<PAGE>
- --------------------------------------------------------------------------------
THIS PROSPECTUS IS FILED PURSUANT
TO RULE 424 (B) (3) OF THE SECURITIES ACT OF 1933.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
TO PROSPECTUS
DATED OCTOBER 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRITON PCS, INC.
11% SENIOR SUBORDINATED DISCOUNT NOTES
DUE 2008
ATTACHED IS THE COMPANY'S REPORT ON FORM [10-Q]
- --------------------------------------------------------------------------------
<PAGE>
Type: 10Q
Sequence: 1
Description: Form 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER:
TRITON PCS, INC.
375 TECHNOLOGY DRIVE
MALVERN, PA 19355
(610) 651-5900
DELAWARE 23-2930873
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION
OF INCORPORATION OR ORGANIZATION) NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
<PAGE>
TRITON PCS INC. AND PREDECESSOR COMPANY
THIRD QUARTER REPORT
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Combined Balance Sheets - September 30, 1998 and December 31,
1997
Combined Statements of Operations
Three and nine month periods ended September 30, 1998, three
months period ended September 30, 1997, and for the period
from March 6, 1997 (inception) to September 30, 1997
Combined Statements of Cash Flows
Nine months ended September 30, 1998 and for the period from
March 6, 1997 (inception) to September 30, 1997
Notes to the Combined Financial Statements September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (unaudited)
TRITON PCS INC. AND PREDECESSOR COMPANY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
<S> <C>(audited) <C>(unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 11,362,212 $311,470,902
Due from related party 148,100 225,824
Accounts receivable, net of allowance for
doubtful accounts of $- and $553,998
respectively - 4,854,890
Inventory - 441,135
Prepaid expenses and other current assets 20,960 746,035
------------ ------------
Total current assets 11,531,272 317,738,786
Property, plant, and equipment:
Network infrastructure and equipment - 28,236,159
Land - 313,000
Office furniture and equipment 121,398 4,898,733
Construction in progress 356,258 25,671,102
------------ ------------
477,656 59,118,994
Less accumulated depreciation (4,762) (1,045,849)
------------ ------------
Net property and equipment 472,894 58,073,145
Intangible assets, net - 262,648,805
Deferred transaction costs 1,248,855 695,472
------------ ------------
Total assets $ 13,253,021 $639,156,208
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,580,880 2,948,472
Accrued expenses 1,016,048 4,823,560
Accrued interest 1,228,029 2,342,730
Due to related party 45,402 45,402
Notes payable 13,343,500 -
------------ ------------
Total current liabilities 17,213,859 10,160,164
Long-term debt - 455,441,380
Deferred income taxes - 9,177,426
Shareholder's equity (Deficit):
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding 1 1
Additional paid-in capital - 181,821,116
Accumulated deficit (3,960,839) (17,443,879)
------------ ------------
Total shareholder's equity (deficit) (3,960,838) 164,377,238
------------ ------------
$ 13,253,021 $639,156,208
============ ============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
TRITON PCS INC. AND PREDECESSOR COMPANY
COMBINED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS PERIOD FROM MARCH 6, NINE MONTHS ENDED
ENDED SEPTEMBER 30, 1997 TO SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues:
Service revenues $ - $ 8,373,344 - $ 8,373,344
Equipment revenues - 431,285 - 431,285
----------- ----------- ----------- -----------
Total Revenue - 8,804,629 - 8,804,629
Expenses:
Cost of service revenues - 6,002,311 - 7,446,290
Cost of equipment revenues - 770,134 - 770,134
General and administrative 536,289 2,161,052 923,966 5,898,479
Depreciation and amortization - 2,976,529 - 4,325,914
----------- ----------- ----------- -----------
Loss from operations 536,289 3,105,397 923,966 9,636,188
Interest expense 850,174 11,722,709 850,174 21,594,516
Interest income - (4,147,090) - (6,886,253)
----------- ----------- ----------- -----------
Loss before taxes 1,386,463 10,681,016 1,774,140 24,344,451
Tax benefit - 4,058,786 - 10,861,411
----------- ----------- ----------- -----------
Net loss $1,386,463 $6,622,230 $1,774,140 $13,483,040
=========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
MARCH 6, 1997 TO ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,774,140) $ (13,483,040)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization - 4,325,914
Deferred income taxes - (10,861,411)
Accretion of interest 850,174 14,602,509
Change in operating assets and liabilities:
Accounts receivable (252) (1,715,569)
Inventory - (54,006)
Prepaid expenses and other current assets (4,138) (531,088)
Accounts payable 166,853 2,658,579
Accrued expenses (36,661) 2,337,167
Accrued interest - 2,543,499
---------- ------------
Net cash used in operating activities (798,164) (177,446)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (48,997) (33,245,322)
Myrtle Beach Acquisition, net of cash acquired - (163,852,776)
---------- ------------
Net cash used in investing activities (48,997) (197,098,098)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Credit Facility - 150,000,000
Borrowings on notes payable 1,600,000 -
Borrowings on Subordinated Debt - 291,000,000
Capital contributions from Parent - 68,346,606
Payment of deferred transaction costs - (11,822,145)
Advances from related party, net 36,843 (122,126)
Principal payments under capital lease obligations - (18,101)
---------- ------------
Net cash provided by financing activities 1,636,843 497,384,234
---------- ------------
NET INCREASE IN CASH 789,682 300,108,690
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 11,362,212
---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 789,682 $311,470,902
========== ============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
(1) DESCRIPTION OF BUSINESS
Triton PCS, Inc (formerly Triton PCS License Company, Inc. with its
subsidiaries referred to as the "Company") was formed on October 2, 1997 as
a wholly-owned subsidiary of Triton PCS Holdings, Inc. (formerly Triton
PCS, Inc. referred to as "Holdings" or "Parent"). The Company is the
exclusive provider of wireless mobility services in the AT&T Corp.
(together with affiliates "AT&T") Mid-Atlantic and Southeast regions. The
Company intends to become the leading provider of broadband PCS (Personal
Communication System) in Virginia, South Carolina, North Carolina, northern
Georgia, and surrounding areas. The Company is authorized to provide PCS
Service in major population and business centers such as Charleston, SC,
Columbia, SC, Greenville / Spartansburg, SC, Richmond, VA and Augusta, GA,
as well as major resort destinations such as Myrtle Beach, SC, Hilton Head,
SC, and Kiawah Island, SC. On June 30, 1998, the Company acquired an
existing Cellular System in Myrtle Beach (See Note 4).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 6, 1997, Triton Communications L.L.C. ("L.L.C.") was formed to
explore various business opportunities in the wireless telecommunications
industry, principally related to PCS and cellular activities. During the
period March 6, 1997 through October 1, 1997, L.L.C.'s activities consisted
principally of hiring a management team, raising capital, and negotiating
strategic business relationships, primarily related to PCS business
opportunities. Subsequent to October 2, 1997, these activities continued
but were conducted primarily through the Company. Consequently, for
purposes of the accompanying financial statements, L.L.C. has been treated
as a "predecessor" entity. As a result of this relationship, certain
financing relationships and the similar nature of the business activities
conducted by each respective legal entity, L.L.C. and the Company are
considered companies under common control.
The accompanying combined financial statements are unaudited and have been
prepared by management. In the opinion of management, these combined
financial statements contain all of the adjustments, consisting of normal
recurring adjustments, necessary to present fairly, in summarized form, the
financial position and the results of operations of the Company. The
results of operations for the three and nine month periods ended September
30, 1998 are not indicative of the results that may be expected for the
year ending December 31, 1998. The financial information presented herein
should be read in conjunction with the combined financial statements for
the year ended December 31, 1997.
The combined financial statements incorporate the PCS-related business
activities of L.L.C. and the activities of the Company. The consolidated
accounts of the Company include Triton PCS Inc; Triton PCS Holdings Company
L.L.C.; Triton Management Company, Inc.; Triton PCS Property Company
L.L.C.; Triton PCS Equipment Company L.L.C.; Triton PCS Operating Company
L.L.C.; and Triton PCS License Company L.L.C. All significant intercompany
accounts or balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amount of expenses during the reporting period. Actual
results could differ from those estimates.
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" (SFAS 130), effective January 1, 1998.
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. Comprehensive income is the change in equity of a business
enterprise during a period from transactions and the events and
circumstances from non-owner sources. For the periods presented in the
accompanying statements of operations, comprehensive loss equals the
amounts of the loss reported on the accompanying statements of operations.
CONSTRUCTION IN PROGRESS
Construction in progress includes expenditures for the design, construction
and testing of the Company's PCS network and also includes costs associated
with developing information systems. The Company capitalizes interest on
qualifying construction in progress activities. As of September 30, 1998,
interest capitalized totaled $800,579. When the assets are placed in
service, the Company will transfer the assets to the appropriate property
and equipment category and depreciate these assets over their respective
estimated useful lives. The Company expects to commence PCS service in the
first quarter 1999, or shortly thereafter.
INVESTMENT IN PCS LICENSES
Investments in PCS Licenses, a component of intangible assets, are recorded
at their fair value as determined by an independent appraisal. In
transactions in which the acquisition of the licenses has been funded using
debt, the Company records capitalized interest while readying the licenses
in the Company's region for use. The Company will begin amortizing its PCS
licenses over 40 years upon commencement of service, which is expected in
its first market in the first quarter of 1999, or shortly thereafter. A FCC
license pertaining to the Myrtle Beach System acquired on June 30, is being
amortized using a 40 year estimated life.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" (SFAS 130), which was effective for fiscal
year beginning after December 15, 1997. SFAS 130 established standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is the
change in equity of a business enterprise during a period from transactions
and the events and circumstances from non-owner sources. For the periods
presented in the accompanying statements of operations, comprehensive
income equals the amounts reported on the accompanying statement of
operations.
In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"). This statement
establishes standards for disclosing information about an entity's capital
structure and is effective for periods ending after December 15, 1997. The
Company has adopted SFAS 129. The effect of initial application of this
statement did not have a material effect on the Company's financial
statements.
In June 1997, the FASB issued Statement No. 131, "Disclosure About Segments
of an Enterprise and Related Information" ("SFAS 131"). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15,
1997. The Company has adopted SFAS 131. The effect of initial application
of the statement did not have a material effect on the Company's financial
statements.
In February 1998, the FASB issued Statement No. 132, "Employees'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132").
This statement is effective for fiscal years beginning after December 15,
1997. It is not expected that application of this statement will have a
material effect on the Company's financial statements.
In April 1998, the Accounting Standards Executive Committee (AcSEC) of the
AICPA issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-up Activities ("SOP 98-5"). This statement requires that the costs
of start-up activities, including organization costs, be expensed as
incurred and is effective for fiscal years beginning after December 31,
1998. The Company has elected early adoption of this statement as of
January 1, 1998. The initial application of the statement did not have a
material effect on the Company's financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). The Company has not yet
fully analyzed the impact of this statement on its financial statements.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. This issue will
impact not only Information Technology ("IT"), but Non-IT systems as well,
given Non-IT systems typically include embedded technology such as
microcontrollers. If date sensitive software recognize the year "00" as the
year 1900 rather than the Year 2000, the potential exists for computer
system failure or miscalculations, which could cause disruption of
operations.
Given that the Company is in the development stage, and is currently in the
process of selecting and implementing its operational and financial
systems, the Company believes that it has adequately considered Year 2000
compliance in its selection of IT systems. In addition, given the nature of
the Company's operations, potential non-compliance of Non-IT systems are
not expected to have a significant impact on the Company. However, there
can be no assurance that non-compliance of Non-IT systems will not have a
material adverse effect on the Company or its operations.
The Company has initiated communications with all of its significant
software suppliers and service bureaus to determine their plans for
remediating the Year 2000 Issue in their software which the Company uses or
relies upon. The Company's estimate to complete the remediation plan
includes the estimated time associated with mitigating the Year 2000 Issue
for third party software. However, there can be no guarantee that the
systems of other companies on which the Company relies will be converted on
a timely basis, or that a failure to convert by another company would not
have material adverse effect on the Company.
A thorough assesment of the Year 2000 Issue relative to the Myrtle Beach
Acquisition will be performed. The Company intends to migrate the Myrtle
Beach operational and financial systems to the systems currently being
implemented for the Company and expects to complete this migration by
December 31, 1998. There can be no assurance that this migration will be
successful. The failure to successfully migrate the Myrtle Beach
operational and financial systems into the Company's systems could have a
material adverse effect on the Company.
The costs and risks associated with the Year 2000 Issue are not expected to
have a significant impact on the Company.
INFLATION
The Company does not believe that inflation has had a material impact on
the Company's operations. However, there can be no assurance that a high
rate of inflation in the future will not have a material adverse effect on
the Company's operating results.
(3) AT&T TRANSACTION
On October 8, 1997, Holdings entered into a Securities Purchase Agreement
with AT&T Wireless PCS, Inc ("AT&T PCS"), a subsidiary of AT&T, and the
other stockholders of Holdings, whereby the Company will be the exclusive
provider of wireless mobility services in the AT&T mid-Atlantic and
Southeast regions.
On February 4, 1998, Holdings executed the Closing Agreement with AT&T PCS
and the other stockholders of Holdings, finalizing the transactions
contemplated in the Securities Purchase Agreement. In accordance with the
Closing Agreement, Holdings and AT&T PCS and the other stockholders of
Holdings consented that one or more of Holdings' subsidiaries shall enter
into certain agreements or conduct certain operations on the condition that
such subsidiaries may at all times be direct or indirect wholly-owned
subsidiaries of Holdings and Holdings may cause such subsidiaries to
perform the obligations and conduct such operations required to be
performed or conducted under those agreements.
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
Under the Closing Agreement, Holdings issued equity to AT&T PCS in exchange
for 20 MHz A and B block PCS licenses, which were contributed to the
Company and certain other agreements covering certain areas in the
southeastern United States. The aggregate fair value of all intangibles
acquired was $118.6 million, of which $92.8 million was allocated to the
PCS licenses with an estimated useful life of 40 years. AT&T PCS was issued
Series D Preferred, which at the time of the closing of the transaction was
equal to an initial common equity ownership of Holdings on a fully diluted
basis of 18.66% along with 732,371 shares of non-voting Series A Preferred
Stock.
In connection with the closing of the AT&T transaction, the Company
executed or became a party to certain agreements, including the following:
STOCKHOLDERS' AGREEMENT
Resale Agreement
Pursuant to the Stockholders' Agreement, the Company is required to enter
into a Resale Agreement at the request of AT&T. Under this agreement, AT&T
PCS will be granted the right to purchase and resell on a nonexclusive
basis access to and usage of the Company's services in the Company's
Licensed Area. The Company will retain the continuing right to market and
sell its services to customers and potential customers in competition with
AT&T PCS.
The Resale Agreement will have a term of ten years and will renew
automatically for successive one-year periods unless, after the eleventh
anniversary thereof, either party elects to terminate the Resale Agreement.
Furthermore, AT&T PCS may terminate the Resale Agreement at any time for
any reason on 180 days written notice.
The Company has agreed that the rates, terms, and conditions of service,
taken as a whole, provided by the Company to AT&T PCS pursuant to the
Resale Agreement, shall be at least as favorable as (or if permitted by
applicable law, superior to) the rates, terms, and conditions of service,
taken as a whole, provided by the Company to any other customer. Without
limiting the foregoing, the rate plans offered by the Company pursuant to
the Resale Agreement shall be designed to result in a discounted average
actual rate per minute paid by AT&T PCS for service below the weighted
average actual rate per minute billed by the Company to its subscribers
generally for access and air time.
Neither party may assign or transfer the Resale Agreement or any of its
rights thereunder without the other party's prior written consent, which
will not be unreasonably withheld, except (i) to an affiliate of that party
at the time of execution of the Resale Agreement, (ii) by the Company to
any of its operating subsidiaries, and (iii) to the transferee of a party's
stock or substantially all of its assets, provided that all FCC and other
necessary approvals have been received.
The Company expects to enter into the Resale Agreement upon commencement of
its operations in the initial configuration.
Exclusivity
Under the Stockholders' Agreement, none of the Stockholders will provide or
resell, or act as the agent for any person offering, within the Territory
mobile wireless telecommunications services initiated or terminated using
Time Division Multiple Access and frequencies licensed by the FCC ("Company
Communications Services"), except AT&T PCS and its affiliates may (i)
resell or act as agent for the Company in connection with the provision of
Company Communications Services, (ii) provide or resell wireless
telecommunications services to or from certain specific locations, and
(iii) resell Company Communications Services for another person in any area
where the Company has not placed a system into commercial service by August
2002. Additionally, with respect to the markets listed on the Roaming
Agreement, each of the Company and AT&T PCS agrees to cause their
respective affiliates in their home carrier capacities to program and
direct the programming of customer equipment so that the other party in its
capacity as the serving carrier is the preferred provider in such markets,
and refrain from inducing any of its customers to change such programming.
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
Build-out
The Company is required to conform to certain requirements regarding the
construction of the Company's PCS system. In the event that the Company
breaches these requirements, AT&T PCS may terminate its exclusivity
provisions.
Disqualifying Transactions
In the event of a merger, asset sale, or consolidation, as defined,
involving AT&T and another person that derives annual revenues in excess of
$5.0 billion, derives less than one third of its aggregate revenues from
wireless telecommunications, and owns FCC licenses to offer mobile wireless
telecommunication services to more than 25% of the population within the
Company's territory, AT&T and the Company have certain rights. Most
specifically AT&T may terminate its exclusivity in the territory in which
the other party overlaps that of the Company. If, as a result of any such
transaction, AT&T proposes to sell, transfer, or assign to a non-affiliate
its PCS system owned and operated in Charlotte, NC; Atlanta, GA; Baltimore,
MD; and Washington, DC, or Richmond, VA BTAs, then AT&T will provide the
Company with the opportunity for a 180 day period to have AT&T jointly
market the Company's licenses that are included in the MTA that AT&T is
requesting to sell.
The Stockholders' Agreement expires on February 4, 2009. Certain provisions
expire upon an initial public offering.
LICENSE AGREEMENT
Pursuant to a Network Membership License Agreement, dated February 4, 1998
(the "License Agreement"), between AT&T and the Company, AT&T granted to
the Company a royalty-free, nontransferable, nonsublicensable, limited
right, and license to use certain Licensed Marks solely in connection with
certain licensed activities. The Licensed Marks include the logo containing
the AT&T and globe design and the expression "Member, AT&T Wireless
Services Network." The "Licensed Activities" include (i) the provision to
end-users and resellers, solely within the Territory, of Company
Communications Services on frequencies licensed to the Company for
Commercial Mobile Radio Services ("CMRS") provided in accordance with the
AT&T Agreement (collectively, the "Licensed Services") and (ii) marketing
and offering the Licensed Services within the Territory. The License
Agreement also grants to the Company the right and license to use Licensed
Marks on certain permitted mobile phones.
The License Agreement contains numerous restrictions with respect to the
use and modification of any of the Licensed Marks. Furthermore, the Company
is obligated to use commercially reasonable efforts to cause all Licensed
Services marketed and provided using the Licensed Marks to be of comparable
quality to the Licensed Services marketed and provided by AT&T and its
affiliates in areas that are comparable to the Territory taking into
account, among other things, the relative stage of development of the
areas. The License Agreement also sets forth specific testing procedures to
determine compliance with these standards, and affords the Company with a
grace period to cure any instances of alleged noncompliance therewith.
The Company may not assign or sublicense any of its rights under the
License Agreement; provided, however, that the License Agreement may be
assigned to the Company's lenders under the Credit Facility (see note 6)
and after the expiration of any applicable grace and cure periods under the
Credit Facility, such lenders may enforce the Company's rights under the
License Agreement and assign the License Agreement to any person with
AT&T's consent.
The term of the License Agreement is for five years (the "Initial Term")
and renews for an additional five-year period if neither party terminates
the Agreement. The License Agreement may be terminated by AT&T at any time
in the event of a significant breach by the Company, including the
Company's misuse of any Licensed Marks, the Company licensing or assigning
any of the rights in the License Agreement, the Company's failure to
maintain AT&T's quality standards, or if a change in control of the Company
occurs.
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
After the Initial Term, AT&T may also terminate the License Agreement upon
the occurrence of certain transactions described in the Stockholders'
Agreement.
The License Agreement, along with the Resale Agreement and AT&T's
exclusivity obligations under the Stock Holders' Agreement, have a fair
value of $20.3 million, as determined by an independent appraisal, with an
estimated useful life of 10 years.
ROAMING AGREEMENT
Pursuant to the Intercarrier Roamer Service Agreement, dated as of February
4, 1998 (the "Roaming Agreement"), between AT&T Wireless Services, Inc. and
the Company, each of AT&T PCS and the Company agrees to provide (each in
its capacity as serving provider, the "Serving Provider") mobile wireless
radiotelephone service for registered customers of the other party's (the
"Home Carrier") customers while such customers are out of the Home
Carrier's geographic area and in the geographic area where the Serving
Carrier (itself or through affiliates) holds a license or permit to
construct and operate a mobile wireless radio/telephone system and station.
Each Home Carrier whose customers receive service from a Serving Carrier
shall pay to such Serving Carrier 100% of the Serving Carrier's charges for
wireless service and 100% of pass-through charges (i.e., toll or other
charges). Each Service Carrier's service charges per minute or partial
minute for the use for the first 3 years will be fixed at a declining rate,
and thereafter will be equal to an adjusted average home rate or such lower
rate as the parties negotiate from time to time. Each service Carrier's
toll charges per minute of use for the first 3 years will be fixed at a
declining rate and thereafter such other rates as the parties negotiate
from time to time.
The Roaming Agreement has a term of 20 years, unless earlier terminated by
a party due to the other party's uncured breach of any term of the Roaming
Agreement or the FCC revoking or denying renewal of the other party's
license or permit to provide CMRS.
Neither party may assign or transfer the Roaming Agreement or any of its
rights thereunder except to an assignee of all or part of its license or
permit to provide CMRS, provided that such assignee expressly assumes all
or the applicable part of the obligations of such party under the Roaming
Agreement.
The fair value of the Roaming Agreement, as determined by an independent
appraisal, was $5.5 million, with an estimated useful life of 20 years.
(4) MYRTLE BEACH ACQUISITION
On June 30, 1998, the Company acquired an existing cellular system (the
"Myrtle Beach System") which serves the South Carolina 5--Georgetown Rural
Service Area (the "SC-5") for a purchase price of approximately $163.8
million from Vanguard Cellular Systems. The Company intends to integrate
the Myrtle Beach System into its planned PCS Network. As a result of the
acquisition, the Company is no longer considered a development stage
enterprise under SFAS No. 7. The effects of the acquisition have been
presented using the purchase method and accordingly, the purchase price was
allocated to the assets acquired and liabilities assumed based upon
management's best estimate of their fair value.
Results of operations after the acquisition date are included in the
Statement of Operations from July 1, 1998. The following pro forma
information has been prepared assuming that this acquisition had taken
place on January 1, 1997. The pro forma information includes adjustments to
interest expense that would have been incurred to finance the purchase,
additional depreciation based on the fair market value of the property,
plant and equipment acquired, and the amortization of intangibles arising
from the transaction.
<TABLE>
<CAPTION>
Nine months ended September 1997 1998
<S> <C> <C>
Net Revenues $18,650,320 $23,342,629
----------- -----------
Net loss $13,215,000 $10,268,034
=========== ===========
</TABLE>
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
(5) SHORT-TERM DEBT
Convertible Notes
At various dates in 1997, certain private equity investors provided $1.6
million in financing to L.L.C. in the form of convertible promissory notes.
The notes originally bore interest at 14% annually, payable at maturity. On
January 15, 1998, L.L.C. assigned the notes to the Company. The Company, in
conjunction with Holdings and the noteholders, subsequently negotiated a
revised arrangement under which no interest would be paid on the notes, and
such notes became convertible into approximately $3.2 million worth of
Holdings' Series C preferred stock. The conversion of L.L.C. notes into
Holdings equity occurred on February 4, 1998. The $1.6 million preferred
return to the investors was accounted for as a financing cost during the
period the notes were outstanding.
Noninterest bearing loans
During 1997, Holding's Cash Equity Investors provided short-term financing
in the form of $11.9 million noninterest-bearing loans, which were advanced
to the Company. Pursuant to the Closing Agreement, such loans were
converted to equity of Holdings as a reduction of the requirements of the
initial cash contribution. Concurrently, Holdings contributed these funds
to the Company, which has recorded the transaction as additional paid in
capital on the date of the contribution.
(6) BANK CREDIT FACILITY
On February 3, 1998, the Company entered into a Credit Agreement (the
"Credit Facility"), a $425.0 million Credit Facility with Holdings, The
Chase Manhattan Bank, as Administrative Agent, and certain banks and other
financial institutions party thereto. The Credit Facility provides for (i)
a $175.0 million senior secured term loan (the "Tranche A Term Loan") which
matures on August 3, 2004 (ii) a $150.0 million senior secured term loan
(the "Tranche B Term Loan" and, together with the Tranche A Term Loan, the
"Term Loans") which matures on May 3, 2007 and (iii) a $100.0 million
senior secured revolving credit facility (the "Revolving Credit Facility"
and, together with the commitments to make the Term Loans, the
"Facilities") which matures on August 3, 2006.
The commitment to make loans under the Revolving Credit Facility
("Revolving Credit Loans" and, together with the Term Loans, the "Loans")
automatically and permanently reduces, beginning on August 3, 2004 in eight
quarterly reductions (the amount of each of the first two reductions, $5.0
million, the next four reductions, $10.0 million, and the last two
reductions, $25.0 million). The Tranche A Term Loans are required to be
repaid, beginning on February 4, 2002 in eighteen consecutive quarterly
installments (the amount of each of the first four installments,
$4,375,000, the next four installments, $6,562,500, the next four
installments $8,750,000, the next four installments, $10,937,500, and the
last two installments, $26,250,000). The Tranche B Term Loans are also
required to be repaid beginning on February 4, 2002 in twenty-one
consecutive quarterly installments (the amount of the first sixteen
installments, $375,000, the next four installments $7,500,000, and the last
installment, $114.0 million).
Interest on all loans accrue, at the Company's option, either at (i) (a) a
LIBOR rate multiplied by a fraction, the numerator of which is the number
one and the denominator of which is the number one minus the aggregate of
the maximum reserve percentages (including any marginal, special,
emergency, or supplemental reserves) expressed as a decimal established by
the Board of Governors of the Federal Reserve System which the
Administrative Agent is subject for eurocurrency funding, plus (b) the
Applicable Rate (as defined below) (Loans bearing interest described in
(i), "Eurodollar Loans") or (ii) (a) the higher of (1) the Administrative
Agent's prime rate and (2) the Federal Funds Effective Rate (as defined in
the Credit Facility) plus 0.5%, plus (b) the Applicable Rate (Loans bearing
interest described in (ii), "ABR Loans"). Interest on any overdue amounts
will be at a rate per annum equal to 2% plus the rate otherwise applicable
to such amounts. The Applicable Rate means, with respect to Tranche B Term
Loans, 1.75% per annum, in the case of an ABR Loan, and 3.00% per annum, in
the case of a Eurodollar Loan, and, with respect to Tranche A Term Loans
and Revolving Credit Loans, a rate between 0.0% to 1.25% per annum
(depending on the level of the Company's ratio of debt to earnings before
income taxes, depreciation, and amortization (EBITDA) in the case of an ABR
Loan, and a rate between 1.00% and
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
2.25% per annum (depending on the level of the Company's ratio of debt to
EBITDA), in the case of a Eurodollar Loan.
The Credit Facility requires an annual commitment fee of between 0.375% and
0.60% (depending on the level of the Company's ratio of debt to EBITDA) of
the unused portion of the Facilities payable quarterly in arrears and a
separate agent's fee payable to the Administrative Agent. The Credit
Facility also requires the Company to purchase an interest rate hedging
contract covering an amount equal to at least 60% (as amended in July 1998)
of the total amount of the outstanding indebtedness of the Company.
The Term Loans are required to be prepaid and commitments under the
Revolving Credit Facility reduced in an aggregate amount equal to (i) 50%
of excess cash flow of each fiscal year commencing the fiscal year ending
December 31, 2001, (ii) 100% of the net proceeds of asset sales, in excess
of a yearly threshold, outside the ordinary course of business or unused
insurance proceeds, (iii) 100% of the net cash proceeds in excess of the
initial $150.0 million of issuances of debt obligations and (iv) 50% of the
net cash proceeds of issuances of equity securities (other than in
connection with the Equity Commitments); provided, that the prepayments and
reductions set forth under clauses (iii) and (iv) will not be required if,
after giving effect to such issuance, (a) the Company's ratio of senior
debt to EBITDA would be less than 5 to 1 and (b) the Company would be in
pro forma compliance with certain covenants in the Credit Facility.
All obligations of the Company under the Facilities are unconditionally and
irrevocably guaranteed (the "Bank Facility Guarantees") by Holdings and
each existing and subsequently acquired or organized domestic subsidiary of
the Company. The Facilities and the Bank Facility Guarantees, and any
related hedging contracts provided by the lenders under the Credit
Facility, will be secured by substantially all of the assets of the Company
and each existing and subsequently acquired or organized domestic
subsidiary of the Company, including a first priority pledge of all of the
capital stock held by the Company or any of its subsidiaries; provided that
the pledge of shares of foreign subsidiaries may be limited to 65% of the
outstanding shares of such foreign subsidiaries. The PCS Licenses will be
held by one or more single purpose subsidiaries of the Company and will not
be pledged to secure the obligations of the Company under the Credit
Facility, although the equity interest of such subsidiaries must be
pledged. Each single purpose subsidiary will not be allowed by the Company
to incur any liabilities or obligations other than the Bank Facility
Guarantee issued by it, the security agreement entered into by it in
connection with the Credit Facility, and, in the case of any single purpose
subsidiary established to hold real estate, liabilities incurred in the
ordinary course of business of such subsidiary which are incident to being
the lessee of real property of the purchaser, owner of lessee of equipment
and taxes and other liabilities incurred in the ordinary course in order to
maintain its existence.
The Credit Facility contains covenants customary for facilities and
transactions similar to the Credit Facility, including covenants relating
to the amounts of indebtedness that the Company may incur, limitations on
dividends and distributions on, and redemptions and repurchases of, capital
stock and other similar payments and various financial maintenance
covenants. The Credit Facility also contains covenants relating to the
population covered by the Company's network and number of customers and
customary representations, warranties, indemnities, conditions precedent to
borrowing, and events of default.
Loans under the Credit Facility are available to fund capital expenditures
related to the construction of the Company's PCS network, the acquisition
of related businesses, working capital needs of the Company, and customer
acquisition costs. All indebtedness under the Credit Facility will
constitute Senior Debt.
The terms of the Credit Facility originally allowed the Company to incur
only $150 million of indebtedness pursuant to the issuance of Subordinated
Debt (as defined in the Credit Facility). In April 1998, the Company
negated an amendment to the Credit Facility, which included provisions that
(i) permit certain acquisitions (note 4); (ii) permit up to a total of
$450 million in high yield debt; and (iii) exclude the equity issuances
associated with certain acquisitions from the mandatory prepayment
requirement.
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
As of September 30, 1998, the Company has drawn $150 million of Tranche B
Term Loans under the facility.
(7) Income Taxes
The Company accounts for income taxes in accordance with the principles of
SFAS No. 109, which requires the use of the liability method in accounting
for deferred taxes.
In connection with the AT&T transaction discussed in Note 3, a gross
deferred tax liability (due to a difference in book and tax basis of
intangibles) of $20,040,000 was initially recorded.
As of September 30, 1998, the Company recorded a tax benefit (gross
deferred tax asset) of $10,861,411 related to temporary deductible
differences, primarily net operating losses and capitalized start-up costs,
arising during the current and prior year. No valuation allowance is
necessary for these items due to the scheduled reversal of existing taxable
temporary differences arising from the AT&T transaction, within the
applicable carryforward period of these deductible differences.
Accordingly, management believes it is more likely than not that all
recorded deferred tax assets will be realized.
Deferred taxes of $9,177,426 are shown net in the accompanying balance
sheet.
(8) Pending Acquisition
The Company has signed a purchase agreement to acquire from AT&T PCS, Inc,
(the "Norfolk Acquisition") (i) an FCC license to use 20MHz of authorized
frequencies to provide broadband PCS services throughout the entirety of
the Norfolk, Virginia BTA and (ii) certain assets of AT&T PCS used in the
operation of the PCS system in such BTA for an aggregate purchase price of
$105 million, including $13.5 million of Holdings' Series D Preferred Stock
to be issued to AT&T PCS. In addition, the company has received equity
commitments of $16.5 million from certain institutional investors related
to the acqusition (See note 10). The build-out of the network relating to
the Norfolk Acquisition, including the installation of a switch, has been
substantially completed. The Norfolk Acquisition is subject to closing
condition typical in acquisitions of this nature. There can be no assurance
that the Norfolk Acquisition will be consummated on the terms described
herein or at all.
(9) SUBORDINATED DEBT
On May 7, 1998, the Company completed an offering (the "Offering") of
$511,989,000 of 11% Senior Subordinated Discount Notes ("the Notes"),
pursuant to Rule 144A of the Securities Act of 1933, as amended. The net
proceeds of the Offering (after deducting an Initial Purchaser's Discount
of $9 million and fees and expenses of the offering of $1 million) were
approximately $290 million. The Company used $135.0 million of the net
proceeds to acquire the Myrtle Beach System (note 4). The Company intends
to use the balance of the net proceeds from the Offering, together with the
Capital Contributions (note 10) and borrowings under the Credit Facility,
to fund: (i) capital expenditures, including the build-out of its PCS
network; (ii) the Norfolk acquisition (note 8), (iii) operating losses;
(iv) general corporate purposes, and (v) potential acquisitions.
Cash interest will not accrue prior to May 1, 2003. Commencing on November
1, 2003, cash interest will be payable semiannually. Each Note was offered
at an original issue discount (Initial Purchaser's Discount). Although
cash interest will not be paid prior to May 1, 2003, the original issue
discount will accrue from the issue date to May 1, 2003.
The Notes are not redeemable prior to May 1, 2003, except as set forth
below. The Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after May 1, 2003 and prior to maturity at
the following redemption prices (expressed as percentages of principal
amount), plus accrued interest, if any, to but excluding the redemption
date, if redeemed during the 12-month period beginning on May 1 of the
years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003 105.50%
2004 103.67
2005 101.84
2006 and thereafter 100.00
</TABLE>
<PAGE>
TRITON PCS, INC. AND PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
In addition, on or prior to May 1, 2001, the Company may redeem up to 35%
of the principal amount at maturity of Notes issued under the Indenture at
a redemption price equal to 111% of the accreted value at the redemption
date with the net proceeds of one or more equity offerings of qualified
stock of (a) the Company, (b) Holdings, or (c) a special purpose
corporation formed to own qualified stock of the Company or Holdings,
provided that at least 65% of the aggregate principal amount at maturity of
Notes issued under the Indenture would remain outstanding immediately after
giving effect to such redemption.
Upon a change in control, each holder of the Notes may require the Company
to repurchase such Holder's Notes, in whole or in part, at a purchase price
equal to 101% of the accreted value thereof or the principal amount at
maturity, as applicable plus accrued and unpaid interest to the purchase
date.
(10) CAPITAL CONTRIBUTIONS
On February 4, 1998, pursuant to the Securities Purchase Agreement,
Holdings issued $140,000,000 of equity to certain institutional investors.
The Securities Purchase Agreement requires these investors to fund their
unconditional and irrevocable obligations in installments in accordance
with the following schedule:
<TABLE>
<CAPTION>
DATE DUE AMOUNT
<S> <C>
February 4, 1998 $ 45,000,000
February 4, 1999 35,000,000
February 4, 2000 35,000,000
February 4, 2001 25,000,000
$140,000,000
</TABLE>
Pursuant to the Securities Purchase Agreement, the initial cash
contribution and the unfunded commitments are required to be made to
Holdings however the credit agreement requires and pursuant to the Closing
Agreement, Holdings has directed that all cash contributions subsequent to
the initial cash contribution be made directly to the Company.
As of September 30, 1998, Holdings received $35 million of additional
equity contributions related to the acquisition of the Myrtle Beach System
(see note 4). These funds were concurrently contributed to the Company.
Through September 30, 1998, Holdings received commitments for $55 million
in equity contributions related to (i) the Norfolk acquisition (note 8) and
(ii) a potential contribution by AT&T PCS of additional PCS licenses to the
Company. These commitments are contingent on the completion of the pending
acquisition.
Common Stock
On October 2, 1997, the Company issued 100 shares of its common stock to
Holdings.
L.L.C. Member Capital
Members' capital contributions are recorded when received. Total committed
capital at October 31, 1997 was $1.00. Cash available for distribution
will be made in proportion to their capital accounts. Allocation of
income, gains, losses, and deductions will be in proportion to their
capital accounts
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission ("SEC"), in the Company's press releases and
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "will likely result," "management expects" or
"the Company expects," "will continue," "is anticipated," "estimated" or similar
expressions (including confirmations by an authorized executive officer of the
Company or any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speak only as of the date made. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The Company has no obligation to release publicly the result of any
revisions, which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
GENERAL
The following discussion and analysis is based upon the combined financial
statements of the Company and its predecessor, Triton Communications L.L.C.
("L.L.C.") for the periods presented herein, and should be read in conjunction
with the combined financial statements and the notes thereto.
On March 6, 1997, L.L.C. was formed to explore various business
opportunities in the wireless telecommunications industry, principally related
to PCS and cellular activities. During the period from March 6, 1997 through
October 1, 1997, L.L.C.'s activities consisted principally of hiring a
management team, raising capital, and negotiating strategic business
relationships, primarily related to PCS business opportunities. Triton PCS, Inc.
(formerly Triton PCS License Company, Inc., with its subsidiaries referred to as
"Triton") was formed on October 2, 1997 as a wholly owned subsidiary of Triton
PCS Holdings, Inc. (formerly Triton PCS, Inc. referred to as "Holdings").
Subsequent to October 2, 1997, the above activities continued but were conducted
primarily through Triton. Consequently, for purposes of the accompanying
financial statements, L.L.C. has been treated as a "predecessor" entity. The
chief executive officer of L.L.C. is also the chief executive officer of
Holdings and Triton. As a result of this relationship, certain financing
relationships and the similar nature of the business activities conducted by
each respective legal entity, L.L.C. and Triton are considered companies under
common control.
OVERVIEW
The Company intends to become a leading provider of wireless broadband PCS
in the southeastern United States. The Company was established by Michael
Kalogris, Steven Skinner and other former executives of Horizon Cellular Group,
along with various private equity investors, with the intent to develop and
operate a leading PCS network in the Southeast. In October 1997, the Company
entered into a joint venture agreement with AT&T PCS, a wholly-owned subsidiary
of AT&T Corp., whereby the Company will be the exclusive provider of wireless
mobility services under the AT&T consumer brand name in a contiguous area
covering approximately 11 million Pops (population equivalents) in the
southeastern United States. AT&T PCS contributed the PCS Licenses to the Company
covering the Licensed Area in exchange for an equity interest in Holdings.
Additionally, the Company is a party to agreements with AT&T that, among other
things, allow the Company to benefit from AT&T's nationwide wireless footprint
and promotional and marketing efforts and provide the Company with favorable
roaming and long distance rates for services on AT&T's wireless and long
distance networks. The PCS Licenses authorize the Company to provide PCS
services to such major population and business centers as Charleston, SC,
Columbia, SC, Greenville/Spartanburg, SC, Richmond, VA and Augusta, GA, as well
as major resort destination such as Myrtle Beach, SC, Hilton Head, SC and Kiawah
Island, SC. The Company expects to commence commercial operations by the end of
the first quarter of 1999 or shortly thereafter in the Initial Configuration.
<PAGE>
On June 30, 1998, the Company acquired an existing cellular system (the
"Myrtle Beach System"), which serves Myrtle Beach, SC and the surrounding area
(the "Myrtle Beach Acquisition"), from Vanguard Cellular Systems of South
Carolina, Inc. for a purchase price of approximately $163.8 million. The Company
believes it will seamlessly integrate the Myrtle Beach System, which uses
digital TDMA/IS-136 cellular technology, into its planned PCS network as part of
the Initial Configuration. Since the Myrtle Beach System is within the Licensed
Area, it will operate under the AT&T Agreements. The Company expects that the
Myrtle Beach Acquisition will (i) provide the Company with a system that
currently generates positive cash flow, (ii) accelerate the ability of the
Company to capture roaming traffic generated by Myrtle Beach's highly transitory
population, (iii) accelerate the Company's time-to-market in South Carolina and
(iv) render a PCS build-out in the Myrtle Beach region unnecessary.
The Company has signed a purchase agreement to acquire from AT&T PCS, Inc.
(the "Norfolk Acquisition") (i) an FCC license to use 20MHz of authorized
frequencies to provide broadband PCS services throughout the entirety of the
Norfolk, Virginia BTA and (ii) certain assets of AT&T PCS used in the operation
of the PCS system in such BTA for an aggregate purchase price of $105 million,
including $13.5 million of Series D Holdings Preferred Stock to be issued to
AT&T PCS. In addition, the company has received equity commitments of $16.5
million from certain institutional investors related to the acquisition. The
build-out of the network relating to the Norfolk Acquisition, including the
installation of a switch, has been substantially completed. The Norfolk
Acquisition is subject to closing conditions typical in acquisitions of this
nature. There can be no assurance that the Norfolk Acquisition will be
consummated on the terms described herein or at all.
To date, the Company has incurred expenditures in connection with the
establishment of its business, raising capital, the initial design and
construction of its PCS network, and engineering, marketing, administrative and
other start-up related expenses. The Company expects to launch commercial
operations in the Initial Configuration by the end of the first quarter of 1999
or shortly thereafter. Upon completion of the Initial Configuration, the Company
intends to target the remaining cities, connecting highway corridors and
counties along the interstates with population densities of 50 or more per
square mile. The Company expects to extend its coverage to approximately 85% of
the Pops in the Licensed Area by the end of the fourth quarter of 2001, which
the Company believes will generally provide greater coverage than current
cellular operators in such markets. The extent to which the Company is able to
generate operating revenues and earnings is dependent on a number of business
factors, including construction of the network at or below its estimated costs,
successfully deploying the PCS network and attaining profitable levels of market
demand for the Company's products and services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Revenues for the three months ended September 30, 1998 were $8.8 million related
to the Myrtle Beach area. Service revenues were $8.4 million for the quarter,
primarily due to revenues in the Myrtle Beach Area. Equipment revenues were $0.4
million for the quarter, primarily related to sales of handsets and accessories
to new customers.
Total operating costs and expenses were $11.9 million for the three months ended
September 30, 1998 as compared to $0.5 million area for the same period in 1997.
Cost of service revenues and equipment revenues were $6.0 million and $0.8
million, respectively, and relate primarily to the Myrtle Beach area and the
establishment of operations in the Company's Initial Configuration.
<PAGE>
General and Administrative expenses increased $1.6 million to $2.2 million for
the three months ended September 30, 1998 as compared to the same period in
1997, primarily due to administrative costs associated with the Myrtle Beach
Area and the establishment of the Company's corporate and regional
organizational structure. During the three months ended September 30, 1998,
depreciation and amortization expenses were $3.0 million. The increase relates
primarily to the depreciation of the assets acquired in Myrtle Beach and the
amortization of the Myrtle Beach license.
For the three months ended September 30, 1998, interest expense was $11.7
million, net of capitalized interest of $0.5 million. The Company had borrowings
of $455.4 million as of September 30, 1998, with a weighted average interest
rate of 10.11%.
For the three months ended September 30, 1998, interest income was $4.1 million
related to interest income on its cash and cash equivalents. Available cash
increased significantly in August after drawing down $75 million on the
Company's outstanding bank facility.
For the three months ended September 30, 1998, the Company recorded a tax
benefit of $4.1 million related to temporary deductible differences, primarily
net operating losses, arising during the current year. Management has concluded
that a valuation allowance is not necessary for these items due to the scheduled
reversal of existing taxable temporary differences within the applicable
carryforward period of those deductible differences, which arose in connection
with the AT&T transaction. Accordingly, management believes it is more likely
than not that all recorded deferred tax assets will be realized.
The net loss increased $5.2 million to $6.6 million for the three months ended
September 30, 1998 as compared to the same period in 1997. The loss resulted
primarily from the items discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE PERIOD FROM MARCH 6, 1997
TO SEPTEMBER 30, 1997
Revenues for the nine months ended September 30, 1998 were $8.8 million related
to the Myrtle Beach Acquisition. For the nine months ended September 30, 1998,
service revenues were $8.4 million, and equipment revenues were $0.4 million,
respectively, which represents third quarter activity in the Myrtle Beach Area
subsequent to the acquisition on June 30, 1998.
Total operating costs and expenses were $18.4 million for the nine months ended
September 30, 1998 as compared to $0.9 million for the same period in 1997.
Cost of service revenues and equipment revenues were $7.4 million and
$0.8 million, respectively, and relate primarily to the Myrtle Beach area
and the establishment of operations in the Company's Initial Configuration.
General and Administrative expenses increased $5.0 million to $5.9 million for
the nine months ended September 30, 1998, primarily due to administrative costs
associated with the Myrtle Beach area and the establishment of the Company's
organizational structure. During the nine months ended September 30, 1998,
depreciation and amortization expenses were $ 4.3 million and relates primarily
to the depreciation of the Myrtle Beach assets and the amortization of the
Myrtle Beach licenses.
For the nine months ended September 30, 1998, interest expense was $21.6
million, net of capitalized interest of $0.8 million. The Company had
borrowings of $455.4 million as of September 30, 1998, with a weighted average
interest rate of 10.11%.
For the nine months ended September 30, 1998, interest income was $6.9 million,
due primarily to interest income on its cash and cash equivalents. Available
cash increased significantly during the nine months due to proceeds of $150
million from the Company's outstanding bank credit facility and proceeds of $291
million from the subordinated debt offering in May 1998.
For the nine months ended September 30, 1998, the Company recorded a tax benefit
of $10.9 million related to temporary deductible differences, primarily net
operating losses, arising during the current and prior year. Management has
concluded that a valuation allowance is not necessary for these items due to the
scheduled reveresal of existing taxable temporary differences within the
applicable carryforward period of those deductible
<PAGE>
differences, which arose in connection with the AT&T transaction. Accordingly,
management believes it is more likely than not that all recorded deferred tax
assets will be realized.
The net loss increased $11.7 million to $13.5 million for the nine months ended
September 30, 1998 as compared to the same period in 1997. The loss resulted
primarily from the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash Used In Operating Activities
Net cash used in operating activities decreased $0.6 million to $0.2 million as
compared to the same period in 1997. The decrease is due primarily to an
increase in the Company's net loss, as adjusted to cash used in operating
activities, of $4.6 million, offset by a positive change in working capital of
$5.2 million due to increases in accounts payable and accrued expenses related
to the operations in the Myrtle Beach area and the ongoing establishment of the
Company's corporate and regional organizational structures.
Net Cash Used in Investing Activities
Net cash used in investing activities for the nine months ended September 30,
1998 was $197.1 million due to capital expenditures related to the initial
network build-out and the establishment of administrative operations and the
payments of approximately $163.9 million attributable to the Myrtle Beach
Acquisition completed on June 30, 1998.
Net Cash Provided By Financing Activities
Net cash provided by financing activities for the nine months ended September
30, 1998 was $497.4 million an increase of $495.7 million over the period from
March 6, 1997 to September 30, 1997. During the period, the Company had net
proceeds from borrowings under the Bank Credit Facility of $150 million The
Company had net proceeds from borrowings under the High Yield Offering $290.
million net of an initial purchasers discount of $9.0 million and fees and
expenses of $1.0 million. In addition, the Company received capital
contributions of $68.3 million from Holdings related to funding of capital
commitments by the initial cash equity investors and receipt of additional
capital commitments related to the Myrtle Beach Acquisition.
Liquidity
The build-out of the Company's PCS network and the marketing of the Company's
PCS services will require substantial capital. As it completes its build-out,
the Company will be highly leveraged. The Company currently estimates that its
capital requirements (including capital expenditures, working capital, debt
service requirements and anticipated operating losses) for the period from
inception through year-end 2001 (assuming substantial completion of the
Company's network build-out of the Pops in the Licensed Area by
such time) will total approximately $859 million. Actual amounts of the funds
required may vary materially from these estimates.
The Company is engaged in a substantial construction project. The Company
expects to spend $167 million on the build-out of its initial coverage area by
year-end 1998. The build-out will include the installation of two switches and
the lease or acquisition of approximately 500 cell sites, as well as spectrum
clearing costs, retail store fitout, and administrative systems. The Company
estimates that it will spend $185 million in 1999 as it continues it's build
out, which will include such activities as cell site acquisitions, construction,
and costs related to it's administrative systems, spectrum clearing, switch
software and retail store fitouts. The preceding capital forecasts exclude
internal engineering and capitalized interest costs.
The Company currently has no sources of revenue to meet its capital requirements
other than from the Myrtle Beach Acquisition. Accordingly, the Company's
revenues will remain insufficient to meet its capital requirements. The Cash
Equity Investors and certain Management Stockholders have severally made
irrevocable commitments to contribute $140 million in cash to the Company
through January 2001 in exchange for 1.4 million shares of Series C Preferred
Stock. To date, the Cash Equity Investors, along with the Management
Stockholders, have contributed an aggregate of $45 million. The Cash Equity
Investors, along with Management Stockholders, will contribute an additional $35
million on each of the first and second anniversaries of the Securities Purchase
Closing Date and $25 million on the third anniversary of the Securities Purchase
Closing Date. In addition, the
<PAGE>
Company has received an additional equity commitment of $35 million of these
commitments have been received. These funds were concurrently contributed to the
Company.
Through September 30, 1998, Holdings received commitments for $55 million in
equity contributions related to (i) the Norfolk acquisition and (ii) a potential
contribution by AT&T PCS of additional PCS licenses to the company. These
commitments are contingent on the completion of the pending acquisition.
On February 3, 1998, the Company entered into the Credit Facility. The Credit
Facility provides for (i) a $175 million, eight and one-half year Tranche A Term
Loan, (ii) a $150 million, nine and one-quarter year Tranche B Term Loan and
(iii) a $100 million, eight and one-half year Revolving Credit Facility. The
commitment to make Revolving Credit Loans is reduced automatically beginning on
August 3, 2004 and the Term Loans must be repaid beginning on February 4, 2002.
In addition, the Credit Facility requires the Company to make mandatory
prepayments of outstanding borrowings under the Credit Facility commencing with
the fiscal year ending December 31, 2001 based on a percentage of excess cash
flow, and contains customary financial and other covenants. To date, $150
million of the Tranche B Term Loans have been drawn by the Company, which are
expected to fund the Company's future operations. Borrowings under the
facilities are secured by a first priority pledge of all assets of the Company,
including the capital stock of the Company and its subsidiaries.
On May 7, 1998, the Company completed an offering (the "Offering") of
$511,989,000 of 11% Senior Subordinated Discount Notes due 2008 (the "Notes"),
pursuant to Rule 144A of the Securities Act of 1933, as amended. The net
proceeds of the Offering (after deducting an Initial Purchaser's Discount of $9
million and fees and expenses of the offering of $1 million) were $290 million.
The Company used $135 million of the net proceeds to acquire the Myrtle Beach
System. The Company intends to use the balance of the net proceeds from the
offering, together with the Capital Contributions and borrowings under the
Credit Facility, to fund: (i) capital expenditures, including the build-out of
its PCS network; (ii) the acquisition of the Myrtle Beach System; (iii)
operating losses; (iv) general corporate purposes, and (v) potential
acquisitions.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" (SFAS 130), which was effective for fiscal year
beginning after December 15, 1997. SFAS 130 established standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is the change in
equity of a business enterprise during a period from transactions and the events
and circumstances from non-owner sources. For the periods presented in the
accompanying statements of operations, comprehensive income equals the amounts
reported on the accompanying statement of operations.
In February 1997, the FASB issued Statement No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"). This statement establishes standards for
disclosing information about an entity's capital structure and is effective for
periods ending after December 15, 1997. The Company has adopted SFAS 129. The
effect of initial application of this statement did not have a material effect
on the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosure About Segments of
an Enterprise and Related Information" ("SFAS 131"). This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. The Company has
adopted SFAS 131. The effect of initial application of the statement did not
have a material effect on the Company's financial statements.
In February 1998, the FASB issued Statement No. 132, "Employees' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). This statement
is effective for fiscal years beginning after December 15, 1997. It is not
expected that application of this statement will have a material effect on the
Company's financial statements.
In April 1998, the Accounting Standards Executive Committee (AcSEC) of the AICPA
issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up
Activities ("SOP 98-5"). This statement requires that the costs of start-up
activities, including organization costs, be expensed as incurred and is
effective for fiscal year ending December 31, 1998. The Company has elected
early adoption of this statement beginning in fiscal year ending December 31,
1998. The effect of initial application of the statement did not have a material
effect on the Company's financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999. The
Company has not yet fully analyzed the impact of this statement on its financial
statements.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. This issue will impact
not only Information Technology ("IT"), but Non-IT systems as well, given Non-IT
systems typically include embedded technology such as microcontrollers. If date
sensitive software recognize the year "00" as the year 1900 rather than the Year
2000, the potential exists for computer system failure or miscalculations, which
could cause disruption of operations.
Given that the Company is in the development stage, and is currently in the
process of selecting and implementing its operational and financial systems, the
Company believes that it has adequately considered Year 2000 compliance in its
selection of IT systems. In addition, given the nature of the Company's
operations, potential non-compliance of Non-IT systems are not expected to have
a significant impact on the Company. However, there can be no assurance that
non-compliance of Non-IT systems will not have a material adverse effect on the
Company or its operations.
The Company has initiated communications with all of its significant software
suppliers and service bureaus to determine their plans for remediating the Year
2000 Issue in their software which the Company uses or relies upon. The
Company's estimate to complete the remediation plan includes the estimated time
associated with mitigating the Year 2000 Issue for third party software.
However, there can be no guarantee that the systems of other companies on which
the Company relies will be converted on a timely basis, or that a failure to
convert by another company would not have material adverse effect on the
Company.
A thorough assesment of the Year 2000 Issue relative to the Myrtle Beach
Acquisition will be performed. The Company intends to migrate the Myrtle Beach
operational and financial systems to the systems currently being implemented
for the Company and expects to complete this migration by December 31, 1998.
There can be no assurance that this migration will be successful. The failure
to successfully migrate the Myrtle Beach operational and financial systems into
the Company's systems could have a material adverse effect on the Company.
The costs and risks associated with the Year 2000 Issue are not expected to have
a significant impact on the Company.
INFLATION
The Company does not believe that inflation has had a material impact on the
Company's operations. However, there can be no assurance that a high rate of
inflation in the future will not have a material adverse effect on the Company's
operating results.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of Management, the
amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or
liquidity of the Company.
Item 5. Other Information
On October 31, 1998 the Company consummated a fully subscribed
registered exchange offer for the notes (the "Exchange Offer") to
satisfy certain of the Company's obligations under a registration
rights agreement relating to the notes. The form and terms of the
notes issued under the Exchange Offer are substantially identical in
all material respects to the form and terms of the notes issued on May
7, 1998.
Item 6. Exhibit and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securites and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
TRITON PCS, INC.
(Registrant)
By: /S/ Michael E. Kalogris
--------------------------------------
Michael E. Kalogris
CEO
By: /S/ David D. Clark
--------------------------------------
David D. Clark
Senior Vice President & CFO
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 0 311,470,902
<SECURITIES> 0 0
<RECEIVABLES> 0 5,408,888
<ALLOWANCES> 0 553,998
<INVENTORY> 0 441,135
<CURRENT-ASSETS> 0 317,738,786
<PP&E> 0 59,118,994
<DEPRECIATION> 0 1,045,849
<TOTAL-ASSETS> 0 639,156,208
<CURRENT-LIABILITIES> 0 10,160,164
<BONDS> 0 300,000,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 328,996,956
<TOTAL-LIABILITY-AND-EQUITY> 0 639,156,208
<SALES> 0 0
<TOTAL-REVENUES> 8,804,629 8,804,629
<CGS> 2,299,332 2,299,332
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 9,874,575 16,405,366
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,475,140 14,444,382
<INCOME-PRETAX> 0 0
<INCOME-TAX> 4,058,786 (10,861,411)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,622,230) (13,483,040)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
