<PAGE>
As filed with the Securities and Exchange Commission on October , 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TELECORP PCS, INC.
(Exact name of registrant as specified in its charter)
Delaware 4812 54-1872248
(Primary Standard (I.R.S. Employer
(State or other Industrial Classification Identification No.)
jurisdiction of Code Number)
incorporation or -----------
organization)
1010 N. Glebe Road
Suite 800
Arlington, VA 22201
(703) 236-1100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-----------
Thomas H. Sullivan
Executive Vice President and Chief Financial Officer
TeleCorp PCS, Inc.
1010 N. Glebe Road, Suite 800
Arlington, VA 22201
(703) 236-1122
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
Copies to:
Thomas J. Murphy William P. Rogers, Jr.
David A. Cifrino Cravath, Swaine & Moore
McDermott, Will & Emery 825 Eighth Avenue
28 State Street New York, New York 10019
Boston, Massachusetts 02109 (212) 474-1270
(617) 535-4000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities To Be Registered Aggregate Offering Price (1) Registration Fee
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<S> <C> <C>
Class A Common Stock, par value
$0.01 per share................ $143,750,000 $39,963(1)
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457 under the Securities Act of 1933.
-----------
The Registrant hereby amends this Registration Statement on the date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall then become effective in accordance with Section
8(a) of the Securities Act of 1933 or until this Registration Statement shall
become effective on the date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 20, 1999.
PROSPECTUS
Shares
TeleCorp PCS, Inc.
Class A Common Stock
--------
We are selling shares of our class A common stock. The underwriters
named in this prospectus may purchase up to additional shares of our class
A common stock to cover over-allotments.
This is our initial public offering and no public market currently exists for
our shares. We currently expect that the initial public offering price will be
between $ and $ per share. We have applied for quotation of the class A
common stock on the Nasdaq National Market under the symbol "TLCP".
--------
Investing in our class A common stock involves risks. See "Risk Factors"
beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial Public Offering Price................................... $ $
Underwriting Discount........................................... $ $
Proceeds to TeleCorp (before expenses).......................... $ $
</TABLE>
--------
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------
Salomon Smith Barney Lehman Brothers
Deutsche Banc Alex. Brown Merrill Lynch & Co.
, 1999
<PAGE>
[Map showing TeleCorp PCS and AT&T Wireless networks in south-central and
northeast United States and Puerto Rico, and captions.]
[TeleCorp and AT&T markets shaded in appropriate regions. TeleCorp and
SunCom logos also displayed.]
[Pictures of wireless phones and users.]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Historical and Pro Forma Consolidated Financial Information..... 20
Management's Discussion and Analysis of Financial Conditions and Results
of Operations.......................................................... 22
Business................................................................. 37
Management............................................................... 58
Principal Stockholders and Beneficial Ownership of Management............ 68
Certain Relationships and Related Transactions........................... 72
Description of Indebtedness.............................................. 89
Description of Capital Stock............................................. 94
Shares Eligible for Future Sale.......................................... 102
Material U.S. Tax Consequences to Non-U.S. Holders....................... 104
Underwriting............................................................. 107
Legal Matters............................................................ 108
Experts.................................................................. 108
Available Information.................................................... 109
Index to Financial Statements............................................ F-1
</TABLE>
---------------
Until , 1999, all dealers that buy, sell or trade the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
TeleCorp
We are the largest AT&T Wireless affiliate in the United States, with
licenses covering approximately 16.5 million people. We provide wireless
personal communications services in selected markets in the south-central and
northeast United States and in Puerto Rico, encompassing eight of the 100
largest metropolitan areas in the United States. Commencing with the launch of
our New Orleans market in February 1999, we have successfully launched our
services in 18 markets, including all of our major markets, and currently have
more than 75,000 subscribers. Our senior management team has substantial
experience in the wireless industry with companies such as AT&T, Bell Atlantic
and Sprint PCS.
Strategic Alliance with AT&T
We entered into a venture with AT&T in July 1998 under which AT&T
contributed personal communications services, or PCS, licenses to us in
exchange for ownership in our company. AT&T is our largest investor,
beneficially owning approximately % of our class A common stock upon
completion of this offering. As an AT&T Wireless affiliate, we enjoy numerous
strategic benefits, including the following:
. Exclusivity. We are AT&T's exclusive provider of wireless mobility
services using equal emphasis co-branding with AT&T in our covered
markets, subject to AT&T's right to resell services on our network.
. Brand. We have the right to use the AT&T brand name and logo together
with our SunCom brand name and logo in our covered markets, giving equal
emphasis to each. We also benefit from AT&T's nationwide advertising and
marketing campaigns.
. Roaming. We are AT&T's preferred roaming partner in our markets. Our
roaming revenues increased from approximately $1.9 million in the first
quarter of 1999 to approximately $7.5 million in the second quarter. We
believe our AT&T Wireless affiliation will continue to provide us with a
valuable base of recurring roaming revenue.
. Coast-to-Coast Coverage. Outside our markets, our wireless customers can
place and receive calls in AT&T Wireless markets and the markets of AT&T
Wireless's other roaming partners. Our ability to offer coast-to-coast
coverage is a competitive advantage as users increasingly choose these
rate plans. As of September 30, 1999, 19% of our customers have chosen
one of our national SunRate(TM) pricing plans.
Markets
Our PCS licenses include several major population centers and popular
vacation destinations such as:
. San Juan, Puerto Rico and the U.S. Virgin Islands;
. New Orleans and Baton Rouge, Louisiana;
. Memphis, Tennessee;
. Little Rock, Arkansas;
. Manchester, Concord and Nashua, New Hampshire; and
. Worcester, Cape Cod and Martha's Vineyard, Massachusetts.
Our launched networks covered approximately 65% of our licensed population
as of September 30, 1999, and by the end of 1999 we expect our network will
cover approximately 75% of our licensed population.
1
<PAGE>
Competitive Strengths
Our goal is to provide our customers with simple-to-buy, easy-to-use
wireless services, including coverage across the nation, superior call quality,
competitive pricing and personalized customer care. In addition to our
strategic alliance with AT&T, we believe we have several key business,
operational and marketing advantages, including our:
. Attractive Markets. Our markets have favorable demographic
characteristics for personal communications services with an average
population density of approximately 38% above the national average. We
believe our markets are strategically important to AT&T because they are
located near or adjacent to traffic corridors in and around large
markets such as Boston, Houston and St. Louis. Our markets include major
population and business centers and vacation destinations that attract
an estimated 39 million visitors per year. Most of our markets are also
adjacent to the markets of the other SunCom companies, Triton PCS, Inc.
and Tritel Communications, Inc.
. Experienced and Incentivized Management. Our 21 member senior management
team has an average of 11 years of experience in the wireless industry.
Together, they will beneficially own approximately % of our class A
common stock upon completion of this offering.
. Substantial Airwave Capacity. We have licenses with a minimum of 35 MHz
of airwaves in our major urban markets of San Juan and New Orleans and
30 MHz in Little Rock and Memphis. Megahertz, or MHz, represents a
measure of airwave capacity. These amounts are equal to or greater than
those held by each of our principal competitors in each of these
markets. We believe these amounts of airwaves will enable us to
competitively deploy new and enhanced voice and data services. This
capacity will also permit us to provide service to the increasing number
of wireless users and to service increased use by subscribers.
. Strong Capital Base. Upon completion of this offering, we will have
approximately $1.5 billion of funded and committed capital. We believe
our existing capital resources, including the proceeds of this offering,
will be sufficient to fund our current business plan, including capital
expenditures and operating losses, through the end of 2001.
. Advanced Digital Technology. We are building our network using time
division multiple access technology, which makes our network compatible
with AT&T's network and other time division multiple access networks.
This technology allows us to offer enhanced features and services
relative to standard cellular service, including extended battery life,
integrated voicemail, paging, fax and e-mail delivery, enhanced voice
privacy and short-messaging capability.
Risk Factors
You should consider carefully all of the information described in this
prospectus and, in particular, you should evaluate the specific factors under
"Risk Factors" beginning on page 6.
------------
Our principal executive offices are at 1010 N. Glebe Road, Suite 800,
Arlington, Virginia 22201. The telephone number at our executive offices is
(703) 236-1100. This prospectus contains trademarks and registered trademarks
of ours and of other companies.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Class A common stock offered by this pro- shares
spectus.................................
Class A common stock outstanding after shares
this offering...........................
Class A common stock and equivalents out- shares
standing after this offering (1)(2).....
Use of proceeds.......................... We expect to use the estimated $
in net proceeds from this offering
for general corporate purposes,
including capital expenditures in
connection with the expansion of our
personal communications services
network, sales and marketing
activities and working capital.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol... TLCP
</TABLE>
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(1) Our restated certificate of incorporation provides that, subject to the
rights of specific classes of stock to vote as a class on specified
matters, until FCC ownership restrictions currently applicable to us no
longer apply, the holders of our class A common stock will collectively
possess 49.9% of the total voting power of the outstanding common stock.
Our founders, Mr. Vento and Mr. Sullivan, as the holders of our voting
preference common stock, collectively possess 50.1% of the total voting
power of our outstanding common stock. See, "Business--Governmental
Regulation--FCC Designated Entity and Small Business Regulation,"
"Principal Stockholders and Beneficial Ownership of Management" and
"Description of Capital Stock."
(2) Includes the following number of shares of class A common stock that are
issuable upon conversion of certain of our other securities that will be
outstanding after this offering:
. 4,826,141 shares issuable to the holders of our series F preferred
stock at their option at any time,
. 368,385 shares issuable to the holders of our class C, class D and
voting preference common stock upon the consent of two-thirds of the
class A common stock after the FCC ownership restrictions no longer
apply to us, and
. 178,735 shares issuable upon the exercise of outstanding employee and
director options as of October 18,1999 at a weighted average exercise
price of $0.02 per share, including 68,610 shares issuable within one
year of completion of this offering. In addition, 408,424 shares of
class A common stock are available for future awards under our 1999
Stock Option Plan.
Excluded from equivalents presented above are shares of class A common
stock issuable to holders of our series A preferred stock at their option
at any time after July 17, 2006, at a conversion rate equal to the
liquidation preference on those shares divided by the market price of the
class A common stock at the time of conversion. At the June 30, 1999,
liquidation preference of the series A preferred shares of approximately
$104.3 million and a market price equal to an assumed initial public
offering price of this offering of $ , the outstanding shares of series
A preferred stock would convert into shares of class A common stock.
See "Description of Capital Stock."
Except where otherwise indicated, the information in this prospectus:
. has been restated to give effect to a 100-for-1 stock split of our
common stock and series F preferred stock effected in August 1999 and a
-for-1 stock split of our common stock that will be effected prior to
this offering.
. assumes no exercise of the underwriters' over-allotment option.
3
<PAGE>
Summary Historical Financial Information
The following summary historical consolidated financial information has been
derived from our audited and unaudited consolidated financial statements
included elsewhere in this prospectus, other than the balance sheet data as of
December 31, 1996, which has been derived from our audited consolidated
financial statements not included in this prospectus. You should read this
information together with our financial statements and related notes included
elsewhere in this prospectus and the information under "Use of Proceeds,"
"Selected Historical and Pro Forma Consolidated Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations. "
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------ -----------------------
July 29, 1996
(inception) to
December 31, 1996 1997 1998 1999
(Predecessor) (Predecessor) 1998 (unaudited) (unaudited)
----------------- ------------- ---------- ----------- -----------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Service revenue....... $ -- $ -- $ -- $ -- $ 6,232
Equipment revenue..... -- -- -- -- 5,649
Roaming revenue....... -- -- 29 -- 9,487
------- -------- ---------- --------- ----------
Total revenue........ -- -- 29 -- 21,368
------- -------- ---------- --------- ----------
Operating expense:
Cost of revenue....... -- -- -- -- 10,107
Operations and
development.......... -- -- 9,772 1,214 15,498
Selling and
marketing............ 10 304 6,325 1,095 20,925
General and
administrative....... 515 2,637 26,239 6,873 22,441
Depreciation and
amortization......... -- 11 1,584 97 16,491
------- -------- ---------- --------- ----------
Total operating
expense............. 525 2,952 43,920 9,279 85,462
------- -------- ---------- --------- ----------
Operating loss....... (525) (2,952) (43,891) (9,279) (64,094)
Other (income)
expense:
Interest expense...... -- 396 11,934 445 17,107
Interest income....... -- (13) (4,697) (140) (3,065)
Other expense......... -- -- 27 4 147
------- -------- ---------- --------- ----------
Net loss............. (525) (3,335) (51,155) (9,588) (78,283)
Accretion of
mandatorily
redeemable
preferred stock.... (289) (726) (8,567) (207) (9,896)
------- -------- ---------- --------- ----------
Net loss attributable
to common equity.... $ (814) $ (4,061) $ (59,722) $ (9,795) $ (88,179)
======= ======== ========== ========= ==========
Net loss attributable
to common equity per
share--basic and
diluted............... $(44.45) $(111.74) $ (6.78) $ (506.60) $ (4.26)
======= ======== ========== ========= ==========
Weighted average common
equity shares
outstanding--basic and
diluted............... 18,313 36,340 8,813,523 19,335 20,689,655
======= ======== ========== ========= ==========
Pro forma net loss
attributable to common
equity per share--
basic and diluted(a).. $ (3.95) $ (4.36)
========== ==========
Pro forma weighted
average common equity
shares outstanding--
basic and diluted(a).. 19,075,746 22,472,928
========== ==========
Other Operating Data:
Subscribers (end of
period)............... -- -- -- -- 30,970
Covered population (end
of period)............ -- -- -- 2,078,000 10,456,000
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
As of June 30, 1999
-----------------------------
Pro Forma
Actual As Adjusted(b)
--------- --------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 151,438
Working capital................................. 108,442
Property and equipment, net..................... 320,604
Personal communications services licenses and
microwave relocation costs..................... 205,075
Intangible assets--AT&T Agreements, net......... 40,321
Total assets.................................... 778,234
Total debt...................................... 618,687
Mandatorily redeemable preferred stock, net..... 239,152
Total stockholders' deficit..................... $(152,630)
</TABLE>
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(a) Pro forma basic and diluted net loss attributable to common equity per
share have been calculated assuming that our pending acquisitions of Viper
Wireless, Inc. and TeleCorp LMDS, Inc. and the completed acquisitions of
Digital PCS, Inc., AT&T Puerto Rico and Wireless 2000, Inc. had been
completed at the beginning of the periods presented. Since we had a net
loss attributable to common equity in each of the periods presented, pro
forma basic and diluted net loss attributable to common equity per share is
the same.
(b) Gives effect to completion of this offering, our pending acquisitions and
adjustments relating to completed acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition History" and "--Recent Developments."
5
<PAGE>
RISK FACTORS
Investing in shares of our class A common stock involves a high degree of
risk. You should carefully consider the risks described below as well as all
the other information in this prospectus--including our financial statements
and related notes--before investing in our class A common stock. Our business,
operating results and financial condition could be seriously harmed due to any
of the following risks. The trading price of our class A common stock could
decline due to any of these risks, and you could lose all or part of your
investment.
We may never achieve operating profitability or generate sufficient cash flow
to meet our obligations.
Our operating history is limited, and we have a history of operating losses.
If we do not achieve and maintain positive cash flow from operations on a
timely basis, we may be unable to develop our network or conduct our business
in an effective or competitive manner. As of June 30, 1999, we had incurred
cumulative operating losses of approximately $111.5 million. We expect to
continue to incur operating losses and to generate negative cash flow from
operating activities during the next several years while we develop our
business and expand our network. Additionally, our business has required and
will continue to require substantial capital expenditures. We will have to
dedicate a substantial portion of any cash flow from operations to make
interest and principal payments on our debt, which will reduce funds available
for other purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
We depend on our agreements with AT&T for our success, and we would have
difficulty operating without them. In addition, our roaming rates with AT&T
will decline over time.
We have entered into a number of agreements with AT&T, including:
. a license agreement;
. a stockholders' agreement;
. an intercarrier roamer services agreement;
. a roaming administration service agreement; and
. a long distance agreement.
In limited situations, AT&T may withdraw from these agreements with us. If
any of the agreements we have entered into with AT&T are not renewed or are
terminated, we would have difficulty operating.
In addition, under the roaming agreement, the roaming rate that AT&T pays to
us when AT&T's customers roam onto our network will decline over each of the
next several years and may be renegotiated. This may affect our roaming
revenue, most of which has historically been derived from AT&T wireless
customers traveling through our markets.
We have agreements with AT&T for equipment discounts. Any disruption in our
relationship with AT&T could hinder our ability to obtain the infrastructure
equipment that we use in our network or harm our relationship with our vendors.
Our agreements with AT&T contain stringent development requirements which, if
not met, will result in the loss of some of our rights under those agreements.
The agreements we have entered into with AT&T contain requirements regarding
the construction of our network, which, in many instances, are more stringent
than those imposed by the FCC. The construction of the remainder of our network
involves risks of unanticipated costs and delays. If we fail to meet AT&T's
requirements, AT&T could terminate the exclusivity of our relationship. Other
providers could then enter into
6
<PAGE>
agreements with AT&T and we could lose access to customers. See "Business--
Network Development" and "Certain Relationships and Related Transactions--AT&T
Agreements."
AT&T could terminate its exclusive relationship with us.
If AT&T combines with specified entities with over $5 billion in revenue
from communications activities that have overlapping PCS or cellular licenses
with us, then AT&T may terminate its exclusivity obligations with us in markets
that overlap with markets of those entities. Other providers could then enter
into agreements with AT&T in those markets, exposing us to increased
competition, and we could lose access to customers.
In addition, AT&T can at any time require us to enter into a resale
agreement which would allow AT&T to sell access to, and usage of, our services
in our licensed area on a nonexclusive basis using the AT&T brand. See "Certain
Relationships and Related Transactions--AT&T Agreements."
We rely on the use of the AT&T brand name and logo to market our services, and
a loss of use of this brand and logo or a decrease in the market value of this
brand and logo would hinder our ability to market our products.
The AT&T brand and logo is highly recognizable and AT&T supports its brand
and logo by its marketing. If we lose our rights to use the AT&T brand and logo
under our license agreement, we would lose the advantages associated with
AT&T's marketing efforts. If we lose the rights to use this brand and logo,
customers may not recognize our brand readily and we may have to spend
significantly more money on advertising to create brand recognition. See
"Business--Marketing Strategy," "--Intellectual Property" and "Certain
Relationships and Related Transactions--AT&T Agreements."
In addition, we depend on AT&T's success as a wireless communications
provider and the value of its brand and logo because many of our operations are
tied to AT&T's network. If AT&T encounters problems in developing and operating
its wireless network it could adversely affect the value to us of the AT&T
brand and our agreements with AT&T. In that event, we may need to invest
heavily in obtaining other operating agreements and in marketing our brand to
develop our business, and we may not have funds to do so.
If we fail to maintain certain quality standards, AT&T could terminate its
exclusive relationship with us and our rights to the AT&T brand.
If we fail to meet specified customer care, reception quality and network
reliability standards set forth under the stockholders' agreement, AT&T may
terminate its exclusivity obligations with us and our rights to the AT&T brand.
If AT&T terminates its exclusivity obligations, other providers could then
enter into agreements with AT&T, exposing us to increased competition, and we
could lose access to customers. If we lose our rights to use the AT&T brand, we
would lose the advantages associated with AT&T's marketing efforts. If we lose
the rights to use this brand, customers may not recognize our brand readily. We
may have to spend significantly more money on advertising to create a brand
recognition. See "Certain Relationships and Related Transactions--AT&T
Agreements."
Our association with the other SunCom companies may harm our reputation if
consumers react unfavorably to them.
We use the SunCom brand name to market our products and services in
conjunction with two other affiliates of AT&T Wireless, Triton PCS and Tritel
Communications, in order to broaden our marketing exposure and share the costs
of advertising. If either of those companies encounters problems in developing
and operating its network, it could harm consumer perception of the SunCom
brand, and in turn harm our own reputation.
7
<PAGE>
We may not be able to manage the construction of our network or the growth of
our business successfully.
We have experienced rapid growth and development in a relatively short
period of time and expect to continue to experience rapid growth in the future.
Our financial performance will depend on our ability to manage such growth and
the successful construction of our network. Our management may not be able to
direct our development effectively, including implementing adequate systems and
controls in a timely manner or retaining qualified employees. This inability
could slow our growth and our ability to compete in the telecommunications
service industry.
We have substantial existing debt, and may incur substantial additional debt,
that we may be unable to service.
We have a substantial amount of debt and may incur additional debt in the
future, and we may not have sufficient funds to make interest and principal
payments on our debt. As of June 30, 1999, our outstanding debt was
approximately $618.7 million. Our senior credit facilities provide for total
borrowings in the amount of up to $560.0 million. In addition, Lucent has
committed to purchase up to an additional $55.0 million of junior subordinated
notes in connection with our development of new markets.
Our substantial amount of debt makes us especially susceptible to competition
and market fluctuations, which may affect our ability to grow our business or
service our debt.
Our substantial amount of debt limits our ability to adjust to changing
market conditions. Because we require significant amounts of cash flow to
service our debt, we may not be able to discount our prices to maintain
competitive pricing packages. If our business does not grow, we may not have
funds to service our debt. We need to realize a significant amount of revenue
to pay our debt.
Our debt instruments contain restrictive covenants that may limit our operating
flexibility.
The documents governing our indebtedness, including the credit facility and
senior subordinated note indenture, contain significant covenants that limit
our ability to engage in various transactions and, in the case of the credit
facility, require satisfaction of specified financial performance criteria. In
addition, under each of these documents, the occurrence of specific events, in
some cases after notice and grace periods, would constitute an event of default
permitting acceleration of the respective indebtedness. The limitations imposed
by the documents governing our outstanding indebtedness are substantial, and if
we fail to comply with them, our debts could become immediately payable at a
time when we are unable to pay them.
If we do not pay our debt owed to the U.S. government when due, the FCC may
impose financial penalties on us or terminate or modify our licenses.
If we do not pay the interest and principal on any debt that we or our
subsidiaries owe to the U.S. government when it is due, the FCC may:
. impose substantial financial penalties;
. reclaim and reauction the licenses for which we incurred the debts;
. not renew any of our other licenses; and
. pursue other enforcement measures.
Any of these FCC actions would slow our growth and our ability to compete in
the wireless telecommunications industry. See "Description of Indebtedness--
Government Debt."
8
<PAGE>
Some of our stockholders are obligated to make equity contributions to us in
the future and we cannot guarantee that they will make those contributions.
We received unconditional and irrevocable equity commitments from some of
our stockholders in connection with the completion of our venture with AT&T and
certain other acquisitions. In return for these commitments, these stockholders
received shares of our common and preferred stock, which they pledged to us and
our senior bank lenders to secure their commitments. These stockholders are
required to fund $37.7 million of these commitments in 2000, $48.6 million in
2001 and the remaining $11.0 in 2002. Under certain circumstances, these
stockholders can transfer their interests in our preferred stock, subject to
the pledge, prior to funding their commitments. In the event any of these
stockholders do not fund the remaining portions of their commitments, we could
foreclose on their pledged shares, but we would likely have to obtain
alternative financing to complete our network. Such financing may not be
available on terms satisfactory to us. If we are unable to secure alternate
financing, we may have to delay, modify or abandon some of our plans to
construct the remainder of our network.
We may not be able to obtain the additional financing we may need to complete
our network and fund operating losses.
We will make significant capital expenditures to finish the construction,
testing and deployment of our network. The actual expenditures necessary to
achieve these goals may differ significantly from our estimates. We cannot
predict whether any additional financing we may need will be available, or what
the terms of any such additional financing would be or whether our existing
debt agreements will allow additional financing. We may incur variable rate
debt, which would make us more vulnerable to interest rate increases. If we
cannot obtain additional financing when needed, we will have to delay, modify
or abandon some of our plans to construct the remainder of our network, which
could slow our growth and our ability to compete in the wireless
telecommunications industry.
We would have to obtain additional financing if, among other things:
. any of our sources of capital are unavailable or insufficient;
. we significantly depart from our business plan;
. we experience unexpected delays or cost overruns in the construction of
our network;
. we experience increases in operating costs;
. changes in technology or governmental regulations create unanticipated
costs; or
. we acquire additional licenses.
We have many competitors that have substantial coverage of our licensed areas,
which makes it difficult for us to acquire and maintain a strong competitive
position and to earn profits.
We compete in our markets with three or more major U.S. wireless
communications services companies in each of our markets, such as:
. Bell Atlantic;
. BellSouth;
. GTE;
. SBC Communications; and
. Sprint PCS.
In some markets, we compete with as many as five major competitors. Many of
these competitors have greater financial, marketing and sales and distribution
resources than we do. In addition, some of these
9
<PAGE>
competitors have achieved substantial coverage in portions of our licensed
areas. Some of our competitors have more extensive coverage within our licensed
areas than we provide and also have broader regional coverage. In order to
attract customers and otherwise compete effectively, we may have to
significantly discount our prices, which may reduce our revenues and make it
more difficult for us to achieve positive cash flow to meet our obligations.
See "Business--Competition."
We may not be able to effectively compete with carriers who entered the
wireless communications market before us.
Competitors who entered the wireless communications services market before
us may have a significant time-to-market advantage over us. As a new entrant in
the market, we may have to significantly discount our prices to attract
customers, which would make it more difficult for us to achieve positive cash
flow to meet our obligations. See "Business--Competition."
Some competitors may have different or better technology than us, and may
attract more customers.
We compete with companies that use other communications technologies,
including paging and digital two-way paging, enhanced specialized mobile radio
and domestic and global mobile satellite service. Specialized mobile radio is a
digital technology system that reuses radio airwaves. These technologies may
have advantages over our technology, and may attract our customers. See
"Business--The Wireless Communications Industry."
Competitors who offer more services than us may attract more customers.
Some of our competitors market other services, such as traditional telephone
service, cable television access and access to the Internet, together with
their wireless communications services, which may make their services more
attractive to customers. They may attract customers away from us, or prevent us
from attracting customers. In addition, in the future, we expect that providers
of traditional telephone services, energy companies, utility companies and
cable operators who expand their services to offer communications services may
compete with us and other wireless providers. See "Business--Competition."
We may not be able to acquire the sites necessary to complete our network.
We must lease or otherwise acquire rights to use sites for the location of
network equipment and obtain zoning variances and other governmental approvals
for construction of our network and to provide wireless communications services
to customers in our licensed areas. If we encounter significant difficulties in
leasing or otherwise acquiring rights to sites for the location of network
equipment, we may need to alter the design of our network. Changes in our
development plan could slow the construction of our network, which would make
it harder to compete in the wireless telecommunications industry or cause us
not to meet development requirements.
Difficulties in obtaining infrastructure equipment may affect our ability to
construct our network and meet our development requirements.
If we do not receive our network equipment in a timely manner, we may be
unable to provide wireless communications services comparable to those of our
competitors. We have purchased a substantial majority of our network equipment
from Lucent. There is high demand for the equipment that we require to
construct our network, and manufacturers of this equipment, including Lucent,
could have substantial backlogs of orders. Accordingly, the lead time for the
delivery of this equipment may be long. Some of our competitors purchase large
quantities of communications equipment and may have established relationships
with the manufacturers of this equipment, such as Lucent. Consequently, they
may receive priority in the delivery of this equipment. If we fail to construct
our network in a timely manner, we may not be able to compete effectively, we
could lose our licenses or we could breach our agreements with AT&T. See
"Business--Network Development" and "Certain Relationships and Related
Transactions--AT&T Agreements."
10
<PAGE>
Potential acquisitions may require us to incur additional debt and integrate
new technologies, operations and services, which may be costly and time
consuming.
We continually evaluate opportunities for the acquisition of licenses and
properties that will compliment or extend our existing operations. If we
acquire new licenses or facilities, we may encounter difficulties that may be
costly and time-consuming and that may slow our growth, which could lower the
market value of our class A common stock. Examples of such difficulties are
that we may have to:
. incur additional debt to finance the acquisitions;
. assume U.S. government debt related to the licenses;
. integrate new technologies with our technology;
. integrate new operations with our operations;
. integrate new services with our offering of services; or
. divert the attention of our management from other business concerns.
We may experience a high rate of customer turnover which may negatively impact
our business.
Many providers in the personal communications services industry have
experienced a high rate of customer turnover as compared to cellular industry
averages. Our strategy to address customer turnover may not be successful, or
the rate of customer turnover may be unacceptable. The rate of customer
turnover may be the result of several factors, including network coverage,
reliability issues such as blocked and dropped calls, handset problems,
nonusage of phones, change of employment, affordability, customer care concerns
and other competitive factors. Price competition and other competitive factors
could also cause increased customer turnover.
We depend upon consultants and contractors for our network services, and if any
of them fail to perform its obligations to us, we may not complete our network
development on a timely basis.
We have retained Lucent and other consultants and contractors to help us to
design, construct and support our network. See "Business--Network Development."
The failure by any of these consultants or contractors to fulfill its
contractual obligations could slow the construction of our network in a timely
manner, which could slow our growth and our ability to compete in the wireless
telecommunications industry.
We may become subject to new health and safety regulations, which may result in
a decrease in demand for our services.
Media reports have suggested that some radio airwave emissions from wireless
handsets may be linked to health concerns. These reports could discourage the
use of wireless handsets, which would decrease demand for our services. Recent
studies have also suggested that hand-held phones may interfere with medical
devices. Subsequent studies that raise public concern could decrease demand for
our services. Governmental authorities may create new regulations concerning
hand-held phones, and our handsets may not comply with rules adopted in the
future. Noncompliance would decrease demand for our services. In addition, some
state and local legislatures have passed or are considering restrictions on
wireless phone use for drivers. The passage or proliferation of this or future
legislation could decrease demand for our services. See "Business--Government
Regulation."
If the management agreement with TeleCorp Management is terminated, we may not
be able to comply with applicable FCC rules.
Under our management agreement with TeleCorp Management, Mr. Vento and Mr.
Sullivan provide management services to us regarding the design, development
and operation of our network. If the management
11
<PAGE>
agreement is terminated, we may have limited success and less ability to comply
with the FCC rules regarding our licenses. See "Business--Government
Regulation" and "Management--Management Agreement."
If we cannot retain senior management, we may not be able to effectively run
our business.
We depend on Mr. Vento, our Chief Executive Officer, Mr. Sullivan, our
Executive Vice President and Chief Financial Officer, and Ms. Dobson, our Chief
Operating Officer, for management leadership. If we lose the services of any of
these executives, we may not be successful in running our business. We do not
carry life insurance on Mr. Vento, Mr. Sullivan or Ms. Dobson. See
"Management."
Government regulation, changes in our licenses or other governmental action
could affect how we do business.
Congress, the FCC, the Federal Aviation Administration, state and local
regulatory authorities or the courts may adopt new regulations, amend existing
regulations, alter the administration of existing regulations or take other
actions that might cause us to incur significant costs in making changes to our
network, and such costs might affect our cash flows.
As the FCC continues to implement changes to promote competition under the
Communication Act of 1934, as amended by the Telecommunication Act of 1996, it
may change how it regulates how our network connects with other carriers'
networks. The FCC may require us to provide lower cost services to other
carriers, which may lessen our revenues.
Our licenses to provide wireless communications services, which are our
principal assets, have terms of ten years. The FCC may revoke all of our
licenses at any time for cause, which includes our failure to comply with the
terms of the licenses, our failure to remain qualified under applicable FCC
rules to hold the licenses, violations of FCC regulations and malfeasance and
other misconduct. The FCC may not renew our licenses upon expiration of their
terms. Further, the FCC could modify our licenses in a way that decreases their
value or use to us or allocate unused airwaves for similar services. The
nonrenewal or loss of any of our licenses would slow our growth and our ability
to compete in the wireless telecommunications industry. See "Business--
Government Regulation."
We could lose our PCS licenses or incur financial penalties if the FCC
determines we are not a very small business or if we do not meet the FCC's
minimum construction requirements.
The FCC could impose penalties on us related to our very small business
status and its requirements regarding minimum construction of our network that
could slow our growth and our ability to compete in the wireless
telecommunications industry.
We and TeleCorp Holding acquired PCS licenses as a very small business, and
TeleCorp Holding and we must remain a very small business for at least five
years to comply with applicable rules of the FCC, including rules governing our
capital and ownership structure and corporate governance. If the FCC determines
that we violated these rules or failed to meet its minimum construction
requirements, it could impose substantial penalties upon us or TeleCorp
Holding. Among other things, the FCC could:
. fine us;
. revoke our licenses;
. accelerate our installment payment obligations; or
. cause us to lose bidding credits retroactively.
See "Business--Government Regulation."
The technologies that we use may become obsolete, which would limit our ability
to compete effectively.
If our technologies become obsolete, we may need to purchase and install
equipment necessary to allow us to convert to new technologies to compete in
the marketplace. We use the TDMA, or time division multiple
12
<PAGE>
access, technology standard in our network. This digital technology allocates a
discrete amount of radio airwaves to each user to permit many simultaneous
conversations on one radio airwave channel. Other digital technologies, such as
CDMA, or code division multiple access, and GSM, or global system for mobile
communications, may have significant advantages over TDMA. CDMA codes and sends
scrambled speech using very few information bits on a network. GSM encompasses
uniform standards in Europe and Japan. Our agreements with AT&T include
conditions requiring us to upgrade of our technology to match the technology of
AT&T. We may not be able to purchase and install successfully the equipment
necessary to allow us to convert to a new or different technology or to adopt a
new or different technology at an acceptable cost, if at all. In addition, the
technologies that we choose to invest in may not lead to successful
implementation of our business plan. See "Business--The Wireless Communications
Industry" and "Certain Relationships and Related Transactions--AT&T
Agreements."
We expect to incur operating costs due to fraud.
Based upon the experiences of other providers of wireless communications
services, we expect to incur costs as a result of the unauthorized use of our
network and to lose revenues. If we are not able to control the unauthorized
use of our network, or if we experience unanticipated types of fraud, we will
not collect revenues owing to us and will incur costs. These costs include the
capital and administrative costs associated with detecting, monitoring and
reducing the incidence of fraud and the costs associated with payments to other
providers of wireless communications services for unbillable fraudulent roaming
on their networks.
A limited number of stockholders control us, and their interests may be
different from yours.
Mr. Vento and Mr. Sullivan will continue to control 50.1% of our total
voting power after the offering through their ownership of the voting
preference stock and have agreed to vote their shares of this stock together on
all matters. In addition, Chase Capital Partners, Equity Linked Investors-II,
Hoak Communications Partners, L.P., Whitney Equity Partners, LP, Media
Communications Partners, AT&T Wireless and TWR Cellular, Inc., will control
approximately % of our total voting power, in the aggregate, after this
offering. These stockholders and certain of their affiliates, together have the
power to elect all of our directors. They have agreed in a stockholders
agreement to arrangements for the designation of board nominees and to vote
their shares together to elect all of the nominees designated by them under the
stockholders agreement. As a result of their stock ownership, these
stockholders and our management will have the ability to control our future
operations and strategy. They will also be able to effect or prevent a sale or
merger or other change of control of us. In addition, by virtue of their
ownership of voting preference stock, Mr. Vento and Mr. Sullivan can control
the outcome of any matter that requires a vote of a majority of the common
stock and can prevent the approval of any matter that requires a supermajority
vote of the common stock.
Conflicts of interest between these stockholders and management stockholders
and our public stockholders may arise with respect to sales of shares of class
A common stock owned by our initial investors and management stockholders or
other matters. For example, sales of shares by our initial investors and
management stockholders could result in a change of control under our credit
facility, which would constitute an event of default under the credit facility,
and under our senior subordinated discount note indenture, which would require
us to offer to repurchase those notes. In addition, the interests of our
initial investors and other existing stockholders regarding any proposed merger
or sale may differ from the interests of our new public stockholders,
especially if the consideration to be paid for the class A common stock is less
than the price paid by public stockholders in this offering.
Our initial investors, directors and members of our management have interests
in other personal communications services companies, and conflicts of interest
may arise from these investments and from other directorships held by our
directors.
Our initial investors, or their affiliates, currently have significant
investments in personal communications services companies other than us. These
initial investors may in the future invest in other entities that compete with
us. In addition, several of our directors, including Mr. Vento and Mr.
Sullivan, serve as directors of, own,
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<PAGE>
or may acquire interests in other communications services companies. As a
result, these directors may be subject to conflicts of interest during their
tenure as our directors. Also, Mr. Vento or Mr. Sullivan may allocate a portion
of their time to managing these companies. Our interests may conflict with the
interests of these companies and any conflicts may not be resolved in our
favor.
We do not intend to pay dividends in the foreseeable future.
We have never declared or paid any cash dividends on our common stock. For
the foreseeable future, we intend to retain any earnings to finance the
development and expansion of our business, and we do not anticipate paying any
cash dividends on our common stock. Payment of any future dividends on our
common stock will depend on our earnings and capital requirements, the terms of
our debt instruments and preferred stock and other factors our board of
directors considers appropriate.
Our stock price is likely to be very volatile.
Prior to this offering, you could not buy or sell our class A common stock
publicly. The market price of the class A common stock after this offering may
vary from the initial public offering price. The market price of our class A
common stock is likely to be highly volatile and could be subject to wide
fluctuations in response to factors such as the following, some of which are
beyond our control:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities analysts
and investors;
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
. changes in the status of our intellectual property and other proprietary
rights;
. changes in law and regulation;
. announcements by third parties of significant claims or proceedings
against us;
. changes in market valuations of other PCS companies;
. announcements of technological innovations or new services by us or our
competitors;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. additions or departures of key personnel;
. future sales of our class A common stock; and
. stock market price and volume fluctuations.
Additional shares of our class A common stock will be eligible for public sale
in the future and could cause our stock price to drop, even if our business is
doing well.
After this offering, we will have shares of class A common stock
outstanding, or shares if the underwriters' over-allotment option is
exercised in full, and we have reserved an additional 587,159 shares of class A
common stock for the issuance of stock options available for grant under our
1999 Stock Option Plan, 178,735 of which have been granted as of October 18,
1999. In addition, shares of our class A common stock may be issued upon
conversion of our series C and series D common stock and our series A and
series F preferred stock. The shares sold in this offering, except for any
shares purchased by our affiliates, may be resold in the public market
immediately. The remaining shares of our outstanding class A common stock,
14
<PAGE>
representing approximately %, or % if the underwriters' over-allotment
option is exercised in full, will be restricted securities and will become
available for resale in the public market as shown in the chart below.
<TABLE>
<CAPTION>
% of Date of availability for resale into public
Number of shares total outstanding market
---------------- ----------------- -------------------------------------------
<C> <C> <S>
32,834 % Between 90 and 365 days after the date of
this prospectus due to provisions of the
federal securities laws.
1,224,385 % 180 days after the date of this prospectus
due to an agreement these stockholders have
with the underwriters. However, the
underwriters can waive this restriction and
allow these stockholders to sell their
shares at any time.
22,676,225 % July 17, 2001 due to restrictions on
transfer under the stockholders' agreement,
unless the restrictions are waived by the
parties thereto, in which case those shares
will be subject to resale subject to volume
limitations, and, in the case of non-
affiliates, without restriction after July
17, 2000.
</TABLE>
We also intend to register under the Securities Act of 1933 approximately
587,159 shares of our class A common stock reserved for issuance under our 1999
Stock Option Plan.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them. See "Shares Eligible for Future Sale."
We depend on our third party service providers to become year-2000 compliant
and we can not assure that this will occur.
We are dependent upon the ability of our third party service providers to
make their software and equipment year-2000 compliant. The failure of such
third party service providers to be year-2000 compliant may affect, among other
things, our clearing house services and billing systems and our customers'
ability to receive local access and over the air activation or to roam on other
networks.
We have engaged a nationwide provider of year-2000 services and initiated a
year-2000 readiness program. While we expect our systems will be year-2000
compliant, we can not guarantee that this will be the case.
Anti-takeover provisions affecting us could prevent or delay a change of
control that you may favor.
Provisions of our restated certificate of incorporation that will become
effective upon closing of this offering and our bylaws, provisions of our debt
instruments and other agreements, and provisions of applicable Delaware law and
applicable federal and state regulations may discourage, delay or prevent a
merger or other change of control that stockholders may consider favorable. The
provisions of our restated certificate of incorporation or bylaws, among other
things, will:
. divide our board of directors into three classes, with members of each
class to be elected in staggered three-year terms;
. limit the right of stockholders to remove directors;
. regulate how stockholders may present proposals or nominate directors
for election at annual meetings of stockholders; and
. authorize our board of directors to issue preferred stock on one or more
series, without stockholder approval.
These provisions could:
. have the effect of delaying, deferring or preventing a change in control
of our company;
15
<PAGE>
. discourage bids for our class A common stock at a premium over the
market price;
. lower the market price of, and the voting and other rights of the
holders of, our class A common stock; or
. impede the ability of the holders of our class A common stock to change
our management.
In addition, our stockholders' agreement, credit facility and our senior
subordinated note indenture contain limitations on our ability to enter into
change of control transactions. See "Certain Relationships and Related
Transactions," "Description of Indebtedness" and "Description of Capital
Stock--Anti-Takeover Provisions."
Our business is subject to regulation by the FCC and state regulatory
commissions or similar state regulatory agencies in the states in which we
operate. This regulation may prevent some investors from owning our securities,
even if that ownership may be favorable to us. The FCC and some states have
statutes or regulations that would require an investor who acquires a specified
percentage of our securities or the securities of one of our subsidiaries to
obtain approval to own those securities from the FCC or the applicable state
commission.
You will experience immediate and substantial dilution.
We expect the initial public offering price will be substantially higher
than the net tangible book value of each outstanding share of common stock.
Purchasers of common stock in this offering will suffer immediate and
substantial dilution. The dilution will be $ per share in the net tangible
book value of the class A common stock at an assumed initial public offering
price of $ per share, which is the midpoint of the initial public offering
price range set forth on the cover of this prospectus.
This prospectus contains statements that are not statements of fact, and these
statements may prove to be incorrect, which may mean we need more capital than
we anticipate.
All statements in this prospectus that are not statements of historical
facts are forward-looking statements. Forward-looking statements are inherently
speculative, and they may be incorrect. We base forward-looking statements in
this prospectus upon the following assumptions, among others, and they may be
incorrect:
. We will not incur any unanticipated costs in the construction of our
network.
. We will be able to compete successfully in each of our markets.
. Demand for our services will meet wireless communications industry
projections.
. Our network will satisfy the requirements described in our agreements
with AT&T and support the services we expect to provide.
. We will be successful in working with AT&T and the other SunCom
companies, as well as with other providers of wireless communications
services and roaming partners, to ensure effective marketing of our
network and the services we intend to offer.
. There will be no change in any governmental regulation or the
administration of existing governmental regulations that requires a
material change in the operation of our business.
If one or more of these assumptions is incorrect, our actual business,
operations and financial results may differ materially from the expectations,
expressed or implied, in the forward-looking statements. Do not place undue
reliance on any forward-looking statements.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of class
A common stock in this offering will be approximately $ at an estimated
initial public offering price of $ per share and after deducting the
estimated underwriting discounts and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that our
net proceeds will be approximately $ million.
We expect to use the net proceeds of this offering for general corporate
purposes, including capital expenditures in connection with the expansion of
our personal communications services network, sales and marketing activities
and working capital. We anticipate spending approximately $95 million in the
fourth quarter of 1999 and approximately $185 million in the year 2000 on
capital expenditures to continue our network construction, although actual
amounts expended may vary significantly depending upon the progress of the
construction and other factors. These capital expenditures are expected to be
funded through a combination of the proceeds of this offering, cash on hand,
available bank and vendor credit facilities and committed equity investments.
A portion of the net proceeds may also be used for approved acquisitions.
Other than the pending acquisitions of TeleCorp LMDS and additional airwaves in
Louisiana, we have no agreements or commitments with respect to any such
acquisition. However, we continually evaluate opportunities and enter into
discussions regarding possible acquisitions of licenses and properties that
will complement or extend our existing operations. We do not currently expect
that we would acquire licenses in any new market unless we are able to extend
the AT&T agreements to cover our operations in such market. See "Management,
Discussion and Analysis of Financial Condition of Results of Operations."
Pending such uses, the net proceeds of this offering will be invested in
short term, interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business. Any future determination to pay
dividends will be at the discretion of our board of directors and will be
dependent upon then existing conditions, including our financial conditions and
results of operations, contractual restrictions, business prospects and other
factors that the board of directors considers relevant. Our ability to pay
dividends is restricted by the terms of our preferred stock, our indenture and
our credit facility. See "Description of Capital Stock" and "Description of
Indebtedness."
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual, unaudited basis,
. giving pro forma effect to our pending acquisition of the remaining
minority interest of Viper Wireless that we do not currently own and
TeleCorp LMDS and adjustments related to completed acquisitions during
the first six months of 1999, and
. on a pro forma as adjusted basis to give effect to the items described
above and the sale of shares of class A common stock in this offering at
an assumed initial public offering price of $ per share.
This information should be read together with "Selected Historical and Pro
Forma Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
-----------------------------------
(In thousands)
Pro Forma
Actual Pro Forma(a) As Adjusted
--------- ------------ -----------
<S> <C> <C> <C>
Cash and cash equivalents.................. $ 151,438 $ 136,622 $
========= ========= ====
Long-term debt:
Government license obligations, net of
discounts............................... $ 17,192 $ 17,192 $
Senior credit facilities (b)............. 225,000 225,000
Senior subordinated notes................ 334,829 334,829
Vendor financing (c)..................... 41,666 41,666
--------- --------- ----
Total long-term debt................... 618,687 618,687
--------- --------- ----
Mandatorily redeemable preferred stock,
net....................................... 239,152 255,067
--------- --------- ----
Stockholders' equity (deficit):
Series F preferred stock................. 44 49
Common stock............................. 221 252
Additional paid-in capital............... 86 44,862
Deferred compensation.................... (13) (2,943)
Common stock subscriptions receivable.... (191) (23,263)
Treasury stock........................... -- --
Accumulated deficit...................... (152,777) (173,172)
--------- --------- ----
Total stockholders' equity (deficit)... (152,630) (154,215)
--------- --------- ----
Total capitalization................... $ 705,209 $ 719,539 $
========= ========= ====
</TABLE>
- --------
(a) Includes, in addition to the Viper Wireless and TeleCorp LMDS transactions,
adjustments resulting from the amortization of the extension of a network
membership license agreement which increases the accumulated deficit, and
the accretion of mandatorily redeemable preferred stock issued in
connection with asset acquisitions which were completed, or were to be
issued in connection with pending acquisitions, which increases the
mandatorily redeemable preferred stock, net and the accumulated deficit.
(b) Our senior credit facilities provide up to $560.0 million of term loan and
revolving credit financing. See "Description of Indebtedness--Senior Credit
Facilities."
(c) Our vendor arrangements with Lucent Technologies have an additional
aggregate commitment of up to $55 million. See "Description of
Indebtedness--Vendor Financing."
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<PAGE>
DILUTION
If you invest in our class A common shares, your interest will be diluted by
an amount equal to the difference between the public offering price per class A
common share and the net tangible book value per class A common share after
this offering. We calculate net tangible book value, which is total assets less
intangible assets and total liabilities, by the number of outstanding class A
common shares.
Our net tangible book deficit as of June 30, 1999, was approximately
$(416,711,000) or approximately $(19.21) per class A common share. After the
sale of the class A common shares we offer under this prospectus, at an
assumed public offering price per class A common share of $ , and after
deducting underwriting commissions and discounts and our estimated expenses in
connection with this offering, our net tangible book deficit as at June 30,
1999, would have been $ million or approximately $ per class A common
share. This represents an immediate increase in net tangible book value of
$ per class A common share to existing shareholders and an immediate
dilution of $ per class A common share to new investors. The following
table illustrates this dilution on a per class A common share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per class A common
share....................................................... $
Net tangible book deficit per class A common share at June
30, 1999.................................................. $(19.21)
Increase in net tangible book deficit per class A common
share attributable to new investors....................... $
-------
Net tangible book deficit per class A common share after the
offering.................................................... $
Dilution in net tangible book deficit per class A common
share to new investors...................................... $
====
</TABLE>
The following table summarizes on a pro forma basis as at June 30, 1999, the
differences between the number of class A common shares purchased from us, the
total consideration paid and the average price per share paid by existing
shareholders and by the new investors in the offering before deducting the
underwriting discounts and commission and estimated offering expenses payable
by us, at the public offering price of $ per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ----------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 24,282,050 % $ 304,548 % $0.0125
New Investors........... % %
---------- --- ------------ -------
Total................. 100% $ 100%
========== === ============ =======
</TABLE>
The foregoing discussion and tables assume no exercise of any options after
June 30, 1999. As of October 18, 1999, an aggregate of 178,735 shares of class
A common stock were issuable upon the exercise of outstanding options issued
under our 1999 Stock Option Plan at a weighted average exercise price of $0.02
per share. If all options outstanding as of June 30, 1999, were exercised, the
net tangible book value per share immediately after completion of this offering
would be $ . This represents an immediate dilution in net tangible book
value of $ per share to purchasers of class A common shares in this
offering.
In addition, the foregoing discussion and table assume no conversion of
outstanding preferred or common stock after June 30, 1999, into class A common
stock. An aggregate of shares of class A common stock are issuable upon
conversion of our class C, class D and voting preference common stock and our
series F preferred stock, subject to FCC ownership restrictions no longer being
applicable to us. If all such shares were converted to class A common shares
and all options described in the preceding paragraph were exercised, the net
tangible book value per share immediately after completion of the offering
would be $ . This represents an immediate dilution in net tangible book
value of $ per share to purchasers of class A common shares in the
offering.
19
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The selected historical consolidated financial information presented on the
following page as of and for the years ended December 31, 1997 and 1998, and
for the period from inception on July 29, 1996 to December 31, 1996, has been
derived from our audited consolidated financial statements included elsewhere
in this prospectus. The balance sheet data as of December 31, 1996 have been
derived from our audited consolidated financial statements not included in this
prospectus. The historical information as of and for the six month period ended
June 30, 1999 has been derived from our unaudited consolidated financial
statements included herein. "Other Operating Data" is not directly derived from
our historical consolidated financial statements, and has been presented to
provide additional information. The unaudited pro forma balance sheet data as
of June 30, 1999 give effect to our pending acquisition of the remaining
minority interest of Viper Wireless that we do not currently own and our
pending acquisition of TeleCorp LMDS as if each of these transactions had
occurred on January 1, 1998. The unaudited pro forma statement of operations
data for the year ended December 31, 1998 and the six month period ended June
30, 1999 give effect to our Viper Wireless and TeleCorp LMDS transactions as if
they had occurred on January 1, 1998. The unaudited pro forma as adjusted
balance sheet data give effect to Viper Wireless and TeleCorp LMDS transactions
and the completion of this offering as if each had occurred on June 30, 1999.
We have provided the pro forma information for informational purposes only and
you should not assume that our results would actually have been as shown as if
we had completed the transactions on the dates indicated.
You should read this information together with our financial statements and
related notes included elsewhere in this prospectus and the information under
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
20
<PAGE>
<TABLE>
<CAPTION>
July 29, 1996 Year Ended December 31, Six Months Ended June 30,
(inception) to ----------------------------------- -----------------------------------
December 31, 1999
1996 1997 1998 1999 Pro Forma
(Predecessor) (Predecessor) 1998 Pro Forma 1998 (unaudited) (unaudited)
-------------- ------------- --------- ---------- --------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Service revenue........ $ -- $ -- $ -- $ -- $ -- $ 6,232 $ 6,232
Equipment revenue...... -- -- -- -- -- 5,649 5,649
Roaming revenue........ -- -- 29 29 -- 9,487 9,487
------- -------- --------- ---------- --------- ---------- ----------
Total revenue.......... -- -- 29 29 -- 21,368 21,368
------- -------- --------- ---------- --------- ---------- ----------
Operating expense:
Cost of revenue........ -- -- -- -- -- 10,107 10,107
Operations and
development........... -- -- 9,772 9,772 1,214 15,498 15,498
Selling and marketing.. 10 304 6,325 6,325 1,095 20,925 20,925
General and
administrative........ 515 2,637 26,239 31,490 6,873 22,441 27,664
Depreciation and
amortization.......... -- 11 1,584 2,764 97 16,491 17,081
------- -------- --------- ---------- --------- ---------- ----------
Total operating
expense............... 525 2,952 43,920 50,351 9,279 85,462 91,275
------- -------- --------- ---------- --------- ---------- ----------
Operating loss......... (525) (2,952) (43,891) (50,322) (9,279) (64,094) (69,907)
Other (income) expense:
Interest expense....... -- 396 11,934 11,934 445 17,107 17,108
Interest income........ -- (13) (4,697) (4,760) (140) (3,065) (3,074)
Other expense.......... -- -- 27 27 4 147 146
------- -------- --------- ---------- --------- ---------- ----------
Net loss............... (525) (3,335) (51,155) (57,523) (9,588) (78,283) (84,087)
Accretion of
mandatorily redeemable
preferred stock....... (289) (726) (8,567) (17,897) (207) (9,896) (13,940)
------- -------- --------- ---------- --------- ---------- ----------
Net loss attributable
to common equity...... $ (814) $ (4,061) $ (59,722) $ (75,420) $ (9,795) $ (88,179) $ (98,027)
======= ======== ========= ========== ========= ========== ==========
Net loss attributable to
common equity per
share--basic and
diluted................ $(44.45) $(111.74) $ (6.78) -- $ (506.60) $ (4.26) --
======= ======== ========= ========= ==========
Weighted average common
equity shares
outstanding--basic and
diluted................ 18,313 36,340 8,813,523 -- 19,335 20,689,655 --
======= ======== ========= ========= ==========
Pro forma net loss
attributable to common
equity per share--basic
and diluted (a)........ $ (3.95) $ (4.36)
========== ==========
Pro forma weighted
average common equity
shares outstanding--
basic and diluted (a).. 19,075,746 22,472,928
========== ==========
Other Operating Data:
Subscribers (end of
period)............... -- -- -- -- -- 30,970 30,970
Covered population (end
of period)............ -- -- -- -- 2,078,000 10,456,000 10,456,000
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma(a) As Adjusted
--------- ------------ -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 151,438 $ 136,622
Working capital........................... 108,442 93,626
Property and equipment, net............... 320,604 320,604
Personal communications services licenses
and microwave relocation costs........... 205,075 237,408
Intangible assets--AT&T Agreements, net... 40,321 54,651
Total assets.............................. 778,234 792,564
Total debt................................ 618,687 618,687
Mandatorily redeemable preferred stock,
net...................................... 239,152 255,067
Total stockholders' deficit............... $(152,630) $(154,215)
</TABLE>
- --------
(a) Pro forma basic and diluted net loss attributable to common equity per
share have been calculated assuming that completion of our pending
acquisitions of Viper Wireless, Inc. and TeleCorp LMDS, Inc. and the
completed acquisitions of Digital PCS, Inc., AT&T Puerto Rico and Wireless
2000, Inc. had been completed at the beginning of periods presented. Since
we had a net loss attributable to common equity in each of the periods
presented, pro forma basic and diluted net loss attributable to common
equity per share is the same.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Our predecessor, TeleCorp Holding Corp., Inc., was incorporated on July 29,
1996, to participate in the FCC's auction of PCS licenses in April 1997, as a
designated entity and very small business, as defined by the FCC. TeleCorp
Holding obtained PCS licenses in the New Orleans, Memphis, Beaumont and Little
Rock basic trading areas, as well as other licenses that were subsequently
transferred to unrelated entities. The FCC has divided the country into major
trading areas which are each further subdivided into basic trading areas for
the purposes of PCS licensing.
We were incorporated on November 14, 1997, by the controlling stockholders
of TeleCorp Holding, which subsequently became our wholly-owned subsidiary. In
January 1998, we entered into a venture with AT&T under which AT&T contributed
PCS licenses to us in exchange for an equity interest in us and sold additional
PCS licenses to us for $21.0 million. In July 1998, we received final FCC
approval for the venture and, in connection with the completion of the venture,
we entered into exclusivity, licensing, roaming and long distance agreements
with AT&T Wireless. We are AT&T's exclusive provider of PCS in our licensed
markets subject to AT&T's right to resell services on our network. We use the
AT&T brand name and logo together with the SunCom name and logo, giving equal
emphasis to each. We have acquired PCS licenses in a total of eight major
trading areas covering approximately 16.5 million people. See "Acquisition
History" below.
For periods prior to 1999 we were a development stage company. In the first
quarter of 1999, we commenced commercial operations in each of our major
mainland U.S. markets, after having launched our New Orleans market for roaming
services in late December 1998. We launched our service in our Puerto Rico
markets on June 30, 1999.
Revenue
We derive our revenue from:
. Service. We sell wireless personal communications services. The various
types of service revenue associated with personal communications
services for our subscribers include monthly recurring charges and
monthly non-recurring airtime charges for local, long distance and
roaming airtime used in excess of pre-subscribed usage. Our customers'
charges are rate plan dependent, based on the number of pooled minutes
included in their plans. Service revenue also includes monthly non-
recurring airtime usage associated with our prepaid subscribers and non-
recurring activation and de-activation service charges.
. Roaming. We charge monthly, non-recurring, per minute fees to other
wireless companies whose customers use our network facilities to place
and receive wireless services.
. Equipment. We sell wireless personal communications handsets and
accessories that are used by our customers in connection with our
wireless services.
Roaming revenue constituted the largest component of our revenue during the
first six months of this year. We expect that as our customer base grows, there
will be a significant change in our gross revenue mix. As a result, service
revenue is expected to increase while roaming revenues and equipment sales are
expected to decrease, as a percent of gross revenue. Roaming minutes on our
network are expected to increase as AT&T and other carriers increase the number
of subscribers on their networks. Under our reciprocal roaming agreement with
AT&T, our largest roaming partner, the amount we will receive and pay for
roaming minutes declines for each of the next several years.
22
<PAGE>
It appears that the wireless industry is experiencing a general trend
towards offering rate plans containing larger buckets of minutes. This is
expected to result in decreases in gross revenue per minute.
We have autonomy in determining our pricing plans. We have developed our
pricing plans to be competitive and to emphasize the advantages of our
offerings. We may discount our pricing in order to obtain customers or in
response to downward pricing in the market for wireless communications
services.
Cost of Revenue
Equipment. We purchase personal communications handsets and accessories from
third party vendors to resell to our customers for use in connection with our
services. The cost of handsets is, and is expected to remain, higher than the
resale price to the customer. We record as cost of revenue an amount
approximately equal to our revenue on equipment sales. We record the excess
cost of handsets as a sales and marketing operating expense. We do not
manufacture any of this equipment.
Roaming Fees. We pay fees to other wireless communications companies based
on airtime usage of our customers on other communications networks. It is
expected that reciprocal roaming rates charged between us and other carriers
will decrease. We do not have any significant minimum purchase requirements
other than our obligation to purchase at least 15 million roaming minutes from
July 1999 to January 2002 from another wireless provider in Puerto Rico
relating to customers roaming outside our coverage area. We believe we will be
able to meet these minimum requirements.
Clearinghouse Fees. We pay fees to an independent clearinghouse for
processing our call data records and performing monthly inter-carrier financial
settlements for all charges that we pay to other wireless companies when our
customers use their network, and that other wireless companies pay to us when
their customers use our network. We do not have any significant minimum
purchase requirements. These fees are based on the number of transactions
processed in a month.
Variable Interconnect. We pay monthly charges associated with the connection
of our network with other carriers' networks. These fees are based on minutes
of use by our customers. This is known as interconnection. We do not have any
significant minimum purchase requirements.
Variable Long Distance. We pay monthly usage charges to other communications
companies for long distance service provided to our customers. These variable
charges are based on our subscribers' usage, applied at pre-negotiated rates
with the other carriers. We do not have any significant minimum purchase
requirements other than an obligation to AT&T Wireless to purchase a minimum
number of minutes of traffic annually over a specified time period and a
specified number of dedicated voice and data leased lines in order for us to
retain preferred pricing rates. We believe we will be able to meet these
minimum requirements.
Operating Expense
Operations and development. Our operations and development expense includes
engineering operations and support, field technicians, network implementation
support, product development, and engineering management. This expense also
includes monthly recurring charges directly associated with the maintenance of
network facilities and equipment. Operations and development expense is
expected to increase as we expand our coverage and add subscribers. In future
periods, we expect that this expense will decrease as a percentage of gross
revenues.
Selling and marketing. Our selling and marketing expense includes brand
management, external communications, retail distribution, sales training,
direct, indirect, third party and telemarketing support. We also record the
excess cost of handsets over the resale price as a cost of selling and
marketing. Selling and
23
<PAGE>
marketing expense is expected to increase as we expand our coverage and add
subscribers. In future periods, we expect that this expense will decrease as a
percentage of gross revenues.
General and administrative. Our general and administrative expense includes
customer support, billing, information technology, finance, accounting and
legal services. Although we expect general and administrative
expense to increase in future periods we expect this expense will decrease
significantly as a percentage of gross revenues. As a result of the offering,
the value of some outstanding stock option and restricted stock awards will
become fixed although most of the awards will remain subject to vesting
requirements over approximately four years. Accordingly, we will record
approximately $68.0 million on our balance sheet as deferred compensation and
additional paid-in capital, based on the assumed initial public offering price.
This amount will be amortized in the statement of operations as additional
compensation expense as the vesting requirements are met. Because some of these
awards will be vested upon the closing of this offering we will record a charge
of approximately $24.0 million of the $68.0 million on our statement of
operations as compensation expense for the fourth quarter of 1999.
Depreciation and amortization. Depreciation of property and equipment is
computed using the straight-line method, generally over three to ten years,
based upon estimated useful lives. Leasehold improvements are amortized over
the lesser of the useful lives of the assets or the term of the lease. Network
development costs incurred to ready our network for use are capitalized.
Amortization of network development costs begins when the network equipment is
ready for its intended use and will be amortized over its estimated useful life
ranging from five to ten years. We began amortizing the cost of the PCS
licenses, microwave relocation costs, and capitalized interest in the first
quarter of 1999, when PCS services commenced in some of our basic trading
areas. Microwave relocation entails transferring business and public safety
companies from radio airwaves that overlap with the portion of the airwaves
covered by our business to other portions of the airwaves. Amortization is
calculated using the straight-line method over 40 years. The AT&T agreements
are amortized on a straight-line basis over the related contractual terms,
which range from three to ten years. Amortization of the AT&T exclusivity
agreement, long distance agreement and the intercarrier roamer services
agreement began once wireless services were available to its customers.
Amortization of the network membership license agreement began on July 17,
1998, the date of the finalization of the AT&T transaction.
Capital expenditures. Our principal capital requirements for deployment of
our wireless network include installation of equipment and, to a lesser extent,
site development work.
Interest Income (Expense). Interest income is earned primarily on our cash
and cash equivalents. Interest expense through June 30, 1999 consists of
interest due on our senior credit facilities, vendor financing, and debt owed
to the U.S. government related to our licenses. Interest payable on the Lucent
series A notes and the Lucent series B notes on or prior to May 11, 2004 will
be payable in additional series A and series B notes. Thereafter, interest will
be paid in arrears in cash on each six month and yearly anniversary of the
series A and series B closing date or, if cash interest payments are prohibited
under the senior credit facilities or a qualifying high yield debt offering, in
additional series A and series B notes. The U.S. government financing receives
quarterly interest payments, which commenced in July 1998 and continued for one
year thereafter, then quarterly principal and interest payments for the
remaining nine years.
Results of Operations
Six Months ended June 30, 1999 Compared to Six Months ended June 30, 1998
For the six months ended June 30, 1999 total revenue was approximately $21.3
million, consisting of service revenue of approximately $6.2 million, equipment
revenue of approximately $5.6 million and roaming revenue of approximately $9.5
million. We began offering wireless services in most of our major markets in
the first quarter of 1999 and a large portion of our revenue resulted from
servicing AT&T's roaming customers in these markets. We generated no revenue
for the six months ended June 30, 1998.
24
<PAGE>
Cost of revenue for the six months ended June 30, 1999 was approximately
$10.1 million. We did not incur any cost of revenue for the six months ended
June 30, 1998.
Operations and development expense for the six months ended June 30, 1999,
was approximately $15.5 million, as compared to approximately $1.2 million for
the six months ended June 30, 1998. This increase was due mainly to the launch
of our networks during the first half of 1999.
Selling and marketing expense for the six months ended June 30, 1999, was
approximately $20.9 million, as compared to approximately $1.1 million for the
six months ended June 30, 1998. This increase was due to salary and benefits
for sales and marketing staff, as well as sales commissions, advertising and
handset subsidy expenses related to the commencement of our services in our
domestic markets during the six months ended June 30, 1999.
General and administrative expense for the six months ended June 30, 1999,
was approximately $22.4 million, as compared to approximately $6.9 million for
the six months ended June 30, 1998. The increase was due to the development and
growth of infrastructure and staffing related to information technology,
customer care and other administrative functions incurred in conjunction with
the commercial launch of our markets during the six months ended June 30, 1999.
Depreciation and amortization expense for the six months ended June 30,
1999, was approximately $16.5 million, as compared to approximately $97,000 for
the six months ended June 30, 1998. This increase was due to our commencing our
wireless network resulting in the depreciation of our fixed assets, as well as
the initiation of amortization on PCS licenses and AT&T agreements.
Interest expense, net of interest income, for the six months ended June 30,
1999, was approximately $14.0 million, as compared to approximately $305,000
for the six months ended June 30, 1998. This increase in interest expense was
primarily related to the $225.0 million principal outstanding under our senior
credit facilities since July 1998 and $327.6 million of senior subordinated
discount notes outstanding since April 1999.
Year ended December 31, 1998 Compared to Year ended December 31, 1997
Revenue for the year ended December 31, 1998 was approximately $29,200. This
revenue resulted from servicing AT&T's roaming customers in our Louisiana
markets. We began offering wireless services in each of our major markets in
the first quarter of 1999. We generated no revenue for the year ended 1997.
Operations and development expense for the year ended December 31, 1998, was
approximately $9.8 million. This expense was primarily related to an increase
in engineering and operating staff devoted to the implementation of future
operations of our network. There was no operations and development expense for
the year ended December 31, 1997.
Selling and marketing expenses for the year ended December 31, 1998, was
approximately $6.3 million, as compared to approximately $0.3 million for the
year ended December 31, 1997. The year-over-year increase was due to the
increase in corporate and regional sales and marketing staff in order to
prepare for domestic market launches in the first quarter of 1999.
General and administrative expense for the year ended December 31, 1998, was
approximately $26.2 million, as compared to approximately $2.6 million for the
year ended December 31, 1997. The year-over-year increase was due to the
development and growth of infrastructure and staffing related to information
technology, customer care and other administrative functions incurred in the
preparation for commercial launch of our markets in the first quarter of 1999.
25
<PAGE>
Depreciation and amortization expense for the year ended December 31, 1998,
was approximately $1.6 million, as compared to approximately $11,000 for the
year ended December 31, 1997. This expense was related to depreciation of
furniture, fixtures and office equipment, as well as the initiation of
amortization on AT&T agreements.
Interest expense, net of interest income, for the year ended December 31,
1998, was approximately $7.2 million, as compared to approximately $0.4 million
for the year ended December 31, 1997. This interest expense was related to
notes payable to shareholders and affiliates. This increase in interest expense
was related to borrowings under the senior credit facilities of $225.0 million
since July 1998 and the issuance of $10.0 million aggregate principal amount of
notes under the vendor financing provided by Lucent.
From July 29, 1996 (inception) to December 31, 1996
Selling and marketing expense and general and administrative expense for the
period from July 29, 1996 (inception), to December 31, 1996, was approximately
$0.5 million, which were associated with salary, benefits and expenses of
administrative personnel, as well as legal and other costs associated with our
formation.
Acquisition History
Following approval of our venture with AT&T by the FCC, we completed the
following acquisitions:
On April 20, 1999, we completed the acquisition of PCS licenses covering the
Baton Rouge, Houma, Hammond and Lafayette, Louisiana basic trading areas from
Digital PCS. As consideration for these licenses, we issued to Digital PCS $2.3
million of our common and preferred stock, paid Digital PCS approximately $0.3
million in reimbursement of interest paid on U.S. government debt related to
the licenses and assumed $4.1 million of debt owed to the U.S. government
related to these licenses. This debt is shown on our balance sheet net of a
discount of [$1.1/$0.7] million reflecting the below market interest rate on
the debt. These licenses cover a population of approximately 1.6 million,
including a population of 1.2 million in Baton Rouge and Lafayette covered by
licenses we already owned. These licenses also cover areas contiguous to our
existing licensed area, including travel corridors, which provide us with
opportunities to expand our covered area.
On May 25, 1999, we completed the acquisition of a PCS license and related
assets covering the San Juan major trading area from AT&T. On May 24, 1999, we
sold to AT&T $40.0 million of our series A and F preferred stock. On May 25,
1999, we purchased the license and related assets from AT&T for $95.0 million
in cash. In addition, we reimbursed AT&T $3.2 million for microwave relocation
and $1.5 million for other expenses it incurred in connection with the
acquisition. This license covers a population of approximately 4.0 million in
Puerto Rico and the U.S. Virgin Islands.
On June 2, 1999, we completed the acquisition of PCS licenses covering the
Alexandria, Lake Charles and Monroe, Louisiana basic trading areas from
Wireless 2000. As consideration for these licenses, we issued to Wireless 2000
approximately $0.4 million of common and preferred stock, paid Wireless 2000
$0.2 million for its costs for microwave relocation related to the Monroe
license and $0.4 million in reimbursement of interest paid on government debt
related to their licenses, and assumed $7.4 million of debt owed to the U.S.
government related to these licenses. This debt is shown on our balance sheet
net of a discount of $1.3 million reflecting the below market interest rate on
the debt. These licenses cover a population of approximately 0.8 million. These
licenses also cover areas contiguous to our existing licensed area, including
travel corridors, which provide us with opportunities to expand our covered
area. We cannot, without AT&T's consent, develop the markets covered by the
Monroe license.
Our agreements with AT&T were extended to cover these markets, except for a
portion of the Monroe basic trading area, upon the closing of the Louisiana and
Puerto Rico acquisitions.
We participated in the FCC's reauction of PCS licenses for additional
licenses through Viper Wireless. On April 15, 1999, the FCC announced that the
reauction ended, and Viper Wireless was the high bidder for
26
<PAGE>
additional airwaves in New Orleans, Houma and Alexandria, Louisiana, San Juan,
Puerto Rico, Jackson, Tennessee and Beaumont, Texas. The FCC granted us all of
these licenses. At present, TeleCorp Holding owns 85% of Viper Wireless, and
Mr. Vento and Mr. Sullivan together own the remaining 15%. Mr. Vento and Mr.
Sullivan together have voting control over Viper Wireless. On September 30,
1999, we solicited the approval of the FCC for the transfer of shares of Viper
Wireless we do not yet own to TeleCorp Holding. Any consolidation of Viper
Wireless into us will be subject to a final FCC order approving the
transaction. In order to finance the acquisition of Viper Wireless, AT&T and
some of our other initial investors paid $32.3 million for additional shares of
our preferred and common stock.
Recent Developments
We have recently entered into the following agreements:
On October 18, 1999, we agreed to acquire TeleCorp LMDS, Inc. through an
exchange of all of the outstanding stock of TeleCorp LMDS for 270,000 shares of
our class A common stock and 2,700 shares of our series C preferred stock.
TeleCorp LMDS's stockholders are Mr. Vento, Mr. Sullivan and three of our
initial investors. By acquiring TeleCorp LMDS, we will gain local multipoint
distribution service licenses covering 1100 MHz of airwaves in the Little Rock,
Arkansas basic trading area and 150 MHz of airwaves in each of the Beaumont,
Texas, New Orleans, Louisiana, San Juan and Mayaguez, Puerto Rico, and U.S.
Virgin Islands basic trading areas. These licenses will provide us with
additional airwaves we can use to carry portions of our PCS network traffic in
these markets.
On October 14, 1999, we agreed to purchase 15 MHz of additional airwaves in
the Lake Charles, Louisiana basic trading area from Gulf Telecomm, LCC. As
consideration for the additional airwaves we will pay Gulf Telecomm $362,844 in
cash, assume approximately $2.3 million in FCC debt related to the license and
reimburse Gulf Telecomm for all interest it paid to the FCC on debt related to
the license from June, 1998 until the date the transaction is completed.
Each of these agreements are subject to governmental approvals and other
customary conditions to closing and they may not close on schedule or at all.
From time to time, we enter into discussions regarding the acquisition of other
licenses, including swapping our licenses for those of other license holders.
Liquidity and Capital Resources
Since inception, our activities have consisted principally of:
. hiring a management team;
. raising capital;
. negotiating strategic business relationships;
. planning and participating in the PCS auction;
. initiating research and development;
. conducting market research; and
. developing our wireless services offering and network.
We have been relying on the proceeds from borrowings and issuances of
capital stock, rather than revenues, for our primary sources of cash flow. We
began commercial operations in December 1998 and began earning recurring
revenues by the end of the first quarter of 1999.
Cash and cash equivalents totaled $151.4 million at June 30, 1999, as
compared to $111.7 million at December 31, 1998. This increase was the result
of incoming cash provided by financing activities of $407.6 million, offset by
$49.5 million of cash used in operating activities and $318.4 million of cash
used in network development and investing activities.
27
<PAGE>
During the six months ended June 30, 1999, we increased long-term debt, net
of accrued interest, by $357.6 million and received $64.2 million of preferred
stock proceeds and receipt of preferred stock subscriptions receivable. Cash
outlays for capital expenditures required to develop and construct our network
totaled $203.2 million. We spent $72.2 million to purchase PCS licenses. In
addition, we were required to deposit $17.5 million with the FCC for other
licenses during the six months ended June 30, 1999. Cash used in operating
activities of $49.5 million for the six months ended June 30, 1999 resulted
from a net loss of $78.3 million that was partially offset by non-cash charges
of $26.1 million and changes in current assets and current liabilities of $2.7
million.
From inception through June 1998, our primary source of financing was notes
issued to our stockholders. In July 1996, we issued $0.5 million of
subordinated promissory notes to our stockholders. We converted these notes
into 50 shares of our series A preferred stock in April 1997. In December 1997,
we issued various promissory notes totaling $2.8 million to our stockholders.
We converted these notes into mandatorily redeemable preferred stock in July
1998. From January 1 to June 30, 1998, we borrowed approximately $22.5 million
in the form of promissory notes to existing and prospective stockholders to
satisfy working capital needs. We converted these notes into our equity in July
1998 in connection with the completion of the venture with AT&T.
From inception through July 1999, for aggregate cash payments of $90.9
million and other consideration, we have issued 97,473 shares of series A
preferred stock, 198,080 shares of series C preferred stock, 47,175 shares of
series D preferred stock, 24,906 shares of series E preferred stock, 4,601,985
shares of series F preferred stock, 22,627,095 shares of class A common stock,
91,846 shares of class C common stock, 275,539 shares of class D common stock;
and 1,000 shares of voting preference stock. The class C, class D and voting
preference common stock are convertible into an aggregate of 368,385 shares of
class A common stock. The issuances have been in connection with capital
infusions as well as with acquisition of licenses and other assets by the
company, as described below. The primary recipients of these shares were CB
Capital Investors, L.P; Equity-Linked Investors--II; Hoak Communications
Partners, L.P; Whitney Equity Partners. L.P; Media/Communications Partners;
AT&T Wireless PCS, LLC; TWR Cellular, Inc; as well as Gerald Vento and Thomas
Sullivan and other management. See "Securities Ownership of Beneficial Owners
and Management."
Our preferred stock is convertible into shares of our common stock at
various times and following various events as follows:
. our series A preferred stock is convertible into shares of our class A
common stock after July 17, 2006 at a conversion rate equal to the
liquidation preference, which was $104.3 million as of June 30, 1999
divided by the market price of the class A common stock at the time of
conversion;
. our series F preferred stock is convertible at any time into shares of
our class A or class B common stock on a share for share basis.
We may redeem:
. shares of our series A preferred stock after the tenth anniversary of
its issuance; and
. shares of our series B, series C and series D preferred stock at any
time;
at the liquidation preference for the shares being redeemed.
The holders of our series A, series B, series C, series D and series E
preferred stock have the right to require us to redeem their shares after the
twentieth anniversary of their issuance time at the liquidation preference for
the shares being redeemed.
Holders of our series A preferred stock are entitled to a quarterly dividend
equal to 10% per annum of such stock's accumulated liquidation preference. Our
accumulated liquidation preference was $104.3 million in aggregate as of June
30, 1999. We may defer payment of this dividend until December 31, 2008, and we
are currently doing so.
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Holders of our series C, D and E preferred stock are not entitled to a
dividend except to the extent declared by our board. However, such stock is
entitled to an accumulated liquidation preference, which was $245.5 million in
aggregate as of June 30, 1999, which accretes at a rate of 6% per annum,
compounded quarterly.
See "Description of Capital Stock" for additional information on the
dividends, liquidation preferences, rankings and voting rights of the capital
stock.
Equity Commitments
In connection with completion of the venture with AT&T, we received
unconditional and irrevocable equity commitments from our stockholders in the
aggregate amount of $128.0 million in return for the issuance of preferred and
common stock. As of September 30, 1999, approximately $55.5 million of the
equity commitments had been funded. The remaining equity commitments are
required to be funded in an installment of $36.3 million in July 2000 and $36.2
million in July 2001.
We received additional irrevocable equity commitments from our stockholders
in the aggregate amount of $5.0 million in return for the issuance of preferred
and common stock in connection with the Digital PCS acquisition. Our
stockholders funded $2.2 million of these equity commitments on April 30, 1999,
and are required to fund $1.4 million in each of July 2000 and July 2001.
We have received additional irrevocable equity commitments from our
stockholders in the aggregate amount of approximately $40.0 million in return
for the issuance of preferred and common stock in connection with the Puerto
Rico acquisition. We received $12.0 million of these commitments on May 24,
1999, and $6.0 million are required to be funded in December 1999 and $11.0
million are required to be funded on each of March 30, 2001 and March 30, 2002.
We also received irrevocable equity commitments from our stockholders in the
amount of approximately $32.3 million in connection with Viper Wireless'
participation in the FCC's reauction of PCS licenses. We received approximately
$6.5 million of these equity commitments on May 14, 1999 and approximately
$11.0 million on July 15, 1999, and approximately $14.8 million on September
29, 1999. In the aggregate, we have obtained $205.3 million of equity
commitments, of which $102.0 million had been funded as of September 30, 1999.
These equity commitments cannot be amended without our consent and the
consent of AT&T and all of the other initial investors. In addition, the terms
of our senior subordinated discount notes and our bank and vendor credit
facilities restrict us from waiving or amending these commitments. The
foregoing equity commitments are also secured by pledges of the shares of our
capital stock issued to each initial investor, other than certain shares of
preferred stock. Those pledges have been assigned to our senior lenders as
security for our senior credit facilities. Transfers of shares of our capital
stock pledged to secure an equity commitment remain subject to such pledge
until the equity commitment is funded in full.
In addition, pursuant to the stockholders' agreement between our initial
investors, Mr. Vento and Mr. Sullivan and us, the initial investors are
restricted from transferring their shares of common stock prior to July 2001,
except to affiliates. Any transfers by them of class A common stock are subject
to rights of first offer and tag-along and drag-along rights in favor of AT&T
and the initial investors. In addition to the approval of our senior lenders,
the terms of the stockholders' agreement may be amended only if agreed to in
writing by us and the beneficial holders of a majority of the class A common
stock party to the stockholders' agreement, including AT&T Wireless, 66 2/3% of
the class A common stock beneficially owned by our initial investors other than
AT&T, and 66 2/3% of the class A common stock beneficially owned by Mr. Vento
and Mr. Sullivan. Following the offering and the expiration or waiver of the
180 day restriction on transfers described under "Underwriting," shares of
preferred stock may be transferred, subject, however, to the pledge described
above and to the continuing obligation of the investor to fund its commitment.
29
<PAGE>
Senior Credit Facilities
In July 1998, we entered into senior credit facilities with a group of
lenders for an aggregate amount of $560.0 million. As amended through the date
of this prospectus, our senior credit facilities provide for:
. a $150.0 million senior secured term loan that matures in January 2007,
. a $225.0 million senior secured term loan that matures in January 2008,
. a $150.0 million senior secured revolving credit facility that matures
in January 2007, and
. a $35.0 million senior secured loan that matures in May 2009
We must repay the term loans in quarterly installments, beginning in
September 2002, and the commitments to make loans under the revolving credit
facility are automatically and permanently reduced beginning in April 2005. As
of June 30, 1999, $225.0 million had been drawn under the senior credit
facilities at an interest rate of 8.29%. See "Description of Indebtedness--
Senior Credit Facilities."
Vendor Financing
In May 1998, we entered into a vendor procurement contract with Lucent,
under which we agreed to purchase radio, call connecting and related equipment
and services for the development of our network. Lucent agreed to provide us
with $80.0 million of junior subordinated vendor financing. This $80.0 million
consisted of $40.0 million aggregate principal amount of increasing rate Lucent
series A notes due 2012 which accrues interest at a rate per annum of 8.5% as
of June 30, 1999 and $40.0 million aggregate principal amount of increasing
rate Lucent series B notes due 2012 and accruing interest at a rate per annum
of 10.0% as of June 30, 1999.
As of June 30, 1999, we had outstanding approximately $41.7 million of the
Lucent series A notes, including $1.6 million of Lucent series A notes issued
as payment in kind, plus $0.1 million of additional accrued interest and
accruing interest at a rate per annum of 8.5% as of June 30, 1999. The $41.7
million principal amount of Lucent series A notes is subject to mandatory
prepayment in an amount equal to the 50% of the amount of the net proceeds of
equity offerings in excess of $198.0 million.
Lucent has agreed to make available up to an additional $55.0 million of
junior subordinated vendor financing in amounts of up to 30% of the value of
equipment, software and services provided by Lucent in connection with any
additional markets we acquire. Any notes purchased under this facility would be
divided equally between Lucent series A and series B notes. As a result of the
markets acquired in connection with the Puerto Rico acquisition, we have $15.0
million of availability under this facility, consisting of $7.5 million of
Lucent series A notes and $7.5 million of Lucent series B notes. The terms of
these Lucent series A and series B notes are identical to the terms of the
original Lucent series A and series B notes, with the exception of their
maturities. These notes will mature six months after the maturity of the senior
subordinated notes. In the event we acquire any new markets, we would have up
to an additional $40.0 million available to us under this facility. See
"Description of Indebtedness--Vendor Financing."
Pursuant to our May 1998 agreement with Lucent, Lucent had agreed to provide
us with $80.0 million in additional junior subordinated vendor financing. In
October 1999, Lucent agreed to provide us with $35 million of financing as a
lender under our senior credit facility, and reduced its commitment to provide
junior subordinated vendor financing to the $55.0 million set forth above.
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<PAGE>
Capital Commitments
Below is a table of capital commitments to us:
<TABLE>
<CAPTION>
Amounts Funded
Capital Commitments Committed Amounts Through June 30, 1999
------------------- ----------------- ---------------------
(in millions) (in millions)
<S> <C> <C>
Senior credit facility.... $ 560.00 $225.0
Senior subordinated
discount notes........... 327.6 327.6
Vendor financing.......... 95.0 40.0
Redeemable preferred
stock:
Issuable for cash....... 205.3 76.2
Issuable for property... 148.9 148.9
-------- ------
Total................... $1,336.8 $817.7
</TABLE>
The senior subordinated discount notes represent a large portion of our
capital resources that do not have required scheduled payments of principal or
interest for five years from their issue date. Accordingly, they represent a
significant source of our liquidity without creating a capital requirement in
the near term.
Capital Expenditures
From inception through December 31, 1998, cash outlays for capital
expenditures were approximately $108.7 million. The continued construction of
our network and the marketing and distribution of wireless communications
products and services will require substantial additional capital. We will
incur significant amounts of debt to implement our business plan and will be
highly leveraged. We estimate that our capital commitments will be sufficient
to meet our total capital requirements through December 31, 2001. These
requirements include:
. license acquisition costs;
. capital expenditures for network construction;
. operating cash flow losses and other working capital costs;
. debt service; and
. closing fees and expenses.
Capital expenditures from inception to June 30, 1999, were approximately $311.9
million. Capital expenditures were approximately $203.2 for the first six
months of 1999. We estimate capital expenditures for year ended December 31,
1999, and December 31, 2000, will be approximately $355.0 million and $185.0
million, respectively.
As of June 30, 1999, we have approximately $20.7 million of debt owed to the
U.S. government related to some of our licenses. This debt is shown on our
balance sheet at $17.2 million net of discounts of $3.5 million reflecting the
below market interest rates on the debt. As of June 30, 1999, we owe the U.S.
government $9.2 million less a discount of $1.1 million, for the acquisition of
PCS licenses in New Orleans, Memphis, Beaumont and Little Rock obtained during
the 1997 auction. The terms of the notes include: an interest rate of 6.25%,
quarterly interest payments which commenced in July 1998 and continued for the
one year thereafter, then quarterly principal and interest payments for the
remaining nine years. The promissory notes are collateralized by the underlying
PCS licenses. As of June 30, 1999, we have approximately $8.2 million of
liabilities for microwave relocation obligations. Approximately $5.7 million is
required to be paid within the next year, and the remaining $2.5 million is
required to be paid in the following year. We do not expect to incur
significant additional microwave relocation costs for our existing markets.
Other
During the six months ended June 30, 1999, we completed the acquisition of
additional PCS licenses from Digital PCS, Inc. and Wireless 2000, Inc. As part
of these acquisitions, we assumed additional U.S. government financing with the
FCC amounting to $11.5 million, less a discount of $2.4 million. The terms of
the notes
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<PAGE>
include an interest rate of 6.125% for notes assumed from Digital PCS, Inc. and
7.00% for notes assumed from Wireless 2000, Inc., quarterly interest payments
for a two--year period and then quarterly principal and interest payments for
the remaining eight years.
In May 1998, we entered into a vendor procurement contract with Lucent under
which we are permitted to purchase up to $285.0 million of radio, call
connecting and related equipment and services for the development of our
wireless communications network. Through June 30, 1999, we have purchased
approximately $130.9 million of equipment and services from Lucent.
We have operating leases primarily related to retail store locations,
distribution outlets, office space and rent for our network development. The
terms of some of the leases include a reduction of rental payments and
scheduled rent increases at specified intervals during the term of the leases.
We are recognizing rent expense on a straight-line basis over the life of the
lease, which establishes deferred rent on the balance sheet. As of December 31,
1998, the aggregate minimum rental commitments under non-cancelable operating
leases are as follows:
<TABLE>
<S> <C>
1999............................................................. $10,755,694
2000............................................................. 10,752,666
2001............................................................. 10,507,474
2002............................................................. 10,369,758
2003............................................................. 8,520,560
Thereafter....................................................... 23,139,323
-----------
Total.......................................................... $74,045,475
===========
</TABLE>
Rental expense, which is recorded ratably over the lease terms, was
approximately $2,000, $157,000, and $3.2 million for the period ended December
31, 1996 and for the years ended December 31, 1997 and 1998, respectively.
We own more than 163 communications towers situated on leased sites in all
of our markets. We are considering entering into sale/leaseback transactions
and may do so if we can obtain terms acceptable to us.
We have entered into a series of agreements for software licenses,
consulting, transition support and maintenance with various vendors. The total
future commitments under the agreements is approximately $6.0 million as of
December 31, 1998.
We have entered into letters of credit to facilitate local business
activities. We are liable under the letters of credit for nonperformance of
certain criteria under the individual contracts. The total amount of
outstanding letters of credit was $1.4 million at December 31, 1998. The
outstanding letters of credit reduce the amount available to be drawn under our
senior credit facility.
We believe that the net proceeds of this offering and other capital raised
to date, which includes proceeds from the offering of the senior subordinated
notes and the funding of the irrevocable equity commitments from our
stockholders will be sufficient to meet our projected capital requirements
through December 31, 2001. The network development requirements imposed by our
agreements with AT&T create significant capital requirements much of which will
be covered by indebtedness we incur. We believe that the capital we have raised
to date as well as the other capital resources currently available to us under
our senior credit facilities and our committed cash equity will be sufficient
to meet our projected capital requirements through December 31, 2001. Our
ability to meet our capital requirements is subject to our ability to construct
our network and obtain customers in accordance with our plans and assumptions
and a number of other risks and uncertainties including those discussed under
the heading "Risk Factors." The development of our network may not be completed
as projected and we may not be able to generate positive cash flow. If any of
our projections are incorrect, we may not be able to meet our projected capital
requirements.
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<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
We are not exposed to fluctuations in currency exchange rates since all of
our services are invoiced in U.S. dollars. We are exposed to the impact of
interest rate changes on our short-term cash investments, consisting of U.S.
Treasury obligations and other investments in respect of institutions with the
highest credit ratings, all of which have maturities of three months or less.
These short term investments carry a degree of interest rate risk. We believe
that the impact of a 10% increase or decline in interest rates would not be
material to our investment income.
We use interest rate swaps to hedge the effects of fluctuations in interest
rates on our senior credit facilities. These transactions meet the requirements
for hedge accounting, including designation and correlation. These interest
rate swaps are managed in accordance with our policies and procedures. We do
not enter into these transactions for trading purposes. The resulting gains or
losses, measured by quoted market prices, are accounted for as part of the
transactions being hedged, except that losses not expected to be recovered upon
the completion of hedged transactions are expensed. Gains or losses associated
with interest rate swaps are computed as the difference between the interest
expense per the amount hedged using the fixed rate compared to a floating rate
over the term of the swap agreement. As of June 30, 1999, we have entered into
six interest rate swap agreements totaling $225.0 million to convert our
variable rate debt to fixed rate debt. The interest rate swaps had no material
impact on our consolidated financial statements as of and for the year ended
December 31, 1998 or the six month period ended June 30, 1999.
Year 2000
The year-2000 issue is the result of computer programs being written using
two digits, rather than four digits, to define the applicable year. Programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year-2000. This could result in a major system failure or
miscalculations, including an inability to process transactions, send invoices
or engage in similar normal business activities. Because we rely on computer
hardware and software, telecommunications and related service industries are
highly susceptible to the year-2000 issue.
Over the past two years, as we purchased the various components that
comprise our internal information technology systems, we received
representations from our vendors that these components were year-2000
compliant. Our non-information technology systems may also be susceptible to
the year-2000 issues. In particular, our network equipment that connects calls
contains embedded components that are date sensitive. We have received
assurances from Lucent that all of our network hardware purchased from them is
year-2000 compliant.
We recently engaged Cayenta.com, a nation-wide provider of year-2000
services. We and Cayenta.com formed a year-2000 committee, and initiated a
year-2000 readiness program that:
. is developing an enterprise plan for addressing the year-2000 situation;
. is providing an inventory of all hardware, software, and network assets;
. has reviewed vendor contracts to determine if year-2000 language is
included;
. is conducting an assessment of year-2000 readiness of TeleCorp
technology assets; and
. will recommend further testing and remediation, if applicable.
The scope of this effort includes our Virginia headquarters as well as our
locations in Arkansas, Louisiana, New England, Tennessee, and Puerto Rico. The
Cayenta.com engagement will address wireless network infrastructure, internally
developed and third party vender-developed applications, information technology
networks, and issues at our data centers, call centers, and call connection
sites.
We also depend upon the ability of AT&T, AT&T's roaming partners and
Electronic Data Systems to ensure that their software and equipment are year-
2000 compliant. We rely on AT&T to provide our customers with over-the-air
activation and roaming. We rely on Electronic Data Systems to provide
clearinghouse services.
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<PAGE>
Our costs with respect to year-2000 compliance have been approximately
$250,000 through June 30, 1999, and we anticipate that our total costs in
evaluating our information technology system will not exceed $1.5 million,
including costs to build the necessary redundancy into our systems.
Although we expect our systems will be year-2000 compliant on a timely
basis, they may not be, and the systems of other parties may not be year-2000
compliant on a timely basis or be compatible with our systems. We believe that
the greatest risk to our ability to provide communications services is the
failure of our service providers to be year-2000 compliant, especially those
service providers that provide local access and some of the billing systems
upon which our long distance communications service relies. In the event one of
our vendors is not year-2000 compliant and their noncompliance affects us, we
believe that this effect will cause only a temporary disruption of our service,
if at all. Although we cannot estimate the material lost revenue due to this
worst case scenario, we do not believe that such losses, if any, will be
significant.
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<PAGE>
THE WIRELESS COMMUNICATIONS INDUSTRY
Wireless communications systems use a variety of radio airwaves to transmit
voice and data. The wireless communications industry includes one-way radio
applications, such as paging or beeper services, and two-way radio
applications, such as personal communications services, or PCS, cellular
telephone and other technologies. Each application is licensed and operates in
a distinct radio airwave block.
Since the introduction of commercial cellular service in 1983, the wireless
communications industry has experienced dramatic growth. The number of wireless
subscribers in the United States has increased from an estimated 340,000 at the
end of 1985 to over 69 million as of December 31, 1998, according to the
Cellular Telecommunications Industry Association, an international association
for the wireless industry. Paul Kagan Associates, an independent media and
telecommunications association, estimates that the number of wireless users
will increase to 142 million by 2003, with PCS users representing nearly 34% of
total users, a significant increase over the approximately 11% of total users
represented by PCS today. The following chart illustrates the annual growth in
U.S. wireless communications customers, who use cellular, PCS or other two-way
wireless services through December 31, 1998:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Wireless Industry
Statistics(1)
Total service revenues
(in billions).......... $ 7.8 $ 10.9 $ 14.2 $ 19.1 $ 23.6 $ 27.5 $ 33.1
Wireless subscribers at
end of period (in
millions).............. 11.0 16.0 24.1 33.8 44.0 55.3 69.2
Subscriber growth....... 45.9% 45.1% 50.8% 40.0% 30.4% 25.6% 25.1%
Average monthly wireless
bill................... $68.68 $61.49 $56.21 $51.00 $47.70 $42.78 $39.43
Ending penetration...... 4.4% 6.2% 9.4 13.0% 16.3% 20.7% 25.7%
Digital subscribers (in
millions).............. -- -- -- -- -- -- 18.3
</TABLE>
- --------
Sources: Cellular Telecommunications Industry Association and Paul Kagan
Associates.
(1) Reflects domestic commercially operational cellular, enhanced special
mobile radio and PCS and enhanced specialized mobile radio technology
providers.
In the wireless communications industry, there are two principal services
licensed by the FCC for transmitting voice and data signals: PCS and cellular.
Personal communications services, or PCS, is a term commonly used in the United
States to refer to service carried over the 1850 MHz to 1990 MHz portion of the
radio airwaves. Megahertz, or MHz, is a method of measuring radio airwaves.
Cellular is a term commonly used in the United States to refer to service
carried over the 824 MHz to 893 MHz portion of the radio airwaves. Cellular
service is the predominant form of wireless voice communications service
available. Cellular systems were originally analog-based systems, although
digital technology has been introduced in some markets. PCS systems use digital
technology. Analog technology currently has several limitations, including lack
of privacy and limited capacity. Digital systems convert 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
enhanced capacity, along with improvements in digital signaling, allows
digital-based wireless technologies to offer new and enhanced services, such as
greater call privacy and robust data transmission features, including mobile
office applications like facsimile, e-mail and wireless connections to
computer/data networks and including the Internet. See "--Government
Regulation" for a discussion of the FCC auction process and allocation of
wireless licenses.
Operation of Wireless Communications Systems
Wireless communications system service areas, whether PCS, cellular or other
technologies, are divided into multiple units. Each unit contains a
transmitter, a receiver and signaling equipment to transmit wireless signals to
individual phones. This equipment is connected by telephone lines or microwave
signals to call connection equipment that uses computers to control the
operation of the communications system for the entire service area. The call
connection equipment controls the connection of calls and the connection of the
wireless
35
<PAGE>
network to local telephone systems and long distance carriers. The system
controls the transfer of calls from equipment site to equipment site as a
subscriber's handset travels, coordinates calls to and from handsets, allocates
calls among the network equipment sites within the system and connects calls to
the local telephone system or to a long distance telephone carrier. Wireless
communications providers must establish agreements with local and long distance
carriers that allow them to pass calls, or interconnect, thereby integrating
their system with the existing communications system.
Because the signal strength of a transmission between a handset and a
network equipment site declines as the handset moves away from the network
equipment site, the wireless network monitors the signal strength of calls in
progress. When the signal strength of a call declines to a predetermined level,
the call connection equipment may transfer the call to another network
equipment site where the signal is stronger. If a handset leaves the service
area of a PCS or cellular system, the call is disconnected unless there is a
technical connection with the adjacent system. If there is a technical
connection with the adjacent system, the customer may roam onto the adjacent
system.
Analog handsets that use the cellular portion of the airwaves are
functionally compatible with cellular systems in all markets in the United
States. As a result, these handsets may be used wherever a subscriber is
located, as long as a cellular system is operational in the area and either the
service provider's system covers such area or a roaming arrangement exists with
a provider covering the area.
Although PCS and cellular systems use similar technologies and hardware,
they operate on different portions of the airwaves and use different technical
and network standards. Use of advanced handsets makes it possible for users of
one type of system to roam on a different type of system outside of their
service area, and to transfer calls from one type of system to another if the
appropriate agreements are in place and the networks are properly configured to
transfer calls from one system to the next.
Currently, PCS systems operate under one of three principal digital signal
transmission technological standards that various operators and vendors have
proposed for use in PCS systems: TDMA, CDMA or GSM. TDMA and GSM are both time
division-based standards but are incompatible with each other and with CDMA.
Accordingly, a subscriber of a system that uses TDMA technology is unable to
use a TDMA handset when travelling in an area not served by TDMA-based PCS
operators, unless the subscriber carries a special handset that permits the
subscriber to use the analog or digital system on the cellular portion of the
airwaves in that area and the appropriate agreements are in place.
With an advanced handset, a user can place or receive calls using:
. a PCS system using the technological standard with which the handset is
compatible;
. a digital system on the cellular portion of the airwaves using the
corresponding technological standard; or
. an analog system on the cellular portion of the airwaves.
If a PCS system operated by the service provider or covered by a roaming
agreement is operating in the area, the call will be placed via this system. If
there is no PCS system providing coverage, the call will be placed through a
digital system on the cellular portion of the airwaves operating in the area
and providing coverage to the user, and if no digital system on the cellular
portion of the airwaves is providing coverage, the call will be connected over
an analog system that uses the cellular portion of the airwaves providing
coverage. These handsets allow for a call in progress to be handed off to an
adjacent system, whether the same mode or band or otherwise, without
interruption if the appropriate agreements are in place. Prior generations of
handsets would cut off the call when the handset left the coverage of one
system and would require the customer to place the call again using the
adjacent system.
36
<PAGE>
BUSINESS
We are the largest AT&T Wireless affiliate in the United States, with
licenses covering approximately 16.5 million people. We provide wireless PCS in
selected markets in the south-central and northeast United States and in Puerto
Rico, encompassing eight of the 100 largest metropolitan areas in the United
States. Commencing with the launch of our New Orleans market in February 1999,
we have successfully launched our services in 18 markets, including all of our
major markets, and currently have more than 75,000 subscribers. Our senior
management team has substantial experience in the wireless industry with
companies such as AT&T, Bell Atlantic and Sprint PCS.
We entered into a venture with AT&T in July 1998 under which AT&T
contributed PCS licenses to us in exchange for ownership in our company. We are
AT&T's exclusive provider of wireless mobility services using equal emphasis
co-branding with AT&T in our covered markets, subject to AT&T's right to resell
services on our network. We have the right to use the AT&T brand name and logo
together with our SunCom brand name and logo, giving equal emphasis to each. We
are AT&T's preferred roaming partner for digital subscribers in our markets.
Additionally, our relationship with AT&T allows us to provide coast-to-coast
coverage to our customers.
Our PCS licenses include several major population centers and popular
vacation destinations such as:
. San Juan, Puerto Rico and the U.S. Virgin Islands;
. New Orleans and Baton Rouge, Louisiana;
. Memphis, Tennessee;
. Little Rock, Arkansas;
. Manchester, Concord and Nashua, New Hampshire; and
. Worcester, Cape Cod and Martha's Vineyard, Massachusetts.
Our launched networks covered approximately 65% of our licensed population
as of September 30, 1999, and by the end of 1999 we expect our network will
cover approximately 75% of our licensed population.
Our goal is to provide our customers with simple-to-buy, easy-to-use
wireless services, including coverage across the nation, superior call quality,
competitive pricing and personalized customer care.
We market our services through company stores, retail outlets, through our
direct corporate and telemarketing sales forces, and on the Internet through
our website. We have a strong distribution presence in our markets with 35
company-owned stores and more than 500 retail outlets where consumers can
purchase our services, including Best Buy, Circuit City, Office Depot, Office
Max, Staples and Radio Shack. As of September 30, 1999, we employed
approximately 340 sales employees, 84 of whom were dedicated to business-to-
business sales activities. Our affiliation with AT&T enables us to leverage its
marketing and sales efforts in our markets.
Strategic Alliance with AT&T
One of our most important competitive advantages is our strategic alliance
with AT&T. In order to rapidly develop some of its wireless communications
markets, AT&T Wireless has focused on constructing its own network in selected
cities and has entered into agreements with independent wireless operators,
such as us, to construct and operate wireless networks in other markets. Our
strategic alliance with AT&T Wireless provides us with many business,
operational and marketing advantages, including:
. Exclusivity. We are AT&T's exclusive provider of wireless mobility
services using equal emphasis co-branding with AT&T in our covered
markets, subject to AT&T's right to resell services on our network.
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. Brand. We have the right to use the AT&T brand name and logo together
with our SunCom brand name and logo in our markets, giving equal
emphasis to each.
. Roaming. We are AT&T's preferred roaming partner for digital subscribers
in our markets. Our roaming revenues increased from approximately $1.9
million in the first quarter of 1999 to approximately $7.5 million in
the second quarter. We believe our AT&T affiliation will continue to
provide us with a valuable base of recurring roaming revenue.
. Coast-to-Coast Coverage. Outside our markets, our wireless customers can
place and receive calls in AT&T Wireless' markets and the markets of
AT&T Wireless' other roaming partners. We believe our ability to offer
coast-to-coast coverage is a competitive advantage as users increasingly
choose these rate plans. As of September 30, 1999, 19% of our customers
have chosen one of our national SunRate pricing plans.
. Products and Services. We receive preferred terms on selected products
and services, including handsets, infrastructure equipment and back
office support from companies who provide these products and services to
AT&T.
. Marketing. We benefit from AT&T's nationwide marketing and advertising
campaigns, including the success of the AT&T Digital One Rate SM plans,
in the marketing of our own national SunRate plans. In addition, we are
working with AT&T's national sales representatives to jointly market our
wireless services to AT&T corporate customers located in our markets.
Competitive Strengths
In addition to the advantages provided by our strategic alliance with AT&T,
we have the following competitive strengths:
. Attractive Markets. Our markets have favorable demographic
characteristics for personal communications services. According to
industry analysts, the average population density of our markets is
approximately 38% above the national average. We believe our markets are
strategically important to AT&T because they are located near or
adjacent to traffic corridors in and around large markets such as
Boston, Houston and St. Louis. Our markets include major population and
business centers and vacation destinations that attract an estimated 39
million visitors per year. Most of our markets are also adjacent to the
markets of the other SunCom companies.
. Experienced and Incentivized Management. Our 21 member senior management
team has an average of 11 years of experience with companies such as
AT&T, Bell Atlantic, BellSouth, SBC Communications, ALLTEL and Sprint
PCS. Together, they will beneficially own approximately % of our class
A common stock upon completion of this offering. Our top three
executives are:
. Gerald Vento, our co-founder and Chief Executive Officer, who has 20
years of experience in communications and previously served as Chief
Executive Officer of Sprint Spectrum/American PCS, L.P., leading the
development of the first PCS network launched in North America.
. Thomas Sullivan, our co-founder, Executive Vice President and Chief
Financial Officer, who formerly served as President of TeleCorp
Holding, our predecessor company, and co-head of the
telecommunications law practice at McDermott, Will & Emery.
. Julie Dobson, our Chief Operating Officer, who has extensive
operating experience in the telecommunications industry, including
18 years at Bell Atlantic, most recently as President of the New
York region of Bell Atlantic Mobile Systems.
. Substantial Airwave Capacity. We have licenses with a minimum of 35 MHz
of airwaves in our major urban markets of San Juan and New Orleans and
30 MHz in Little Rock and Memphis. These
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amounts are equal to or greater than those held by each of our principal
competitors in each of these markets. We believe these amounts of
airwaves will enable us to competitively deploy new and enhanced voice
and data services. This capacity will also permit us to provide service
to the increasing number of wireless users and to service increased use
by subscribers.
. Strong Capital Base. Upon completion of this offering we will have
approximately $1.5 billion of funded and committed capital. We believe
our capital resources, including the proceeds of this offering, will be
sufficient to fund our current business plan, including capital
expenditures and operating losses, through December 31, 2001. Our
initial investors included AT&T, Chase Capital, Desai Associates, Hoak
Capital Corporation, J.H. Whitney & Co., M/C Partners, One Liberty Fund,
Toronto Dominion Investments, and Northwood Capital Partners.
. Advanced Digital Technology. We are building our network using TDMA
technology, which makes our network compatible with AT&T's network and
other TDMA networks. TDMA technology allows enhanced features and
services relative to analog cellular service, including extended battery
life, integrated voicemail, paging, fax and e-mail delivery, enhanced
voice privacy and short-messaging capability. Investment in TDMA product
development has led to the development of an advanced generation of
handsets capable of delivering stand-by battery life of up to 14 days.
We believe that wireless users place great value on the convenience and
reliability afforded by this technological advance. TDMA provides high
network call clarity and in-building penetration. TDMA provides network
capacity at least three times greater than existing analog cellular
networks, which results in operating cost advantages. The increased
volume of TDMA users has driven down handset prices and has increased
the importance of TDMA as an industry standard.
Business Strategy
Our goal is to become the leading provider of wireless personal
communications services in each of our markets, by providing our customers
with simple-to-buy and easy-to-use wireless services, including, coverage
across the nation, superior call quality, competitive pricing and personalized
customer care. The elements of our strategy to achieve these objectives are:
. Leverage AT&T Relationship. We receive numerous benefits from AT&T,
including market exclusivity, co-branding, roaming and coast-to-coast
coverage, and preferred terms on selected products and services. Also,
we benefit from AT&T's nationwide marketing and advertising campaigns,
including those for the AT&T Digital One Rate SM plans, in the marketing
of our national SunRate plans. In addition, we are working with AT&T's
national sales representatives to jointly market our wireless services
to AT&T corporate customers located in our markets.
. Provide Coast-to-Coast Coverage. Our market research indicates that
scope and quality of coverage are extremely important to customers in
their choice of a wireless service provider. We have designed extensive
local calling areas, and we offer coast-to-coast coverage through our
arrangements with AT&T Wireless and its roaming partners. Our network
covers those areas where people are most likely to take advantage of
wireless coverage, such as suburbs, metropolitan areas and vacation
locations: the places where they live, work and play.
. Offer Superior Call Quality. We are committed to making the capital
investment required to develop a superior network. We intend to invest
approximately $55 per covered person in our licensed markets for the
construction of our currently planned network, which we believe will
ensure consistent quality performance and result in a high level of
customer satisfaction. Our capital investment is designed to provide a
highly reliable network as measured by performance factors such as
percentage of call completion and number of dropped calls. We maintain a
state-of-the-art network operations center and, to ensure continuous
monitoring and maintenance of our network, we have a disaster recovery
plan.
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. Provide Enhanced Value at Low Cost. We offer our customers advanced
services and features at competitive prices. Our pricing plans are
designed to promote the use of wireless services by enhancing the value
of our services to our customers. We include usage enhancing features
such as call waiting, three-way conference calling, and short message
service in our basic packages. We market our service with a simple, all-
in-one focus: digital phone, pager and voice mail. We offer our
customers affordable, simple calling plans, and we take advantage of the
coast-to-coast reach of AT&T and its roaming partners. Our national
SunRate plans are similar to AT&T Digital One Rate SM plans in which
minutes can generally be used throughout the United States without
paying additional roaming fees or long distance charges. We believe we
can offer competitive services because of the cost advantages provided
by our agreements with AT&T and the other SunCom companies, the cost-
effective characteristics of TDMA and our centralized administrative
functions and efficient distribution.
. Deliver Quality Customer Care. We serve our customers from our state-of-
the-art facility in Memphis, Tennessee, which houses our customer
service, collections and anti-fraud personnel. Convergys, a leading
provider of outsourced call center services, provides backup call center
support and, for our Spanish speaking customers, bilingual customer
service from two facilities in Florida. We have implemented a "one call
resolution" approach to customer care through the use of customer
support tools such as an advanced diagnostic mechanism and access to
online reference information. In addition, we emphasize proactive and
timely customer service, including welcome packages and anniversary
calls. Finally, we support our customer care initiatives through
employee compensation plans based on subscriber satisfaction and
retention.
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Market Overview
We have basic trading area licenses within the following eight major trading
areas:
<TABLE>
<CAPTION>
Amount of
Markets 1998 Population* Launch Date Airwaves
- ------- ---------------- ----------- ---------
(in thousands) (in MHz)
<S> <C> <C> <C>
San Juan, Puerto Rico
Puerto Rico/San Juan........... 2,719 June 1999 35
Mayaguez Aguadilla............. 1,089 First Quarter 2000 20
Virgin Islands................. 106 Second Quarter 2000 20
------
Total......................... 3,914
New Orleans, Louisiana
New Orleans.................... 1,402 February 1999 35
Baton Rouge.................... 676 February 1999 20
Lafayette...................... 531 June 1999 20
Lake Charles................... 279 Second Quarter 2000 30(a)
Houma.......................... 272 First Quarter 2000 25
Alexandria..................... 209 Third Quarter 2000 30
Hammond........................ 107 September 1999 10
------
Total......................... 3,476
Little Rock, Arkansas
Little Rock.................... 926 March 1999 30
Fort Smith..................... 312 Second Quarter 2000 20
Fayetteville................... 291 April 1999 20
Jonesboro...................... 174 First Quarter 2000 20
Pine Bluff..................... 148 Third Quarter 2000 20
Hot Springs.................... 133 March 1999 20
El Dorado...................... 103 Fourth Quarter 2002 20
Russellville................... 95 Second Quarter 2000 20
Harrison....................... 88 Fourth Quarter 2001 20
------
Total......................... 2,270
Memphis, Tennessee
Memphis........................ 1,493 March 1999 30
Jackson........................ 276 September 1999 35
Dyersburg...................... 116 Third Quarter 2000 20
Blytheville, AR................ 70 Third Quarter 2000 20
------
Total......................... 1,955
Boston, Massachusetts
Worcester, MA.................. 727 April 1999 20
Manchester, NH................. 584 April 1999 20
Boston, MA (b)................. 383 April 1999 20
Hyannis, MA.................... 231 April 1999 20
------
Total......................... 1,925
St. Louis, Missouri
Springfield (c)................ 283 Fourth Quarter 2001 20
Carbondale, IL................. 216 Fourth Quarter 2000 20
Columbia....................... 209 Third Quarter 2000 20
Cape Giradeau.................. 189 Fourth Quarter 2000 20
Quincy......................... 181 Fourth Quarter 2001 20
Jefferson City................. 156 Third Quarter 2000 20
Poplar Bluff................... 155 Fourth Quarter 2002 20
Mt. Vernon, IL................. 121 Fourth Quarter 2000 20
Rolla.......................... 98 Fourth Quarter 2002 20
West Plains.................... 76 Fourth Quarter 2002 20
Kirksville..................... 56 Fourth Quarter 2002 20
------
Total......................... 1,740
Houston, Texas
Beaumont....................... 459 Fourth Quarter 2000 40
------
Total......................... 459
Louisville, Kentucky
Evansville, Indiana............ 518 Fourth Quarter 2000 20
Paducah, Kentucky.............. 231 Fourth Quarter 2000 20
------
Total......................... 749
======
Population Total................ 16,488
======
</TABLE>
- --------
* Sources: The 1998 PCS Atlas & Databook, Paul Kagan Associates, Inc.; 1990
U.S. Census.
(a) Includes 15 MHz to be acquired under pending agreement.
(b) Rockingham and Stafford counties only.
(c) Camden, Cedar, Dallas, Douglas, Hickory, Laclede, Polk, Stone, Taney,
Texas, Webster and Wright counties only.
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Marketing Strategy
We believe that our affiliation with the AT&T brand name and the distinctive
advantages of our TDMA network, combined with our simple-to-buy and easy-to-use
philosophy, will allow us to expand our customer base by capturing significant
market share from existing providers of wireless services in our markets.
Additionally, we expect to attract new users to wireless. We developed our
marketing strategy on the basis of extensive market research in each of our
markets. This research indicates that limited coverage of existing wireless
systems, relatively high costs, inconsistent performance and overall confusion
about wireless services drive subscriber dissatisfaction and reduce the
attractiveness of wireless services for potential new subscribers.
We are focusing our marketing efforts on four primary market segments:
. corporate accounts;
. current wireless users;
. individuals with the intent to purchase a wireless product within six
months; and
. prepaid subscribers.
For each segment, we are creating a specific marketing program, including a
service package, pricing plan and promotional strategy. We believe that
targeted service offerings will increase customer loyalty and satisfaction,
reducing customer turnover.
The following are key components of our marketing strategy:
Branding
We market our wireless services as "SunCom, Member of the AT&T Wireless
Network" and use the globally recognized AT&T brand name and logo in equal size
and prominence with the SunCom brand name and logo. We believe that consumers
associate the AT&T brand with reliability and quality.
We have entered into agreements with Triton PCS and Tritel Communications,
other companies similarly affiliated with AT&T, to adopt a common regional
brand, SunCom. We and the other SunCom companies are establishing the SunCom
brand as a strong local presence with a service area covering a population of
approximately 43.0 million. We enjoy preferred pricing on equipment, handset
packaging and distribution by virtue of our affiliation with AT&T and the other
SunCom companies.
Advertising/Promotion
We believe that the most successful marketing strategy is to establish a
strong local presence in each of our markets. We are directing our media
efforts at the community level by advertising in local publications and
sponsoring local and regional events. We combine these local efforts with mass
market media, including television, radio, newspaper, magazine, outdoor and
Internet advertisements, to promote the SunCom and AT&T brands in the markets
we serve. Outside advertising agencies support our brand campaigns, and also
develop newspaper, radio and web page advertisements to promote specific
product offerings and direct marketing programs for targeted audiences. All of
our advertising materials use the SunCom and AT&T names and the tagline
"SunCom, Member of the AT&T Wireless Network."
Pricing
Our pricing plans are designed to be competitive and straightforward,
offering large buckets of minutes, large local calling areas and usage
enhancing features. We offer pricing plans tailored for our market segments,
including local, regional and national pricing plans. We also offer shared
minute pools that are available for businesses and families who have multiple
wireless users who want to share the bucket of minutes. Through September 30,
1999 our average subscriber used an average of 420 minutes per month.
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We believe the pre-paid subscriber segment represents a large market
opportunity, and we offer pricing plans that will drive growth in these
categories. Pre-pay plans provide an opportunity for individuals whose credit
profiles would not otherwise allow them access to wireless communications to
take advantage of our services. In addition, our pre-pay plans provide an
attractive alternative for families and business users to control the usage of
family members or employees. We also structure our plans to be attractive to
the youth market, who we believe want to pay as they use the service. We
believe we differentiate ourselves from existing wireless competitors by
providing our pre-paid subscribers the same digital services and features
available to other customer segments. Our customers can use pre-pay service
virtually anywhere in the United States on our network, on AT&T's network or
through AT&T's extensive network of roaming agreements. Additionally, our pre-
pay customers hear a "whispered" announcement of time remaining in their
account before each call they place, which allows them to control usage and
reduce balance inquiries to customer service. By contrast, typical pre-pay
plans of our competitors limit service to their networks and usually provide
fewer features and a narrow selection of handsets. As of September 30, 1999,
prepay customers represented 25% of our total subscribers.
AT&T introduced AT&T Digital One Rate SM in May 1998, a suite of rate plans
that allows customers to purchase a large bucket of minutes per month that can
be used locally, or across the U.S., on AT&T's wireless network and its
extensive network of roaming partners for a fixed price with no additional
roaming or long distance charges. We believe AT&T Digital One Rate SM and other
competing flat rate plans are causing shifts in calling patterns in the
wireless industry. As of June 30, 1999, AT&T has reported over 1.5 million
subscribers on the AT&T Digital One Rate SM plans, and reported they were
adding an additional 100,000 subscribers a month. We believe growth in this
category will provide us a valuable roaming revenue stream as AT&T Digital One
Rate SM subscribers use their minutes while visiting our networks.
We are able to offer a similar national SunRate plan by virtue of our
relationship with AT&T. Competing flat rate plans often limit flat rate usage
to the competitor's own networks. We are able to offer a differentiated
national rate plan by virtue of our roaming arrangements with AT&T and its
roaming partners. Through September 30, 1999, 19% of our subscribers had chosen
a national SunRate price plan.
We believe our pricing policies differentiate us from our competition
through simplicity and design. We offer 12 price plans per region, on average,
and we design our plans to encourage customers to enter into long-term
agreements. As of September 30, 1999, approximately 50% of our total
subscribers, and approximately 75% of our total subscribers other than pre-pay
customers, were on annual contracts.
Handsets
We sell our service exclusively with handsets that are compatible with
wireless communications systems that operate using digital service on the PCS
portion of the airwaves, as well as digital and analog service on the cellular
portion of the airwaves. Through the use of technologically advanced Nokia,
Ericsson and Motorola handsets, our customers can use their phones across a
variety of wireless networks.
Service and Features
Wireless Calling
Our primary service is wireless calling, which features advanced handsets,
enhanced voice clarity, improved protection from eavesdropping and a broad
feature set. Our basic wireless service offering includes caller
identification, three-way conference calling, call waiting, voicemail, paging
and short-messaging.
Feature-Rich Handsets
As part of our basic service offering, we provide easy-to-use, interactive
menu-driven handsets that can be activated over the air. These handsets
primarily feature word prompts and easy-to-use menus rather than numeric codes
to operate handset functions. These handsets allow mobile access to e-mail and
other Internet services.
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Extended Battery Life
Our advanced handsets offer significantly extended battery life over earlier
technologies, providing up to 14 days of stand-by battery life. Handsets
operating on a digital system are capable of "sleep-mode" while turned on but
not in use, improving efficiency and extending battery life. We expect that
this feature will increase usage, especially for incoming calls, as users will
be able to leave the phone on for significantly longer periods. The use of
these handsets further extends battery life by using a digital system for
roaming when in areas covered by digital systems.
Improved Voice Quality
We believe the version of TDMA we are using offers significantly improved
voice quality, more powerful error correction, less susceptibility to call
fading and enhanced interference rejection, which results in fewer dropped
calls compared to earlier versions of TDMA.
Voice Privacy and Call Security
Digital technology is inherently more secure than analog technologies. This
security provides increased voice privacy and enhanced fraud protection for our
customers.
Wireless Services Inside Buildings
As the use of wireless devices becomes more widespread, consumers
increasingly are demanding wireless services which extend into office
buildings, subways, airports, shopping centers and private homes. We use large
numbers of small network equipment sites to offer corporate users full coverage
inside buildings of outside calls. We also provide intra-office wireless
communications capabilities letting the user dial office extensions without the
need to dial the complete telephone number. In addition, we are working with a
number of hardware and software suppliers to develop next generation wireless
office services including the use of small network equipment sites within a
building that circumvent the local carrier.
Data and Internet Services
Because of the quality of digital signal transmission, wireless
communications systems are suitable for the transmission of wireless data
services such as applications providing weather reports, sports summaries,
stock quotes, monitoring of alarm systems and Internet access.
Bundling and Affinity Marketing
We may bundle our wireless communications services with other communications
services, including discounted long distance services, through strategic
alliances and resale agreements with AT&T and others. We also may offer service
options in partnership with local business and affinity marketing groups.
Examples of these arrangements include offering wireless services with utility
services, banking services, cable television, Internet access or alarm
monitoring services in conjunction with local information services. These
offerings provide the customer access to information, such as account status,
weather and traffic reports, stock quotes, sports scores and text messages from
any location.
Sales and Distribution
Our sales strategy is to use a balanced mix of distribution channels to
maximize penetration within our licensed service area while minimizing customer
acquisition costs. Our channels include a network of company stores, nationally
recognized retailers, a direct sales force for corporate and business
customers, regional and local mass merchandisers, telesales, direct mail and
on-line sales. We also work with AT&T's sales channels to cooperatively
exchange leads and develop new business.
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We invest in training to ensure that knowledgeable staff is communicating
with customers and potential customers. We also take advantage of over-the-air
activation features available through our digital technology. Our goal is to
let customers use their phone within ten minutes of deciding to purchase the
handset. We provide point of sale materials and tools to educate customers on
their coverage areas and how to use the handset. We differentiate ourselves
from our competition by letting customers participate in the selection of their
phone number, and we offer a variety of custom faceplates to make a customer's
phone unique. We believe these tools, along with educating the customer, will
lead to reduced customer turnover.
Company Stores
We have opened 35 company stores for the distribution and sale of our
handsets and services. We believe that company stores offer a considerable
competitive advantage by providing a strong local presence. We also believe
that company stores offer one of the lowest customer acquisition costs among
our different distribution channels. Sales representatives in company stores
receive in-depth training to allow them to explain wireless communications
services simply and clearly. We believe this process distinguishes us from our
competitors and will increase subscribership within our markets. Our stores
range in size from small kiosks to 3600 square foot stores in the principal
retail district in each market. We expect to have a total of 45 SunCom stores
open by the end of 1999.
Retail Outlets
We have negotiated distribution agreements with national and regional mass
merchandisers and consumer electronics retailers, including Circuit City,
Cellular Warehouse, Metrocall, Office Depot, Staples, Best Buy and Office Max.
In Puerto Rico, we have relationships with Farmacia El Amal, Let's Talk
Wireless and Beeper Connections and Radio Shack. We currently have over 500
retail outlet locations where customers can purchase our services. We chose
these distributors based upon their ability to reach our target customers in
our service area. In some of these retail store locations, we are implementing
a store-within-a-store concept, which uses visual merchandising to leverage the
brand awareness created by both SunCom and AT&T advertising. The ease of
distribution of shrink-wrapped handsets appeals to mass merchandisers who have
altered their in-store merchandising to reflect the changing wireless
marketplace.
Direct Sales
We focus our direct sales distribution channel on high-revenue, high-profit
corporate users. Our direct corporate sales force consists of approximately 85
dedicated professionals targeting the wireless decision maker within large
corporations. We also benefit from AT&T's national corporate accounts sales
force. AT&T, in conjunction with us, supports marketing of our services to
AT&T's large national accounts located in our service areas. We have formed
regional advisory groups as an additional way to interface with corporate
customers in our markets. These advisory groups are comprised of local business
leaders, who are also wireless users or prospective users, and are designed to
provide timely feedback regarding our proposed wireless offerings and establish
a customer base prior to launch. We expect our direct sales force to grow to
approximately 135 business account executives by year end 1999.
Direct Marketing
We use direct marketing efforts such as direct mail and telemarketing. These
efforts are used to generate leads and stimulate prospects. Direct marketing
allows us to maintain low selling costs and to offer our customers additional
features or customized services. We employ 21 telesales representatives in our
Memphis call center, and we contract for 11 Spanish speaking telesales
representatives in Convergys' Fort Lauderdale operation.
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E-Commerce
Our web page provides current information about us, our markets and our
product offerings. In October we will establish an online store on our website,
located at www.suncom1.com. The web page conveys our marketing message and we
expect it will generate customers through online purchasing. All information
that is required to make a purchasing decision is available through our
website. Customers are able to choose any of our rate plans, features, handsets
and accessories. The online store will provide a secure environment for
transactions, and customers purchasing through the online store will experience
a similar business process to that of customers purchasing service through
other channels. We expect to add electronic bill viewing and online bill
payment capabilities to our website by year end 1999. Information on our
website is not part of this prospectus.
Customer Care
We are committed to building strong customer relationships by providing
customers with prompt and helpful service. We serve our customers from our
state of the art facility in Memphis, Tennessee. Convergys, a leading provider
of outsourced call center services, provides back up call center support and
bilingual customer service, for our Spanish speaking customers, from two
facilities in Florida. As of September 30, 1999, the three centers employed 193
customer care representatives including 65 of our employees. The three center
structure allows us to distribute customer service calls between the centers to
promote cost effective 24 hour/seven days a week customer service.
We have strict quality standards in our care operation, including a
commitment to handling at least 80% of calls within twenty seconds. All of our
centers have sophisticated infrastructure and information systems including
Lucent automated call distributors, Vantive Software, and diagnostic tools for
one call trouble resolution.
We emphasize proactive and responsive customer service, including welcome
packages and first bill, three months and one year anniversary calls. We also
are expanding web-based services to include online account information to allow
customers to check billing, modify service or otherwise manage their accounts.
We use a highly selective recruiting process, train our consultants for four
weeks before they take live customer calls, and provide a sophisticated set of
on-line tools for our representatives. Our experience with call forecasting and
our three center design provide us with the resources to serve our customer
base. We believe these initiatives will result in higher levels of customer
satisfaction and reduce customer turnover.
Network Development
We launched commercial operations in February 1999 and have commenced our
services in each of our major markets. Consistent with our strategy, we
launched in markets which have attractive characteristics for a high volume of
wireless communications usage, including metropolitan "downtown" areas, the
surrounding suburbs, commuting and travel corridors, and popular leisure and
vacation destinations. Immediately upon launch, subscribers had access to
coast-to-coast coverage through roaming arrangements with AT&T and its roaming
partners, both inside and outside our licensed areas. Within each market,
geographic coverage will be based upon changes in wireless communications usage
patterns, demographic changes within our licensed areas and our experiences in
those markets. We currently provide coverage to approximately 65% of the
population of our licensed area. We define coverage to include an entire basic
trading area if we have a significantly developed system in that basic trading
area.
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Construction of our network is scheduled for multiple phases. In the first
half of 1999, we completed the first phase and successfully launched service in
the following 15 markets:
. Baton Rouge . Lafayette . Nashua
. Cape Cod . Little Rock . New Orleans
. Concord . Martha's Vineyard . Portsmouth
. Fayetteville . Manchester . San Juan
. Hot Springs . Memphis . Worcester
Our network currently covers a population of 10.7 million. Our subscriber base
and the number of minutes generated on our network have grown rapidly since we
commenced service. Since February 1999, our subscriber base has grown to
approximately 75,000 at the end of September.
We are in the process of completing the second phase, covering ten
additional markets and 1.6 million additional potential customers. To date, we
have launched three of these ten markets, Arecibo, Jackson and Hammond, and
expect to complete the second phase by the end of the second quarter 2000. Our
network includes five call connection sites and 613 network equipment sites. We
expect that by the end of the second quarter 2000 our network will cover a
total of 25 markets and a population of 12.3 million, and will include
approximately 780 network equipment sites and five connection sites.
The third and fourth phases of the plan will focus on expanding our coverage
to a total of 46 markets including a population of 3.3 million, and entail
launching service in Beaumont, Alexandria, Evansville, Paducah, Columbia,
Jefferson City, Pine Bluff, Fort Smith, and the Virgin Islands. Upon completion
of the fourth phase, which we expect by the end of 2001, we expect our network
will be available to a population of 15.6 million, and our network will include
8 call connection sites and 1,215 network equipment sites. Additional network
construction will further expand our coverage to all of our markets, except
Monroe.
We are committed to making the capital investment required to develop a
superior network. We intend to invest approximately $55 per covered person for
the construction of our network through 2001, which we believe will ensure
consistent quality performance and result in a high level of customer
satisfaction. Our capital investment is designed to provide a highly reliable
network as measured by performance factors such as percentage of call
completion and number of dropped calls.
We intend to continue to meet our network development plan by using the
expertise of vendors recognized in the industry for providing high quality
services. Lucent is providing the necessary radio, call connecting and related
equipment for construction of our network. In addition, a number of other
experienced wireless vendors are assisting us in deploying our network.
We have entered into an agreement with Lucent to purchase up to $285 million
of equipment, software and services for the development of our network. We pay
Lucent for equipment and software at Lucent's list prices less a discount on
the items purchased. Lucent has agreed to provide specified technical support
at no cost, and to provide us with incentive discount bonuses upon our
completing markets. The agreement provides for cooperative marketing of our
services. Lucent has agreed that the prices we pay and payment terms for
equipment, software and services will be no less favorable than those offered
by Lucent to any other affiliate of AT&T Wireless purchasing similar volumes.
We have the right to terminate the agreement at any time subject to paying for
materials already shipped. Lucent may terminate the agreement sixty days
following our material breach. The agreement contains indemnities and
limitations on liabilities for specific damages. Lucent provides us with
warranties on products they produce for specified periods of between 12 and 60
months. Lucent has agreed to provide us with vendor financing. See "Description
of Indebtedness--Vendor Financing."
The network development requirements imposed by our agreements with AT&T
create significant capital requirements much of which will be covered by
indebtedness we incur. We believe that the capital we have
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raised to date as well as the other capital resources currently available to us
under our senior credit facilities, our committed cash equity and the proceeds
of this offering will be sufficient to meet our projected capital requirements
through December 31, 2001.
Network Construction
As of June 30, 1999, we had leased over 640 network equipment sites and we
had built and now operate five sites containing network call connection sites
in four locations. We develop the network design, including frequency planning
for our network equipment sites. We designed our network to allow us to use
existing sites, which minimizes the construction of new towers and
significantly reduces our need to obtain zoning approvals. We use two
experienced vendors, WFI and Divine, to perform property acquisition,
construction and installation of our sites.
Network Operations
We maintain a state-of-the-art network operations center and, to ensure
continuous monitoring and maintenance of our network, we have a disaster
recovery plan. The effective operation of our network requires:
. connection agreements and agreements to transmit signals from network
equipment sites to call connection equipment with other communications
providers;
. long distance connection;
. the implementation of roaming arrangements;
. the development of network monitoring systems; and
. the implementation of information technology systems.
Connection
Our network is connected to the public telephone network to facilitate the
origination and termination of traffic between our network and both the local
and long distance carriers. We have signed agreements with numerous carriers,
including, among others:
. BellSouth in New Orleans and Memphis;
. SBC Communications in Little Rock;
. Bell Atlantic in New England; and
. Puerto Rico Telephone in Puerto Rico.
These agreements are standard agreements entered into with all qualifying
carriers on generally the same terms. Each party pays the other for the
carrying or completion of calls on the other's network.
Long Distance
We have executed a wholesale long distance agreement with AT&T providing for
preferred rates for long distance services. See "Certain Relationships and
Related Transactions--AT&T Agreements."
Roaming
Through our arrangements with AT&T and via the use of advanced handsets, our
customers have roaming capabilities on AT&T's wireless network and AT&T's
customers have roaming capability on our wireless network. Further, we have the
benefit of AT&T's roaming agreements with third party carriers at AT&T's
preferred pricing. These agreements, together with AT&T's wireless network,
cover approximately 98% of the U.S. population, including in-region roaming
agreements covering all of our launched service areas. AT&T has recently
experienced significant growth in roaming traffic in our markets as a result of
the success of the AT&T Digital One Rate SM plan.
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Network Monitoring Systems
Our network operations center provides around-the-clock monitoring and
maintenance of our entire network. The network operations center is equipped
with sophisticated electronics that constantly monitor the status of all
network equipment sites and call connection equipment and record network
traffic. The network operations center provides continuous monitoring of system
quality for blocked or dropped calls, call clarity and evidence of tampering,
cloning or fraud. We designed our network operations center to oversee the
interface between customer usage, data collected by call connection equipment
and our billing systems. Our network operations center is located in the
Memphis site containing call connection equipment, and we also have back-up
network operations center capabilities in our Arlington, Virginia data center.
Information Technology
We operate management information systems to handle customer care, billing,
network management and financial and administrative services. The systems focus
on three primary areas:
. network management, including service activation, pre-pay systems,
traffic and usage monitoring, trouble management and operational support
systems;
. customer care, including billing systems and customer service and
support systems; and
. business systems, including financial, purchasing, human resources and
other administrative systems.
We have incorporated sophisticated network management and operations support
systems to facilitate network fault detection, correction and management,
performance and usage monitoring and security. System capabilities have been
developed to allow over-the-air activation of handsets and implement fraud
protection measures. We maintain stringent controls for both voluntary and
involuntary deactivations. Subscriber disconnections initiated by us are
minimized by:
. preactivation screening to identify any prior fraudulent or bad debt
activity;
. credit review;
. call pattern profiling to identify where activation and termination
policy adjustments are needed.
We entered into a long-term software license, development and implementation
agreement with LHS Communications Systems and CAP Gemini America to support our
established billing system, and we have engaged a variety of industry leaders
such as Lucent and Lightbridge to provide activation, fraud management and
support systems.
Technology
TDMA Digital Technology
We have chosen digital TDMA technology for our network. TDMA technology
allows for:
. the use of advanced handsets which allow for roaming across the PCS and
cellular portion of the airwaves, including both analog and digital
technologies;
. enhanced services and features, such as short-messaging, extended
battery life, added call security and improved voice quality; and
. network equipment sites that are small and that improve network coverage
with low incremental investment.
TDMA technology is the digital technology choice of two of the largest
wireless communications companies in the United States, AT&T and SBC
Communications. This technology served an estimated 19 million subscribers
worldwide and nine million subscribers in North America as of December 31,
1998, according to the Universal Wireless Communications Consortium, an
association of TDMA providers and manufacturers. We believe that the increased
volume of TDMA has increased the probability that this technology will remain
an industry standard. TDMA equipment is available from leading
telecommunication vendors such as Lucent, Ericsson and Northern Telecom, Inc.
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Future Technology Development
Our advanced TDMA technology provides us the ability to offer new services,
including information services, wireless service applications inside buildings,
two-way text messaging, voice-activated dialing, audio e-mail retrieval and web
browsing. In addition, TDMA technology provides us with a strong foundation for
the introduction of high-speed wireless data.
The mobile data market is projected to grow at 30% annually over the next
seven years, leading to a vast array of new services. Today, we participate in
the data market through our short message service, one-way paging broadcasts,
and Internet e-mails sent to our mobile phones. These applications are provided
through the signaling capabilities of TDMA. We expect to introduce a suite of
information services, including news, sports, stock quotes and weather, in
January 2000. Our next series of offerings are scheduled for the second quarter
of 2000, using two-way short message service and handsets capable of accessing
the Internet.
Our planned evolution to higher speed data applications, including video
conferencing, is through the implementation of enhanced data rates for global
evolution, which is expected to be available in 2001. With our TDMA
architecture, we expect to be able to support faster transmission speeds with
limited software and hardware upgrades. We are working with AT&T to plan for an
evolution to these third generation services in 2002, and with Lucent to
understand the implications on our network development.
Competition
We believe subscribers choose a wireless communications service provider
principally based upon network coverage, pricing, quality of service and
customer care.
We compete directly with at least two cellular providers and other PCS
providers in each of our markets and against enhanced special mobile radio
operations in some of our markets. We compete with at least one analog, one
CDMA and one GSM operator in each of our markets other than Puerto Rico and New
Orleans where there is no GSM system currently in operation. Most of the
existing cellular providers in our markets have an infrastructure in place and
have been operational for a number of years, with some of these competitors
having greater financial and technical resources than we do. These cellular
operators may upgrade their networks to provide services comparable to those
offered by us. We also compete with other PCS license holders in each of our
markets:
. in New Orleans, we compete primarily against Radiofone and BellSouth for
cellular services, Sprint PCS and PrimeCo Personal Communications for
PCS, and Nextel for enhanced special mobile radio;
. in Memphis, we compete primarily against GTE and BellSouth for cellular
services, Powertel and Sprint PCS for PCS and Nextel for enhanced
special mobile radio;
. in Little Rock, we compete primarily against ALLTEL and SBC
Communications for cellular services and Sprint PCS for PCS;
. in New England, we compete primarily against SBC Communications and Bell
Atlantic for cellular services and Sprint PCS, Omnipoint Technologies
for PCS and Nextel for enhanced special mobile radio;
. in Puerto Rico, we compete primarily against Puerto Rico Telephone
Company and Cellular One for cellular services and Centennial Cellular
and NewCom Wireless Services, Inc. for PCS.
We also compete with resellers of wireless communications services in each
of our markets. Resellers purchase large volumes of services on a wireless
operator's network, usually at a discount, and resell the services to end users
under the reseller's own brand name. While the network operator receives some
revenue from the sale of services to the reseller, the operator is competing
with its own customer for sales to the end users. The principal resellers in
our markets include MCI in New England and Motorola in Puerto Rico. We have
agreed to resell services to AT&T in each of our markets should AT&T desire to
do so. We have not yet entered into any such arrangements with AT&T or any
other party. The FCC informally limits the amount of our minutes AT&T can
resell in our market to less than a majority of the minutes they sell in our
market. If we allow AT&T to resell more than a majority of our minutes, the FCC
may question our compliance with FCC license requirements.
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As the most recent entrant into the market for wireless communications
services, we do not believe that we have obtained a significant share of the
market in any of our areas of operation. As a recent entrant, we face
significant competition from operators who have already established strong
market positions and have signed up many customers. Most of the existing
cellular operators have developed systems that have larger local and regional
coverage than we currently have or anticipate developing. We seek to compete by
offering a competitive product with attractive pricing plans and through our
extensive access to roaming, including in-region roaming, which gives us an
effective coverage area competitive with that of our principal competitors. We
have developed our pricing plans to be competitive and to emphasize the
advantages of our offerings. We have and may continue to discount our pricing
in order to obtain customers or in response to downward pricing in the market
for wireless communications services.
We do not believe that we are at a significant competitive disadvantage to
competitors that can market wireless communications services together with
other services, such as traditional telephone service, cable television access
or Internet access. We may face such disadvantages in the future as a result of
modified offerings by our competitors or changes in consumer expectations if
such bundled offerings become common. If we were to become disadvantaged, we
would be forced to respond by modifying our pricing or seeking to offer
competitive bundled services. We may not be able to do so on profitable terms.
Our ability to compete successfully will depend, in part, upon our ability
to anticipate and respond to various competitive factors affecting the
industry, including the introduction of new services, changes in consumer
preferences, demographic trends, economic conditions and competitors' discount
pricing strategies, all of which could adversely affect our operating margins.
We expect that once deployed, our extensive digital network will provide cost-
effective means to react appropriately to any price competition. Additionally,
we believe we have invested in network and information technology which
provides us scaleable cost effective capabilities to combat competition.
Government Regulation
We are subject to substantial regulation by the FCC, state public utility
commissions and, in some cases, local authorities. Our principal operations are
classified as commercial mobile radio service by the FCC, subject to regulation
under Title II of the Communications Act of 1934, as amended by the
Telecommunications Act of 1996, as a common carrier and subject to regulation
under Title III of the Communications Act as a radio licensee. The states are
preempted from regulating our entry into and rates for commercial mobile radio
service offerings, but remain free to regulate other terms and conditions of
our commercial mobile radio service services and to regulate other intrastate
offerings by us. Congress and the states regularly enact legislation, and the
FCC, state commissions and local authorities regularly conduct rulemaking and
adjudicatory proceedings that could have a material adverse effect on us and
other similarly situated carriers. In addition, our nature as a regulated
entity may adversely affect our ability to engage in, or rapidly complete,
transactions and may require us to expend additional resources in due diligence
and filings related to FCC and other requirements, as compared to unregulated
entities.
FCC Common Carrier Regulation Under Title II
Under Title II of the Communications Act, among other things, we are:
. required to offer service upon reasonable request;
. prohibited from imposing unjust or unreasonable rates, terms or
conditions of service;
. proscribed from unjustly or unreasonably discriminating among customers;
. required to reserve communications capacity for law enforcement
surveillance operations and to make technical network changes to
facilitate this surveillance;
. required to make our services and products accessible to, and usable by,
Americans with disabilities, if readily achievable; and
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. required to comply with limitations on our use of customer proprietary
network information.
Under the Telecommunications Act, we are entitled to benefits when
negotiating interconnection arrangements with other communications carriers,
such as resale rights, our customers being able to keep their old numbers when
switching to us and compensation equal to that of the carriers, but we are
subject to those same requirements when other carriers seek to interconnect
with our network. The FCC is still in the process of implementing some of these
benefits. While the rates of common carriers are subject to the FCC's
jurisdiction, the FCC forbears from requiring commercial mobile radio service
carriers to file tariffs for their services. Common carriers, including
commercial mobile radio service providers, are also prohibited under the
Communications Act from unreasonably restricting the resale of their services
and are required to offer unrestricted resale. There can be no assurance that
the FCC will not choose to regulate common carriers more comprehensively to
promote competition under the Telecommunications Act, which could have an
adverse effect on our operations.
FCC Radio License Regulation Under Title III
Among other things, Title III of the Communications Act:
. does not permit licenses to be granted or held by entities that have
been subject to the denial of federal benefits;
. requires us to seek prior approval from the FCC to transfer control of
us or to assign our radio authorizations, including subdividing our
radio airwaves or partitioning geographic license areas, except in very
limited circumstances; and
. limits foreign ownership in radio licensees, including PCS providers.
While we believe that we comply with Title III, any future violation of
these limitations could result in license revocation, forfeiture or the forced
restructuring of our ownership to comply with the rules, any of which could
have a material adverse effect on us. The Title III restrictions could also
materially adversely affect our ability to attract additional equity financing.
FCC Commercial Mobile Radio Service Regulation
The FCC rules and policies impose substantial regulations on commercial
mobile radio service providers. Among other regulations, commercial mobile
radio service providers such as us:
. incur costs as a result of required contributions to federal programs;
. are prohibited from acquiring or holding an attributable interest in
PCS, cellular or special mobile radio licenses with more than 45MHz of
airwaves in the same metropolitan area, and more than 55 MHz in rural
markets;
. are required to provide manual roaming service to enable a customer of
one provider to obtain service while roaming in another carrier's
service area;
. are required to route emergency calls to public safety centers and
provide the public safety centers with information regarding the
originating number and the location of the caller; and
. will be required to allow subscribers to retain their telephone numbers
when changing service providers after March 31, 2000, in some
circumstances.
While we believe we comply with these regulations, any violation of the
commercial mobile radio service regulations could result in a revocation or
forfeiture of our licenses that would have a material adverse effect on us. In
addition, there can be no assurance that the FCC will not choose to regulate
commercial mobile radio service providers more comprehensively, which could
have an adverse effect on our operations.
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FCC Personal Communications Services Regulation
We are subject to service-specific regulations under the FCC's rules. Among
other things, these regulations provide that PCS licensees, such as us, are
granted licenses for a 10-year term, subject to renewal. Under these policies,
we will be granted a renewal expectancy that would preclude the FCC from
considering competing applications if we have:
. provided "substantial" performance, that is "sound, favorable and
substantially above a level of mediocre service just minimally
justifying renewal;" and
. substantially complied with FCC rules and policies and the
Communications Act.
While we intend to structure our operations to secure a renewal expectancy,
there can be no assurance that a renewal expectancy will be granted and, if the
renewal expectancy is not granted, that our licenses will be renewed. Our
failure to obtain renewal of our licenses would have a material adverse effect
on our operations.
These regulations also govern the transmission characteristics of PCS
handsets and network equipment sites and other technical requirements. PCS
licensees are required to comply with limits intended to ensure that these
operations do not interfere with radio services in other markets or in other
portions of the airwaves and to ensure emissions from mobile transmitters do
not cause adverse health effects. We are also subject to minimum construction
requirements that will require us to deploy facilities with service coverage of
a particular amount of the population of our licensed area within specified
time periods. While we believe we comply with all PCS regulations in effect,
any violation of the PCS regulations could result in a revocation or forfeiture
that would have a material adverse effect on us. In addition, there can be no
assurance that the FCC will not choose to regulate PCS licensees more
comprehensively, which could have an adverse effect on our operations.
Relocation of Fixed Microwave Licensees
Because PCS carriers use airwaves occupied by existing microwave licensees,
the FCC has adopted special regulations governing the relocation of incumbent
systems and cost-sharing among licensees that pay to relocate microwave
incumbents. Relocation usually requires a PCS operator to compensate an
incumbent for the costs of system modifications and new equipment required to
move the incumbent to new portions of the airwaves, including possible premium
costs for early relocation to alternate portions of the airwaves. The
transition plan allows most microwave users to operate in the PCS portion of
the airwaves for a one-year voluntary negotiation period and an additional one-
year mandatory negotiation period following the issuance of the PCS license.
These periods are longer for public safety entities. We have entered into all
necessary agreements for microwave relocation. Relocated licensees may exercise
their rights to move back to their original sites in the event the new sites
are inadequate. Any delay in the relocation of microwave users to other
portions of the airwaves also may affect adversely our ability to operate our
network. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FCC and Federal Aviation Administration Facilities Regulation
Because we acquire and operate antenna sites for use in our network, we are
subject to FCC and Federal Aviation Administration regulations governing
registration of towers, the marking and lighting of structures and regulations
governing compliance with the National Environmental Policy Act of 1969, which
requires carriers to assess the impact of their operations on the environment,
including the health effects of radio airwave radiation on humans.
FCC Designated Entity and Small Business Regulation
Each of TeleCorp Holding, TeleCorp LMDS and Viper Wireless was the winning
bidder of licenses in the auction of PCS licenses. Viper Wireless also acquired
six licenses in the recent designated entity PCS reauction. With respect to
those licenses granted by the FCC, and additional designated entity licenses
acquired and to be acquired through auctions and later transactions, we:
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(1) believe we qualify as a very small business and as an entrepreneurs,
and
(2) intend to diligently pursue and maintain our qualification as a very
small business and as an entrepreneur in a manner intended to ensure
compliance with the applicable FCC rules.
We rely on representations of our investors to determine our compliance with
the FCC's rules applicable to PCS licenses. There can be no assurance, however,
that our investors or we will continue to satisfy these requirements during the
term of any PCS license granted to TeleCorp Holding or TeleCorp PCS, LLC, our
wholly owned subsidiary, or that we will be able successfully to implement
divestiture or other mechanisms included in our corporate charter that are
designed to ensure compliance with FCC rules. Any non-compliance with the FCC
very small business and entrepreneur rules could subject us to penalties,
including a fine, revocation of our PCS licenses, acceleration of installment
payment obligations or retroactive loss of bidding credits.
Entrepreneurs. In order to hold some of our PCS licenses, the qualifying
entity, an entrepreneur, and its affiliates must have had less than $125
million in average gross revenues in the last two years and less than $500
million in total assets at the time it filed its application to acquire the
licenses. In calculating revenues and assets for these purposes, the FCC
includes the gross revenues and total assets of our affiliates, those entities
that hold attributable interests in us and the affiliates of the entities.
However, the revenues and assets of affiliates are not attributable to the
licensee if the licensee maintains an organizational structure that satisfies
entrepreneur requirements. For at least five years after the initial licensing
of a these licenses, a licensee must continue to meet the control group
requirements to continue to qualify for the installment payment program and
must continue to meet the very small business requirements to continue to
qualify for the bidding credits received in the auction, although normal
business growth as a result of holding the licenses will not disqualify a
licensee.
Very Small Business. We are also structured under the FCC's rules to
qualify as a very small business. A very small business is an entity that,
together with its affiliates and entities that hold interests in the applicant
and their affiliates, has average annual gross revenues of not more than $15
million for the previous three calendar years. As a result of our
classification as a very small business, we were eligible for both a 25%
bidding credit and for a preferential installment payment program. In the more
recent reauction, Viper Wireless qualified as a very small business, eligible
for the same bidding credit, but the FCC has ceased to provide installment
payment financing.
Control Group Requirements. To avoid attribution of the revenues and assets
of some of our investors, we are required to maintain a conforming control
group and to limit the amount of equity held by these entities on a fully-
diluted basis. These requirements mandate that the control group, among other
things, have and maintain both actual and legal control of the licensee. Under
these control group requirements:
. an established group of investors meeting the financial qualifications
must own at least three-fifths of the control group's equity, or 15% of
the licensee's overall equity, on a fully-diluted basis and at least
50.1% of the voting power, in the licensee entity; and
. additional members of the control group must hold, on a fully-diluted
basis, the remaining 10% equity interest in the licensee entity.
Additional members may be non-controlling institutional investors, including
most venture capital firms. A licensee must have met the requirements at the
time it filed its application to acquire these licenses and must continue to
meet the requirements for five years following the date that a license is
granted, although normal business growth is permitted. Beginning the fourth
year of the license term, the FCC rules:
. eliminate the requirement that additional members hold the 10% equity
interest; and
. allow the qualifying investors to reduce the minimum required equity
interest from 15% to 10%.
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If the FCC were to determine that we did not comply with the regulations, we
would be required to attribute the revenues of additional stockholders, which
would likely cause the loss of our status both as an entrepreneur and a very
small business. Loss of this status would have a materially adverse effect on
us.
FCC Transfer Restrictions. During the first five years of their license
terms, some PCS licensees may only transfer or assign their license, in whole
or in part, to other qualified entrepreneurs. The acquiring entities would take
over the license, or any portion of the license, subject to separately
established installment payment obligations. After five years, licenses are
transferable to entrepreneurs and non-entrepreneurs alike, subject to unjust
enrichment penalties. If transfer occurs during years six through ten of the
initial license term to a company that does not qualify for the same level of
auction preferences as the transferor, the sale would be subject to immediate
payment of the outstanding balance of the government installment payment debt
and payment of any unjust enrichment assessments as a condition of transfer.
The FCC has also initiated transfer disclosure regulations that require
licensees who transfer control of or assign a PCS license within the first
three years to file associated contracts for sale, option agreements,
management agreements or other documents disclosing the total consideration
that the applicant would receive in return for the transfer or assignment of
its license. If the FCC determines that a transferor or assignor is being
unjustly enriched by a proposed sale or transfer of a license, it may condition
its approval of the transaction on payment of money to the U.S. Treasury,
accelerate installment payments or require repayment of bidding credits.
State and Local Regulation
The FCC permits the states to:
. regulate terms and conditions of our commercial mobile radio service
services other than rates and entry and may regulate all aspects of our
intrastate toll services;
. regulate the intrastate portion of services offered by local telephone
carriers, and therefore the rates we must pay to acquire critical
facilities from other common carriers;
. administer numbering resources, subject to federal oversight; and
. have other responsibilities that impact the nature and profitability of
our operations, including the ability to specify cost-recovery
mechanisms for network modifications to support emergency public safety
services.
States and localities also regulate construction of new antenna site
facilities and are responsible for zoning and developmental regulations that
can materially impact our timely acquisition of sites critical to our radio
network. The states and localities regularly conduct legislative, rulemaking
and adjudicatory proceedings on matters within their jurisdiction that could
have a material adverse effect on us and other similarly situated carriers.
States may petition the FCC to expand their jurisdiction over commercial mobile
radio service rates and entry. There can be no assurance that a state in which
we operate will not attempt to engage in more comprehensive regulation of our
operations, which could increase the costs of providing service and materially
affect our ability to operate in that state.
Emission and Hands-Free Regulation
Media reports have suggested that some radio airwave emissions from wireless
handsets may be linked to health concerns, including the incidence of cancer.
Data gathered in studies performed by manufacturers of wireless communications
equipment dispute these media reports. Further, a major industry trade
association and governmental agencies have stated publicly that the use of
wireless handsets does not pose any undue health risks. Nevertheless, concerns
regarding radio airwave emissions could have the effect of discouraging the use
of wireless handsets, which would decrease demand for our services.
The FCC adopted rules specifying the methods to be used in evaluating radio
airwave emissions from radio equipment, including wireless handsets. The hand-
held digital telephones that we offer to our customers
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comply with the standards adopted under the new rules. These handsets may not
comply with any rules adopted by the FCC in the future. The failure of these
handsets to remain in compliance with applicable FCC rules and standards would
decrease demand for our services.
Recent studies have shown that hand-held digital telephones interfere with
medical devices, including hearing aids and pacemakers. The University of
Oklahoma Center for the Study of Wireless Electromagnetic Compatibility,
together with industry trade associations and other interested parties, are
currently studying the extent of, and possible solutions to, this
interference. If these studies demonstrate significant interference or create
public concern about interference, the results of these studies could decrease
demand for our services.
Measures that would:
. require hands free use of cellular phones while operating motor
vehicles;
. ban cellular phone use while driving;
. limit the length of calls while driving; or
. require people to pull to the side of the road to use cellular phones
while driving,
have been proposed or are being considered in 12 state legislatures. In
addition, some gas stations have banned the use of mobile phones on their
premises. We cannot predict the success of the proposed laws concerning car
phone use or the effect on the use of cellular phones as a result of the
publicity surrounding or passage of these laws. In addition, more restrictive
measures or measures aimed at wireless services companies as opposed to users
may be proposed or passed in state legislatures in the future. The passage or
proliferation of this legislation could decrease demand for our services.
Intellectual Property
The AT&T and globe design logo is a service mark registered with the U.S.
Patent and Trademark Office. AT&T owns the service mark. We use the AT&T and
globe design logo, on a royalty free basis, with equal emphasis on our SunCom
brand and logo, solely within our licensed area in connection with marketing,
offering and providing licensed services to end-users and resellers of our
services. Our license agreement with AT&T grants us the right and license to
use licensed marks on permitted mobile phones. This license agreement contains
numerous restrictions with respect to the use and modification of licensed
marks. See "Relationships and Related Transactions--AT&T Agreements."
We, Triton PCS and Tritel Communications have adopted a common brand,
SunCom, that is co-branded with equal emphasis with the AT&T brand name and
logo. Each of the SunCom companies owns one-third of Affiliate License Co.,
which owns the SunCom name. We and the other SunCom companies license the
SunCom name from Affiliate License Co. We use the brand to market, offer and
provide services to end-users and resellers of our PCS. See "--Marketing
Strategy," "Certain Relationships and Related Transactions--Other Related
Party Transactions."
Triton PCS recently paid $975,000 to settle a potential dispute regarding
prior use of a version of the SunCom brand. In connection with this
settlement, Triton PCS transferred the SunCom trademark to Affiliate License
Co. for $650,000. Each of the other SunCom companies agreed to pay $325,000 as
a royalty fee to license the trademark from Affiliate License Co.
Employees
As of September 30, 1999, we employed approximately 793 people. None of our
employees currently are represented by a union. We believe that our relations
with our employees are good.
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Properties
We lease space for our call connection equipment in New Orleans, Boston and
Puerto Rico and for our network operations center, our call connection
equipment, our customer care and our data center in Memphis. Further, we have
operating leases primarily related to our headquarters, regional offices,
retail store locations, distribution outlets, office space and network
equipment sites.
Legal Proceedings
We are not a party to any lawsuit or proceeding which is likely, in the
opinion of management, to have a material adverse effect on our financial
position, results of operations and cash flows. We are a party to routine
filings and customary regulatory proceedings with the FCC relating to our
operations.
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MANAGEMENT
The table below sets forth our directors and executive officers and their
ages as of September 30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gerald T. Vento......... 52 Chief Executive Officer and Chairman
Thomas H. Sullivan...... 37 Executive Vice President, Chief Financial Officer and Director
Julie A. Dobson......... 43 Vice President and Chief Operating Officer
Scott Anderson.......... 41 Director
Rohit M. Desai.......... 60 Director
Michael R. Hannon....... 39 Director
Gary Fuqua.............. 48 Director
James M. Hoak........... 55 Director
Mary Hawkins Key........ 48 Director
William Kussell......... 40 Director
William Laverack, Jr.... 42 Director
Joseph O' Donnell....... 57 Director
Michael Schwartz........ 35 Director
James F. Wade........... 43 Director
Mr. Wade, Mr. Laverack, Mr. Fuqua and Mr. O'Donnell have agreed to resign
as directors upon completion of the offering.
The table below sets forth our five regional general managers and their
ages as of September 30, 1999:
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Raul Burgos............. 35 Vice President/General Manager, Puerto Rico
Steve Chandler.......... 46 Vice President/General Manager, South Central Region
Andy Hearn.............. 36 Vice President/General Manager, New Orleans
Mitch Johnson........... 37 Vice President/General Manager, New England
Randy Johnson........... 39 Vice President/General Manager, Little Rock
</TABLE>
Executive Officers and Directors
Gerald T. Vento is our co-founder and the co-founder of our predecessor
company and has been Chief Executive Officer and a director since the
inception. He has been Chairman of our board since June 1999. From December
1993 to March 1995, Mr. Vento was Vice Chairman and Chief Executive Officer of
Sprint Spectrum/American PCS, L.P. Under Mr. Vento's leadership, that
partnership developed the first PCS network in the United States. From April
1995 to March 1998, Mr. Vento was Chairman of Entel Technologies, Inc., a
wireless site acquisition and construction management company. From April 1996
to December 1996, Mr. Vento also served as the Chief Executive Officer of
National Fiber Networks, Inc. Mr. Vento also served as managing partner in a
joint venture with the Washington Post Company to build and operate the
company's systems in the United Kingdom prior to its sale in 1993 to TCI/US
West Communications. Mr. Vento has spent over twenty years in cable, telephone
and wireless businesses. Mr. Vento was the founder and Managing General
Partner for several communications companies, which he developed from
inception, including wireless and cable television properties throughout the
United States and Puerto Rico.
Thomas H. Sullivan has been Executive Vice President and one of our
directors since our inception, and Chief Financial Officer since March 1999.
Mr. Sullivan served as President of TeleCorp Holding from 1996 to 1998 and has
served as a senior executive and founder of several wireless and wireline
companies for the past five years. From 1992 to 1998, Mr. Sullivan was a
partner at McDermott, Will & Emery, where he served as co-head of its
telecommunications practice and co-chairman of its Boston corporate
department. In 11 years at McDermott, Will & Emery, he counseled several of
the country's largest cellular and PCS operators including Sprint
Spectrum/American PCS, L.P., Aerial Communications, NorthCoast Communications
and Bell Atlantic Mobile.
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Julie A. Dobson has served as our Chief Operating Officer since July 1998.
Prior to joining us, Ms. Dobson was President of Bell Atlantic Mobile Systems
New York/New Jersey Metro Region. She was responsible for sales, marketing,
customer service and the continued expansion of that company's wireless
communications network in the region. She also oversaw more than 1,500
employees and an extensive retail store network in 22 counties in New York and
northern and central New Jersey. Ms. Dobson had been with Bell Atlantic since
1980, when she began her career as an account executive in sales at Bell
Atlantic-Pennsylvania, and served in a variety of positions in sales, marketing
and operations over two decades.
Scott Anderson has served as one of our directors since July 1998. Since
1997, Mr. Anderson has served as Principal in Cedar Grove Partners, an
investment and consulting/advisory partnership, and since 1998 as Principal in
Cedar Grove Investments, a small "angel" capital investment fund. Mr. Anderson
was an independent board member of PriCellular Corp from March 1997 through
June 1998. He is a board member and advisory board member of Tegic, a wireless
technology licensing company, a board member of Tritel Communications, a board
member of Triton PCS and a board member of Xypoint, a private emergency safety
service company. He was employed by McCaw Cellular Communications and AT&T from
1986 until 1997, where he last served as Senior Vice President of the
Acquisitions and Development group.
Rohit M. Desai has served as one of our directors since January 1998. He has
been the Chairman, President and Chief Investment Officer of Desai Capital
Management Incorporated, an equity investment firm with approximately $1
billion under management, since 1984. Desai Capital Management is the
investment advisor to Equity-Linked Investors II and Private Equity Investors
III, L.P., of which Mr. Desai is the managing general partner. Mr. Desai
currently sits on the board of The Rouse Company, Sunglass Hut International,
Finlay Fine Jewelry Holdings and Independence Community Bankcorp.
Michael R. Hannon has been one of our directors since July 1998. Mr. Hannon
has been a General Partner of Chase Capital Partners, a subsidiary of Chase
Manhattan Corporation, since January 1988. Mr. Hannon is currently a director
of Formus Communications, Entertainment Communications and Financial Equity
Partners.
Gary Fuqua has served as one of our directors since July 1998. Mr. Fuqua is
the President and Chief Executive Officer of Utility Engineering, an
architecture and engineering firm, since August 1999. From July 1998 to July
1999, Mr. Fuqua managed corporate development activities at Entergy and oversaw
Entergy's non-regulated domestic retail businesses, including District Energy,
Entergy Security and Entergy's various telecommunications businesses. Before he
joined Entergy, Mr. Fuqua served as a Vice President with Enron Ventures
Corporation in London from January 1998 to July 1998. He also founded and
managed his own company prior to joining Enron in 1988. Mr. Fuqua is also a
member of the board of Tritel Communications.
James M. Hoak, Jr., has served as one of our directors since July 1998. Mr.
Hoak has served as Chairman and a Principal of Hoak Capital Corporation, a
private equity investment firm, since September 1991. He has also served as
Chairman of HBW Holdings, an investment bank, since July 1996. He served as
Chairman of Heritage Media Corporation, a broadcasting and marketing services
firm, from its inception in August 1987 to its sale in August 1997. From
February 1991 to January 1995, he served as Chairman and Chief Executive
Officer of Crown Media, a cable television company. From 1971 to 1987, he
served as President and Chief Executive Officer of Heritage Communications, a
diversified communications company, and as its Chairman and Chief Executive
Officer from August 1987 to December 1990. He is also a director of PanAmSat
Corporation, Pier 1 Imports and Texas Industries.
Mary Hawkins Key has served as one of our directors since March 1999. She
has been Senior Vice President of Partnership Operations for AT&T Wireless
since July 1998. Ms. Hawkins Key joined AT&T's Messaging Division in April
1995, and subsequently became Chief Operating Officer for the 1100 employee
division until its sale in late 1998. Ms. Hawkins Key is on the board of Triton
PCS and is a partner committee member for CMT Partners, the partnership which
owns the Bay Area Cellular Telephone.
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William Kussell has served as one of our directors since July 1998. Mr.
Kussell has served as President of Dunkin' Donuts marketing office since 1994,
as well as Retail Concept Officer for Allied Domecq Retailing USA since 1997.
He was Vice President of worldwide marketing for Reebok from November 1991 to
March 1994.
William Laverack, Jr. has served as one of our directors since January 1998.
He has been a General Partner of J. H. Whitney & Co., an investment firm
focused on private equity and mezzanine capital investments, since May 1993.
Prior to May 1993, he was with Gleacher & Co., Morgan Stanley and J.P. Morgan.
He is currently a director of Steel Dynamics, and several private companies.
Joseph O'Donnell has served as one of our directors since July 1998. He is
the former Chairman and Chief Executive Officer of two major advertising
agencies: J. Walter Thompson Company Worldwide and Campbell-Mithum-Esty
Advertising. Since leaving the advertising business in 1991, Mr. O'Donnell has
founded several marketing and communication related businesses, principally
Osgood, O'Donnell & Walsh LLC, a communications consulting company serving
companies such as Equitable Insurance, Chase Manhattan Bank,
PricewaterhouseCoopers LLP, Ford and Teligent.
Michael Schwartz has served as one of our directors since November 1998. Mr.
Schwartz joined AT&T in September of 1996. He is currently a Vice President in
AT&T's Acquisitions and Development group. From September 1996 through
September 1998, Mr. Schwartz was Vice President and Chief Counsel of AT&T's
Messaging Division. Prior to joining AT&T, Mr. Schwartz was in private law
practice in the Seattle office of Graham & James.
James F. Wade has served as one of our directors since July 1998. He is
currently the Managing Partner of M/C Venture Partners, a $250 million private
equity fund and has been a General Partner in a series of predecessor funds
since 1987. M/C Venture Partners invests solely in the telecommunications and
information technology sectors.
Regional General Managers
Raul Burgos joined us in May 1999 as the Vice President/General Manager of
the Puerto Rico Region. Prior to joining us, Mr. Burgos served as General
Manager/VP of Operations for Nextel International in Sao Paulo, Brazil from May
1998 to April 1999. Mr. Burgos also served as Director of Marketing and New
Business Development for Nextel Communications in Orlando, Florida from October
1996 to May 1998. From August 1995 to September 1996, Mr. Burgos was a
Marketing Analyst with Motorola Network Ventures and from March 1993 to August
1995, he was a Senior Marketing Analyst with Cellular One.
Steve Chandler joined us in October 1997 as the Vice President/General
Manager of the Southcentral Region. Prior to joining us, Mr. Chandler was the
General Manager of Bell South Mobility PCS in Greenville, South Carolina from
January 1996 to October 1997. Mr. Chandler also worked in Memphis, Tennessee
and Louisville, Kentucky as General Manager for Bell South Mobility from 1988
through 1995.
Andy Hearn joined us in December 1998 as the Vice President/General Manager
for the New Orleans Region. Prior to joining us, Mr. Hearn was the Vice
President/General Manager for ALLTEL Communications in South Carolina from
September 1996 to December 1998. Mr. Hearn also served as Retail Operations
Manager for ALLTEL Communications in Charlotte, North Carolina from October
1994 to September 1996.
Mitch Johnson joined us in June 1999 as the Vice President/General Manager
of the New England Region. Prior to joining us, Mr. Johnson was Vice
President/General Manager for ALLTEL Communications throughout the Las Vegas,
Nevada Region from August 1998 to June 1999. Mr. Johnson also served as Vice
President/General Manager for the Western Arkansas and Eastern Oklahoma market
from October 1996 to October 1998. From April 1994 to October 1996, Mr. Johnson
was the Regional Customer Service Manager with ALLTEL Communications.
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<PAGE>
Randy Johnson joined us in November 1997 as the Vice President/General
Manager of the Little Rock Region. Prior to joining us, Mr. Johnson was Vice
President/General Manager for ALLTEL Communications in Little Rock from April
1997 to October 1997. Mr. Johnson also served as Director of Marketing for
ALLTEL Communications Cellular Operations throughout the Southeastern US from
January 1995 to March 1997. From September 1989 to January 1995, Mr. Johnson
served as Vice President/General manager with ALLTEL Communications for the
Missouri Region.
Selection of Directors
Upon completion of this offering, our board will consist of nine directors.
Our directors are elected to serve until they resign or are removed or are
otherwise disqualified to serve or until their successors are elected and
qualified. Our directors are elected at the annual meeting of stockholders.
The stockholders' agreement provides that any action of our board be
approved by the affirmative vote of a majority of our entire board, except in
circumstances where voting by particular classes of directors is required. Upon
completion of this offering, the parties to the stockholders' agreement have
agreed to vote all of the shares of class A voting common stock and voting
preference stock to cause the election of the following nine individuals to our
board:
. Mr. Vento and Mr. Sullivan so long as each remains an officer and the
management agreement with TeleCorp Management remains in effect;
. two individuals selected by holders of a majority in interest of the
common stock beneficially owned by our initial investors other than AT&T
Wireless;
. two additional individuals selected by Mr. Vento and Mr. Sullivan, so
long as they remain officers, who must be acceptable to the holders of a
majority in interest of the common stock beneficially owned by our
initial investors other than AT&T on the one hand, and AT&T Wireless on
the other hand;
. one individual nominated by AT&T Wireless in its capacity as the holder
of series A preferred stock so long as it has the right to nominate one
director in accordance with our restated certificate of incorporation;
. one individual selected by Mr. Vento and Mr. Sullivan, so long as they
remain officers, who must be acceptable to AT&T Wireless; and
. one individual selected by Mr. Vento and Mr. Sullivan, so long as they
remain officers, who must be acceptable to the holders of a majority in
interest of the class A voting common stock beneficially owned by our
initial investors other than AT&T.
The stockholders agreement provides that when FCC ownership restrictions no
longer apply to us, our board will have seven members and the right of Mr.
Vento and Mr. Sullivan to appoint the individuals set forth in the last two
items above will expire.
Compensation of Directors
Representatives of our initial investors who serve on our board or any
committee of our board, do not receive cash compensation for their service on
our board. Other non-management members of our board or its committees receive
a quarterly stipend of $1,875, $1,000 for attending each board or committee
meeting and $500 for participating in each teleconference. The directors may
also receive stock options. All members of our board or any committee of our
board, including our management members, will be reimbursed for out-of-pocket
expenses in connection with attendance at meetings.
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Committees of the Board of Directors
Our bylaws provide that our board may establish committees to exercise
powers delegated by our board. Under that authority, our board has established
an audit committee and a compensation committee.
Upon completion of the offering, the audit committee will be comprised of
Mr. Anderson, Mr. Hoak and Mr. Schwartz.
Upon completion of the offering, the compensation committee will be
comprised of Mr. Anderson, Mr. Desai, Mr. Hannon and Mr. Schwartz.
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Executive Compensation
The following table contains information about the cash and other
compensation that we paid in the 1998 fiscal year to Mr. Vento, our Chief
Executive Officer, and the four other most highly paid executive officers. In
addition to salary, our employees are eligible for annual cash bonuses. These
bonuses are generally earned in the year prior to which they are paid based
upon achievement of corporate and individual performance objectives; however
some bonuses are specified in employment agreements. The bonuses earned in 1997
were paid in 1998 and are not included in this table. The bonuses in the table
were earned in 1998 and were paid in 1999. Other annual compensation consists
of amounts reimbursed for relocation expenses and any taxes that we paid on
behalf of the executive for the reimbursement.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------- --------------------
Other Annual
Name and Principal Compensation Restricted Stock
Position Salary($) Bonus($) ($) Awards($)
- ------------------ --------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Gerald T. Vento......... $213,461(a) $157,500 $ 4,664(b) $ 0
Chief Executive Officer
and Chairman
Thomas H. Sullivan...... 206,931(c) 125,000 106,637(d) 0
Executive Vice
President and Chief
Financial Officer
Julie A. Dobson......... 114,423(e) 155,000 66,134(f) 4,746(g)
Vice President and
Chief Operating
Officer
Robert Dowski(h)........ 181,196(i) 101,251 5,005(j) 2,170(k)
Chief Financial Officer
Steven Chandler......... 118,808(l) 45,000 114,109(m) 776(n)
General Manager
</TABLE>
- --------
(a) This amount consists of $111,538 that TeleCorp Management paid to Mr. Vento
out of amounts we paid to TeleCorp Management under the management
agreement and $101,923 that TeleCorp Holding paid to Mr. Vento.
(b) Represents an amount paid on behalf of Mr. Vento into our 401(k) plan.
(c) This amount consists of $92,947 that TeleCorp Management paid to Mr.
Sullivan out of amounts we paid to TeleCorp Management under the management
agreement and $113,984 that TeleCorp Holding paid to Mr. Sullivan.
(d) This amount consists of $103,637 in relocation expenses that TeleCorp
Management paid to Mr. Sullivan out of amounts that we paid to TeleCorp
Management under the management agreement and $3,000 that we paid on behalf
of Mr. Sullivan in our 401(k) plan.
(e) This amount consists of $114,423 that TeleCorp Communications paid to Ms.
Dobson.
(f) This amount consists of $66,134 in relocation expenses that TeleCorp
Communications paid to Ms. Dobson.
(g) Consists of 2,287 shares of series E preferred stock, valued at $1.00 per
share, and 345,945 shares of class A common stock, valued at $0.01 per
share, issued under our restricted stock grant plan on July 17, 1998.
(h) Mr. Dowski ceased to be employed with us as of March 8, 1999, except for
transition support.
(i) This amount consists of $72,692 that TeleCorp Holding paid to Mr. Dowski
and $108,504 that TeleCorp Communications paid to Mr. Dowski.
(j) Represents an amount paid on behalf of Mr. Dowski into our 401(k) plan.
(k) Consists of 714.34 shares of series E preferred stock, valued at $1.00 per
share, and 145,591 shares of class A common stock, valued at $0.01 per
share, issued under our restricted stock grant plan on July 17, 1998. On
March 8, 1999, we repurchased 577 of Mr. Dowski's shares of series E
preferred stock and 131,646 of Mr. Dowski's shares of class A common stock
for a total of approximately $19, which is not reflected in the table.
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(l) This amount consists of $54,519 that TeleCorp Holding paid to Mr. Chandler
and $64,288 that TeleCorp Communications paid to Mr. Chandler.
(m) This amount consists of $111,995 in relocation expenses that TeleCorp
Communications paid to Mr. Chandler and $2,114 that we paid on behalf of
Mr. Chandler into our 401(k) plan.
(n) Consists of 255 shares of series E preferred stock, valued at $1.00 per
share, and 52,092 shares of class A common stock, valued at $0.01 per
share, issued under our restricted stock grant plan on July 17, 1998.
Restricted Stock Grant Plan
In July 1998 we established the TeleCorp PCS, Inc. 1998 Restricted Stock
Plan to award key employees shares of our series E preferred stock and class A
common stock. Each award is subject to a five- or six-year vesting schedule
that depends on the employee's date of hire, with unvested shares being
redeemed by us for $0.01 per share upon termination of employment. The shares
granted are subject to the same transfer restrictions and repurchase rights as
our shares held by AT&T and our other initial investors. See "Description of
Capital Stock." As of September 30, 1999, 6,687 shares of series E preferred
stock and 1,229,719 shares of class A common stock are outstanding under this
plan. We repurchased an additional 1,155 shares of series E preferred stock and
263,337 shares of class A common stock from our stockholders, which we had
granted under this plan, and we have regranted some of these repurchased shares
under this plan.
1999 Stock Option Plan
On July 22, 1999, we implemented the 1999 Stock Option Plan to award
employees and members of our board options to acquire shares of our class A
common stock. Our board has the discretion to determine the terms of any
options granted under this plan. We have reserved 587,159 shares of our class A
common stock for issuance under this plan. On July 22, 1999, our board approved
the grant of options to virtually all our employees and three of our directors
to purchase 178,735 shares of class A common stock under our plan at an
exercise price of $0.02 per share, the estimated fair value of the class A
common stock on the date of grant. We effected these grants on August 31, 1999.
These options vest ratably over a three to four year period. Upon the closing
of the offering, the option holders will be able to exercise any vested
options.
Management Agreement
Under a management agreement dated July 17, 1998, as amended, TeleCorp
Management, under our oversight, review and ultimate control and approval,
assists us with:
. administrative services, such as accounting, payment of all bills and
collection;
. operational services, such as engineering, maintenance and construction;
. marketing services, such as sales, advertising and promotion;
. regulatory services, such as tax compliance, FCC applications and
regulatory filings; and
. general business services, such as supervising employees, budgeting and
negotiating contracts.
Mr. Vento and Mr. Sullivan own TeleCorp Management.
TeleCorp Management has agreed to provide the services of Mr. Vento and Mr.
Sullivan in connection with the performance of TeleCorp Management's
obligations under the management agreement. Mr. Vento and Mr. Sullivan have
agreed to devote their entire business time and attention to providing these
services, provided that they may devote reasonable periods of time to other
enumerated activities.
We reimburse TeleCorp Management for all out of pocket expenses it incurs
for the retention of third parties on our behalf. We pay TeleCorp Management
fees of $550,000 per year, payable in monthly installments. TeleCorp Management
is also entitled to a potential annual bonus based upon the achievement of
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objectives established by the compensation committee of our board for a
particular calendar year. In 1998, we paid bonuses totaling approximately
$285,000 to TeleCorp Management.
The management agreement has a five-year term. We may terminate the
management agreement immediately in certain circumstances including:
. indictment of Mr. Vento or Mr. Sullivan for a felony;
. a material breach which remains uncured after 30 days written notice;
. the failure of TeleCorp Management to provide to us the services of Mr.
Vento and Mr. Sullivan;
. an event of default on any of our credit agreements for borrowings of
$25.0 million or more; or
. acceleration of any of our indebtedness over $25.0 million.
TeleCorp Management may terminate the agreement voluntarily upon 30 days
written notice to us. TeleCorp Management may also terminate the agreement
immediately if:
. Mr. Vento and Mr. Sullivan are removed as directors or are demoted or
removed from their respective offices or there is a material
diminishment of Mr. Vento's and Mr. Sullivan's responsibilities, duties
or status, which diminishment is not rescinded within 30 days after the
date of receipt by our board from Mr. Vento and Mr. Sullivan of their
respective written notice referring to the management agreement and
describing the diminishment; or
. we relocate our principal offices without TeleCorp Management's consent
to a location more than 50 miles from our principal offices in
Arlington, Virginia.
If TeleCorp Management terminates the agreement for the two preceeding
reasons or if we terminate the agreement because of a breach by TeleCorp
Management or we fail to comply with any of our credit agreements for borrowed
money in the amount of $25.0 million or more, TeleCorp Management will be
entitled to their management fee and annual bonus. Their annual bonus will be
determined as follows:
. if the date of termination is on or prior to June 30 or any applicable
calendar year, the annual bonus will be equal to a pro rata portion of
the annual bonus in respect of that year, as determined based upon our
achievement of the objectives for that year;
. if the date of termination is after June 30 of any applicable calendar
year, the annual bonus will be equal to the annual bonus payable in
respect of that year, as determined based upon our achievement of the
objectives for that year,
in either instance payable upon the later to occur of 30 days after
certification of our financial statements for that year and the last day of the
month after which a new management service provider is retained by us, and
conditioned upon TeleCorp Management having nominated a successor person or
persons, who are acceptable to our board, and:
. who would not cause a significant and detrimental effect on our
eligibility to hold our PCS licenses and to realize the benefits, if
any, that we derive from TeleCorp Management's status as a very small
business; and
. to whom our voting preference common stock and class C common stock will
be transferred by Mr. Vento and Mr. Sullivan.
The management agreement protects us if TeleCorp Management does not
nominate an acceptable person or persons to provide management services to us.
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The shares of class A common stock and series E preferred stock that Mr.
Vento and Mr. Sullivan received under the securities purchase agreement vest in
accordance with the following schedule, which is contained in the management
agreement:
<TABLE>
<CAPTION>
Vesting Date Percent of Shares
------------ -----------------
<S> <C>
July 17, 1998.......................................... 20%
July 17, 2000.......................................... 15%
July 17, 2001.......................................... 15%
July 17, 2002.......................................... 15%
July 17, 2003.......................................... 15%
</TABLE>
The remaining shares vest according to the completion of different steps in
our minimum construction plan.
We are obligated to repurchase from Mr. Vento and Mr. Sullivan, and they are
required to sell to us, following the termination of the management agreement
for any reason, the amount of our class A common stock, up to 1,865,600 shares,
and our series E preferred stock, up to 18,219 shares, that have not yet
vested.
During the term of the management agreement, and under limited circumstances
for a period following termination, TeleCorp Management, Mr. Vento and Mr.
Sullivan are prohibited from assisting or becoming associated with any person
or entity, other than as a holder of up to 5% of the outstanding voting shares
of any publicly traded company, that is actively engaged in the business of
providing mobile wireless communications services in our territory, and from
employing any person who was employed by us unless that person was not employed
by us for a period of at least six months.
Employee Agreement
On July 17, 1998, we entered into an employee agreement with Ms. Dobson,
under which she serves as our Chief Operating Officer at a base annual salary
of $250,000. Ms. Dobson is eligible under the employee agreement, at our
board's discretion, to receive a potential annual bonus based upon the
achievement of objectives established by the compensation committee of our
board.
Ms. Dobson's employee agreement provides that she is an employee-at-will. We
will reimburse the reasonable expenses that she incurs while performing her
services under her employee agreement and she may participate in our employee
benefit plans available to employees of comparable status and position.
If Ms. Dobson should die, we will pay any amounts that we owe her under her
employee agreement accrued prior to her death to her estate, heirs and
beneficiaries. All family medical benefits under the employee agreement for the
benefit of Ms. Dobson will continue for six months after death. Termination for
cause is:
. engaging in misconduct which has caused demonstrable and serious injury,
financial or otherwise, to us or our reputation;
. being convicted of a felony or misdemeanor as evidenced by a judgment,
order or decree of a court of competent jurisdiction;
. failing to comply with our board's directions, or neglecting or refusing
to perform the executive's duties or responsibilities, unless changed
significantly without the executive's consent; or
. violating the employee agreement or restricted stock grant plan.
If we terminate Ms. Dobson for cause, or she voluntarily quits, we will pay
her any amounts that we owe her accrued prior to the cessation of employment.
If we terminate her other than for cause, we will pay Ms. Dobson an amount
equal to her then annual base salary, at normal payroll intervals, as well as
continue to cover her under our employee benefit plans for 12 months.
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Under the employee agreements, the executives are subject to confidentiality
provisions, and have agreed, for one year after cessation of employment with
us, to non-competition and non-solicitation provisions and to limit public
statements concerning us.
Separation Agreement
On March 8, 1999, we entered into a separation agreement with Mr. Dowski,
under which we agreed to pay Mr. Dowski:
. $17,500 per month for 12 months;
. a lump sum of $105,000, representing a 1998 bonus;
. a lump sum equal to earned but unpaid or unused vacation;
. $4,300 as reimbursement for relocation expenses, including taxes payable
by Mr. Dowski on the sum; and
. a lump sum equal to outstanding travel and expense reimbursement.
We also agreed to continue covering Mr. Dowski under our employee benefit
plans for 12 months.
In addition, we repurchased 577 shares of Mr. Dowski's series E preferred
stock and 131,646 of Mr. Dowski's shares of class A common stock for an
aggregate amount of approximately $19 in accordance with his share grant
agreement concerning such restricted stock.
The separation agreement contained mutual releases by Mr. Dowski and us of
each other. In addition, in the separation agreement, Mr. Dowski confirmed his
confidentiality agreements with us, and his one-year non-competition, non-
solicitation and limitation on public speaking agreements.
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PRINCIPAL STOCKHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table describes, as of September 30, 1999, the number of
shares of each class of our voting stock beneficially owned by:
. each of our directors;
. executive officers named in the summary compensation table above,
. each person known by us to beneficially own more than 5% of the
outstanding shares of any class of our voting capital stock at such
date, and
. all of our current directors and executive officers, as a group.
Except as otherwise indicated, the address for each director and executive
officer is c/o TeleCorp, 1010 N. Glebe Road, Suite 800, Arlington, Virginia
22201.
The following table shows the beneficial ownership of our class A common
stock on the assumption that FCC restrictions on the conversion of some classes
of our capital stock into class A common stock no longer apply to us and any
required stockholder approvals have been obtained.
Under the terms of our restated certificate of incorporation that will
become effective upon completion of this offering, until the occurrence of
defined events, and subject to specific rights granted to holders of other
classes of our capital stock, Mr. Vento and Mr. Sullivan, as the holders of
voting preference common stock, possess 50.1% of the voting power of all shares
of our capital stock, and the holders of class A common stock possess 49.9% of
the voting power of all shares of our capital stock. If, under circumstances
described under "Description of Capital Stock," we receive FCC approval for the
class A common stock and voting preference common stock to vote as a single
class, the class A common stock and the voting preference common stock will
vote as a single class on all matters and be granted one vote per outstanding
share. Holders of some of our other classes of capital stock have been granted
voting rights regarding matters specifically affecting those classes. Finally,
so long as AT&T Wireless continues to own not less than two-thirds of the
shares of series A preferred stock it owned on July 17, 1998, it will have the
right to nominate one member of our board. See "Description of Capital Stock."
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<PAGE>
<TABLE>
<CAPTION>
Percentage of
Class A
Class A Common Stock
Common Beneficially
Stock Owned Percentage of
---------- ----------------- Total Voting
Number of Before After Power After
Stockholder Shares Offering Offering Offering
- ----------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C>
Chase Capital Partners.......... 4,974,113(a) 20.74% --%
Equity-Linked Investors-II...... 4,722,078(b) 19.69 --
Hoak Communications Partners,
L.P............................ 3,541,484(c) 14.61 --
Whitney Equity Partners, L.P.... 2,951,172(d) 12.32 --
Media/Communications Partners... 1,896,942(e) 7.93 --
AT&T Wireless PCS, LLC.......... 5,125,700(f) 17.83 --
TWR Cellular, Inc............... 5,125,700(f) 17.83 --
Gerald T. Vento................. 1,648,671(g) 6.88 -- (s)
Thomas H. Sullivan.............. 1,067,440(h) 4.46 -- (s)
Michael R. Hannon............... 4,974,113(i) 20.74 --
Rohit M. Desai.................. 4,722,078(j) 19.69 --
James M. Hoak................... 3,541,484(k) 14.61 --
William Laverack, Jr............ 2,951,172(l) 12.32 --
Gary Fuqua...................... 0 0 --
James F. Wade................... 1,896,942(m) 7.93 --
Scott Anderson.................. 2,500(n) * --
William Kussell................. 2,500(o) * --
Joseph O'Donnell................ 2,500(p) * --
Michael Schwartz................ 5,125,700(f) 17.83 --
Mary Hawkins Key................ 5,125,700(f) 17.83 --
Julie A. Dobson................. 518,213 2.17 --
Robert Dowski................... 13,945 * --
Steven Chandler................. 57,342(q) * --
All directors and executive
officers, as a group,
14 persons..................... 26,282,891(r) 90.40
</TABLE>
- --------
* Less than one percent.
(a) Consists of 114,225 shares of class A common stock, 186 shares of class C
common stock and 1,223 shares of class D common stock held by TeleCorp
Investment Corp., LLC. and 4,785,013 shares of class A common stock, 8,896
shares of class C common stock and 64,570 shares of class D common stock
held by Chase Capital Partners. The shares of class C and D common stock
under some circumstances are convertible into shares of class A common
stock on a one for one basis. These shares may also be deemed to be
beneficially owned by Mr. Hannon. Mr. Hannon disclaims beneficial
ownership of all of these shares. The address of the stockholders is 380
Madison Avenue, 12th Floor, New York, New York 10017.
(b) Consists of 2,788,290 shares of class A common stock, 4,355 shares of
class C common stock and 34,287 shares of class D common stock held by
Private Equity Investors III, L.P. and 1,862,202 shares of class A common
stock, 4,355 shares of class C common stock and 28,589 shares of class D
common stock held by Equity-Linked Investors-II. The shares of class C and
D common stock under some circumstances are convertible into shares of
class A common stock on a one for one basis. These shares may also be
deemed to be beneficially owned by Mr. Desai. Mr. Desai disclaims
beneficial ownership of all these shares. The address of the stockholders
is 540 Madison Avenue, 36th Floor, New York, New York 10022.
(c) Consists of 292,340 shares of class A common stock, 547 shares of class C
common stock and 3,952 shares of class D common stock held by HCP Capital
Fund, L.P. and 3,195,453 shares of class A common stock, 5,985 shares of
class C common stock and 43,207 shares of class D common stock held by
Hoak Communications Partners, L.P. The shares of class C and D common
stock under some circumstances are convertible into shares of class A
common stock on a one for one basis. These shares may also be deemed
to be beneficially owned by Mr. Hoak. The address of the stockholders is
One Galleria Tower, 13355 Noel Road, Suite 1050, Dallas, Texas 75240.
69
<PAGE>
(d) Consists of 1,986,628 shares of class A common stock, 3,721 shares of class
C common stock and 26,862 shares of class D common stock held by J. H.
Whitney III, L.P.; 47,871 shares of class A common stock, 90 shares of
class C common stock and 648 shares of class D common stock held by Whitney
Strategic Partners III, L.P.; and 871,928 shares of class A common stock,
1,633 shares of class C common stock and 11,791 shares of class D common
stock held by Whitney Equity Partners, L.P. The shares of class C and D
common stock under some circumstances are convertible into shares of class
A common stock on a one for one basis. These shares may also be deemed to
be beneficially owned by Mr. Laverack. The address of the stockholders is
177 Broad Street, 15th Floor, Stamford, Connecticut 06901.
(e) Consists of 1,784,377 shares of class A common stock, 3,314 shares of class
C common stock and 23,820 shares of class D common stock held by
Media/Communications Partners III Limited Partnership and 84,075 shares of
class A common stock, 138 shares of class C common stock and 1,218 shares
of Class D common stock held by Media/Communications Investors Limited
Partnership. The shares of class C and D common stock under some
circumstances are convertible into shares of class A common stock on a one
for one basis. These shares may also be deemed to be beneficially owned by
Mr. Wade. The address of the stockholders is 75 State Street, Suite 2500,
Boston, Massachusetts 02109.
(f) Consists of 134,499 shares of class A common stock, 3,107 shares of class D
common stock and 3,022,495 shares of series F preferred stock held by AT&T
Wireless PCS, LLC and 158,296 shares of class A common stock, 3,657 shares
of class D common stock and 1,803,646 shares of series F preferred stock
held by TWR Cellular. The shares of series F preferred stock and class D
common stock under some circumstances are convertible into shares of class
A common stock on a one for one basis. These shares may also be deemed to
be held by Mr. Schwartz, Ms. Hawkins-Key and various AT&T affiliates. Mr.
Schwartz and Ms. Hawkins Key disclaim beneficial ownership of all of these
shares. The address of the stockholders is c/o AT&T Wireless PCS, LLC 7277
164th Avenue, N.E., Redmond, Washington 98052.
(g) Consists of 159,244 shares of class A common stock and 3,678 shares of
class D common stock held by TeleCorp Investment Corp. II, L.L.C. and
1,450,610 shares of class A common stock, 34,124 shares of class C common
stock and 1,015 shares of class D common stock held by Mr. Vento. The
shares of class C and D common stock under some circumstances are
convertible into shares of class A common stock on a one for one basis. Mr.
Vento serves as a manager and is a stockholder of this entity.
(h) Consists of 159,244 shares of class A common stock and 3,678 shares of
class D common stock held by TeleCorp Investment Corp. II, L.L.C. and
883,136 shares of class A common stock, 21,156 shares of class C common
stock and 226 shares of class D common stock held by Mr. Sullivan. The
shares of class C and D common stock under some circumstances are
convertible into shares of class A common stock on a one for one basis. Mr.
Vento serves as a manager and is a stockholder of this entity.
(i) Consists of 114,225 shares of class A common stock, 186 shares of class C
common stock and 1,223 shares of class D common stock held by TeleCorp
Investment Corp., LLC. and 4,785,013 shares of class A common stock, 8,896
shares of class C common stock and 64,570 shares of class D common stock
held by Chase Capital Partners. Mr. Hannon serves as Vice President of CB
Capital Investors, L.P. The shares of class C and D common stock under some
circumstances are convertible into shares of class A common stock on a one
for one basis. Mr. Hannon disclaims beneficial ownership of all of these
shares. The address of the stockholder is c/o CB Capital Investors, L.P.,
380 Madison Avenue, 12th Floor, New York, New York 10017.
(j) Consists of 2,788,290 shares of class A common stock, 4,355 shares of class
C common stock and 34,287 shares of class D common stock held by Private
Equity Investors III, L.P. and 1,862,202 shares of class A common stock,
4,355 shares of class C common stock and 28,589 shares of class D common
stock held by Equity-Linked Investors-II. Mr. Desai serves as managing
general partner of each of these stockholders. The shares of class C and D
common stock under some circumstances are convertible into shares of class
A common stock on a one for one basis. Mr. Desai disclaims beneficial
ownership of all of these shares. The address of this stockholder is 540
Madison Avenue, 36th Floor, New York, New York 10022.
(k) Consists of 292,340 shares of class A common stock, 547 shares of class C
common stock and 3,952 shares of class D common stock held by HCP Capital
Fund, L.P. and 3,195,453 shares of class A common stock, 5,985 shares of
class C common stock and 43,207 shares of class D common stock held by Hoak
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<PAGE>
Communications Partners, L.P. Mr. Hoak serves as Principal and Chairman of
the manager of these stockholders, shareholder of the manager and General
Partner of Hoak Communications Partners, L.P. and limited partner and
shareholder of the General Partner of HCP Capital Fund, L.P. The shares of
class C and D common stock under some circumstances are convertible into
shares of class A common stock on a one for one basis. The address of these
stockholders is c/o Hoak Communications Partners, L.P., One Galleria Tower,
13355 Noel Road, Suite 1050, Dallas, Texas 75240.
(l) Consists of 1,986,628 shares of class A common stock, 3,721 shares of class
C common stock and 26,862 shares of class D common stock held by J.H.
Whitney III, L.P., 47,871 shares of class A common stock, 90 shares of
class C common stock and 648 shares of Class D common stock held by Whitney
Strategic Partners III, L.P.; and 871,928 shares of class A common stock,
1,633 shares of class C common stock and 11,791 shares of class D common
stock held by Whitney Equity Partners, L.P. Mr. Laverack serves as Managing
Member of J.H. Whitney Equity Partners, L.L.C., which is a General Partner
in Whitney Equity Partners, L.P., Managing Member of J.H. Whitney Equity
Partners III, L.L.C., which is a General Partner in J.H. Whitney III, L.P.,
and Whitney Strategic Partners III, L.P. The class C and class D shares,
under some circumstances, are convertible into shares of class A common
stock on a one for one basis. The address of these stockholders is c/o
Whitney Equity Partners, L.P., 177 Broad Street, 15th Floor, Stamford,
Connecticut 06901.
(m) Consists of 1,784,377 shares of class A common stock, 3,314 shares of class
C common stock and 23,820 shares of class D common stock held by
Media/Communications Partners III Limited Partnership and 84,075 shares of
class A common stock, 138 shares of class C common stock and 1,218 shares
of class D common stock held by Media/Communications Investors Limited
Partnership. Mr. Wade serves as President of M/C Investor General Partner-
J, Inc., which is a General Partner in Media Communications Investors
Limited Partnerships and Manager of M/C III, L.L.C., which is a General
Partner in Media Communications Partners III Limited Partnership. The
shares of class C and D common stock under some circumstances are
convertible into shares of class A common stock on a one for one basis. The
address of these stockholders is c/o Media/Communications Partners, 75
State Street, Suite 2500, Boston, Massachusetts 02109.
(n) Consists of 159,244 shares of class A common stock and 3,678 shares of
class D common stock owned by TeleCorp Investment Corp. II, L.L.C., of
which Cedar Grove Partners, LLC owns 4.49%, and vested options to purchase
2,500 shares of class A common stock held by Mr. Anderson. Mr. Anderson is
a principal of Cedar Grove Partners, LLC. The shares of class D common
stock under some circumstances are convertible into shares of class A
common stock on a one for one basis.
(o) Consists of vested options to purchase 2,500 shares of class A common stock
held by Mr. Kussell.
(p) Consists of vested options to purchase 2,500 shares of class A common stock
held by Mr. O'Donnell.
(q) Consists of vested options to purchase 250 shares of class A common stock
held by Mr. Chandler.
(r) Consists of shares held by members of management and our initial investors
that may be deemed to be beneficially owned by members of our board. These
members of our board disclaim beneficial ownership. Does not include shares
held by Mr. Dowski, whom we no longer employ. Does not include options that
have been approved but not granted under our 1999 Stock Option Plan.
(s) Includes 500 shares of voting preference stock owned by each of Mr. Vento
and Mr. Sullivan. Together, the voting preference stock possesses 50.1% of
the voting power of all shares of our capital stock. Mr. Vento and Mr.
Sullivan are required to vote their shares of voting preference stock
together on all matters.
71
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AT&T Agreements
On January 23, 1998, we and AT&T announced the formation of a venture under
which we are financing, constructing and operating a wireless communications
network using the AT&T and SunCom brand names and logos together, giving equal
emphasis to both. AT&T contributed licenses to us in exchange for an equity
interest in us. The venture provides the basis for an alliance between us and
AT&T to provide wireless communications services in particular markets. These
agreements are unique and were heavily negotiated by the parties. The parties
entered into these agreements as a whole, and, taken as a whole, we believe
that the terms of these agreements were no more favorable to any of the parties
than could have been obtained from third parties negotiated at arms' length.
AT&T, as a result of these agreements, owns shares of our capital stock. The
terms of the venture and the alliance are described in a number of agreements,
summaries of which are set forth below. These summaries are qualified by
reference to the agreements, which are exhibits to the registration statement
that we filed with the SEC, including this prospectus.
Securities Purchase Agreement
Under a securities purchase agreement, dated as of January 23, 1998, as
amended, among our initial investors, the former stockholders of TeleCorp
Holding, Mr. Vento and Mr. Sullivan and us, we received PCS licenses from AT&T
Wireless and TWR Cellular, Inc. in exchange for shares of our series A
preferred stock, series D preferred stock and series F preferred stock and
$21.0 million in cash. Our initial investors include AT&T Wireless, TWR
Cellular, Chase Capital Partners, Desai Associates, Hoak Capital Corporation,
J. H. Whitney & Co., M/C Partners, One Liberty Fund III, L.P., Toronto Dominion
Investments, Inc. and Northwood Capital Partners. Under the securities purchase
agreement, the initial investors other than AT&T agreed to contribute $128.0
million to us in exchange for shares of our series C preferred stock, class A
common stock, class C common stock, and class D common stock. In addition, the
securities purchase agreement provides that, upon the closing by us of an
acquisition of PCS licenses covering populations of one million or more people,
our initial investors other than AT&T will contribute an additional $5.0
million to us in exchange for additional shares of our series C preferred stock
and class A common stock. This obligation was satisfied in connection with our
purchase of the Digital PCS licenses. Approximately $39.0 million of the
contributions to be made by our initial investors other than AT&T were made
upon the closing of the transactions contemplated by the securities purchase
agreement, which occurred on July 17, 1998, and the remainder of the
contributions will be made over a three-year period. The obligations of such
initial investors to make its remaining contributions are:
. irrevocable and unconditional, and not subject to counterclaim, set-off,
deduction or defense, or to abatement, suspension, deferment, diminution
or reduction for any reason whatsoever; and
. under a pledge agreement between each initial investor, other than AT&T,
and us, secured by a pledge of the shares of our capital stock issued to
each such initial investor under the securities purchase agreement in
exchange for its cash commitment.
See "Management Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
Under the securities purchase agreement, Mr. Vento and Mr. Sullivan
exchanged their shares of stock in TeleCorp Holding for shares of our series E
preferred stock, class A common stock, class C common stock and class D common
stock. Mr. Vento and Mr. Sullivan also each received 500 shares of our voting
preference stock in exchange for shares of stock we previously issued to them.
The other former stockholders of TeleCorp Holding exchanged their shares of
stock in TeleCorp Holding for shares of our series C preferred stock, class A
common stock, class C common stock and class D common stock. The table below
indicates each of the parties to the securities purchase agreement, their
contribution and the consideration received:
72
<PAGE>
<TABLE>
<CAPTION>
Stockholder Contribution Consideration Received
<S> <C> <C>
. AT&T Wireless PCS, LLC . PCS licenses covering some of the . 30,650 shares of our series A
basic trading areas or other areas preferred stock
within the St. Louis major trading . 15,741 shares of our series D
area, the Louisville-Lexington- preferred stock
Evansville major trading area, and . 1,532,495 shares of our series F
the Boston-Providence major preferred stock
trading area
- ----------------------------------------------------------------------------------------------------
. TWR Cellular, Inc. . PCS licenses covering the Little . 36,073 shares of our series A
Rock, Arkansas major trading area preferred stock
and covering some of the basic . 18,526 shares of our series D
trading areas or other areas within preferred stock
the Memphis-Jackson major . 1,803,646 shares of our series F
trading area preferred stock
- ----------------------------------------------------------------------------------------------------
. Chase Capital Partners . $27,782,016 . 28,942 shares of our series C
. 363 class A shares of TeleCorp preferred stock
Holding . 2,751,127 shares of our class A
. 2,296 class C shares of TeleCorp common stock
Holding . 8,896 shares of our class C
. 58 series A preferred shares of common stock
TeleCorp Holding . 58,401 shares of our class D
common stock
- ----------------------------------------------------------------------------------------------------
. Desai Associates . $27,782,016 . 27,782 shares of our series C
preferred stock
. 2,636,902 shares of our class A
common stock
. 8,710 shares of our class C
common stock
. 57,178 shares of our class D
common stock
- ----------------------------------------------------------------------------------------------------
. Hoak Capital . $20,836,512 . 20,837 shares of our series C
Corporation
preferred stock
. 1,977,677 shares of our class A
common stock
. 6,532 shares of our class C
common stock
. 42,884 shares of our class D
common stock
- ----------------------------------------------------------------------------------------------------
. J.H. Whitney & Co. . $17,363,760 . 17,364 shares of our series C
preferred stock
. 1,648,064 shares of our class A
common stock
. 5,444 shares of our class C
common stock
. 35,737 shares of our class D
common stock
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Stockholder Contribution Consideration Received
<S> <C> <C>
. Entergy Technology Holding . $13,891,008 . 15,051 shares of our series C
Company, who has since . 1,974 class B shares of TeleCorp preferred stock
transferred all of our Holding . 1,432,676 shares of our class A
capital
stock it owned to others . 685 class C shares of TeleCorp common stock
of our initial investors Holding . 34,353 shares of our class D
. 58 series A preferred shares of common stock
TeleCorp Holding
- --------------------------------------------------------------------------------------------------------------
. M/C Partners and M/C . $10,418,256 . 11,578 shares of our series C
Investors
. 363 class A shares of TeleCorp preferred stock
Holding . 1,103,062 shares of our class A
. 2,296 class C shares of TeleCorp common stock
Holding . 3,452 shares of our class C
. 58 series A preferred shares of common stock
TeleCorp Holding . 22,665 shares of our class D
common stock
- --------------------------------------------------------------------------------------------------------------
. One Liberty Fund III, L.P. . $3,472,752 . 5,004 shares of our series C
. 837 class A shares of TeleCorp preferred stock
Holding . 463,256 shares of our class A
. 2,273 class C shares of TeleCorp common stock
Holding . 1,307 shares of our class C
. 77 series A preferred shares of TeleCorp common stock
Holding . 8,578 shares of our class D
common stock
- --------------------------------------------------------------------------------------------------------------
. Toronto Dominion . $3,472,752 . 3,473 shares of our series C
Investments,
Inc. preferred stock
. 329,613 shares of our class A
common stock
. 1,089 shares of our class C
common stock
. 7,147 shares of our class D
common stock
- --------------------------------------------------------------------------------------------------------------
. Northwood Capital Partners .$2,430,926 .3,591 shares of our series C
and
Northwood Ventures .363 class A shares of TeleCorp preferred stock
Holding .344,954 shares of our class A
.2,296 class C shares of TeleCorp common stock
Holding .948 shares of our class C
.58 series A preferred shares of common stock
TeleCorp Holding .6,227 shares of our class D
common stock
- --------------------------------------------------------------------------------------------------------------
. Gilde Investment Fund B.V. .8 class A shares of TeleCorp .15 shares of our series C
Holding preferred stock
.23 class C shares of TeleCorp .1,349 shares of our class A
Holding common stock
.1 series A preferred share of TeleCorp .less than 2 shares of our class C
Holding common stock
.less than 14 shares of our class D
common stock
- --------------------------------------------------------------------------------------------------------------
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Stockholder Contribution Consideration Received
<S> <C> <C>
. TeleCorp Investment Corp., .2,659 class C shares of TeleCorp .144,225 shares of our class A
L.L.C. Holding common stock
.58 series A preferred shares of TeleCorp .2 shares of our class C
Holding common stock
.189 shares of our class D
common stock
.1,160 shares of our series C
preferred stock
- -------------------------------------------------------------------------------------------------------------
. Gerald T. Vento .$450,000 .500 shares of our voting preferred
.1,788 class A shares of TeleCorp common stock
Holding .450 shares of our series C
preferred stock
.8,729 shares of our series E
preferred stock
.1,120,623 shares of our class A
common stock
.34,124 shares of our class C
common stock
.926 shares of our class D
common stock
- -------------------------------------------------------------------------------------------------------------
. Thomas H. Sullivan .$100,000 .500 shares of our voting preferred
.1,112 class A shares of TeleCorp common stock
Holding .100 shares of our series C
preferred stock
.5,426 shares of our series E
preferred stock
.679,588 shares of our class A
common stock
.21,156 shares of our class C
common stock
.206 shares of our class D
common stock
</TABLE>
Our initial investors other than AT&T also committed in the securities
purchase agreement to make additional irrevocable equity contributions in the
aggregate amount of $5.0 million in return for the issuance of preferred and
common stock in connection with the Digital PCS acquisition. In addition, upon
the closing of the transactions contemplated by the securities purchase
agreement, we also issued to other members of management shares of our series E
preferred stock and class A common stock. Up to 35.71% of the class A common
stock issued to members of management are under our restricted stock plan.
Shares issued under the restricted stock plan are subject to forfeiture
according to a schedule if employment of such stockholder with us is terminated
within six years after the closing of the securities purchase agreement.
Stockholders' Agreement
General. The stockholders' agreement, as amended as of October , 1999,
among our initial investors, Messrs. Vento and Sullivan and us sets guidelines
for our management and operations and restricts the sale, transfer or other
disposition of our capital stock.
Board of Directors. The stockholders' agreement provides that any action of
our board be approved by the affirmative vote of a majority of our entire
board, except in circumstances where voting by particular classes of directors
is
75
<PAGE>
required. The stockholders' agreement also provides that, upon closing of this
offering, our board will consist of nine directors.
The parties to the stockholders' agreement have agreed to vote all of the
shares of class A voting common stock and voting preference stock to cause the
election of the following nine individuals to our board:
. Mr. Vento and Mr. Sullivan so long as each remains an officer and the
management agreement with TeleCorp Management remains in effect;
. two individuals selected by holders of a majority in interest of the
common stock beneficially owned by our initial investors other than AT&T
Wireless;
. two additional individuals selected by Mr. Vento and Mr. Sullivan, so
long as they remain officers, who must be acceptable to the holders of a
majority in interest of the common stock beneficially owned by our
initial investors other than AT&T on the one hand, and AT&T Wireless on
the other hand;
. one individual nominated by AT&T Wireless in its capacity as the holder
of series A preferred stock so long as it has the right to nominate one
director in accordance with our restated certificate of incorporation;
. one individual selected by Mr. Vento and Mr. Sullivan, so long as they
remain officers, who must be acceptable to AT&T Wireless; and
. one individual selected by Mr. Vento and Mr. Sullivan, so long as they
remain officers, who must be acceptable to the holders of a majority in
interest of the class A voting common stock beneficially owned by our
initial investors other than AT&T.
The stockholders agreement provides that when FCC ownership restrictions no
longer apply to us, our board will have seven members and the right of Mr.
Vento and Mr. Sullivan to appoint the individuals set forth in the last two
items above will expire.
The stockholders' agreement also addresses the composition of our board
committees. See "Management."
Exclusivity. The parties to the stockholders' agreement have agreed that,
during the term of the stockholders' agreement, neither they nor any of their
respective affiliates will provide or resell, or act as the agent for any
person offering, within the areas covered by our licenses, wireless
communications services initiated or terminated using TDMA and portions of the
airwaves licensed by the FCC, except that AT&T and its affiliates may:
. resell or act as agent for us in connection with mobile wireless
communications services;
. provide or resell wireless communications services only to or from
specific locations, provided that any equipment sold in connection with
the service must be capable of providing our wireless communications
services; and
. resell mobile wireless communications services from another person in
any area where we have not placed a system into commercial service.
Additionally, with respect to some markets identified in the intercarrier
roamer services agreement with AT&T Wireless Services, each of us and AT&T
Wireless has agreed to cause our 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 these markets; and
. refrain from inducing any of its customers to change such programming.
76
<PAGE>
AT&T Wireless has retained some PCS licenses within the areas covered by our
licenses for which we have a right of negotiation in the event of a proposed
transfer.
If we materially breach any of our obligations, AT&T Wireless may terminate
its exclusivity obligations under the stockholders' agreement and may terminate
our rights to the AT&T brand and logo under the license agreement if a default
continues after the applicable cure periods lapse. These material breaches
include:
. AT&T Wireless and its affiliates decide to adopt a new technology
standard other than TDMA in a majority of its markets, and we decline to
adopt the new technology;
. each portion of our network does not, within one year after being placed
into service, meet or exceed technical standards that AT&T has developed
regarding voice quality and performance of network and call completion
equipment. Each portion of our network must, within one year after being
placed into service, perform on a level, as measured by these standards
manuals, that meets or exceeds the levels achieved by the average of all
comparable wireless communications networks owned and operated by AT&T;
. we fail to satisfy specific percentages that our entire network,
measured as a single system, must meet, including as to percentage of
calls completed, percentage of established calls that are dropped,
percentages of calls that are not successfully transferred from one
network equipment site to another as a handset moves, as well as
technical standards regarding the functioning of network and call
connection equipment; or
. we fail to meet specified customer care, reception quality and network
reliability standards.
In all of our launched markets, we believe we currently meet all of the
standards that we are required to satisfy by the first anniversary of each
launch date.
The exclusivity provisions in the stockholders' agreement do not apply to
approximately 100,000 people that overlapped with the coverage area of licenses
AT&T purchased from Vanguard Cellular in Strafford, New Hampshire. We have
agreed with AT&T to exchange our licenses covering these people for licenses
covering other people. These exchanged populations will be covered under the
scope of our agreements with AT&T.
Construction. The stockholders' agreement requires us to construct a PCS
system in the areas covered by our licenses according to a minimum construction
plan, which requires us to construct a system in areas covering:
. 20% of the total 1995 population of the area covered by our licenses in
the mainland United States by July 17, 1999, focusing on designated
areas of Memphis and New Orleans;
. 30% of the total 1995 population of the area covered by our licenses in
Puerto Rico and the U.S. Virgin Islands by May 25, 2000, focusing on the
core urban and suburban cities of the San Juan metropolitan area;
. 40% of the total 1995 population of the area covered by our licenses in
Puerto Rico and U.S. Virgin Islands by May 25, 2001, and also focusing
on secondary cities throughout Puerto Rico;
. 40% of the total 1995 population of the area covered by our licenses by
July 17, 2000, and also focusing on designated areas of New England,
Little Rock and Missouri and enhancing coverage in all markets;
. 55% of the total 1995 population of the area covered by our licenses in
the mainland United States by July 17, 2001 and also focusing on
secondary cities and the important associated connecting highways;
. 55% of the total 1995 population of the area covered by our licenses in
Puerto Rico and the U.S. Virgin Islands by May 25, 2002, and continuing
to expand the secondary cities of Puerto Rico and key cities to the U.S.
Virgin Islands and the important associated connected highways;
77
<PAGE>
. 70% of the total 1995 population of the area covered by our licenses in
the mainland United States by July 17, 2002, and continuing to expand
the secondary cities and enhancing coverage of the core areas;
. 70% of the total 1995 population of the area covered by our licenses in
Puerto Rico and the U.S. Virgin Islands by May 25, 2003, and continuing
to expand secondary cities and enhancing coverage and capacity of core
areas;
. 75% of the total 1995 population of the area covered by our licenses in
the mainland United States by July 17, 2003, and also focusing on adding
capacity sites and filling in the remaining suburban areas; and
. 75% of the total 1995 population of the area covered by our licenses in
Puerto Rico and the U.S. Virgin Islands by May 25, 2004, and also
focusing on adding capacity sites and filling in the remaining suburban
areas.
In addition to the minimum construction plan, we are bound to do the
following:
. arrange for all necessary microwave relocation for our licenses and
AT&T's retained licenses;
. ensure compatibility of our systems with the majority of systems in
Louisiana, Oklahoma, Minnesota, Illinois and Texas, excluding Houston;
. satisfy the FCC construction requirements in the areas covered by our
licenses and AT&T's retained licenses;
. offer service features such as call forwarding, call waiting and
voicemail with respect to our systems, causing our systems to comply
with AT&T's network, audio and system performance quality standards; and
. refrain from providing or reselling services other than long distance
services that constitute mobile wireless communications services
initiated or terminated using TDMA and portions of the airwaves licensed
by the FCC or that are procured from AT&T.
Disqualifying Transaction. If AT&T and an entity that:
. derives annual revenues from communications businesses in excess of $5
billion;
. derives less than one-third of its aggregate revenues from wireless
communications; and
. owns FCC licenses to offer, and does offer, mobile wireless
communications services serving more than 25% of the residents, as
determined by Equifax Marketing Decision Systems Inc., within the areas
covered by our licenses
merge, consolidate, acquire or dispose of assets to each other, or otherwise
combine, then AT&T, upon written notice to us, may terminate its exclusivity
obligations where the territory covered by our licenses overlaps with
commercial mobile radio service licenses of the business combination partner.
Upon such termination, we have the right to cause AT&T, TWR Cellular, or any
transferee that acquired any shares of series A preferred stock, series D
preferred stock or series F preferred stock owned by AT&T Wireless on July 17,
1998, and any shares of our common stock into which any of these shares are
converted, to exchange their shares into shares of series B preferred stock. If
we decide to convert their shares into shares of series B preferred stock AT&T
may terminate its exclusivity obligations in all of our markets.
Once so converted, we may redeem the shares of series B preferred stock at
any time in accordance with our restated certificate of incorporation.
Currently, only Sprint, SBC Communications, Bell Atlantic and BellSouth satisfy
the criteria for a business combination partner.
Under some circumstances, if AT&T proposes to sell, transfer or assign to
any person that is not an affiliate of AT&T Wireless, any PCS system owned and
operated by AT&T Wireless and its affiliates in any of the St. Louis, Missouri,
Louisville, Kentucky, or Boston, Massachusetts basic trading areas, then AT&T
must provide us with the opportunity to offer our network for sale jointly with
AT&T for a 90-day period.
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Acquisition of Licenses. The stockholders' agreement provides that we may
acquire any cellular license that our board has determined is a demonstrably
superior alternative to constructing a PCS system within the corresponding
areas covered by our licenses, if:
. a majority of the population covered by the license is within the areas
covered by our licenses;
. AT&T Wireless and its affiliates do not own commercial mobile radio
service licenses in the area covered by the license; and
. our ownership of the license will not cause AT&T Wireless or any
affiliate to be in breach of any law or contract.
Vendor Discounts; Roaming Agreements. AT&T Wireless has agreed in the
stockholders' agreement that, if we so request, and if such request shall not
result in any adverse impact to AT&T Wireless PCS, it will use all commercially
reasonable efforts:
. to assist us in obtaining discounts from any AT&T Wireless vendor with
whom we are negotiating for the purchase of any infrastructure equipment
or billing services; and
. to enable us to become a party to the roaming agreements between AT&T
Wireless and its affiliates and operators of other cellular and PCS
systems.
Resale Agreements. We, upon the request of AT&T Wireless, will enter into
resale agreements relating to the areas covered by our licenses under which
AT&T may resell our services. The rates, terms and conditions of service that
we provide are to be at least as favorable, and to the extent permitted by
applicable law, more favorable, to AT&T Wireless, taken as a whole, as the
rates, terms and conditions that we provide to other customers.
Subsidiaries. The stockholders' agreement provides that all of our
subsidiaries must be direct or indirect wholly owned subsidiaries. The
stockholders' agreement also provides that, without the prior written consent
of, or right of first offer to, AT&T Wireless, we and our subsidiaries may not:
. sell or dispose of a substantial portion of our assets or the assets of
any of our subsidiaries; or
. liquidate, merge or consolidate until we meet minimum construction
requirements.
Restrictions on Transfer. The stockholders' agreement restricts the sale,
transfer or other disposition of our capital stock, such as by giving rights of
first offer, drag along and tag along rights and providing demand and piggyback
registration rights.
If one of our stockholders who is a party to the stockholders' agreement
desires to transfer any or all of its shares of preferred or common stock,
other than voting preference stock and class C common stock, the selling
stockholder must first give written notice to us and:
. if the selling stockholder is one of our initial investors other than
AT&T or any other stockholder who is a party to the stockholders'
agreement, to AT&T Wireless; and
. if the selling stockholder is AT&T Wireless or TWR Cellular, to every
other initial investor.
The stockholders who receive notice from the selling stockholders may
acquire all, but not less than all, of the shares offered to be sold at the
price offered by the selling stockholder. If none of the stockholders opt to
purchase the shares of the selling stockholder, the selling stockholder can
sell its shares to any other person on the same terms and conditions as
originally offered to the stockholders. The right of first offer does not apply
to our repurchase of any shares of our class A voting common stock or class E
preferred stock from one of our employees in connection with the termination of
the employee's employment with us.
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A stockholder subject to the stockholders' agreement may not transfer 25% or
more of any of the following shares of our capital stock, whether alone or with
other stockholders or whether in one transaction or a series of transactions:
. series A preferred stock;
. series C preferred stock;
. series D preferred stock;
. series E preferred stock;
. series F preferred stock;
. voting preference stock;
. class A voting common stock;
. class B non-voting common stock;
. class C common stock; or
. class D common stock,
unless the proposed transfer includes an offer to our initial investors and Mr.
Vento and Mr. Sullivan to join in the transfer. Class C common stock and class
D common stock will count as one class of stock for purposes of the 25% test.
If a selling stockholder receives an offer from a bona fide purchaser to
transfer a selling stockholder's shares, the selling stockholder must follow
procedures included in the stockholders' agreement to include the other
stockholders in the proposed transfer.
In addition to the foregoing restrictions, the initial investors have agreed
not to transfer any shares of their common stock until July 17, 2001 except to
affiliates, and Mr. Vento and Mr. Sullivan have agreed not to transfer any
shares of common stock prior to July 17, 2003, subject to limited exceptions,
including that 25% of their common stock may be transferred after July 17,
2001. In addition, some of our stockholders, including AT&T, the initial
investors, Mr. Vento and Mr. Sullivan are subject to restrictions imposed by
the underwriters prohibiting them from transferring any shares of their capital
stock for 180 days.
Our stockholders who are subject to the stockholders' agreement also have
demand and piggyback registration rights. In some circumstances and for days
after completion of this offering, stockholders may demand that we register
some or all of their securities with the SEC under the Securities Act. Also, if
we propose to register any shares of our class A voting common stock or
securities convertible into or exchangeable for class A voting common stock
with the SEC under the Securities Act, we must notify all stockholders of our
intention to do so, and our stockholders may include in our registration their
shares of class A voting stock or securities convertible into or exchangeable
for class A voting common stock.
Amendments. In addition to the approval of our senior lenders, the terms of
the stockholders' agreement may be amended only if agreed to in writing by us
and the beneficial holders of a majority of the class A common stock party to
the stockholders' agreement, including AT&T Wireless, 66 2/3% of the class A
common stock beneficially owned by our initial investors other than AT&T, and
66 2/3% of the class A common stock beneficially owned by Mr. Vento and
Mr. Sullivan.
Termination. The stockholders' agreement will terminate upon the earliest to
occur of:
. the receipt of the written consent of each party;
. July 17, 2009; and
. under circumstances, the date on which a single stockholder beneficially
owns all of the outstanding shares of class A common stock.
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Network Membership License Agreement
Under a network license agreement dated as of July 17, 1998 between AT&T and
us, AT&T granted to us a royalty-free, non-transferable, non-sublicensable,
non-exclusive, limited license to use some of their licensed marks in our
markets, including:
. the logo containing the AT&T name and globe design;
. the expression "Member, AT&T Wireless Services Network"; and
. AT&T colors, graphics and overall configurations,
The licensed marks may only be used in connection with licensed activities.
These licensed activities include:
. providing to our customers and resellers of our wireless services,
solely within the areas covered by our licenses, mobile wireless
communications services; and
. marketing and offering the licensed services within the areas covered by
our licenses with limited advertising outside our licensed area.
The license agreement also grants to us the right to use licensed marks on
specified mobile phones distributed to our customers.
Except in specified instances, AT&T has agreed not to grant to any other
person a right to provide or resell, or act as agent for any person offering,
mobile wireless communications services under the licensed marks in our
licensed markets. AT&T retains all rights of ownership in the licensed marks,
subject to its exclusivity obligations to us, in both the areas covered by our
licenses and all other areas.
The license agreement restricts our use and modification of any of the
licensed marks. Although we may develop our own marks, we may not use them
together with the licensed marks without the prior approval of AT&T. Any
services we market or provide using the licensed marks must be of comparable
quality to similar services that AT&T markets and provides in areas that are
comparable to the areas covered by our licenses. We may take into account
commercial reasonableness and the relative stage of development of the licensed
areas, to determine what is comparable service. We must also provide
sufficiently high quality services to provide maximum enhancement to and
protect licensed marks, such as attaining specified levels of network quality,
audio quality, system performance and meeting customer care standards. The
license agreement also defines specific testing procedures to determine
compliance with these standards and affords us with a grace period to cure any
instances of noncompliance. Following the cure period, we must stop using the
licensed marks until we comply with the standards, or we may be deemed to be in
breach of the license agreement and we may lose our rights to the licensed
marks.
We may not assign, sublicense or transfer, by change of control or
otherwise, any of our rights under the license agreement, except that the
license agreement may be, and has been, assigned to our lenders under our
senior credit facilities. After the expiration of any applicable grace and cure
periods under our senior credit facilities, the lenders may then enforce our
rights under the license agreement and assign the license agreement to any
person with AT&T's consent.
The initial term of the license agreement is for a period of five years,
which will be automatically renewed for an additional five-year period if each
party gives written notice to the other party of our election to renew the
license agreement and neither party gives notice of non-renewal.
The license agreement may be terminated by AT&T at any time in the event of
our significant breach and the exhaustion of any applicable cure periods, which
include:
. our misuse of any licensed marks;
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. our bankruptcy;
. our licensing or assignment of any of our rights under the license
agreement, except as permitted by the terms of the license agreement;
. our loss of the licenses acquired from AT&T;
. our failure to maintain AT&T's quality standards in any material
respect; or
. our change of control, which is defined as a transaction, other than a
transfer by AT&T, that results in any person other than our initial
stockholders or our senior lenders acquiring beneficial ownership of
more than 50% of our voting stock, or 33.3% of our voting stock if the
person acquiring our stock acquires more than our initial stockholders
hold at that time. Also included is a transaction that results in any of
the three largest telecommunications carriers, excluding AT&T and any
wireless carrier using TDMA technology, or any regional bell operating
company, or Microsoft acquiring more than 15% of our voting stock,
excluding acquisitions through open market transactions or a majority of
our directors are removed in a proxy contest.
Our rights under the license agreement are also subject to the minimum
construction plan set forth in the stockholders' agreement. For more
information concerning the minimum construction plan, see the discussion under
"Stockholders' Agreement" under the heading "A&T Agreements." After the
initial term, AT&T may also terminate the license agreement in connection with
a disqualifying transaction.
Upon closing of the Digital PCS acquisition, the license agreement was
automatically amended to include the Baton Rouge, Houma, Hammond and
Lafayette, Louisiana basic trading areas under its scope. Upon closing of the
Puerto Rico acquisition, the license agreement was automatically amended to
include the San Juan major trading area under its scope. Upon the closing of
the Wireless 2000 acquisition, the license agreement was automatically amended
to include the Alexandria and Lake Charles, Louisiana basic trading areas and
certain other counties under the Monroe, Louisiana basic trading area under
its scope.
Intercarrier Roamer Service Agreement/Roaming Administration Service
Agreement
Intercarrier Roamer Service Agreement. We entered into the intercarrier
roamer services agreement dated as of July 17, 1998 with AT&T Wireless
Services and several of its affiliates. We have agreed with AT&T Wireless that
each party, in its capacity as a serving provider, will provide services to
each others customers where it has a license or permit to operate a wireless
communications system. Each home carrier whose customers receive service from
a serving provider will pay to the serving provider all of the serving
provider's charges for wireless service and all of the applicable charges.
Each serving provider's service charges per minute or partial minute for use
for the first three years will be fixed at a declining rate.
The intercarrier roamer service agreement has a term of 20 years, which is
automatically renewed on a year-to-year basis unless terminated by either
party upon 90 days prior written notice after 10 years. The intercarrier
roamer service agreement may be terminated immediately by either party upon
written notice to the other of a default of the other party. A party will be
in default under the intercarrier roamer service agreement upon any of the
following:
. material breach of any material term of the intercarrier roamer service
agreement by a party that continues for thirty days after receipt of
written notice of the breach from the nonbreaching party;
. voluntary liquidation or dissolution or the approval by the management
or owners of a party of any plan or arrangement for the voluntary
liquidation or dissolution of the party; or
. bankruptcy or insolvency of a party.
The intercarrier roamer service agreement may also be suspended by either
party immediately upon written notice to the other party of the existence of a
breach of the agreement, whether or not the breach constitutes a default, if
the breach materially affects the service being provided to the customers of
the non-
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breaching party. While the suspension is in effect, either in whole or in part,
the parties will work together to resolve as quickly as possible the difficulty
that caused the suspension. When the party who originally gave notice of
suspension concludes that the problem causing the suspension has been resolved,
that party will give to the other written notice to this effect, and the
agreement will resume in full effect within five business days after the
parties have mutually agreed that the problem has been resolved. Neither party
may assign or transfer its rights and obligations under the intercarrier roamer
service agreement without the written consent of the other party, except to an
affiliate or an assignee of its license.
Roaming Administrative Service Agreement. Under the roaming administrative
service agreement dated as of July 17, 1998 between AT&T Wireless and us, AT&T
Wireless has agreed to make available to us the benefits of the intercarrier
roaming services agreements it has entered into with other wireless carriers,
subject to the consent of the other wireless carriers and to our remaining a
member in good standing of the North American Cellular Network.
The roaming administrative service agreement has an initial term of two
years, which is automatically renewed on a year-to-year basis unless terminated
by either party upon 90 days prior written notice. Either party may terminate
the roaming administrative service agreement for any reason at any time upon
180 days prior written notice. Either party may also terminate the roaming
administrative service agreement:
. upon a material breach of the other party that is not cured or for which
cure is not reasonably begun within 30 days after written notice of the
claimed breach; or
. immediately by either party, after reasonable prior notice, if the other
party's operations materially and unreasonably interfere with its
operations and the interference is not eliminated within 10 days.
AT&T Wireless can terminate the roaming administrative service agreement if:
. we are no longer a member in good standing of the North American
Cellular Network; or
. the agreement under which AT&T Wireless receives roaming administration
services is terminated or expires; provided, however, that AT&T Wireless
will offer to resume its services in the event that it extends or
continues that agreement.
Neither party may assign or transfer its rights and obligations under the
roaming administrative service agreement without the written consent of the
other party, except to an affiliate or an assignee of its license, except that
AT&T Wireless may subcontract its duties.
Resale Agreement
The stockholders' agreement provides that, from time to time, at AT&T
Wireless' request, we are required to enter into a resale agreement with AT&T
Wireless PCS or other of its affiliates. The resale agreement would grant to
AT&T Wireless the right to purchase from us our wireless services on a non-
exclusive basis within a designated area and resell access to, and use of, our
services. AT&T Wireless must pay charges for any services that are resold,
including usage, roaming, directory assistance and long distance charges, and
taxes and tariffs. Any resale agreement would have an initial term of ten years
that would be automatically renewed on a year-to-year basis unless terminated
by either party upon 90 days prior written notice. In addition, AT&T Wireless
would be able to terminate any resale agreement for any reason at any time upon
180 days prior written notice.
Long Distance Agreement
Under the long distance agreement dated as of December 21, 1998 between AT&T
Wireless and us, we purchase interstate and intrastate long distance services
from AT&T Wireless at preferred rates. We then resell these long distance
services to our customers. We can only obtain these preferred rates if we
continue our affiliation with AT&T Wireless. The long distance agreement has a
term of up to three years.
The long distance agreement requires that we meet a minimum traffic volume
during the term of the agreement, which are adjusted at least once each
calendar year at the time specified by AT&T Wireless. The
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minimum traffic volume commitments may be adjusted more frequently upon mutual
agreement by AT&T Wireless and us. During the first year, we set the minimum
traffic volume commitment in our sole discretion. After the first calendar
year, the commitment may be increased by any amount or decreased by any amount
up to ten percent at our discretion. We may reduce the minimum traffic volume
commitments by more than ten percent with AT&T Wireless' permission. If we fail
to meet the volume commitments, we must pay to AT&T Wireless the difference
between the expected fee based on the volume commitment and the fees based on
actual volume.
The long distance services we purchase from AT&T Wireless may only be used
in connection with:
. our commercial mobile radio services;
. calls that originate on our network; and
. those commercial mobile radio services that share our call connection
equipment.
Puerto Rico License
In a series of transactions, we acquired a license and related assets
covering the San Juan major trading area from AT&T Wireless on May 25, 1999.
The following transactions took place ultimately to effect the acquisition of
the license and related assets from AT&T Wireless:
. on May 24, 1999, we sold to AT&T for $40.0 million 30,750 shares of our
series A preferred stock, 10,250 shares of our series D preferred stock,
and 1,000,000 shares of our series F preferred stock under a preferred
stock purchase agreement;
. on May 25, 1999, we sold to our initial investors other than AT&T 39,997
shares of our series C preferred stock and 3,999,660 shares of our class
A common stock in exchange for an aggregate amount of $40.0 million in
cash under a stock purchase agreement, which will be funded over a
three-year period.
. on May 25, 1999, we purchased the license for the San Juan major trading
area and related assets, which included 27 constructed network equipment
sites, call connection equipment and leases for additional network
equipment sites, from AT&T for $95.0 million in cash under an asset
purchase agreement; and
. we reimbursed AT&T $3.2 million for microwave relocation and $1.5
million for other expenses it incurred in connection with this
acquisition.
In addition, Mr. Vento and Mr. Sullivan were issued fixed and variable
awards of 5,244 and 755,400 restricted shares of our series E preferred stock
and class A common stock, respectively, in exchange for their interest in
Puerto Rico Acquisition Corporation. Puerto Rico Acquisition Corporation was an
entity wholly-owned by Mr. Vento and Mr. Sullivan that was created for the
special purpose of acquiring the license and related assets of the San Juan
major trading area. The fixed awards typically vest over a five-year period.
The variable awards vest based upon certain events taking place, including our
reaching milestones in our minimum construction plan.
The stockholders' agreement sets forth network development requirements for
the Puerto Rico license. See "Certain Relationships and Related Transactions--
Stockholders Agreement--Construction."
The San Juan major trading area covers a population of approximately 4
million in Puerto Rico, as well as the U.S. Virgin Islands. Our agreements with
AT&T were automatically amended to include the San Juan major trading area
under the scope of those agreements.
1999 Stock Option Plan
On July 22, 1999, we implemented a 1999 Stock Option Plan to award employees
and members of the board options to acquire shares of our class A common stock.
Our board granted options to purchase 178,735 shares of class A common stock
under the plan with an exercise price equal to the fair market value of the
underlying stock at the date of the grant. For information regarding grants
under the plan, see "Management--1999 Stock Option Plan."
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Management Agreement
As of July 17, 1998, we entered into a management agreement with TeleCorp
Management, a company owned by Mr. Vento and Mr. Sullivan under which, TeleCorp
Management provides to us administrative, operational, marketing, regulatory
and general business services. For information regarding compensation payable
under the management agreement, see "Management--Management Agreement."
The terms of this agreement were no more favorable to the parties than they
could have obtained from third parties negotiated at arms' length.
Other Related Party Transactions
Relationship with Entel Technologies and other Site Acquisition Service
Providers
We receive site acquisition, construction management, program management,
microwave relocation and engineering services under a master services agreement
with Wireless Facilities, Inc. Payments under the agreement were approximately
$30.7 million in the 1998 fiscal year. At the time of entering into the master
services agreement, Mr. Vento was a senior officer, and he and Mr. Sullivan
were the controlling stockholders, of Entel Technologies. Mr. Vento is our
chief executive officer and chairman of our board and Mr. Sullivan is our
executive vice president, chief financial officer and a director. In February
1998, they sold their interests in Entel Technologies to Wireless Facilities,
Inc. The terms of this agreement were no more favorable to the parties than
they could have obtained from third parties negotiated at arms' length.
American Towers, Inc. provides us with network site leases for PCS
deployment under a master site lease agreement. Chase Capital Partners, one of
our beneficial owners, has a noncontrolling interest in American Towers. The
terms of these lease agreements were no more favorable to the parties than they
could have obtained from third parties negotiated at arms' length.
Relationship with the Initial Purchasers of the Senior Subordinated Discount
Notes
Chase Securities Inc. was one of the initial purchasers of the outstanding
notes. Chase Securities Inc. and its affiliates perform various investment
banking and commercial banking services from time to time for us and our
affiliates. Chase Securities Inc. acted as our lead manager for our offering of
our senior subordinated discount notes. The Chase Manhattan Bank, an affiliate
of Chase Securities Inc., is the agent bank and a lender under our senior
credit facilities. Michael R. Hannon, a member of our board, is a General
Partner of Chase Capital Partners, an affiliate of Chase Securities Inc. In
addition, CB Capital Investors, L.P., an affiliate of Chase Capital Partners,
is one of our initial investors and owns shares of our common and preferred
stock. For further information concerning these relationships, see
"Management," "Principal Stockholders and Beneficial Ownership of Management"
and "Underwriting." The terms of our senior credit facilities were no more
favorable to the parties than they could have obtained from third parties
negotiated at arms' length.
Relationships with Tritel Communications and Triton PCS
We have formed Affiliate License Co. with Triton PCS and Tritel
Communications to adopt a common brand, SunCom, that is co-branded with AT&T on
an equal emphasis basis. Under the agreement, we, Triton PCS and Tritel
Communications each own one third of Affiliate License Co., the owner of the
SunCom name. We and the other SunCom companies license the SunCom name from
Affiliate License Co. Mr. Sullivan is a director of Affiliate License Co. The
terms of this agreement were no more favorable to the parties than they could
have obtained from third parties negotiated at arms' length.
Triton PCS recently paid $975,000 to settle a potential dispute regarding
its prior use of a version of the SunCom brand. In connection with this
settlement, Triton PCS transferred the SunCom trademark to Affiliate License
Co. for $650,000. Each of the other SunCom companies agreed to pay $325,000 as
a royalty fee to license such trademark from Affiliate License Co.
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AT&T owns stock in us and in Tritel Communications, and we may be deemed
affiliates by virtue of common ownership. Mr. Anderson and Mr. Fuqua, two of
our directors, also serve as directors of Tritel Communications. See
"Management." AT&T, CB Capital Investors and Equity-Linked Investors own stock
in us and in Triton PCS, and we may be deemed affiliates by virtue of common
ownership. Ms. Hawkins Key, our director elected by AT&T Wireless PCS, and Mr.
Anderson also serve as directors of Triton PCS. See "Management."
Tritel Communications owned a controlling interest in Digital PCS at the
time we acquired licenses from Digital PCS. Tritel Communications may be
deemed an affiliate of Digital PCS. In addition, at the time we acquired
licenses from Digital PCS, Mr. Anderson and Mr. Fuqua were directors of Tritel
Communications. See "Business--Recent Developments." The terms of this
agreement were no more favorable to the parties than they could have obtained
from third parties negotiated at arms' length.
Relationship with Other Entities
TeleCorp Holding. TeleCorp Holding, our predecessor company, was
incorporated to participate in the FCC's auction of licenses in April 1997.
TeleCorp Holding raised money from investors to develop any licenses it
obtained in the auction. TeleCorp Holding successfully obtained licenses in
the New Orleans, Memphis, Beaumont, Little Rock, Houston, Tampa, Melbourne and
Orlando basic trading areas. In August 1997, TeleCorp Holding transferred the
Houston, Tampa, Melbourne and Orlando basic trading area licenses to four
newly-formed entities created by TeleCorp Holding's stockholders:
. THC of Houston;
. THC of Tampa;
. THC of Melbourne; and
. THC of Orlando;
and issued notes in the aggregate amount of approximately $2.7 million to
these entities to develop these licenses. These licenses were transferred
along with the related operating assets and liabilities in exchange for
investment units consisting of class A, B and C common stock and series A
preferred stock in August 1997. Concurrently, TeleCorp Holding distributed the
investment units, on a pro rata basis, in a partial stock redemption to
TeleCorp Holding's existing stockholder group. As a result of this
distribution, TeleCorp Holding no longer retains any ownership equity interest
in the newly formed entities. TeleCorp Holding performed administrative and
management services and paid costs on behalf of these entities for the year
ended December 31, 1997 worth the aggregate amount of $0.7 million. In 1998,
upon the closing of the agreements with AT&T, TeleCorp Holding paid
approximately $2.0 million to the four THC entities as payment of the notes,
offset by the approximately $0.7 million in services and costs. The terms of
these transactions were no more favorable to the parties than they could have
obtained from third parties negotiated at arms' length.
TeleCorp WCS. On May 5, 1997, TeleCorp Holding lent approximately $3.0
million to TeleCorp WCS, Inc. in exchange for interest-free notes from
TeleCorp WCS. On May 5, 1997, TeleCorp Holding received equity investments in
exchange for the right to receive:
. the notes from TeleCorp WCS;
. any cash, notes or other assets received by TeleCorp Holding on behalf
of the notes; or
. any capital stock into which the notes were converted.
TeleCorp WCS repaid approximately $2.7 million of the notes with cash to
TeleCorp Holding, and TeleCorp Holding forwarded this cash to the equity
investors. TeleCorp WCS issued a note in the amount of approximately $0.3
million directly to the investors on behalf of the remaining $0.3 million
outstanding under the notes. TeleCorp WCS converted these notes into capital
stock issued to the investors in 1998.
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Mr. Sullivan and Mr. Vento own 2,875 and 4,625 shares of class C common
stock of TeleCorp WCS, respectively, which represents 60% of its outstanding
class A common stock. At the time of entering into the transactions with
TeleCorp WCS, Mr. Sullivan and Mr. Vento were stockholders in TeleCorp Holding.
The terms of these transactions were no more favorable to the parties than
they could have obtained from third parties negotiated at arms' length.
TeleCorp Investment Corp.; TeleCorp Investment Corp. II. TeleCorp
Investment Corp. owns 1,114,225 shares of our class A common stock, 186 shares
of our class C common stock, 1,223 shares of our class D common stock and
1,160.17 shares of our series C preferred stock. Some of our stockholders own
stock in TeleCorp Investment Corp., as follows:
. Chase Capital Partners, one of our initial investors, owns an 80% equity
interest;
. Mr. Sullivan and Mr. Vento each own a 2.4% equity interest;
. Mr. Chandler owns a 2.0% equity interest; and
. Mr. Dowski owns a 1.6% equity interest.
In addition, TeleCorp Investment Corp. II was formed to purchase from
Entergy Technology Holding Corporation 159,244 shares of class A common stock
and 3,678 shares of class D common stock. The purchase of shares was concluded
on July 15, 1999. Mr. Vento, Mr. Sullivan and Ms. Dobson each own 5.99% of
TeleCorp Investment Corp. II. Mr. Vento and Mr. Sullivan serve as managers of
TeleCorp Investment Corp. II.
The terms of these transactions were no more favorable to the parties than
they could have obtained from third parties negotiated at arms' length.
Viper Wireless. Viper Wireless was formed to participate in the FCC's
reauction of PCS licenses in most of our markets. TeleCorp Holding owns 85% of
Viper Wireless, and Mr. Vento and Mr. Sullivan collectively own the remaining
15%. Mr. Vento and Mr. Sullivan collectively have voting control over Viper
Wireless. On September 30, 1999, we solicited the approval of the FCC for the
transfer of the shares of Viper Wireless we do not yet own to TeleCorp Holding.
AT&T and some of our other initial investors have funded an aggregate of
approximately $32.3 million in exchange for additional shares of our preferred
and common stock in connection with the Viper Wireless reauction. AT&T received
one share each of our series D preferred stock and our series F preferred
stock, and each of the other participating initial investors received one share
each of our class A common stock and our series C preferred stock, for each
$1,000 of the pro rata portion of the amount we invested in Viper Wireless,
which is based upon their portion of the aggregate amount. Additionally, upon
approval of the FCC, some of our employees, Mr. Vento and Mr. Sullivan will
receive a total of 1,111 shares of series E preferred stock and 1,628 shares of
class A common stock. Our employees will receive their shares as restricted
stock that will vest ratably over 5 years. Mr. Vento and Mr. Sullivan will
receive their shares in exchange for shares they hold in Viper Wireless, and
their shares will vest immediately. The estimated value of the series E
preferred stock is $57,772, and of the class A common stock is $3,907. As part
of this financing, we paid approximately $0.5 million to Chase Securities,
Inc., an initial purchaser and an affiliate of one of our initial investors,
for placement advice. The terms of these transactions were no more favorable to
the parties than they could have obtained from third parties negotiated at
arms' length.
On April 20, 1999, the FCC announced that the reauction ended, and Viper
Wireless was the higher bidder for additional portions of the airwaves in New
Orleans, Houma and Alexandria, Louisiana, San Juan, Puerto Rico, Jackson,
Tennessee and Beaumont, Texas. The FCC has granted us all of these licenses.
AT&T and the investors funded a total of approximately $32.3 million to satisfy
Viper Wireless' payment to the FCC.
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TeleCorp LMDS
On October 18, 1999, we agreed to acquire TeleCorp LMDS, Inc. through an
exchange of all of the outstanding stock of TeleCorp LMDS for 270,000 shares of
our class A common stock and 2,700 shares of our series C preferred stock.
TeleCorp LMDS's stockholders are Mr. Vento, Mr. Sullivan and three of our
initial investors. By acquiring TeleCorp LMDS, we will gain LMDS licenses
covering airwaves in Little Rock, Arkansas, Beaumont, Texas, New Orleans,
Louisiana, San Juan and Mayaguez, Puerto Rico, and the U.S. Virgin Islands. See
"Principal Stockholders and Beneficial Ownership of Management."
Relationship with Toronto Dominion
Toronto Dominion Investments, one of our initial investors, and TD
Securities (USA), an affiliate of Toronto Dominion Investments, which is a
lender under our senior credit facilities for $525.0 million, may be deemed to
be under common control by virtue of their relationship to each other and to
us. The terms of our senior credit facilities were no more favorable to the
parties than they could have obtained from third parties negotiated at arms'
length.
Relationships with Stockholders
From inception through June 1998, our primary source of financing was notes
issued to some of our initial investors. In July 1996, we issued $0.5 million
of subordinated promissory notes to such investors. These notes were converted
into 50 shares of our series A preferred stock in April 1997. In December 1997,
we issued various promissory notes to some of our initial investors. These
notes were converted into mandatorily redeemable preferred stock in July 1998.
From January 1, 1998 to June 30, 1998, we borrowed approximately $22.5 million
in the form of promissory notes to existing and prospective investors to
satisfy working capital needs. These notes were converted into equity in July
1998 in connection with the completion of the venture with AT&T.
The terms of these transactions were no more favorable to the parties than
they could have obtained from third parties negotiated at arms' length.
Relationship with McDermott, Will & Emery
We use the services of a law firm, McDermott, Will & Emery, to which Mr.
Sullivan, our executive vice president, chief financial officer and a member of
our board, is counsel. Prior to July 1998, Mr. Sullivan was a partner of
McDermott, Will & Emery. The terms of these arrangements were no more favorable
to McDermott, Will & Emery than could have been obtained from third parties
negotiated at arms' length.
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DESCRIPTION OF INDEBTEDNESS
Senior Credit Facilities
Our credit agreement, as amended, provides for senior credit facilities for
$560.0 million with several lenders, including The Chase Manhattan Bank, as
administrative agent and issuing bank, TD Securities (USA) Inc., as syndication
agent, and Bankers Trust Company, as documentation agent.
The senior credit facilities provide for:
. a $150.0 million senior secured term loan, the tranche A term loan,
which matures in January 2007;
. a $225.0 million senior secured term loan, the tranche B term loan,
which matures in January 2008;
. a $150.0 million senior secured revolving credit facility, which matures
in January 2007; and
. a $35.0 million senior secured loan, the tranche C term loan facility
established under an expansion facility, which matures in May 2009.
The tranche A term loan must be repaid, beginning in September 2002, in 18
consecutive quarterly installments. The amount of each of the first six
installments is $3.75 million. The amount of each of the next four installments
is $9.4 million. The amount of each of the last eight installments is $11.25
million. The tranche B term loan is required to be repaid, beginning in
September 2002, in 22 consecutive quarterly installments. The amount of each of
the first 18 installments is $0.6 million. The amount of each of the last four
installments is $54.0 million. The tranche C term loan is required to be repaid
in May 2009. The commitment to make loans under the revolving credit facility
automatically and permanently is reduced, beginning in April 2005, by virtue of
eight consecutive quarterly reductions. The amount of each of the first four
reductions is $12.5 million. The amount of each of the last four reductions is
$25.0 million.
We may select the rate at which interest accrues on all loans. We may choose
a eurodollar loan, which accrues at a reserve-adjusted London Interbank
Offering Rate, with a margin equal to:
. between 1.25% and 2.75% per annum, depending upon our leverage ratio,
with respect to the tranche A Term loan and the revolving credit loans;
and
. 3.25% per annum, with respect to the tranche B term loan.
Alternatively, we may choose an alternative rate loan, which accrues at the
higher of (a) the administrative agent's prime rate and (b) the federal funds
rate plus 0.50% plus, in each case,
. a rate between 0.25% and 1.75% per annum, depending on our leverage
ratio with respect to the tranche A term loan and the revolving credit
loans; and
. 2.25% per annum, with respect to the tranche B term loan.
Interest on any overdue amounts will accrue at a rate per annum equal to
2.00% plus the rate otherwise applicable to these amounts.
The terms of the senior credit facilities require us to pay an annual
commitment fee between 0.50% and 1.25%, depending on the percentage drawn, of
the unused portion of the revolving credit facility. The term loans are payable
quarterly in arrears, and a separate agent's fee is payable to the
administrative agent. The senior credit facilities also require us to purchase
an interest rate hedging contract covering an amount equal to at least 50% of
the total amount of our outstanding indebtedness, excluding indebtedness that
bears interest at a fixed rate.
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The tranche A term loan automatically will be reduced to the extent its
undrawn portion exceeds $50.0 million in July 2000 by the amount of the excess.
The term loans will be prepaid, and commitments under the revolving credit
facility will be reduced, in an aggregate amount equal to:
(1) 50% of the excess cash flow of each fiscal year beginning with the
fiscal year ending December 31, 2001;
(2) 100% of the net proceeds of asset sales outside of the ordinary course
of business, in excess of a $1.0 million annual threshold, or unused
insurance proceeds;
(3) 100% of the net cash proceeds of issuances of debt obligations, other
than debt obligations permitted by the senior credit agreement,
including the issuance of the notes; and
(4) 50% of the net cash proceeds of issuances of equity securities, other
than in connection with our equity investments and other than the
proceeds of this offering;
provided that the prepayments and reductions described under clauses (3) and
(4) will not be required if, after giving effect to the issuance:
(A) our leverage ratio would be less than 5.0 to 1.0; and
(B) in the case of clause (4), we would be in pro forma compliance with
each covenant contained in the senior credit agreement.
Each of our existing and future domestic subsidiaries unconditionally
guarantees all our obligations under the senior credit facilities. The
facilities and the credit facility subsidiary guarantees, and any related
hedging contracts provided by the lenders under the senior credit facilities,
are secured by substantially all of our assets and the assets of each of our
existing and future domestic subsidiaries, including a first priority pledge of
all of the capital stock held by us or any of our subsidiaries. Under the
senior credit facilities, no action may be taken against our licenses unless
and until the requisite approval is obtained from the FCC.
The senior credit agreement contains financial and other covenants customary
for senior credit agreements. The senior credit agreement also contains
customary representations, warranties, indemnities, conditions precedent to
borrowing and events of default.
Borrowings under the senior credit facilities are available to finance
capital expenditures related to the construction of our network, the
acquisition of related businesses, working capital needs and subscriber
acquisition costs.
Senior Subordinated Discount Notes
On April 20, 1999, we sold $575,000,000 aggregate principal amount at
maturity of 11 5/8% senior subordinated discount notes due April 15, 2009. Cash
interest on these notes will not accrue or be payable prior to April 15, 2004.
From April 15, 2004, cash interest will accrue at a rate of 11 5/8% per annum
on the principal amount at maturity of the notes through and including the
maturity date and will be payable semi-annually on April 15 and October 15 of
each year. In connection with the sale of these notes, we received net proceeds
of approximately $317 million after deducting initial purchasers' discount and
issuance expenses of approximately $10 million.
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These notes are general senior unsecured obligations subordinate to all of
our existing and future senior debt and will rank equally in right of payment
with all our existing and future unsecured and unsubordinated indebtedness and
senior in right of payment to any of our subordinated indebtedness. The notes
are guaranteed by our subsidiary, Telecorp Communications, Inc., and may be
guaranteed by future subsidiaries. The notes are redeemable at any time and
from time to time at our option, in whole or in part on or after April 15,
2004, plus accrued and unpaid interest. The redemption prices for the senior
subordinated discount notes, if redeemed during the 12-month period beginning
on April 15 of the years described below are as follows:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2004........................................................... 105.813%
2005........................................................... 103.875%
2006........................................................... 101.938%
2007 and thereafter............................................ 100.000%
</TABLE>
In addition, on or prior to April 15, 2002, we may redeem, at our option,
up to 35% of the aggregate principal amount at maturity of the notes with the
net proceeds of one or more equity offerings, at 111.625% of the accreted
value thereof, as long as notes representing at least 65% of the aggregate
initial accreted value of the notes originally issued remain outstanding after
each redemption and that the redemption occurs within 60 days of the closing
of any equity offering.
If we experience a change of control, each holder of senior subordinated
discount notes will have the right to require us to repurchase all or any part
of the holder's notes at a purchase price in cash equal to:
(1) 101% of the accreted value on the purchase date, if the date is on
or before April 15, 2004; or
(2) 101% of the principal amount at maturity, plus accrued and unpaid
interest, if any, to the purchase date, if the date is after April 15,
2004.
A change of control would occur under the indenture if any of the following
occurs:
. any person or group, as the terms are used in the applicable provisions
of the Securities Exchange Act of 1934, other than some permitted
holders, becomes the beneficial owners, as defined in the beneficial
ownership provisions under the Exchange Act, except that a person shall
be deemed to have beneficial ownership of all the securities that the
person has the right to acquire within one year, upon the happening of
an event or otherwise, directly or indirectly, of our securities
representing 50% or more of the combined voting power of our then
outstanding voting stock;
. the following individuals cease for any reason to constitute more than a
majority of the number of directors then serving on our board:
individuals who, on April 23, 1999, constituted our board and any new
director, other than a director whose initial assumption of office is in
connection with an actual or threatened election contest, including, but
not limited to, a consent solicitation relating to the election of our
directors, whose appointment or election by our board or nomination for
election by our stockholders was approved by the vote of at least two-
thirds of the directors then still in office or whose appointment,
election or nomination was previously so approved or recommended or made
in accordance with the terms of the stockholders' agreement; or
. our stockholders shall approve any plan of liquidation, whether or not
otherwise in compliance with the provisions of the indenture.
The indenture under which the notes were issued notes restrict, among other
things, our ability to:
. incur debt;
. create levels of debt that are senior to the notes but junior to our
senior debt;
. pay dividends on or redeem capital stock;
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. make some investments or redeem other subordinated debt;
. make particular dispositions of assets;
. engage in transactions with affiliates;
. engage in particular business activities; and
. engage in mergers, consolidations and particular sales of assets.
The indenture provides for acceleration of payments under the senior
subordinated discount notes upon customary events of default, including cross
defaults, judgment defaults and events of bankruptcy.
Vendor Financing
In May 1998, we entered into a vendor procurement contract with Lucent,
under which we agreed to purchase radio, call connecting and related equipment
and services for the development of our network. In connection with the
procurement contract, Lucent originally agreed to provide us with $80.0 million
of junior subordinated vendor financing. In addition, Lucent had originally
agreed to make available up to an additional $80.0 million of junior
subordinated vendor financing, which amount was reduced to $55.0 million in
consideration of Lucent's agreement to provide $35.0 million of financing as a
lender under our senior credit facilities. We have $25.0 million of
availability under the vendor expansion facility agreement as a result of the
Puerto Rico and Evansville and Lake Charles acquisitions. The expiration date
for any notes issued under the vendor expansion facility is the date which is
six months after the scheduled maturity of the notes.
Under a note purchase agreement dated as of May 11, 1998, between Lucent and
us, we have issued to Lucent $40.0 million aggregate principal amount of Lucent
series A notes due 2012. All proceeds from the sale of these notes are to be
used to develop our network in designated areas. We had also issued to Lucent
$40.0 million aggregate principal amount of Lucent series B notes due 2012. We
repaid these notes with the proceeds from the offering of the outstanding
notes. Upon the completion of the offering of the outstanding notes, Lucent's
commitment to provide us with $40.0 million of Lucent series B notes
terminated.
We have a commitment from Lucent to purchase an additional $12.5 million of
Lucent series A notes and $12.5 million of Lucent series B notes under the
vendor expansion facility in connection with the acquisition of licenses in
Puerto Rico, Evansville Indiana, Paducah, Kentucky and Alexandria and Lake
Charles, Louisiana basic trading areas. The obligation of Lucent to purchase
notes under the vendor expansion facility is subject to a number of conditions,
and that we commit to purchase one wireless call connection equipment site and
50 network equipment sites for each additional market from Lucent.
The original $40.0 million principal amount of the Lucent series A notes is
due in October 2009. We must prepay this amount together with any future series
A note borrowings with 50% of the proceeds of future equity offerings over
$198.0 million.
Any Lucent series B notes issued under the vendor expansion facility will
mature and will be subject to mandatory prepayment on a dollar for dollar basis
out of the net proceeds of any future public or private offering or sale of
debt securities, exclusive of borrowings under the senior credit agreement.
The Lucent series A notes, including any Lucent series A notes issued under
the vendor expansion facility, will initially accrue interest at a rate of 8.5%
per annum. If the Lucent series A notes are not redeemed in full on or prior to
January 1, 2001, the rate will increase by 1.5% per annum on each January 1
thereafter, beginning January 1, 2002, provided that the maximum interest rate
will not exceed 12 1/8%. Interest on the Lucent series A notes will be payable
semi-annually, provided that prior to May 11, 2004, interest will be payable in
additional Lucent series A notes and subsequently will be payable in cash,
unless prohibited by the senior credit facilities or the indenture.
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Any Lucent series B notes issued under the vendor expansion facility will
initially accrue interest at a rate of 10% per annum. If the Lucent series B
notes are not redeemed in full on or prior to January 1, 2000, the rate will
increase by 1.5% per annum on each January 1 beginning on January 1, 2001,
provided that the maximum interest rate will not exceed 12 1/8%. Interest on
the Lucent series B notes will be payable semi-annually, provided that prior to
May 11, 2004, interest will be payable in additional Lucent series B notes and
subsequently will be payable in cash unless prohibited by the terms of the
senior credit facilities or the indenture.
Upon a change of control, we must repay the Lucent series A and series B
notes at their principal amount plus a premium. We will not be required to pay
a premium on any required repayment of the Lucent series A notes prior to May
31, 2007 or of the Lucent series B notes prior to May 31, 2005. After those
dates, the premiums will initially be equal to one-half of the interest rate on
the series of notes being repaid. The premiums will decrease ratably in each
year after the first year following the dates upon which the premiums first
become payable. The Lucent series A and series B notes may not be prepaid,
however, if prohibited by the terms of the senior credit facilities, the
indenture or other indebtedness that ranks senior to the Lucent series A and
series B notes. In the event a change of control occurs prior to May 1, 2002 in
the case of the Lucent series A notes, or in the case of the Lucent series B
notes, May 1, 2000, the Lucent series A and series B notes may be prepaid in
accordance with the optional prepayment provisions.
If Lucent has not completed specified sales in respect of the Lucent series
A or series B notes then outstanding prior to January 1, 2003, we must pay
Lucent up to 3% of the then outstanding principal amount of all the Lucent
series A and series B notes to defray any actual marketing distribution and
other costs incurred by Lucent in connection with any sales remarketing.
The Lucent series A notes may be prepaid without payment of a premium at any
time prior to May 1, 2002. In addition, the Lucent series A notes may be
prepaid at any time after May 1, 2002 without payment of a premium to the
extent Lucent or its affiliates have retained them. The Lucent series B notes
may be prepaid without payment of a premium at any time prior to May 1, 2000.
In addition, the Lucent series B notes may be prepaid at any time after May 1,
2000 without payment of a premium to the extent Lucent or its affiliates have
retained them.
Government Debt
In connection with our purchase of our licenses, we issued to the FCC
secured installment payment plan notes in an aggregate principal amount of $9.2
million. This debt is shown on our balance sheet at a value of $8.0 reflecting
a discount of $1.2 million reflecting the below market interest rate on the
debt. The FCC notes are due April 28, 2007, and bear interest at a rate of
6.25% per annum. In addition, we assumed $4.1 million in aggregate principal
amount of additional secured installment payment plan notes in connection with
the Digital PCS acquisition. This debt is shown on our balance sheet at a value
of $3.0 million reflecting a discount of $1.1 million reflecting the below
market interest rate on the debt. The Digital PCS notes are due August 21,
2007, and bear interest at a rate of 6.125% per annum. In connection with the
Wireless 2000 acquisition, we assumed $7.4 million in aggregate principal
amount of additional secured installment payment plan notes. This debt is shown
on our balance sheet at a value of $6.1 million reflecting a discount of $1.3
million reflecting the below market interest rate on the debt. The Wireless
2000 notes are due September 17, 2006, and bear interest at a rate of 7.0% per
annum. A security agreement secures the FCC notes, Wireless 2000 notes and
Digital PCS notes, which grants the FCC a first priority security interest in
the license for which the applicable note was issued. In the event of a default
under the FCC notes, Wireless 2000 notes or Digital PCS notes, the FCC may
revoke the licenses for which the defaulted notes were issued.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock, as set forth in our restated certificate of
incorporation that will become effective upon closing of this offering, will
consist of:
. shares of common stock, par value $0.01 per share, consisting of:
. 95,000,000 shares of class A common stock
. 95,000,000 shares of class B common stock
. 100,000 shares of class C common stock
. 300,000 shares of class D common stock
. 1,000 shares of voting preference common stock
. shares of preferred stock, par value $0.01 per share, consisting of:
. 100,000 shares of series A preferred stock
. 200,000 shares of series B preferred stock
. 215,000 shares of series C preferred stock
. 50,000 shares of series D preferred stock
. 30,000 shares of series E preferred stock
. 5,000,000 shares of series F preferred stock
As of September 30, 1999 our outstanding capital stock consisted of:
. 23,879,899 shares of class A common stock
. 91,846 shares of class C common stock
. 275,539 shares of class D common stock
. 1,000 shares of voting preference common stock
. 97,473 shares of series A preferred stock
. 210,608 shares of series C preferred stock
. 49,417 shares of series D preferred stock
. 24,906 shares of series E preferred stock
. 4,826,141 shares of series F preferred stock
Subject to any required approval of holders of any shares of any class or
series of preferred stock, our board has the power, by resolution, to issue
additional shares of preferred stock with the preferences, rights and
designations as it determines.
Voting Rights
Subject to the rights of specific classes of stock to vote as a class on
some matters, regardless of the number of shares outstanding, the holders of
the class A common stock are entitled to an aggregate 4,990,000 votes and the
holders of voting preference common stock are entitled to an aggregate
5,010,000 votes of all outstanding capital stock. Each holder of class A common
stock shall have the number of votes equal to 4,990,000 divided by the number
of outstanding shares of class A common stock multiplied by the number of
shares of class A common stock held by such stockholder. No other class of
capital stock has the right to vote on any matter except as required by law. In
addition, for so long as AT&T and its affiliates continue to hold at least two-
thirds of the shares of series A preferred stock they held as of May 14, 1999,
they will be entitled, but not obliged, to nominate one of our directors.
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Our restated certificate of incorporation that will become effective upon
closing of this offering provides that, except where a class of capital stock
has the right to vote as a class, a quorum will be present so long as a
majority of the outstanding voting preference common stock and shares
representing at least 5,010,000 votes are present. When a class vote is
required, a majority of that class must also be present. Any further action not
requiring a class vote may be approved by the affirmative vote of a majority of
voting preference common stock present at any meeting where a quorum is
present.
The holders of each class of preferred stock have the right to vote as a
class on any measure to:
. authorize or issue any shares senior to or on a parity with the class;
. amend our restated certificate of incorporation to change any of the
characteristics of the class; or
. authorize or issue any security convertible into, exchangeable for or
granting the right to purchase or otherwise receive any shares of stock
senior to or on a parity with the class.
The majority of each class of preferred stock must affirmatively vote to
act.
Subject to any class voting requirements, shares of common stock
representing at least two-thirds of the votes entitled to be cast for the
election of our directors must affirmatively vote for any amendment, alteration
or repeal of our certificate of incorporation or bylaws, unless any amendment,
alteration or repeal is proposed and declared advisable by our board, in which
case only the affirmative vote of a majority of these shares is required.
If:
. we receive an opinion of regulatory counsel that class A common stock
and voting preference common stock can vote and be treated as a single
class of stock for quorum purposes and have one vote per share;
. not less than two-thirds of the outstanding class A common stock
affirmatively vote for the single class status; and
. our board determines that it is not likely to be detrimental to us,
we will seek the approval of the FCC to have class A common stock and voting
preference common stock vote and be treated together as a single class with one
vote per share.
Some of our stockholders have entered into agreements regarding the voting
of their shares on particular matters, including the election of directors.
These agreements include the stockholders' agreement and the investors
stockholders' agreement dated as of July 17, 1998 among our initial investors
and the management stockholders. See "Certain Relationships and Related
Transactions--AT&T Agreements."
Conversion
After July 17, 2006, holders of series A preferred stock may convert their
shares into shares of class A common stock at a conversion rate equal to the
liquidation preference of series A preferred stock divided by the market price
of class A common stock.
On the date of our initial public offering of our capital stock, we have the
right to convert shares of series C preferred stock and series E preferred
stock into shares of class A common stock at a conversion rate equal to the
liquidation preference of series C preferred stock or series E preferred stock,
as applicable, divided by the initial public offering price.
At any time, holders of series F preferred stock may convert each share into
one share of class A common stock; provided, that, until the class C common
stock and class D common stock is convertible into class A common stock, the
first 63,127 of these shares to be converted are convertible into shares of
class D common stock.
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At any time, holders of series F preferred stock may convert each share into
one share of class A or class B common stock; provided, that, until the class C
common stock and class D common stock is convertible into class A common stock
as set forth in the preceding paragraph, the first 63,127 of these shares to be
converted are convertible into shares of class D common stock.
At any time, holders of class A common stock and class B common stock may
convert their shares into shares of the other class.
All conversions are subject to obtaining any required FCC approvals. Holders
of preferred or common stock may elect to convert any or all of their shares by
giving written notice to us prior to the requisite FCC approvals. This
conversion will not become effective until the final receipt of all necessary
FCC approvals.
Redemption
We have the right to redeem our capital stock as follows:
. shares of series A preferred stock: following 30 days after the 10th
anniversary of issuance at the liquidation preference of the series A
preferred stock;
. shares of series B preferred stock: at any time at the liquidation
preference of the series B preferred stock; and
. shares of series C preferred stock and series D preferred stock: at any
time at the liquidation preferences of series C preferred stock and
series D preferred stock; provided, that if we redeem any shares of
either series C preferred stock or series D preferred stock, we must
redeem a proportionate number of shares of the other.
In addition, the holders of some classes of capital stock have the right to
require us to redeem their shares as follows:
. holders of series A preferred stock or series B preferred stock:
following the 30th day after the 20th anniversary of issuance at the
liquidation preference of the series A preferred stock or series B
preferred stock; and
. holders of series C preferred stock, series D preferred stock or series
E preferred stock: following the 30th day after the 20th anniversary of
issuance at the liquidation preference of the series C preferred stock,
series D preferred stock and series E preferred stock.
Neither we nor any holder of shares of any class of our capital stock may
cause us to redeem our capital stock if, at that time:
. we are insolvent or will be rendered insolvent by the redemption; or
. law or any of our agreements prohibits the redemption.
Further, our restated certificate of incorporation restricts our ability to
redeem any shares of capital stock to the extent shares of capital stock
ranking senior to or on a parity with the shares remain outstanding or
dividends on the senior or parity shares have not been paid in full.
Our restated certificate of incorporation also provides for our redemption
of any shares of our capital stock that is held by stockholders whose holding
of the shares, in the opinion of our board, may result in the loss of, or
failure to obtain the reinstatement of, any of our licenses or franchises.
The management agreement provides for the redemption by us of specific
shares of class A common stock and series E preferred stock held by Mr. Vento
and Mr. Sullivan in particular circumstances. See "Management--Management
Agreement."
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Ranking
With respect to the payment of dividends and distributions upon our
liquidation, dissolution or winding up, classes of our preferred stock rank as
follows:
<TABLE>
<CAPTION>
Class of Stock Parity with Junior to Senior to
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
series A series B preferred none series C preferred
preferred series D preferred
series E preferred
series F preferred
common stock
- --------------------------------------------------------------------------------------------
series B series A preferred none series C preferred
preferred series D preferred
series E preferred
series F preferred
common stock
- --------------------------------------------------------------------------------------------
series C series D preferred-- series A preferred and series E preferred
preferred except when a statutory series B preferred series F preferred
liquidation series D preferred-- common stock--
common stock-- only upon a statutory only with respect to
only with respect to liquidation dissolution, liquidation
dividends and winding up
- --------------------------------------------------------------------------------------------
series D series C preferred-- series A preferred series C preferred--
preferred except when a statutory series B preferred only upon a statutory
liquidation liquidation
common stock-- series E preferred
only with respect to series F preferred
dividends common stock--
only with respect to
dissolution, liquidation
and winding up
- --------------------------------------------------------------------------------------------
series E series A preferred series F preferred
preferred series B preferred common stock
series C preferred
series D preferred
- --------------------------------------------------------------------------------------------
series F common stock-- series A preferred common stock--
preferred except when a statutory series B preferred only upon a statutory
liquidation series C preferred liquidation
series D preferred
series E preferred
</TABLE>
Dividends
The holders of series A preferred stock and series B preferred stock are
entitled to receive annual dividends equal to 10% of the liquidation preference
related to their shares; provided that so long as any shares of series A
preferred stock or series B preferred stock are outstanding, no dividends may
be paid on any shares of any class of capital stock ranking junior to series A
preferred stock or series B preferred stock. Dividends accrue from the date of
issuance of the shares and are payable quarterly, provided that we have the
option to defer payments for up to ten and one-half years from the date of
issuance.
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<PAGE>
The holders of series C preferred stock, series D preferred stock, series E
preferred stock and series F preferred stock are entitled to dividends as
declared by our board.
The dividend rights of our outstanding preferred stock are summarized below:
<TABLE>
<CAPTION>
Series of Aggregate
Preferred Liquidation Preference
Stock Amount of Dividend Payment Dates as of June 30, 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
series A 10% of liquidation preference Quarterly commencing $
annually, accruing daily from September 30, 1998; may
July 17, 1998 be deferred until December 31,
2008 on which date all past
unpaid dividends become due
- ----------------------------------------------------------------------------------------------------
series C As declared by our board, up to When and if declared by $ , accreting
the liquidation preference our board at 6% per annum,
compounded quarterly,
plus accrued and
unpaid dividends
- ----------------------------------------------------------------------------------------------------
series D As declared by our board, up to When and if declared by our $ , accreting
the liquidation preference board 6% per annum,
compounded quarterly,
plus accrued and unpaid
dividends
- ----------------------------------------------------------------------------------------------------
series E As declared by our board, up to When and if declared by our $ , accreting
the liquidation preference board at 6% per annum,
compounded quarterly,
plus accrued and unpaid
dividends
- ----------------------------------------------------------------------------------------------------
series F As declared by our board When and if declared by our $48,000, plus accrued
board and unpaid dividends
</TABLE>
Subject to the rights of the holders of the preferred stock, our board may
declare dividends on the common stock; provided, that dividends on class C
common stock and class D common stock may only be paid up to the amount by
which funds legally available for the dividends exceed the excess of:
(1) fair market value of the assets of TeleCorp Holding less TeleCorp
Holding's liabilities over
(2) the aggregate par value of class C common stock and class D common
stock, at our board's discretion.
Dividends may only be paid on the other classes of common stock up to the
amount legally available after subtracting the maximum amount payable in
respect of class C common stock and class D common stock, at our board's
discretion.
We may not pay dividends on any shares of any class of our capital stock if,
at the time:
. we are insolvent or will be rendered insolvent by the payments; or
. law or any of our agreements prohibits the dividend payments.
Further, our restated certificate of incorporation restricts our ability to
pay any dividends on any class of capital stock to the extent shares of capital
stock ranking senior to or on a parity with the class remain outstanding or
dividends on the senior or parity shares have not been paid in full.
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<PAGE>
Liquidation Preference
The holders of preferred stock are entitled to preferences with respect to
distributions upon our liquidation, dissolution or winding up as follows:
. holders of series A preferred stock and series B preferred stock are
entitled to a preference per share equal to $1,000 plus accrued and
unpaid dividends on the shares.
. holders of series C preferred stock are entitled to a preference per
share equal to the paid-in capital per share of series C preferred stock
together with interest on $1,000 from the date of issuance at a rate of
6% per annum, compounded quarterly, less the amount of any dividends
paid on the share, plus accrued and unpaid dividends.
. holders of series D preferred stock are entitled to a preference per
share equal to $1,000 together with interest from the date of issuance
at rate of 6% per annum, compounded quarterly, less the amount of any
dividends paid on the share, plus accrued and unpaid dividends.
. holders of series E preferred stock are entitled to a preference per
share equal to the amount of accrued and unpaid dividends on the share,
together with interest on $1,000 from the date of issuance at a rate of
6% per annum, compounded quarterly, less the amount of any dividends
declared and paid on the share.
. holders of series F preferred stock are entitled to a preference equal
to $.01 plus accrued and unpaid dividends on the shares.
Following payment of all amounts payable to the holders of preferred stock
upon our liquidation, dissolution or winding up, the holders of class C common
stock and class D common stock will be entitled to receive the fair market
value of the assets of TeleCorp Holding less TeleCorp Holding's liabilities.
The holders of the other classes of common stock will be entitled to receive
the remaining amounts available for distribution.
Transfer Restriction
Some of our stockholders have entered into agreements that restrict transfer
of their shares and provide for the happening of specified events, such as
share conversions. See "Certain Relationships and Related Transactions--AT&T
Agreements" and "--Management Agreement."
Our restated certificate of incorporation provides that, upon the happening
of specified events described in the stockholders' agreement, we have the right
to exchange all or some of the shares of series A preferred stock, series D
preferred stock, series F preferred stock and common stock held by AT&T for an
equal number of shares of series B preferred stock. See "Certain Relationships
and Related Transactions--AT&T Agreements."
Anti-Takeover Effects of Certain Provisions of Delaware Law and our Amended and
Restated Certificate of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Generally, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained that status with the approval of the board of directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of a corporation's voting stock. This
statute could prohibit or delay the accomplishment of mergers or other
takeovers or changes in control with respect to us and, accordingly, may
discourage attempts to acquire us.
99
<PAGE>
In addition, provisions of our restated certificate of incorporation and
bylaws, which provisions will be in effect upon the closing of the offering and
are summarized in the following paragraphs, may be deemed to have an anti-
takeover effect. These provisions may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
Nomination and Election of Directors. Our restated certificate of
incorporation provides that following completion of this offering, our nine
member board of directors will be divided into three classes of directors. Each
class will serve a staggered three-year term where one-third of the board of
directors will be elected each year. In general, this means that a director
will stand for election only once every three years. The classified board
provision could have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of us, even though the
attempt might be beneficial to us and our stockholders. In addition, the
classified board provision could delay the stockholders who do not agree with
the policies of the board from removing a majority of the board for two years.
Board of Directors Removal and Vacancies. Our restated certificate of
incorporation provides that directors may be removed only for cause and only by
the affirmative vote of the holders of a majority of the outstanding shares of
voting stock cast, at an annual or special meeting, except that any director
nominated by any holder of our preferred stock having the right to nominate
such director may be removed and replaced by such holder with or without cause.
In addition, our bylaws authorize the board of directors to fill vacant
directorships or increase the size of the board of directors except that any
vacancy that was left by a nominee of a stockholder entitled to nominate the
nominee will be filled by a new director selected by the holder, subject to any
required approvals. This may prevent a stockholder from removing incumbent
directors and simultaneously gaining control of the board of directors by
filling the resulting vacancies created by such removal with its own nominees.
Special Meetings of Stockholders. Our bylaws provide that special meetings
of our stockholders may be called only by the Chairman, or a majority of the
board of directors or stockholders holding 35% of our outstanding voting
shares.
Authorized But Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to the limitations imposed by the Nasdaq National Market.
These additional shares may be used for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued and unreserved common stock and preferred stock could render more
difficult or discourage an attempt to obtain control of us by means of a proxy
contest, tender offer, merger or otherwise.
Amendment to Our Certificate of Incorporation. Amendments to our restated
certificate of incorporation which are not proposed by our board must be
approved by the affirmative vote of at least two-thirds of our outstanding
shares of capital stock entitled to vote in the election of directors. Any
amendment proposed by the board requires only the minimum vote required by law
or any applicable terms of our capital stock. Our bylaws may be amended in the
same manner as our restated certificate of incorporation or, alternatively, by
a majority vote of our board of directors.
Stockholder Proposals. The bylaws require that stockholders wishing to bring
any business, including the nomination of directors, before an annual meeting
of stockholders, deliver written notice to us not less than 90 days prior to
the date of the annual meeting of stockholders. If, however, the date of the
meeting is scheduled to occur more than 30 days before or more than 90 days
after the anniversary of the prior year's annual meeting, notice by the
stockholder must be delivered to us not later than the close of business on the
tenth day following the day on which we publicly announce the date of our
annual meeting. The foregoing provisions regarding director nomination
procedures do not apply to holders of our capital stock who have the right to
nominate directors. These provisions may discourage or make more difficult the
acquisition of control of us by means of a tender offer, open market purchase,
proxy contest or otherwise.
100
<PAGE>
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation, or bylaws,
unless a corporation's certificate of incorporation or bylaws, as the case may
be, requires a greater percentage.
Indemnification of Directors and Executive Officers and Limitation of
Liability
Our restated certificate of incorporation includes a provision that
eliminates the personal liability of our directors and executive officers for
monetary damages for breach of fiduciary duty as a director or executive
officer, except:
. for any breach of the director's or executive officer's duty of loyalty
to us or our stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful dividends and stock purchases under the Delaware General
Corporation Law; or
. for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that:
. we must indemnify our directors and officers to the fullest extent
permitted by Delaware law, subject to very limited exceptions;
. we may indemnify our other employees and agents to the same extent that
we indemnify our officers and directors, unless otherwise required by
law, our amended and restated certificate of incorporation, our bylaws
or agreements; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with any legal proceeding to the fullest extent
permitted by Delaware law, subject to limited exceptions.
We have entered into indemnity agreements with each of our directors and
executive officers to give them additional contractual assurances regarding
the scope of the indemnification described above and to provide additional
procedural protections. In addition, we have obtained directors' and officers'
insurance providing indemnification for our directors, officers and key
employees for various liabilities. We believe that these indemnification
provisions and agreements are necessary to attract and retain qualified
directors and officers.
The limitation of liability and indemnification provisions in our restated
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. These
provisions may also have the effect of reducing the likelihood of stockholder
derivative litigation against directors and officers, even though a derivative
action, if successful, might otherwise benefit us and our stockholders.
Furthermore, a stockholder's investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against directors and
officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees for which indemnification is sought, nor
are we aware of any threatened litigation that my result in claims for
indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for our class A common stock is State
Street Bank and Trust Company.
Listing
We have applied for quotation of our class A common stock on the Nasdaq
National Market under the trading symbol "TLCP."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our class A
common stock. As described below, only a limited number of shares will be
available for sale shortly after this offering due to contractual and legal
restrictions on resale. Sales of substantial amounts of our class A common
stock in the public market after the restrictions lapse or are waived could
cause the market price of our class A common stock to drop significantly.
Upon completion of this offering, we will have outstanding an aggregate of
shares of class A common stock assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering, other than shares held by our
"affiliates" and other than shares sold pursuant to the directed share
program, will be freely tradable without restriction or further registration
under the Securities Act. The remaining class A common shares held by existing
shareholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. These shares are eligible for public sale only if
registered under the Securities Act or sold under an exemption to registration
under the Securities Act. There are also contractual restrictions on some of
the holders of these shares which restrict their ability to sell the shares.
The following table summarizes approximately when the 23,907,398 shares of
class A common stock that are not being sold in this offering, but which will
be outstanding at the time this offering is complete, will be eligible for sale
into the public market:
<TABLE>
<CAPTION>
Date of availability for resale into
Number of shares % of total outstanding public market
---------------- ---------------------- ------------------------------------
<C> <C> <S>
32,834 % Between 90 and 365 days after the date
of this prospectus due to provisions
of the federal securities laws.
1,224,385 % 180 days after the date of this
prospectus due to an agreement these
stockholders have with the
underwriters. However, the
underwriters can waive this
restriction and allow these
stockholders to sell their shares at
any time.
22,676,225 % July 17, 2001-due to restrictions on
transfer under the stockholders'
agreement (unless such restrictions
are waived by the parties thereto, in
which case all such shares will be
subject to resale subject to volume
limitations and, in the case of non-
affiliates, without restriction after
July 17, 2000).
</TABLE>
These rules and contractual restrictions governing the shares' eligibility
for public sale are as follows:
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned class A common
stock for at least one year would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
. 1% of the number of class A common shares then outstanding, which will
equal approximately class A common shares immediately after this
offering; or
. the average weekly trading volume of the class A common shares on the
Nasdaq National Market during the four calendar weeks preceding the
filing of a notice of Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell these shares without
102
<PAGE>
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Unless otherwise restricted, these shares may be
sold immediately upon the completion of this offering.
Rule 701
As of October 18, 1999, we have granted to our employees and certain
directors and officers options to purchase an aggregate of 178,735 shares of
class A common stock, of which options to purchase 24,545 of class A common
stock had vested.
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase class A common shares from us in
connection with a compensatory stock or option plan or other written agreement
before the effective date of this offering is entitled to resell these shares
90 days after the effective date of this offering in reliance on Rule 144,
without having to comply with certain restrictions, including the holding
period contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of these options, including exercises after the date of this
prospectus. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described below, may be sold:
. beginning 90 days after the date of this prospectus;
. by persons other than affiliates subject only to the manner of sale
provisions of Rule 144; and
. by affiliates under Rule 144 without compliance with its one year
minimum holding period requirement.
Directed Share Program
Shareholders who purchase shares of class A common stock in this offering
under the directed share program have agreed that they will not sell these
shares for a period of 30 days from the date of this prospectus. After the
expiration of this lockup period, those shares, other than those held by
officers and directors, who are subject to 180 day lockups, will be freely
tradable without restriction or registration under the Securities Act.
Lock-up Agreements
Our executive officers, directors, other key employees and our initial
investors have signed lock-up agreements under which they agreed not to dispose
of or hedge any capital stock or any securities convertible into or
exchangeable for class A common stock for a period of 180 days from the date of
this prospectus.
Stock Options
Following the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering the shares of class A
common shares reserved for issuance under our stock option plan and other
options issued to our employees, directors and officers. We expect the
registration statement to be filed soon after the date of this prospectus and
automatically to become effective upon filing. Accordingly, class A common
stock registered under the registration statement will, subject to vesting
provisions and volume limitations under the Securities Act applicable to our
affiliates, be available for sale in the open market immediately, or, in the
case of certain directors, immediately after the 180-day lock-up agreements
expire.
Registration Rights
Commencing on the first anniversary of the completion of this offering, the
beneficial holders of shares of class A common stock are entitled to
request that we register their shares under the Securities Act. After these
shares are registered, they will become freely tradable without restriction
under the Securities Act. However, under the stockholders' agreement, these
stockholders have agreed not to transfer their shares until July 17, 2001.
103
<PAGE>
MATERIAL U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
Following is a general discussion of material U.S. federal income and estate
tax consequences of the ownership and disposition of the class A common stock
applicable to non-U.S. holders of class A common stock. For purposes of this
discussion, a non-U.S. holder is any holder of class A common stock that, for
U.S. federal income tax purposes, is not a U.S. person. This discussion does
not address all aspects of U.S. federal income and estate taxation that may be
relevant in light of a non-U.S. holder's particular facts and circumstances,
such as being a U.S. expatriate, and does not address any tax consequences
arising under the laws of any state, local or non-U.S. taxing jurisdiction.
Furthermore, the following discussion is based on current provisions of the
Internal Revenue Code of 1986, as amended, and administrative and judicial
interpretations thereof, all as in effect on the date hereof, and all of which
are subject to change, possibly with retroactive effect. We have not and will
not seek a ruling from the Internal Revenue Service with respect to the U.S.
federal income and estate tax consequences described below, and as a result,
there can be no assurance that the Internal Revenue Service may disagree with
or challenge any of the conclusions set forth in this discussion.
For purposes of this discussion, the term U.S. person means:
. a citizen or resident of the United States;
. a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or any political
subdivision thereof;
. an estate whose income is included in gross income for U.S. federal
income tax purposes regardless of its source; or
. a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
Dividends
A dividend paid to a non-U.S. holder generally will be subject to U.S.
withholding tax either at a rate of 30% of the gross amount of the dividend or
such lower rate as may be specified by an applicable income tax treaty.
Dividends received by a non-U.S. holder that are effectively connected with a
U.S. trade or business conducted by the non-U.S. holder are exempt from that
withholding tax. However, those effectively connected dividends, net of certain
deductions and credits, are taxed at the same graduated rates applicable to
U.S. persons.
In addition to the graduated tax described above, dividends received by a
corporate non-U.S. holder that are effectively connected with a U.S. trade or
business of the corporate non-U.S. holder may also be subject to a branch
profits tax at a rate of 30% or such lower rate as may be specified by an
applicable income tax treaty.
A non-U.S. holder that is eligible for a reduced rate of withholding tax
pursuant to an applicable income tax treaty may be required to submit
documentation to avail itself of that treaty and may be able to obtain a refund
of any excess amounts withheld by us by filing an appropriate claim for refund
with the Internal Revenue Service.
Gain on Disposition of Class A Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
on any gain realized upon the sale or other disposition of class A common stock
unless:
. the gain is effectively connected with a U.S. trade or business of the
non-U.S. holder, which gain, in the case of a corporate non-U.S. holder,
must also be taken into account for branch profits tax purposes;
104
<PAGE>
. the non-U.S. holder is an individual who holds his or her class A common
stock as a capital asset, which generally means as an asset held for
investment purposes, and who is present in the United States for a
period or periods aggregating 183 days or more during the calendar year
in which the sale or disposition occurs and certain other conditions are
met; or
. We are or we have been a United States real property holding corporation
for U.S. federal income tax purposes at any time within the shorter of
the five-year period preceding the disposition or the holder's holding
period for its class A common stock. We believe that we are not and will
not become a United States real property holding corporation for U.S.
federal income tax purposes.
Backup Withholding and Information Reporting
Generally, we would be required to report annually to the Internal Revenue
Service the amount of dividends, if any, paid on the class A common stock, the
name and address of the recipient, and the amount, if any, of tax withheld. A
similar report would be sent to the recipient. Pursuant to applicable income
tax treaties or other agreements, the Internal Revenue Service may make its
reports available to tax authorities in the recipient's country of residence.
Dividends paid to a non-U.S. holder at an address within the United States
may be subject to backup withholding at a rate of 31% if the non-U.S. holder
fails to establish that it is entitled to an exemption or to provide a correct
taxpayer identification number and other information to the payer. Backup
withholding will generally not apply to dividends paid to non-U.S. holders at
an address outside the United States on or prior to December 31, 2000 unless
the payer has knowledge that the payee is a U.S. person. Under the recently
finalized Treasury Regulations regarding withholding and information
reporting, payment of dividends to non-U.S. holders at an address outside the
United States after December 31, 2000 may be subject to backup withholding at
a rate of 31% unless such Non-U.S. Holder satisfies various certification
requirements.
Under current treasury regulations, the payment of the proceeds of the
disposition of class A common stock to or through the U.S. office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes an exemption. Generally, the payment of the proceeds of
the disposition by a non-U.S. holder of class A common stock outside the
United States to or through a foreign office of a broker will not be subject
to backup withholding but will be subject to information reporting
requirements if the broker is:
. a U.S. person;
. a controlled foreign corporation for U.S. federal income tax purposes;
or
. a foreign person 50% or more of whose gross income for certain periods
is from the conduct of a U.S. trade or business
unless the broker has documentary evidence in its files of the holders' non-
U.S. status and certain other conditions are met, or the non-U.S. holder
otherwise establishes an exemption. Neither backup withholding nor information
reporting generally will apply to a payment of the proceeds of a disposition
of class A common stock by or through a foreign office of a foreign broker not
subject to the preceding sentence.
In general, the recently finalized treasury regulations, described above,
do not significantly alter substantive withholding and information reporting
requirements but would alter procedures for claiming benefits of an income tax
treaty and change the certifications procedures relating to the receipt by
intermediaries of payments on behalf of the beneficial owner of shares of
class A common stock. Non-U.S. holders should consult their tax advisors
regarding the effect, if any, of those final treasury regulations on an
investment in the class A common stock. Those final treasury regulations are
generally effective for payments made after December 31, 2000.
105
<PAGE>
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
Estate Tax
An individual non-U.S. holder who owns class A common stock at the time of
his or her death or had made certain lifetime transfers of an interest in class
A common stock will be required to include the value of that class A common
stock in his or her gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
The foregoing discussion is a summary of the principal U.S. federal income
and estate tax consequences of the ownership, sale or other disposition of
class A common stock by non-U.S. holders. Accordingly, investors are urged to
consult their own tax advisors with respect to the income and estate tax
consequences of the ownership and disposition of class A common stock,
including the application and effect of the laws of any state, local, foreign
or other taxing jurisdiction.
106
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has severally
agreed to purchase and we have agreed to sell to each underwriter, the number
of shares set forth opposite the name of each underwriter.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
Salomon Smith Barney Inc. ............................................
Lehman Brothers Inc. .................................................
Deutsche Bank Securities Inc. ........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................................
----
Total...............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of various legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Lehman Brothers Inc.,
Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives, propose to offer some of the shares
directly to the public at the public offering price listed on the cover page of
this prospectus and some of the shares to various dealers at the public
offering price less a concession not in excess of $ per share. The
underwriters may allow, and these dealers may reallow, a concession not in
excess of $ per share on sales to other dealers. If all of the shares are
not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares of class
A common stock at the public offering price less the underwriting discount. The
underwriters may exercise their option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent this option
is exercise, each underwriter will be obligated, subject to various conditions,
to purchase a number of additional shares approximately proportionate to its
initial purchase commitment.
At our request, the underwriters will reserve up to approximately
shares of class A common stock to be sold, at the initial public offering
price, to our directors, officers and employees and their friends and family
members, who will agree to hold their shares for at least 30 days after the
date of this prospectus. This directed share program will be administered by
Salomon Smith Barney Inc. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase reserved shares. Any reserved shares which are not so purchased will
be offered by the underwriters to the general public on the same basis as the
other shares offered hereby.
Our executive officers, directors, other key employees and our initial
investors have agreed that, for a period of 180 days from the date of this
prospectus, they will not, without the prior written consent of Salomon Smith
Barney Inc., dispose of or hedge any class A common stock, or any securities
convertible into or exchangeable for class A common stock, except for shares
acquired in the public market following the offering by persons other than our
officers and directors.
Prior to this offering, there has been no public market for the class A
common stock. Consequently, the initial public offering price for the shares
was determined by negotiations between us and the representatives. Among the
factors considered in determining the initial public offering price were our
record of operations, our
107
<PAGE>
current financial condition, our future prospects, our markets, the economic
conditions in and future prospects for the industry in which we compete, our
management, and currently prevailing general conditions in the equity
securities markets, including current market valuations of publicly traded
companies considered comparable to us. We cannot assure you, however, that the
prices at which the shares will sell in the public market after this offering
will not be lower than the price at which they are sold by the underwriters or
that an active trading market in the class A common stock will develop and
continue after this offering.
The following table shows the underwriting discounts and commissions we must
pay to the underwriters in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares of class A common stock to cover over-allotments.
<TABLE>
<CAPTION>
Paid by TeleCorp
-----------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per share.................................................. $ $
Total...................................................... $ $
</TABLE>
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of class A common stock in excess of the number of shares to be purchased
by the underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the class A common stock
made for the purpose of preventing or retarding a decline in the market price
of the class A common stock while the offering is in progress. Penalty bids
permit the underwriters to reclaim a selling concession from a syndicate member
when Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member. These activities may cause the price of the class A common stock to be
higher than the price that would otherwise would exist in the open market in
the absence of these transactions. These transactions may be effected on the
Nasdaq national market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.
Deutsche Bank Securities Inc. and Lehman Brothers Inc. have performed
investment banking and advisory services for us from time to time for which
they have received customary compensation and reimbursement of expenses. Among
other services, they have acted as underwriters and arrangers for our senior
subordinated discount notes offering and as agents and lenders under our senior
credit facilities.
LEGAL MATTERS
Certain legal matters in connection with the common stock we are offering
under this prospectus are being passed upon for us by McDermott, Will & Emery.
Mr. Sullivan, our Executive Vice President, Chief Financial Officer and a
member of our board is counsel to McDermott, Will & Emery. Mr. Sullivan owns
shares of our capital stock. The underwriters have been represented by Cravath,
Swaine & Moore. Wiley, Rein & Fielding are also advising us on regulatory
matters under the Federal communications laws.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1998, and the
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the period July 29, 1996, date of our inception,
to December 31, 1996, and for the years ended December 31, 1997 and 1998,
included in this prospectus, have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
the firm as experts in accounting and auditing.
108
<PAGE>
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the class A common shares. As permitted by the
rules and regulations of the SEC, this prospectus omits some information,
exhibits and undertakings contained in the registration statement. For further
information with respect to us and the class A common shares, you should review
the registration statement, including the exhibits and the financial statements
to the registration statement, notes and schedules filed as a part of the
registration statement. We are subject to the informational requirements of the
Exchange Act. The registration statement and the exhibits and schedules to the
registration statement, as well as the periodic reports and other information
filed with the SEC, may be inspected and copied at the Public Reference Section
of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, DC
20549 and at the regional offices of the SEC located at 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of these materials may be obtained
from the Public Reference Section of the SEC, Room 1024, Judiciary Plaza, 450
Fifth Street, NW, Washington DC 20549, and its public reference facilities in
New York, New York at the prescribed rates. You may obtain information as to
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. The SEC maintains a website at http://www.sec.gov that contains periodic
reports, proxy and information statements and other information regarding
registrants that file documents electronically with the SEC. Statements
contained in this prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of the contract or document filed as an exhibit to the registration
statement, each statement being qualified in all respects by reference. Under
the indenture, we have agreed to file with the SEC and provide to the holders
of the notes annual reports and the information, documents and other reports
which are specified in the disclosure and reporting provisions of the Exchange
Act.
109
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TELECORP PCS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit)...... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Pro forma Condensed Consolidated Financial Statements.................... F-41
Unaudited Pro forma Condensed Consolidated Balance Sheet as of June 30,
1999.................................................................... F-42
Unaudited Pro forma Condensed Consolidated Statement of Operations for
the Six Months Ended June 30, 1999...................................... F-43
Unaudited Pro forma Condensed Consolidated Statement of Operations for
the Year Ended December 31, 1998........................................ F-44
Notes to the Unaudited Pro forma Condensed Consolidated Financial
Statements.............................................................. F-45
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
TeleCorp PCS Inc. and Subsidiaries and Predecessor Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of TeleCorp PCS Inc. and Subsidiaries and Predecessor
Company (the Company) at December 31, 1997 and 1998, and the consolidated
results of their operations and their cash flows for the period July 29, 1996
(date of inception) to December 31, 1996, and for the years ended December 31,
1997 and 1998, 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.
PricewaterhouseCoopers LLP
McLean, Virginia
March 8, 1999, except for the information in the third paragraph of Note 16,
for which the date is September 29, 1999.
F-2
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------- June 30,
1997 1998 1999
----------- ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 2,566,685 $111,732,841 $ 151,437,828
Accounts receivable, net............ -- -- 13,013,034
Inventory........................... -- 778,235 7,733,620
Prepaid expenses.................... -- 2,185,444 2,166,260
Other current assets................ 73,468 1,218,263 243,074
----------- ------------ -------------
Total current assets............... 2,640,153 115,914,783 174,593,816
Property and equipment, net......... 3,609,274 197,468,622 320,604,414
PCS licenses and microwave
relocation costs................... 10,018,375 118,107,256 205,075,025
Intangible assets -- AT&T
agreements......................... -- 26,285,612 40,321,095
Deferred financing costs, net....... -- 8,584,753 18,684,989
FCC deposit......................... -- -- 17,516,394
Other assets........................ 26,673 283,006 1,438,708
----------- ------------ -------------
Total assets....................... $16,294,475 $466,644,032 $ 778,234,441
=========== ============ =============
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................... $ 3,202,295 $ 14,591,922 $ 28,935,648
Accrued expenses.................... 824,164 94,872,262 26,607,076
Microwave relocation obligation..... -- 6,636,369 5,733,393
Long-term debt...................... 4,881,073 -- --
Accrued interest.................... 389,079 4,490,553 4,170,612
Deferred revenue.................... -- -- 705,362
----------- ------------ -------------
Total current liabilities.......... 9,296,611 120,591,106 66,152,091
Long-term debt....................... 7,727,322 243,385,066 618,687,300
Microwave relocation obligation...... -- 2,481,059 2,470,072
Accrued expenses..................... -- -- 3,939,688
Deferred rent........................ -- 196,063 463,734
----------- ------------ -------------
Total liabilities.................. 17,023,933 366,653,294 691,712,885
----------- ------------ -------------
Mandatorily redeemable preferred
stock, issued 367, 255,999 and
356,575 (unaudited) shares,
respectively; and outstanding, 367,
255,215 and 356,575 (unaudited)
shares, respectively, (liquidation
preference $349,858,266 (unaudited)
as of June 30, 1999)................ 4,144,340 240,408,879 342,435,903
Deferred compensation................ -- (4,111) (283,827)
Treasury stock, none, 784 shares, and
none (unaudited), respectively, at
cost................................ -- (8) --
Preferred stock subscriptions
receivable.......................... -- (75,914,054) (103,000,531)
----------- ------------ -------------
Total mandatorily redeemable
preferred stock, net.............. 4,144,340 164,490,706 239,151,545
----------- ------------ -------------
Commitments and contingencies........ -- -- --
Stockholders' equity (deficit):
Series F preferred stock, par value
$.01 per share, none, 3,336,141 and
4,434,141 (unaudited) shares issued
and outstanding, respectively
(liquidation preference; $44,341
(unaudited) as of June 30, 1999)... -- 33,361 44,341
Common stock, par value none, for
December 31, 1997, $.01 per share
for December 31, 1998 and June 30,
1999 (unaudited), issued 19,335,
15,973,342 and 22,057,404
(unaudited) shares, respectively;
and outstanding 19,335, 15,794,548
and 22,057,404 (unaudited) shares,
respectively....................... 856 159,733 220,574
Additional paid-in capital.......... -- -- 86,187
Deferred compensation............... -- (7,177) (13,133)
Common stock subscriptions
receivable......................... -- (86,221) (190,990)
Treasury stock, none, 178,794
shares; and none (unaudited),
respectively, at cost.............. -- (1,787) --
Accumulated deficit................. (4,874,654) (64,597,877) (152,776,968)
----------- ------------ -------------
Total stockholders' equity
(deficit)......................... (4,873,798) (64,499,968) (152,629,989)
----------- ------------ -------------
Total liabilities, mandatorily
redeemable preferred stock and
stockholders' equity (deficit).... $16,294,475 $466,644,032 $ 778,234,441
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the period
July 29, 1996
(date of For the year ended For the six months ended
inception) to December 31, June 30, (unaudited)
December 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service revenue....... $ -- $ -- $ -- $ -- $ 6,232,355
Equipment revenue..... -- -- -- -- 5,648,966
Roaming revenue....... -- -- 29,231 -- 9,486,916
--------- ----------- ------------ ----------- ------------
Total revenue....... -- -- 29,231 -- 21,368,237
--------- ----------- ------------ ----------- ------------
Operating expenses:
Cost of revenue....... -- -- -- -- 10,106,968
Operations and
development.......... -- -- 9,772,485 1,214,372 15,498,104
Selling and
marketing............ 9,747 304,062 6,324,666 1,095,361 20,924,712
General and
administrative....... 515,146 2,637,035 26,239,119 6,873,306 22,440,887
Depreciation and
amortization......... 75 10,625 1,583,864 96,145 16,491,374
--------- ----------- ------------ ----------- ------------
Total operating
expenses........... 524,968 2,951,722 43,920,134 9,279,184 85,462,045
--------- ----------- ------------ ----------- ------------
Operating loss...... (524,968) (2,951,722) (43,890,903) (9,279,184) (64,093,808)
Other (income) expense:
Interest expense...... -- 396,362 11,934,263 445,204 17,107,514
Interest income....... -- (12,914) (4,697,233) (140,338) (3,064,606)
Other expense......... -- -- 27,347 3,818 146,675
--------- ----------- ------------ ----------- ------------
Net loss............ (524,968) (3,335,170) (51,155,280) (9,587,868) (78,283,391)
Accretion of mandatorily
redeemable preferred
stock.................. (288,959) (725,557) (8,566,922) (207,217) (9,895,700)
--------- ----------- ------------ ----------- ------------
Net loss
attributable to
common equity...... $(813,927) $(4,060,727) $(59,722,202) $(9,795,085) $(88,179,091)
========= =========== ============ =========== ============
Net loss attributable to
common equity per
share--Basic and
Diluted................ $ (44.45) $ (111.74) $ (6.78) $ (506.60) $ (4.26)
========= =========== ============ =========== ============
Weighted average common
equity shares
outstanding--Basic and
Diluted................ 18,313 36,340 8,813,523 19,335 20,689,655
========= =========== ============ =========== ============
Pro forma net loss
attributable to common
equity--Basic and
Diluted................ $(75,420,100) $(98,026,555)
============ ============
Pro forma net loss
attributable to common
equity per share--Basic
and Diluted............ $ (3.95) $ (4.36)
============ ============
Pro forma weighted
average common equity
shares outstanding--
Basic and Diluted...... 19,075,746 22,472,928
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series F
preferred stock Common stock Additional Common stock Treasury stock
------------------ --------------------- paid-in Deferred subscriptions -----------------
Shares Amount Shares Amount capital compensation receivable Shares Amount
--------- -------- ---------- --------- ---------- ------------ ------------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
capitalization
for cash........ -- $ -- 8,750 $ 2,000 $ -- $ -- $ -- -- $ --
Issuance of
common stock for
cash............ -- -- 34,374 -- -- -- -- -- --
Accretion of
mandatorily
redeemable
preferred
stock........... -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
--------- -------- ---------- --------- -------- --------- ---------- -------- -------
Balance,
December 31,
1996............ -- -- 43,124 2,000 -- -- -- -- --
Issuance of
common stock for
cash............ -- -- 6,875 -- -- -- -- -- --
Accretion of
mandatorily
redeemable
preferred
stock........... -- -- -- -- -- -- -- -- --
Noncash
redemption of
equity
interests....... -- -- (30,664) (1,144) -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
--------- -------- ---------- --------- -------- --------- ---------- -------- -------
Balance,
December 31,
1997............ -- -- 19,335 856 -- -- -- -- --
Noncash
redemption of
equity
interests....... -- -- (19,335) (856) -- -- -- -- --
Issuance of
preferred and
common stock for
cash, licenses
and AT&T
agreements...... 3,336,141 33,361 14,971,571 149,715 -- -- (86,221) -- --
Accretion of
mandatorily
redeemable
preferred
stock........... -- -- -- -- -- -- -- -- --
Noncash issuance
of restricted
stock to
employees....... -- -- 1,001,771 10,018 -- (10,018) -- -- --
Repurchase of
common stock for
cash............ -- -- -- -- -- 1,787 -- (178,794) (1,787)
Amortization of
deferred
compensation.... -- -- -- -- -- 1,054 -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
--------- -------- ---------- --------- -------- --------- ---------- -------- -------
Balance,
December 31,
1998............ 3,336,141 33,361 15,973,342 159,733 -- (7,177) (86,221)) (178,794) (1,787)
Issuance of
preferred stock
and common stock
for cash and
licenses
(unaudited)..... 1,098,000 10,980 5,327,344 53,273 71,326 -- (104,769) -- --
Accretion of
mandatorily
redeemable
preferred stock
(unaudited)..... -- -- -- -- -- -- -- -- --
Noncash issuance
of restricted
stock to
employees
(unaudited)..... -- -- 756,718 7,568 14,861 (12,842) -- 310,440 3,104
Amortization of
deferred
compensation
(unaudited)..... -- -- -- -- -- 5,582 -- -- --
Repurchase of
common stock for
cash
(unaudited)..... -- -- -- -- -- 1,304 -- (131,646) (1,317)
Net loss
(unaudited)..... -- -- -- -- -- -- -- -- --
--------- -------- ---------- --------- -------- --------- ---------- -------- -------
Balance, June
30, 1999
(unaudited)..... 4,434,141 $ 44,341 22,057,404 $ 220,574 $ 86,187 $ (13,133) $ (190,990) -- $ --
========= ======== ========== ========= ======== ========= ========== ======== =======
<CAPTION>
Accumulated
deficit Total
--------------- ---------------
<S> <C> <C>
Initial
capitalization
for cash........ $ -- $ 2,000
Issuance of
common stock for
cash............ -- --
Accretion of
mandatorily
redeemable
preferred
stock........... (288,959) (288,959)
Net loss........ (524,968) (524,968)
--------------- ---------------
Balance,
December 31,
1996............ (813,927) (811,927)
Issuance of
common stock for
cash............ -- --
Accretion of
mandatorily
redeemable
preferred
stock........... (725,557) (725,557)
Noncash
redemption of
equity
interests....... -- (1,144)
Net loss........ (3,335,170) (3,335,170)
--------------- ---------------
Balance,
December 31,
1997............ (4,874,654) (4,873,798)
Noncash
redemption of
equity
interests....... -- (856)
Issuance of
preferred and
common stock for
cash, licenses
and AT&T
agreements...... (1,003) 95,852
Accretion of
mandatorily
redeemable
preferred
stock........... (8,566,922) (8,566,922)
Noncash issuance
of restricted
stock to
employees....... -- --
Repurchase of
common stock for
cash............ (18) (18)
Amortization of
deferred
compensation.... -- 1,054
Net loss........ (51,155,280) (51,155,280)
--------------- ---------------
Balance,
December 31,
1998............ (64,597,877) (64,499,968)
Issuance of
preferred stock
and common stock
for cash and
licenses
(unaudited)..... -- 30,810
Accretion of
mandatorily
redeemable
preferred stock
(unaudited)..... (9,895,700) (9,895,700)
Noncash issuance
of restricted
stock to
employees
(unaudited)..... -- 12,691
Amortization of
deferred
compensation
(unaudited)..... -- 5,582
Repurchase of
common stock for
cash
(unaudited)..... -- (13)
Net loss
(unaudited)..... (78,283,391) (78,283,391)
--------------- ---------------
Balance, June
30, 1999
(unaudited)..... $ (152,776,968) $ (152,629,989)
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------
<TABLE>
<CAPTION>
For the period
July 29, 1996 For the year
(date of ended For the six months ended
inception) to December 31 June 30, (unaudited)
December 31, --------------------------- ---------------------------
1996 1997 1998 1998 1999
-------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (524,968) $ (3,335,170) $ (51,155,280) $ (9,587,868) $ (78,283,391)
Adjustment to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 75 10,625 1,583,864 96,145 16,491,374
Noncash compensation
expense associated
with the issuance of
restricted common
stock and preferred
stock................. -- -- 1,664 -- 365,028
Noncash interest
expense associated
with issuance of
Lucent Notes and
senior subordinated
discount notes........ -- -- 460,400 -- 8,512,801
Allowance for bad debt
expense............... -- -- -- -- 159,248
Noncash general and
administrative expense
charge by affiliates.. -- -- 196,622 -- --
Amortization of
deferred financing
costs................. -- -- 524,924 -- 500,083
Amortization of
discount on notes
payable............... -- 134,040 197,344 90,449 112,957
Changes in cash flow
from operations
resulting from changes
in assets and
liabilities:
Accounts receivable.... -- -- -- -- (12,337,283)
Inventory.............. -- -- (778,235) -- (6,955,385)
Prepaid expenses....... -- -- (2,185,444) (185,428) 19,184
Other current assets... (21,877) (51,591) (1,144,795) (135,573) 975,189
Other assets........... -- (26,673) (256,333) (87,138) (17,490)
Accounts payable....... 98,570 618,889 11,389,627 1,519,681 18,559,466
Accrued expenses....... -- -- 9,145,111 1,162,821 1,863,368
Deferred rent.......... -- -- 196,063 69,288 267,657
Accrued interest....... -- 257,682 2,046,432 354,278 (411,081)
Deferred revenue....... -- -- -- -- 705,362
---------- ------------ ------------- ------------ -------------
Net cash used in
operating
activities........... (448,200) (2,392,198) (29,778,036) (6,703,345) (49,472,913)
---------- ------------ ------------- ------------ -------------
Cash flows from
investing activities:
Expenditures for
network under
development, wireless
network and property
and equipment......... (904) (1,134,234) (107,542,189) (7,797,433) (203,235,573)
Capitalized interest on
network under
development and
wireless network...... -- -- (227,000) -- (4,152,701)
Expenditures for
microwave relocation.. -- -- (3,339,410) (550,002) (5,137,397)
Purchase of PCS
licenses.............. -- -- (21,000,000) -- (72,188,037)
Deposit on PCS
licenses.............. (7,500,000) -- -- -- (28,877,743)
Partial refund of
deposit on PCS
licenses.............. -- 1,561,702 -- -- 11,361,351
Purchase of
intangibles--AT&T
agreements............ -- -- -- -- (16,144,725)
---------- ------------ ------------- ------------ -------------
Net cash (used in)
provided by investing
activities........... (7,500,904) 427,468 (132,108,599) (8,347,435) (318,374,825)
---------- ------------ ------------- ------------ -------------
Cash flows from
financing activities:
Proceeds from sale of
mandatorily redeemable
preferred stock....... 7,500,000 1,500,000 26,661,420 -- 60,410,929
Receipt of preferred
stock subscription
receivable............ -- -- -- -- 3,740,068
Direct issuance costs
from sale of
mandatorily redeemable
preferred stock....... -- -- (1,027,694) -- (2,500,000)
Proceeds from sale of
common stock.......... 2,000 -- 38,305 -- 5,477
Proceeds from long-term
debt.................. 498,750 2,808,500 257,491,500 20,390,954 397,635,000
Purchases of treasury
shares................ -- -- (26) -- (19)
Payments on notes
payable............... -- -- (2,072,573) -- (40,000,000)
Payments of deferred
financing costs....... -- -- (9,109,677) -- (10,600,517)
Net increase (decrease)
in amounts due to
affiliates............ -- 171,269 (928,464) (824,164) (1,138,213)
---------- ------------ ------------- ------------ -------------
Net cash provided by
financing
activities........... 8,000,750 4,479,769 271,052,791 19,566,790 407,552,725
---------- ------------ ------------- ------------ -------------
Net increase in cash and
cash equivalents....... 51,646 2,515,039 109,166,156 4,516,010 39,704,987
Cash and cash
equivalents at the
beginning of period.... -- 51,646 2,566,685 2,566,685 111,732,841
---------- ------------ ------------- ------------ -------------
Cash and cash
equivalents at the end
of period.............. $ 51,646 $ 2,566,685 $ 111,732,841 $ 7,082,695 $ 151,437,828
========== ============ ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
------------
<TABLE>
<CAPTION>
For the period
July 29, 1996 For the six months
(date of For the year ended ended
inception) to December 31, June 30, (unaudited)
December 31, ----------------------- ----------------------
1996 1997 1998 1998 1999
-------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Supplemental disclosure
of cash flow
information:
Cash paid for income
taxes................ $ -- $ -- $ -- $ -- $ --
Cash paid for
interest............. $ -- $ -- $ 9,785,829 $ -- $10,540,603
Supplemental disclosure
of non-cash investing
and financing
activities:
Network under
development and
microwave relocation
costs included in
accounts payable and
accrued expenses..... $ -- $2,484,836 $ 98,091,667 $2,147,998 $ 9,141,452
Issuance of
mandatorily
redeemable preferred
stock and preferred
stock in exchange for
PCS licenses and AT&T
agreements........... $ -- $ -- $100,900,000 $ -- $ 2,705,629
Issuance of
mandatorily
redeemable preferred
stock and common
stock in exchange for
stock subscriptions
receivable.......... $ -- $ -- $ 76,000,275 $ -- $30,931,314
U.S. Government
financing of PCS
licenses............. $ -- $9,192,938 $ -- $ -- $11,550,646
Discount on U.S.
Government
financing............ $ -- $1,599,656 $ -- $ -- $ 2,396,215
Conversion of notes
payable to
stockholders into
preferred stock...... $ -- $ 498,750 $ 25,300,000 $ -- $ --
Accretion of preferred
stock dividends...... $288,959 $ 725,557 $ 8,566,922 $ 207,217 $ 9,895,700
Elimination of equity
interests in Holding
for equity interests
in TeleCorp.......... $ -- $ -- $ 4,369,680 $ -- $ --
Redemption of equity
interests............ $ -- $6,370,070 $ -- $ -- $ --
Distribution of net
assets to
affiliates........... $ -- $3,644,602 $ -- $ -- $ --
Notes payable to
affiliates........... $ -- $2,725,468 $ -- $ -- $ --
Capitalized interest.. $ -- $ 131,397 $ 2,055,043 $ 378,940 $ 4,601,298
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------
The consolidated financial statements and the Notes have been adjusted to
give effect to the stock split as described in Note 16.
1. Organization
TeleCorp Holding Corp., Inc. (Holding) was incorporated in the State of
Delaware on July 29, 1996 (date of inception). Holding was formed to
participate in the Federal Communications Commission's (FCC) Auction of F-Block
Personal Communications Services (PCS) licenses (the Auction) in April 1997.
Holding successfully obtained licenses in the New Orleans, Memphis, Beaumont,
Little Rock, Houston, Tampa, Melbourne and Orlando Basic Trading Areas (BTAs).
Holding qualifies as a Designated Entity and Very Small Business under Part 24
of the rules of the FCC applicable to broadband PCS.
In April 1997, Holding entered into an agreement to transfer the PCS
licenses for the Houston, Tampa, Melbourne and Orlando BTAs to four newly-
formed entities created by Holding's existing stockholder group: THC of
Houston, Inc.; THC of Tampa, Inc.; THC of Melbourne, Inc.; and THC of Orlando,
Inc. These licenses were transferred along with the related operating assets
and liabilities in exchange for investment units consisting of Class A, B and C
common stock and Series A preferred stock in August 1997. Concurrently, Holding
distributed the investment units, on a pro rata basis, in a partial stock
redemption to Holding's existing stockholder group and issued an aggregate of
approximately $2.7 million in affiliate notes payable (see Note 5) to the
newly-formed entities. As a result of this distribution, Holding no longer
retains any ownership equity interest in the newly-formed entities. Because the
above transaction was non-monetary in nature and occurred between entities with
the same stockholder group, the transaction was accounted for at historical
cost (see Note 13).
TeleCorp PCS, Inc. (TeleCorp) was incorporated in the State of Delaware on
November 14, 1997 by the controlling stockholders of Holding. TeleCorp will be
the exclusive provider of wireless mobility services in its licensed regions in
connection with a strategic alliance with AT&T Corporation and its affiliates
(collectively AT&T). Upon finalization of the AT&T Transaction, Holding became
a wholly-owned subsidiary of TeleCorp (see Note 6).
TeleCorp has various wholly-owned subsidiaries which includes TeleCorp
Communications, Inc., TeleCorp LLC and Holding. TeleCorp receives services from
TeleCorp Management Corp., an affiliate company owned by two officers and
stockholders of TeleCorp (see Note 13).
2. Summary of Significant Accounting Policies
Basis of presentation
Holding was formed to explore various business opportunities in the wireless
telecommunications industry. TeleCorp was formed to continue the activity of
Holding through its strategic alliance with AT&T. Since inception, Holding's
and TeleCorp's activities have consisted principally of hiring a management
team, raising capital, negotiating strategic business relationships,
participating in the Auction and operating wireless networks. Consequently, for
purposes of the accompanying financial statements, Holding has been treated as
a "predecessor" entity. Therefore, the financial statements as of December 31,
1997 and for the period July 29, 1996 to December 31, 1996 and for the year
ended December 31, 1997 include the historical financial information of
Holding, the predecessor entity. The financial statements as of and for the
year ended December 31, 1998 and for all periods thereafter, include the
historical financial information of Holding and TeleCorp. The Chief Executive
Officer and President of Holding maintain the positions of Chief Executive
Officer and Executive Vice President and Chief Financial Officer, respectively,
of TeleCorp. In addition, these
F-8
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
officers own a majority of the voting stock of TeleCorp and, prior to the
finalization of the AT&T Transaction, owned a majority of the voting stock of
Holding. As a result of this relationship, certain financing relationships and
the similar nature of business activities, Holding and TeleCorp are considered
companies under common control. Therefore, the accompanying financial
statements incorporate the combined business activities of Holding and
TeleCorp. Collectively, TeleCorp and Holding are referred to as the Company in
the accompanying consolidated financial statements.
Unaudited Interim Financial Information
The unaudited consolidated balance sheet as of June 30, 1999, and the
unaudited consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for the six months ended June 30, 1998 and
1999, and related footnotes, have been prepared in accordance with generally
accepted accounting principles for interim financial information and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of only normal recurring accruals)
considered necessary for the fair presentation have been included. Operating
results for the six months ended June 30, 1999 are not necessarily indicative
of results that may be expected for the year ending December 31, 1999.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, which includes TeleCorp Communications,
Inc., TeleCorp LLC and Holding. All intercompany accounts and transactions have
been eliminated in consolidation. For the six months ended June 30, 1999, the
Company has consolidated the results of Viper Wireless, Inc. since the
Company's absence of voting control is considered temporary (see Note 16).
Development Stage Company
Prior to January 1, 1999, the Company's activities principally have been
planning and participation in the Auction, initiating research and development,
conducting market research, securing capital and developing its proposed
service and network. Since the Auction, the Company has been relying on the
borrowing of funds and the issuance of common and preferred stock rather than
recurring revenues, for its primary sources of cash flow. Accordingly, the
Company's financial statements for all periods prior to January 1, 1999 were
presented as a development stage enterprise, as prescribed by Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises." In the first quarter of 1999, the Company commenced
operations in the New Orleans, Memphis and Little Rock BTA's and began
providing wireless mobility services for its customers. As a result, the
Company exited the development stage in the first quarter ended March 31, 1999.
The Company incurred cumulative losses through December 31, 1998 of
approximately $55,000,000. The Company expects to continue to incur significant
operating losses and to generate negative cash flow from operating activities
for at least the next several years while it constructs its network and
develops its customer base. The Company's ability to eliminate operating losses
and to generate positive cash flow from operations in the future will depend
upon a variety of factors, many of which it is unable to control. These factors
include: (1) the cost of constructing its network, (2) changes in technology,
(3) changes in governmental regulations, (4) the level of demand for wireless
communications services, (5) the product offerings, pricing strategies and
other competitive factors of the Company's competitors and (6) general economic
conditions. If the Company's is unable to implement its business plan
successfully, it may not be able to eliminate operating losses, generate
F-9
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
positive cash flow or achieve or sustain profitability which would materially
adversely affect its business, operations and financial results as well as its
ability to make payments on its debt obligations.
Fair Value of Financial Instruments
The Company believes that the carrying amount of its financial instruments
approximate fair value.
Use of Estimates
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 on the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
The Company has invested its excess cash in overnight sweep accounts and U.S.
Treasury obligations. The Company has not experienced any losses on its cash
and cash equivalents.
Cash Equivalents
The Company considers all highly liquid instruments with a maturity from
purchase date of three months or less to be cash equivalents. Cash equivalents
consist of overnight sweep accounts and U.S. Treasury obligations.
Revenue Recognition
The Company earns revenue by providing wireless mobility services to both
its subscribers and subscribers of other wireless carriers traveling in the
Company's service area, as well as sale of equipment and accessories.
Wireless mobility services revenue consists of monthly service fees,
activation fees, airtime and long distance revenue. Generally, access fees,
airtime and long distance charges are billed monthly and are recognized when
service is provided. Prepaid service revenue is collected in advance, is
recorded as deferred revenue and recognized as service is provided.
Roaming revenue consist of the airtime and long distance charged to the
subscribers of other wireless carriers for use of the Company's network while
traveling in the Company's service area and are recognized when the service is
rendered.
Equipment revenue is recognized upon delivery of the equipment to the
customer and when future obligations are no longer significant.
PCS Licenses and Microwave Relocation Costs
PCS licenses include costs incurred, including capitalized interest related
to the U.S. Government financing, to acquire FCC licenses in the 1850-1990 MHz
radio frequency band. Interest capitalization on the
F-10
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
U.S. Government financing began when the activities necessary to get the
Company's network ready for its intended use were initiated and concluded when
the wireless networks were ready for intended use. The PCS licenses are issued
conditionally for ten years. Historically, the FCC has granted license renewals
providing the licensees have complied with applicable rules, policies and the
Communications Act of 1934, as amended. The Company believes it has complied
with and intends to continue to comply with these rules and policies.
As a condition of each PCS license, the FCC requires each license-holder to
relocate existing microwave users (Incumbents) within the awarded spectrum to
microwave frequencies of equal capacity. Microwave relocation costs include the
actual and estimated costs incurred to relocate the Incumbent's microwave links
affecting the Company's licensed frequencies.
PCS licenses, microwave relocation costs, and capitalized interest consist
of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998 1999
----------- ------------ -----------
(unaudited)
<S> <C> <C> <C>
PCS licenses........................... $ 9,886,978 $104,736,978 188,785,074
Microwave relocation costs............. -- 12,456,838 15,924,096
Capitalized interest................... 131,397 913,440 1,004,581
----------- ------------ -----------
10,018,375 118,107,256 205,713,751
Accumulated amortization............... -- -- (638,726)
----------- ------------ -----------
$10,018,375 $118,107,256 205,075,025
=========== ============ ===========
</TABLE>
The Company began amortizing the cost of the PCS licenses, microwave
relocation costs, and capitalized interest in March 1999, when PCS services
commenced in certain BTAs. Amortization is calculated using the straight-line
method over 40 years. Amortization expense for the six months ended June 30,
1999 was $638,726 (unaudited).
Property and Equipment and Network Under Development
Property and equipment are recorded at cost and depreciation is computed
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment.............. 3 to 5 years
Network under development and
wireless network............... 5 to 10 years upon commencement of service
Internal use software........... 3 years
Furniture, fixtures and office
equipment...................... 5 years
Leasehold improvements.......... Lesser of useful life or lease term
</TABLE>
Expenditures for repairs and maintenance are charged to operations when
incurred. Gains and losses from disposals, if any, are included in the
statements of operations. Network under development includes all costs related
to engineering, cell site acquisition, site development, interest expense and
other development costs being incurred to ready the Company's wireless network
for use.
Internal and external costs incurred to develop the Company's billing,
financial systems and other internal applications during the application
development stage are capitalized as internal use software. All costs incurred
prior to the application development stage are expensed as incurred. Training
costs and all post implementation internal and external costs are expensed as
incurred.
F-11
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
Intangible assets--AT&T Agreements
The AT&T Agreements consist of the fair value of various agreements with
AT&T (see Note 6) exchanged for mandatorily redeemable preferred stock and
Series F preferred stock (see notes 6 and 7). The AT&T Agreements are amortized
on a straight-line basis over the related contractual terms, which range from
three to ten years. Amortization on the AT&T Exclusivity Agreement, Long
Distance Agreement and the Intercarrier Roamer Services Agreement began once
wireless services were available to its customers. Amortization of the Network
Membership License Agreement began on July 17, 1998, the date of the
finalization of the AT&T Transaction. During 1999, the Company completed
acquisitions for additional licenses (see Note 7).
Inventory
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------
June 30,
1997 1998 1999
---- -------- -----------
(unaudited)
<S> <C> <C> <C>
Handsets.............................................. $-- $778,235 $7,350,304
Accessories........................................... -- -- 383,316
---- -------- ----------
Total inventory..................................... $-- $778,235 $7,733,620
==== ======== ==========
</TABLE>
Inventory is valued at the lower of cost or market and is recorded net of an
allowance for obsolescence. No allowance for obsolescence has been recorded as
of December 31, 1998 and June 30, 1999.
Deferred Financing Costs
In connection with entering into the credit facility and the senior-
subordinated discount rates (see Note 5), the Company incurred certain debt
issuance costs. The Company has capitalized financing costs of $9,109,677 and
$19,709,996 (unaudited), as of December 31, 1998 and June 30, 1999,
respectively. The financing costs are being amortized using the straight line
method over the term of the credit facility. For the year ended December 31,
1998 and for the six months ended June 30, 1999, the Company recorded interest
expense related to the amortization of the deferred financing costs of $524,924
and $500,083 (unaudited), respectively.
Long-Lived Assets
The Company periodically evaluates the recoverability of the carrying value
of property and equipment, network under development, intangible assets, PCS
licenses and microwave relocation costs. The Company considers historical
performance and anticipated future results in its evaluation of potential
impairment. Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of these assets in relation to the operating
performance of the business and future and undiscounted cash flows expected to
result from the use of these assets. Impairment losses are recognized when the
sum of the present value of expected future cash flows are less than the
assets' carrying value. No such impairment losses have been recognized to date.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for tax consequences in future
years for differences between the tax bases of assets and
F-12
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
liabilities and their financial reporting amounts at each year-end, based on
enacted laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce net deferred tax assets to the amount
expected to be realized. The provision for income taxes consists of the current
tax provision and the change during the period in deferred tax assets and
liabilities.
Start-Up and Advertising Costs
Start-up costs are expensed as incurred. The Company expenses production
costs of print, radio and television advertisements and other advertising costs
as such costs are incurred. Advertising expenses in selling and marketing for
1996, 1997, and 1998 were insignificant. Advertising expenses in selling and
marketing were $6,579,029 (unaudited) for the six months ended June 30, 1999.
Interest Rate Swaps
The Company uses interest swaps to hedge the effects of fluctuations in
interest rates from their Senior Credit Facility (see Note 5). These
transactions meet the requirements for hedge accounting, including designation
and correlation. The interest rate swaps are managed in accordance with the
Company's policies and procedures. The Company does not enter into these
transactions for trading purposes. The resulting gains or losses, measured by
quoted market prices, are accounted for as part of the transactions being
hedged, except that losses not expected to be recovered upon the completion of
hedged transactions are expensed. Gains or losses associated with interest rate
swaps are computed as the difference between the interest expense per the
amount hedged using the fixed rate compared to a floating rate over the term of
the swap agreement. As of December 31, 1998, the Company has entered into six
interest rate swap agreements with various commercial lenders totaling a
notional amount of $225,000,000 to convert the Company's variable rate debt of
LIBOR plus 3.25% to fixed rate debt. The interest rate swaps had no material
impact on the consolidated financial statements as of and for the year ended
December 31, 1998 and as of and for the six months ended June 30, 1999.
Segment Reporting
The Company presently operates in a single business segment as a provider of
wireless mobility services in its licensed regions primarily in the south-
central and northeastern United States. The Company operates in various MTAs
including New Orleans, LA, Memphis, TN, Little Rock, AK, Boston, MA and Puerto
Rico.
Stock Compensation
The Company periodically issues restricted stock awards to its employees.
Upon reaching a measurement date, the Company records deferred compensation
equal to the estimated fair value of the stock award. Deferred compensation is
amortized to compensation expense over the related vesting period.
Recently Issued Accounting Standards
In July 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137, "Deferral of the Effective
Date of FAS 133" which defers the effective date of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not determined the effect of adopting this standard.
F-13
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
Net Loss Attributable to Common Equity Per Share and Pro Forma Net Loss
Attributable to Common Equity Per Share
The Company computes net loss attributable to common equity per share in
accordance with SFAS No. 128, "Earnings Per Share," and SEC Staff Accounting
Bulletin No. 98 (SAB 98). Under the provisions of SFAS No. 128 and SAB 98,
basic net loss attributable to common equity share is computed by dividing the
net loss attributable to common equity for the period by the weighted average
number of common equity shares outstanding during the period, which includes
Series F Preferred Stock and all classes of Common Stock. Diluted net loss
attributable to common equity share is computed by dividing the net loss
attributable to common equity for the period by the weighted average number of
common and dilutive common equivalent shares outstanding during the period. As
the Company had a net loss attributable to common equity in each of the
periods presented, basic and diluted net loss attributable to common equity
per share are the same. Pro forma basic and diluted net loss attributable to
common equity per share has been calculated assuming the completion of our
pending acquisitions of Viper Wireless, Inc. and Telecorp LMDS, Inc. (see Note
16) and the completed acquisitions (see Note 7) as if these acquisitions were
in effect in the periods presented. As the Company had a net loss attributable
to common equity in each of the periods presented, pro forma basic and diluted
net loss attributable to common equity per share is the same.
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
June 30,
1997 1998 1999
---------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Wireless network................... $ -- $ -- $282,874,088
Network under development.......... 3,269,793 170,885,628 3,519,535
Computer equipment................. 328,875 10,115,063 13,502,865
Internal use software.............. -- 11,161,142 17,610,821
Leasehold improvements............. -- 3,204,623 10,048,722
Furniture, fixtures and office
equipment......................... 21,306 2,924,233 7,061,781
Land............................... -- -- 47,500
---------- ------------ ------------
3,619,974 198,290,689 334,665,312
Accumulated depreciation........... (10,700) (822,067) (14,060,898)
---------- ------------ ------------
$3,609,274 $197,468,622 $320,604,414
========== ============ ============
</TABLE>
F-14
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
4. Accrued Expenses
Accrued expenses, consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
June 30,
1997 1998 1999
-------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Property and equipment..................... $ -- $85,634,829 $ 6,794,344
Sales taxes................................ -- -- 11,005,687
Consulting services........................ -- 4,237,411 2,642,478
Bonuses and vacation....................... -- 2,386,317 2,858,834
Engineering................................ -- 676,893 1,147,406
Selling and marketing...................... -- 346,552 2,561,576
Other...................................... 824,164 1,187,367 3,271,690
Legal fees................................. -- 402,893 264,749
-------- ----------- -----------
824,164 94,872,262 30,546,764
Less: non-current portion.................. -- -- (3,939,688)
-------- ----------- -----------
$824,164 $94,872,262 $26,607,076
======== =========== ===========
</TABLE>
5. Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
June 30,
1997 1998 1999
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Senior subordinated discount notes.. $ -- $ -- $334,829,320
Senior credit facility.............. -- 225,000,000 225,000,000
Lucent Series A notes............... -- 10,460,400 41,665,926
U.S. Government financing........... 7,727,322 7,924,666 17,192,054
Notes payable to stockholders....... 2,808,500 -- --
Notes payable to affiliates (see
Note 13)........................... 2,072,573 -- --
----------- ------------ ------------
12,608,395 243,385,066 618,687,300
Less: current portion............... (4,881,073) -- --
----------- ------------ ------------
$ 7,727,322 $243,385,066 $618,687,300
=========== ============ ============
</TABLE>
Senior Subordinated Discount Notes
On April 23, 1999, the Company completed the issuance and sale of 11 5/8%
Senior Subordinated Discount Notes (the Notes) with an aggregate principal
amount at maturity of $575,000,000. The total gross proceeds from the sale of
the Notes were $327,635,000. Offering expenses consisting of underwriting,
printing, legal and accounting fees totaled $10,600,517. The Notes mature April
15, 2009, unless previously redeemed by the Company. As interest accrues, it
will be added to the principal as an increase to interest expense and the
carrying value of the Notes until April 15, 2004. The Company will begin paying
interest semi-annually on April 15 and October 15 of each year beginning
October 15, 2004. The Notes are not collateralized. The Notes
F-15
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
are subordinate to all of the Company's existing and future senior debt and
ranks equally with all other senior subordinated debt, and ranks senior to all
of the Company's existing and future subordinated debt. The Notes are
guaranteed by the Company's wholly owned subsidiary, TeleCorp Communications,
Inc. (see Note 15). As of June 30, 1999 accrued interest added to the principal
was $7,194,320.
Senior Credit Facility
In July 1998, the Company entered into a credit facility (the Senior Credit
Facility) with a group of commercial lenders, under which the Company may
borrow up to $525,000,000, in the aggregate, consisting of (i) up to
$150,000,000 in revolving loans (the Senior Revolving Credit Facility) with a
maturity date of January 2007, (ii) a $150,000,000 term loan (the Tranche A
Term Loan) with a maturity date of January 2007, and (iii) a $225,000,000 term
loan (the Tranche B Term Loan) with a maturity date of January 2008. A total of
$225,000,000 of indebtedness from the Tranche B Term Loan was outstanding as of
December 31, 1998 and June 30, 1999. The Senior Credit Facility also provides
for an uncommitted $75,000,000 senior term loan (the Expansion Facility) with a
maturity date of January 2008.
Beginning in September 2002, principal repayments will be made in 18
quarterly installments for the Tranche A Term Loan and 22 quarterly
installments for the Tranche B Term Loan. Quarterly principal repayments for
the Tranche A Term Loan are as follows: first six, $3,750,000; next four,
$9,375,000; last eight, $11,250,000. Quarterly principal repayments for the
Tranche B Term Loan are as follows: first 18, $562,500, last four, $53,718,750.
Interest payments on the senior credit facility are made quarterly. The Senior
Credit Facility contains a prepayment provision whereby certain amounts
borrowed must be repaid upon the occurrence of certain specified events.
The commitment to make loans under the Tranche A Term loan will terminate in
July 2001, or earlier if elected by the Company. Beginning in April 2005, the
commitment to make loans under the Senior Revolving Credit Facility will be
permanently reduced on a quarterly basis through April 2007 as follows: first
four reductions, $12,500,000; last four reductions $25,000,000. The unpaid
principal on the Senior Revolving Credit Facility is due January 2007. In July
2000, if the undrawn portion of the Tranche A Term Loan exceeds $50,000,000 the
amount of the Tranche A Term Loan will be automatically reduced by such excess.
The interest rate applicable to the Senior Credit Facility is based on, at
the Company's option, (i) LIBOR (Eurodollar Loans) plus the Applicable Margin,
as defined, or (ii) the higher of the administrative agent's prime rate or the
Federal Funds Effective Rate (ABR Loans), plus the Applicable Margin, as
defined. The Applicable Margin for Eurodollar Loans will range from 125 to 325
basis points based upon certain events by the Company, as specified. The
Applicable Margin for ABR Loans will range from 25 to 225 basis points based
upon certain events by the Company, as specified. At December 31, 1998, the
interest rate applicable to the Tranche B Term Loan was 8.75% and interest
incurred for the year ended December 31, 1998 was $9,210,187 of which
$7,710,187 was expensed and $1,500,000 was capitalized. At June 30, 1999, the
interest rate applicable to the Tranche B Term Loan was 8.29%, and for the six
months ended June 30, 1999 interest incurred on the Tranche B Term Loan was
$9,843,750 of which $6,366,699 was expensed and $3,477,051 was capitalized.
The loans from the Senior Credit Facility are subject to an annual
commitment fee which ranges from 0.50% to 1.25% of the available portion of the
Tranche A Term Loan and the Senior Revolving Credit Facility. The Company has
expensed $3,305,905 and $2,063,686 (unaudited), respectively, for the year
ended December 31, 1998 and for the six months ended June 30, 1999 related to
these bank commitment fees. The Senior Credit Facility requires the Company to
purchase interest rate hedging contracts covering amounts equal to at least
F-16
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
50% of the total amount of the outstanding indebtedness of the Company. As of
December 31, 1998 and June 30, 1999, the Company hedged 100% of its outstanding
indebtedness of $225,000,000 to take advantage of favorable interest rate
swaps.
Initially, borrowings under the Senior Credit Facility are subject to a
maximum Senior Debt to Total Capital ratio, as defined, of 50%. This ratio is
increased to 55% if certain specified operating benchmarks are achieved. In
addition, the Company must comply with certain financial and operating
covenants. The financial covenants include various debt to equity, debt to
EBITDA, interest coverage, and fixed charge coverage ratios, as defined in the
Senior Credit Facility. The operating covenants include minimum subscribers,
minimum aggregate service revenue, minimum coverage of population and maximum
capital expenditure thresholds. As of December 31, 1998 and June 30, 1999
(unaudited), the Company was in compliance with these covenants.
The Company may utilize the Expansion Facility as long as the Company is not
in default of the Senior Credit Facility and is in compliance with each of the
financial covenants. However, none of the lenders are required to participate
in the Expansion Facility.
The Senior Credit Facility is collateralized by substantially all of the
assets of the Company. In addition, the Senior Credit Facility has been
guaranteed by the Company's subsidiaries and shall be guaranteed by
subsequently acquired or organized domestic subsidiaries of the Company.
Lucent Note Agreements
In May 1998, the Company entered into a Note Purchase Agreement (the Lucent
Note Agreement) with Lucent Technologies, Inc. (Lucent) which provides for the
issuance of increasing rate 8.5% Series A (the Series A Notes) and 10.0% Series
B (the Series B Notes) junior subordinated notes (the Subordinated Notes) with
an aggregate face value of $80,000,000. The aggregate face value of the
Subordinated Notes shall decrease dollar for dollar, upon the occurrence of
certain events as defined in the Lucent Note Agreement. The proceeds of the
Subordinated Notes are to be used to develop the Company's network in certain
designated areas. As of December 31, 1998, the Company had $10,460,400
outstanding under the Series A Notes. As of June 30, 1999, the Company had
$41,665,925 (unaudited) outstanding under the Series A Notes. During the six
months ended June 30, 1999, the Company borrowed and repaid $40,000,000 on the
Lucent Series B Notes plus $227,778 of accrued interest. Interest expense for
the year ended December 31, 1998 and for the six months ended June 30, 1999 was
$460,000 and $1,205,525 (unaudited), respectively.
The Series A and Series B Notes will not amortize and will have a maturity
date six months after the final maturity of the Company's high yield debt
offering, but in no event later than May 1, 2012. The Series A Notes will have
a mandatory redemption at par plus accrued interest from the proceeds of a
subsequent equity offering to the extent the net proceeds exceed an amount
identified in the Lucent Note Agreement. If the Series A Notes and Series B
Notes are not redeemed in full by January 2001 and January 2000, respectively,
the interest rate on each note will increase by 1.5% per annum on January 1.
However, the interest rate applicable to the Subordinated Notes shall not
exceed 12.125%. Interest payable on the Series A Notes and the Series B Notes
on or prior to May 11, 2004 shall be payable in additional Series A and Series
B Notes. Thereafter, interest shall be paid in arrears in cash on each six
month and yearly anniversary of the Series A and Series B closing date or, if
cash interest payments are prohibited under the Senior Credit Facility and/or
the Senior Subordinated Discount Notes, in additional Series A and Series B
Notes. As of December 31, 1998, interest accrued under the Series A Notes of
$460,400 has been included in long-term debt. As of June 30, 1999, interest
accrued under the Series A Notes of $1,665,925 (unaudited) has been included in
long-term debt.
F-17
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
The Company may redeem the Subordinated Notes held by Lucent or any of its
affiliates at any time. The Series A Notes that are not held by Lucent or any
of its affiliates may be redeemed by the Company prior to May 2002 and after
May 2007. The Series B Notes that are not held by Lucent or any of its
affiliates may be redeemed by the Company prior to May 2000 and after May 2005.
Any redemption after May 2007, in the case of the Series A Notes, and May 2005,
in the case of the Series B Notes, shall be subject to an interest rate
premium, as specified. All of the outstanding notes under the Lucent Note
Agreement as of December 31, 1998 and June 30, 1999 are held by Lucent. The
Company must comply with certain operating covenants. As of December 31, 1998
and June 30, 1999, the Company was in compliance with these operating
covenants.
In addition, Lucent has agreed to make available up to an additional
$80,000,000 of junior subordinated vendor financing in amounts up to 30% of the
value of the equipment, software and services provided by Lucent in connection
with any additional markets the Company acquires, subject to certain conditions
as specified (the Vendor Expansion Facility). The expiration date for any notes
issued pursuant to the Vendor Expansion Facility is the date which is six
months after the scheduled maturity of the Notes, subject to mandatory
prepayment if certain future events occur.
U.S. Government financing
As of December 31, 1998 and June 30, 1999, the Company owes the U.S.
Government $9,192,938 and $20,743,584 (unaudited), less a discount of
$1,268,272 and $3,551,530 (unaudited), respectively, for the acquisition of PCS
licenses in New Orleans, Memphis, Beaumont and Little Rock obtained during the
1997 F-Block auction. The terms of the notes include: an interest rate of
6.25%, quarterly interest payments which commenced in July 1998 and continue
for the one year thereafter, then quarterly principal and interest payments for
the remaining 9 years. The promissory notes are collateralized by the
underlying PCS licenses.
During the six months ended June 30, 1999, the Company completed the
acquisition of additional PCS licenses from Digital PCS, Inc. and Wireless
2000, Inc. (see Note 7). As part of these acquisitions, the Company assumed
additional U.S. Government financing with the FCC amounting to $11,550,646,
less a discount of $2,396,215. The terms of the notes include an interest rate
of 6.125% for notes assumed from Digital PCS, Inc. and 7.00% for notes assumed
from Wireless 2000, Inc., quarterly interest payments for a two-year period and
then quarterly principal and interest payments for the remaining eight years.
These notes are net of a discount of $1,268,272, and $3,551,530 (unaudited)
as of December 31, 1998 and June 30, 1999, respectively. The notes were
discounted using management's best estimate of the prevailing market interest
rate at the time of issuance of 10.25%.
Notes payable to stockholders
In July 1996, the Company issued $498,750 of subordinated promissory notes
to two stockholders. The notes bore interest at a rate of 10%, compounded semi-
annually, and were due in full in July 2002. In April 1997, these notes were
converted into 50 shares of Series A preferred stock.
In December 1997, the Company issued various promissory notes totaling
$2,808,500 to stockholders. The notes bore interest at a rate of 6% and were
converted into mandatorily redeemable preferred stock of the Company in July
1998. The notes were discounted using management's best estimate of the
prevailing market interest rate at the time of issuance of 10.25%. The effect
on the Company's 1997 financial statements of discounting these notes was not
material.
F-18
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
From January 1, 1998 to June 30, 1998, the Company borrowed approximately
$22,491,500 in the form of promissory notes from existing and prospective
stockholders to satisfy the working capital needs of the Company. The
promissory notes bore interest at the rate of 6.25% per annum compounded
quarterly and were payable in one lump sum on August 31, 1998. In July 1998,
these notes were converted to mandatorily redeemable preferred stock of the
Company (see Note 10) in connection with the AT&T Transaction.
As of December 31, 1998, minimum required annual principal repayment
(undiscounted) under all of the Company's outstanding debt obligations were as
follows:
<TABLE>
<S> <C>
1999............................................................ $ --
2000............................................................ 450,719
2001............................................................ 944,470
2002............................................................ 1,004,897
2003............................................................ 1,631,691
Thereafter...................................................... 291,070,238
------------
$295,102,015
============
</TABLE>
6. AT&T Transaction
In January 1998, the Company entered into a Securities Purchase Agreement
(the Securities Purchase Agreement) with AT&T Wireless PCS, Inc. and TWR
Cellular, Inc. (both subsidiaries of AT&T Corporation and collectively referred
to as AT&T PCS), the stockholders of Holding and various venture capital
investment firms (the Cash Equity Investors). The Securities Purchase Agreement
provides the Company will be a provider of wireless mobility services in its
licensed regions utilizing the AT&T brand name.
Upon the receipt of FCC approval in July 1998, the Company finalized the
transaction contemplated in the Securities Purchase Agreement (the AT&T
Transaction). As a result, the Company (i) issued preferred stock and paid AT&T
$21,000,000 in exchange for 20 MHz PCS licenses with a fair value of
$94,850,000 and certain operating agreements with AT&T for exclusivity, network
membership, long distance and roaming with a fair value of $27,050,000; (ii)
issued preferred and common stock for 100% of the outstanding ownership
interests in Holding, which includes 10 MHz PCS licenses which was recorded at
historical cost; and (iii) issued preferred and common stock for a cash
commitment from the Cash Equity Investors of $128,000,000 to be paid over a
three year term (see Note 10) plus an additional $5,000,000 upon the closing of
the Digital PCS, Inc. transaction (see Note 7).
The general terms of the operating agreements with AT&T are summarized
below:
. AT&T Exclusivity: The Company will be AT&T's exclusive facilities-based
provider of mobile wireless telecommunications services within the
Company's BTAs for an initial ten year period. This agreement will
automatically renew for a one-year term and then operate on a year-to-
year basis unless one party terminates at least ninety (90) days prior
to the end of any one-year term.
The Company has determined the fair value of this agreement to be
$11,870,000 and is amortizing this value over the initial 10 year term.
. Network Membership License Agreement: The Network Membership License
Agreement (the License Agreement) defines that AT&T will make available
to the Company use of the AT&T logo and the right to refer to itself as
a "Member of the AT&T Wireless Network" to market its PCS services.
Through the use of these rights, the Company expects to participate in
and benefit from AT&T
F-19
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
promotional and marketing efforts. The License Agreement has an initial
five-year term with a five-year renewal term if both the Company and
AT&T elect to renew at least ninety 90 days prior to the expiration of
the initial term.
The Company has determined the fair value of this agreement to be
$8,480,000 and is amortizing this value over the initial five year term.
. Intercarrier Roamer Services Agreement: AT&T and the Company have
entered into a twenty-year reciprocal roaming agreement provided that
their customers who own tri-mode phones will roam on the other's mobile
wireless systems at commercially reasonable rates to the extent
commercially and technologically feasible. Thereafter, this agreement
shall renew automatically on a year-to-year basis unless either the
Company or AT&T terminates this agreement by written notice at least 90
days prior to the conclusion of the original or any subsequent term.
After ten years, this agreement may be terminated by the Company or AT&T
at any time upon 90 days prior written notice.
The Company has determined the value of this roaming agreement to be
$3,500,000 and is amortizing this value over the initial 10 year term.
. Long Distance Agreement: The long distance agreement provides that AT&T
will be the exclusive provider for long distance services to the
Company's customers within the Company's licensed regions for an initial
three year period. The long distance agreement requires that the Company
meet a minimum traffic volume commitment during the term of the
agreement. If the Company fails to meet such volume commitments, the
Company must pay to AT&T the difference between the expected fee based
on the volume of the commitment and the fees based on actual volume.
The Company had determined the fair value of this agreement to be
$3,200,000 and is amortizing this value over the initial three year
term.
Triton PCS, Inc. (Triton), Tritel Communications (Tritel), and the Company
have adopted a common brand, SunCom, which is co-branded with equal emphasis
with the AT&T brand name and logo. On April 16, 1999, Triton, Tritel and
TeleCorp Communications formed a new company, Affiliate License Co., L.L.C.,
to own, register and maintain the marks SunCom, SunCom Wireless and other
SunCom and Sun formative marks (SunCom Marks) and to license the SunCom marks
to Triton, Tritel and the Company. Triton, Tritel and TeleCorp Communications
each have a 33% membership interest in Affiliate License Co., L.L.C. On April
16, 1999, Triton entered into an agreement to settle a potential dispute
regarding prior use of the SunCom brand. In connection with this settlement,
Triton agreed to pay $975,000 to acquire the SunCom Marks which were
contributed to Affiliate License Co., L.L.C. The Company paid $325,000 in
royalty payments to reimburse Triton for the contributed SunCom marks.
7. Acquisitions
On April 20, 1999, the Company completed the acquisition of 10 MHz PCS
licenses covering the Baton Rouge, Houma, Hammond and Lafayette, Louisiana
BTA's from Digital PCS, Inc. The total purchase price of $5,604,380 was
comprised of $2,334,819 of mandatorily redeemable preferred stock and common
stock of the Company, the assumption of U.S. Government financing with the FCC
of $4,101,455, less a discount of $608,941, and $286,556 in cash as
reimbursement to Digital PCS, Inc., for interest due to the FCC incurred prior
to close and legal costs. The entire purchase price has been allocated to the
PCS license.
F-20
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
As a result of completing the transaction with Digital PCS, Inc., the Cash
Equity Investors have irrevocably committed to contribute $5,000,000 in
exchange for mandatorily redeemable preferred stock and common stock over a two
year period from the close of this transaction. As of June 30, 1999 the Company
has received $2,200,000 of the $5,000,000 commitment.
On May 24, 1999, the Company sold mandatorily redeemable preferred stock and
preferred stock to AT&T for $40,000,000. On May 25, 1999, the Company acquired
from AT&T 20 MHz PCS licenses covering the San Juan MTA, 27 constructed cell
sites, a switching facility, leases for additional cell sites, the extension of
the Network Membership License Agreement, Long Distance Agreement, Intercarrier
Roamer Services Agreement and AT&T Exclusivity Agreement and the reimbursement
of AT&T for microwave relocation costs, salary and lease payments (the Puerto
Rico Transaction) incurred prior to acquisition. The total purchase price of
this asset acquisition was $99,694,055 in cash. In addition, the Company
incurred legal fees of $252,340 related to this acquisition. The purchase price
has been allocated to the assets acquired, subject to adjustment, based upon
their estimated fair value as follows:
<TABLE>
<S> <C>
PCS licenses................................................... $70,421,295
Intangible assets--AT&T Agreements............................. 17,310,000
Cell sites, site acquisition, switching facility assets, and
other assets.................................................. 9,015,100
Microwave relocation costs..................................... 3,200,000
-----------
$99,946,395
===========
</TABLE>
As a result of completing this transaction, the Company's available
borrowings under the Lucent Note Agreement (see Note 5) increased by
$15,000,000 ($7,500,000 of Series A and $7,500,000 of Series B) and certain
Cash Equity Investors committed $39,996,600 in cash in exchange for mandatorily
redeemable preferred and common stock. The Cash Equity Investors cash
commitment of $39,996,600 will be funded over a three year period from the
close of this transaction. As of June 30, 1999, the Company received
$11,998,980 of this cash commitment. As a part of obtaining this additional
preferred and common stock financing, the Company paid $2,000,000 to a Cash
Equity Investor upon the closing of the transaction. In addition, certain
officers, the Chief Executive Officer and the Executive Vice President and
Chief Financial Officer of the Company were issued fixed and variable awards of
5,244 and 755,400 restricted shares of mandatorily redeemable Series E
preferred stock and Class A common stock, respectively, in exchange for their
interest in Puerto Rico Acquisition Corporation. Puerto Rico Acquisition
Corporation was a special purpose entity wholly-owned by the Company's Chief
Executive Officer and Executive Vice President and Chief Financial Officer. The
fixed awards typically vest over a five-year period. The variable awards vest
based upon certain future events taking place, such as build-out milestone POP
coverage, the completion of our initial public offering and other events. The
estimated fair value of these shares has been recorded as deferred compensation
and is being amortized over the related vesting periods. Upon the occurrence of
these future events the Company will remeasure the variable awards and record
compensation expense, deferred compensation expense and additional paid-in-
capital.
On June 2, 1999 the Company acquired from Wireless 2000, Inc. 15 MHz PCS
licenses in the Alexandria, Lake Charles and Monroe, Louisiana BTAs. The total
purchase price of $7,192,174 was comprised of $370,810 of mandatorily
redeemable preferred stock and common stock of the Company, the assumption of
U.S. Government financing with the FCC of $7,449,190, less a discount of
$1,021,621, and $649,939 in cash as reimbursement of microwave relocation costs
and reimbursement of FCC interest and legal costs. The purchase price has been
allocated to the assets acquired, subject to adjustment, based upon their
estimated fair value as follows:
<TABLE>
<S> <C>
PCS licenses..................................................... $6,992,174
Microwave relocation costs....................................... 200,000
----------
$7,192,174
==========
</TABLE>
F-21
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
8. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
Holding
Holding's authorized capital stock consisted of 6,000 shares of no par value
mandatorily redeemable Series A preferred stock, 125,000 shares of no par value
Class A common stock, 175,000 shares of no par value Class B common stock and
175,000 shares of no par value Class C common stock. This capital stock was in
existence during 1996, 1997, and through July 1998, the closing of the AT&T
Transaction, at which time Holding became a wholly-owned subsidiary of the
Company. Subsequent to the AT&T Transaction, the authorized and outstanding
shares of Holding were cancelled and replaced with 1,000 authorized shares of
common stock of which 100 shares were issued to the Company.
TeleCorp
On May 14, 1999, TeleCorp restated its Certificate of Incorporation. The
Restated Certificate of Incorporation provides the Company with the authority
to issue 202,996,000 shares of stock, consisting of the following:
<TABLE>
<CAPTION>
Par Shares
Preferred Stock Value authorized
- --------------- ----- ----------
<S> <C> <C>
Mandatorily
redeemable Series
A................. $0.01 100,000
Mandatorily
redeemable Series
B................. $0.01 200,000
Mandatorily
redeemable Series
C................. $0.01 215,000
Mandatorily
redeemable Series
D................. $0.01 50,000
Mandatorily
redeemable Series
E................. $0.01 30,000
Series F........... $0.01 5,000,000
---------
Total............ 5,595,000
=========
</TABLE>
<TABLE>
<CAPTION>
Par Shares
Common Stock Value authorized
- ------------------ ----- -----------
<S> <C> <C>
Senior............ $0.01 7,000,000
Class A........... $0.01 95,000,000
Class B........... $0.01 95,000,000
Class C tracked... $0.01 100,000
Class D tracked... $0.01 300,000
Voting
Preference....... $0.01 1,000
-----------
Total........... 197,401,000
===========
</TABLE>
F-22
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
The following schedules represents the transactions that took place with
respect to Holding's Mandatorily redeemable preferred stock and common stock
for the period from July 29, 1996 (date of inception) to December 31, 1998.
<TABLE>
<CAPTION>
Series A
preferred stock
------------------
Shares Amount
------ -----------
<S> <C> <C>
Mandatorily redeemable preferred stock
Initial capitalization for cash............................. 750 $ 7,500,000
Accretion of preferred stock dividends...................... -- 288,959
---- -----------
Balance, December 31, 1996.................................. 750 7,788,959
Issuance of preferred stock for cash........................ 150 1,500,000
Accretion of preferred stock dividends...................... -- 725,557
Conversion of promissory note to preferred stock............ 50 498,750
Noncash redemption of equity interests (see Note 13)........ (583) (6,368,926)
---- -----------
Balance, December 31, 1997.................................. 367 4,144,340
Accretion of preferred stock dividends...................... -- 224,484
Recapitalization of Holding................................. (367) (4,368,824)
---- -----------
Balance, December 31, 1998.................................. -- $ --
==== ===========
</TABLE>
<TABLE>
<CAPTION>
Class A Class B Class C
common stock common stock common stock Common stock
-------------- -------------- --------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount Total
------ ------ ------ ------ ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock
Initial capitalization
for cash............... 8,750 $2,000 -- $-- 25,520 $-- -- $-- $2,000
Issuance of common
stock.................. 3,750 -- 5,104 -- -- -- -- -- --
------ ------ ------ ---- ------- ---- ---- ---- ------
Balance, December 31,
1996................... 12,500 2,000 5,104 -- 25,520 -- -- -- 2,000
Issuance of common stock
for cash............... -- -- -- -- 6,875 -- -- -- --
Noncash redemption of
equity Interests (See
Note 13)............... (7,666) (1,144) (3,130) -- (19,868) -- -- -- (1,144)
------ ------ ------ ---- ------- ---- ---- ---- ------
Balance, December 31,
1997................... 4,834 856 1,974 -- 12,527 856
Recapitalization of
Holding................ (4,834) (856) (1,974) -- (12,527) -- 100 -- (856)
Elimination of 100% of
equity Interests in
Holding................ -- -- -- -- -- -- (100) -- --
------ ------ ------ ---- ------- ---- ---- ---- ------
Balance, December 31,
1998................... -- $ -- -- $-- -- $-- -- $-- $ --
====== ====== ====== ==== ======= ==== ==== ==== ======
</TABLE>
F-23
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
The following schedule represents the transactions that took place with
respect to TeleCorp's mandatorily redeemable preferred stock, Series F
preferred stock and common stock for the period July 1998 to June 30, 1999:
<TABLE>
<CAPTION>
Series A Series C Series D Series E
preferred stock Preferred stock preferred stock preferred stock
------------------- -------------------- ------------------ ------------------
Shares Amount Shares Amount Shares Amount Shares Amount Total
------ ------------ ------- ------------ ------ ----------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mandatorily redeemable
preferred stock
Issuance of preferred
stock to AT&T PCS for
licenses and AT&T
Agreements............. 66,723 $ 66,723,000 -- $ -- 34,267 $34,143,639 -- $ -- $100,866,639
Issuance of preferred
stock to Cash Equity
Investors, net of
issuance costs of
$1,027,695............. -- -- 128,000 126,847,780 -- -- -- -- 126,847,780
Accretion of preferred
stock dividends........ -- 3,039,603 -- 3,818,827 -- 945,780 -- 541,038 8,345,248
Noncash issuance of
restricted stock....... -- -- -- -- -- -- 5,505 5,505 5,505
Repurchase of restricted
stock for cash......... -- -- -- -- -- -- (784) (792) (792)
Noncash issuance of
preferred stock for
equity of Holding...... -- -- 7,348 4,334,276 -- -- 14,156 10,215 4,344,491
------ ------------ ------- ------------ ------ ----------- ------ ---------- ------------
Balance, December 31,
1998................... 66,723 $ 69,762,603 135,348 $135,000,883 34,267 $35,089,419 18,877 $ 555,966 $240,408,871
Issuance of preferred
stock for cash, net of
issuance costs of
$2,500,000............. 30,750 30,454,218 50,473 47,844,985 11,230 10,499,516 -- -- 88,798,719
Issuance of preferred
stock for PCS licenses
operating agreements... -- -- 2,878 2,674,130 -- -- -- -- 2,674,130
Accretion of preferred
stock dividends........ -- 3,791,396 -- 4,581,221 -- 1,122,155 -- 645,028 10,139,800
Noncash issuance of
restricted stock....... -- -- -- -- -- -- 6,606 414,959 414,959
Repurchase of restricted
stock for cash......... -- -- -- -- -- -- (577) (576) (576)
------ ------------ ------- ------------ ------ ----------- ------ ---------- ------------
Balance, June 30, 1999
(unaudited)............ 97,473 $104,008,217 188,699 $190,101,219 45,497 $46,711,090 24,906 $1,615,377 $342,435,903
====== ============ ======= ============ ====== =========== ====== ========== ============
</TABLE>
F-24
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
<TABLE>
<CAPTION>
Class C Class D Voting
Series F Class A tracked tracked common preference
preferred stock common stock common stock stock common stock
----------------- -------------------- ------------- -------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Total
--------- ------- ---------- -------- ------ ------ ------- ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series F preferred and
common stock
Issuance of common stock
to Cash Equity
Investors for cash..... -- $ -- 12,148,991 $121,490 35,774 $358 267,792 $2,678 -- $-- $124,526
Issuance of preferred
stock to AT&T PCS for
licenses and AT&T
agreements............. 3,336,141 33,361 -- -- -- -- -- -- -- -- 33,361
Exchange of 100% of
equity interests in
Predecessor Company for
equity in the Company.. -- -- 2,454,195 24,541 56,072 561 7,747 77 1,000 10 25,189
Noncash issuance of
restricted stock....... -- -- 1,001,771 10,018 -- -- -- -- -- -- 10,018
Repurchase of restricted
stock for cash......... -- -- (178,794) (1,787) -- -- -- -- -- -- (1,787)
--------- ------- ---------- -------- ------ ---- ------- ------ ----- ---- --------
Balance, December 31,
1998................... 3,336,141 $33,361 15,426,163 $154,262 91,846 $919 275,539 $2,755 1,000 $ 10 $191,307
Issuance of common stock
and preferred stock for
cash................... 1,098,000 10,980 5,047,381 50,473 -- -- -- -- -- -- 61,453
Issuance of common stock
for PCS licenses
operating agreements... -- -- 279,963 2,814 -- -- -- -- -- -- 2,814
Noncash issuance of
restricted stock....... -- -- 1,067,158 10,658 -- -- -- -- -- -- 10,658
Repurchase of restricted
stock for cash......... -- -- (131,646) (1,317) -- -- -- -- -- -- (1,317)
--------- ------- ---------- -------- ------ ---- ------- ------ ----- ---- --------
Balance, June 30, 1999
(unaudited)............ 4,434,141 $44,341 21,689,019 $216,890 91,846 $919 275,539 $2,755 1,000 $ 10 $264,915
========= ======= ========== ======== ====== ==== ======= ====== ===== ==== ========
</TABLE>
F-25
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
There are no issued or outstanding shares of Series B preferred stock,
Senior common stock or Class B common stock as of June 30, 1999.
The conversion features and conversion prices of the Company's issued stock
are summarized below:
<TABLE>
<CAPTION>
Convertible Security Convertible Into Conversion Price
- -------------------- ---------------- ----------------
<S> <C> <C>
Series A preferred stock After July 2006, at the The Series A conversion rate is equal to
holders' option, into the liquidation preference of the Series A
Class A common stock preferred stock on the conversion date
divided by the market price of the Class A
common stock on the conversion date.
Series C preferred stock At the option of the The liquidation preference of the Series C
Company at the IPO date preferred stock divided by the IPO price.
into either Class A or B
common stock
Series D and Series F If Series C preferred The liquidation preference divided by the
preferred stock stock is converted then IPO price.
automatically at the IPO
date into Senior common
stock
Series E preferred stock At the option of the The liquidation preference of the Series E
Company at the IPO date preferred stock divided by the IPO price.
into either Class A or
Class B common stock
Series F preferred stock At the holders' option, One share of Series F preferred stock or
and Senior common stock into Class A, Class B or Senior common stock for one share of either
Class D common stock, Class A, Class B or Class D common stock.
depending upon the
occurrence of certain
defined events
Class A common stock At the holders' option One share of Class B common stock for one
into Class B common share of Class A common stock.
stock
Class C tracked common Subject to FCC One share of Class A or Class B common
stock constraints and Board stock for one share of Class C tracked
approval, at the common stock.
holders' option and by
affirmative vote of at
least 66 2/3% of Class A
common stock into Class
A or Class B common
stock
Class D tracked common Subject to FCC One share of Class A or Class B common
stock constraints and Board stock for one share of Class D tracked
approval, at the common stock.
holders' option and by
affirmative vote of at
least 66 2/3% of Class A
common stock into Class
A or Class B common
stock
</TABLE>
F-26
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
The conversion features and conversion prices of the Company's issued stock
are summarized below:
Liquidation rights
In the event of any liquidation, dissolution or winding up of the Company,
as defined, the stockholders of the Company are entitled to liquidation
preferences as follows:
<TABLE>
<CAPTION>
Order of Distribution Stock Classification Distribution Preference
- --------------------- -------------------- -----------------------
<S> <C> <C>
First Series A and Series B $1,000 per share plus accrued and unpaid
preferred stock dividends.
Second Series C and Series D Series C: actual paid-in capital per share
preferred stock plus accrued and unpaid dividends plus
interest of 6% per annum on the actual
paid-in capital, compounded quarterly, less
amount of dividends declared and paid.
Series D: $1,000 per share plus accrued and
unpaid dividends plus an amount equal to
interest on $1,000 per share at a rate of
6% per annum, compounded quarterly, less
amount of dividends declared and paid.
Third Series E preferred stock Accrued and unpaid dividends, plus an
amount equal to interest on $1,000 per
share at 6% per annum, compounded
quarterly, less dividends declared and
paid.
Fourth Series F preferred stock and Series F preferred: $0.01 per share plus
Senior common stock accrued and unpaid dividends.
Senior common stock: The sum of the
liquidation preference of each share of
Series D and Series F preferred stock
converted in Senior common stock divided by
the aggregate number of shares of Senior
common stock issued upon conversion of
shares of Series D and Series F preferred
stock
</TABLE>
Dividends and voting rights
The holders of the Series A and Series B preferred stock are entitled to
cumulative quarterly cash dividends at an annual rate of 10% of the liquidation
preference of the then outstanding shares. The holders of the remaining shares
of preferred and common stock are entitled to dividends if and when declared.
The Class A common stock has 4,990,000 voting rights and the Voting
Preference common stock has 5,010,000 voting rights. The remaining shares of
preferred and common stock shall have no voting rights, except as provided by
law or in certain limited circumstances.
Call and Redemption features
The preferred stock is callable at the option of the Company at a price
equal to the liquidation preference on the redemption date. The Series A
preferred stock is callable thirty days after the 10th anniversary of the
issuance of such shares. The Series B preferred stock is callable at any time.
The Series C and Series D preferred stock are callable at any time, provided
that the Series C and Series D Preferred Stock are called concurrently.
The Series A, Series B, Series C, Series D and Series E preferred stock are
redeemable thirty days after the 20th anniversary of the issuance of such
shares at the option of the holder at a price equal to the liquidation
preference on the redemption date. The Series F preferred stock is not
redeemable. Pursuant to a Management
F-27
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
Agreement, the Company may redeem certain shares of Class A common stock and
Series E preferred stock held by the Company's Chief Executive Officer and
Executive Vice President (the TMC officers). For the period from the
finalization of the AT&T Transaction to December 31, 1998, the Company accreted
$8,345,248 of dividends in connection with this redemption feature.
Tracked common stock
The Class C and Class D common stock have been designated as Tracked common
stock. The holders of the Tracked common stock are entitled to a dividend, when
available, equal to the excess of the fair value of the net assets of Holding
over the aggregate par value of the outstanding shares of the Tracked common
stock. After all other preferential liquidating distributions have been made,
the holders of the Tracked common stock will be entitled to a liquidation
preference equal to the excess of the fair value of the net assets of Holding.
Participating stock
The Series F preferred stock, the Senior common stock and the Class A and B
common stock are participating stock, and the Board of Directors may not
declare dividends on or redeem, purchase or otherwise acquire for consideration
any shares of the Participating Stock, unless the Board of Directors makes such
declaration or payment on the same terms with respect to all shares of
participating stock, ratably in accordance with each class and series of
participating stock then outstanding.
9. Restricted Stock Plan
In July 1998, the Company adopted a Restricted Stock Plan (the Plan) to
attract and retain key employees and to reward outstanding performance. Key
employees selected by management may elect to become participants in the Plan
by entering into an agreement which provides for issuance of fixed and variable
units consisting of Series E mandatorily redeemable preferred stock and Class A
common stock. The fixed units typically vest over a five or six year period.
The variable units vest based upon certain events taking place, such as
buildout milestones, Pop coverage, the completion of an initial public offering
and other events. Unvested shares are forfeited upon termination of employment.
The shares issued under the Plan shall consist of units transferred to
participants without payment as additional compensation for their services to
the Company. The total number of units that may be awarded to key employees
shall not exceed 7,085 units or a defined number of shares of Series E
preferred stock and Class A common stock, respectively, as determined upon
award. Any units not granted on or prior to July 17, 2003 shall be awarded to
two officers of the Company. Each participant has voting, dividend and
distribution rights with respect to all shares of both vested and unvested
common stock. Prior to the Class A shares becoming publicly traded, the Company
retains the right of first offer to buy the employees' vested shares at the
offer price. After the Class A shares become publicly traded, the right of
first offer will no longer exist for the Series E preferred shares. In addition
the shares contain rights of inclusion and first negotiation. The Company may
repurchase unvested shares, and under certain circumstances, vested shares of
participants whose employment with the Company terminates. The repurchase price
is equal to $0.01 per share.
F-28
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Series E Estimated Estimated
preferred fair value Class A fair value
stock per share common stock per share
--------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Shares awarded................. 5,505 $ 1.00 1,001,771 $ .01
Repurchases.................... (784) -- (178,794) --
----- ---------
Balance, December 31, 1998..... 4,721 $ 1.00 822,977 $ .01
Shares awarded................. 2,542 $ 52.00 538,388 $ .02
Repurchases.................... (577) -- (131,646) --
----- ---------
Balance, June 30, 1999
(unaudited)................... 6,686 $1.00-$52.00 1,229,719 $.01-.02
===== =========
</TABLE>
Deferred compensation and compensation expense related to the issuance of
restricted stock to employees, based on the estimated fair value of the
preferred and common stock, was immaterial for the year ended December 31, 1998
and for the six months ended June 30, 1999.
Some of the awards granted under the Plan are variable awards. When it is
probable the future events will occur, the Company determines the fair value of
the variable awards of the Series E preferred stock and Class A common stock,
subject to a final measurement date upon the occurrence of defined events.
Outstanding fixed awards and variable awards as of December 31, 1998 and June
30, 1999 (unaudited) for each class of stock are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
<S> <C> <C>
Series E preferred stock: (unaudited)
Fixed awards...................................... 3,664 5,280
Variable awards................................... 1,057 1,406
------- -----------
Total Series E awards........................... 4,721 6,686
======= ===========
Class A common stock:
Fixed awards...................................... 373,011 548,349
Variable awards................................... 449,966 681,370
------- -----------
Total Class A awards............................ 822,977 1,229,719
======= ===========
</TABLE>
10. Preferred and Common Stock Subscriptions Receivable
In connection with the AT&T Transaction described in Note 6 and the
acquisitions described in Note 7, the Company received cash commitments of
$172,996,600 from the Cash Equity Investors in exchange for Series C preferred
stock and various classes of common stock. The agreements require the Cash
Equity Investors to fund their unconditional and irrevocable obligations in
installments in accordance with the following schedules:
<TABLE>
<CAPTION>
Due Date Amount
- -------- -------------
<S> <C>
AT&T Transaction:
Initial closing (July 17, 1998).................................. $ 39,375,005
December 31, 1998................................................ 16,125,005
Second anniversary of initial closing............................ 36,250,005
Third anniversary of initial closing............................. 36,249,985
-------------
$ 128,000,000
=============
</TABLE>
F-29
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
<TABLE>
<S> <C>
===
</TABLE>
The initial contributions were provided in the form of short-term interest
bearing promissory notes (see Note 5). These notes were converted to
mandatorily redeemable preferred and common stock of the Company as partial
satisfaction of the $128,000,000 of committed contributions in connection with
the closing of the AT&T Transaction.
<TABLE>
<CAPTION>
Due Date Amount
- -------- -----------
<S> <C>
Digital PCS, Inc. Transaction:
Initial closing (April 20, 1999)................................... $ 2,200,000
July 2000.......................................................... 1,400,000
July 2001.......................................................... 1,400,000
-----------
$ 5,000,000
===========
</TABLE>
<TABLE>
<CAPTION>
Due Date Amount
- -------- ------------
<S> <C>
Puerto Rico Transaction:
Initial closing (May 24, 1999).................................... $ 11,996,600
December 31, 1999................................................. 6,000,000
March 30, 2001.................................................... 11,000,000
March 30, 2002.................................................... 11,000,000
------------
$ 39,996,600
============
</TABLE>
Through December 31, 1998, the Company received $51,999,725 of the above
committed equity and received an additional $14,196,600 (unaudited) during the
six months ended June 30, 1999 (unaudited). The Company has recorded a
preferred stock subscription receivable of $75,914,054 and $103,000,531
(unaudited) as of December 31, 1998 and June 30, 1999, respectively, as a
reduction to the mandatorily redeemable preferred stock and a common stock
subscription receivable of $86,221 and $190,990 (unaudited) as of December 31,
1998 and June 30, 1999, respectively, as a reduction to stockholders equity
(deficit) for the unpaid commitment.
11. Income Taxes
The tax effect of temporary differences which gives rise to significant
portions of the deferred tax assets as of December 31, 1997 and 1998,
respectively, are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- ------------
<S> <C> <C>
Capitalized start-up costs........................... $ 1,321,340 $ 17,599,251
Net operating losses................................. 145,710 3,634,809
Depreciation and amortization........................ -- 288,985
Deferred rent........................................ -- 74,504
Capitalized interest................................. -- (917,107)
Other................................................ (4,220) 174,952
----------- ------------
1,462,830 20,855,394
Less valuation allowance............................. (1,462,830) (20,855,394)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
F-30
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
For federal income tax purposes, start-up costs will be amortized over five
years once active business operations commence. There may be a limitation on
the annual utilization of net operating losses and capitalized start-up costs
as a result of certain ownership changes that have occurred since the Company's
inception. The net operating losses start expiring in 2017. A valuation
allowance is recognized if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax asset will
not be realized. Based on the Company's financial results, management has
concluded that a full valuation allowance for all of the Company's deferred tax
assets is appropriate.
12. Commitments
In May 1998, the Company entered into a vendor procurement contract (the
Vendor Procurement Contract) with Lucent, pursuant to which the Company may
purchase up to $285,000,000 of radio, switching and related equipment and
services for the development of the Company's wireless communications network.
Through December 31, 1998 and June 30, 1999, the Company has purchased
approximately $90,900,000 and $130,900,000 (unaudited), respectively, of
equipment and services from Lucent.
The Company has operating leases primarily related to retail store
locations, distribution outlets, office space, and rent for the Company's
network build-out. The terms of some of the leases include a reduction of
rental payments and scheduled rent increases at specified intervals during the
term of the leases. The Company is recognizing rent expense on a straight-line
basis over the life of the lease, which establishes deferred rent on the
balance sheet. As of December 31, 1998, the aggregate minimum rental
commitments under non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
1999.................................. $10,755,694
2000.................................. 10,752,666
2001.................................. 10,507,474
2002.................................. 10,369,758
2003.................................. 8,520,560
Thereafter............................ 23,139,323
-----------
Total............................... $74,045,475
===========
</TABLE>
Rental expense, which is recorded ratably over the lease terms, was
approximately $2,000, $157,000, and $3,193,000 for the period ended December
31, 1996 and for the years ended December 31, 1997 and 1998, respectively.
The Company has entered into a series of agreements for software licenses,
consulting, transition support and maintenance with various vendors. The total
future commitments under the agreements are approximately $6,000,000 as of
December 31, 1998.
The Company has entered into letters of credit to facilitate local business
activities. The Company is liable under the letters of credit for
nonperformance of certain criteria under the individual contracts. The total
amount of outstanding letters of credit was $1,425,000 at December 31, 1998.
The outstanding letters of credit reduce the amount available to be drawn under
the Senior Credit Facility (see Note 5). The Company is unaware of any events
that would have resulted in nonperformance of a contract during the year ended
December 31, 1998.
13. Related Parties
The Company utilizes the services of a law firm in which the Executive Vice
President and Chief Financial Officer of the Company was also a partner. The
Company incurred expenses of approximately
F-31
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
$110,000, $250,000, $2,123,000 and $1,362,218 (unaudited) for the period ended
December 31, 1996, for the years ended December 31, 1997 and 1998 and for the
six months ended June 30, 1999, respectively, for legal services. As of
December 31, 1997, 1998 and June 30, 1999, the Company owed the law firm
$70,464, $160,000 and $798,676 (unaudited), respectively. Subsequent to
December 31, 1997, the individual resigned from the law firm but continues as
special counsel.
The Company receives site acquisition, construction management, program
management, microwave relocation, and engineering services pursuant to a Master
Services Agreement with WFI/Entel Technologies, Inc. (Entel). The Chief
Executive Officer and Executive Vice President and Chief Financial Office of
the Company were formerly stockholders and senior officers of Entel. Fees for
the above services are as follows: $12,000 per site for site acquisition
services, $7,000 per site for construction management services, $9,000 per site
for program management and $1,100,000 for microwave relocation services for all
of the Company's existing regions. Fees for engineering services are based upon
Entel's customary hourly rates. For the period ended December 31, 1996 and for
the years ended December 31, 1997 and 1998 and for the six months ended June
30, 1999, the Company paid $30,829, $1,939,795, $30,719,865 and $31,295,020
(unaudited), respectively, to Entel for these services. As of December 31, 1997
and 1998 and June 30, 1999, the Company owed Entel $170,596, $21,177,516 and
$2,246,278 (unaudited), respectively. Subsequent to December 31, 1997, the
Chief Executive Officer and Executive Vice President sold 100% of their
interests in Entel.
In April 1997, Holding entered into an agreement to transfer PCS licenses,
operating assets, liabilities and U.S. Government financing, for the Houston,
Tampa, Melbourne and Orlando BTAs to four newly-formed entities created by
Holding's existing stockholder group: THC of Houston, Inc.; THC of Tampa, Inc.;
THC of Melbourne, Inc.; and THC of Orlando, Inc. (the THC entities). These
assets and liabilities were transferred in exchange for investment units of the
newly-formed THC entities which consisted of Class A, B and C common stock and
Series A preferred stock in August 1997. The carrying amount of the total
assets and liabilities transferred was $15,678,814 and $12,034,212,
respectively. Simultaneously, Holding reacquired shares of its preferred and
common stock in a $6,370,070 partial stock redemption through the exchange of
the investment units in the newly-formed companies of $3,644,602, which
represented the net difference between the cost of the assets and liabilities
transferred and the issuance of an aggregate of $2,725,468 of notes payable to
those newly-formed THC entities. Summarized below is a reconciliation of this
activity:
<TABLE>
<S> <C>
PCS licenses and other assets....... $ 15,678,814
U.S. Government financing and other
liabilities........................ (12,034,212)
------------
Investment units in the THC enti-
ties............................... 3,644,602
Notes payable to the THC entities... 2,725,468
------------
Partial preferred and common stock
redemption......................... $ 6,370,070
============
</TABLE>
As a result of this transfer, Holding no longer retains any ownership
interest in the THC entities. Because this transaction was nonmonetary in
nature and occurred between entities with the same stockholder group, the
transaction was recorded at historical cost. Subsequent to the transfer, the
Company reduced the notes payable by $652,895, which represented certain costs
incurred by the Company on behalf of the THC entities for the year ended
December 31, 1997 pursuant to Transfer Agreements and Management Agreements.
The combined amounts owed THC Houston, Inc., THC Tampa, Inc., THC Melbourne,
Inc., and THC Orlando, Inc. of $2,072,573 as of December 31, 1997 were repaid
in full during 1998. As of December 31, 1998 and June 30, 1999, the combined
amounts owed by the Company to THC Houston, Inc., THC Tampa, Inc., THC
Melbourne, Inc., and THC Orlando, Inc. were $547,047 and $540,728 (unaudited),
respectively.
F-32
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
As of December 31, 1997, the Company had amounts payable of $824,164 to
TeleCorp WCS, Inc. (WCS), an affiliate, formerly TeleCorp Management
Corporation, Inc. The amount payable to WCS represented $1,200,000 of funds
received by the Company on behalf of WCS related to wireless communications
service licenses owned by WCS reduced by expenses and other payments owed by
WCS to the Company. The entire balance due WCS as of December 31, 1997 was
repaid during 1998.
Pursuant to a Management Agreement, TeleCorp Management Corp. (TMC) provides
assistance to the Company in the form of administrative, operational,
marketing, regulatory and general business services. For these services,
beginning in July 1998, the Company pays a management fee to TMC of $550,000
per year plus reimbursement of certain business expenses, payable in equal
monthly installments, plus an annual bonus. The management agreement has a
five-year term, but may be terminated by the Company upon the occurrence of
certain defined events. TMC may terminate the agreement at any time with proper
notice. The Officers of TMC own all of the ownership interest in TMC. For the
year ended December 31, 1998, the Company paid approximately $250,000 to TMC
for these services plus $282,500 in bonuses to TMC officers. For the six months
ended June 30, 1999, the Company paid approximately $685,945 (unaudited) to TMC
for these services.
The Company has entered into a Master Site Lease Agreement with American
Towers Inc., a company partially owned by certain stockholders of the Company.
Under this arrangement American Tower provides network site leases for PCS
deployment. The Company has incurred $16,862 of and no (unaudited) expense for
the year ended December 31, 1998 and the six months ended June 30, 1999,
respectively.
14. Defined Contribution Plan
During 1998, the Company established the TeleCorp Communications, Inc.
401(k) Plan (the 401(k) Plan), a defined contribution plan in which all
employees over the age of 21 are immediately eligible to participate in the
401(k) Plan. TeleCorp Communications, Inc. is a wholly-owned subsidiary of the
Company. Under the 401(k) Plan, participants may elect to withhold up to 15% of
their annual compensation, limited to $160,000 of total compensation as
adjusted for inflation. The Company may make a matching contribution based on a
percentage of the participant's contributions. Participants vest in the
Company's matching contributions as follows: 20% after one year; 60% after two
years and 100% after three years. Total Company contributions to the 401(k)
Plan were $505,495 and $918,358 (unaudited) for the year ended December 31,
1998 and for the six months ended June 30, 1999.
15. Subsidiary Guarantee
On April 23, 1999, the Company completed the issuance and sale of 11 5/8%
Senior Subordinated Discount Notes. The Notes are fully and unconditionally
guaranteed on a joint and several basis by TeleCorp Communications, Inc., one
of the Company's wholly-owned subsidiaries. Summarized financial information of
TeleCorp, TeleCorp Communications, Inc. and non-guarantor subsidiaries as of
December 31, 1998 and June 30, 1999, and for the year ended December 31, 1998
and for the six months ended June 30, 1999 are as follows:
F-33
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
Balance Sheet Information as of December 31, 1998:
<TABLE>
<CAPTION>
TeleCorp
Communications, Inc.-- Non-Guarantor
TeleCorp Guarantor Subsidiary Subsidiaries Eliminations Consolidated
------------ ---------------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 93,046,614 $ 21,440,720 $ (2,754,493) $ -- $111,732,841
Accounts receivable.... -- -- -- -- --
Inventory.............. -- 778,235 -- -- 778,235
Intercompany
receivables........... 279,077,565 -- -- (279,077,565) --
Prepaid expenses....... -- 811,999 1,373,445 -- 2,185,444
Other current assets... 637,102 581,161 -- -- 1,218,263
------------ ------------ ------------ ------------- ------------
Total current
assets.............. 372,761,281 23,612,115 (1,381,048) (279,077,565) 115,914,783
Property and equipment,
net.................... 1,500,000 90,072,502 105,912,651 (16,531) 197,468,622
PCS licenses and
microwave relocation
costs.................. -- 12,456,838 105,650,418 -- 118,107,256
Intangible assets--AT&T
agreements............. -- -- 26,285,612 -- 26,285,612
Deferred financing
costs, net............. 8,584,753 -- -- -- 8,584,753
FCC deposit............. -- -- -- -- --
Other assets............ 4,369,680 6,944 276,062 (4,369,680) 283,006
------------ ------------ ------------ ------------- ------------
Total assets......... $387,215,714 $126,148,399 $236,743,695 $(283,463,776) $466,644,032
============ ============ ============ ============= ============
LIABILITIES, MANDATORILY
REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Due to affiliates...... $ -- $ 92,923,096 $186,154,469 $(279,077,565) $ --
Accounts payable....... 11 8,331,045 6,260,866 -- 14,591,922
Accrued expenses....... 13,403 41,644,524 53,214,335 -- 94,872,262
Microwave relocation
obligation............ -- 6,636,369 -- -- 6,636,369
Long-term debt......... -- -- -- -- --
Accrued interest....... 3,991,500 -- 499,053 -- 4,490,553
Deferred revenue....... -- -- -- -- --
------------ ------------ ------------ ------------- ------------
Total current
liabilities......... 4,004,914 149,535,034 246,128,723 (279,077,565) 120,591,106
------------ ------------ ------------ ------------- ------------
Long-term debt.......... 235,460,400 -- 7,924,666 -- 243,385,066
Microwave relocation
obligation............. -- 2,481,059 -- -- 2,481,059
Accrued expenses........ -- -- -- -- 196,063
Deferred rent........... -- -- 196,063 -- --
------------ ------------ ------------ ------------- ------------
Total liabilities.... 239,465,314 152,016,093 254,249,452 (279,077,565) 366,653,294
------------ ------------ ------------ ------------- ------------
Mandatorily redeemable
preferred stock........ 240,408,879 -- -- -- 240,408,879
Deferred compensation... -- (4,111) -- -- (4,111)
Treasury stock.......... (8) -- -- -- (8)
Preferred stock
subscriptions
receivable............. (75,914,054) -- -- -- (75,914,054)
------------ ------------ ------------ ------------- ------------
Total mandatorily
redeemable preferred
stock............... 164,494,817 (4,111) -- -- 164,490,706
------------ ------------ ------------ ------------- ------------
Series F preferred
stock.................. 33,361 -- -- -- 33,361
Common stock............ 159,733 -- -- -- 159,733
Additional paid in
capital................ -- -- 4,369,680 (4,369,680) --
Deferred compensation... -- (7,177) -- -- (7,177)
Common stock
subscriptions
receivable............. (86,221) -- -- -- (86,221)
Treasury stock.......... (1,787) -- -- -- (1,787)
Accumulated deficit..... (16,849,503) (25,856,406) (21,875,437) (16,531) (64,597,877)
------------ ------------ ------------ ------------- ------------
Total shareholders'
equity (deficit).... (16,744,417) (25,863,583) (17,505,757) (4,386,211) (64,499,968)
------------ ------------ ------------ ------------- ------------
Total liabilities and
shareholders' equity
(deficit)........... $387,215,714 $126,148,399 $236,743,695 $(283,463,776) $466,644,032
============ ============ ============ ============= ============
</TABLE>
F-34
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
Balance Sheet as of June 30, 1999 (unaudited):
<TABLE>
<CAPTION>
TeleCorp
Communications, Inc.-- Non-Guarantor
TeleCorp Guarantor Subsidiary Subsidiaries Eliminations Consolidated
------------- ---------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 165,830,722 $ (605,978) $ -- $ (13,786,916) $ 151,437,828
Accounts receivable,
net................... -- 12,999,084 13,950 -- 13,013,034
Inventory.............. -- 7,733,620 -- -- 7,733,620
Intercompany
receivables........... 609,508,087 -- -- (609,508,087) --
Prepaid expenses....... -- 686,984 1,479,276 -- 2,166,260
Other current assets... 34,088 205,139 3,847 -- 243,074
------------- ------------ ------------ ------------- -------------
Total current
assets.............. 775,372,897 21,018,849 1,497,073 (623,295,003) 174,593,816
Property and equipment,
net.................... 5,480,254 155,188,091 160,007,163 (71,094) 320,604,414
PCS licenses and
microwave relocation
costs.................. -- 85,534,649 119,540,376 -- 205,075,025
Intangible assets-AT&T
agreements............. 1,290,462 42,500 38,988,133 -- 40,321,095
Deferred financing
costs, net............. 18,684,989 -- -- -- 18,684,989
FCC deposit............. -- -- 17,516,394 -- 17,516,394
Other assets............ 4,598,101 923,655 17,803,025 (21,886,073) 1,438,708
------------- ------------ ------------ ------------- -------------
Total assets......... $ 805,426,703 $262,707,744 $355,352,164 $(645,252,170) $ 778,234,441
============= ============ ============ ============= =============
LIABILITIES, MANDATORILY
REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Due to affiliates...... $ -- $286,540,760 $322,967,327 $(609,508,087) $ --
Accounts payable....... -- 20,061,053 22,661,510 (13,786,915) 28,935,648
Accrued expenses....... 1,701,106 20,615,267 4,290,703 -- 26,607,076
Microwave relocation
obligation............ -- 5,733,393 -- -- 5,733,393
Accrued interest....... 3,815,623 -- 354,989 -- 4,170,612
Deferred Revenue....... -- 705,362 -- -- 705,362
------------- ------------ ------------ ------------- -------------
Total current
liabilities......... 5,516,729 333,655,835 350,274,529 (623,295,002) 66,152,091
------------- ------------ ------------ ------------- -------------
Long-term debt.......... 601,495,246 -- 17,192,054 -- 618,687,300
Microwave relocation
obligation............. -- 2,470,072 -- -- 2,470,072
Accrued expenses........ -- -- 3,939,688 -- 3,939,688
Deferred rent........... -- -- 463,734 -- 463,734
------------- ------------ ------------ ------------- -------------
Total liabilities.... 607,011,975 336,125,907 371,870,005 (623,295,002) 691,712,885
------------- ------------ ------------ ------------- -------------
Mandatorily redeemable
preferred stock........ 342,435,903 -- -- -- 342,435,903
Deferred compensation... (279,716) (4,111) -- -- (283,827)
Treasury stock.......... -- -- -- -- --
Preferred stock
subscriptions
receivable............. (103,000,531) -- -- -- (103,000,531)
------------- ------------ ------------ ------------- -------------
Total mandatorily
redeemable preferred
stock, net.......... 239,155,656 (4,111) -- -- 239,151,545
------------- ------------ ------------ ------------- -------------
Series F preferred
stock.................. 44,341 -- -- -- 44,341
Common stock............ 220,574 -- -- -- 220,574
Additional paid in
capital................ 86,187 -- 21,886,074 (21,886,074) 86,187
Deferred compensation... (5,956) (7,177) -- -- (13,133)
Common stock
subscriptions
receivable............. (190,990) -- -- -- (190,990)
Treasury stock.......... -- -- -- -- --
Accumulated deficit..... (40,895,084) (73,406,875) (38,403,915) (71,094) (152,776,968)
------------- ------------ ------------ ------------- -------------
Total shareholders'
equity (deficit).... (40,740,928) (73,414,052) (16,517,841) (21,957,168) (152,629,989)
------------- ------------ ------------ ------------- -------------
Total liabilities and
shareholders' equity
(deficit)........... $ 805,426,703 $262,707,744 $355,352,164 $(645,252,170) $ 778,234,441
============= ============ ============ ============= =============
</TABLE>
F-35
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
Income Statement Information as of December 31, 1998:
<TABLE>
<CAPTION>
TeleCorp
Communications, Inc.-- Non-Guarantor
TeleCorp Guarantor Subsidiary Subsidiaries Eliminations Consolidated
------------ ---------------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service revenue........ $ -- $ -- $ -- $ -- $ --
Equipment revenue...... -- 777,187 260,509 (1,037,696) --
Roaming revenue........ -- 29,231 -- -- 29,231
------------ ------------ ------------ ----------- ------------
Revenue................ -- 806,418 260,509 (1,037,696) 29,231
------------ ------------ ------------ ----------- ------------
Operating expenses:
Cost of revenue........ -- -- -- -- --
Operations and
development........... -- 5,218,225 4,675,429 (121,169) 9,772,485
Selling and
marketing............. -- 4,920,442 1,404,224 6,324,666
General and
administrative........ 974,761 16,136,799 10,027,554 (899,995) 26,239,119
Depreciation and
amortization.......... -- 458,704 1,125,160 -- 1,583,864
------------ ------------ ------------ ----------- ------------
Total operating
expense............. 974,761 26,734,170 17,232,367 (1,021,164) 43,920,134
------------ ------------ ------------ ----------- ------------
Operating loss....... (974,761) (25,927,752) (16,971,858) (16,532) (43,890,903)
Other (income) expense:
Interest expense....... 11,922,994 -- 11,269 -- 11,934,263
Interest income........ (4,426,810) (86,517) (183,906) -- (4,697,233)
Other expense.......... 21,000 4,553 1,794 -- 27,347
------------ ------------ ------------ ----------- ------------
Net loss............. (8,491,945) (25,845,788) (16,801,015) (16,532) (51,155,280)
Accretion of mandatorily
redeemable preferred
stock.................. (8,566,922) -- -- -- (8,566,922)
------------ ------------ ------------ ----------- ------------
Net loss attributable
to common equity.... $(17,058,867) $(25,845,788) $(16,801,015) $ (16,532) $(59,722,202)
============ ============ ============ =========== ============
</TABLE>
Income Statement Information as of June 30, 1999 (unaudited):
<TABLE>
<CAPTION>
TeleCorp
Communications, Inc.-- Non-Guarantor
TeleCorp Guarantor Subsidiary Subsidiaries Eliminations Consolidated
------------ ---------------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service revenue........ $ -- $ 6,232,355 $ -- $ -- $ 6,232,355
Equipment revenue...... -- 5,648,966 1,547,786 (1,547,786) 5,648,966
Roaming revenue........ -- 9,486,916 -- -- 9,486,916
------------ ------------ ------------ ----------- ------------
Revenue................ -- 21,368,237 1,547,786 (1,547,786) 21,368,237
------------ ------------ ------------ ----------- ------------
Operating expenses:
Cost of revenue........ 10,106,968 -- -- 10,106,968
Operations and
development........... -- 11,799,434 5,191,894 (1,493,224) 15,498,104
Selling and
marketing............. -- 20,610,792 313,920 -- 20,924,712
General and
administrative........ 353,592 20,669,546 1,417,749 -- 22,440,887
Depreciation and
amortization.......... 672,530 5,754,607 10,064,237 -- 16,491,374
------------ ------------ ------------ ----------- ------------
Total operating
expense............. 1,026,122 68,941,347 16,987,800 (1,493,224) 85,462,045
------------ ------------ ------------ ----------- ------------
Operating loss....... (1,026,122) (47,573,110) (15,440,014) (54,562) (64,093,808)
Other (income) expense:
Interest expense....... 16,065,007 -- 1,042,507 -- 17,107,514
Interest income........ (2,949,948) (109,680) (4,978) -- (3,064,606)
Other expense.......... 8,089 137,556 1,030 -- 146,675
------------ ------------ ------------ ----------- ------------
Net loss............. (14,149,270) (47,600,986) (16,478,573) (54,562) (78,283,391)
Accretion of mandatorily
redeemable preferred
stock.................. (9,895,700) -- -- -- (9,895,700)
------------ ------------ ------------ ----------- ------------
Net loss attributable
to common equity.... $(24,044,970) $(47,600,986) $(16,478,573) $ (54,562) $(88,179,091)
============ ============ ============ =========== ============
</TABLE>
F-36
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
December 31, 1998 Cash Flow Information:
<TABLE>
<CAPTION>
TeleCorp
Communications, Inc.--
TeleCorp Guarantor Subsidiary
------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................ $ (8,495,787) $(26,644,880)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... -- 581,120
Noncash compensation expense associated
with the issuance of restricted common
stock and preferred stock.............. -- --
Noncash interest expense associated
with Lucent notes and senior
subordinated debt...................... 460,400 --
Noncash general administrative expense
charged by affiliates.................. -- --
Amortization of deferred financing
costs.................................. 524,924 --
Amortization of discount on notes
payable................................ -- --
Changes in cash flow from operations
resulting from changes in assets and
liabilities:
Accounts receivable..................... (56,689) (472,572)
Inventory............................... -- (778,235)
Prepaid expenses........................ -- (816,020)
Other current assets.................... (580,413) (104,568)
Other assets............................ -- (6,944)
Accounts payable........................ -- 2,260,294
Accrued expenses........................ 13,414 16,211,148
Deferred rent........................... -- --
Accrued interest........................ 3,991,500 --
------------- ------------
Net cash used in operating
activities........................... (4,142,651) (9,770,657)
------------- ------------
Cash flows from investing activities:
Expenditures for network under
development, wireless network and
property and equipment................. -- (58,205,039)
Capitalized interest on network under
development and wireless network....... (227,000) --
Expenditures for microwave relocation... -- (3,339,410)
Purchase of PCS licenses................ (21,000,000)
Deposit on PCS licenses................. -- --
Partial refund of deposit on PCS
licenses...............................
------------- ------------
Net cash used in investing
activities........................... (21,227,000) (61,544,449)
------------- ------------
Cash flows from financing activities:
Proceeds from sale of mandatorily
redeemable preferred stock............. 26,661,420 --
Receipt of preferred stock subscription
receivable............................. -- --
Direct issuance costs from sale of
mandatorily redeemable preferred
stock.................................. (1,027,694) --
Proceeds from sale of common stock...... 38,305 --
Proceeds from long-term debt............ 235,000,000 --
Purchases of treasury shares............ (26) --
Payments on notes payable............... -- --
Payments of deferred financing costs.... (9,109,677) --
Proceeds from cash transfers from and
expenses paid by affiliates............ 1,064,858 121,750,000
Payments on behalf of and transfers to
affiliates............................. (134,210,920) (28,994,174)
------------- ------------
Net cash provided by financing
activities........................... 118,416,266 92,755,826
------------- ------------
Net increase in cash and cash
equivalents............................ 93,046,615 21,440,720
Cash and cash equivalents at the
beginning of period.................... -- --
------------- ------------
Cash and cash equivalents at the end of
period................................. $ 93,046,615 $ 21,440,720
============= ============
</TABLE>
F-37
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
June 30, 1999 Cash Flow Information:
<TABLE>
<CAPTION>
TeleCorp
Communications,
Inc.--Guarantor
TeleCorp Subsidiary
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (14,148,269) $ (47,553,042)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 172,448 5,754,607
Noncash compensation expense associated with
the issuance of restricted common stock and
preferred stock............................... -- --
Noncash accretion of Series E preferred stock.. -- 365,028
Noncash interest expense associated with Lucent
Notes and High Yield facility................. 8,512,801 --
Noncash general and administrative expense
charged by affiliates......................... -- --
Amortization of deferred financing costs....... 500,083 159,248
Amortization of discount on notes payable...... -- --
Changes in cash flow from operations resulting
from changes in assets and liabilities:
Accounts receivable............................ 56,689 (11,690,889)
Inventory...................................... -- (6,955,385)
Prepaid expenses............................... -- 129,036
Other current assets........................... 546,325 (100,572)
Other assets................................... (1,166,859) (216,023)
Accounts payable............................... -- 17,800,759
Accrued expenses............................... 1,687,692 (1,749,469)
Deferred rent.................................. -- --
Accrued interest............................... (451,236) --
------------- -------------
Net cash used in operating activities......... (4,290,326) (44,056,702)
------------- -------------
Cash flows from investing activities:
Expenditures for network under development,
wireless network and property and equipment... -- (96,303,039)
Capitalized interest on network under
development and wireless network.............. (3,876,641) --
Expenditures for microwave relocation.......... -- (5,138,298)
Purchase of PCS licenses....................... -- (69,690,000)
Deposit on PCS licenses........................ (28,877,743) --
Partial refund of deposit on PCS licenses...... 11,361,350 --
------------- -------------
Net cash used in investing activities......... (21,393,034) (171,131,337)
------------- -------------
Cash flows from financing activities:
Proceeds from sale of mandatorily redeemable
preferred stock............................... 60,410,929 --
Receipt of preferred stock subscription
receivable.................................... 3,740,068 --
Direct issuance costs from sale of mandatorily
redeemable preferred stock.................... (2,500,000) --
Proceeds from sale of common stock............. 5,477 --
Proceeds from long-term debt................... 397,635,000 --
Purchases of treasury shares................... (19) --
Payments on notes payable...................... (40,000,000) --
Payments of deferred financing costs........... (10,600,517) --
Proceeds from cash transfers from and expenses
paid by affiliates............................ 2,756,543 238,435,161
Payments on behalf of and transfers to
affiliates.................................... (312,980,013) (45,293,822)
------------- -------------
Net cash provided by financing activities..... 98,467,468 193,141,339
------------- -------------
Net increase in cash and cash equivalents...... 72,784,108 (22,046,700)
Cash and cash equivalents at the beginning of
period........................................ 93,046,614 21,440,720
------------- -------------
Cash and cash equivalents at the end of
period........................................ $ 165,830,722 $ (605,980)
============= =============
</TABLE>
F-38
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
16. Subsequent Events (unaudited)
Viper Wireless, Inc.
In February 1999, Viper Wireless, Inc. (Viper), was formed to participate in
the C-Block PCS license reauction for additional spectrum in most of the
Company's markets. Viper was initially capitalized for $100 and was equally-
owned by the Company's Chief Executive Officer and Executive Vice President-
Chief Financial Officer. In order to participate in the reauction, the Company
paid the FCC an initial deposit of $17,818,549, on behalf of Viper.
Simultaneously, the Company transferred this initial deposit to Viper in
exchange for an 85% ownership interest which represented a 49.9% voting
interest.
On April 15, 1999, the FCC announced Viper was the high bidder for 15 MHz
licenses in New Orleans, Houma and Alexandria, Louisiana, San Juan Puerto Rico
and Jackson, Tennessee and 30 MHz licenses in Beaumont, Texas. The total
auction price is $32,286,000 plus legal fees of $46,566. During the six months
ended June 30, 1999, the FCC refunded $11,361,351 (unaudited) of the initial
deposit; however, the Company was required to pay the FCC $11,059,194 as a
final deposit on behalf of Viper. As of and for the six months ended June 30,
1999, Viper has no financial activity other than its capitalization which
includes the transfer of the initial deposit to Viper. The Company received
final regulatory approval of the license transfer from the FCC on September 9,
1999. Upon finalization of this transaction, the Company will own 100% of
Viper. The entire purchase price has been allocated to the PCS licenses
acquired.
AT&T and certain of the Company's other stockholders have committed an
aggregate of up to approximately $32,300,000 in exchange for additional shares
of mandatorily redeemable preferred stock, Series F preferred stock and common
stock of the Company. As part of this financing, the Company paid approximately
$500,000 to an affiliate of a Cash Equity Investor for closing this preferred
and common stock financing. In May and July 1999, AT&T and the certain Cash
Equity Investors funded approximately $17,516,000 of their commitment to the
Company. The Company made its final payment of $14,679,600 to the FCC on
September 13, 1999 with respect to these licenses and received the remaining
funding commitments from AT&T and the certain Cash Equity Investors on
September 29, 1999.
Additionally, certain employees, the Chief Executive Officer and the
Executive Vice President of the Company will be issued a total of 1,111 shares
and 162,800 shares of mandatorily redeemable Series E preferred stock and Class
A common stock, respectively, pending final FCC approval of the share issuance.
The Chief Executive Officer and the Executive Vice President's shares vest
immediately and the employees' shares vest ratably over five years. The total
estimated fair value of these shares is approximately $8,140,000 which will be
recorded as deferred compensation of which $5,200,000 will be recorded as
compensation expense in the fourth quarter of 1999 if final share transfer
approval is received from the FCC.
Stock Option Plan, Restricted Stock and Stock Split
On July 22, 1999, the Company implemented the 1999 Stock Option Plan to
allow employees and members of the Board of Directors to acquire shares of
Class B common stock. The options will have an option term of 10 years, ratable
vesting over a three to four year period, exercise prices equal to the
estimated fair value of the underlying Class B common stock on the date of
award and restrictions on exercisability until, (i) a qualified initial public
offering (IPO) to which the Class A voting common stock has been registered
under the Securities Act of 1933 for aggregate proceeds of $20,000,000, (ii)
the sale of all or substantially all of the assets of the Company or (iii) a
sale of all or substantially all of the outstanding capital stock of the
Company. The Company has reserved 587,159 shares of Class B common stock for
issuance under this plan.
F-39
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
On July 22, 1999, the Company granted 189,250 stock options at an exercise
price of $0.02 per share, of which 10,515 were subsequently forfeited. The
number of options and exercise price have been adjusted for a 100 for 1 stock
split as approved by the Board of Directors on July 22, 1999 for the Series F
preferred stock and all classes of common stock. This stock split has been
retroactively reflected in the historical financial statements of TeleCorp and
has not been retroactively reflected in the financial statements of Holding's
as this represented a different equity structure to which the split was not
applicable. The stock options awarded during the six month period ended June
30, 1999 represent variable awards since their exercisability is restricted
until the completion of an initial public offering, sale of assets or sale of
the Company. Therefore, the measurement date from an accounting standpoint,
will occur when the exercisability restrictions are relieved, upon the initial
public offering. At that point, the Company will record deferred compensation
expense based on the difference between the estimated fair value and the
exercise price of the award. Deferred compensation has been estimated to be
$9,000,000 and will be recognized as compensation expense over the related
vesting periods, of which approximately $2,000,000 will be recorded as
compensation expense in the fourth quarter of 1999. In addition, under the
restricted stock plan, certain variable awards will become fixed upon an
initial public offering resulting in deferred compensation of approximately
$34,000,000 of which $7,000,000 will be recorded as compensation expense on the
fourth quarter of 1999.
In addition, certain variable restricted stock awards will become fixed upon
effectiveness of an initial public offering. This will result in estimated
deferred compensation of approximately $50,800,000 of which $16,800,000 will be
recorded as compensation expense in the fourth quarter of 1999.
Pending Acquisitions
On October 18, 1999, the Company agreed to acquire TeleCorp LMDS, Inc.
(TeleCorp LMDS) through a purchase of all of the outstanding stock of TeleCorp
LMDS for an estimated aggregate purchase price of approximately $16,100,000.
The consideration will be comprised of Series C preferred stock and Class A
common stock. TeleCorp LMDS' only assets are LMDS licenses. The purchase price
has been preliminarily allocated to the acquired licenses, subject to
adjustment, based on a final valuation. TeleCorp LMDS's stockholders are Mr.
Vento, Mr. Sullivan and three of our Cash Equity Investors. By acquiring
TeleCorp LMDS, the Company will gain local multipoint distribution service, or
LMDS. The LMDS licenses will provide the Company with additional airwaves to
use as back-haul portions of our PCS network traffic in several of our markets.
On October 14, 1999, the Company agreed to purchase 15 MHz of additional
airwaves in the Lake Charles, Louisiana basic trading area from Gulfstream
Telecomm, L.L.C. Total consideration approximates $2,700,000 and consists of
approximately $400,000 in cash plus the assumption of approximately $2,300,000
in debt related to the license. Additionally, the Company will reimburse Gulf
Telecomm for all interest it paid to the FCC on debt related to the license
from June 1998 until the date the transaction is completed.
Each of these agreements are subject to governmental approvals and other
customary conditions to closing, but no assurance can be given that they will
be closed on schedule or at all.
F-40
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
Description of Unaudited Pro Forma
Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated financial
statements are based upon the historical consolidated financial statements of
the Company. The unaudited pro forma adjustments are based upon available
information and certain assumptions that management of the Company believes are
reasonable. The unaudited pro forma condensed consolidated balance sheet as of
June 30, 1999 has been prepared to illustrate the effects of the acquisition of
the C Block PCS licenses by Viper Wireless, Inc. and the issuance of
mandatorily redeemable preferred stock, Series F preferred stock and common
stock to AT&T and certain Cash Equity Investors, the acquisition of TeleCorp
LMDS, Inc. and certain adjustments related to the asset acquisitions which
completed in the first six months of 1999 as if these transactions had occurred
on January 1, 1998. The unaudited pro forma condensed consolidated statements
of operations for the year ended December 31, 1998 and for the six months ended
June 30, 1999 have been prepared to illustrate the effects of the acquisition
of C block PCS licenses by Viper Wireless, Inc. and the issuance of mandatorily
redeemable preferred stock, Series F preferred stock and common stock to AT&T
and certain Cash Equity Investors, and the acquisition of TeleCorp LMDS, Inc.
as if these transactions occurred on January 1, 1998.
The unaudited pro forma condensed consolidated financial statements and
accompanying notes thereto should be read in conjunction with the historical
consolidated financial statements of the Company and the other financial
information included elsewhere in this Prospectus. The unaudited pro forma
condensed consolidated financial statements are provided for informational
purposes only and do not purport to be indicative of what the Company's
consolidated financial position would actually have been had the issuance of
mandatorily redeemable preferred stock, preferred stock, and common stock and
the acquisition of TeleCorp LMDS, Inc. occurred on such date, or to project the
Company's consolidated financial position for any future period.
F-41
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
As of June 30, 1999 (unaudited)
----------------------------------------------------------------------
Historical
TeleCorp PCS,
Inc. and
Subsidiaries
and Predeces- Viper Proforma Pro Forma
sor Company Wireless Telecorp LMDS Adjustments Consolidated
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 151,437,828 $(14,816,172) $ -- $ -- $ 136,621,656
Accounts receivable,
net................... 13,013,034 -- -- -- 13,013,034
Inventory.............. 7,733,620 -- -- -- 7,733,620
Prepaid expenses....... 2,166,260 -- -- -- 2,166,260
Other current assets... 243,074 -- -- -- 243,074
------------- ------------ ------------ ------------ -------------
Total current assets.. 174,593,816 (14,816,172) -- -- 159,777,644
Property and equipment,
net................... 320,604,414 -- -- -- 320,604,414
PCS licenses and
microwave relocation
costs................. 205,075,025 32,332,566 -- -- 237,407,591
Intangible assets --
AT&T agreements....... 40,321,095 -- 16,100,000 (1,770,000) 54,651,095
Deferred financing
costs, net............ 18,684,989 -- -- -- 18,684,989
FCC deposits........... 17,516,394 (17,516,394) -- -- --
Other assets........... 1,438,708 -- -- -- 1,438,708
------------- ------------ ------------ ------------ -------------
Total assets.......... $ 778,234,441 $ $ 16,100,000 $ (1,770,000) $ 792,564,441
============= ============ ============ ============ =============
Liabilities, Mandatorily
Redeemable Preferred
Stock and Stockholders'
Equity (Deficit)
Current liabilities:
Accounts payable....... 28,935,648 -- -- -- 28,935,648
Accrued expenses....... 26,607,076 -- -- -- 26,607,076
Microwave relocation
obligation............ 5,733,393 -- -- -- 5,733,393
Long-term debt......... -- -- -- -- --
Accrued interest....... 4,170,612 -- -- -- 4,170,612
Deferred revenue....... 705,362 -- -- -- 705,362
------------- ------------ ------------ ------------ -------------
Total current
liabilities.......... 66,152,091 -- -- -- 66,152,091
------------- ------------ ------------ ------------ -------------
Long-term debt......... 618,687,300 -- -- -- 618,687,300
Microwave relocation
obligation............ 2,470,072 -- -- -- 2,470,072
Accrued expenses....... 3,939,688 -- -- -- 3,939,688
Deferred rent.......... 463,734 -- -- -- 463,734
------------- ------------ ------------ ------------ -------------
Total liabilities..... 691,712,885 -- -- -- 691,712,885
------------- ------------ ------------ ------------ -------------
Mandatorily redeemable
preferred stock....... 342,435,903 9,271,314 2,500,000 13,373,867 367,581,084
Deferred compensation.. (283,827) (16,172) -- -- (299,999)
Treasury stock, at
cost.................. -- -- -- -- --
Preferred stock
subscriptions
receivable............ (103,000,531) (9,213,542) -- -- (112,214,300)
------------- ------------ ------------ ------------ -------------
Total mandatorily
redeemable preferred
stock, net........... 239,151,545 41,600 2,500,000 13,373,867 255,067,012
------------- ------------ ------------ ------------ -------------
Commitments and
contingencies......... -- -- -- -- --
Stockholders' equity
(deficit):
Series F preferred
stock................. 44,341 4,900 -- -- 49,241
Common stock........... 220,574 29,014 2,700 -- 252,288
Additional paid-in-
capital............... 86,187 31,178,544 13,597,300 -- 44,862,031
Deferred compensation.. (13,133) (2,930,400) -- -- (2,943,533)
Common stock
subscriptions
receivable............ (190,990) (23,072,458) -- -- (23,263,448)
Treasury stock, at
cost.................. -- -- -- -- --
Accumulated deficit.... (152,776,968) (5,251,200) -- (15,143,867) (173,172,035)
------------- ------------ ------------ ------------ -------------
Total stockholders
equity (deficit)..... (152,629,989) (41,600) 13,600,000 (15,143,867) (154,215,456)
------------- ------------ ------------ ------------ -------------
Total liabilities,
mandatorily
redeemable preferred
stock and
stockholders' equity
(deficit)............ $ 778,234,441 $ -- $ 16,100,000 $ (1,770,000) $ 792,564,441
============= ============ ============ ============ =============
</TABLE>
F-42
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the six months June 30, 1999 (Unaudited)
----------------------------------------------------------------
Historical
TeleCorp PCS, Inc
and Predecessor Viper TeleCorp Pro Forma Pro Forma
Company Wireless LMDS Adjustments Consolidated
----------------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service revenue....... $ 6,232,355 $-- $ -- $ -- $ 6,232,355
Equipment revenue..... 5,648,966 -- -- -- 5,648,966
Roaming revenue....... 9,486,916 -- -- -- 9,486,916
------------- ---- -------- ------------ -------------
Total revenue....... 21,368,237 -- -- -- 21,368,237
------------- ---- -------- ------------ -------------
Operating expenses:
Cost of revenue....... 10,106,968 -- -- -- 10,106,968
Operations and
development.......... 15,498,104 -- -- -- 15,498,104
Selling and
Marketing............ 20,924,712 -- -- -- 20,924,712
General and
administrative....... 22,440,887 -- 13,258 5,209,600 27,663,745
Depreciation and
amortization......... 16,491,374 -- -- 590,000 17,081,374
------------- ---- -------- ------------ -------------
Total operating
expenses........... 85,462,045 -- 13,258 (5,799,600) 91,274,903
------------- ---- -------- ------------ -------------
Operating loss.......... (64,093,808) (13,258) (5,799,600) (69,906,666)
Other (income) expense:
Interest expense...... 17,107,514 -- -- -- 17,107,514
Interest income....... (3,064,606) -- (9,667) -- (3,074,273)
Other expense......... 146,675 -- -- -- 146,675
------------- ---- -------- ------------ -------------
Net loss............ (78,283,391) -- (3,591) (5,799,600) (84,086,582)
Accretion of mandatorily
redeemable preferred
stock.................. (9,895,700) -- -- (4,044,273) (13,939,973)
------------- ---- -------- ------------ -------------
Proforma net loss
attributable to
common equity...... $ (88,179,091) $-- $ (3,591) $ (9,843,873) $ (98,026,555)
============= ==== ======== ============ =============
</TABLE>
F-43
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended December 31, 1998 (unaudited)
----------------------------------------------------------------
Historical
TeleCorp PCS, Inc.
and Predecessor Viper TeleCorp ProForma Pro Forma
Company Wireless LMDS Adjustments Consolidated
------------------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Service revenue....... $ -- $-- $ -- $ -- $ --
Equipment revenue..... -- -- -- -- --
Roaming revenue....... 29,231 -- -- -- 29,231
------------ ---- -------- ------------ ------------
Total revenue....... 29,231 -- -- -- 29,231
------------ ---- -------- ------------ ------------
Operating expenses:
Cost of revenue....... -- -- -- --
Operations and
development.......... 9,772,485 -- -- -- 9,772,485
Selling and
marketing............ 6,324,666 -- -- -- 6,324,666
General and
administrative....... 26,239,119 -- 40,996 5,209,600 31,489,715
Depreciation and
amortization......... 1,583,864 -- -- 1,180,000 2,763,864
------------ ---- -------- ------------ ------------
Total operating
expenses........... 43,920,134 -- 40,996 6,389,600 50,350,730
------------ ---- -------- ------------ ------------
Operating loss...... (43,890,903) -- (40,996) (6,389,600) (50,321,499)
Other (income) expense:
Interest expense...... 11,934,263 -- -- -- 11,934,263
Interest income....... (4,697,233) -- (62,292) -- (4,759,525)
Other expense......... 27,347 -- -- -- 27,347
------------ ---- -------- ------------ ------------
Net (loss) income... (51,155,280) -- 21,296 (6,389,600) (57,523,584)
Accretion of mandatorily
redeemable preferred
stock.................. (8,566,922) -- -- (9,329,594) (17,896,516)
------------ ---- -------- ------------ ------------
Proforma net (loss)
income attributable
to common equity..... $(59,722,202) $-- $ 21,296 $(15,719,194) $(75,420,100)
============ ==== ======== ============ ============
</TABLE>
F-44
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
------------
In February 1999, Viper was formed to participate in the C-Block PCS license
reauction for additional spectrum in most of the Company's markets. Viper was
initially capitalized and equally-owned by the Company's Chief Executive
Officer and Executive Vice President-Chief Financial Officer. In order to
participate in the reauction, the Company paid the FCC an initial deposit of
$17,818,549, on behalf of Viper. Simultaneously, the Company transferred this
initial deposit to Viper in exchange for an 85% ownership interest which
represented a 49.9% voting interest.
On April 15, 1999, the FCC announced Viper was the high bidder for 15 MHz
licenses in New Orleans, Houma and Alexandria, Louisiana, San Juan Puerto Rico
and Jackson, Tennessee and 30 MHz licenses in Beaumont, Texas. The total
auction price is $32,286,000 plus legal fees of $46,566. During the six months
ended June 30, 1999, the FCC refunded $11,361,351 (unaudited) of the initial
deposit; however, the Company was required to pay the FCC $11,059,194 as a
final deposit on behalf of Viper. As of and for the six months ended June 30,
1999, Viper has no financial activity other than its capitalization which
includes the transfer of the initial deposit to Viper. The Company received
final regulatory approval from the FCC on September 9, 1999. Upon finalization
of this transaction, the Company will own 100% of Viper. The entire purchase
price has been allocated to the PCS licenses acquired.
AT&T and certain of the Company's other stockholders have committed an
aggregate of up to approximately $32,300,000 in exchange for additional shares
of mandatorily redeemable preferred stock, Series F preferred stock and common
stock of the Company. As part of this financing, the Company paid approximately
$500,000 to an affiliate of a Cash Equity Investor for closing this preferred
and common stock financing. In May and July 1999, AT&T and the certain Cash
Equity Investors funded approximately $17,516,000 of their commitment to the
Company. The Company made its final payment of $14,679,600 to the FCC on
September 13, 1999 with respect to these licenses. On September 29, 1999, AT&T
and the Certain Cash Equity Investors funded their remaining commitment to the
Company.
Additionally, certain employees, the Chief Executive Officer and the
Executive Vice President of the Company will be issued a total of 1,111 shares
and 162,800 shares of mandatorily redeemable Series E preferred stock and Class
A common stock. The Chief Executive Officer and the Executive Vice President's
shares vest immediately and the employees' shares vest ratably over five years.
On a pro forma basis, the estimated value of the Series E preferred stock of
$57,772 has been preliminarily recorded as mandatorily redeemable preferred
stock of $57,772, accumulated deficit of $41,600 and deferred compensation of
$16,172, and the estimated value of the Class A common stock of $8,140,000 has
been recorded as common stock of $1,628, additional paid-in capital of
$8,138,372, accumulated deficit of $5,209,600 and deferred compensation of
$2,930,400.
On October 18, 1999, the Company agreed to acquire TeleCorp LMDS, Inc.
through a purchase of all of the outstanding stock of TeleCorp LMDS for an
aggregate purchase price of approximately $16,100,000. The consideration will
be comprised of Series C preferred stock and Class A Common Stock. TeleCorp
LMDS' only assets are LMDS licenses. The purchase price has been preliminarily
allocated to the acquired licenses, subject to adjustment based upon a final
valuation. TeleCorp LMDS' stockholders are Mr. Vento, Mr. Sullivan and three of
the Company's Cash Equity Investors. By acquiring TeleCorp LMDS, the Company
will gain local multipoint distribution service, or LMDS. The LMDS licenses
will provide the Company with additional airwaves the Company can use to back-
haul portions of its PCS network traffic in several of its markets.
F-45
<PAGE>
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
------------
The proforma adjustments result from the following:
(i) The amortization of the extension of the Network Membership License
Agreement related to the AT&T Puerto Rico acquisition as if the
transaction occurred on January 1, 1998, and
(ii) The accretion of manditorily redeemable preferred stock issued related
to asset acquisitions which have completed (AT&T Puerto Rico, Wireless
2000, and Digital PCS) or to be issued related to pending acquisitions
(Viper Wireless, Inc. and TeleCorp LMDS) as if the transactions
occurred on January 1, 1998.
(iii) The compensation expense related to the estimated fair value of
Series E preferred stock and Class A common stock issued to our Chief
Executive Officer and the Executive Vice President upon final
approval of the Viper Wireless transaction.
F-46
<PAGE>
[Pictures of company stores, customers using handsets and customer care
center.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
TELECORP PCS, INC.
Class A Common Stock
--------
PROSPECTUS
, 1999
--------
Salomon Smith Barney
Lehman Brothers
Deutsche Banc Alex. Brown
Merrill Lynch & Co.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered
hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee, and the Nasdaq National Market listing application fee, are
estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................... $39,963
National Association of Securities Dealers, Inc. filing fee............ **
Nasdaq National Market listing application fee......................... **
Printing and engraving fees and expenses*.............................. **
Legal fees and expenses*............................................... **
Accountants' fees and expenses*........................................ **
Blue Sky fees and expenses*............................................ **
Transfer Agent and Registrar fees and expenses*........................ **
Miscellaneous expenses*................................................ **
-------
Total*............................................................... $
=======
</TABLE>
- --------
* Estimated
** To be provided supplementally
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify the person serving in that capacity who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred by the
person in connection with the defense or settlement of the action or suit if
the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim, issue or matter
as to which the person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which the action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, the person is fairly and reasonably entitled to indemnity for the
expenses which the Court of Chancery or other court shall deem proper. The
provisions regarding indemnification and advancement of expenses under Section
145 of the DGCL shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, stockholders' or disinterested directors' vote or
otherwise.
II-1
<PAGE>
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that the provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law; (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption); or
(iv) for any transaction from which the director derived an improper personal
benefit.
As permitted by Section 145(e) of the DGCL, our Fourth Amended and Restated
Certificate of Incorporation and our Amended and Restated Bylaws provide that
we shall indemnify our directors and officers, and, to the extent our board at
any time authorizes, incorporators, employees or agents, as such, to the
fullest extent permitted by applicable law, and that expenses reasonably
incurred by any officer or director or other person entitled to indemnification
in connection with a threatened or actual action or proceeding shall be
advanced or promptly reimbursed by us in advance of the final disposition of
the action or proceeding, provided that, if required to do so under the DGCL,
we receive an undertaking by or on behalf of the officer or director or other
person to repay the amount if and to the extent that it is ultimately
determined by final judicial decision from which there is no further right of
appeal that the officer or director or other person is not entitled to
indemnification. Our Third Amended and Restated Certificate of Incorporation
provides that the rights are not exclusive.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our inception, we sold shares of our common stock and preferred stock
in the amounts (restated to account for our 100-to-1 stock split), at the
times, and for the aggregate amounts of consideration listed below without
registration under the Securities Act of 1933. Exemption from registration
under the Securities Act for each of the following sales is claimed under
Section 4(2) of the Securities Act because such transactions were by an issuer
and did not involve a public offering.
On July 17, 1998, we issued, in the aggregate, 66,722.81 shares of series A
preferred stock, 135,347.76 shares of series C preferred stock, 34,266.97
shares of series D preferred stock, 3,336,141 shares of series F preferred
stock, 12,855,107 shares of class A common stock, 36,738 shares of class C
common stock, 275,539 shares of class D common stock and 1,000 shares of voting
preference stock to 21 individuals and entities for an aggregate consideration
of $128,000,000, ownership of all of the issued and outstanding shares of
TeleCorp Holding Corp. and a PCS license.
On April 20, 1999, we issued 2,332.55 shares of class C preferred stock and
226,923 shares of class A common stock to Digital PCS, LLC in consideration for
the transfer of the ownership of PCS licenses.
On May 14, 1999, we issued 980 shares of series D preferred stock, 98,000
shares of series F preferred stock, 5,477.2 shares of series C preferred stock
and 547,720 shares of class A common stock to 15 entities for an aggregate
consideration of $6,457,200.
On May 25, 1999, we issued 30,750 shares of series A preferred stock,
39,996.60 shares of series C preferred stock, 4,063.35 shares of series E
preferred stock and 3,999,660 shares of class A common stock to 20 individuals
and entities for an aggregate consideration of $79,996,640.63 and a PCS
license.
On June 2, 1999, we issued 545.20 shares of series C preferred stock and
53,040 shares of class A common stock to Wireless 2000, Inc. in consideration
for the transfer of the ownership of PCS licenses.
On July 15, 1999, we issued 1,678.44 shares of series D preferred stock,
167,844 shares of series F preferred stock, 9,380.75 shares of series C
preferred stock and 938,075 shares of class A common stock to 15 entities for
an aggregate consideration of $11,059,190.
On September 29, 1999, we issued 2,241.56 shares of series D preferred
stock, 224,156 shares of series F preferred stock, 12,528.05 shares of series C
preferred stock and 1,252,805 shares of class A common stock to 15 entities for
an aggregate consideration of $14,769,610.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES.
(a) Unless indicated otherwise below, the following exhibits were filed with
registrant's Registration Statement on Form S-4 as initially filed on June 22 ,
1999 or amendments thereto and are incorporated herein by reference.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1** Form of Underwriting Agreement
3.1 Fourth Amended and Restated Certificate of Incorporation, filed
August 27, 1999, of TeleCorp PCS, Inc.
3.1.2** Form of Fifth Amended and Restated Certificate of Incorporation of
TeleCorp PCS, Inc. to be adopted by the registrant
3.21 Amended and Restated Bylaws of TeleCorp PCS, Inc.
3.22** Second Amended and Restated Bylaws of TeleCorp PCS, Inc. to be
adopted by the registrant
4.1** Articles IV, VI, and IX of the TeleCorp PCS, Inc. Fifth Amended and
Restated Certificate of Incorporation to be adopted by the registrant
(contained in Exhibit 3.1.2)
4.2** Articles 1 and 9 of the TeleCorp PCS, Inc. Second Amended and
Restated Bylaws to be adopted by the registrant (contained in Exhibit
3.22)
5.1** Opinion of McDermott, Will & Emery regarding the legality of the
securities being registered
10.1 Note Purchase Agreement by and between TeleCorp PCS, Inc. and Lucent
Technologies, Inc., dated as of May 11, 1998
10.2 General Agreement for Purchase of PCS Systems and Services by and
between TeleCorp PCS, Inc. and Lucent Technologies, Inc., dated as of
May 12, 1998, as amended
10.3.1 Securities Purchase Agreement by and among TeleCorp PCS, Inc., AT&T
Wireless PCS Inc, TWR Cellular, Inc. and certain Cash Equity
Investors, TeleCorp Investors and Management Stockholders identified,
dated as of January 23, 1998
10.4.1 Network Membership License Agreement by and among AT&T Corp.,
including AT&T Wireless Services, Inc., and TeleCorp PCS, Inc., dated
as of July 17, 1998
10.4.2 Amendment No. 1 to Network Membership License Agreement, dated March
30, 1999
10.5.1 Management Agreement by and between TeleCorp Management Corp. and
TeleCorp PCS, Inc., dated as of July 17, 1998
10.5.2 Amendment No. 1 to the Management Agreement between TeleCorp
Management Corp. and TeleCorp PCS, Inc., dated as of May 25, 1999
10.6.1 Intercarrier Roamer Service Agreement by and between AT&T Wireless
Services, Inc. and TeleCorp PCS, Inc., dated as of July 17, 1998
10.6.2 Amendment No. 1 to Intercarrier Roamer Service Agreement, dated May
25, 1999
10.7 Roaming Administration Service Agreement by and between AT&T Wireless
Services, Inc. and TeleCorp PCS, Inc., dated as of July 17, 1998
10.8.1 Credit Agreement by and among TeleCorp PCS, Inc., the Lenders party
to, and the Chase Manhattan Bank, as Administrative Agent and Issuing
Bank, TD Securities (USA) Inc., as Syndication Agent, and Bankers
Trust Company, as Documentation Agent, dated as of July 17, 1998 (the
"Credit Agreement")
10.8.2 First Amendment, Consent, and Waiver to the Credit Agreement, dated
as of December 18, 1998
10.8.3 Second Amendment and Waiver to the Credit Agreement, dated as of
March 1, 1999
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.8.4 Third Amendment to the Credit Agreement, dated as of March 30, 1999
10.8.5 Fourth Amendment to the Credit Agreement, dated as of March 31, 1999
10.8.6 Fifth Amendment and Acceptance to the Credit Agreement, dated as of
April 7, 1999
10.8.7 Sixth Amendment to the Credit Agreement, dated as of April 7, 1999
10.8.8 Seventh Amendment to the Credit Agreement, dated as of May 21, 1999
10.9 Stock Purchase Agreement by and among TeleCorp PCS, Inc., AT&T
Wireless PCS, Inc. and certain Cash Equity Investors identified in,
dated as of March 22, 1999
10.9.1 Amendment No. 1 to Stock Purchase Agreement by and among TeleCorp PCS,
Inc., AT&T Wireless PCS, Inc. and Cash Equity Investors, dated as of
March 30, 1999.
10.9.2 Amendment No. 2 to Stock Purchase Agreement by and among TeleCorp PCS,
Inc., AT&T Wireless PCS, Inc. and Cash Equity Investors, dated as of
April 6, 1999.
10.9.3 Amendment No. 3 to Stock Purchase Agreement by and among TeleCorp PCS,
Inc., AT&T Wireless PCS, Inc. and Cash Equity Investors, dated as of
May 14, 1999.
10.9.4 Amendment No. 4 to Stock Purchase Agreement by and among TeleCorp PCS,
Inc., AT&T Wireless PCS, Inc. and Cash Equity Investors, dated as of
July 15, 1999.
10.10 Stock Purchase Agreement by and among Viper Wireless, Inc., TeleCorp
Holding Corp., Inc. and TeleCorp PCS, Inc., dated as of March 1, 1999
10.11 Puerto Rico Stock Purchase Agreement by and among TeleCorp PCS, Inc.,
Puerto Rico Acquisition Corp. and certain Management Stockholders and
Cash Equity Investors, dated as of March 30, 1999
10.12 Letter of Agreement by and between AT&T Wireless Services, Inc. and
TeleCorp Communications, Inc., dated as of December 21, 1998
10.13 Asset Purchase Agreement, dated May 25, 1999, by and between AT&T
Wireless PCS Inc. and TeleCorp PCS, Inc.
10.14 Preferred Stock Purchase Agreement, dated May 24, 1999, by and between
AT&T Wireless PCS Inc. and TeleCorp PCS, Inc.
10.15 License Acquisition Agreement, dated May 15, 1998, by and between
Mercury PCS II, LLC and TeleCorp PCS, Inc.
10.16 License Acquisition Agreement, dated May 15, 1998, by and between
Wireless 2000, Inc. and TeleCorp PCS, Inc.
10.17 Stockholders' Agreement, dated as of October , 1999, by and among
AT&T Wireless PCS, Inc., TWR Cellular, Inc., Cash Equity Investors,
Management Stockholders, and TeleCorp PCS, Inc.
10.18 Purchase Agreement, dated April 20, 1999, by and among Chase
Securities Inc., BT Alex. Brown Incorporated, Lehman Brothers Inc.,
TeleCorp PCS, Inc. and TeleCorp Communications, Inc.
10.19 Exchange and Registration Rights Agreement, dated April 23, 1999, by
and among Chase Securities Inc., BT Alex. Brown Incorporated, Lehman
Brothers Inc., TeleCorp PCS, Inc. and TeleCorp Communications, Inc.
10.20 Agreement, dated as of July 17, 1998, by and among AT&T Wireless PCS
Inc., TWR Cellular, Inc., the Cash Equity Investors, the TeleCorp
Investors and the Management Stockholders.
10.21 Employee Agreement, dated as of July 17, 1998, by and between TeleCorp
PCS, Inc. and Julie A. Dobson.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.22 Share Grant Agreement, dated July 16, 1998, by and between TeleCorp
PCS, Inc. and Julie A. Dobson.
10.23 Separation Agreement, dated as of March 8, 1999, by and among TeleCorp
PCS, Inc., TeleCorp Communications, Inc. and Robert Dowski.
10.24 Agreement among the Parties, dated as of June 30, 1999, by and among
TeleCorp PCS, Inc., the Cash Equity Investors, Entergy Technology
Holding Company, AT&T Wireless PCS, Inc., TWR Cellular Inc. and other
stockholders.
10.25 Amended and Restated Agreement, dated April 16, 1999, by and among
TeleCorp Communications, Inc., Triton PCS, Inc., Tritel
Communications, Inc. and Affiliate License Co, L.L.C.
10.26 TeleCorp PCS, Inc. 1998 Restricted Stock Plan, as amended May 20,
1999.
10.27 TeleCorp PCS, Inc. 1999 Stock Option Plan, dated June 23, 1999.
10.30** Amendment No. 2 to Stockholders' Agreement dated October , 1999.
10.31 Indenture, dated as of April 23, 1999, by and between Bankers Trust
Company, as trustee, and TeleCorp PCS, Inc. relating to the 11 5/8%
Senior Subordinated Discount Notes due 2009
21.1 Subsidiaries of TeleCorp PCS, Inc.
23.1** Consent of McDermott, Will & Emery (contained in Exhibit 5.1)
23.2* Consent of PricewaterhouseCoopers, LLP
24.1 Power of Attorney for TeleCorp PCS, Inc. (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
*Filed herewith.
**To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant under the foregoing provisions, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling persons of the
registrant in the successful defense of any action suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether the indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
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 of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Arlington,
Commonwealth of Virginia, on October 20, 1999.
Telecorp PCS, Inc.
/s/ Gerald T. Vento
By: _________________________________
Gerald T. Vento
Chief Executive Officer
II-6
<PAGE>
POWER OF ATTORNEY
Telecorp PCS, Inc. and each person whose signature appears below constitutes
and appoints Thomas H. Sullivan and Gerald T. Vento, and each of them, as true
and lawful attorneys-in-fact and agents with full power of substitution and
resubstitution for each such person and in such person's name, in any and all
capacities, (A) to sign all amendments (including pre-effective and post-
effective amendments) to this registration statement (and any registration
statement filed under Rule 462(b) of the Securities Act); (B) to file such
amendments with all exhibits and other related documents with the Securities
and Exchange Commission; and (C) to perform every act necessary in connection
with (A) or (B); and (2) ratifies and confirms everything that such attorneys-
in-fact and agents, or any or them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue of this appointment.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald T. Vento Chief Executive Officer October 20, 1999
______________________________________ (Principal Executive
Gerald T. Vento Officer) and Chairman
/s/ Thomas H. Sullivan Executive Vice President, October 19, 1999
______________________________________ Chief Financial Officer
Thomas H. Sullivan (Principal Financial and
Accounting Officer) and
Director
/s/ Michael R. Hannon Director October 20, 1999
______________________________________
Michael R. Hannon
/s/ Scott Anderson Director October 20, 1999
______________________________________
Scott Anderson
Director October , 1999
______________________________________
Rohit M. Desai
Director October , 1999
______________________________________
Gary S. Fuqua
/s/ James M. Hoak Director October 20, 1999
______________________________________
James M. Hoak
/s/ Mary Hawkins-Key Director October 20, 1999
______________________________________
Mary Hawkins-Key
/s/ William Kussell Director October 18, 1999
______________________________________
William Kussell
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Director October , 1999
______________________________________
William Laverack, Jr.
/s/ Joseph O'Donnell Director October 18, 1999
______________________________________
Joseph O'Donnell
/s/ Michael Schwartz Director October 20, 1999
______________________________________
Michael Schwartz
/s/ James F. Wade Director October 20, 1999
______________________________________
James F. Wade
</TABLE>
II-8
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the inclusion in this Registration Statement on Form S-1 of
our report dated March 8, 1999, except for the information in the third
paragraph of Note 16, for which the date is September 29, 1999, relating to the
financial statements of TeleCorp PCS, Inc. We also consent to the reference to
our firm under the headings "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
McLean, VA
October 19, 1999
