership and disposition of the Units, Notes and Warrants by United
States persons acquiring Units on original issue for cash, but does not purport
to be a complete analysis of all potential tax effects. The discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations, Internal Revenue Service ("IRS") rulings and pronouncements and
judicial decisions all in effect as of the date hereof, all of which are subject
to change at any time, and any such change may be applied retroactively in a
manner that could adversely affect a holder of the Units, Notes or Warrants. The
discussion does not address all of the federal income tax consequences that may
be relevant to a holder in light of such holder's particular circumstances or to
holders subject to special rules, such as certain financial institutions,
insurance companies, dealers in securities, foreign corporations, nonresident
alien individuals and persons holding the Units, Notes or Warrants as part of a
"straddle," "hedge" or "conversion transaction." Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed. The discussion
deals only with Units, Notes and Warrants held as "capital assets" within the
meaning of section 1221 of the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to the position of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the purchase, ownership or disposition of the Units, Notes or
Warrants or that any such position would not be sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
ALLOCATION OF UNIT ISSUE PRICE TO NOTES AND WARRANTS
Each Note will be treated for federal income tax purposes as having been
issued as part of an "investment unit" consisting of the Note and the associated
Warrants. The issue price of an investment unit consisting of the Note and the
associated Warrants will be the first price at which a substantial amount of
Units are sold to the public for money (excluding sales to bond houses, brokers,
or similar persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers). The "issue price" of an investment unit is
allocated between its component parts based on their relative fair market
values. The Company will allocate the issue price of a Unit between the Note and
the associated Warrants in accordance with the Company's determination of their
relative fair market values on the issue date. The Company will use that
allocation to determine the issue price of the Notes and the holder's tax basis
in the Warrants. Although the Company's allocation is not binding on the IRS, a
holder of a Unit must use the Company's allocation unless the holder discloses
on its federal income tax return that it plans to use an allocation that is
inconsistent with the Company's allocation.
SENIOR DISCOUNT NOTES
Original Issue Discount
The Senior Discount Notes will be considered to be issued at an original
issue discount ("OID") for federal income tax purposes. In general, the amount
of OID is equal to the excess of the "stated redemption price at maturity" of a
Senior Discount Note over the portion of the issue price of a Unit that is
allocable to the Senior Discount Note. For tax purposes, the stated redemption
price at maturity of each Senior Discount Note includes all cash payments
required to be made under such Notes, other than principal and "qualified
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stated interest." The stated interest on the Senior Discount Notes will not
constitute qualified stated interest. As a result, the stated interest on the
Senior Discount Notes will be included in the stated redemption price at
maturity, resulting in substantial OID with respect to such Notes. Thus, the
stated interest on the Senior Discount Notes will not be included in the gross
income of a holder when received or accrued, but instead will be included in
income under the OID accrual rules described below. In addition, that portion of
the issue price of a Unit that is allocable to the associated Warrants will, to
that extent, add to the OID with respect to a Senior Discount Note.
Original Issue Discount Accrual
For federal income tax purposes, each holder (regardless of its accounting
method) must generally include in gross income a portion of the OID in each
taxable year during which a Senior Discount Note is held in an amount equal to
the OID that accrues during such period, determined by using a constant yield to
maturity method. The OID included in income for each year will be calculated
under a compounding formula that will result in the allocation of less OID to
the earlier years of the term of a Senior Discount Note and more OID to later
years. This means that each holder will be required to include amounts in gross
income without a corresponding receipt of cash attributable to such income.
Adjusted Tax Basis
A holder's adjusted tax basis in a Senior Discount Note will be equal to
the portion of the issue price of a Unit that is allocable to the Senior
Discount Note, increased by OID included in gross income with respect to such
Note and decreased by payments of stated interest on such Notes.
SENIOR NOTES
Stated Interest
Holders of the Senior Notes will be required to include stated interest on
the Senior Notes in gross income in accordance with their respective methods of
accounting for federal income tax purposes, whether or not the Senior Notes are
considered to be issued with any OID, as discussed below.
Original Issue Discount
Since the Senior Notes are being issued as part of an investment unit, the
Senior Notes will likely be considered to be issued with OID. If the stated
redemption price at maturity of a Senior Note (which, for these purposes, will
be its stated principal amount) exceeds the portion of the issue price of a Unit
that is allocable to the Senior Note, such excess will constitute OID. The
amount of OID is, however, considered de minimis and deemed to be zero if such
excess is less than 1/4 of 1% of the stated redemption price at maturity
multiplied by the number of complete years to maturity. Accordingly, if the
portion of the issue price of a Unit that is allocable to the Warrants equals or
exceeds such de minimis amount, the Senior Notes will be considered to be issued
with OID.
If the Senior Notes are issued with OID, each holder (regardless of its
accounting method) must generally include in gross income a portion of the OID
in each taxable year during which the Senior Note is held in the manner and with
the consequences as described above with respect to the Senior Discount Notes
under "Senior Discount Notes -- Original Issue Discount Accrual". If the Senior
Notes are issued with a de minimis amount of OID, each holder generally must
include such de minimis OID in gross income as capital gain as stated principal
payments are made.
Adjusted Tax Basis
A holder's adjusted tax basis in a Senior Note will be equal to the portion
of the issue price of a Unit that is allocable to the Senior Note, increased by
OID (if any) included in gross income with respect to such Note.
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ORIGINAL ISSUE DISCOUNT INFORMATION
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of a Note, information with respect to OID
accruing during the calendar year. That information will be based upon the
adjusted issue price of the Note as if the holder were the original holder of
the Note.
SALE OR RETIREMENT OF A NOTE
In general, a holder of a Note will recognize gain or loss upon the sale,
retirement or other taxable disposition of such Note in an amount equal to the
difference between (a) the sum of the amount of cash and the fair market value
of property received in exchange therefor and (b) the holder's adjusted tax
basis in such Note.
In general, any gain or loss recognized on the sale, retirement or other
taxable disposition of a Note will be capital gain or loss. Such capital gain or
loss generally will be long-term capital gain or loss if the Note has been held
for more than one year.
WARRANTS
Upon the sale or exchange of a Warrant (including the receipt of cash in
lieu of a fractional interest in Series B Common Stock upon exercise of a
Warrant), a holder will recognize gain or loss in an amount equal to the
difference between (a) the sum of the amount of cash and the fair market value
of property received therefor and (b) the holder's tax basis in the Warrant. A
holder's initial tax basis in a Warrant acquired in the Unit Offering will be
that portion of the issue price of a Unit that is allocable to the Warrant, as
described above. Such gain or loss will be capital gain or loss if the Series B
Common Stock to which the Warrants relate would be a capital asset in the hands
of the Warrant holder. Any such capital gain or loss will be long-term capital
gain or loss if the Warrant is held for more than one year.
Notwithstanding the above, it is possible that a redemption of a Warrant by
the Company would not be treated as a sale or exchange of a capital asset. In
that event, the holder of a Warrant could recognize ordinary income or loss on
such redemption.
The exercise of a Warrant for cash will not result in a taxable event to
the holder of the Warrant (except to the extent of cash, if any, received in
lieu of a fractional interest in Series B Common Stock). Upon such exercise, the
holder's tax basis in the Series B Common Stock obtained will be equal to the
sum of the holder's tax basis in the Warrant (as described above) and the
exercise price of the Warrant. The holder's holding period with respect to such
Series B Common Stock will commence on the day after the date of exercise. The
holder will generally recognize capital gain or loss on the sale or exchange of
Series B Common Stock if the Series B Common Stock is a capital asset in the
hands of the holder, and such capital gain or loss will be long-term if the
Series B Common Stock was held for more than one year. If a Warrant expires
without being exercised, the holder will recognize a loss in an amount equal to
its tax basis in the Warrant. Such loss will be a capital loss if the Series B
Common Stock to which the Warrants relate would have been a capital asset in the
hands of the Warrant holder, and such capital loss will be a long-term capital
loss if the Warrant was held for more than one year.
Adjustments to the conversion ratio of the Warrants, or the failure to make
adjustments, may in certain circumstances result in the receipt of taxable
constructive dividends by the holder, in which event the holder's tax basis in
the Warrants would be increased by an amount equal to the constructive dividend.
BACKUP WITHHOLDING
A holder of a Note may be subject to backup withholding at a rate of 31%
with respect to interest and OID (if applicable) on, and gross proceeds upon
sale or retirement of, a Note unless such holder (i) is a corporation or other
exempt recipient and, when required, demonstrates that fact, or (ii) provides a
correct taxpayer identification number, certifies under penalties of perjury,
when required, that such holder is not subject to backup withholding, and
otherwise complies with applicable requirements of the backup withhold-
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ing rules. Backup withholding is not an additional tax, and any amounts so
withheld are creditable against the holder's federal income tax, provided the
required information is provided to the IRS.
APPLICABLE HIGH-YIELD DISCOUNT OBLIGATIONS
If the Notes are considered to have "significant OID" and if the yield of
the Notes is at least five percentage points above the applicable federal rate,
the Company would not be able to deduct for tax purposes any OID accruing with
respect thereto until such interest is actually paid. In addition, if the yield
of the Notes is more than six percentage points above the applicable federal
rate, then (a) a portion of such interest corresponding to the yield in excess
of six percentage points above the applicable federal rate would not be
deductible by the Company at any time, and (b) a corporate holder may be
entitled to treat the interest that would not be not deductible as a dividend to
the extent of the earnings and profits of the Company, which may then qualify
for the dividends received deduction. In such event, corporate holders should
consult their tax advisers concerning the availability of the dividends received
deduction.
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Company's
Amended and Restated Certificate of Incorporation and Restated Bylaws, which are
included as exhibits to the Registration Statement of which this Prospectus
forms a part and by the provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company currently consists of 500
million shares of Common Stock, par value $.0001 per share. Of the 500 million
authorized shares of the Company's Common Stock, 60 million shares have been
designated as Series A Common Stock; 278,980,556 shares have been designated as
Series B Common Stock; 1,019,444 shares have been designated as Series C Common
Stock; and the remaining 160 million shares of Common Stock are undesignated. As
of January 31, 1997, 36,245,031 shares of Series A Common Stock were issued and
outstanding, held by 28 stockholders of record, 125,931,074 shares of Series B
Common Stock were issued and outstanding, held by 158 stockholders of record,
and no shares of Series C Common Stock were outstanding. After the Equity
Offering, all existing rights to acquire Series C Common Stock will become
rights to acquire the same number of shares of Series B Common Stock.
Upon consummation of the Equity Offering, however, the Company's Restated
Certificate of Incorporation will be amended and restated to provide for
authorized capital stock of 505,000,000 shares, which shall consist of
500,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, each
having a par value of $.0001 per share. Of the 500,000,000 shares of Common
Stock, 3,000 shares will be designated Series A Common Stock, all of which will
be issued and outstanding and held by members of the Control Group,
shares will be designated Series B Common Stock, of which shares will
be issued and outstanding and shares will be designated Series C
Common Stock of which shares will be issued and outstanding. No shares
of Preferred Stock will be issued and outstanding.
COMMON STOCK
Voting Rights. Upon consummation of the Equity Offering, under the
Company's Amended and Restated Certificate of Incorporation, the holders of the
Series A Common Stock have the right to vote on all matters that come before the
stockholders and shall have the right, voting as a class, to elect a majority of
the Board of Directors. The holders of Series B Common Stock and Series C Common
Stock have the right, voting together as a class, to elect a number of directors
equal to the total number of directors, less the number of directors to be
elected by the holders of Series A Common Stock, except as otherwise required by
law. In addition, the affirmative vote of a majority of holders of Series A
Common Stock, voting separately as a class, and of a majority of the holders of
Series B Common Stock and Series C Common Stock, voting together as a class,
shall be required for the Company (i) to amend the Company's Amended and
Restated Certificate of Incorporation or Restated Bylaws in a manner detrimental
to the Series B Common Stock or the Series C
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Common Stock, provided that except as required by law, no approval of the Series
B Common Stock or the Series C Common Stock is required if such amendment is
necessary to comply with FCC rules or regulations; (ii) to effect a sale, lease,
mortgage, transfer or other disposal or encumbrance of all or substantially all
of the Company's assets; (iii) to enter into a merger or other business
combination with any other entity which transaction would result in the
Company's stockholders immediately prior to such transaction not holding at
least fifty percent of the voting power of the surviving or continuing entity;
(iv) to conduct a liquidation, dissolution or winding up of the Company; (v) to
declare dividends, other than a dividend payable solely in shares of capital
stock or in options to purchase shares of capital stock or a regular periodic
dividend payable in cash and declared out of the earned surplus of the Company;
(vi) to effect any capital reorganization of the Company or any reclassification
or recapitalization of the capital stock of the Company; and (vii) as may
otherwise be required by law.
After the tenth anniversary of the License Grant Date, each holder of
Series B Common Stock shall be entitled to one vote per share on all matters
submitted to the vote of the Company's stockholders.
Transfer Restrictions. Holders of Series A Common Stock, Series B Common
Stock and Series C Common Stock shall be subject to certain transfer
restrictions pursuant to the terms of the Company's Amended and Restated
Certificate of Incorporation, which provides that any transfer of Common Stock
of the Company by any party will be void and of no force and effect to the
extent that such transfer will cause the Company or any of its subsidiaries to
violate applicable FCC rules and regulations concerning foreign ownership or
which will prevent the Company from qualifying as a "Designated Entity" and
"Small Business" or "Very Small Business" under Part 24 of the rules of the FCC
applicable to broadband PCS. See "Principal Stockholders."
In order for the Company to qualify for the Entrepreneurs' Auction and as a
Small Business or Very Small Business, the FCC Rules require that, during the
three years following the date on which the last PCS license in the "C" or "F"
frequency block for which the licensee is a winning bidder is granted, (i) a
"control group" collectively own at least 25% for the three-year period after
the License Grant Date of the Company's fully diluted equity and (ii) persons or
entities meeting certain FCC qualifications known as "qualifying investors" own
at least 60% of this percentage interest. To remain eligible for the preferences
afforded bidders in the Entrepreneurs' Auction, during the 10-year term of the
PCS license, a control group must maintain the rights to elect a majority of the
members of the Company's Board of Directors and to exercise control over the
Company, and the qualifying investors must continue to own at least 10% of the
Company's fully diluted equity. A control group and the qualifying investors may
satisfy the minimum FCC's Required Ownership Percentage by holding options or
warrants.
Conversion of Series A Common Stock at the Closing of the Equity
Offering. Pursuant to an irrevocable election made by the holders of a majority
of the shares of Series A Common Stock, upon consummation of the Equity Offering
each share of Series A Common Stock (other than 3,000 shares) will be converted
into shares of Series B Common Stock and shares of Series C
Common Stock.
Series C Common Stock. Pursuant to the Company's Amended and Restated
Certificate of Incorporation, the Series C Common Stock will be mandatorily
redeemable by the Company if and to the extent shares of Series B Common Stock
are required to be issued in settlement of the CTRs, at a redemption price of
$.0001 per share of Series C Common Stock. In such event, the Amended and
Restated Certificate of Incorporation will provide that the Company will redeem
a number of shares of Series C Common Stock equal to the number of shares of
Series B Common Stock issued in settlement of the CTRs.
In the event the Company subdivides (by stock dividend, stock split or
otherwise) or combines (by reverse stock split or otherwise), the number of
shares of Series B Common Stock the Company is obligated to appropriately adjust
the number of shares of Series C Common Stock it will be obligated to redeem. In
the event the Company redeems less than all of the then outstanding shares of
Series C Common Stock, the Company will effect such redemption pro rata. In
addition, no fractional shares or scrip representing fractions of shares of
Series C Common Stock will be redeemed in connection with any such redemption.
Upon the CTR Expiration Date, each share of Series C Common Stock which is not
redeemed pursuant to the terms of
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the Amended and Restated Certificate of Incorporation will be converted into a
share of Series B Common Stock. See "-- Description of Contingent Transfer
Rights."
An aggregate of shares of Series C Common Stock will be issued to the
Control Group, together with shares of Series B Common Stock, in exchange for
the outstanding shares of Series A Common Stock (other than 3,000 shares) upon
the consummation of the Equity Offering. To the extent the Underwriters'
over-allotment option is not exercised, an equivalent number of shares of Series
C Common Stock will be automatically converted into Series B Common Stock such
that the total remaining outstanding shares of Series C Common Stock will equal
the number of CTRs issued in the Equity Offering.
Control Group Warrants. Upon any issuance of shares of Common Stock, or
options, warrants, rights or other securities exercisable for or convertible
into shares of Common Stock, from and until 10 years after the License Grant
Date, other than shares of Series B Common Stock issued (i) upon conversion of
shares of Series A Common Stock; (ii) as a result of any adjustments for
subdivisions, dividends or combinations; or (iii) as a dividend or distribution
on Series A, Series B Common Stock or Series C Common Stock for which an
adjustment is made pursuant to (ii) above, which issuance would cause the equity
interest of the Control Group or the Qualifying Investors on a fully-diluted
basis to fall below the Required Ownership Percentage, as defined in the Amended
and Restated Certificate of Incorporation (such issuance, a "Dilutive
Issuance"), the Qualifying Investors automatically shall be issued warrants to
purchase shares of Series B. Common Stock at a price equal to "fair market
value" of the Series B. Common Stock at the time of the Dilutive Issuance in an
amount sufficient to maintain the aggregate equity interest of the Control Group
or the Qualifying Investors in the Company at the Required Ownership Percentage.
Any Control Group Warrants issuable prior to the CTR Expiration Date will expire
on the later of the second anniversary of their issuance or six months after the
CTR Expiration Date. Any Control Group Warrants issuable on or after the CTR
Expiration Date will expire on the Termination Date and will provide that the
exercise price thereof will be the then "fair market value" of the Series B
Common Stock. Expiration of a Control Group Warrant which causes the equity
interest of the Qualifying Investor on a fully diluted basis to fall below the
Required Ownership Percentage shall be deemed to be a Dilutive Issuance. The
issuance of Control Group Warrants will also trigger the Company's obligation to
issue adjustment warrants to MCI. See "-- Other Options, Warrants and
Convertible Debt -- MCI Warrants -- Adjustment Warrants."
Automatic Conversion. Upon the tenth anniversary of the License Grant
Date, all shares of Series A Common Stock shall automatically convert into
shares of Series B Common Stock at a conversion ratio of one share of Series B
Common Stock for each share of Series A Common, subject to adjustment as
described below (the "Series A Conversion Ratio"). Upon conversion of shares of
Series A Common Stock, any accrued but unpaid dividends with respect to the
shares of Series A Common Stock so converted will become payable.
Adjustment to Series A Conversion Ratio. In the event (i) the outstanding
shares of Series B Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Series B Common
Stock, respectively, the Series A Conversion Ratio in effect immediately prior
to such combination or consolidation shall, concurrently with the effectiveness
of such combination or consolidation, be proportionately increased or decreased
as appropriate and (ii) the Company shall declare or pay any dividend on the
Series B Common Stock payable in shares of Series B Common Stock or in the event
the outstanding shares of Series B Common Stock shall be subdivided, by
reclassification or otherwise than by payment of a dividend in shares of Series
B Common Stock, respectively, into a greater number of shares of Series B Common
Stock, respectively, the Series A Conversion Ratio in effect immediately prior
to such dividend or subdivision shall be proportionately decreased or increased
as appropriate.
Liquidation. Except to the extent otherwise required by applicable
regulations of the FCC, as codified or otherwise adopted in decisions or orders
of the FCC from time to time, in the event of any liquidation, dissolution or
winding up of the Company, either voluntary or involuntary, subject to the
rights of any holders of Preferred Stock, the assets and funds which remain in
the Company, if any, shall be distributed ratably on a per share basis among the
holders of shares of Series A Common Stock (on the basis of the number of shares
of Series B Common Stock into which such shares of Series A Common Stock are
convertible at the
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applicable Series A Conversion Ratio), Series B Common Stock and Series C Common
Stock (on the basis of the number of shares of Series B Common Stock into which
such shares of Series C Common Stock are convertible).
Dividends. Except to the extent otherwise required by applicable
regulations of the FCC, as codified or otherwise adopted in decisions or orders
from time to time, as and when dividends are declared and paid by the Company,
whether in cash, property or securities of the Company (other than Series B
Common Stock), the holders of Series A Common Stock and Series C Common Stock
shall be entitled to participate in such dividends ratably on a per share basis
(on the basis of the number of shares of Series B Common Stock into which such
shares are convertible) with the holders of the Series B Common Stock.
PREFERRED STOCK
Under the Amended and Restated Certificate of Incorporation, the Board of
Directors is authorized from time to time to provide by resolution for the
issuance of shares of Preferred Stock in one or more series not exceeding in the
aggregate the number of shares of Preferred Stock authorized by the Amended and
Restated Certificate of Incorporation, as amended from time to time; and subject
to the provisions of the Amended and Restated Certificate of Incorporation, to
determine with respect to each such series the voting powers, if any (which
voting powers, if granted, may be full or limited), designations, preferences
and relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions relating thereto, including without
limiting the generality of the foregoing, the voting rights relating to shares
of Preferred Stock of any series (which may be one or more votes per share or a
fraction of a vote per share, which may vary over time and which may be
applicable generally or only upon the happening and continuance of stated events
or conditions), the rate of dividend to which holders of Preferred Stock of any
series may be entitled (which may be cumulative or noncumulative), the rights of
holders of Preferred Stock of any series in the event of liquidation,
dissolution or winding up of the affairs of the Company, the rights, if any, of
holders of Preferred Stock of any series to convert or exchange such shares of
Preferred Stock of such series for shares of any other class or series of
capital stock or for any other securities, property or assets of the Company or
any subsidiary (including the determination of the price or prices or the rate
or rates applicable to such rights to convert or exchange and the adjustment
thereof, the time or times during which the right to convert or exchange shall
be applicable and the time or times during which a particular price or rate
shall be applicable), whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates, and whether any shares of that
series shall be redeemed pursuant to a retirement or sinking fund or otherwise
and the terms and conditions of such obligation.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION, RESTATED BYLAWS AND DELAWARE LAW
Amended and Restated Certificate of Incorporation and Restated Bylaws
The Restated Bylaws provide that the Company's stockholders may call a
special meeting of stockholders only upon a request of stockholders owning at
least a majority of the Company's capital stock. These provisions of the Amended
and Restated Certificate of Incorporation and Bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. In addition, upon the Termination Date, the Amended and Restated
Certificate of Incorporation provides that the Company's Board of Directors will
be classified into three classes, that any stockholder action may only be taken
at a duly called meeting of stockholders and that special meetings of
stockholders may be called only by the Board of Directors. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Company. These
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal. These provisions are also intended to
discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the
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Company's shares and, as a consequence, they also may inhibit fluctuations in
the market price of the Company's shares that could result from actual or
rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company.
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer, or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
DESCRIPTION OF CONTINGENT TRANSFER RIGHTS
General. The CTRs will be issued under the CTR Agreement between the
Company and the CTR Agent, a form of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following summary
of certain provisions of the CTR Agreement does not purport to be complete, and
is subject to, and is qualified in its entirety by reference to, all provisions
of the CTR Agreement, including the definitions of certain terms therein.
Payment at Expiration Date. Each CTR represents the right to receive as of
, 2000 (the date which is three one-half years following consummation
of the Equity Offering) (the "CTR Expiration Date"), subject to adjustment as
described under "Adjustment" below, a number of shares set forth below under
"CTR Formula" of Series B Common Stock (or fraction of a share of Series B
Common Stock) to be determined by the Average Fair Market Value (as defined
below) of the Series B Common Stock for the 60 trading day period ending on the
5th trading day prior to the CTR Expiration Date (the "Valuation Period").
CTR Formula. Each CTR will entitle the holder thereof (the "CTR Holder")
to receive, subject to adjustment as provided in "Adjustment" below, one share
of Series B Common Stock, if the Average Fair Market Value of the Series B
Common Stock during the Valuation Period is less than $ . If the
Average Fair Market Value of the Series B Common Stock during the Valuation
Period is equal to or greater than $ and less than $ , each
CTR Holder will be entitled to receive, subject to adjustment as provided in
"Adjustment" below, a fraction of a share of Series B Common Stock determined by
dividing (A) $ minus the Average Fair Market Value of the Series B
Common Stock during the Valuation Period by (B) the Average Fair Market Value of
the Series B Common Stock during the Valuation Period. If
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the Average Fair Market Value of the Series B Common Stock is equal to or
greater than $ during the Valuation Period each CTR will expire and no
shares of Series B Common Stock will be issuable thereunder. The CTR Agreement
will provide that "Average Fair Market Value" with respect to the Series B
Common Stock means the average of the Market Prices of the Series B Common Stock
during the Valuation Period. The CTR Agreement will provide that the term
"Market Price" shall mean (a) the closing sales price of the Series B Common
Stock on The Nasdaq National Market or such other national securities exchange
on which the Series B Common Sock is then listed or admitted for trading, or (b)
if the Series B Common Stock is not then listed or traded on any exchange or The
Nasdaq National Market, the average of the closing bid and ask prices per share
on The Nasdaq National Market, (c) or if such quotation is not available, the
fair market value thereof as determined by a nationally recognized investment
banking, accounting or appraisal firm.
Series C Common Stock; Escrow Agreement. As a condition to the
consummation of the Equity Offering, each share of Series A Common Stock (other
than 3,000 shares) will be converted into shares of Series B Common
Stock and shares of Series C Common Stock. Pursuant to the Company's
Amended and Restated Certificate of Incorporation, the Series C Common Stock
will be mandatorily redeemable by the Company if shares of Series B Common Stock
are required to be issued in settlement of the CTRs, at a redemption price of
$.0001 per share of Series C Common Stock. In such event, the CTR Agreement will
provide that the Company will redeem a number of shares of Series C Common Stock
equal to the number of shares of Series B Common Stock issued in settlement of
the CTRs. For a description of the other terms of the Series C Common Stock, see
"Description of Capital Stock -- Series C Common Stock."
Pursuant to the CTR Escrow Agreement to be entered into by the holders of
the Series C Common Stock, the CTR Agent and the Company, the holders of the
Series C Common Stock will transfer to the CTR Agent the Series C Common Stock.
The Escrow Agreement will provide that the CTR Agent will hold the shares of
Series C Common Stock so received in accordance with and pursuant to the terms
of the Escrow Agreement. The CTR Agent will hold such shares of Series C Common
Stock pending redemption pursuant to the terms described in the preceding
paragraph or the early termination of the CTRs pursuant to the provisions of the
CTR Agreement described under "Early Expiration of the CTRs" below. To the
extent shares of Series C Common Stock remain outstanding following settlement
or early termination of the CTRs, the CTR Agent will release such shares of
Series C Common Stock to the registered holders thereof and such shares will
automatically convert into shares of Series B Common Stock.
An aggregate of shares of Series C Common Stock will be issued to the
Control Group, together with shares of Series B Common Stock, in exchange for
the outstanding shares of Series A Common Stock (other than 3,000 shares) upon
the consummation of the Equity Offering. To the extent the Underwriters'
over-allotment option is not exercised, an equivalent number of shares of Series
C Common Stock will be automatically converted into Series B Common Stock such
that the total remaining outstanding shares of Series C Common Stock will equal
the number of CTRs issued in the Equity Offering.
Early Expiration of the CTRs. If, after 18 months from the closing of the
Equity Offering, the Fair Market Value of the Series B Common Stock exceeds
$ for 30 of any 60 consecutive trading days prior to the CTR Expiration
Date, the CTRs will terminate and no shares of Series B Common Stock will be
issuable thereunder.
Fractional Shares. The CTR Agreement will provide that the Company may pay
cash in lieu of fractional shares, if any, to be issued in respect of the CTRs.
If the Company elects to pay cash in lieu of such fractional shares, the Company
will pay cash in an amount equal to such fractional interest multiplied by the
Average Fair Market Value of the Series B Common Stock during the Valuation
Period.
Delivery of Shares to CTR Holders. The shares of Series B Common Stock to
which holders of CTRs are entitled will be delivered to such holders by the
Company within 30 business days of the CTR Expiration Date.
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Certain Purchases and Sales. The CTR Agreement will provide that the
Company will not, and will not permit any of its subsidiaries, officers and
directors to purchase, sell or otherwise dispose of any shares of the Series B
Common Stock in open market transactions, in privately negotiated transactions
or otherwise (other than pursuant to the conversion or exercise of outstanding
securities), on any day during the period commencing 30 trading days before the
Valuation Period and ending on the last day of the Valuation Period.
Amended Series A Shareholders Agreement. As a condition to the
consummation of the Equity Offering, the Amended Series A Shareholders Agreement
will provide that the terms and conditions thereof will apply to the shares of
Series A Common Stock, Series B Common Stock and Series C Common Stock, if any,
to be issued in the Recapitalization to be effected prior to the consummation of
the Offerings. Under the Amended Series A Shareholders Agreement, the holders of
Series A Common Stock will be restricted from transferring their shares of
Series A Common Stock, Series B Common Stock and Series C Common Stock until the
later of (i) three years from the License Grant Date or such longer period as
may be required to comply with the FCC's rules and regulations or (ii) the
trading day following the CTR Expiration Date. The CTR Agreement will provide
that the Company will enforce all of the Company's rights under the Amended
Series A Shareholders Agreement and will not give to any other party thereto a
waiver of any of its obligations thereunder or excuse any breach by such other
party of any such obligation thereunder. For a description of the terms of the
Amended Series A Shareholders Agreement, see "Principal Stockholders."
No Extension of 10% Qualified Investor Holding Period. The CTR Agreement
will provide that the Company will not take any action or fail to take any
action that could reasonably be expected to extend beyond ,
2000, the date on which, pursuant to applicable FCC rules and regulations,
including 47 C.F.R. Section 24.709(b)(5)(i)(D), as currently in effect, as such
section may be amended from time to time, or any similar section, rule or
regulation hereafter adopted by the FCC, the aggregate equity interest in the
Company required to be held by the Qualifying Investors is reduced to 10%.
No Extension of Valuation Period. The CTR Agreement will provide that the
Company will not take any action or fail to take any action that would lengthen
the Valuation Period.
Adjustments. In the event the Company shall in any manner subdivide (by
stock split, stock dividend or otherwise) or combine (by reverse stock split or
otherwise) the number of outstanding shares of the Series B Common Stock, the
Company shall appropriately adjust the CTR Formula. Whenever such an adjustment
is made, the Company shall (i) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment;
(ii) promptly file with the CTR Agent a copy of such certificate; and (iii) mail
a brief summary thereof to each CTR Holder.
Consolidation, Merger and Sale of Assets. The CTR Agreement will provide
that the Company may, without the consent of the CTR Holders, consolidate with
or merge into any other entity or convey, transfer or lease its properties and
assets substantially as an entirety to any corporation, partnership or trust
organized under the laws of the United States of America, any state thereof or
the District of Columbia, provided that (i) the successor entity assumes the
Company's obligations under the CTRs and the CTR Agreement and (ii) the Company
delivers to the CTR Agent an officer's certificate regarding compliance with the
foregoing.
CTR Separation from Equity Units. The CTRs and the shares of Series B
Common Stock included in the Equity Units will become detachable and separately
tradeable 90 days after the closing date of the Equity Offering, or such earlier
date as may be determined by Smith Barney Inc.
No Rights as Stockholders. The CTRs will not confer upon the CTR Holder
any voting rights or any other rights as a stockholder of the Company prior to
their maturity.
Amendments. The CTR Agreement may be amended by the written consent of the
Company and the affirmative vote or the written consent of CTR Holders holding
not less than a majority of the CTRs. Notwithstanding the foregoing, the Company
and the CTR Agent may from time to time supplement or amend the CTR Agreement,
without the approval of any CTR Holder, in order to cure any ambiguity or to
correct or supplement any provision contained in the CTR Agreement, which may be
defective or inconsistent with any other provision in the CTR Agreement, or to
make any other provisions in regard to matters or questions arising under the
CTR Agreement which the Company and the CTR Agent may deem necessary or
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desirable and which shall not be inconsistent with the provisions of the CTRs
and which shall not adversely affect the interests of the CTR Holders.
OTHER OPTIONS, WARRANTS AND CONVERTIBLE DEBT
Options. As of September 30, 1996, there were options to purchase
18,243,322 shares of Series B Common Stock outstanding under the Company's
Amended and Restated Stock Option Plan, at exercise prices ranging from $0.25 to
$5.00. Stock options which have been granted under the Amended and Restated
Stock Option Plan generally expire 10 years after the date of grant.
Convertible Debt
Hughes Subscription Agreement, Convertible Promissory Note and Escrow
Agreement
Hughes Subscription Agreement and Convertible Promissory Note. On October
25, 1996, the Company entered into a Subscription Agreement (the "Subscription
Agreement") with Hughes, pursuant to which the Company has sold the Hughes
Convertible Note to Hughes in the principal amount of $50 million. The Hughes
Convertible Note and accrued interest thereon, at a rate of 14% per annum, will
automatically convert into shares of Series B Common Stock at a conversion price
of $5.00 per share (subject to adjustment for stock splits, stock dividends,
combinations and the like) upon the later of the closing of the Equity Offering
or the early termination or expiration of the waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"). The Hughes
Convertible Note matures on June 30, 1997 if not previously converted. Under the
terms of the Subscription Agreement, the Company has agreed, upon written notice
from Hughes on or before March 29, 1997, to use its best efforts to cause the
appointment of a Hughes representative to the NextWave Board of Directors.
Hughes has the right to have one individual designated by it continue to serve
on the Company's board of directors for three years. The Subscription Agreement
also contains customary representations, warranties and covenants with respect
to the Company. See "Business -- Equipment Vendors."
Hughes Escrow Agreement; Conditions to Release. The proceeds from the sale
of the Hughes Convertible Note were deposited into an escrow account pursuant to
the terms of an Escrow Agreement between Hughes, the Company and The Chase
Manhattan Bank, as escrow agent. A total of $35 million of the Hughes
Convertible Note proceeds were released to the Company in January 1997 when the
Company's C-Block licenses were granted. The remaining Hughes Convertible Note
proceeds will be released from the escrow account by the completion of the
Equity Offering.
LG Loans
Convertible Promissory Notes and Loan Agreement. On February 23, 1996, LG
InfoComm, Inc., a California corporation and a subsidiary of LGIC ("LG"),
entered into an agreement with the Company pursuant to which it agreed to make a
convertible loan to the Company in an aggregate principal amount of $10 million
which is convertible into 2 million shares of Series B Common Stock at a
conversion price of $5.00 per share. The loan was funded on June 3, 1996. In
August 1996, LGT advanced to the Company an additional $10 million which is
expected to be evidenced by a convertible promissory note which will be
converted into 2 million shares of Series B Common Stock at $5.00 per share upon
the completion of the Equity Offering. Under a Loan Agreement dated as of
January 6, 1997 (the "LG Loan Agreement"), between the Company and LG, LG lent
an additional $25 million to the Company. The loan will bear interest at 9.7%
and will mature on the earlier of (i) 30 days from the closing of the Equity
Offering or (ii) six months from the drawdown date. In connection with the LG
Loan Agreement, the Company agreed to reduce the conversion price on the $10
million convertible promissory note issued to LG under a loan agreement dated
February 23, 1996 with the Company from $7.00 per share to $5.00 per share of
Series B Common Stock (subject to antidilution adjustments).
In January 1997, the Company and this vendor entered into a stock pledge
agreement, pursuant to which the Company pledged all of the issued and
outstanding capital stock of NextWave Personal Communications Inc. to this
vendor as collateral for the repayment by the Company of the amounts advanced
previously by this vendor. Pursuant to the loan agreement with the vendor, the
Company agreed not to permit or create any liens
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on the assets of NextWave Personal Communications Inc. or allow NextWave
Personal Communications Inc. to become obligated with respect to any
indebtedness other than liens or indebtedness in connection with the C-Block
payment terms provided by the FCC in connection with the grant of the Company's
C-Block PCS licenses (the "C-Block Payment Terms"). The Company also agreed that
NextWave Personal Communications Inc. will not transfer, encumber or cause any
liens or encumbrances to attach to the capital stock of NextWave Personal
Communications Inc. or the Company's C-Block PCS licenses, except as otherwise
provided by the C-Block Payment Terms. Finally, the Company agreed to cause
NextWave Power Partners to take all steps necessary to transfer any D-Block PCS
licenses finally awarded to NextWave Power Partners to NextWave Personal
Communications Inc. The stock pledge will be released upon payment of all
obligations under the loan agreement with the vendor.
Other Convertible Debt
The Company issued $130,348,000 aggregate principal amount of Bridge Notes.
The Bridge Notes are convertible at any time into 32,587,000 shares of Series B
Common Stock at a conversion price of $4.00 per share. The Company is obligated
to prepay approximately $ million of Bridge Notes out of the proceeds of the
Debt Offering.
QUALCOMM has made a convertible loan to the Company in an aggregate
principal amount of $398,000 which is convertible into 1,019,444 shares of
Series B Common Stock at a conversion price of $0.39 per share. This loan
matures on June 7, 1999.
In connection with its initial private placement of Series B Common Stock,
the Company issued $38,912,478 aggregate principal amount of convertible
promissory notes to certain foreign investors. The convertible promissory notes
convert automatically into 12,970,826 shares of Series B Common Stock at a price
of $3.00 per share at such time as conversion is permitted under the FCC's rules
and regulations regarding foreign ownership. In the event the convertible
promissory notes are not fully converted by the first anniversary date of the
completion of the C-Block Auction, each foreign stockholder shall have the right
to demand repayment of the principal balance due under the convertible
promissory notes together with interest due thereon, at a rate of 6% per annum.
The convertible promissory notes otherwise mature on May 6, 2001.
Warrants. The Company issued warrants to purchase 12,975,135 shares of
Series B Common Stock to investors in its private placement of Series B Common
Stock. These warrants have an exercise price of $3.00 per share and expire one
year following the consummation of the Equity Offering. If at the time of
expiration the warrant holder has been unable to exercise a warrant due to FCC
ownership restrictions, the exercise period of the warrant will be extended to
90 days after the date the warrant holder becomes able to exercise the warrant
without violating FCC regulations.
In connection with certain loans made by PECO, the Company has issued to
PECO warrants to purchase a total of 980,556 shares of Series B Common Stock at
$3.00 per share. 500,000 of these warrants expire November 1, 1998 and 480,556
of these warrants expire March 29, 1999.
In connection with a loan made to the Company by LG, the Company has issued
to LG warrants to purchase 250,000 shares of Series B Common Stock at $3.00 per
share. These warrants expire one year following the consummation of the Equity
Offering. If at the time of expiration LG has been unable to exercise a warrant
due to FCC ownership restrictions, the exercise period of the warrant will be
extended to 90 days after the date LG becomes able to exercise the warrant
without violating FCC regulations. See "Certain Indebtedness -- Convertible
Promissory Notes."
In connection with several third party consultants performing financial
advisory services for the Company, the Company issued to the consultants
warrants to purchase an aggregate of 164,113 shares of Series B Common Stock at
$4.00 per share. These warrants expire one year following the consummation of
the Equity Offering.
In connection with the repayment of the Bridge Notes pursuant to the use of
proceeds from the Offerings, the Company is obligated to issue to the Bridge
Note holders warrants to purchase up to 32,587,000 shares of
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Series B Common Stock at an exercise price of $4.00 per share. These warrants
expire five years from the date of issuance.
MCI Warrants
Pursuant to the MCI Warrant Agreement, the Company has granted MCI the
Initial Warrants to purchase shares of Series B Common Stock and has agreed to
grant to MCI upon the occurrence of certain events the Additional Initial
Warrants, the Adjustment Warrants and the Performance Warrants, as described
below.
Initial Warrants. On the date of the MCI Warrant Agreement, the Company
granted MCI warrants to purchase 23,673,284 shares of Series B Common Stock (the
"Initial Warrants"). These warrants have an exercise price of $4.00 per share,
subject to adjustments for certain anti-dilution events, and, subject to
extension in certain circumstances, expire on February 18, 2004. The exercise
price of the Initial Warrants, however, will be adjusted, if necessary, to equal
the exercise price of the Additional Initial Warrants upon the grant of such
Additional Initial Warrants at the consummation of the Equity Offering or
shortly thereafter.
Additional Initial Warrants. Upon the consummation of the Equity Offering
or shortly thereafter, the Company shall issue and deliver to MCI additional
warrants (the "Additional Initial Warrants") to purchase shares of
Series B Common Stock (which, together with the Initial Warrants, will represent
the right to acquire up to 12% of the outstanding shares of the Company's
capital stock, on a Fully-Diluted Basis (the "Initial Grant Percentage"). These
warrants will have an exercise price, subject to adjustment for certain
anti-dilution events, equal to the lesser of (i) $4.00 per share; (ii) 40% of
the price attributable to the Series B Common Stock included in the Equity Units
issued by the Company in the Equity Offering, if such price is less than $7.00
per share; or (iii) the lowest price per share for shares of Series B Common
Stock (or options, warrants or securities convertible into Series B Common
Stock) sold or issued by the Company on or after June 30, 1996 (and prior to the
issuance and delivery of the Additional Initial Warrants). The Additional
Initial Warrants will, subject to extension in certain circumstances, expire
seven and one-half years after their date of issuance.
Adjustment Warrants. If the Company, at any time after the issuance of the
Additional Initial Warrants and within 10 years from the date of the MCI Warrant
Agreement, sells or issues any capital stock or any options, warrants,
convertible securities or other rights entitling the holder thereof to purchase
from the Company shares of its capital stock (any such event, a "Triggering
Issuance"), then the Company must issue and deliver to MCI additional warrants
(the "Adjustment Warrants"). The number of shares of Series B Common Stock
issuable upon exercise of Adjustment Warrants will equal the number of shares
necessary to preserve the aggregate percentage of the outstanding shares of the
Company's capital stock (up to 12% as of or shortly after consummation of the
Equity Offering), on a Fully-Diluted Basis, in respect of which warrants have
been issued to MCI. The Adjustment Warrants issued on any date will have an
exercise price, subject to certain exceptions, equal to the Market Price (as
defined) of the Series B Common Stock as of the date one day prior to the
Triggering Issuance relating to such Adjustment Warrants. The Adjustment
Warrants will, subject to extension in certain circumstances, expire five and
one-half years after the issuance date of such Adjustment Warrants.
If, on any date on which Adjustment Warrants are to be issued, there are
any shares of capital stock of the Company outstanding, on a fully diluted
basis, other than (i) shares of Series A Common Stock outstanding on the date of
the Warrant Agreement or (ii) Series B Common Stock, then MCI may require that
the Adjustment Warrants provide MCI with the right to purchase shares of any
class or series of outstanding capital stock of the Company, other than Series A
Common Stock.
Performance Warrants. If MCI purchases an aggregate amount of Full
Mobility Services MOUs exceeding certain incremental thresholds (each such
incremental threshold, a "Performance Threshold"), the Company will issue and
deliver to MCI warrants to purchase shares of Series B Common Stock (such
warrants, the "Performance Warrants"), up to a maximum, together with MCI's
Initial Warrants, Additional Initial Warrants and Adjustment Warrants, of 25% of
the number of outstanding shares of capital stock of the Company, on a
Fully-Diluted Basis, after giving effect to the issuance of such Performance
Warrants. The
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Performance Thresholds are subject to reduction in the event the Company sells
or transfers any PCS licenses under certain circumstances, fails to achieve
certain levels of Full Mobility Service offerings within a specified time
period, or if MCI has terminated service in any Market in which the Company's
PCS network fails to meet certain service, quality and capacity requirements.
The Performance Warrants are to have an exercise price, subject to adjustment
for certain anti-dilution events, equal to the Market Price (as defined) of the
Series B Common Stock on the last day of the billing period under the applicable
monthly invoice relating to the specific issuance, and the Performance Warrants
are, subject to extension in certain circumstances, to expire five years after
the date of their issuance. If MCI has terminated the MCI Agreement because of a
default by the Company or if MCI has terminated service under the MCI Agreement
in the Los Angeles or New York City Markets due to the failure of NextWave to
meet certain service, quality and capacity requirements in those markets, MCI
may accelerate the Company's obligation to deliver Performance Warrants.
If, on any date on which Performance Warrants are to be issued, there are
any shares of capital stock of the Company outstanding, on a Fully-Diluted Basis
other than (i) shares of Series A Common Stock outstanding on the date of the
MCI Warrant Agreement or (ii) Series B Common Stock, then MCI may require that
the Performance Warrants provide MCI with the right to purchase shares of any
class or series of outstanding capital stock of the Company, other than Series A
Common Stock.
Mergers and Asset Sales. Under the MCI Warrant Agreement, in the event of
a merger or consolidation to which the Company is a party or any sale of assets
of the Company as an entirety or substantially as an entirety (other than a
merger, consolidation or sale of assets which (i) does not result in any
reclassification or change in any outstanding shares of capital stock, on a
Fully-Diluted Basis, of the Company or (ii) results in the holders of all such
outstanding shares being entitled to receive solely cash and/or securities that
are not equity securities), the surviving or transferee entity (or an issuer of
equity securities in the transaction) must enter into a written agreement with
MCI pursuant to which such entity will assume all of the Company's obligations
under the MCI Warrant Agreement, subject to certain modifications, and the
Company must not enter into any such transaction unless such entity has entered
into such an agreement with MCI. In the event of a merger, consolidation or sale
of all or substantially all of the assets of the Company which results in the
holders of all outstanding shares of the Company's capital stock, on a
Fully-Diluted Basis, being entitled to receive solely cash and/or securities
that are not equity securities, MCI is, subject to certain conditions, entitled
to receive a cash payment equal to up to approximately 2% (subject to reduction
to the extent that Performance Warrants have theretofore been issued) of the
market value of the capital stock of the Company on a Fully-Diluted Basis.
Lucent Warrants
On November 15, 1996, the Company entered into a Warrant Purchase Agreement
with Lucent (the "Lucent Warrant Agreement"). Under the Lucent Warrant
Agreement, (the "Common Stock Price"), the Company has granted Lucent warrants
to purchase a number of shares of Series B Common Stock equal to (i) $10
million, divided by (ii) the price per share attributable to the Series B Common
Stock included in the Equity Units issued by the Company in the Equity Offering
(the "Common Stock Price"), at an exercise price equal to the Common Stock
Price, subject to adjustment for certain anti-dilution events (the "Lucent
Warrants"). The Lucent Warrants may not be exercised until the earlier to occur
of (i) December 31, 1997, or (ii) the 181st day after the closing of the Equity
Offering. The Lucent Warrants expire on the earlier to occur of (i) June 30,
2002, or (ii) the fifth anniversary of the closing of the Equity Offering.
Comdisco Warrants
In connection with the Master Lease Agreement, on November 1, 1996, the
Company granted Comdisco warrants to purchase 1,500,000 shares of Series B
Common Stock at an exercise price equal to the Common Stock Price, subject to
adjustment for certain anti-dilution events (the "Comdisco Warrants"). The
Comdisco Warrants shall vest from time to time as follows: Comdisco shall have
the right to exercise the warrant to purchase that number of shares of Series B
Common Stock equal to 1% of each "Progress Payment" (as such term is defined in
the Master Lease Agreement) provided, however, that Comdisco shall vest in the
right to
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purchase all 1,500,000 shares upon the earlier to occur of (i) December 31,
1997, or (ii) the date upon which Comdisco funds equipment purchases pursuant to
the Master Lease Agreement equal $150 million. The Comdisco Warrants expire on
various dates in 2002.
CERTAIN INDEBTEDNESS
U.S. GOVERNMENT FINANCING
The Company successfully bid $4.7 billion, net of a 25% bidding credit, for
63 BTA licenses in the FCC's C-Block Auctions and successfully bid $129 million,
net of bidding credits, for 32 licenses in the D, E and F-Block Auctions. To
date the Company has paid $488 million, representing in excess of 10% of its
total net bids, as downpayment. The FCC has granted NextWave its C-Block
licenses and is expected to grant the D, E and F-Block licenses later this year.
When the D and E-Block licenses are granted, the Company will be required to pay
$4.6 million, representing the balance of its bid amount. The Company will be
required, pursuant to the FCC's installment payment plan, to execute a note and
security agreement to the U.S. Government creating a first priority security
interest in favor of the FCC in the licenses (and the proceeds of any sale,
thereof). The U.S. Government Financing terms for the remaining 90% balance of
the C-Block indebtedness include a below market interest rate of 6.5% fixed for
the 10-year term. This financing allows the Company to pay interest only on the
principal balance for the first six years, with payments of interest and
principal amortized over the seventh through tenth years of the license term.
When the F-Block licenses are granted, the Company will make a second 10%
downpayment of $12.3 million and have the remaining 80% balance financed with
favorable terms including a below market interest rate (the 10-year Treasury
Note Rate at time of grant) with interest only payments for the first two years
and interest and principal amortized over the third through tenth year. The
favorable financing terms of the C and F-Block licenses significantly reduces
the effective cost of these licenses to the Company on a net present value
basis.
The combined C and F-Block financing is approximately $4.4 billion.
Although the Company's obligation under this financing will be recorded on the
Company's financial statements at its estimated fair market value of $2.8
billion, the amount that would be owed to the U.S. Government if the financing
was declared immediately due and payable would be $4.4 billion plus accrued
interest. The Company may incur substantial financial penalties, license
revocation or other enforcement measures at the FCC's discretion in the event
that the Company becomes unable to make timely payments on its U.S. Government
Financing. Payments are deemed untimely for such purposes if not made within 90
days after they become due. The FCC has indicated that, in the event that a
licensee anticipates an inability to make any required payment based upon
bankruptcy, foreclosure or financial distress, there will be a presumption in
favor of granting the licensee's request for a further three-month grace period
before the FCC cancels its licenses, re-auctions them, and subjects the Company
to a penalty, which may be comprised of the difference between the price at
which the Company acquired its licenses and the amount of the winning bid at the
re-auction, plus an additional penalty of 3% of the lesser of the subsequent
winning bid and the defaulting bid. See "Regulation of the Wireless
Telecommunications Industry -- The Entrepreneurs' Block."
BRIDGE NOTES
In April and May 1996, the Company issued $130,348,000 aggregate principal
amount of Bridge Notes. The Bridge Notes are unsecured obligations of the
Company and are subordinated in right of payment to certain "Senior Debt,"
including the PCS license debt, U.S. Government Financings, equipment
manufacturer and vendor financings and certain other indebtedness. The Bridge
Notes provide for a term of six years with an interest rate of 2% per annum for
the first two years of the term of such notes and an interest rate of 12% per
annum for the balance of the term. During the first three years after the
issuance date of the Bridge Notes, the Company may elect to pay all or a portion
of the interest payable by issuing additional Bridge Notes. Each holder of
Bridge Notes may convert all or any portion of such notes into Series B Common
Stock at a conversion price of $4.00 per share, subject to certain anti-dilution
adjustments.
The Company is obligated to prepay the Bridge Notes in connection with any
issuance of certain high-yield debt securities, including the Senior Notes and
the Senior Discount Notes issued in the Units Offering.
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Holders of an aggregate of $93 million in principal amount of the Bridge Notes
have executed consents (collectively, the "Consents") permitting the Company to
satisfy its prepayment obligation with cash, Public Debt Securities (as defined
below) or any combination thereof; provided, however, that any Public Debt
Securities issued by the Company to the holders of Bridge Notes will have a
public float of at least the greater of (i) $150 million and (ii) two times the
aggregate principal amount of Bridge Notes which are being prepaid with the
relevant Public Debt Securities, in each case excluding the Public Debt
Securities issued to such holders ("Consenting Holders") pursuant to the
Consents. The Public Debt Securities will be issued to such Consenting Holders
at the same time as the Public Debt Securities sold to the public and will be
deemed to have a value for purposes of the redemption equal to the price at
which the Public Debt Securities are sold to the public. The prepayment of the
Bridge Notes will be at a redemption price of 100% of the principal amount
thereof, together with accrued interest through the date of prepayment, and will
also require the issuance of the warrants described below. "Public Debt
Securities" means debt securities which shall include bonds, notes or any
similar securities or units consisting of any of the foregoing and warrants,
issued by the Company pursuant to an effective registration statement. In the
event the Public Debt Securities are sold to the public in two or more tranches,
any prepayment, in whole and in part, in Public Debt Securities will be divided
ratably between and among the Public Debt Securities in each such tranche unless
otherwise determined by the Company.
Upon consummation of the Units Offering, the Company would have the right
to deliver Senior Note Units and Senior Discount Note Units in satisfaction of
the Company's prepayment obligation with respect to Bridge Notes held by
Consenting Holders. The Company currently intends to do so by issuing
$ aggregate principal amount of Senior Notes and $
aggregate principal amount at maturity of Senior Discount Notes. At the closing
of the Units Offering, Consenting Holders will receive a fee equal to 5% of the
principal amount plus accrued interest of the Bridge Notes, payable in cash or,
if elected by a Consenting Holder in its Consent, in shares of Series B Common
Stock valued at $5.00 per share.
In addition, whether or not the Units Offering is consummated, the Company
may prepay the Bridge Notes at any time at its option. If the Company prepays
such notes prior to the second anniversary of the date of initial issuance of
such notes, whether pursuant to an optional or mandatory prepayment, the Company
shall issue 32,587,000 warrants to purchase Series B Common Stock to the holders
of such notes at an exercise price of $4.00 per share, subject to anti-dilution
adjustments. The warrants expire on the fifth anniversary of issuance. The
holder of a warrant may only exercise such warrant to the extent such holders'
ownership of Series B Common Stock does not then violate FCC rules and
regulations relating to foreign ownership. If the Company prepays the Bridge
Notes at, or any time after, April 9, 1998, whether pursuant to an optional or
mandatory prepayment, the Bridge Notes are subject to a call premium of $0.50
per each $1.00 of outstanding principal, increasing ratably $0.10 per year until
April 9, 2002, and no warrants will be issued.
CONVERTIBLE PROMISSORY NOTES AND VENDOR FINANCING
For information regarding convertible promissory notes outstanding, see
"Description of Capital Stock -- Other Options, Warrants and Convertible Debt."
For a description of indebtedness related to the purchase of PCS infrastructure
equipment and services, see "Business -- Equipment Vendors."
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SHARES ELIGIBLE FOR FUTURE SALE
The outstanding shares of Series B Common Stock and all Series B Common
Stock issuable upon exercise of outstanding options or warrants or upon
conversion of convertible notes (collectively, "Restricted Shares") constitute
or will constitute restricted securities under Rule 144 of the Securities Act.
Without consideration of the contractual restrictions described below, all of
the shares of Series B Common Stock which constitute Restricted Shares will be
eligible for sale in the public market in accordance with Rule 144 beginning two
years after such securities were acquired.
The holders of shares of Series B Common Stock (including shares
issuable upon conversion of convertible securities and exercise of options and
warrants) have the right, commencing , 1997 (90 days after the
closing of the Equity Offering), to require the Company to file a registration
statement under the Securities Act for the sale of such shares of Series B
Common Stock. The Company is permitted to delay the filing of a registration
statement in connection therewith for up to 120 days, and presently intends to
do so to the extent necessary to avoid having to register any secondary resales
of Series B Common Stock until at least 210 days after the date hereof. Such
holders also have the right to require the Company to include their shares in a
registered offering of securities by the Company for their own account.
Restricted Shares may not be sold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, including pursuant to Rule 144. In general, assuming the
consummation of the Equity Offering, under Rule 144 as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
shares of Series B Common Stock which constitutes Restricted Shares (or Series A
Common Stock which is converted into shares of Series B Common Stock) for at
least two years, including affiliates of the Company, would be entitled to sell
in brokers' transactions or to market makers within any three-month period a
number of shares of Series B Common Stock that does not exceed the greater of 1%
of the then outstanding shares of Series B Common Stock or the average weekly
trading volume of the shares of Series B Common Stock on The Nasdaq National
Market during the four calendar weeks preceding the date on which notice of the
sale is filed with the Securities and Exchange Commission. Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company.
Affiliates of the Company may sell shares of Series B Common Stock not
constituting Restricted Shares in accordance with the foregoing volume
limitations and other restrictions, but without regard to the two-year holding
period. Restricted Shares held by affiliates of the Company eligible for sale in
the public market under Rule 144 are subject to the foregoing volume limitations
and other restrictions, including the two-year holding period.
The Company, its officers, directors, certain of its employees and
stockholders and its affiliates have agreed not to sell, solicit an offer to
buy, contract to sell, grant any option to purchase or otherwise transfer or
dispose of, or register or announce the sale or offering of, any Equity Units,
CTRs or shares of Series B Common Stock of the Company or any securities that
are convertible into, or exercisable or exchangeable for, shares of Series B
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of Smith Barney Inc., subject to certain limited
exceptions included in the Underwriting Agreement. The shares of Series B Common
Stock held by members of the Control Group are subject to certain transfer
restrictions under the Amended Series A Shareholders Agreement. See "Principal
Stockholders."
There currently is no market for the Equity Units or the Series B Common
Stock. The Company intends to list the Equity Units and the Series B Common
Stock on The Nasdaq National Market following the consummation of the Equity
Offering. There can be no assurance, however, that the Equity Offering will
occur or that an active trading market will develop thereafter. Assuming a
public market for the Equity Units or the Series B Common Stock does develop, no
predictions can be made as to the effect, if any, that market sales of the
Equity Units or shares of Series B Common Stock or the availability of Series B
Common Stock for sale will have on the market prices for the Units and the
Warrants prevailing from time to time. Nevertheless, sales of substantial
amounts of Series B Common Stock in the public market, for acquisitions or
otherwise, could adversely affect prevailing market prices for the Units and the
Warrants.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each of CIBC Woody Gundy Securities Corp.
("CIBC Wood Gundy"), Smith Barney Inc., Lehman Brothers Inc., Bear, Stearns &
Co., Inc., Prudential Securities Incorporated, ING Baring (U.S.) Securities,
Inc. and Oppenheimer & Co., Inc. (collectively, the "Underwriters") has agreed
severally, and not jointly, to purchase, and the Company has agreed to sell, the
number of Units offered hereby set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SENIOR DISCOUNT
UNDERWRITERS SENIOR NOTE UNITS NOTE UNITS
- -------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
CIBC Wood Gundy Securities Corp...............................
Smith Barney Inc..............................................
Lehman Brothers Inc...........................................
Bear, Stearns & Co. Inc.......................................
Prudential Securities Incorporated............................
ING Baring (U.S.) Securities, Inc.............................
Oppenheimer & Co., Inc........................................
--------- ---------
Total...............................................
========= =========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Senior Note Units and Senior
Discount Note Units are subject to approval of certain legal matters by counsel
and to certain other conditions. The Underwriting Agreement also provides that
the Company will indemnify the Underwriters and their controlling persons
against certain liabilities and expenses, including liabilities under the
Securities Act. The Underwriters are obligated to take and pay for all of the
Senior Note Units and Senior Discount Note Units offered hereby if any such
Senior Note Units and Senior Discount Note Units are taken.
The Underwriters propose to offer the Senior Note Units and Senior Discount
Note Units directly to the public initially at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of % of the principal amount, in the case
of the Senior Notes and % of the principal amount at maturity, in the case
of the Senior Discount Notes. After the initial public offering of the Senior
Note Units and Senior Discount Note Units, the offering price and other selling
terms may be changed by the Underwriters.
Prior to the Units Offerings, there has been no public market for the
Units, the Senior Notes, the Senior Discount Notes or the Warrants. The Company
does not intend to list the Units, Senior Notes, the Senior Discount Notes or
the Warrants on a national securities exchange or to seek admission thereof for
trading on The Nasdaq National Market. The Underwriters have advised the Company
that they currently intend to make a market in the Units, the Notes and the
Warrants, but are not obligated to do so and may discontinue any such market
making at any time without notice. Accordingly, there can be no assurance as to
the liquidity of, or that an active trading market will develop for the Units,
the Senior Notes, the Senior Discount Notes and the Warrants.
CIBC Wood Gundy acted as the placement agent in connection with the
placement of the Bridge Notes and an affiliate of CIBC Wood Gundy purchased an
aggregate of $15 million of Bridge Notes in such private placement. Moreover,
CIBC Wood Gundy acted as a placement agent in connection with the placement of
shares of Series B Common Stock and convertible promissory notes. In addition,
CIBC acted as a financial advisor to the Company in connection with the
Company's solicitation of the Consents of the holders of the Bridge Notes. The
Company has agreed to pay CIBC Wood Gundy customary compensation for these
services. ING Baring (U.S.) Securities, Inc. acted as a placement agent in
connection with the placement of shares of Series B Common Stock and convertible
promissory notes of the Company and purchased 1,666,666 shares of Series B
Common Stock and warrants to purchase 123,356 shares of Series B Common Stock in
such private placement. ING Baring (U.S.) Securities, Inc. received customary
compensation from the Company for these services. An affiliate of Prudential
Securities Incorporated also purchased 1,000,000 shares of Series B Common Stock
and warrants to purchase 74,013 shares of Series B Common Stock in such private
placement.
139
<PAGE> 142
LEGAL MATTERS
The legality of the Units, the Notes, the Warrants, and the Gauarantees
offered hereby will be passed upon for the Company and Wireless by Latham &
Watkins, San Diego, California. Certain legal matters in connection with the
Units Offering will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York.
EXPERTS
The financial statements as of December 31, 1995 and September 30, 1996 and
for the periods from May 16, 1995 (inception) to December 31, 1995, the nine
months ended September 30, 1996 and the period from May 16, 1995 to September
30, 1996 included in this Prospectus have been so included in reliance on the
report (which contains an explanatory paragraph relating to the Company's
ability to continue as a going concern as described in Note 1 to the financial
statements) of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
140
<PAGE> 143
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, with respect to the Units, the Notes and the
Warrants offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Units, the Notes and the
Warrants offered hereby, reference is hereby made to such Registration
Statement, exhibits and schedules filed as part of the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
any 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 or such other document. Each such
statement is qualified in all respects by such reference to subject exhibit.
After consummation of the Offerings, the Company will be subject to the
informational and reporting requirements of the Securities Exchange Act of 1934,
as amended, and, in accordance therewith, will be required to file reports,
proxy or information statements, and other information with the Commission. Such
reports, proxy statements and other information, as well as the Registration
Statement of which this Prospectus is a part and the exhibits and schedules
thereto, can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the following regional offices: 7 World
Trade Center, New York, New York 10048, and 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials also can be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
website on the Internet that contains reports, proxy and information statements
and other information (http://www.sec.gov).
141
<PAGE> 144
GLOSSARY OF SELECTED TERMS
Set forth below are certain technical terms defined as they are used in
this Prospectus.
AIN: Advanced Intelligent Network. The means by which a
telecommunications network will provide call control. Database structure and
signal transfer points facilitate call management
maintenance and control.
Analog: A transmission method employing a continuous
(rather than pulsed or digital) electrical signal
that varies in amplitude or frequency in response
to changes in sound impressed on a transducer in
the sending device.
Area-Based Service: The provision of PCS services in a residential or
business environment offered as an alternative to
or replacement for wireline services.
Base Station: Transmitter, receiver, signaling and related
equipment located at each cell site.
BTA: Basic Trading Area. A geographic area devised by
Rand McNally and adopted by the FCC as the PCS C,
D, E and F license service areas.
C-Block Auction: The FCC Auction of 493 30 MHz BTA licenses,
restricted to entities meeting certain financial
and other criteria.
C-Block Auctions: The C-Block Auction and the C-Block Re-Auction.
C-Block Re-Auction: The FCC Auction of C-Block licenses for which the
high-bidder defaulted on their initial downpayments
to the FCC that commenced July 6, 1996.
CDMA: Code Division Multiple Access. One of the three
leading PCS and digital cellular technology
platforms.
Cellular: The commercial mobile radio-telephone service
comprised of 25 MHz MSA and RSA licenses in the 800
MHz band. The first mobile radio service to broadly
employ frequency reuse in its system design.
Churn Rate: The rate at which communications service customers
terminate service. It is calculated as a rate per
month for a given measurement period, as the number
of subscriber units disconnected divided by the
average number of subscribers on the networks.
CMRS: Commercial Mobile Radio Service.
Common Carriers: Companies which own or operate transmission
facilities and offer telecommunication services to
the general public on a non-discriminatory basis.
CTIA: The Cellular Telecommunications Industry
Association. A trade association in North America
comprised primarily of cellular and PCS telephone
service providers and some mobile satellite service
providers.
D, E and F-Block Auctions: The FCC Auction of 493 10 MHz BTA licenses in the
D-Block, E-Block and F-Block. The F-Block Auction
is restricted to entities meeting certain financial
and other criteria.
Digital: A method of storing, processing and transmitting
information through the use of distinct electronic
or optical pulses that represent the binary digits
0 and 1. Digital transmission/switching
technologies employ a sequence of discrete,
distinct pulses to represent information, as
opposed to the continuously variable analog signal.
142
<PAGE> 145
ESMR: Enhanced Specialized Mobile Radio. Radio
communications systems that employ digital
technology with a multi-site configuration that
permits frequency reuse to significantly increase
system capacity. The expanded system capacity of
ESMR systems allows for the provision of a wide
array of services including, enhanced dispatch
(group calling), mobile telephony, text messaging
with acknowledgment (paging) and mobile data.
FCC: The Federal Communications Commission. An
independent regulatory agency with authority
delegated by Congress to regulate interstate and
foreign communications by wire and radio, and to
manage the nongovernment radio spectrum.
Frequency Reuse: The use of many low-elevation antenna and/or
low-power sites, so that the same frequencies can
be reused in numerous sites separated by a defined
distance without causing interference. Thus
frequency re-use systems can increase capacity,
increase the number of sites and reuse frequencies
more often.
Full Mobility Service: The provision of digital wireless voice airtime
with mobile inter-cell (base station) hand-off
capability.
GHz: Gigahertz. A unit of frequency equal to one billion
cycles (or hertz) per second.
GSM: Global System for Mobile Communications. One of the
three leading PCS and digital cellular technology
platforms, currently widely deployed in Europe.
Hard Hand-Off: A cell tower transfer method which simultaneously
disconnects the in-use cell and reconnects with a
new cell.
LECs: Local exchange carriers.
License Grant Date: The last date on which the FCC issues a C or
F-Block license to the Company.
Local Loop Services: Local telephony services.
MHz: Megahertz. A unit of frequency equal to one million
cycles (or hertz) per second.
MTA: Major Trading Area. A geographic area devised by
Rand McNally and adopted by the FCC as either a PCS
A-Block or B-Block license service area.
MSA: Metropolitan Statistical Area. A geographic area
devised by Rand McNally and adopted by the FCC as a
cellular license service area.
PBX: Private branch exchange.
PCS: Personal Communications Service. Broadband radio
communications that encompasses mobile and
ancillary fixed communications that provide
services to individuals and businesses and can be
integrated with a variety of competing networks. In
Canada and the United States, 120 MHz of PCS
spectrum has been allocated for use by public
systems at the 2 GHz frequency range. It is
expected that PCS will initially consist primarily
of low cost enhanced voice, two-way data and text
messaging services, primarily directed at the mass
consumer wireless communications market. Such PCS
applications are expected to be followed over
143
<PAGE> 146
time by services offering integrated voice, data,
image and eventually perhaps video capability.
POPs: A shorthand abbreviation for population. A POP
refers to one person living in a population area
which is included in the coverage area of a
telecommunications service provider.
Protocol: An all-inclusive term used to describe the various
control functions, tuning and methodology standards
by which a communications system operates, as well
as any other equipment system characteristics
necessary to ensure compatibility.
PSTN: Public Switched Telephone Network. A term for the
existing public switched telephone networks
comprised of local and long distance switching
centers interconnected through transmission
facilities.
RF: Radio Frequency.
RFQ: Request For Quotation.
Roam(ing): A service offered by wireless communications
network carriers which allows subscribers to use
their radio or phone while outside their carrier's
service area. Roaming requires an agreement between
participating carriers.
RSA: Rural Statistical Area. A defined regional
geographical service area devised by Rand McNally
and adopted by the FCC for cellular service areas.
SMR: Specialized Mobile Radio. A two-way radio service
provided within a designated portion of the 800 and
900 MHz frequency bands.
Soft Hand-Off: Cell tower transfer method which establishes a new
cell communications channel prior to disconnecting
the existing channel.
Spectrum: The electromagnetic radio spectrum. The FCC grants
authorizations and licenses to private and
governmental entities to use specified portions
under certain conditions.
TDMA: Time Division Multiple Access. One of the three
leading PCS and digital cellular technology
platforms.
Vocoder: An electronic mechanism that compresses digital
speech signals prior to transmission in order to
increase the capacity of over communication systems
of limited frequency bandwidth.
Wireless Local Loop: Wireless switched local telephony service.
Wireless PBX: Wireless Private Branch Exchange. Dedicated
wireless local network providing telephone service
for medium to large institutions.
144
<PAGE> 147
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants...................................................... F-2
Consolidated Balance Sheet at December 31, 1995 and September 30, 1996................. F-3
Consolidated Statement of Operations for the period from May 16, 1995 (inception) to
September 30, 1995 (unaudited), for the period from May 16, 1995 (inception) to
December 31, 1995, for the nine months ended September 30, 1996, and for the period
from May 16, 1995 (inception) to September 30, 1996.................................. F-4
Consolidated Statement of Cash Flows for the period from May 16, 1995 (inception) to
September 30, 1995 (unaudited), for the period from May 16, 1995 (inception) to
December 31, 1995, for the nine months ended September 30, 1996, and for the period
from May 16, 1995 (inception) to September 30, 1996.................................. F-5
Consolidated Statement of Changes in Stockholders' Equity for the period from May 16,
1995 (inception) to December 31, 1995 and for the nine months ended September 30,
1996................................................................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE> 148
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of NextWave Telecom Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of NextWave Telecom Inc., a development stage enterprise (Note 1), and
its subsidiaries at December 31, 1995 and September 30, 1996, and the results of
their operations and their cash flows for the period from May 16, 1995
(inception) to December 31, 1995, the nine months ended September 30, 1996 and
the period from May 16, 1995 (inception) to September 30, 1996 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 1 to the
consolidated financial statements, in order to implement its business plan, the
Company will require significant capital to meet its obligations to the FCC,
build out the PCS infrastructure necessary to provide service, and cover its
operational expenses. These capital requirements raise a substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to this matter, which include raising additional capital in equity and
debt offerings, are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
PRICE WATERHOUSE LLP
San Diego, California
January 31, 1997, except as to the
refund of certain FCC downpayments
and the loan repayment described
in Notes 1 and 11, which are as
of February 6, 1997
F-2
<PAGE> 149
NEXTWAVE TELECOM INC.
(a development stage enterprise)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30,
1995 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 4,486,000 $ 26,102,000
Other current assets........................................... 106,000 1,476,000
----------- ------------
Total current assets................................... 4,592,000 27,578,000
Property and equipment, net...................................... 142,000 15,802,000
Restricted cash.................................................. 875,000 131,760,000
FCC license deposits............................................. 79,225,000 267,182,000
Other assets..................................................... -- 8,788,000
----------- ------------
$84,834,000 $451,110,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 156,000 $ 8,643,000
Accrued liabilities............................................ 348,000 6,856,000
Advances from contingent stock purchase subscribers............ 30,225,000 10,000,000
Advances from related party contingent stock purchase
subscriber.................................................. 4,875,000 --
Current portion of convertible notes payable and capital
leases...................................................... 19,200,000 48,643,000
Notes payable to related party................................. 25,000,000 --
----------- ------------
Total current liabilities.............................. 79,804,000 74,142,000
Convertible notes payable and capital leases, less current
portion........................................................ 24,000 130,845,000
----------- ------------
Total liabilities...................................... 79,828,000 204,987,000
----------- ------------
Commitments (Note 9)
Stockholders' equity:
Common stock, $0.0001 par value, 500,000,000 shares authorized:
Series A, 60,000,000 shares designated: 20,000,000 and
47,396,437 shares issued and outstanding.................. 2,000 5,000
Series B, 278,980,556 shares designated: no shares and
99,898,262 shares issued and outstanding.................. -- 10,000
Series C, 1,019,444 shares designated: no shares issued or
outstanding............................................... -- --
Paid-in capital................................................ 6,898,000 291,406,000
Common stock notes receivable.................................. -- (2,810,000)
Deferred charges and unearned compensation..................... -- (25,993,000)
Deficit accumulated during development stage................... (1,894,000) (16,495,000)
----------- ------------
Total stockholders' equity............................. 5,006,000 246,123,000
----------- ------------
$84,834,000 $451,110,000
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 150
NEXTWAVE TELECOM INC.
(a development stage enterprise)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
MAY 16, 1995 MAY 16, 1995 NINE MONTHS MAY 16, 1995
(INCEPTION) (INCEPTION) ENDED (INCEPTION)
TO SEPTEMBER 30, TO DECEMBER 31, SEPTEMBER 30, TO SEPTEMBER 30,
1995 1995 1996 1996
---------------- --------------- ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Consulting revenues from
related party............. $ -- $ -- $ 1,914,000 $ 1,914,000
Consulting revenues.......... -- 173,000 44,000 217,000
----------- --------- ------------ ------------
Total revenues............ -- 173,000 1,958,000 2,131,000
----------- --------- ------------ ------------
Operating expenses:
Costs of related
party consulting
revenues.................. -- -- 1,832,000 1,832,000
Consulting costs............. -- 114,000 26,000 140,000
General and administrative... 497,000 1,631,000 11,844,000 13,475,000
Selling and marketing........ 4,000 8,000 370,000 378,000
Research and development..... -- -- 754,000 754,000
----------- --------- ------------ ------------
Total operating
expenses................ 501,000 1,753,000 14,826,000 16,579,000
----------- --------- ------------ ------------
Operating loss................. (501,000) (1,580,000) (12,868,000) (14,448,000)
Debt conversion expense........ -- -- (738,000) (738,000)
Interest expense............... -- (332,000) (2,227,000) (2,559,000)
Interest income................ 1,000 18,000 1,232,000 1,250,000
----------- --------- ------------ ------------
Net loss....................... $ (500,000) $ (1,894,000) $ (14,601,000) $(16,495,000)
=========== ========= ============ ============
Pro forma net loss per share
(unaudited)(Note 2).......... $ $
========= ============
Shares used in computing pro
forma net loss per share
(unaudited)(Note 2)..........
========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 151
NEXTWAVE TELECOM INC.
(a development stage enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 16, 1995 MAY 16, 1995 NINE MONTHS MAY 16, 1995
(INCEPTION) (INCEPTION) ENDED (INCEPTION)
TO SEPTEMBER 30, TO DECEMBER 31, SEPTEMBER 30, TO SEPTEMBER 30,
1995 1995 1996 1996
---------------- --------------- ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $ (500,000) $ (1,894,000) $ (14,601,000) $ (16,495,000)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Debt conversion expense.............. -- -- 738,000 738,000
Non-cash interest charges............ -- 176,000 585,000 761,000
Non-cash compensation................ -- -- 400,000 400,000
Depreciation expense................. 7,000 14,000 290,000 304,000
Amortization of debt issuance
costs.............................. -- -- 171,000 171,000
Changes in:
Other assets....................... (7,000) (106,000) (7,475,000) (7,581,000)
Accounts payable................... 24,000 156,000 8,487,000 8,643,000
Accrued liabilities................ 49,000 348,000 3,794,000 4,142,000
------------- ------------- --------- -------------
Net cash used in operating
activities....................... (427,000) (1,306,000) (7,611,000) (8,917,000)
------------- ------------- --------- -------------
Cash flows from investing activities:
Restricted cash for long-term FCC
licenses............................. -- (875,000) (129,473,000) (130,348,000)
Deposits for long-term FCC licenses.... -- (79,225,000) (187,957,000) (267,182,000)
Purchases of property and equipment.... (89,000) (105,000) (15,282,000) (15,387,000)
------------- ------------- --------- -------------
Net cash used in investing
activities....................... (89,000) (80,205,000) (332,712,000) (412,917,000)
------------- ------------- --------- -------------
Cash flows from financing activities:
Proceeds from issuances of Common
Stock................................ 665,000 5,000,000 29,531,000 34,531,000
Proceeds from issuances of notes
payable and warrants................. -- 40,000,000 10,000,000 50,000,000
Proceeds from issuances of notes
payable to related party............. -- 25,000,000 -- 25,000,000
Proceeds from issuances of convertible
senior subordinated notes payable.... -- -- 130,348,000 130,348,000
Repayment of notes payable to related
party................................ -- -- (9,602,000) (9,602,000)
Debt issuance costs.................... -- -- (2,053,000) (2,053,000)
Advances from contingent stock purchase
subscribers.......................... -- 11,000,000 212,366,000 223,366,000
Advance from related party contingent
stock purchase subscriber............ -- 5,000,000 -- 5,000,000
Private placement issuance costs....... -- -- (9,680,000) (9,680,000)
Capital contributions.................. -- -- 1,078,000 1,078,000
Payments on capital leases............. -- (3,000) (49,000) (52,000)
------------- ------------- --------- -------------
Net cash provided by financing
activities....................... 665,000 85,997,000 361,939,000 447,936,000
------------- ------------- --------- -------------
Net increase in cash and cash
equivalents............................ 149,000 4,486,000 21,616,000 26,102,000
Cash and cash equivalents at beginning
of period.............................. -- -- 4,486,000 --
------------- ------------- --------- -------------
Cash and cash equivalents at end of
period................................. $ 149,000 $ 4,486,000 $ 26,102,000 $ 26,102,000
============= ============= ========= =============
Supplemental cash flow disclosures:
Conversion of notes payable to advances
from contingent stock purchase
subscribers.......................... $ -- $ 20,000,000 $ 20,000,000 $ 40,000,000
============= ============= ========= =============
Conversion of notes payable to related
party to advances from related party
contingent stock purchase
subscriber........................... $ -- $ -- $ 15,000,000 $ 15,000,000
============= ============= ========= =============
Conversion of advances from contingent
stock purchase subscribers to Series
B Common Stock and capital
contributions........................ $ -- $ 775,000 $ 213,679,000 $ 214,454,000
============= ============= ========= =============
Conversion of advances from related
party contingent stock purchase
subscribers to Series B Common Stock
and capital contributions............ $ -- $ 125,000 $ 19,875,000 $ 20,000,000
============= ============= ========= =============
Conversion of advances from contingent
stock purchase subscriber to
convertible notes payable............ $ -- $ -- $ 38,912,000 $ 38,912,000
============= ============= ========= =============
Conversion of notes payable to related
party to long-term convertible notes
payable to related party............. $ -- $ -- $ 398,000 $ 398,000
============= ============= ========= =============
Issuance of warrants for purchase of
property and equipment............... $ -- $ -- $ 437,000 $ 437,000
============= ============= ========= =============
Issuance of Common Stock notes
receivable in connection with
issuances of Series A and Series B
Common Stock......................... $ -- $ -- $ 2,810,000 $ 2,810,000
============= ============= ========= =============
Issuance of warrants to purchase Series
B Common Stock in connection with
issuance of notes payable............ $ -- $ 1,000,000 $ 600,000 $ 1,600,000
============= ============= ========= =============
Issuance of warrants to purchase Series
B Common Stock in connection with
issuance of Series B Common Stock.... $ -- $ -- $ 1,138,000 $ 1,138,000
============= ============= ========= =============
Issuances of stock options and warrants
to purchase Series B Common Stock in
connection with non-employee
agreements........................... $ -- $ -- $ 26,342,000 $ 26,342,000
============= ============= ========= =============
Unpaid debt issuance costs............. $ -- $ -- $ 2,165,000 $ 2,165,000
============= ============= ========= =============
Unpaid private placement costs......... $ -- $ -- $ 549,000 $ 549,000
============= ============= ========= =============
Non-cash debt issuance costs........... $ -- $ -- $ 48,000 $ 48,000
============= ============= ========= =============
Non-cash private placement stock option
costs................................ $ -- $ -- $ 65,000 $ 65,000
============= ============= ========= =============
Non-cash private placement Series B
Common Stock costs................... $ -- $ -- $ 848,000 $ 848,000
============= ============= ========= =============
Issuances of stock options to purchase
Series B Common Stock in connection
with non-employee agreements......... $ -- $ -- $ 117,000 $ 117,000
============= ============= ========= =============
Acquisitions of equipment under capital
lease obligations.................... $ -- $ 51,000 $ 231,000 $ 282,000
============= ============= ========= =============
Unamortized debt discount related to
debt converted to equity............. $ -- $ -- $ 439,000 $ 439,000
============= ============= ========= =============
Interest paid.......................... $ -- $ 32,000 $ 312,000 $ 344,000
============= ============= ========= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 152
NEXTWAVE TELECOM INC.
(a development stage enterprise)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES B COMMON DEFERRED CHARGES
COMMON STOCK COMMON STOCK STOCK AND
------------------------ ------------------------- PAID-IN NOTES UNEARNED
NUMBER OF SHARES AMOUNT NUMBER OF SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------------- ------ ---------------- ------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuances of Series A Common
Stock to founding stockholders
during May through November 1995
at $0.25 per share.............. 20,000,000 $2,000 -- $ -- $ 4,998,000 $ -- $ --
Issuance during November 1995 of
warrants to purchase 500,000
shares of Series B Common Stock
exercisable at $3.00 per
share........................... -- -- -- -- 1,000,000 -- --
Capital contributions during
December 1995 (Note 7).......... -- -- -- -- 900,000 -- --
Net loss......................... -- -- -- -- -- -- --
---------- ------ ----------- ------ ------------ ----------- -----------
Balance at December 31, 1995..... 20,000,000 2,000 -- -- 6,898,000 -- --
Issuances during February 1996 of
options to purchase 466,667
shares of Series B Common Stock
exercisable at $0.25 per share
(valued by an independent
appraiser)...................... -- -- -- -- 117,000 -- --
Issuances of Series A Common
Stock to founding stockholders
during March 1996 through May
1996 at $0.25 per share......... 35,760,000 4,000 -- -- 8,936,000 (2,510,000) --
Capital contributions during
March 1996 and June 1996 (Note
7).............................. -- -- -- -- 2,178,000 -- --
Issuances of Series B Common
Stock during May 1996 at $3.00
per share, net of issuance costs
of $12,332,000.................. -- -- 78,533,836 8,000 220,822,000 (300,000) --
Issuances of Series B Common
Stock during May 1996 at $5.00
per share, net of issuance costs
of $65,000...................... -- -- 4,620,300 -- 23,037,000 -- --
Issuances during March 1996
through June 1996 of warrants to
purchase 13,705,691 shares of
Series B Common Stock
exercisable at $3.00 per share
(valued by an independent
appraiser)...................... -- -- -- -- 2,476,000 -- --
Issuance during May 1996 of
options to purchase 200,000
shares of Series B Common Stock
exercisable at $3.00 per share
(valued by an independent
appraiser)...................... -- -- -- -- 437,000 -- --
Issuance during May 1996 of
warrants to purchase 64,113
shares of Series B Common Stock
exercisable at $4.00 per share
(valued by an independent
appraiser)...................... -- -- -- -- 113,000 -- --
Issuances during August 1996 of
warrants to purchase 23,773,284
shares of Series B Common Stock
exercisable at $4.00 per share
(valued by an independent
appraiser)...................... -- -- -- -- 25,211,000 -- (25,211,000)
Conversion during August 1996 of
15% of Series A Common Stock
into Series B Common Stock at a
ratio of one share of Series A
Common Stock into two shares of
Series B Common Stock........... (8,363,563) (1,000) 16,727,126 2,000 (1,000) -- --
Exercise of common stock
options......................... -- -- 17,000 -- 51,000 -- --
Compensatory stock options
issued.......................... -- -- -- -- 1,131,000 -- (782,000)
Net loss......................... -- -- -- -- -- -- --
---------- ------ ----------- ------ ------------ ----------- -----------
Balance at September 30, 1996.... 47,396,437 $5,000 99,898,262 $10,000 $291,406,000 $(2,810,000) $(25,993,000)
========== ====== =========== ====== ============ =========== ===========
<CAPTION>
DEFICIT
ACCUMULATED
DURING TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
---------------- ----------------
<S> <<C> <C>
Issuances of Series A Common
Stock to founding stockholders
during May through November 1995
at $0.25 per share.............. $ -- $ 5,000,000
Issuance during November 1995 of
warrants to purchase 500,000
shares of Series B Common Stock
exercisable at $3.00 per
share........................... -- 1,000,000
Capital contributions during
December 1995 (Note 7).......... -- 900,000
Net loss......................... (1,894,000) (1,894,000)
----------- ------------
Balance at December 31, 1995..... (1,894,000) 5,006,000
Issuances during February 1996 of
options to purchase 466,667
shares of Series B Common Stock
exercisable at $0.25 per share
(valued by an independent
appraiser)...................... -- 117,000
Issuances of Series A Common
Stock to founding stockholders
during March 1996 through May
1996 at $0.25 per share......... -- 6,430,000
Capital contributions during
March 1996 and June 1996 (Note
7).............................. -- 2,178,000
Issuances of Series B Common
Stock during May 1996 at $3.00
per share, net of issuance costs
of $12,332,000.................. -- 220,530,000
Issuances of Series B Common
Stock during May 1996 at $5.00
per share, net of issuance costs
of $65,000...................... -- 23,037,000
Issuances during March 1996
through June 1996 of warrants to
purchase 13,705,691 shares of
Series B Common Stock
exercisable at $3.00 per share
(valued by an independent
appraiser)...................... -- 2,476,000
Issuance during May 1996 of
options to purchase 200,000
shares of Series B Common Stock
exercisable at $3.00 per share
(valued by an independent
appraiser)...................... -- 437,000
Issuance during May 1996 of
warrants to purchase 64,113
shares of Series B Common Stock
exercisable at $4.00 per share
(valued by an independent
appraiser)...................... -- 113,000
Issuances during August 1996 of
warrants to purchase 23,773,284
shares of Series B Common Stock
exercisable at $4.00 per share
(valued by an independent
appraiser)...................... -- --
Conversion during August 1996 of
15% of Series A Common Stock
into Series B Common Stock at a
ratio of one share of Series A
Common Stock into two shares of
Series B Common Stock........... -- --
Exercise of common stock
options......................... -- 51,000
Compensatory stock options
issued.......................... -- 349,000
Net loss......................... (14,601,000) (14,601,000)
----------- ------------
Balance at September 30, 1996.... $ (16,495,000) $ 246,123,000
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 153
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS CAPITAL RESOURCES
THE COMPANY
NextWave Telecom Inc. ("NextWave" or the "Company") was incorporated on May
16, 1995. NextWave is the parent company of five wholly-owned subsidiaries that
hold substantially all of the assets of the Company. NextWave was formed to
build and operate Personal Communications Services ("PCS") networks. NextWave
Personal Communications Inc. was formed to acquire PCS licenses obtained
pursuant to the Federal Communications Commission's ("FCC") PCS C-Block
auctions. NextWave Power Partners Inc. was formed to act as a joint venture with
certain utility companies, energy management firms, and other strategic partners
and acquire PCS licensees in the FCC's D, E and F-Block auctions. NextWave
Partners Inc. was formed to hold NextWave's interest in NextWave Power Partners
Inc. TELE*Code Inc. was formed to provide CDMA-based products and engineering
services to the Company and third parties. NextWave Wireless Inc. was formed to
act as an operating company and parent company for additional subsidiaries to be
formed for each of the Company's PCS service regions.
CAPITAL RESOURCES
The Company is a development stage enterprise which has incurred net losses
since inception. In order to implement its business plan, significant capital
will be required to (i) meet the Company's obligations to the FCC, (ii) build
out the PCS network infrastructure necessary to provide service and (iii) cover
its operational expenses. During January 1997, the FCC granted the Company
C-Block PCS licenses in 63 basic trading areas. The C-Block licenses were
granted subject to the requirement that the Company demonstrate compliance with
FCC foreign ownership regulations within six months from the date of license
grant and that the Company undertake various reporting obligations to the FCC to
notify the agency of the steps being taken by the Company to ensure regulatory
compliance. Although there can be no assurance, management believes that the
Company will satisfy these conditions upon the consummation of the Company's
initial public equity and debt offerings. These licenses are also subject to
petitions for reconsideration or appeal filed by other C-Block auction
participants. The total bid by the Company for the C-Block auctions was
$4,743,648,000 of which $79,225,000 and $237,182,000 was on deposit with the FCC
as of December 31, 1995 and September 30, 1996, respectively. During January
1997, following the FCC's notice of grant, the Company paid the remaining
downpayment of $237,183,000 to the FCC.
The remaining $4,269,283,000 will be paid pursuant to U.S. Government
financing. Such U.S. Government financing is payable quarterly with payments of
interest only through January 2003 and equal principal and interest payments
from April 2003 through January 2007. The interest rate is fixed at the ten-year
Treasury Note rate (6.5% at December 31, 1996) at the date of license grant,
resulting in quarterly interest-only payments, commencing in April 1997, in the
amount of $69,376,000 ($277,503,000 per year).
During August 1996, the Company deposited $30,000,000 with the FCC to
participate in the D, E and F-Block auctions. During January 1997, the D, E, and
F-Block auctions ended with the FCC naming the Company the winning bidder on
licenses in 32 basic trading areas with net bids totaling $128,972,000. These
licenses required downpayments of $13,475,000, resulting in a refund to the
Company of $16,525,000, which was received from the FCC and used to repay a loan
during February 1997 (Note 11). Upon the grant of these licenses, the Company
will make a final downpayment of $16,945,000. The remaining $98,552,000 will be
paid pursuant to U.S. Government financing made to the Company. Such U.S.
Government financing will be payable quarterly with payments of interest only
for the first two years after the grant of the licenses and then equal principal
and interest payments in the third through tenth years after the grant of the
licenses. The interest will be fixed at the ten-year Treasury Note rate (6.5% at
December 31, 1996) at the date of license grant, resulting in quarterly interest
only payments of approximately $1,601,000 ($6,406,000 per year).
F-7
<PAGE> 154
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's applications for these licenses may be subject to challenges
by various competing bidders and other interested parties in the D, E and
F-Block auctions. There can be no assurance that the Company will be successful
in defending any such challenges should they occur and will be finally awarded
any or all of these licenses. Any grant by the FCC of D, E, and F-Block PCS
licenses may be conditioned on the Company's compliance with the FCC's foreign
ownership restrictions within a specified period of time. Additionally, the
Company participated in the F-Block auction as a small business (as defined by
FCC rules) and there can be no assurance that there will not be challenges of
the Company's status as a small business for purposes of the F-Block. If the
Company were found to be ineligible or otherwise disqualified from holding the
D, E or F-Block PCS licenses, the FCC could impose substantial financial and
regulatory penalties on it, up to and including the refusal to grant such
licenses. In the event that the Company were denied the D, E or F-Block PCS
licenses, the Company would not be authorized to offer PCS services in those
basic trading areas for which it was the winning bidder in those auctions.
The Company will be required, pursuant to the FCC's installment payment
plan, to execute note and security agreements to the U.S. Government, creating
first priority security interests in favor of the FCC for all licenses (and the
proceeds of any sales thereof) in the event of a default. The Company's failure
to comply on an ongoing basis with FCC regulations, including those related to
foreign ownership restrictions, network build-out requirements and control group
ownership requirements could result in the FCC ordering divestiture of non-U.S.
stockholders, issuance of substantial fines or denial of renewal or revocation
of the licenses.
Based on the Company's capital resources as of September 30, 1996, which
are comprised primarily of cash and cash equivalents of $26,102,000, along with
$18,650,000 of equity and $69,670,000 of debt financing raised subsequent to
September 30, 1996, the Company will be required to raise additional financing
in order to meet its financial obligations and achieve its business plan through
1997 and beyond. The successful implementation of the Company's strategy, among
other things, is necessary for the Company to be able to meet its debt service
and significant capital requirements. In addition, the Company's ability to
satisfy its debt service obligations once its PCS networks are operational will
be dependent upon the Company's future performance, which is subject to a number
of factors that are beyond the Company's control. There can be no assurance that
the Company's PCS networks can be completed or that, once completed, the Company
will generate sufficient cash flow from operating activities to meet its debt
service and working capital requirements. Any failure or delay in meeting these
debt service requirements, and in particular, the requirements of the debt
obligations to the U.S. Government, could have a material adverse effect upon
the Company's business, results of operations and financial condition. Although
there can be no assurance, management believes that the Company's capital
resources at September 30, 1996, along with the proceeds from completed
transactions as well as the equity and debt offerings planned for 1997 and the
consummation of vendor financing necessary for network build-out (Notes 10 and
11) will be adequate to meet its capital requirements through 1997. Although
there can be no assurance, management also believes that, in addition to its
C-Block licenses, the Company will be awarded all D, E and F-Block licenses for
which it was named the winning bidder in the FCC auctions which concluded in
January 1997 and will be successful in meeting its operating plan to build out
its PCS networks and commence providing PCS services in certain markets by the
end of 1997.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PREPARATION
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.
F-8
<PAGE> 155
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments and consist of money market
accounts purchased with maturities of three months or less and exclude FCC
deposits and restricted amounts.
REVENUE RECOGNITION
Consulting revenues are recognized as the services are performed. Revenues
from long-term contracts are recognized using the percentage-of-completion
method, primarily based on costs incurred to date compared to total estimated
costs at completion. Estimated contract losses are recognized when identified.
Amounts received in advance of performance under consulting arrangements are
recorded as deferred revenue. During the period from inception to December 31,
1995, 100% of total revenues was from one customer, and during the nine months
ended September 30, 1996, 98% of total revenues was from another customer.
PROPERTY AND EQUIPMENT
All property and equipment is stated at cost and depreciated or amortized
using the straight-line method over its estimated useful life of 3 to 5 years or
the remaining lease term, whichever is shorter. Repair and maintenance costs are
charged to expense as incurred.
LICENSE COSTS
As of September 30, 1996, the Company had recorded $237,182,000 of license
costs representing funds remitted in satisfaction of the first downpayment
requirement for the C-Block auctions. During January 1997, the Company remitted
an additional downpayment of $237,183,000 and recorded $3,204,822,000 as an
intangible asset representing the cost of the acquired licenses, with cost
determined as (i) the present value of the deferred payment obligation provided
by the U.S. Government using a risk-adjusted fair value discount rate of 14.0%
and (ii) the downpayments. The U.S. Government financing, which provides for
favorable terms, including a below market interest rate equal to the ten-year
Treasury Note rate (6.5% at December 31, 1996) at the date of license grant over
the ten-year life of the financing, is available to the Company because it
qualifies as a small business as defined by the FCC rules and regulations. The
FCC C-Block licenses expire in January 2007 but typically are renewable for a
nominal fee. The licenses will be amortized using the straight-line method over
their estimated useful lives of 40 years.
During January 1997 the D, E and F-Block auctions ended with the FCC naming
the Company the winning bidder on 32 licenses and the Company depositing
$13,475,000 as a downpayment. When the licenses are granted, later this year, a
second downpayment of $16,945,000, will be made and an intangible asset of
$98,976,000 will be recorded using the same assumptions as above.
CAPITALIZATION OF INTEREST COST
Interest costs incurred during the period of time that internally
constructed assets are being made ready for their intended use are capitalized
as part of the cost of acquiring such assets to the extent that these interest
costs relate to financing obtained in order to prepare such assets for use.
Assets considered to qualify for capitalization of related interest cost include
PCS infrastructure and FCC licenses. As of September 30, 1996, PCS
infrastructure construction activity had not commenced, and no PCS licenses had
been awarded to the Company; therefore, no interest costs have been capitalized.
F-9
<PAGE> 156
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS
The Company investigates potential impairments of long-lived assets,
certain identifiable intangibles, and any associated goodwill, on an exception
basis, when there is evidence that events or changes in circumstances indicate
that an asset's carrying value may not be recoverable. An impairment loss is
recognized when the sum of the expected future net cash flows is less than the
carrying amount of the asset. No such losses have been identified by the
Company.
DEBT DISCOUNTS AND ISSUE COSTS
Underwriting discounts taken and costs incurred related to issuances of
debt instruments are deferred and amortized, using the effective interest
method, over the term of the respective debt instruments.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset and/or liability is computed
for both the expected future impact of differences between the financial
statement and tax bases of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be "more likely than not" realized in future tax returns. Tax
rate changes are reflected in the statement of operations in the period such
changes are enacted.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is computed based on the weighted average
number of common shares and common stock equivalents, using the treasury stock
method, outstanding during the respective periods after giving retroactive
effect to the conversion, which occurred upon the closing of the FCC C-Block
auction during May 1996, of all then outstanding contingent stock purchase
subscriptions (Note 4) and convertible notes payable (Note 5) into shares of
Series B Common Stock. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, all common stock and convertible notes payable
issued since June 10, 1995 have been included as outstanding for all periods and
all Series B Common Stock warrants and Series B Common Stock options granted
since June 10, 1995 have been included as outstanding for all periods using the
treasury stock method and an estimated price per share attributable to the
Series B Common Stock issued by the Company in the initial public offering of
$ per share. Historical net loss per share is not presented because
such amounts are not deemed meaningful due to the significant change in the
Company's capital structure that occurred in connection with the contingencies
satisfied as a result of the closing of the FCC auction during May 1996.
DIVERSIFICATION OF CREDIT RISK
The Company's financial instruments that are subject to concentrations of
credit risk consist primarily of cash and cash equivalents. The Company's policy
is to place its cash and cash equivalents with high credit quality financial
institutions in order to limit the amount of credit exposure.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted cash,
deposits, accounts payable, accrued liabilities and advances from contingent
stock purchase subscribers, approximate fair value because of the short
maturities of these financial instruments. See Note 5 for fair value information
for the Company's notes payable, capital leases, and notes payable to related
party.
F-10
<PAGE> 157
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net loss and net loss per share as if the fair value-based
methods prescribed by Financial Accounting Standards Board Statement No. 123
(FAS 123) had been applied in measuring compensation expense (Note 8).
Compensation charges for non-employee stock-based compensation is measured using
fair value-based methods prescribed by FAS 123.
INTERIM RESULTS (UNAUDITED)
The consolidated financial statements for the period from May 16, 1995
(inception) to September 30, 1995 have been prepared on the same basis as the
consolidated financial statements for the period from May 16, 1995 (inception)
to December 31, 1995 and include all adjustments, consisting of only normal
recurring adjustments, necessary for the fair statement of results of the
interim period.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE 3 -- COMPOSITION OF PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Property and equipment, net:
Construction in process................................ $ -- $ 9,875,000
Computers and related equipment........................ 142,000 3,709,000
Furniture and fixtures................................. 9,000 996,000
Test equipment......................................... -- 709,000
Office equipment....................................... 5,000 664,000
Leasehold improvements................................. -- 153,000
-------- -----------
156,000 16,106,000
Less accumulated depreciation and amortization......... (14,000) (304,000)
-------- -----------
$142,000 $ 15,802,000
======== ===========
</TABLE>
The Company leases certain computer equipment under non-cancelable capital
leases. As of December 31, 1995 and September 30, 1996, the total recorded value
of leased equipment, net of accumulated amortization of $3,000 and $50,000,
respectively, was $48,000 and $232,000, respectively.
NOTE 4 -- ADVANCES FROM CONTINGENT STOCK PURCHASE SUBSCRIBERS
During November 1995, investors executed contingent stock subscription
agreements to purchase in aggregate 12,000,000 shares of Series B Common Stock
for $3.00 per share for aggregate gross proceeds in the amount of $36,000,000
and to participate, on a pro rata basis to their respective original contingent
investments, in a warrant pool to purchase an aggregate of 7,975,135 shares of
Series B Common Stock for $3.00 per share. Of this $36,000,000, $20,000,000 was
originally issued in the form of a convertible note payable, which was converted
into a contingent stock subscription agreement. Such warrants are exercisable
from their date of issuance until a date one year following the closing of a
firm commitment underwritten public offering of the Company's Series B Common
Stock with aggregate gross proceeds of at least $20,000,000 and a number of
shares issued which equates to at least 5% of the Company's then outstanding
F-11
<PAGE> 158
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common shares, on a fully diluted basis ("qualified public offering"). If a
warrant holder has not been able to exercise a warrant due to FCC ownership
restrictions (Note 7), the exercise period of the warrant will be extended to 90
days after the date the warrant holder becomes able to exercise the warrant
without violating the FCC restrictions. Pursuant to the respective subscription
agreements, the subscribed stock and warrants were issued in May 1996 upon the
FCC's announcement that NextWave was the winning bidder in the FCC's C-Block
Auction for PCS licenses in 56 basic trading areas, thereby satisfying all
conditions necessary for issuance of such stock and warrants. Debt conversion
expense was charged in the amount of $588,000 upon the issuance of such warrants
to purchase 4,419,584 shares of Series B Common Stock as these warrants were
issued as an inducement to convert the $20,000,000 convertible note payable.
During February 1996 to June 1996, investors executed contingent
subscription agreements to purchase in aggregate 67,555,330 shares of Series B
Common Stock for $3.00 per share for aggregate gross proceeds in the amount of
$202,666,000 and to participate, on a pro rata basis with certain other
investors, in a warrant pool to purchase an aggregate of 5,000,000 shares of
Series B Common Stock for $3.00 per share. Such warrants are exercisable from
their date of issuance until a date one year following the closing of a
qualified public offering. If a warrant holder has not been able to exercise a
warrant due to FCC ownership restrictions (Note 7), the exercise period of the
warrant will be extended to 90 days after the date the warrant holder becomes
able to exercise the warrant without violating the FCC restrictions. Pursuant to
the respective subscription agreements, the subscribed stock and warrants were
issued in May 1996 upon the FCC's announcement that NextWave was the winning
bidder in the FCC's C-Block Auction for PCS licenses in 56 basic trading areas,
thereby satisfying all conditions necessary for issuance of such stock and
warrants. Due to FCC foreign ownership restrictions, $38,912,000 of the
contingent subscription agreements were issued in the form of convertible
promissory notes (Note 5).
During August 1996, a certain investor executed a subscription agreement to
purchase shares of Series B Common Stock for gross proceeds of $10,000,000.
Pursuant to the subscription agreement, the issuance of such subscribed stock is
contingent upon the Company's compliance with FCC foreign ownership
restrictions.
F-12
<PAGE> 159
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- NOTES PAYABLE, CAPITAL LEASES AND NOTES PAYABLE TO RELATED PARTY
<TABLE>
<CAPTION>
ESTIMATED
SEPTEMBER FAIR VALUE AT
DECEMBER 31, 30, SEPTEMBER 30,
1995 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
Convertible note payable, $20,000,000 face value,
non-interest bearing, due on the earlier of 45 days
after the completion of the FCC auction or June 30,
1996, unsecured, net of $824,000 unamortized discount
at December 31, 1995................................. $ 19,176,000 $ -- $ --
Convertible senior subordinated notes, bearing interest
(commencing January 1997) at 2.0% per annum for the
first 2 years and 12.0% per annum for the remaining 4
years, due April 2002, unsecured..................... -- 130,348,000 97,482,000
Convertible promissory notes, bearing interest
(commencing May 1997) at 6.0% per annum, due on
demand if not fully converted by May 1997 or
otherwise due May 2001, unsecured.................... -- 38,912,000 26,273,000
Convertible note payable, $10,000,000 face value,
bearing interest at the prime rate (8.25% at
September 30, 1996), due June 1997, unsecured, net of
$400,000 unamortized discount at September 30,
1996................................................. -- 9,600,000 9,496,000
Convertible note payable to related party (Note 10),
bearing interest at 6.0% per annum, due June 1999,
secured by substantially all of the assets of the
Company.............................................. -- 398,000 317,000
Obligations under capital leases, bearing interest at
9.8% to 13.6% per annum, monthly principal and
interest payments of $3,400 to $8,000 through June
1999................................................. 48,000 230,000 230,000
------------ ----------- -----------
19,224,000 179,488,000 $133,798,000
===========
Less current portion................................... (19,200,000) (48,643,000)
------------ -----------
$ 24,000 $130,845,000
============ ===========
Notes payable to related party (Note 10), bearing
interest at 6.0% per annum, due 30 days after the
completion of the FCC C-Block auction, secured by
substantially all of the assets of the Company....... $ 25,000,000 $ --
============ ===========
</TABLE>
As of December 31, 1995, the $20,000,000 face value unsecured note payable
was convertible into a contingent stock subscription agreement to purchase up to
6,666,666 shares of Series B Common Stock for $3.00 per share (Note 4). In
connection with the $20,000,000 unsecured note payable, the Company issued to
the lender, in lieu of interest and also as an inducement to convert, warrants
to purchase an aggregate of 980,556 shares of Series B Common Stock for $3.00
per share. 500,000 of these warrants expire in November 1998 and 480,556 of
these warrants expire in March 1999. Based on an independent valuation, the
Company recorded a related debt discount of $1,000,000, and this amount was
amortized to interest expense until March 1996 when the lender converted its
entire $20,000,000 note payable into a contingent stock purchase subscription
agreement. Additionally, based on an independent valuation, the Company charged
$150,000 to debt conversion expense in connection with the warrants granted as
an inducement to convert.
The proceeds from the issuances during April 1996 to May 1996 of the
$130,348,000 aggregate principal amount of Convertible Senior Subordinated Notes
Due 2002 (the "Bridge Notes") were subject to restrictions which were removed
upon the formal grant of the C-Block PCS licenses to the Company by the FCC
(Note 1). Each holder of the Bridge Notes may convert all or any portion of such
notes into shares of Series B Common Stock at any time after October 6, 1996 at
a conversion price of $4.00 per share, subject to certain anti-dilution
adjustments. The Company is obligated to prepay the Bridge Notes in connection
with the issuance of certain high-yield debt securities and to issue certain
warrants to the note holders.
F-13
<PAGE> 160
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company prepays such notes prior to various dates ranging from April 1998
to May 1998, the number of shares issuable upon exercise of the warrants shall
be 32,587,000. These warrants expire on various dates ranging from April 2001 to
May 2001. If the Company prepays the Bridge Notes at any time after April 1998,
the notes are subject to a call premium of $0.50 per each $1.00 of outstanding
principal, increasing ratably $0.10 per year until 2002, and no warrants will be
issued.
At September 30, 1996, letters of credit totaling $1,412,000 associated
with certain operating lease arrangements, were issued pursuant to the terms of
a $1,500,000 letter of credit line. Securities, including cash and cash
equivalents subject to such restrictions are classified as restricted cash.
The $38,912,000 aggregate principal amount of convertible promissory notes
were issued to foreign investors and the principal and interest convert
automatically into shares of Series B Common Stock at a price of $3.00 per share
at such time as conversion is permitted under the FCC's rules and regulations
regarding foreign ownership. In the event the convertible promissory notes are
not fully converted by May 1997, each foreign stockholder shall have the right
to demand repayment of the principal balance due under the convertible
promissory notes together with interest due thereon. The convertible promissory
notes otherwise become due in May 2001.
The $10,000,000 note payable is convertible into shares of Series B Common
Stock at $5.00 per share. In connection with the issuance of this note payable,
the Company issued to the lender warrants to purchase 250,000 shares of Series B
Common Stock at $3.00 per share. Such warrants are exercisable for a period of
one year from the consummation of a qualified public offering (Note 4). The
Company recorded a related debt discount of $600,000 based on an independent
valuation, and this amount is being amortized to interest expense over the term
of the note payable.
As of December 31, 1995, $20,000,000 of the $25,000,000 notes payable to
related party (Note 10) was convertible into a contingent stock purchase
subscription agreement to purchase up to 6,666,666 shares of Series B Common
Stock for $3.00 per share (Note 4). The lender had the option to elect to
receive as payment for approximately $398,000 of the $25,000,000 note payable, a
promissory note in like amount which is convertible into 1,019,444 shares of
Series C Common Stock for $0.39 per share, subject to certain anti-dilution
adjustments (Note 7). The remaining $4,602,000 of the $25,000,000 notes payable
was not convertible. During March 1996, the lender converted $15,000,000 of its
original $25,000,000 notes payable into a contingent stock purchase subscription
agreement. Of the $10,000,000 unconverted portion of the original $25,000,000
note payable, $9,602,000 was repaid during June 1996 and $398,000 was converted
into a long-term note payable which is convertible into Series C Common Stock.
At December 31, 1995, as required by the respective note payable and
contingent stock purchase subscription agreements (Note 4), $79,225,000 of
proceeds from the issuance of these instruments had been submitted to the FCC as
a deposit in connection with the auction of licenses by the FCC and are
classified as FCC deposits in the accompanying balance sheet, and the remaining
$875,000 of the proceeds, net of $900,000 of capital contributions (Note 7), was
restricted for the benefit of the holders of the note payable and contingent
stock purchase subscription agreements pending the outcome of the FCC auction
and additional deposit requirements. During May 1996, another $130,834,000 was
paid to the FCC in order to meet the balance of the initial deposit requirement
of $210,059,000 for the original C-Block auction, which concluded during May
1996. During June and July 1996, another $6,985,000 and $20,138,000,
respectively, were submitted to the FCC as deposits in connection with a C-Block
re-auction held during July 1996. During August 1996, the Company deposited
$30,000,000 with the FCC to participate in the D, E and F-Block auctions,
bringing the total amount on deposit with the FCC at September 30, 1996 to
$267,182,000.
F-14
<PAGE> 161
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying values of the Company's notes payable and notes payable to
related party at December 31, 1995 and its capital leases at December 31, 1995
and September 30, 1996 approximate fair value because of the short maturities of
these financial instruments. The fair values of the Company's notes payable and
note payable to related party at September 30, 1996 were estimated based on an
estimated fair value risk-adjusted interest rate of 14.0%. This fair value
risk-adjusted interest rate is based on rates obtained by other comparable
wireless telecommunications companies for debt financing.
NOTE 6 -- INCOME TAXES
The Company has not recorded provisions for income taxes as it has
generated net operating losses for income tax purposes.
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 758,000 $ 6,303,000
Less valuation allowance.................................. (758,000) (6,303,000)
-------- ----------
Net deferred tax asset.......................... $ -- $ --
======== ==========
</TABLE>
At December 31, 1995 and September 30, 1996, the Company provided deferred
tax asset valuation allowances for deferred tax assets which management
determined were not "more likely than not" to be realized. At December 31, 1995
and September 30, 1996, the Company had net operating loss carryforwards for
federal and state income tax reporting purposes in the amounts of approximately
$1,900,000 and $15,800,000, respectively. These federal and state net operating
loss carryforwards expire beginning in 2010 and 2003, respectively. Due to
substantial changes in the Company's ownership, there are annual limitations on
the utilization of its net operating loss carryforwards as prescribed by the
Internal Revenue Code.
NOTE 7 -- CAPITAL STOCK
The authorized capital stock of the Company consists of 500,000,000 shares
of Common Stock, par value $0.0001 per share, of which 60,000,000, 278,980,556,
and 1,019,444 shares have been designated as Series A, B, and C, respectively.
All voting, dividend, conversion, and liquidation rights of the Company's
capital stock as described below are subject to legal and administrative
requirements of the FCC.
The holders of the Series A Common Stock have the right to vote on all
matters that come before the stockholders and shall have the right to vote, as a
class, for a majority of the Board of Directors. The holders of Series B and C
Common Stock have the right, voting together as a class, to elect the remaining
directors but have no other voting rights other than with respect to certain
actions of the Company as defined in its Restated Certificate of Incorporation.
After the tenth anniversary of the date the FCC licenses are granted, each
holder of Series B and C Common Stock shall be entitled to one vote per share on
all matters submitted to a vote of the Company's stockholders.
Holders of the Series A and B Common Stock shall be entitled to
participate, on a pro rata basis, in preference to the holders of the Series C
Common Stock, in dividends when and if declared by the Company's Board of
Directors.
In order to qualify as a small business in the entrepreneur's auction for
PCS licenses, FCC Rules require that, for a period of three years from the date
on which the Company receives its last license, a control group collectively own
at least 25% of the Company's fully diluted equity and persons or entities
meeting certain
F-15
<PAGE> 162
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FCC qualifications own at least 15% of the Company's fully diluted equity. In
order for the Company to remain eligible for the preferences afforded
entrepreneur and small business bidders in the FCC auction (Note 1), a control
group must, during the 10-year term of the PCS license, maintain the right to
vote at least 50.1% of the Company's voting equity and exercise de facto control
over the Company. Minimum total equity requirements may be satisfied by holding
options or warrants. Series A Common Stock held by this control group is subject
to certain anti-dilution provisions in order to maintain these minimum total
equity requirements. These anti-dilution features provide for the Series A
Common Stock (other than 3,000 shares) to convert, at the then applicable
conversion ratio as defined in the Restated Certificate of Incorporation, into
Series B Common Stock and warrants to purchase shares of Series B Common Stock
at the then fair market price. Upon the tenth anniversary of the date on which
the Company receives its last license, all shares of Series A Common Stock shall
automatically convert, at the then applicable conversion ratio, into Series B
Common Stock and warrants to purchase shares of Series B Common Stock at the
then fair market price. Upon conversion of shares of Series A Common Stock, any
accrued but unpaid dividends with respect to the shares of Series A Common Stock
so converted will become payable. At the election of a majority interest of the
holders of Series A Common Stock, Series A shares may be converted as described,
and subject to the limitation set forth above.
Any holder of Series C Common Stock may convert at a ratio of one share of
Series C to one share of Series B, subject to certain anti-dilution provisions,
upon the occurrence of certain events as outlined in the Restated Certificate of
Incorporation. Pursuant to the Company's Restated Certificate of Incorporation,
upon consummation of a qualified initial public offering of the Company's Common
Stock (Note 4), all shares of Series C Common Stock will be automatically
converted into shares of Series B Common Stock at this same conversion ratio.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series B Common Stock shall be
entitled to receive, in advance of the holders of the Series A and C Common
Stock, an amount per share equal to the sum of the price originally paid for
each outstanding share of the Series B Common Stock and an amount equal to
declared but unpaid dividends on such shares. The remaining assets of the
Company, if any, are distributed to the holders of the Series C and A Common
Stock, in that order, in amounts per share equal to the sum of the price
originally paid for each outstanding share of the Series C or A Common Stock and
an amount equal to declared but unpaid dividends on such shares. Thereafter, any
amounts remaining shall be distributed on a pro rata basis among all holders of
Series A, B, and C Common Stock.
Pursuant to the contingent stock purchase subscription agreements (Note 4),
up to $2,000,000 of the related proceeds shall be contributed to the Company's
capital, through forgiveness of the related advance, in order to fund its
operating expenses. As of December 31, 1995, $900,000 of proceeds were
contributed to the Company's capital by the contingent stock purchase
subscribers to fund the Company's operating expenses. During March 1996, an
additional $1,100,000 of proceeds were contributed to the Company's capital by
the contingent stock purchase subscribers to fund the Company's operating
expenses. Additionally, $1,078,000 of interest income earned by investors on the
funds advanced for contingent stock purchase subscriptions while these funds
were restricted was contributed to the Company's capital by the investors.
During April 1996, the Company accepted a $300,000 promissory note as
consideration for the issuance of a contingent stock purchase subscription
agreement (Note 4). The note bears interest at 6.0% per annum and all principal
and accrued interest are due and payable in full during May 1997. The note may
be prepaid at any time without penalty.
F-16
<PAGE> 163
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- EMPLOYEE BENEFIT PLANS, STOCK OPTIONS AND STOCK WARRANTS
EMPLOYEE SAVINGS AND PROFIT SHARING PLAN
Effective July 1, 1995, the Board of Directors of the Company adopted The
NextWave Telecom Inc. 401(k) Retirement and Savings Plan (the "Plan"). Under the
Plan, employees may contribute up to 15% of their salary, subject to annual
limits. The Company may, at its discretion, match a portion of the employee
contributions and make additional contributions based upon earnings. The Company
made no matching contributions during the period from inception to December 31,
1995 or the nine months ended September 30, 1996.
STOCK OPTION PLANS
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its plan. No compensation cost has been
recognized for its employee stock option grants, which are fixed in nature, as
the options have been granted at fair market value as determined by the
Company's Board of Directors. Had compensation cost for the Company's
stock-based compensation plan been determined based on the fair value at the
grant dates for awards under this plan consistent with the method of Financial
Accounting Standards Board Statement No. 123, the Company's net loss and pro
forma net loss per share (unaudited) would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM MAY 16,
1995 (INCEPTION) TO NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- ------------------
<S> <C> <C>
Net loss
As reported..................................... $(1,894,000) $(14,601,000)
Pro forma....................................... $(1,965,000) $(15,635,000)
Pro forma net loss per share (unaudited)
As reported..................................... $ $
Pro forma....................................... $ $
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the period from inception to December 31,
1995 and the nine months ended September 30, 1996, respectively: dividend yield
of 0.0% for both periods; expected volatility of 160.0% and 118.5%; a risk-free
interest rate of 5.6% and 5.9%; and an expected life of 5.0 years for both
periods.
During April 1996, the Company adopted The NextWave Telecom Inc. Amended
and Restated Stock Option Plan (the "Option Plan") under which 20,000,000 shares
of Common Stock were reserved for issuance upon exercise or grant of stock
options, stock bonuses, restricted stock or stock appreciation rights to
employees, directors and consultants of the Company and its affiliates. The
Option Plan amends and restates the Company's 1995 Stock Option Plan, and all
options previously granted as well as all options available for grant under the
1995 Stock Option Plan are subject to the terms and conditions of the Option
Plan. The terms and conditions of previously granted options did not change upon
adoption by the Company of the Option Plan. The Option Plan provides for grants
of incentive stock options to employees (including officers and employee
directors) of the Company and its affiliates, and non-statutory stock options to
employees (including officers and employee directors), non-employee directors
and consultants of the Company and its affiliates. The Option Plan also provides
for the grant of stock bonuses, the sale of restricted stock and the grant of
stock appreciation rights (in tandem with stock option grants or independently)
to employees, directors and consultants of the Company and its affiliates.
F-17
<PAGE> 164
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The terms of stock options granted under the Option Plan will be determined
by the Compensation Committee of the Board of Directors. Stock options may be
granted for periods of up to ten years at a price per share not less than the
fair market value of the Company's Common Stock at the date of grant for
incentive stock options and not less than 85% of the fair market value of the
Company's Common Stock at the date of grant for nonstatutory stock options. The
vesting provisions provide for at least 20% vesting for each year of service.
The terms of stock bonuses and restricted stock granted under the Option
Plan will be determined by the Compensation Committee. The purchase price of
restricted stock will not be less than 85% of the fair market value of the
Common Stock on the date of sale.
The terms of stock appreciation rights granted under the Option Plan will
be determined by the Compensation Committee. Stock appreciation rights may be
granted in tandem with the grant of a stock option or independently. A tandem
stock appreciation right will expire upon the exercise of the corresponding
stock option. If a tandem stock appreciation right is exercised, the
corresponding stock option will expire. Independent stock appreciation rights
may be granted without regard to the grant of a stock option to the recipient.
The appreciation distribution on an exercised stock appreciation right will be
payable in cash or an equivalent number of shares of Common Stock based on the
fair market value on the date of exercise. Through September 30, 1996, no such
stock appreciation rights had been granted.
Employee transactions under the Option Plan during the period from
inception to December 31, 1995 and the nine months ended September 30, 1996, are
summarized as follows:
<TABLE>
<CAPTION>
MAY 16, 1995 (INCEPTION) NINE MONTHS ENDED
TO DECEMBER 31, 1995 SEPTEMBER 30, 1996
---------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EMPLOYEE STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------------------------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
period.......................... -- -- 4,300,000 $ 0.25
Granted........................... 4,300,000 $ 0.25 12,588,655 $ 2.10
Exercised......................... -- -- 17,000 $ 3.00
Forfeited......................... -- -- -- --
--------- ----------
Outstanding at end of period...... 4,300,000 $ 0.25 16,871,655 $ 1.63
========= ==========
Options exercisable at period
end............................. -- 648,000
Weighted-average fair value of
options granted during the
period.......................... $0.23 $1.36
</TABLE>
The following table summarizes information about employee stock options
outstanding at September 30, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICES SEPTEMBER 30, 1996 CONTRACTUAL LIFE EXERCISE PRICE SEPTEMBER 30, 1996 EXERCISE PRICE
--------------------- ------------------ ---------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
0.25 to $0.28........ 11,005,355 9.3 years $ 0.25 648,000 $ 0.26
$3.00................ 2,304,000 9.7 years $ 3.00 -- --
$5.00................ 3,562,300 9.8 years $ 5.00 -- --
---------- -------
16,871,655 648,000
========== =======
</TABLE>
During the period from inception to December 31, 1995 and the nine months
ended September 30, 1996, the Company recorded debt conversion expense, interest
expense and compensation expense related to
F-18
<PAGE> 165
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
non-statutory stock options and stock warrants granted to non-employees in the
aggregate amounts of $176,000 and $1,723,000, respectively. During May 1996, the
Company entered into an agreement with a vendor which provides for the issuance
of options to purchase 200,000 shares of Series B Common Stock for $3.00 per
share as consideration for $1,000,000 of services to be performed. This amount
has been recorded as unearned compensation and is being amortized over the
service period of one year. Also during the nine months ended September 30,
1996, the Company, based on an independent valuation, recorded an additional
$131,000 of unearned compensation related to 505,000 nonstatutory Series B
Common Stock options granted to non-employees. This amount is also being
amortized over the respective service periods.
During August 1996, the Company entered into a ten-year airtime sale
agreement with a customer. The ten-year term starts upon the Company's
commencing PCS network operations in any market and may be renewed at the
election of the customer for an additional five-year term. Pursuant to the
agreement, the Company initially granted the customer warrants to purchase
23,673,284 shares of Series B Common Stock, subject to adjustment for certain
dilutive events, which expire in February 2004. These warrants are initially
exercisable for $4.00 per share; however, this exercise price is subject to
change based on the price of the Company's Series B Common Stock upon
consummation of an initial public offering. Pursuant to FAS 123, due to the
variable nature of the terms of these warrants, it is not possible to reasonably
estimate their fair value. Accordingly, the Company has recorded a deferred
charge equal to the excess of the estimated fair value of the Series B Common
Stock over the exercise price of the warrants ("intrinsic value") of
approximately $25,000,000 at September 30, 1996. The amount of this deferred
charge is subject to change based on changes in the intrinsic value of the
related warrants until the fair value of these warrants is reasonably estimable,
which will occur upon the closing of an initial public offering of the Company's
Series B Common Stock. This deferred charge will be amortized to cost of sales
on a straight-line basis over the ten-year term of the agreement.
The terms of this agreement also provide for the issuance of additional
warrants to purchase shares of the Company's Series B Common Stock up to a
maximum of 12% and 25%, respectively, of the Company's outstanding shares of
capital stock, on a fully diluted basis, upon the consummation of an initial
public offering of the Company's Series B Common Stock and the customer's
periodic purchases of aggregate amounts of minutes of use exceeding certain
incremental thresholds. These warrants will expire seven and one-half and five
years after the date of their issuance, respectively, and are also subject to
anti-dilution adjustments. As the exercise prices of these warrants are also
variable until the consummation of an initial public offering of the Company's
Series B Common Stock and the customer's periodic purchases of aggregate amounts
of minutes of use exceeding certain incremental thresholds, respectively, and
the related fair value is not reasonably estimable, the Company will record
deferred charges equal to the aggregate intrinsic value of the number of
warrants expected to be issued on the date that the Company is committed to
issue such warrants. The deferred charges recorded are subject to change until
the terms of these warrants become fixed and it is possible to reasonably
estimate the warrants' fair value. The deferred charges will be amortized to
cost of sales on a straight-line basis over the remaining term of the agreement.
Pursuant to this agreement, in the event of certain mergers or sales of assets
of the Company, the other entity must enter into an agreement with the customer
to maintain all of the terms of the customer's warrants, or, if only cash
proceeds are to be received by the Company in such merger or sale of assets, the
customer is, subject to certain conditions, entitled to receive a cash payment
equal to up to approximately 2% of the market value of the capital stock of the
Company on a fully diluted basis.
Also during the nine months ended September 30, 1996, the Company, based on
an independent valuation, recorded a deferred charge in the amount of $211,000
related to warrants to purchase 100,000 shares of Series B Common Stock for
$4.00 per share granted to an outside consultant for services performed in
connection with the airtime sale agreement.
F-19
<PAGE> 166
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-employee transactions under the Option Plan, including warrants issued
in connection with financing arrangements, during the periods from inception to
December 31, 1995 and the nine months ended September 30, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
MAY 16, 1995 (INCEPTION)
NINE MONTHS ENDED
TO DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------------ ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NON-EMPLOYEE STOCK OPTIONS AND WARRANTS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------------------------------ ------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period........ -- -- 500,000 $ 3.00
Granted................................... 500,000 $ 3.00 38,914,755 $ 3.54
Exercised................................. -- -- -- --
Forfeited................................. -- -- -- --
------- ---------
Outstanding at end of period.............. 500,000 $ 3.00 39,414,755 $ 3.54
======= =========
Options and warrants exercisable at
period end............................ 500,000 14,836,471
Weighted-average fair value of options and
warrants granted during the period based
on an independent valuation............. $0.17 $0.69
</TABLE>
The following table summarizes information about non-employee stock options
and warrants outstanding at September 30, 1996:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE
------------------------------------------------------ -----------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICES SEPTEMBER 30, 1996 CONTRACTUAL LIFE EXERCISE PRICE SEPTEMBER 30, 1996 EXERCISE PRICE
----------------- ------------------ ---------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
$0.25............ 971,667 5.5 years $ 0.25 466,667 $ 0.25
$3.00-$4.00...... 38,443,088 5.2 years $ 3.62 14,369,804 $ 3.01
--------- ---------
39,414,755 14,836,471
========= =========
</TABLE>
F-20
<PAGE> 167
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- COMMITMENTS
The Company leases office space and equipment under various operating and
capital lease arrangements with terms ranging from one to ten years. Rent
expense for the period from May 16, 1995 (inception) to December 31, 1995 and
for the nine months ended September 30, 1996 was $19,000 and $453,000,
respectively. Future minimum rental commitments under non-cancelable operating
and capital leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
----------- --------
<S> <C> <C>
Three months ending December 31, 1996......................... $ 619,000 $ 36,000
Year ending December 31, 1997................................. 2,404,000 139,000
Year ending December 31, 1998................................. 2,735,000 68,000
Year ending December 31, 1999................................. 2,350,000 20,000
Year ending December 31, 2000................................. 2,085,000 --
Year ending December 31, 2001................................. 1,531,000 --
Thereafter.................................................... 3,918,000 --
------- ------
$15,642,000 263,000
=======
Less amount representing interest (33,000)
------
$230,000
======
</TABLE>
NOTE 10 -- CERTAIN RELATED PARTY TRANSACTIONS
During 1995, the Company retained the services of a consulting firm, the
president and founder of which is a director and Series A Common Stockholder of
the Company. During the period from inception to December 31, 1995 and the nine
months ended September 30, 1996, the Company recorded consulting expenses of
$120,000 and $186,000, respectively, related to the services received from this
firm and had related accounts payable of $93,000 and $0 at December 31, 1995 and
September 30, 1996, respectively.
During November 1995, the Company received an advance related to a
contingent stock purchase subscription agreement in the amount of $5,000,000
(Note 4) and issued notes payable in the aggregate amount of $25,000,000 (Note
5) to a certain investor, a director of which is also a director and Series A
Common Stockholder of the Company. The full amount of the notes payable remained
outstanding as of December 31, 1995. During the period from inception to
December 31, 1995 and the nine months ended September 30, 1996, the Company
recorded interest expense of $124,000 and $484,000, respectively, related to the
notes payable and had related interest payable of $124,000 and $308,000 at
December 31, 1995 and September 30, 1996, respectively. During March 1996, the
investor converted $15,000,000 of the $25,000,000 note payable into a contingent
stock purchase subscription agreement (Note 5). During June 1996, $9,602,000 of
the $10,000,000 unconverted portion was repaid with the remaining $398,000
converted into a long-term note payable, which is convertible into Series C
Common Stock (Note 5). During November 1995, the Company also entered into an
equipment requirements agreement with this same stockholder pursuant to which
the stockholder will supply certain infrastructure equipment to the Company.
Pursuant to the terms of the agreement, the Company has committed to purchase
from the stockholder, at prices to be negotiated, certain infrastructure
equipment. The Company has also agreed to utilize and implement certain
technology of the stockholder and has a further obligation to purchase certain
additional infrastructure equipment, at prices to be negotiated, for a period of
five years from the effective date of the agreement. Additionally, during the
nine months ended September 30, 1996, the Company recorded expenses of $142,000
related to services performed by this stockholder in connection with the
planning and design of the Company's network, and had related accounts payable
of $142,000 at September 30, 1996.
F-21
<PAGE> 168
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the period from January through April 1996, the Company performed
consulting services for another company, the president and chief executive
officer of which is the father of one of the Company's employees, who is the
majority stockholder of another company that is a Series A Common Stockholder of
the Company. During the nine months ended September 30, 1996, the Company
recorded consulting revenues and consulting costs related to this agreement in
the amounts of $1,914,000 and $1,832,000, respectively, and had no related
accounts payable at September 30, 1996.
During May 1996, the company issued a $135,000 loan to an officer of the
Company. The loan bears interest at 6.0% per annum and matures on the earlier of
January 15, 1998 or termination of employment, except that the officer is
obligated to apply any future bonus amounts, net of applicable taxes, to
repayment of the loan.
During May 1996, in connection with the sale of Series A Common Stock to
founders, the Company accepted promissory notes bearing interest at 6.0% per
annum in the aggregate amount of $2,510,000. The principal balance and all
accrued interest are due and payable in full on October 5, 1997. These notes may
be prepaid at any time without penalty and are secured by the shares of Series A
Common Stock for which they were issued.
During May 1996, the Company entered into an agreement with a vendor, a
shareholder of which is an officer of the Company, which provides for the
issuance of options to purchase 200,000 shares of Series B Common Stock at $3.00
per share as consideration for $1,000,000 of services to be performed.
NOTE 11 -- SUBSEQUENT EVENTS
In October 1996, the Company entered into a subscription agreement with a
vendor, pursuant to which the Company issued a convertible promissory note to
the vendor in the principal amount of $50,000,000 (the "Note") of which
$35,000,000 was released to the Company in January 1997 when the Company's
C-Block licenses were granted (Note 1), with the remaining proceeds to be
released from escrow upon the closing of an initial public offering of Series B
Common Stock. The Note and accrued interest thereon, at a rate of 14% per annum,
will automatically convert into shares of Series B Common Stock at a conversion
price of $5.00 per share (subject to certain anti-dilution adjustments) upon the
later of the closing of an initial public offering of Series B Common Stock or
the early termination or expiration of the waiting periods under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 ("HSR Act"). The Note matures June
1997 if not previously converted. The Company also entered into a strategic
supply and development agreement with this vendor, pursuant to which the vendor
has agreed to supply and finance the purchase by the Company of up to
$1,000,000,000 of PCS infrastructure equipment and associated ancillary
services, subject to certain conditions. In connection with this agreement, the
vendor has made a binding commitment to provide the Company with a vendor credit
facility for 100% of the purchase price of PCS infrastructure equipment and
services from the vendor in certain markets pursuant to one or more vendor
supply contracts to be entered into pursuant to the agreement, up to an
aggregate of $245,000,000, subject to the terms and conditions set forth
therein. In addition, under this agreement, the vendor would have the option to
provide a vendor financing facility to finance the purchase of up to an
additional $755,000,000 in PCS infrastructure equipment and services. Such
option would commence in June 1998 and continue until December 2002. In
connection with the strategic supply and development agreement, the Company,
contingent upon conversion of the Note, has committed to make certain research
and development funding payments to the vendor in the amount of $8,000,000. In
the event that the price per share of the Series B Common Stock in the initial
public offering of Series B Common Stock exceeds $8.00 (calculated by
subtracting the value of the contingent transfer right from the price per unit
in the initial public offering of Series B Common Stock), such $8,000,000 will
be payable in two equal installments in October 1997 and October 1998. In the
event the price per share of the Series B Common Stock in the initial public
offering of Series B Common Stock is less than $7.00 (calculated
F-22
<PAGE> 169
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by subtracting the value of the contingent transfer right from the price per
unit in the initial public offering of Series B Common Stock), such amount would
be increased pursuant to a formula based on the public offering price, up to an
aggregate of $12,000,000, and, subject to certain conditions, payable in three
installments over three years.
In November 1996, a Series B Common Stockholder of the Company loaned the
Company $18,000,000, collateralized by funds on deposit with the FCC related to
the D, E and F-Block auctions. The loan bore interest at 9.6% per annum and
matured on the earlier of thirty days from the closing of an initial public
offering of Series B Common Stock or May 1997. During February 1997, $16,525,000
of FCC deposits were refunded to the Company and this loan was repaid in full.
In November 1996, the Company's letter of credit line (Note 5) was
increased to $5,000,000.
In November 1996, the Company and a vendor signed a procurement agreement,
pursuant to which the Company has agreed to purchase, and the vendor has agreed
to finance and supply, up to $200,000,000 of PCS infrastructure equipment for
deployment in certain of the Company's markets. The procurement agreement also
provides that the vendor will have the right to supply equipment for certain
other markets, up to an aggregate of $1,000,000,000, subject to the provision by
the vendor of 100% financing for such purchases. In connection with the
procurement agreement, the Company entered into a warrant purchase agreement
with the vendor. Under the warrant agreement, the Company granted the vendor
warrants to purchase the number of shares of Series B Common Stock equal to
$10,000,000, divided by the price per share attributable to the Series B Common
Stock included in certain units issued by the Company in an initial public
offering of the Company's Series B Common Stock (the "Common Stock Price"), at
an exercise price equal to the Common Stock Price, subject to adjustment for
certain anti-dilution events. These warrants may not be exercised until the
earlier to occur of (i) December 31, 1997, or (ii) the 181st day after the
closing of an initial public offering of the Company's Series B Common Stock.
The warrants expire on the earlier to occur of (i) June 30, 2002, or (ii) the
fifth anniversary of the closing of an initial public offering of the Company's
Series B Common Stock. In January 1997 the Company recorded the $6,676,000 fair
value of these warrants, based on an independent appraisal.
In November 1996, the Company entered into a supply agreement with a vendor
which provides for vendor financing for the Company for 150% of the purchase
price of PCS infrastructure equipment and services, subject to certain
conditions, up to an aggregate of $1,200,000,000. The supply agreement provides
for the Company to purchase up to $300,000,000 in equipment, assuming successful
completion of a market trial of the vendor's equipment in a certain market.
After $700,000,000 of loans have been drawn down by the Company under the
vendor's credit facility, additional financing will become available subject to
the Company raising a certain target level of capital. In January 1997, the
Company and this vendor entered into a stock pledge agreement, pursuant to which
the Company pledged all of the issued and outstanding capital stock of NextWave
Personal Communications Inc. to this vendor as collateral for the repayment by
the Company of amounts to be advanced previously by this vendor. Pursuant to the
loan agreement with the vendor, the Company agreed not to permit or create any
liens on the assets of NextWave Personal Communications Inc. or allow NextWave
Personal Communications Inc. to become obligated with respect to any
indebtedness other than liens or indebtedness in connection with the C-Block
payment terms provided by the FCC in connection with the grant of the Company's
C-Block PCS licenses (the "C-Block Payment Terms"). The Company also agreed that
NextWave Personal Communications Inc. will not transfer, encumber or cause any
liens or encumbrances to attach to the capital stock of NextWave Personal
Communications Inc. or the Company's C-Block PCS licenses, except as otherwise
provided by the C-Block Payment Terms. Finally, the Company agreed to cause
NextWave Power Partners to take all steps necessary to transfer any D, E and
F-Block PCS licenses finally awarded to NextWave Power Partners to NextWave
Personal Communications Inc. The stock pledge will be released upon payment of
all obligations under the loan agreement with the vendor.
F-23
<PAGE> 170
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1996, the Company entered into a master lease agreement
providing for a $250,000,000 equipment lease facility to be used for the
purchase of switching equipment. Under the lease facility, $150,000,000 can be
drawn down during the first year and the additional $100,000,000 may be drawn
down in future periods subject to the Company meeting certain financial and
operational milestones. In connection with the master lease agreement, in
November 1996, the Company granted the leasing company warrants to purchase
1,500,000 shares of Series B Common Stock at an exercise price equal to the
initial public offering price of the Series B Common Stock, subject to
adjustment for certain anti-dilution events. These warrants shall vest from time
to time as follows: the leasing company shall have the right to exercise the
warrant to purchase that number of shares of Series B Common Stock equal to 1%
of each progress payment, as defined in the master lease agreement, provided,
however, that the leasing company shall vest in the right to purchase all
1,500,000 shares upon the earlier to occur of (i) December 31, 1997, or (ii) the
date upon which payments made by the Company pursuant to the master lease
agreement equal $150,000,000. The warrants expire on various dates in 2002. As
the variable terms of these warrants preclude the reasonable estimation of their
fair value, the Company will record the aggregate intrinsic value of the
warrants until such time as the warrants' terms are fixed and their aggregate
fair value can be reasonably estimated and recorded. Based on the terms of these
warrants, their exercise price is equal to the initial public offering price of
the Company's Series B Common Stock, which is estimated to exceed its current
fair value, and, therefore, they have no intrinsic value.
In November 1996, the Company executed a purchase and supply agreement with
a vendor. Pursuant to the five-year agreement, subject to completion of the
initial public offering of Series B Common Stock, the vendor will supply and
finance up to $50,000,000 worth of products and services such as antennas, test
equipment and engineering services. The Company will purchase 40% of the
products and services within the first two years of the term of this agreement
and 20% over each of the following three years, subject to changes resulting
from delays in the Company's build-out of its PCS networks for reasons beyond
the Company's control. The Company may make monthly draw downs under the
facility and amounts borrowed under the agreement will bear interest at the
prime rate plus an applicable margin for the first three years of the term of
the agreement and at the prime rate for the remaining two years of the term.
In December 1996, the Company entered into a promissory note agreement with
a vendor, which provides for financing of services of up to $10,000,000. The
note, which matures on March 31, 1997 and bears interest at the prime rate, as
defined, plus two percent, was issued in consideration for trade accounts
payable. The Company had outstanding accounts payable to this vendor in the
amount of $3,200,000 at September 30, 1996.
In January 1997, a Series B Common Stockholder of the Company loaned the
Company $25,000,000. The loan bears interest at 9.7% and will mature on the
earlier of July 1997 or thirty days from the closing of an initial public
offering of the Company's Series B Common Stock.
During January 1997, the FCC granted the Company C-Block PCS licenses in 63
basic trading areas. Following the FCC's notice of grant, the Company made the
final required downpayment for the C-Block auctions in the amount of
$237,183,000 (Note 1).
In January 1997, the D, E, and F-Block auctions ended with the FCC naming
the Company the winning bidder licenses in 32 basic trading areas with net bids
totaling $128,972,000. These licenses required downpayments of $13,475,000,
resulting in a refund of $16,525,000 received by the Company during February
1997. Upon the grant of these licenses the Company will make a final downpayment
of $16,945,000 (Note 1).
From October 1996 to January 1997, the Company issued 3,730,000 shares of
Series B Common Stock for $5.00 per share to certain investors for aggregate
consideration of $18,650,000.
F-24
<PAGE> 171
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
From October 1996 to January 1997, the Company issued promissory notes in
the aggregate amount of $19,670,000.
NOTE 12 -- UNAUDITED PRO FORMA BALANCE SHEET INFORMATION
The following schedule sets forth the Company's actual and unaudited pro
forma balance sheet as of September 30, 1996. The unaudited pro forma balance
sheet as of September 30, 1996 is based on the actual balance sheet as of
September 30, 1996, adjusted to give pro forma effect to: (i) the remaining
downpayment paid to the FCC during January 1997 related to the grant of C-Block
PCS licenses (Notes 1 and 11) to the Company for the 63 basic trading areas in
which the Company was named high bidder, (ii) significant financing transactions
entered into by the Company subsequent to September 30, 1996, (iii) the grant of
all FCC licenses to the Company for which it was named high bidder in both
C-Block auctions based on the terms of the license award, (iv) the remaining
downpayment required to be made to the FCC related to the grant of D, E and
F-Block PCS licenses to the Company (Notes 1 and 11) for the 32 basic trading
areas in which the Company was named high bidder, (v) the expected award of all
FCC licenses to the Company for which it was named high bidder in the D, E and
F-Block auctions based on the anticipated terms of the license award, and (vi)
the proposed Equity and Notes offerings (the "Offerings").
The unaudited pro forma balance sheet information is not necessarily
indicative of: (i) the financial position of the Company as of September 30,
1996 that would actually have existed if the events described had occurred on
September 30, 1996, (ii) the financial position that may be obtained in the
future or (iii) all future significant non-cash charges that may result from
various warrants issued by the Company to third parties.
F-25
<PAGE> 172
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UNAUDITED
ADJUSTMENTS
FOR FCC
UNAUDITED LICENSE GRANT
ACTUAL UNAUDITED PRO FORMA TRANSACTIONS
SEPTEMBER 30, PRO FORMA SEPTEMBER 30, EXPECTED TO BE
1996 ADJUSTMENTS 1996 CONSUMMATED
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 26,102,000 $ 54,670,000(1) $ 34,112,000 $(16,945,000)(11)
18,650,000(2)
16,525,000(3)
25,000,000(4)
(106,835,000)(5)
Other current assets.................................. 1,476,000 1,476,000
------------ -------------- -------------- ------------
Total current assets............................. 27,578,000 8,010,000 35,588,000 (16,945,000)
Property and equipment, net............................ 15,802,000 15,802,000
Restricted cash........................................ 131,760,000 15,000,000(1) 16,412,000
(130,348,000)(5)
FCC license deposits................................... 267,182,000 (16,525,000)(3) 13,475,000 (13,475,000)(11)
(237,182,000)(5)
Capitalized FCC licenses............................... -- 474,365,000(5) 3,204,822,000 30,420,000(11)
2,730,457,000(6) 68,556,000(12)
Other assets........................................... 8,788,000 6,676,000(8) 15,464,000
------------ -------------- -------------- ------------
$451,110,000 $2,850,453,000 $3,301,563,000 $ 68,556,000
m ============ ============== ============== ============
LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 8,643,000 $ (3,200,000)(10) $ 5,443,000 $
Accrued liabilities................................... 6,856,000 6,856,000
Advances from contingent stock purchase subscribers... 10,000,000 10,000,000
Current portion of notes payable, convertible notes
payable and capital leases.......................... 48,643,000 69,670,000(1) 146,513,000
25,000,000(4)
3,200,000(10)
------------ -------------- -------------- ------------
Total current liabilities........................ 74,142,000 94,670,000 168,812,000 --
Convertible notes payable and capital leases, less current
portion............................................... 130,845,000 130,845,000
Senior notes payable...................................
Senior discount notes payable..........................
U.S. Government financing.............................. -- 2,730,457,000(6) 2,730,457,000 68,556,000(12)
------------ -------------- -------------- ------------
Total liabilities................................ 204,987,000 2,825,127,000 3,030,114,000 68,556,000
------------ -------------- -------------- ------------
Series C Common Stock, mandatorily redeemable, $.0001 par
value, shares authorized: no shares issued or
outstanding actual or pro forma; shares issued and
outstanding as adjusted...............................
Commitments (Note 9)
Stockholders' equity:
Common stock, $0.0001 par value, 500,000,000 shares
authorized:
Series A, 60,000,000 shares designated: 47,396,437 shares
issued and outstanding actual; 36,245,031 pro forma;
3,000 shares issued and outstanding as adjusted..... 5,000 (1,000)(7) 4,000
Series B, 278,980,556 shares designated: 99,898,262
shares issued and outstanding actual; 125,931,074 pro
forma; shares issued and outstanding as adjusted.. 10,000 2,000(7) 12,000
Series C, 1,019,444 shares designated: no shares issued
or outstanding actual, pro forma or as adjusted..... -- --
Paid-in capital....................................... 291,406,000 18,650,000(2) 331,731,000
(1,000)(7)
6,676,000(8)
15,000,000(9)
Common stock notes receivable......................... (2,810,000) (2,810,000)
Deferred charges and unearned compensation............ (25,993,000) (15,000,000)(9) (40,993,000)
Deficit accumulated during development stage.......... (16,495,000) (16,495,000)
------------ -------------- -------------- ------------
Total stockholders' equity....................... 246,123,000 25,326,000 271,449,000 --
------------ -------------- -------------- ------------
$451,110,000 $2,850,453,000 $3,301,563,000 $ 68,556,000
============ ============== ============== ============
<CAPTION>
UNAUDITED AS
ADJUSTED FOR UNAUDITED
FCC LICENSE AS ADJUSTED
GRANT UNAUDITED FOR OFFERING
TRANSACTIONS ADJUSTMENTS TRANSACTIONS
EXPECTED TO BE FOR OFFERING EXPECTED TO BE
CONSUMMATED, TRANSACTIONS CONSUMMATED,
SEPTEMBER 30, EXPECTED TO BE SEPTEMBER 30,
1996 CONSUMMATED 1996
-------------- -------------- --------------
<S> <C<C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 17,167,000
Other current assets..................................... 1,476,000
-------------- -------------- --------------
Total current assets................................ 18,643,000
Property and equipment, net............................... 15,802,000
Restricted cash........................................... 16,412,000
FCC license deposits...................................... --
Capitalized FCC licenses.................................. 3,303,798,000
Other assets.............................................. 15,464,000
-------------- -------------- --------------
$3,370,119,000
============== ============== ==============
LIABILITIES, MANDATORILY REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 5,443,000
Accrued liabilities...................................... 6,856,000
Advances from contingent stock purchase subscribers...... 10,000,000
Current portion of notes payable, convertible notes
payable and capital leases............................. 146,513,000
-------------- -------------- --------------
Total current liabilities........................... 168,812,000
Convertible notes payable and capital leases, less current
portion.................................................. 130,845,000
Senior notes payable......................................
Senior discount notes payable.............................
U.S. Government financing................................. 2,799,013,000
-------------- -------------- --------------
Total liabilities................................... 3,098,670,000
-------------- -------------- --------------
Series C Common Stock, mandatorily redeemable, $.0001 par
value, shares authorized: no shares issued or
outstanding actual or pro forma; shares issued and
outstanding as adjusted..................................
Commitments (Note 9)
Stockholders' equity:
Common stock, $0.0001 par value, 500,000,000 shares
authorized:
Series A, 60,000,000 shares designated: 47,396,437 shares
issued and outstanding actual; 36,245,031 pro forma;
3,000 shares issued and outstanding as adjusted........ 4,000
Series B, 278,980,556 shares designated: 99,898,262
shares issued and outstanding actual; 125,931,074 pro
forma; shares issued and outstanding as adjusted.... 12,000
Series C, 1,019,444 shares designated: no shares issued
or outstanding actual, pro forma or as adjusted........ --
Paid-in capital.......................................... 331,731,000
Common stock notes receivable............................ (2,810,000)
Deferred charges and unearned compensation............... (40,993,000)
Deficit accumulated during development stage............. (16,495,000)
-------------- -------------- --------------
Total stockholders' equity.......................... 271,449,000
-------------- -------------- --------------
$3,370,119,000
============== ============== ==============
</TABLE>
F-26
<PAGE> 173
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA ADJUSTMENTS
(1) To reflect the issuances subsequent to September 30, 1996 of promissory
notes in the aggregate amount of $69,670,000, including $15,000,000 which is
restricted as to withdrawal until the closing of an initial public offering of
Series B Common Stock.
(2) To reflect the issuance of 3,730,000 shares of Series B Common Stock
for $5.00 per share to certain investors subsequent to September 30, 1996 for
aggregate consideration of $18,650,000.
(3) To reflect the net effect of the receipt of a loan in the amount of
$18,000,000, collateralized by funds on deposit with the FCC related to the D, E
and F-Block auctions, during November 1996 from a Series B Common Stockholder,
the February 1997 receipt of the refund of such deposit in the amount of
$16,525,000 and the immediate repayment of the full $18,000,000 loan.
(4) To reflect the receipt of a loan during January 1997 from a certain
vendor and Series B Common Stockholder in the amount of $25,000,000, which will
be repaid with proceeds from the Offerings.
(5) To reflect payment during January 1997 of the remaining FCC license
downpayment, related to the C-Block auctions which closed during May 1996 and
July 1996, in the aggregate amount of $237,183,000 and application of the entire
downpayment to capitalized FCC licenses.
(6) To reflect capitalization as an intangible asset of FCC licenses for
the C-Block granted during January 1997, subject to compliance with FCC foreign
ownership regulations within six months from date of grant (Note 1), and U.S.
Government financing payable to the FCC with a fixed stated interest rate of
6.50% (net of the aggregate downpayments of $474,365,000 and without any related
accrued interest). The amount of U.S. Government financing recorded is based on
the aggregate bid for the FCC licenses of $4,743,648,000 as adjusted, pursuant
to Accounting Principles Board Opinion No. 21, to reflect the fair value of the
debt based on an estimated fair value risk-adjusted market interest rate of
14.0%. The Company has estimated this fair value rate of interest based on
risk-adjusted rates obtained by other comparable companies in the wireless
telecommunications industry for debt financing. The amount of the intangible
asset is based on the fair value of the FCC debt plus the aggregate downpayments
in the amount of $474,365,000. Capitalized FCC licenses will be amortized over
their forty-year estimated useful lives, beginning on commencement of PCS
services in the respective markets for which the related PCS licenses were
granted.
(7) To reflect the conversion of 11,151,406 shares of Series A Common Stock
into 22,302,812 shares of Series B Common Stock upon the occurrence of certain
dilutive events.
(8) To reflect the issuance of warrants with an aggregate fair value, as
determined by an independent appraiser, of $6,676,000 granted to an equipment
vendor in connection with an agreement to provide PCS infrastructure equipment
and services. The number of such warrants will be equal to $10,000,000 divided
by the price per share of Series B Common Stock issued in the initial public
offering, subject to adjustment for certain anti-dilution events. (Note 11).
(9) To reflect warrants issued to a customer in connection with an airtime
agreement (Note 8).
(10) To reflect the execution of a promissory note with a vendor in
consideration for trade accounts payable in the amount of approximately
$3,200,000 at September 30, 1996.
UNAUDITED ADJUSTMENTS FOR FCC LICENSE GRANT TRANSACTIONS EXPECTED TO BE
CONSUMMATED.
(11) To reflect application of the FCC deposits related to the D, E, and
F-Block auctions against the FCC license debt and payment of the remaining FCC
license downpayments related to such auctions.
F-27
<PAGE> 174
NEXTWAVE TELECOM INC.
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) To reflect capitalization as an intangible asset of FCC licenses for
the D, E and F-Block auctions expected to be awarded and related U.S. Government
financing with a fixed stated interest rate equal to the 10-year Treasury Note
rate (6.50% at December 31, 1996) at the date of award (net of the aggregate
downpayments of $30,420,000 and without any related accrued interest). The
amount of U.S. Government financing is recorded based on the aggregate bid for
the FCC licenses of $128,972,000 as adjusted, pursuant to Accounting Principles
Board Opinion No. 21, to reflect the fair value of the debt based on an
estimated fair value risk-adjusted market interest rate of 14.0%. The Company
has estimated this fair value rate of interest based on risk-adjusted rates
obtained by other comparable companies in the wireless telecommunications
industry for debt financing. The amount of the intangible asset is based on the
fair value of the FCC debt plus the aggregate downpayments of $30,420,000.
Capitalized FCC licenses will be amortized over their forty-year estimated
useful lives, beginning on commencement of PCS services in the respective
markets for which the related PCS licenses were granted.
UNAUDITED ADJUSTMENTS FOR OFFERING TRANSACTIONS EXPECTED TO BE CONSUMMATED
(13) To reflect the issuance of Units consisting of one share of
Series B Common Stock and one Series B Common Stock contingent transfer right at
an aggregate price of $ per share, net of estimated underwriting discounts
of % and issuance costs of $ , resulting in net proceeds of
$ from the initial public Equity Offering.
(14) To reflect the conversion of Series A Common Stock (other than 3,000
shares) into shares of Series B Common Stock and shares of
Series C Common Stock.
(15) To reflect the issuance of: (i) units consisting of one
warrant to purchase Series B Common Stock and $ principal amount of
Senior Notes Payable and (ii) units consisting of one warrant to
purchase Series B Common Stock and $ principal amount of Senior
Discount Notes Payable, for aggregate gross proceeds of $ , $
of which is to be restricted for the payment of interest on the notes. For
purposes of this unaudited pro forma presentation, $ of the proceeds
from this units offering have been allocated to the warrants based on the
estimated relative fair values of the notes and warrants. In addition,
underwriting discounts at % of gross proceeds and other issuance costs of
$ are estimated and have been reflected herein. The actual fair market
value of these warrants at their grant date may vary from this estimate,
resulting in different amounts being allocated to paid-in capital as well as
different interest charges on a prospective basis.
(16) To reflect the exchange of $ aggregate principal amount of
Bridge Notes for equal amounts of units including Senior Notes and warrants and
Senior Discount Notes and warrants, including related non-cash charges to
operations in the amount of $ , assuming an estimated fair value of the
warrants issued of $ . Additionally, this adjustment reflects a %
($ ) fee payable by the Company at the closing of the notes offering to
the Bridge Note holders consenting to exchange of the Bridge Notes as well as
the repayment of the $ outstanding balance of the Bridge Notes which
will become due and payable upon the closing of the Debt Offering. The actual
fair market value of these warrants at their grant date may vary from this
estimate, resulting in different amounts being allocated to paid-in capital as
well as different interest charges on a prospective basis.
F-28
<PAGE> 175
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 16
Use of Proceeds........................ 33
Dividend Policy........................ 33
Dilution............................... 34
Capitalization......................... 35
Selected Consolidated Financial Data... 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 38
The Wireless Telecommunications
Industry............................. 43
Business............................... 46
Regulation of The Wireless
Telecommunications Industry.......... 70
Management............................. 79
Principal Stockholders................. 89
Certain Relationships and Related
Transactions......................... 92
Description of the Units............... 93
Description of the Notes............... 93
Description of the Warrants............ 120
Certain Federal Income Tax
Considerations....................... 122
Description of Capital Stock........... 125
Certain Indebtedness................... 136
Shares Eligible for Future Sale........ 138
Underwriting........................... 139
Legal Matters.......................... 140
Experts................................ 140
Additional Information................. 141
Glossary of Selected Terms............. 142
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE
EQUITY OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE UNITS, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS 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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$
LOGO
NEXTWAVE TELECOM INC.
SENIOR NOTE UNITS
% SENIOR NOTES DUE 2007 AND
[ ] WARRANTS TO PURCHASE ONE SHARE OF SERIES B COMMON STOCK
SENIOR DISCOUNT NOTE UNITS
% SENIOR DISCOUNT NOTES DUE 2007 AND
[ ] WARRANTS TO PURCHASE ONE SHARE OF SERIES B COMMON STOCK
------------------------
PROSPECTUS
------------------------
CIBC WOOD GUNDY SECURITIES CORP.
SMITH BARNEY INC.
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
ING BARINGS
OPPENHEIMER & CO., INC.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 176
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of expenses incurred in connection
with this Registration Statement. All such expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $137,932
NASD fee.................................................................. 30,500
NASDAQ NMS listing fee.................................................... *
Legal fees and expenses................................................... *
Accounting fees and expenses.............................................. *
Printing and engraving expenses........................................... *
Blue Sky fees and expenses................................................ *
Miscellaneous expenses.................................................... *
-------
TOTAL........................................................... *
=======
</TABLE>
- ---------------
* To be filed by amendment.
All of the above items are estimates except the Securities and Exchange
Commission registration fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 145 of the Delaware General Corporation Law, each of the
Company Wireless have broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended.
The Company's Amended and Restated Certificate of Incorporation and Bylaws
and Wireless' Certificate of Incorporation and Bylaws (the "Indemnification
Provisions") provide for the indemnification of present or former directors and
officers of the Company and Wireless and persons serving as present or former
directors, officers, employees, agents, or trustees of another corporation or
entity at the request of the Company and Wireless (each, an "Indemnified
Party"). The Indemnification Provisions specifically indemnify to the fullest
extent permitted by Delaware law the Indemnified Parties against all expenses,
including counsel fees, incurred in connection with any action, suit, or
proceeding, whether civil, criminal, administrative or investigative. The
Indemnification Provisions require the Company and Wireless to pay for or
reimburse any expenses incurred by an Indemnified Party in reasonable intervals
and in advance of the final disposition of such proceeding provided that the
Indemnified Party undertakes to repay such amount should it be determined
ultimately that he or she is not entitled to indemnification by the Company or
Wireless.
The Indemnification Provisions further provide that the Indemnified Party
may seek a judicial determination of his or her right to indemnification should
the Company or Wireless fail to pay a claim in full within 90 days of its
submission to the Company or Wireless. The Indemnified Party is entitled to
indemnification for all expenses of prosecuting such a claim against the Company
or Wireless if the claim is successful in whole or in part.
The Indemnification Provisions permit the Company and Wireless to present
as a defense to any claim initiated by a director or officer seeking
indemnification that the claimant has not met the standards of conduct which
make it permissible under the Delaware General Corporation Law (or other
applicable law) to indemnify the director or officer for such amount claimed.
Such defense is inapplicable where the claim in question is yet to be
adjudicated and for which the director or officer has entered into the required
undertaking.
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<PAGE> 177
In addition, the Company's Amended and Restated Certificate of
Incorporation and Wireless' Certificate of Incorporation provide that, pursuant
to the Delaware General Corporation Law, their directors shall not be liable for
monetary damages for conduct as a director. These provisions do not eliminate
the duty of care, and in appropriate circumstances equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available under
Delaware law. Furthermore, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company or
Wireless for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. In addition,
each director and officer shall continue to be subject to liability for any act
or omission for which such elimination of liability is not permitted under the
Delaware General Corporation Law.
The Company has entered or will enter into indemnification agreements with
its directors and certain executive officers (each, an "Indemnified Party"). An
Indemnified Party is specifically indemnified and held harmless under such
indemnification agreements for costs and expenses, including without limitation,
damages, judgments, fines, penalties, settlements and costs, attorneys' fees and
disbursements, costs of attachment or similar bonds, and costs of investigation
reasonably incurred in connection with a threatened, pending or completed claim,
action, suit or proceeding by reason of the fact that the Indemnified Party (i)
is or was a director, or officer of the Company; or (ii) is or was serving as a
director, trustee, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise at the request of the
Company. The Company shall not be liable under the indemnification agreements
for any claim to the extent that: (i) the Indemnified Party receives payment
under a valid, enforceable and collectible insurance policy; (ii) the
Indemnified Party is indemnified and actually paid otherwise than pursuant to an
indemnification agreement; (iii) the Indemnified Party is adjudged to be liable
for negligence or misconduct in the performance of his or her duty; (iv) the
Indemnified Party gains in fact any personal profit or advantage to which he or
she is not legally entitled to; (v) the Indemnified Party is required to
disgorge profits from the purchase or sale of securities pursuant to Section
16(b) of the Securities Exchange Act of 1934, as amended; or (vi) the
Indemnified Party brought about or contributed to the claim by his or her
dishonesty so long as it is judicially determined that he or she (a) committed
acts of active and deliberate dishonesty, (b) with actual dishonest purpose and
intent, (c) which acts were material to the claim against the Indemnified Party.
In the event of payment under an indemnification agreement, the Company is
to be subrogated to the extent of such payment to all of the rights of recovery
of the Indemnified Party. The indemnification agreements provide that the
Company will advance the costs and expenses incurred by the Indemnified Party in
advance of final disposition of an action, suit, or proceeding if he or she
undertakes to repay amounts advanced should it be ultimately determined that he
or she is not entitled to be indemnified by the Company. Under the
indemnification agreements, no expenses other than actual judgments or verdicts
may be indemnified without the prior consent of the Company. The indemnification
agreements further provide that an Indemnified Party may seek a judicial
determination of his or her right to indemnification should the Company fail to
pay his or her claim in full within 30 days of its submission to the Company.
The indemnification agreements and provisions for advancing expenses in
such agreements are expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the Delaware General
Corporation Law and the Company's Amended and Restated Certificate of
Incorporation and Bylaws.
The Company maintains insurance policies covering officers and directors
under which the insurers agree to pay, subject to certain exclusions, including
certain violations of securities laws, for any claim made against the directors
and officers of the Company for a wrongful act that they may become legally
obligated to pay or for which the Company is required to indemnify the officers
or directors. The policies have limits of up to $70,000,000 in the aggregate,
subject to retentions of up to $500,000 in the aggregate. The Company believes
that its Certificate of Incorporation and Bylaw provisions, indemnification
agreements and insurance policies are necessary to attract and retain qualified
persons as directors and officers.
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<PAGE> 178
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Series A Common Stock. The Company sold 55,760,000 shares of Series A
Common Stock to 28 investors from November 1995 to May 1, 1996, primarily to the
Company's directors, officers and employees or entities controlled by the
Company's directors, employees or officers. The shares of Series A Common Stock
were sold for a purchase price of $0.25 per share, for an aggregate
consideration of $13,940,000, $11,430,000 of which was paid in cash and
$2,510,000 of which was paid in promissory notes issued by the holders of the
Series A Common Stock to the Company. In connection with the sales of Series A
Common Stock, the Company has relied on an exemption from registration under
Rule 506 promulgated under Regulation D of the Securities Act. The sales of
Series A Common Stock were effected through a private placement solely to a
limited number of the Company's founders, without general solicitation or
advertising and without brokers or placement agents.
Series B Common Stock. On May 6, 1996, the Company consummated the sale of
78,533,836 shares of Series B Common Stock in a private placement to
institutional investors, venture capital firms and a limited number of
individual investors. The shares of Series B Common Stock were sold for $3.00
per share, for an aggregate consideration of $235,601,562, which was paid in
cash, retirement of $15,000,000 and $20,000,000 of indebtedness payable to
QUALCOMM and PECO, respectively, as described below, and satisfaction of certain
commission obligations payable by the Company. Subscriptions were placed in
escrow and released upon the announcement of the winning bidders in the C-Block
Auction. In connection with the private placement of the Series B Common Stock,
the Company also issued an aggregate of 12,975,135 warrants to purchase shares
of Series B Common Stock at an exercise price of $3.00 per share (the "Series B
Warrants"). In addition, the Company also issued $38,912,478 aggregate principal
amount of convertible promissory notes to certain foreign investors, which will
convert automatically into shares of Series B Common Stock at a conversion price
of $3.00 per share upon additional issuances of equity interests by the Company
to domestic investors, thereby permitting additional foreign ownership of the
Company's equity interests under the FCC's rules. The Company has paid
approximately $9,500,000 in fees to placement agents, including principally ING
Barings (U.S.) Incorporated, in connection with the sale of such shares of
Series B Common Stock. In connection with the sales of Series B Common Stock,
Series B Warrants and convertible promissory notes, the Company has relied on an
exemption from registration under Rule 506 promulgated under Regulation D of the
Securities Act. The sales of Series B Common Stock, Series B Warrants and
Convertible Promissory Notes were effected through a private placement to a
limited number of institutional investors, venture capital firms, strategic
investors and other investors without any general solicitation or advertising,
and otherwise in the manner contemplated by Regulation D.
Pursuant to subscription agreements dated as of May 31, 1996, the Company
sold an additional 4,620,300 shares of Series B Common Stock in a private
placement to five investors with close personal ties to the President of the
Company, without any general solicitation or advertising and without brokers or
placement agents. The shares of Series B Common Stock were sold for $5.00 per
share, for an aggregate consideration of $23,101,500. In connection with these
sales of Series B Common Stock, the Company has relied on an exemption from
registration under Rule 506 promulgated under Regulation D of the Securities
Act.
Between November 13, 1996 and January 10, 1997, the Company issued an
aggregate of 3,770,000 shares of Series B Common Stock to two vendors and three
consultants in connection with the execution of network equipment contracts and
the performance of consulting services. In addition, the Company has executed
Subscription Agreements in the aggregate amount of $27 million with one
consultant and one telecommunications vendor. The Company relied upon an
exemption from registration under Section 4(2) of the Securities Act in
connection with these transactions.
Other Convertible Debt. In November 1995, the Company entered into a
convertible loan agreement with QUALCOMM to borrow $25,000,000, of which
$398,000 was convertible into a promissory note which is convertible at $0.39
per share into 1,019,444 shares of Series C Common Stock (which shall become
rights to acquire Series B Common Stock after the Equity Offering). QUALCOMM
exercised its right to convert the portion of the loan into a convertible
promissory note convertible into Series C Common Stock in May 1996, and the
Company issued such note. The Company relied upon an exemption from registration
under Section 4(2) of the Securities Act in connection with the November 1995
issuance of the convertible note,
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<PAGE> 179
and the Company relied upon an exemption from registration under Section 3(a)(9)
of the Securities Act in connection with the issuance of the second convertible
promissory note and the retirement of $15 million of indebtedness in exchange
for Series B Common Stock.
Between October 29, 1996 and January 29, 1996, the Company issued
convertible promissory notes convertible into an aggregate of 16,321,454 shares
of Series B Common Stock to three vendors and their affiliates and one
consultant in connection with the execution of network equipment contracts and
the performance of consulting services. The conversion prices for the shares in
such transactions ranged from $5.00 to $5.50. The Company relied upon an
exemption from registration under Section 4(2) of the Securities Act in
connection with these transactions.
Between November 26, 1996 and January 28, 1997, the Company issued
convertible promissory notes convertible into an aggregate of 1,800,000 shares
of Series B Common Stock at a conversion price of $5.00 per share to three
foreign entities for an aggregate purchase price of $9 million in connection
with the execution of telecommunications services agreements. The Company relied
upon an exemption from registration under Regulation S of the Securities Act in
connection with these transactions.
PECO Note and Warrants. On November 20, 1995, the Company and PECO Energy
Co. ("PECO") entered into a loan agreement pursuant to which the Company
borrowed $20 million and issued 500,000 warrants to purchase shares of Series B
Common Stock at an exercise price of $3.00 per share. The Company relied upon an
exemption from registration under Section 4(2) of the Securities Act in
connection with this transaction. The Company retired $20 million of
indebtedness in exchange for 6,666,666 shares of Series B Common Stock and
warrants to purchase 480,556 shares of Series B Common Stock at an exercise
price of $3.00 per share in May 1996, and relied upon an exemption from
registration under Section 3(a)(9) of the Securities Act in connection with this
transaction.
Bridge Notes. On April 8, 1996, and on subsequent closing dates through
May 22, 1996, the Company issued $130,348,000 aggregate principal amount of
Convertible Senior Subordinated Notes due 2002 (the "Bridge Notes") to a limited
number of institutional investors, venture capital firms and individual
investors, without any general solicitation or advertising. The Company will pay
approximately $2 million in placement agent fees to CIBC/Wood Gundy Securities
Corp. in connection with the placement of the Bridge Notes. In connection with
the sale of the Bridge Notes, the Company has relied on an exemption from
registration under Rule 506 promulgated under Regulation D of the Securities
Act.
Stock Options; Warrants. The Company has granted stock options under the
Amended and Restated Stock Option Plan since its inception. For a description of
these options to employees of the Company, see "Management." The Company relied
upon an exemption from registration under Rule 701 promulgated under Regulation
E of the Securities Act in connection with such transactions. In addition, the
Company issued warrants to purchase 64,113 shares of Series B Common Stock at
$4.00 per share to two parties in connection with financial advisory services
rendered in May, 1996. Between August 22, 1996 and November 1, 1996, the Company
issued warrants to purchase an aggregate of 25,273,284 shares of Series B Common
Stock to one vendor and one reseller customer in connection with the execution
of network equipment contracts and a reseller contract and the performance of
consulting services. In addition, the Company issued a warrant to a vendor the
number of exercisable shares of which is equal to $10 million divided by an
exercise price equal to the Equity Offering price. The Company relied upon an
exemption from registration under Section 4(2) of the Securities Act in
connection with these transactions.
Common Stock of Wireless. On August 1, 1996, Wireless sold 1,000 shares of
Common Stock, par value $.0001 per share, to the Company, for a purchase price
of $1.00 per share. The aggregate consideration paid to Wireless for such shares
was $1,000. Wireless relied upon an exemption from registration under Section
4(2) of the Securities Act in connection with this transaction.
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<PAGE> 180
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.(2)
3.1 Amended and Restated Certificate of Incorporation of the Company.(4)
3.2 Restated Bylaws of the Company, as currently in effect.(4)
3.3 Form of Certificate of Amendment to Restated Certificate of Incorporation relating
to reverse stock split.(4)
3.4 Form of Amended and Restated Certificate of Incorporation to be filed prior to
closing of the Offerings.(4)
3.5 Certificate of Incorporation of Wireless.(2)
3.6 Bylaws of Wireless, as currently in effect.(2)
4.1 Installment Plan Note by the Company in favor of the FCC relating to the C-Block PCS
licenses.(4)
4.2 Security Agreement between the Company and the FCC relating to the C-Block PCS
Licenses.(4)
4.3 Form of Senior Note Indenture, together with form of Senior Note.(2)
4.4 Form of Senior Discount Note Indenture, together with form of Senior Discount
Note.(2)
4.5 Form of Common Stock Certificate.(4)
4.6 Form of CTR Agreement.(4)
4.7 Form of CTR Escrow Agreement.(4)
4.8 Form of CTR Certificate.(4)
4.9 Securities Purchase Agreement dated as of April 9, 1996 between the Company and
purchasers of the Bridge Notes, together with form of Bridge Notes, Warrants and
Registration Rights.(4)
5.1 Opinion of Latham & Watkins re: securities offered.(2)
8.1 Opinion of Latham & Watkins re: tax matters.(2)
10.1 Amended and Restated Stock Option Plan.(4)
10.2 Form of Incentive Stock Option under the Plan.(4)
10.3 1997 Equity Incentive Plan.(4)
10.4 Form of Nonstatutory Stock Option Agreement.(4)
10.5 1997 Employee Stock Purchase Plan of the Company.(4)
10.6 1997 Non-Employee Director Stock Option Plan.(4)
10.7 Promissory Note, together with Stock Pledge Agreement, from Navation, Inc.(4)
10.8 Promissory Note, together with Stock Pledge Agreement, from Freedom Mobility Inc.(4)
10.9 Amended and Restated Series A Shareholders Agreement between the Company and the
holders of Series A Common Stock dated as of November 15, 1995.(4)
10.10 Form of Convertible Promissory Note issued to foreign investors convertible into
Series B Common Stock.(4)
10.11 Form of Warrants to Purchase Series B Common Stock.(4)
10.12 Registration Rights with purchasers of Series B Common Stock, Warrants and
Convertible Promissory Notes.(4)
10.13 Amended and Restated Shareholders' Rights Agreement among the Company and its
shareholders dated as of November 30, 1996, but effective as of May 8, 1996,
together with form of Registration Rights.(4)
10.14 Amended and Restated Stockholders' Voting Agreement dated as of April 9, 1996, but
effective as of November 30, 1995, among the Company and its Shareholders.(4)
10.15 Airtime Sale Agreement dated as of August 22, 1996 between the Company and MCI.(4)
10.16 Warrant Agreement dated as of August 22, 1996 between the Company and MCI.(4)
10.17 Warrant dated August 29, 1996 by the Company in favor of MCI.(4)
10.18 Registration Rights Agreement dated as of August 22, 1996 between the Company and
MCI.(4)
10.19 Strategic Supply and Development Agreement dated as of October 29, 1996 by and
between the Company and Hughes.(4)
</TABLE>
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<PAGE> 181
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.20 Registration Rights Agreement dated as of October 29, 1996 between the Company and
Hughes.(4)
10.21 Special Voting Agreement dated as of October 29, 1996 between the Company, Hughes
and the Stockholders listed therein.(4)
10.22 Convertible Promissory Note dated as of November 1, 1996 by the Company in favor of
Hughes.(4)
10.23 Escrow Agreement dated as of October 29, 1996, as amended, between the Company,
Hughes and The Chase Manhattan Bank.(4)
10.24 Purchase and Supply Agreement dated as of November 8, 1996 between the Company and
The Allen Group.(4)
10.25 Registration Rights Agreement dated as of November 8, 1996 between the Company and
The Allen Group.(4)
10.26 Master Lease Agreement dated October 28, 1996 between the Company and Comdisco.(4)
10.27 Strategic Supply Agreement dated as of October 30, 1996 between the Company and
LGIC.(4)
10.28 CDMA Technical and Market Trial Agreement dated as of October 23, 1996 between the
Company and LGIC.(4)
10.29 Loan Agreement dated as of February 23, 1996 between the Company and LG.(4)
10.30 Loan Agreement and Promissory Note dated as of January 6, 1997 between the Company
and LG.(4)
10.31 Stock Pledge Agreement dated January 6, 1997 between the Company and LG.(4)
10.32 Agreement for Procurement of Personal Communications Services Products, Licensed
Materials and Services dated as of November 15, 1996 between NextWave Wireless and
Lucent.(4)
10.33 Warrant Purchase Agreement dated as of November 15, 1996 between the Company and
Lucent.(4)
10.34 Warrant dated as of November 15, 1996 by the Company in favor of Lucent.(4)
10.35 Equipment Requirements Agreement dated as of November 30, 1995 between the Company
and QUALCOMM.(4)
10.36 PCS Resale Agreement dated as of September 19, 1996 between NextWave Wireless and
Cellexis.(4)
10.37 PCS Resale Agreement dated as of September 19, 1996 between NextWave Wireless and
UCN.(4)
10.38 PCS Resale Agreement dated as of October 29, 1996 between NextWave Wireless and
PCN.(4)
10.39 PCS Resale Agreement dated as of December 2, 1996 between NextWave Wireless and
Flagship.(4)
10.40 PCS Resale Agreement dated as of November 4, 1996 between NextWave Wireless and One
Stop.(4)
10.41 PCS Infrastructure Deployment Services Master Agreement dated as of July 30, 1996
between the Company and LCC, L.L.C.(4)
10.42 Agreement dated as of March 12, 1996 between the Company and LCC, LLC.(4)
10.43 Form of Indemnification Agreement between the Company and each of its officers and
directors.(4)
10.44 Form of Warrant Agreement relating to the Company's public warrants, together with
form of Warrant.(2)
11.1 Calculation of Pro Forma Net Loss Per Share (Unaudited).(2)
12.1 Calculation of Ratio of Earnings to Fixed Charges.(1)
21.1 Subsidiaries of the Company.(1)
23.1 Consent of Price Waterhouse LLP, Independent Accountants.(1)
23.2 Consent of Latham & Watkins (to be contained in Exhibit 5.1 and Exhibit 8.1).
23.3 Consent of Ha-Young Aum.(1)
23.4 Consent of Jang-Ho Chung.(1)
23.5 Consent of Gregory A. Cucchi.(1)
</TABLE>
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<PAGE> 182
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
23.6 Consent of Jung-Boo Kim.(1)
23.7 Consent of Manjin J. Kim.(1)
23.8 Consent of Muhit U. Rahman.(1)
23.9 Consent of Yutaka Sato.(1)
24.1 Power of Attorney (contained on signature page).
25.1 Statement of Eligibility and Qualification on Form T-1 under the Trust Indenture Act
of 1939 of Senior Notes Trustee (to be bound separately from other exhibits).(2)
25.2 Statement of Eligibility and Qualification on Form T-1 under the Trust Indenture Act
of 1939 of Senior Discount Notes Trustee (to be bound separately from other
exhibits).(2)
27.1 Financial Data Schedule.(1)
</TABLE>
- ---------------
(1) Filed herewith.
(2) To be filed by amendment.
(3) Previously filed.
(4) Filed or to be filed by amendment as an exhibit to Registration Statement
No. 333-5577.
(b) Financial Statement Schedules -- All required information is set forth
in the consolidated financial statements included in the Prospectus
constituting part of this Registration Statement.
ITEM 17. UNDERTAKINGS
The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereto) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total value
of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price range represent no more than 20% change in the maximum
aggregate offering price set forth in the "Caluculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
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
II-7
<PAGE> 183
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 the 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 Registrants hereby further undertake to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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<PAGE> 184
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, registrant
NextWave Telecom Inc. has duly caused this Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on February 6, 1997.
NEXTWAVE TELECOM INC.
By: /s/ ALLEN B. SALMASI
------------------------------------
Allen B. Salmasi
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------- ------------------
<S> <C> <C>
/s/ ALLEN B. SALMASI President, Chief Executive February 6, 1997
- ------------------------------------------ Officer and Director
Allen B. Salmasi
/*/ GENE M. WELSH Senior Vice President, February 6, 1997
- ------------------------------------------ Finance and Chief Financial
Gene M. Welsh Officer (Chief Financial
and Accounting Officer)
/*/ JANICE I. OBUCHOWSKI Vice Chairman, Executive February 6, 1997
- ------------------------------------------ Vice President and Director
Janice I. Obuchowski
/*/ KEVIN M. FINN Senior Vice President, February 6, 1997
- ------------------------------------------ Business Operations -- West
Kevin M. Finn and Director
/*/ NICOLE N. SALMASI Director February 6, 1997
- ------------------------------------------
Nicole N. Salmasi
*By: /s/ ALLEN B. SALMASI
-------------------------------------
Allen B. Salmasi
Attorney-in-Fact
</TABLE>
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<PAGE> 185
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, registrant
NextWave Wireless Inc. has duly caused this Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on February 6, 1997.
NEXTWAVE WIRELESS INC.
By: /s/ ALLEN B. SALMASI
------------------------------------
Allen B. Salmasi
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below authorizes Allen B. Salmasi with
full power of substitution and resubstitution, his true and lawful
attorney-in-fact, for him in any and all capacities, to sign any further
amendments (including post-effective amendments) to the Registration Statement
amended by this Amendment No. 1 to Registration Statement and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------- ------------------
<S> <C> <C>
/s/ ALLEN B. SALMASI President, Chief Executive February 6, 1997
- ------------------------------------------ Officer and Director
Allen B. Salmasi
/s/ GENE M. WELSH Treasurer (Chief Financial February 6, 1997
- ------------------------------------------ and Accounting Officer)
Gene M. Welsh
/s/ JANICE I. OBUCHOWSKI Executive Vice President February 6, 1997
- ------------------------------------------ and Director
Janice I. Obuchowski
/s/ KEVIN M. FINN Senior Vice President and February 6, 1997
- ------------------------------------------ Director
Kevin M. Finn
/s/ NICOLE N. SALMASI Director February 6, 1997
- ------------------------------------------
Nicole N. Salmasi
</TABLE>
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<PAGE> 186
EXHIBIT INDEX
The following exhibits are filed as part of this Form S-1 Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.(2)
3.1 Amended and Restated Certificate of Incorporation of the Company.(4)
3.2 Restated Bylaws of the Company, as currently in effect.(4)
3.3 Form of Certificate of Amendment to Restated Certificate of Incorporation relating
to reverse stock split.(4)
3.4 Form of Amended and Restated Certificate of Incorporation to be filed prior to
closing of the Equity Offering.(4)
3.5 Certificate of Incorporation of Wireless.(2)
3.6 Bylaws of Wireless, as currently in effect.(2)
4.1 Installment Plan Note by the Company in favor of the FCC relating to the C-Block PCS
licenses.(4)
4.2 Security Agreement between the Company and the FCC relating to the C-Block PCS
Licenses.(4)
4.3 Form of Senior Note Indenture, together with form of Senior Note.(2)
4.4 Form of Senior Discount Note Indenture, together with form of Senior Discount
Note.(2)
4.5 Form of Common Stock Certificate.(4)
4.6 Form of CTR Agreement.(4)
4.7 Form of CTR Escrow Agreement.(4)
4.8 Form of CTR Certificate.(4)
4.9 Securities Purchase Agreement dated as of April 9, 1996 between the Company and
purchasers of the Bridge Notes, together with form of Bridge Notes, Warrants and
Registration Rights.(4)
5.1 Opinion of Latham & Watkins re: securities offered.(2)
8.1 Opinion of Latham & Watkins re: tax matters.(2)
10.1 Amended and Restated Stock Option Plan.(4)
10.2 Form of Incentive Stock Option under the Plan.(4)
10.3 1997 Equity Incentive Plan.(4)
10.4 Form of Nonstatutory Stock Option Agreement.(4)
10.5 1997 Employee Stock Purchase Plan of the Company.(4)
10.6 1997 Non-Employee Director Stock Option Plan.(4)
10.7 Promissory Note, together with Stock Pledge Agreement, from Navation, Inc.(4)
10.8 Promissory Note, together with Stock Pledge Agreement, from Freedom Mobility Inc.(4)
10.9 Amended and Restated Series A Shareholders Agreement between the Company and the
holders of Series A Common Stock dated as of November 15, 1995.(4)
10.10 Form of Convertible Promissory Note issued to foreign investors convertible into
Series B Common Stock.(4)
10.11 Form of Warrants to Purchase Series B Common Stock.(4)
10.12 Registration Rights with purchasers of Series B Common Stock, Warrants and
Convertible Promissory Notes.(4)
10.13 Amended and Restated Shareholders' Rights Agreement among the Company and its
shareholders dated as of November 30, 1996, but effective as of May 8, 1996,
together with form of Registration Rights.(4)
10.14 Amended and Restated Stockholders' Voting Agreement dated as of April 9, 1996, but
effective as of November 30, 1995, among the Company and its Shareholders.(4)
10.15 Airtime Sale Agreement dated as of August 22, 1996 between the Company and MCI.(4)
10.16 Warrant Agreement dated as of August 22, 1996 between the Company and MCI.(4)
10.17 Warrant dated August 29, 1996 by the Company in favor of MCI.(4)
10.18 Registration Rights Agreement dated as of August 22, 1996 between the Company and
MCI.(4)
10.19 Strategic Supply and Development Agreement dated as of October 29, 1996 by and
between the Company and Hughes.(4)
</TABLE>
<PAGE> 187
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.20 Registration Rights Agreement dated as of October 29, 1996 between the Company and
Hughes.(4)
10.21 Special Voting Agreement dated as of October 29, 1996 between the Company, Hughes
and the Stockholders listed therein.(4)
10.22 Convertible Promissory Note dated as of November 1, 1996 by the Company in favor of
Hughes.(4)
10.23 Escrow Agreement dated as of October 29, 1996, as amended, between the Company,
Hughes and The Chase Manhattan Bank.(4)
10.24 Purchase and Supply Agreement dated as of November 8, 1996 between the Company and
The Allen Group.(4)
10.25 Registration Rights Agreement dated as of November 8, 1996 between the Company and
The Allen Group.(4)
10.26 Master Lease Agreement dated October 28, 1996 between the Company and Comdisco.(4)
10.27 Strategic Supply Agreement dated as of October 30, 1996 between the Company and
LGIC.(4)
10.28 CDMA Technical and Market Trial Agreement dated as of October 23, 1996 between the
Company and LGIC.(4)
10.29 Loan Agreement dated as of February 23, 1996 between the Company and LG.(4)
10.30 Loan Agreement and Promissory Note dated as of January 6, 1997 between the Company
and LG. (4)
10.31 Stock Pledge Agreement dated January 6, 1997 between the Company and LG.(4)
10.32 Agreement for Procurement of Personal Communications Services Products, Licensed
Materials and Services dated as of November 15, 1996 between NextWave Wireless and
Lucent.(4)
10.33 Warrant Purchase Agreement dated as of November 15, 1996 between the Company and
Lucent.(4)
10.34 Warrant dated as of November 15, 1996 by the Company in favor of Lucent.(4)
10.35 Equipment Requirements Agreement dated as of November 30, 1995 between the Company
and QUALCOMM.(4)
10.36 PCS Resale Agreement dated as of September 19, 1996 between NextWave Wireless and
Cellexis.(4)
10.37 PCS Resale Agreement dated as of September 19, 1996 between NextWave Wireless and
UCN.(4)
10.38 PCS Resale Agreement dated as of October 29, 1996 between NextWave Wireless and
PCN.(4)
10.39 PCS Resale Agreement dated as of December 2, 1996 between NextWave Wireless and
Flagship.(4)
10.40 PCS Resale Agreement dated as of November 4, 1996 between NextWave Wireless and One
Stop.(4)
10.41 PCS Infrastructure Deployment Services Master Agreement dated as of July 30, 1996
between the Company and LCC, L.L.C.(4)
10.42 Agreement dated as of March 12, 1996 between the Company and LCC, LLC.(4)
10.43 Form of Indemnification Agreement between the Company and each of its officers and
directors.(4)
10.44 Form of Warrant Agreement relating to the Company's public warrants, together with
form of Warrant.(2)
11.1 Calculation of Pro Forma Net Loss Per Share (Unaudited).(2)
12.1 Calculation of Ratio of Earnings to Fixed Charges.(1)
21.1 Subsidiaries of the Company.(1)
23.1 Consent of Price Waterhouse LLP, Independent Accountants.(1)
23.2 Consent of Latham & Watkins (to be contained in Exhibit 5.1 and Exhibit 8.1).
23.3 Consent of Ha-Young Aum.(1)
</TABLE>
<PAGE> 188
<TABLE>
<CAPTION>
EXHIBIT
NUMBERS DESCRIPTION OF EXHIBIT
- ------- ------------------------------------------------------------------------------------
<C> <S>
23.4 Consent of Jang-Ho Chung.(1)
23.5 Consent of Gregory A. Cucchi.(1)
23.6 Consent of Jung-Boo Kim.(1)
23.7 Consent of Manjin J. Kim.(1)
23.8 Consent of Muhit U. Rahman.(1)
23.9 Consent of Yutaka Sato.(1)
24.1 Power of Attorney (contained on signature page).
25.1 Statement of Eligibility and Qualification on Form T-1 under the Trust Indenture Act
of 1939 of Senior Notes Trustee (to be bound separately from other exhibits).(2)
25.2 Statement of Eligibility and Qualification on Form T-1 under the Trust Indenture Act
of 1939 of Senior Discount Notes Trustee (to be bound separately from other
exhibits).(2)
27.1 Financial Data Schedule.(1)
</TABLE>
- ---------------
(1) Filed herewith.
(2) To be filed by amendment.
(3) Previously filed.
(4) Filed or to be filed by amendment as an exhibit to Registration Statement
No. 333-5577.
(b) Financial Statement Schedules -- All required information is set forth
in the consolidated financial statements included in the Prospectus
constituting part of this Registration Statement.
<PAGE> 1
EXHIBIT 12.1
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
1995 1996
------------ ------------
<S> <C> <C>
Earnings:
Net loss....................................................... $ (1,894,000) $(14,601,000)
Fixed charges.................................................. 338,000 2,378,000
----------- -----------
Total.................................................. $ (1,556,000) $(12,223,000)
=========== ===========
Fixed charges:
Interest expense and amortization of debt discount............. $ 332,000 $ 2,227,000
Portion of rent expense deemed to be interest.................. 6,000 151,000
----------- -----------
Total.................................................. $ 338,000 $ 2,378,000
=========== ===========
Ratio of earnings to fixed charges(1)............................ -- --
----------- -----------
Coverage deficiency.............................................. $ 1,894,000 $ 14,601,000
=========== ===========
</TABLE>
- ---------------
(1) Pursuant to Regulation S-K Item 503, the ratio of earnings to fixed charges
is not presented as this ratio indicates a coverage of less than one-to-one.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Name State of Incorporation
---- ----------------------
1. NextWave Personal Communications Inc. Delaware
2. NextWave Wireless Inc. Delaware
3. TELE*Code Inc. Delaware
4. NextWave Partners Inc. Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated January 31, 1997, except
as to the refund of certain FCC downpayments and the loan repayment described in
Notes 1 and 11, which are as of February 6, 1997, relating to the financial
statements of NextWave Telecom Inc., which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
San Diego, California
February 6, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF PERSON ABOUT TO
BECOME A DIRECTOR
I, Ha-Young Aum, hereby consent to being named in the Registration
Statement on Form S-1 (No. 333-5829) of NextWave Telecom Inc. as a person about
to become a director of NextWave Telecom Inc.
Dated: July 29, 1996
/s/ Ha-Young Aum
--------------------------------
Ha-Young Aum
<PAGE> 1
Exhibit 23.4
CONSENT OF PERSON ABOUT TO
BECOME A DIRECTOR
I, Jang-Ho Chung, hereby consent to being named in the Registration
Statement on Form S-1 (No. 333-5829) of NextWave Telecom Inc. as a person about
to become a director of NextWave Telecom Inc.
Dated: July 31, 1996
/s/ Jang-Ho Chung
--------------------------------
Jang-Ho Chung
<PAGE> 1
Exhibit 23.5
CONSENT OF PERSON ABOUT TO
BECOME A DIRECTOR
I, Gregory A. Cucchi, hereby consent to being named in the Registration
Statement on Form S-1 (No. 333-5829) of NextWave Telecom Inc. as a person about
to become a director of NextWave Telecom Inc.
Dated: August 18, 1996
/s/ Gregory A. Cucchi
--------------------------------
Gregory A. Cucchi
<PAGE> 1
Exhibit 23.6
CONSENT OF PERSON ABOUT TO
BECOME A DIRECTOR
I, Jung-Boo Kim, hereby consent to being named in the Registration
Statement on Form S-1 (No. 333-5829) of NextWave Telecom Inc. as a person about
to become a director of NextWave Telecom Inc.
Dated: July 31, 1996
/s/ Jung-Boo Kim
--------------------------------
Jung-Boo Kim
<PAGE> 1
Exhibit 23.7
CONSENT OF PERSON ABOUT TO
BECOME A DIRECTOR
I, Manjin Jerome Kim, hereby consent to being named in the Registration
Statement on Form S-1 (No. 333-5829) of NextWave Telecom Inc. as a person about
to become a director of NextWave Telecom Inc.
Dated: July 26, 1996
/s/ Manjin Jerome Kim
--------------------------------
Manjin Jerome Kim
<PAGE> 1
Exhibit 23.8
CONSENT OF PERSON ABOUT TO
BECOME A DIRECTOR
I, Muhit U. Rahman, hereby consent to being named in the Registration
Statement on Form S-1 (No. 333-5829) of NextWave Telecom Inc. as a person about
to become a director of NextWave Telecom Inc.
Dated: July 31, 1996
/s/ Muhit U. Rahman
--------------------------------
Muhit U. Rahman
<PAGE> 1
Exhibit 23.9
CONSENT OF PERSON ABOUT TO
BECOME A DIRECTOR
I, Yutaka Sato, hereby consent to being named in the Registration
Statement on Form S-1 (No. 333-5829) of NextWave Telecom Inc. as a person about
to become a director of NextWave Telecom Inc.
Dated: August 27, 1996
/s/ Yutaka Sato
--------------------------------
Yutaka Sato
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 26,102,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,578,000
<PP&E> 16,106,000
<DEPRECIATION> (304,000)
<TOTAL-ASSETS> 451,110,000
<CURRENT-LIABILITIES> 74,142,000
<BONDS> 130,845,000
0
0
<COMMON> 291,421,000
<OTHER-SE> (45,298,000)
<TOTAL-LIABILITY-AND-EQUITY> 451,110,000
<SALES> 1,958,000
<TOTAL-REVENUES> 1,958,000
<CGS> 1,858,000
<TOTAL-COSTS> 1,858,000
<OTHER-EXPENSES> 12,968,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,965,000
<INCOME-PRETAX> (14,601,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,601,000)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
