<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2000.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
333-47682
Commission File Number: 333-47688
-------------
iPCS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4350876
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1900 East Golf Road, Suite 900
Schaumburg, Illinois 60173
(Address of principal executive offices, including zip code)
(847) 944-2900
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
44,869,643 shares of common stock, $0.01 par value per share, were outstanding
as of November 14, 2000.
<PAGE>
iPCS, INC.
FORM 10-Q
SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 2
Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999 and for the nine months ended
September 30, 2000 and for the period from January 22, 1999 (date
of inception) through September 30, 1999 3
Consolidated Statement of Redeemable Preferred Stock and Equity
for the nine months ended September 30, 2000 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and for the period from January 22, 1999 (date
of inception) through September 30, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 27
PART II OTHER INFORMATION 29
Item 1. Legal Proceedings. 29
Item 2. Changes in Securities and Use of Proceeds. 29
Item 3. Defaults Upon Senior Securities. 31
Item 4. Submission of Matters to a Vote of Security Holders. 31
Item 5. Other Information. 31
Item 6. Exhibits and Reports on Form 8-K. 31
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents........................................................... $108,233 $ 2,733
Accounts receivable, less allowance: 2000 - $169; 1999 - $1........................ 3,405 92
Other receivables................................................................... 180 39
Inventories......................................................................... 705 927
Prepaid expenses and other assets................................................... 2,691 432
-------- -------
Total current assets............................................................. 115,214 4,223
Property and equipment including construction in progress, net........................ 100,359 39,106
Financing costs, less accumulated amortization: 2000 - $205; 1999 - $66............... 9,818 1,514
Intangible assets, net................................................................ 14,835
-------- -------
Total assets..................................................................... $240,226 $44,843
======== =======
Liabilities, Redeemable Preferred Stock and Equity
Current Liabilities:
Accounts payable.................................................................... $ 18,960 $ 3,839
Accrued expenses.................................................................... 1,473 393
Accrued interest.................................................................... 265
Deferred revenue.................................................................... 521
Advance on tower sales.............................................................. 1,250 2,000
-------- -------
Total current liabilities...................................................... 22,204 6,497
Deferred gain on tower sales.......................................................... 4,704 1,655
Accrued interest...................................................................... 2,827
Long-term debt........................................................................ 129,794 27,571
-------- -------
Total liabilities.............................................................. 159,529 35,723
-------- -------
Redeemable preferred stock, $0.01 par value; 35,000,000 shares authorized; 9,090,909
shares issued and outstanding..................................................... 47,268
-------- -------
Commitments and Contingencies
Equity:
Common stock, $0.01 par value; 300,000,000 shares authorized; 44,869,643 shares
issued and outstanding........................................................... 449
Additional paid in capital......................................................... 79,403
Contributed capital - Predecessor Company.......................................... 13,500
Unearned compensation.............................................................. (6,041)
Accumulated deficit................................................................ (40,382) (4,380)
-------- -------
Total equity................................................................. 33,429 9,120
-------- -------
Total liabilities, redeemable preferred stock and equity..................... $240,226 $44,843
======== =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Period from
January 22, 1999
For the Three-Month For the Nine-Month (date of inception)
Period Ended Period Ended through
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Service............................................... $ 6,310 $ 10,746
Equipment and other................................... 861 1,892
----------- -----------
Total revenues...................................... 7,171 12,638
----------- -----------
Operating Expenses:
Cost of service....................................... 5,207 $ 323 9,981 $ 531
Cost of equipment..................................... 2,499 5,097
Selling............................................... 2,849 139 5,695 143
General and administrative:
Non-cash compensation............................... 2,206 10,686
Taxes on non-cash compensation...................... 1,567
Other general and administrative.................... 2,304 258 4,694 844
Depreciation and amortization......................... 2,622 16 5,549 16
----------- ----------- ----------- -----------
Total operating expenses............................ 17,687 736 43,269 1,534
----------- ----------- ----------- -----------
Loss from operations................................... (10,516) (736) (30,631) (1,534)
Other Income (Expense):
Interest income....................................... 1,854 45 1,949 56
Interest expense...................................... (5,665) (7) (6,259) (7)
Other income.......................................... 226 202 424 202
----------- ----------- ----------- -----------
Loss Before Extraordinary Item......................... (14,101) (496) (34,517) (1,283)
Extraordinary item - loss on early extinguishment
of debt........................................... (1,485) (1,485)
----------- ----------- ----------- -----------
Net Loss............................................... $ (15,586) $ (496) $ (36,002) $ (1,283)
=========== =========== =========== ===========
Loss before extraordinary item......................... $ (14,101) $ (496) $ (34,517) $ (1,283)
Beneficial conversion feature related to redeemable
preferred stock.................................... (46,387) (46,387)
Dividends and accretion on redeemable preferred stock.. (881) (881)
----------- ----------- ----------- -----------
Loss available to common stockholders.................. (61,369) (496) (81,785) (1,283)
Extraordinary item..................................... (1,485) (1,485)
----------- ----------- ----------- -----------
Net loss available to common stockholders.............. $ (62,854) $ (496) $ (83,270) $ (1,283)
=========== =========== =========== ===========
Pro forma basic and diluted per share of common
stock:
Loss before extraordinary item................ $ (1.37) $ (0.01) $ (1.83) $ (0.03)
Extraordinary item............................ $ (0.03) $ (0.03)
Net loss...................................... $ (1.40) $ (0.01) $ (1.86) $ (0.03)
Pro forma weighted average common shares
outstanding........................................... 44,869,643 44,869,643 44,869,643 44,869,643
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK AND EQUITY
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION> Redeemable
Preferred Stock Common Stock Additional
Shares Amount Shares Amount Paid In Capital
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 2000
Members contributions from January 1, 2000
to July 11, 2000
Issuance of 1.5% interest in Predecessor
Company to Mr. Yager
Net loss from the period form January 1, 2000
to July 11, 2000
Reorganization of Predecessor Company
to C Corporation 44,869,643 $ 449 $ 38,031
Net loss for the period from July 12, 2000
to September 30, 2000
Sale of redeemable preferred stock 9,090,909 $ 46,387
Beneficial conversion feature related to
redeemable preferred stock 46,387
Accretion of redeemable preferred stock (46,387)
beneficial conversion feature
Accrued dividends on redeemable preferred stock 812 (812)
Accretion to redemption amount of
redeemable preferred stock 69 (69)
Grant of stock options 8,247
Amortization of unearned compensation
Issuance of warrants in connection with the
senior discount notes 24,859
Issuance of warrants to Sprint PCS 9,147
--------- --------- ---------- ----- ---------
BALANCE AT SEPTEMBER 30, 2000 9,090,909 $ 47,268 44,869,643 $ 449 $ 79,403
========= ========= ========== ===== =========
<CAPTION>
Contributed
Capital-
Predecessor Unearned Accumulated
Company Compensation Deficit
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 2000 $ 13,500 $ (4,380)
Members' contributions from January 1, 2000
to July 11, 2000 16,500
Issuance of 1.5% interest in Predecessor
Company to Mr. Yager 8,480
Net loss from the period form January 1, 2000
to July 11, 2000 (21,108)
Reorganization of Predecessor Company
to C Corporation (38,480)
Net loss for the period from July 12, 2000
to September 30, 2000 (14,894)
Sale of redeemable preferred stock
Beneficial conversion feature related to
redeemable preferred stock
Accretion of redeemable preferred stock
beneficial conversion feature
Accrued dividends on redeemable preferred stock
Accretion to redemption amount of
redeemable preferred stock
Grant of stock options $ (8,247)
Amortization of unearned compensation 2,206
Issuance of warrants in connection with the
senior discount notes
Issuance of warrants to Sprint PCS
-------- --------- --------
BALANCE AT SEPTEMBER 30, 2000 $ $ (6,041) $(40,382)
======== ========= ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Period from
For the Nine January 22, 1999
Month Period (date of inception)
Ended through
September 30, September 30,
2000 1999
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(36,002) $ (1,282)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization............................ 5,549
Loss on disposal of property and equipment............... 56
Gain on tower sales...................................... (479) (202)
Amortization of deferred gain on tower sales............. (180)
Amortization of financing costs.......................... 234 16
Non-cash interest........................................ 2,322
Extraordinary loss on early extinguishment of debt....... 1,485
Non-cash compensation.................................... 10,686
Changes in assets and liabilities:
Accounts receivable.................................... (3,313) (1)
Other receivables...................................... (141)
Inventories............................................ 222
Prepaid expenses and other assets...................... (2,259) (307)
Accounts payable, accrued expenses and accrued
interest.............................................. 9,395 618
Deferred revenue....................................... 521
-------- --------
Net cash flows from operating activities.............. (11,904) (1,158)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures...................................... (64,741) (15,475)
Microwave relocation costs................................ (453)
Intangible acquired in purchase of network assets......... (3,526)
Advance on tower sales.................................... 2,000
Proceeds from tower sales................................. 8,500 2,500
-------- --------
Net cash flows from investing activities.............. (60,220) (10,975)
-------- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt.............................. 165,106 8,568
Repayment of Nortel debt.................................. (40,346)
Debt issuance costs....................................... (10,023) (1,580)
Proceeds from sale of redeemable preferred stock,
net of offering costs.................................... 46,387
Members' contributions.................................... 16,500 10,500
-------- --------
Net cash flows from financing activities.............. 177,624 17,488
-------- --------
Increase in cash and cash equivalents...................... 105,500 5,355
Cash and cash equivalents at beginning of period........... 2,733 -
-------- --------
Cash and cash equivalents at end of period................. $108,233 $ 5,355
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 and 1999
(Unaudited)
1. BASIS OF PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with rules issued by the Securities and Exchange
Commission for preparing interim financial information and, therefore, do not
include all information and footnotes necessary for a presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. All adjustments, consisting of normal recurring
accruals, which, in the opinion of management, are necessary for a fair
presentation of financial position and results of operations have been included.
Operating results for the three months and nine months ended September 30, 2000
are not necessarily indicative of results that may be expected for the year
ending December 31, 2000. These unaudited interim consolidated financial
statements should be read in conjunction with Illinois PCS, LLC's financial
statements and footnotes thereto for the year ended December 31, 1999, included
in iPCS, Inc.'s Form S-1 as filed with the Securities and Exchange Commission on
October 10, 2000.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the current year's presentation.
2. REORGANIZATION
On July 12, 2000, Illinois PCS, LLC (the "Predecessor Company") reorganized
its business into a C Corporation in which members of the Predecessor Company
received 44,869,643 shares of common stock of iPCS, Inc. in exchange for their
ownership interests in the Predecessor Company. The ownership percentages among
the members following the reorganization remained consistent with the ownership
percentages at December 31, 1999 as adjusted for the effects of the agreement
described in Note 11. As of July 12, 2000, the Predecessor Company merged with
and into iPCS Wireless, Inc., a wholly owned subsidiary of iPCS, Inc., and iPCS
Equipment, Inc. was also formed and is a wholly owned subsidiary of iPCS
Wireless, Inc. iPCS Wireless, Inc. will continue the activities of the
Predecessor Company and, for accounting purposes, this transaction was accounted
for as a reorganization of the Predecessor Company into a C Corporation. iPCS,
Inc. and its subsidiaries, including the Predecessor Company, are collectively
referred to as the "Company."
3. PRO FORMA LOSS PER SHARE
Pro forma basic and diluted loss per share are calculated by dividing the
net loss by the pro forma weighted average number of shares of common stock of
iPCS, Inc. as if the shares of common stock of iPCS, Inc. into which the
Predecessor Company's members' interests were converted had been outstanding for
all of the periods presented. The calculation was made in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." The pro forma basic and diluted loss per share are the same because the
inclusion of the incremental potential common shares from any assumed conversion
of redeemable preferred stock or exercise of options and warrants is
antidilutive.
6
<PAGE>
4. PROPERTY AND EQUIPMENT INCLUDING CONSTRUCTION IN PROGRESS
Property and equipment including construction in progress consists of the
following (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
Network assets $ 65,576 $22,737
Computer equipment 1,435 675
Furniture, fixtures, office equipment and leasehold improvements 2,539 626
-------- -------
Total property and equipment 69,550 24,038
Less accumulated depreciation and amortization (5,541) (315)
-------- -------
Property and equipment, net 64,009 23,723
Construction in progress (network build-out) 36,350 15,383
-------- -------
Property and equipment including construction in progress, net $100,359 $39,106
======== =======
</TABLE>
5. INTANGIBLE ASSETS, NET
Intangible assets, net at September 30, 2000 consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
<S> <C>
Exclusive provider rights which arose with the issuance of warrants to
Sprint PCS (see Note 6) $ 9,147
Exclusive provider rights which arose with the purchase of assets
from Sprint PCS (see Note 6) 3,526
Microwave clearing costs 2,337
-------
Total intangible assets 15,010
Less accumulated amortization (175)
-------
Intangible assets, net $14,835
=======
</TABLE>
6. AMENDMENT TO SPRINT PCS AGREEMENT
On March 8, 2000, the Company entered into an amendment to the Sprint PCS
agreements to expand its service area to include 20 basic trading areas ("BTAs")
located in Michigan, Iowa and Nebraska (the "Expansion"). In connection with the
Expansion, the Company agreed to purchase certain network assets under
construction in three BTAs in Michigan, for a purchase price to be determined on
the closing date based upon the assets to be purchased and the stage of
completion of those assets as of the closing date. In addition, in connection
with the Expansion, the Company was granted an option, exercisable by the
Company at any time prior to January 31, 2001, to add the Iowa City and Cedar
Rapids, Iowa BTAs to its service area, for an initial purchase price of $25.2
million escalating monthly to a purchase price of $28.8 million if the option is
exercised during January 2001. The purchase price is subject to an upward
adjustment based upon the number of subscribers in the two additional markets at
the option exercise date. As consideration to be the exclusive provider of
Sprint PCS services in the Expansion territory, the Company committed to grant
to Sprint PCS a warrant to acquire 2% of the equity of the Company at the
earliest of July 15, 2000, the closing of an initial public offering, or the
consummation of a private placement of equity in an amount equal to at least
$70.0
7
<PAGE>
million. In connection with the closing of the sale of the convertible preferred
stock discussed in Note 10, the Company issued Sprint PCS a warrant to acquire
1,151,938 shares of common stock of the Company on July 12, 2000 at an exercise
price of $4.95 per share. The fair value of the warrants, as determined using
the Black-Scholes model, was approximately $9.1 million and was recorded as an
increase to paid in capital with a corresponding amount recorded as an
intangible asset representing the right to be the exclusive provider of Sprint
PCS services in the Expansion territory. Such intangible asset is being
amortized over a life of 18.5 years, which is the remaining term of the Sprint
PCS agreement. The fair value of the warrants was calculated using the following
assumptions:
(1) risk free interest rate of 6.35%;
(2) stock price based on a planned initial public offering;
(3) dividend yield of 0%;
(4) life of 7 years; and
(5) volatility of 40%.
Also, on July 12, 2000 the Company purchased the assets under construction
in Michigan from Sprint PCS for approximately $12.7 million. The Company
allocated approximately $9.2 million of the purchase price to property based on
the fair value of the assets acquired, with the excess amount of $3.5 million
allocated to the intangible asset representing the right to be the exclusive
provider of Sprint PCS services in Michigan. The intangible asset is being
amortized over a life of 18.5 years, which is the remaining term of the Sprint
PCS agreement.
7. DEFERRED GAIN ON TOWER SALES
On May 28, 1999 the Company signed a tower sale and leaseback agreement
with American Tower Corporation ("American Tower"). Under the agreement, the
Company will locate sites for, develop and construct between sixty and eighty
wireless communication towers and then sell the towers to American Tower. The
term of this agreement will expire at the earliest of the final tower sale or
December 31, 2000. The purchase price of each tower is $250,000. During the
nine-month period ended September 30, 2000, thirty-seven towers were sold to
American Tower for approximately $9.3 million, resulting in a gain of
approximately $3.7 million, of which approximately $0.5 million was recognized
at the time of the sale and the remainder was deferred and is being amortized as
a reduction to rental expense over the initial lease term of ten years. At
September 30, 2000, a total of fifty-five towers have been sold to American
Tower.
Upon the sale of a tower, the Company leases a portion, generally one-
third, of the tower to collocate antennas and other network communication
equipment. The leases are operating leases. The monthly rent to be paid by the
Company for tower space on each tower is $1,100 plus an annual 3 percent
escalator for a ten-year initial term with three five-year renewal option
periods, subject to the terms of the underlying ground leases.
American Tower has advanced $2.0 million to the Company for the purchases
of the fifty-third through sixtieth towers. Should the Company not construct and
sell the required number of towers to American Tower by December 31, 2000, the
Company will be required to repay the advance plus accrued interest at 5%. The
Company did not receive any cash related to the sale of the fifty-third, fifty-
fourth and fifty-fifth towers. Accordingly, the advance on tower sales was
reduced by approximately $0.8 million and the advance on tower sales at
September 30, 2000 is approximately $1.2 million.
8
<PAGE>
8. DEBT
Senior Discount Notes and Warrants
On July 12, 2000, the Company issued 300,000 units consisting of 14% senior
discount notes due July 15, 2010 (the "Notes") and warrants to purchase
2,982,699 shares of common stock. The Notes were issued at a substantial
discount such that the Company received gross proceeds of approximately $152.3
million. Cash interest on the Notes will not be payable until January 15, 2006.
Prior to the accrual of cash interest, the principal amount of the Notes will
accrete at a rate of 14% per annum, compounded semi-annually, to an aggregate
principal amount of $300.0 million at July 15, 2005. On that date, the Notes
will accrue cash interest at the rate of 14% per year and the Company will be
required to pay the accrued interest beginning January 15, 2006, and on each
January 15 and July 15 thereafter. The Company is amortizing the discount on the
Notes as interest expense over the period from date of issuance to the maturity
date. For the period ended September 30, 2000, the Company recorded
approximately $1.8 million, net of capitalized interest, as interest expense
related to the amortization of the discount.
The Notes are a general unsecured obligation, subordinated in right of
payment to all senior debt, including all obligations under the credit facility.
The Notes Indenture contains covenants which restrict the Company's ability to
incur additional indebtedness, pay dividends, merge, dispose of its assets, and
certain other matters as defined in the Indenture. During the first 36 months,
the Company may redeem up to 35% of the accreted value at a redemption price of
114% with the net cash proceeds of one or more equity offerings excluding the
first $70.0 million of equity offerings. After July 15, 2005, the Notes may be
redeemed at a price of 107% beginning in 2005, 105% beginning in 2006, 102%
beginning in 2007 and 100% thereafter. Upon a change in control as defined in
the Notes agreement, the Company will be required to make an offer to purchase
the Notes at a price equal to 101% of the Accreted Value of Notes (as defined in
the Notes agreement) on any purchase date prior to July 15, 2005 or 101% of the
aggregate principal amount therefore, plus accrued and unpaid interest and
Liquidated Damages (as defined in the Notes agreement), if any, to the date of
purchase if on or after July 15, 2005.
The Company allocated approximately $24.9 million to the fair value of the
warrants, as determined by using the Black-Scholes model, and recorded a
discount on the Notes, which is being recognized as interest expense over the
period from date of issuance to the maturity date. For the period ended
September 30, 2000, the Company recorded approximately $0.3 million as interest
expense related to the amortization of the value of the warrants.
The fair value of the warrants was calculated using the following
assumptions:
(1) risk free interest rate of 6.35%;
(2) stock price based on a planned initial public offering;
(3) dividend yield of 0%;
(4) life of 10 years; and
(5) volatility of 40%.
The Company incurred approximately $6.0 million of costs associated with
the issuance of the Notes. Those costs consisted of investment banker fees,
legal fees and other issuance costs that have been capitalized and are being
amortized to interest expense using the effective interest rate method over the
term of the Notes.
9
<PAGE>
Senior Secured Credit Facility
On July 12, 2000, the Company entered into an amended and restated credit
facility with Toronto Dominion (Texas), Inc. and GE Capital Corporation for a
$140.0 million senior secured credit facility ("credit facility") to replace the
Nortel Credit Facility that was repaid in full with the proceeds from the
issuance of the Notes. The credit facility permits the Company to borrow up to
$140.0 million through two tranches (Tranche A--$90.0 million and Tranche B--
$50.0 million) upon the Company meeting certain conditions, including a sale of
equity securities with gross proceeds of at least $70.0 million. The credit
facility contains certain financial ratios and other financial conditions
similar to the Nortel Credit Facility and is collateralized by all of the
Company's assets and assignment of the Sprint PCS Agreements. The credit
facility has a maturity date of June 30, 2008. Since the Company has not met
the condition of a sale of equity securities, no amounts have been available to
be borrowed under this credit facility as of September 30, 2000.
In connection with the early extinguishment of the Nortel Credit Facility,
the Company recorded an extraordinary loss of approximately $1.5 million related
to the write-off of the unamortized deferred financing costs at July 12, 2000.
The Company incurred approximately $4.0 million of costs associated with
obtaining the credit facility. Those costs consisted of loan origination fees,
legal fees and other debt issuance costs that have been capitalized and are
being amortized to interest expense using the straight-line method over the term
of the credit facility.
9. INCOME TAXES
Prior to July 12, 2000, the Predecessor Company operated as a limited
liability company ("LLC") and, as result, its losses were included in the income
tax returns of its members. Subsequent to July 12, 2000, the date of
reorganization as discussed in Note 2, the Company became a C Corporation and
began accounting for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." No benefit for
federal income taxes has been recorded for the period ended September 30, 2000
as the net deferred tax asset generated, primarily from temporary differences
related to the net operating loss carry forwards, would have been offset by a
full valuation allowance because it is not considered more likely than not that
these benefits will be realized due to the Company's limited operating history.
The Company has not provided any pro forma income tax information because any
net deferred tax asset would have been offset by a full valuation allowance due
to the Company's losses since inception. At September 30, 2000, the Company has
net operating loss carry forwards for federal income tax purposes of
approximately $12.8 million which are available to offset future taxable income
through 2020.
10. REDEEMABLE PREFERRED STOCK
Contemporaneously with the issuance of the 300,000 units discussed in Note
8, the Company issued to an investor group 9,090,909 shares of Series A-1
convertible participating preferred stock ("Series A-1 preferred stock") at a
purchase price of $5.50 per share, yielding gross proceeds of $50.0 million.
Each share of Series A-1 preferred stock is convertible into one share of common
stock. In addition, the investor group has agreed to purchase 14,000,000 shares
of Series A-2 preferred stock at a purchase price of $5.00 per share, subject to
certain conditions, unless the Company completes a public offering yielding
gross proceeds of $30.0 million or more prior to December 31, 2000.
The holders of Series A-1 preferred stock have conversion rights and voting
rights of common stockholders on an as-converted basis. Each share of Series A-1
preferred stock shall automatically convert into common stock under certain
conditions including a public offering of securities with gross proceeds of $50
million or a change of control. In the event that the Company has not completed
an initial public offering
10
<PAGE>
of common stock or consummated a business transaction meeting certain criteria
by the fifth anniversary of the investment, the investor group has the right to
request the Company to repurchase the Series A-1 preferred stock at fair market
value, unless the Company's Board of Directors determines, in its sole
discretion, that it is not in the Company's best interests to do so, whereupon
the investor group would have the right to force a sale of the Company subject
to the rights of Sprint and Sprint PCS under the Sprint PCS Agreements. The
Series A-1 preferred stock has a mandatory redemption for cash at an amount
equal to the stated value plus accrued dividends on July 12, 2011. The Company
accretes the carrying value of the Series A-1 preferred stock (net of offering
costs incurred) to the redemption amount by the effective interest method.
During the period ended September 30, 2000, the Company recorded approximately
$70,000 of accretion on the Series A-1 preferred stock.
The Company allocated the entire net proceeds received from the issuance of
Series A-1 preferred stock of approximately $46.4 million to the beneficial
conversion feature on the issuance of Series A-1 preferred stock. The beneficial
conversion feature was calculated at the issuance date of the Series A-1
preferred stock based on the difference between the conversion price of $5.50
per share and estimated fair market value of the common stock at that date. This
amount, however, was limited to the proceeds received from issuing the
beneficial convertible security. As the Series A-1 preferred stock was
immediately convertible, the Company also recorded accretion of approximately
$46.4 million to additional paid-in capital.
The Series A-1 preferred stock bears dividends, cumulative whether or not
earned, at the rate of 7.5% of the preferred liquidation preference per year
and, when paid, shall be paid only in additional shares of Series A-1 preferred
stock. Dividends shall accumulate and compound semi-annually. The preferred
liquation preference is equal to $5.50 per share plus any accrued but unpaid
dividends on such share of Series A-1 Preferred Stock. Dividends on each share
shall accrue on a daily basis and be cumulative from the date of original issue.
If there is a public offering prior to December 31, 2000 of at least $50.0
million and the price per share is $11.00 per share, then the dividends on the
Series A-1 preferred stock will be cancelled. During the period ended September
30, 2000, the Company recorded approximately $0.8 million for accrued dividends
on Series A-1 preferred stock as a charge to additional paid in capital.
In addition to the 7.5% dividend, when and if the Board of Directors
declares a dividend payable with respect to the then outstanding shares of
common stock, the holders of the Series A-1 Preferred Stock shall be entitled to
the amount of dividends per share as would be payable on the number of shares of
our common stock into which such shares of Series A-1 Preferred Stock could then
be converted. Upon the occurrence of a change of control prior to July 12, 2005,
the Company will be obligated to pay a special dividend to each holder of Series
A-1 Preferred Stock (except as to any changes of control in connection with a
business combination with a private company as to which the investor group
waives its right to receive such dividend) in an amount equal to the amount of
all unpaid dividends that would have been payable through July 12, 2005.
11. EQUITY
On March 12, 1999, the Company entered into a management agreement (the
"Management Agreement") with Mr. Yager to act as the Manager of the Predecessor
Company. The Management Agreement entitled Mr. Yager to a cash bonus equal to
2.5% of the fair market value of the Company in the event of a Transfer (as
defined in the Management Agreement) of all or substantially all of the assets
of the Company, or 2.5% of the fair market value of any transferred interests in
the Company, in excess of the applicable member's cumulative contributions.
Effective as of February 29, 2000, Mr. Yager and the Company agreed to terminate
the Management Agreement, and in exchange therefor Mr. Yager received a 1.5%
ownership interest in the Predecessor Company. In addition, the Company paid the
withholding tax obligation arising by reason of the issuance of the 1.5%
ownership interest to Mr. Yager, and the federal and state taxes on the issuance
of the ownership interest and payment of the withholding tax obligation. Based
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<PAGE>
upon the expected offering price of the initial public offering as determined on
April 24, 2000, the Company recorded non-cash compensation expense of
approximately $8.5 million related to the ownership interest granted and
recorded general and administrative expense of approximately $1.6 million
related to taxes paid by the Company on behalf of Mr. Yager.
On May 5, 2000, the Board of Directors approved the 2000 Long Term
Incentive Stock Plan. Under the plan, the Company may grant stock options, stock
appreciation rights, shares of common stock and performance units to employees,
consultants and directors. The total number of shares of common stock that can
be awarded under the plan is 6,500,000 shares, which will be increased on
December 31 of each year beginning on December 31, 2000 by a number of shares
equal to 1% of the number of shares then outstanding, up to maximum of
8,000,000. On July 12, 2000, the Board of Directors granted options to members
of management, employees and directors to acquire 1,558,750 shares of common
stock with an exercise price of $5.50 per share.
At September 30, 2000, the following is a summary of options granted and
outstanding:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <C> <C>
Outstanding at beginning of period - $ -
Granted 1,558,750 5.50
Exercised - -
Forfeited (2,750) 5.50
--------- -----
Outstanding at end of period 1,556,000 5.50
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations to account for its
employee and director stock options. Compensation expense is determined as the
excess of the fair value of the Company's common stock at date of grant over the
exercise price. Based upon the expected offering price of a planned initial
public offering, the Company recognized total unearned compensation expense of
approximately $8.3 million. This amount is being amortized as compensation
expense over the vesting period of the options; such vesting period begins on
the employee's date of hire and extends for four years. For directors, the
vesting period begins on the date of grant and extends for four years. Total
non-cash compensation expense related to such options was approximately $2.2
million for the period ended September 30, 2000.
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<PAGE>
If compensation expense for the stock option grants had been determined
based on fair value at the grant date consistent with the requirements of SFAS
No. 123, "Accounting for Stock Based Compensation," the Company's net loss
applicable to common stockholders and net loss per share would have been the pro
forma amounts indicated below for the period ended September 30, 2000:
<TABLE>
<S> <C>
Net loss:
As reported $(83,269,695)
Pro forma $(83,902,022)
Basic and diluted loss per share:
As reported $ (1.86)
Pro forma $ (1.87)
</TABLE>
The Company's calculation of fair value of the options was made using the
Black-Scholes model with the following assumptions:
(1) risk free interest rate of 6.35%;
(2) stock price based on a planned initial public offering;
(3) dividend yield of 0%;
(4) life of 4 years; and
(5) volatility of 40%
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
For the period
from
For the January 22, 1999
Nine-month (date of inception)
Period Ended through
September 30, 2000 September 30, 1999
(in thousands)
<S> <C> <C>
Supplemental disclosure of cash flow
information - cash paid for interest $ 1,971 $ -
Supplemental schedule of noncash investing
and financial activities:
Accounts payable incurred for the
acquisition of property, equipment and
construction in progress $10,223 $ 2,866
Accounts payable incurred for the
acquisition of microwave relocation costs 1,884 -
Accrued dividends on redeemable preferred stock 812 -
Accretion to the redemption amount of
preferred stock 69 -
Grant of stock options 8,247 -
Issuance of warrants in connection with the
senior discount notes 24,859 -
Issuance of warrants to Sprint PCS 9,147 -
</TABLE>
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<PAGE>
13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On July 8, 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133." SFAS No. 137
defers the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to all fiscal years beginning after June
15, 2000. The Company is currently evaluating the impact of adoption of SFAS No.
133. The adoption is not expected to have a material effect on the Company's
results of operations, financial position, or cash flows.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board Opinion 25" ("Opinion 25"). This
Interpretation clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000; however, certain conclusions in this Interpretation
cover specific events that occur after either December 15, 1998, or January 12,
2000. To the extent that this Interpretation covers events occurring during the
period after December 15, 1998, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying this Interpretation will be
recognized on a prospective basis from July 1, 2000. The Company does not expect
FIN 44 to have a material effect on the Company's results of operations,
financial position, or cash flows.
On December 3, 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). This bulletin specifically addresses revenue
recognition requirements for nonrefundable fees, such as activation fees,
collected by a company upon entering into an arrangement with a customer, such
as an arrangement to provide telecommunications services. On June 26, 2000, the
SEC released SAB 101B, which delays the required implementation of SAB 101 until
no later than the fourth quarter of fiscal years ending on or after December 31,
2000. The Company does not expect the effects of this bulletin to have a
material effect on the Company's results of operations, financial position, or
cash flows.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-Looking Statements
This quarterly report on Form 10-Q contains statements about future events
and expectations, which are "forward-looking statements". Any statement in this
report that is not a statement of historical fact may be deemed to be a forward-
looking statement. These statements include:
. forecasts of growth in the number of consumers using PCS services;
. statements regarding our plans for and costs of the build-out of our
network;
. statements regarding our anticipated revenues, expense levels,
liquidity and capital resources and projection of when we will achieve
break-even operating cash flow; and
. other statements, including statements containing words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek,"
"intend" and other similar words that signify forward-looking
statements.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements.
Specific factors that might cause such a difference include, but are not limited
to:
. our dependence on our affiliation with Sprint PCS;
. the need to successfully complete the build-out of our network;
. our lack of operating history and anticipation of future losses;
. our dependence on Sprint PCS' back office services;
. potential fluctuations in our operating results;
. our potential need for additional capital;
. our potential inability to expand our services and related products in
the event of substantial increases in demand for these services and
related products;
. our competition; and
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<PAGE>
. our ability to attract and retain skilled personnel.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. We
do not undertake any obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors described in other documents we
have filed and will file from time to time with the Securities and Exchange
Commission.
Overview
On January 22, 1999 we entered into the Sprint PCS agreements whereby we
became the exclusive Sprint PCS affiliate with the right to market 100% digital,
100% PCS wireless products and services under the Sprint and Sprint PCS brand
names in fifteen markets in Illinois and Iowa. In March 2000, the Sprint PCS
agreements were amended to add twenty additional markets to our territory that
increased the size of our territory from a total population of 2.8 million to a
total population of 7.0 million.
Under the Sprint PCS agreements, we manage our network utilizing Sprint
PCS' licensed spectrum as well as using the Sprint and Sprint PCS brand names
during our affiliation with Sprint PCS. We also buy our network equipment,
handsets and accessories at the same discounted rates offered by vendors to
Sprint PCS based on its large volume purchases. These discounts reduce the
overall capital required to build our network and significantly reduce our costs
of handsets and accessories. Additionally, we have access to Sprint PCS national
marketing support and distribution programs. While we must support Sprint PCS'
regional and national pricing plans, we also have the flexibility to offer local
pricing plans with prior approval from Sprint PCS. However, if Sprint PCS were
to price its regional or national pricing plans based upon its own objectives,
it could set price levels that may not be economically sufficient for our
business and could potentially impact our results from operations. Sprint PCS
collects all revenues from our customers and remits the net amount to us. An
affiliation fee of 8% of collected service revenues from Sprint PCS customers
based in our territory, excluding outbound roaming, and from non-Sprint PCS
customers who roam onto our network, is retained by Sprint PCS and recorded as a
cost of service. Revenues generated from the sale of handsets and accessories,
inbound and outbound Sprint PCS roaming fees, and from roaming services provided
to Sprint PCS customers who are not based in our territory are not subject to
the 8% affiliation fee.
Under the Sprint PCS agreements, we contract with Sprint PCS to provide
back office services such as customer activation, billing, collections and
customer care. We currently purchase these services from Sprint PCS to take
advantage of Sprint PCS' economies of scale, to accelerate our build-out and
market launches and to lower our initial capital requirements. The cost for
these services is primarily calculated on a per customer and per transaction
basis and is recorded as an operating expense. Sprint PCS may change the cost
for these services once in every 12-month period. The Sprint PCS agreements also
provide that with nine months' prior written notice, Sprint PCS may terminate
offering any service. If Sprint PCS were to terminate a service for which we
have not yet developed a cost-effective alternative, our operating costs may
increase beyond our expectations and negatively impact our results of
operations. It is not possible, however, to
16
<PAGE>
estimate with certainty the extent of any increase in our operating costs.
Since the date of inception, we have incurred substantial costs to negotiate
the Sprint PCS agreements and our debt financing, to design, engineer and build
out our network in our initial territory and to open our retail stores. We
launched service in our first two markets, Bloomington, Illinois and the Quad
Cities (Rock Island and Moline, Illinois; and Davenport and Bettendorf, Iowa) in
December 1999. In the first nine months of 2000, we launched service in the
remaining thirteen markets of our initial territory. As of September 30, 2000,
our network in those markets covered approximately 2,097,000 residents, or
approximately 75% of a total population of 2,783,000, and we had over 25,000
customers. In November 2000, we launched service in two additional markets,
Grand Rapids and Saginaw-Bay City, Michigan. With these two new markets
launched, our network now covers approximately 3,347,000 residents or 75% of a
total population of 4,451,000.
For the nine months ended September 30, 2000, we recorded a net loss of
approximately $36.0 on total revenues of approximately $12.6 million. For the
period January 22, 1999 (date of inception) through September 30, 1999, we had
no revenues and our net loss was approximately $1.3 million. As of September 30,
2000, our accumulated deficit was approximately $40.4 million and we had
incurred approximately $105.9 million of capital expenditures and construction
in progress related to the build-out of our network. While we anticipate
operating losses to continue, we expect revenue to increase substantially as the
number of our customers increase. All costs of start-up and organizational
activities have been expensed as incurred in accordance with American Institute
of Certified Public Accountants Statement of Position No. 98-5, "Reporting on
the Costs of Start-Up Activities."
Results of Operations
For the three-months ended September 30, 2000 compared to the three-months ended
September 30, 1999
From the date of inception through December 31, 1999, our operating activities
were directed towards the development of our business including executing our
build-out plan and developing our network infrastructure. In January 1999, we
signed the Sprint PCS agreements to operate as the exclusive affiliate of Sprint
PCS in our initial territory. We launched our first markets in December 1999.
Net loss. Our net loss for the three months ended September 30, 2000 was
approximately $15.6 million compared to a net loss of approximately $0.5 million
for the same three-month period in 1999. The loss was caused primarily by cost
of providing service exceeding service revenues, handset subsidies, selling,
general and administrative expenses, depreciation and amortization associated
with the markets launched in 1999 and 2000 and interest expense associated with
our senior discount notes issued in July 2000. In addition, we recorded non-cash
compensation expense of approximately $2.2 million, which is related to the
amortization of the deferred compensation expense associated with the stock
options granted in July 2000, and recorded an extraordinary loss on the early
extinguishment of debt of approximately $1.5 million related to the write-off of
the unamortized deferred financing costs of the Nortel credit facility. Our net
loss for the three months ended September 30, 1999 was approximately $0.5
million and was comprised primarily of network, selling, general and
administrative expenses associated with the preparation of the launch of our
initial markets.
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<PAGE>
Service revenue. For the three months ended September 30, 2000, service
revenue totaled approximately $6.3 million and was comprised of customer revenue
of approximately $3.7 million and roaming revenue of approximately $2.6 million.
For the same three-month period in 1999, we had no service revenue, as we had
not yet launched service in any of our markets.
. Customer revenue consists of services billed to our customers for
monthly Sprint PCS service in our territory under a variety of service
plans. These plans generally mirror national plans offered by Sprint
PCS.
. We receive Sprint PCS roaming revenue at a per-minute rate from Sprint
PCS or another Sprint PCS affiliate when Sprint PCS subscribers
outside of our territory use our network. Pursuant to the Sprint PCS
agreements, Sprint PCS can change this per-minute rate after December
31, 2001.
. Roaming revenue also includes non-Sprint PCS roaming revenue from
other wireless service providers other than Sprint PCS, when those
providers' subscribers roam on our network as well as roaming revenue
from our customers when they roam on non-Sprint PCS networks.
. Our average monthly revenue per user, including long distance and
roaming, for the three months ended September 30, 2000 was
approximately $111. Without roaming revenue, average monthly revenue
per user was approximately $66.
Equipment and other revenues. We record 100% of the revenue from the sale of
our equipment from our retail stores, net of an allowance for returns as
equipment revenue. The amount recorded during the three months ended September
30, 2000 totaled approximately $0.9 million. Because we had not launched service
in our initial markets, we did not record any equipment and other revenue in the
same period in 1999.
Cost of service. Cost of providing service to Sprint PCS customers totaled
approximately $5.2 million for the three months ended September 30, 2000,
compared to approximately $0.3 million for the same period in 1999. Cost of
service includes billing, customer care, network monitoring, cost of operations,
fees related to facilities and other transport lines, interconnection fees,
Sprint PCS roaming fees, non-Sprint PCS roaming fees and other expenses related
to operations. We pay Sprint PCS roaming fees when our customers use the Sprint
PCS network outside of our territory. We pay non-Sprint PCS roaming fees to
other wireless service providers when our customers use their network. Also
included in the cost of service expenses for the three months ended September
30, 2000 is the 8% of collected revenue retained by Sprint PCS of approximately
$0.3 million compared to none for the three-months ended September 30, 1999
because we had not yet launched service.
Cost of equipment. Cost of equipment which includes the costs of handsets,
accessories, and handset subsidies totaled approximately $2.5 million for the
three months ended September 30, 2000. There was no cost of equipment expense
for the three months ended September 30, 1999 because we had not yet launched
service. Because we subsidize the price of handsets for competitive reasons, we
expect and have budgeted for the cost of handsets to continue to exceed the
retail sales price for the foreseeable future.
Selling expenses. Selling expenses totaled approximately $2.8 million and
approximately $0.1 million for the three months ended September 30, 2000 and
September 30, 1999, respectively.
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<PAGE>
Included in selling expenses are advertising and promotional costs, salaries and
sales commissions and expenses related to our distribution channels. The
increase in costs is substantially due to the launching of fifteen markets
beginning in December 1999.
General and administrative expenses. General and administrative expenses were
approximately $4.5 million for the three months ended September 30, 2000 and
approximately $0.3 million for the three months ended September 30, 1999.
Included in general and administrative costs are finance and executive salaries
and bonuses, employee benefit costs, legal fees and other professional service
fees. Also included for the three months ended September 30, 2000 is a non-cash
compensation expense of approximately $2.2 million related to the amortization
of the deferred compensation expense associated with the stock options granted
in July 2000. We apply the provisions of Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees". Deferred compensation expense is
recorded for the difference between the exercise price and the fair market value
of our common stock at the date of grant and is amortized as non-cash
compensation expenses over the vesting period of the options. We did not grant
any options in the same period in 1999. The remaining increase in general and
administrative expenses is due to the launching of fifteen markets beginning in
December 1999.
Depreciation and amortization. For the three months ended September 30, 2000,
depreciation and amortization totaled approximately $2.6 million. Depreciation
is calculated using the straight-line method over the useful life of the asset.
We begin to depreciate the assets for each market after we launch service in
that market. For the three months ended September 30, 1999, we recorded $16,500
of amortization expense.
Interest income. Interest income of approximately $1.9 million and $45,000 was
recorded for the three months ended September 30, 2000 and September 30, 1999,
respectively. The increase in interest income is because of the investment of
the proceeds of the senior discount notes received in July 2000.
Interest expense. Interest expense of approximately $5.7 million, net of
capitalized interest of approximately $0.3 million, was recorded in the three
months ended September 30, 2000 and related primarily to interest accrued on the
senior discount notes and the amortization of the discount and warrants issued
in connection with the issuance of the senior discount notes using the effective
interest rate method over the term of the senior discount notes. For the same
period in 1999, we recorded interest expense of approximately $7,000 related to
the Nortel financing.
Gain on tower sales. For the three months ended September 30, 2000, fifteen
towers were sold to American Tower for $3.0 million. The purchase price of
approximately $0.8 million for three of the towers was applied to the $2.0
million advance that we received in 1999 for the sale of the fifty-third through
sixtieth tower. This sale resulted in a gain of approximately $1.4 million, of
which approximately $0.2 million was recognized at the time of the sale and the
remainder was deferred and is being amortized as a reduction in rental expense
over the initial lease term of ten years for the related towers. For this same
three-month period in 1999, ten towers were sold for $2.5 million resulting in a
gain of approximately $1.1 million of which approximately $0.2 million was
recognized at the time of the sale and the remainder was deferred.
Extraordinary item. In connection with the refinancing of the Nortel credit
facility with the Toronto Dominion and GE Capital Corporation credit facility,
we recorded an extraordinary loss on the early extinguishment of debt of
approximately $1.5 million in the three months ended
19
<PAGE>
September 30, 2000 related to the write-off of the unamortized deferred
financing costs of the Nortel credit facility.
For the nine-month period ended September 30, 2000 compared with the period
January 22, 1999 (date of inception) through September 30, 1999
Net loss. From the date of inception, our operating activities have been
directed towards the development of our business including executing our build-
out plan and developing our network infrastructure. For the nine-month period
ended September 30, 2000, we recorded a loss of approximately $36.0 million on
total revenues of approximately $12.6 million. The loss was caused primarily by
cost of services exceeding service revenues, handset subsidies, selling, general
and administrative expenses, depreciation and amortization associated with the
markets launched in 1999 and 2000 and an extraordinary loss on the early
extinguishment of debt related to the write-off of the unamortized deferred
financing costs of the Nortel credit facility. In addition, we recorded non-cash
compensation expense of approximately $8.5 million and related taxes of
approximately $1.6 million associated with the issuance of a 1.5% ownership
interest in our predecessor, Illinois PCS, LLC, to our President and Chief
Executive Officer. We also recorded approximately $2.2 million of non-cash
compensation expense, which is related to the amortization of the deferred
compensation expense associated with the stock options granted in July 2000. Our
net loss for the period ended September 30, 1999 was approximately $1.3 million
and was comprised primarily of network build-out, selling, and general and
administrative expenses associated with the preparation of the launch of our
initial markets.
Service revenues. For the nine months ended September 30, 2000, service
revenue totaled approximately $10.7 million and was comprised of customer
revenue of approximately $6.4 million and roaming revenue of approximately $4.3
million. For the period ended September 30, 1999, we had no service revenue as
we had not yet launched service. The number of our subscribers increased from
approximately 1,900 at December 31, 1999 to over 25,000 at September 30, 2000.
Our average monthly revenue per user, including long distance and roaming
revenue, was approximately $108. Without roaming revenue, average monthly
revenue per user was approximately $65.
Equipment and other revenue. Equipment and other revenue from the sale of
phones and accessories, net of a sales allowance, totaled approximately $1.9
million for the nine months ended September 30, 2000. For the period ended
September 30, 1999, we had no equipment and other revenue because we had not yet
launched service.
Cost of service. Cost of providing service to Sprint PCS customers in our
territory totaled approximately $10.0 million and $0.5 million for the nine
months ended September 30, 2000 and the period ended September 30, 1999,
respectively. Cost of service includes billing, customer care, network
monitoring, cost of operations, fees related to facilities and other transport
lines, interconnection fees, Sprint PCS roaming fees, non-Sprint PCS roaming
fees and other expenses related to operations. Included in the cost of service
expenses for the nine-month period ended September 30, 2000 is the 8% of
collected revenue retained by Sprint PCS in the amount of approximately $0.5
million.
Cost of equipment. Cost of equipment sold for the nine months ended September
30, 2000 totaled approximately $5.1 million. There was no cost of equipment
expense recorded for same period in 1999 because we had not yet launched
service. Because we subsidize the price of
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<PAGE>
handsets for competitive reasons, we expect and have budgeted for the cost of
handsets to continue to exceed the retail sales price for the foreseeable
future.
Selling expenses. Selling expenses include advertising and promotional costs,
salaries, sales commissions, and expenses related to our distribution channels.
For the nine months ended September 30, 2000, selling expenses totaled
approximately $5.7 million compared with approximately $0.1 million for the
period ended September 30, 1999. The increase in costs is substantially due to
the launching of fifteen markets beginning in December 1999.
General and Administrative. General and administrative expenses were
approximately $16.9 million for the nine-month period ended September 30, 2000
and approximately $0.8 million for the period ended September 30, 1999. Included
in general and administrative costs are finance and executive salaries and
bonuses, employee benefit costs, legal fees and other professional service fees.
Also included in the nine months ended September 30, 2000 is non-cash
compensation expense and taxes on non-cash compensation expense totaling
approximately $12.3 million. Of this amount, approximately $8.5 million was the
non-cash compensation expense which related to a one-time charge for the
issuance of a 1.5% ownership interest to our President and Chief Executive
Officer based on an expected initial public offering price, and approximately
$1.6 million of withholding taxes we have paid in connection with the issuance
of this 1.5% ownership interest. The other $2.2 million of non-cash compensation
expense is related to the amortization of the deferred compensation expense
associated with the stock options granted in July 2000. We apply the provisions
of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees". Deferred compensation expense is recorded for the difference between
the exercise price and the fair market value of our common stock at the date of
grant, and is amortized as non-cash compensation expense over the vesting period
of the options. We did not grant any options during the same period in 1999. The
remaining increase in general and administrative expenses is due to the
launching of fifteen markets beginning in December 1999.
Depreciation and amortization. Depreciation and amortization expense for the
nine-months ended September 30, 2000 totaled approximately $5.5 million. We
begin to depreciate the assets when we launch service in a market. We recorded
$16,500 of amortization expense for the period ended September 30, 1999.
Interest income. For the nine months ended September 30, 2000, interest income
was approximately $1.9 million and was earned on the investment of available
funds. For the period ended September 30, 1999, interest income was $56,000. The
increase in interest income is because of the investment of the proceeds of the
senior discount notes received in July 2000.
Interest expense. For the nine months ended September 30, 2000, interest
expense was approximately $6.3 million, net of capitalized interest of
approximately $1.5 million. For the period ended September 30, 1999, interest
expense was $7,000. In 1999, interest expense related to the Nortel credit
facility. Interest expense in 2000 is related both to the Nortel financing, and
interest accretion for the senior discount notes.
Gain on tower sales. For the nine months ended September 30, 2000, thirty-
seven towers were sold to American Tower for approximately $9.3 million
resulting in a gain of approximately $3.7 million, of which approximately $0.5
million was recognized at the time of the sale and the remainder was deferred
and is being amortized as a reduction in rental expense over the initial lease
term of ten years for the related towers. For the period ended September 30,
1999, we sold
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<PAGE>
10 towers for $2.5 million resulting in a gain of approximately $1.1 million of
which approximately $0.2 million was recognized and the remainder was deferred.
Extraordinary item. In connection with the refinancing of the Nortel credit
facility with the Toronto Dominion and GE Capital Corporation credit facility,
we recorded an extraordinary loss on the early extinguishment of debt of
approximately $1.5 million in the nine months ended September 30, 2000 related
to the write-off of the unamortized deferred financing costs of the Nortel
credit facility.
Income Taxes
Our financial statements did not report any benefit for federal and state
income taxes because we had elected to be taxed as a partnership prior to our
reorganization from a limited liability company into a C corporation holding
company structure. Prior to July 12, 2000, the date of the reorganization, the
owners of our predecessor limited liability company recorded our tax losses on
their own income tax returns. Subsequent to this date, we are accounting for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." No benefit for federal income taxes has been
recorded as of September 30, 2000, as the net deferred tax asset generated,
primarily from temporary differences related to the net operating loss carry
forwards, would have been offset by a full valuation allowance because it is not
considered more likely than not that these benefits will be realized due to our
losses since inception.
Liquidity and Capital Resources
From the date of inception through July 12, 2000, we financed our operations
through an aggregate of $30.0 million of equity contributions from our owners
and through financing provided by Nortel. As of July 12, 2000, we had a $48.0
million credit facility with Nortel, of which approximately $40.3 million had
been drawn. On July 12, 2000, we closed our offering of 300,000 units consisting
of our 14% senior discount notes due 2010 and warrants to purchase 2,982,699
shares of our common stock for gross proceeds of approximately $152.3 million.
The Nortel facility was repaid in full with funds from the senior discount notes
offering. Also on July 12, 2000, we entered into a definitive agreement with an
investor group led by The Blackstone Group pursuant to which we issued $50.0
million of our redeemable convertible preferred stock and received net proceeds
of approximately $46.4 million. The agreement includes a commitment by the
investor group to purchase, subject to certain conditions, an additional $70.0
million of our redeemable convertible preferred stock in the event that we do
not complete an offering with gross proceeds of at least $30.0 million prior to
December 31, 2000.
In addition on July 12, 2000, we entered into our new senior secured credit
facility (which was documented as an amended and restated credit agreement) with
Toronto Dominion (Texas), Inc. and GE Capital Corporation for a $140.0 million
senior secured credit facility to replace the Nortel financing. Currently, no
borrowings can be made under our $140.0 million senior secured credit facility
until we have made an equity contribution or subordinated loan to our wholly
owned subsidiary iPCS Wireless, Inc. of the net proceeds of a $70.0 million
equity offering.
The senior secured credit agreement provides for two different tranches of
borrowings totaling $140.0 million. The Tranche A Commitment provides for
borrowings up to $90.0 million and the Tranche B Commitment provides for
borrowings up to $50.0 million.
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<PAGE>
Commencing March 31, 2004, and on the last day of each calendar quarter
ending during the periods set forth below, the Tranche A commitment as of March
30, 2004 shall be automatically and permanently reduced by the percentage amount
set forth below for the quarters indicated:
- for the four quarters commencing with the fiscal quarter ending March
31, 2004, 2.50% per quarter;
- for quarters five through eight, 3.75% per quarter;
- for quarters nine through sixteen, 6.25% per quarter; and
- for the last two quarters, 12.5% per quarter.
Commencing March 31, 2004, we must begin to repay, in quarterly
installments, the principal on all borrowings outstanding as of March 30, 2004
made under the Tranche B Commitment. A fixed percentage on all Tranche B
borrowings will be due each quarter as follows:
- for the first four quarters commencing with the fiscal quarter ending
March 31, 2004, 2.50% of the principal balance of the loan is due per
quarter;
- for quarters five through eight, 3.75% per quarter;
- for quarters nine through sixteen, 6.25% per quarter; and
- for the last two quarters, 12.5% per quarter.
If we borrow the maximum amount under Tranche B, the aggregate amount
required to be repaid for each of the four periods above will be $5.0 million,
$7.5 million, $25.0 million, and $12.5 million, respectively.
Any principal that has not been paid by the maturity date, June 30, 2008,
is due at that time.
We may voluntarily prepay any of the loans at any time. Tranche A permits
reborrowings on a revolving basis but amounts repaid under Tranche B may not be
reborrowed.
We will have to make mandatory prepayments under certain circumstances,
including among others:
- 50% of our excess annual cash flow as computed under the senior
secured credit agreement, commencing April 30, 2004 with respect to
the fiscal year ending December 31, 2003;
- any amount in excess of $1.0 million per calendar year received as net
proceeds of asset sales outside the ordinary course of business or
insurance proceeds subject to certain exceptions, to the extent not
reinvested in property or assets within a stated period of time;
- 50% of the net proceeds of any equity issuance by us or any subsidiary
excluding the
23
<PAGE>
committed issuance of the convertible preferred stock, an initial
public offering and any offering to a borrower or guarantor party to
the senior secured financing; and
- 100% of the net proceeds of a debt issuance by us or any subsidiary
excluding permitted indebtedness.
All prepayments described above are applied to the outstanding loan
balances pro rata between Tranche A and Tranche B and pro rata across the
maturities.
From the date of the senior secured credit agreement through and including
the date on which EBITDA is greater than zero for two consecutive fiscal
quarters, we may borrow money at the lesser of either:
- a base rate loan with an interest rate equal to 2.75% plus the higher
of:
- the prime rate of the Toronto-Dominion Bank, New York Branch or
- the federal funds effective rate plus 0.5%; or
- a Eurodollar loan with an interest rate equal to the London interbank
offered rate, plus 3.75%.
After the date on which EBITDA is greater than zero for two consecutive fiscal
quarters, the base rate margin will range from 2.750% to 2.250% and the
Eurodollar loan margin will range from 3.750% to 3.250%, depending upon our
leverage ratio as of the most recently ended fiscal quarter.
The new senior secured credit facility will be used to finance capital
expenditures, certain acquisitions and investments for working capital needs and
other general corporate purposes.
The senior discount notes mature in ten years (July 15, 2010), carry a
coupon rate of 14%, and provide for interest deferral for the first five years.
The senior discount notes will accrete in value at a rate of 14% per annum until
July 15, 2005, after which, interest will begin to accrue and will be payable
semiannually beginning on January 15, 2006.
We believe that the net proceeds from our sale of senior discount notes,
the net proceeds of our private placement of redeemable convertible preferred
stock to an investor group led by The Blackstone Group, and anticipated
borrowings under our new senior secured credit facility (the availability of
which is subject to certain conditions) will be adequate to fund our network
build out, anticipated operating losses, working capital requirements and other
capital needs through 2003.
Net cash used in operating activities was approximately $1.2 million from
the date of inception through September 30, 1999 and was approximately $11.9
million for the nine months ended September 30, 2000. Cash used in operating
activities was primarily attributable to operating losses, depreciation and
amortization, non-cash interest, non-cash compensation expense and working
capital needs.
Net cash used in investing activities was approximately $11.0 million from
the date of inception through September 30, 1999 and approximately $60.2 million
for the nine months ended
24
<PAGE>
September 30, 2000. The expenditures were related primarily to the purchase of
our network infrastructure equipment, offset by the proceeds of tower sales, and
the purchase of network assets in Michigan from Sprint PCS.
Net cash provided by financing activities from the date of inception through
September 30, 1999 was approximately $17.5 million and approximately $177.6
million for the nine months ended September 30, 2000 and consisted primarily of
equity contributions and debt borrowings offset by repayments and debt issuance
costs. The significant increase in cash provided by financing activities in 2000
is related to the proceeds from the sale of redeemable convertible preferred
stock and the issuance of our senior discount notes offset by the repayment in
full of the Nortel debt of approximately $40.3 million.
In May 1999, we signed a tower sale and leaseback agreement with American
Tower Corporation. We have agreed to construct between 60 and 80 wireless
communications towers, sell the towers to American Tower and then lease back
tower space from American Tower. We expect the average construction costs for
each tower to be approximately $150,000. Under the agreement we will receive
approximately $250,000 for each tower sold to American Tower and we will pay
rent in the amount of $1,100 per month (which increases at an annual rate of 3%
per annum) for tower space and no more than $350 per month for each
corresponding ground lease.
As of September 30, 2000, we had received $13.0 million related to the sale of
fifty-five towers under this agreement and had incurred an aggregate of
approximately $8.3 million of costs to construct such towers. American Tower has
also provided us with a one-time advance of $2.0 million. This advance was a
prepayment of American Tower's obligations under the agreement, and will be
credited ratably toward the purchase price of the fifty-third through sixtieth
towers. As of September 30, 2000, approximately $0.8 million of the advance had
been applied toward the sale of towers fifty-three through fifty-five. In the
event the agreement is terminated and we do not sell any more towers to American
Tower, the amount of the advance not yet applied must be returned to American
Tower plus accrued interest at a rate of 5% per annum.
As of September 30, 2000, our primary source of liquidity is approximately
$108.2 million in cash and cash equivalents.
Option Territory
As part of Sprint PCS' agreement to grant us expansion territory, we have been
granted the option, but do not have the obligation, to add to our territory the
Iowa City and Cedar Rapids, Iowa markets that have already been launched by
Sprint PCS and to purchase from Sprint PCS related assets in those markets.
These markets, which were launched by Sprint PCS in February 1997, have a total
population of approximately 405,000 and had over 11,000 Sprint PCS subscribers
as of September 30, 2000. Our option expires on January 31, 2001. The purchase
price payable by us for the purchase of assets upon exercise of the option would
be payable within 90 days of the date we exercise the option as a condition to
adding the Iowa City and Cedar Rapids Iowa markets to our territory. The
purchase price for the assets and subscriber accounts was initially $25.2
million and increases monthly to a purchase price of $28.8 million in January
2001. The purchase price is subject to an upward adjustment based upon the
number of subscribers in the two additional markets at the option exercise date.
We would become the manager of all Sprint PCS subscribers in these markets upon
the closing of the asset purchase. We have not determined whether we will
exercise this option, and our decision will depend upon an ongoing analysis of
the
25
<PAGE>
option territory and whether exercising this option is consistent with the best
use of our capital.
Seasonality
The wireless industry has historically experienced higher customer
additions and handset sales in the fourth calendar quarter as compared to the
other three calendar quarters. A number of factors contribute to this including:
-- the primary focus on retail distribution, which is dependent upon the
year-end holiday shopping season;
-- competitive pricing pressures; and
-- aggressive marketing and promotions initiated during the period.
Inflation
Management believes that inflation has not had, and will not have, a
material adverse effect on our results of operations.
Effect of Recently Issued Accounting Pronouncements
On July 8, 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 defers the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," to all
fiscal years beginning after June 15, 2000. We are currently evaluating the
impact of adoption of SFAS No. 133. Our adoption is not expected to have a
material effect on our results of operations, financial position, or cash flows.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board Opinion 25" ("Opinion 25"). This
Interpretation clarifies (a) the definition of employee for purposes of applying
Opinion 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000; however, certain conclusions in this Interpretation
cover specific events that occur after either December 15, 1998, or January 12,
2000. To the extent that this Interpretation covers events occurring during the
period after December 15, 1998, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying this Interpretation will be
recognized on a prospective basis from July 1, 2000. We do not expect FIN 44 to
have a material effect on our results of operations, financial position, or cash
flows.
On December 3, 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). This bulletin specifically addresses revenue
recognition requirements for nonrefundable fees, such as activation fees,
collected by a company upon entering into an arrangement with a customer, such
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<PAGE>
as an arrangement to provide telecommunications services. On June 26, 2000, the
SEC released SAB 101B, which delays the required implementation of SAB 101 until
no later than the fourth quarter of fiscal years ending on or after December 31,
2000. We do not expect the effects of this bulletin will have a material effect
on our results of operations, financial position, or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We do not engage in commodity futures trading activities and do not enter
into derivative financial instrument transactions for trading or other
speculative purposes. We also do not engage in transactions in foreign
currencies that could expose us to market risk.
We are subject to interest rate risk on our senior secured credit facility
and any future financing requirements. Our variable rate debt consists of
borrowings made under our senior secured credit facility as to which no
borrowings have been made at September 30, 2000. The senior secured credit
facility requires us to enter into an interest rate protection agreement within
six months after July 12, 2000, the effective date, to fix the interest rate of
at least 50% of debt that does not have a fixed interest rate. To date, we have
not entered into such an agreement, but we expect to do so prior to the date
required.
The following table presents the estimated future outstanding long-term
debt at the end of each year and future required annual principal payments for
each year then ended associated with our senior secured credit facility based on
our projected level of long-term indebtedness:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
1999 2000 2001 2002 2003 2004 Thereafter
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Senior discount notes:
Fixed interest rate........ 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%
Principal payments......... -- -- -- -- -- -- $300,000
Nortel financing............ $27,571 -- -- -- -- -- --
Senior secured credit ___
facility(1)................ -- $25,000 $50,000 $140,000 $126,000 $105,000
Variable interest rate(2).. 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Principal payments.......... -- -- -- -- -- $ 14,000 $126,000
</TABLE>
_______________________
(1) The amounts presented for periods subsequent to December 31, 1999 represent
estimated year-end long-term debt balances under our senior secured
financing based upon a projection of the funds borrowed under that facility
pursuant to such current network build-out plan.
(2) Interest rate on our senior secured financing equals the lesser of either:
-- a base rate loan with an interest rate equal to the higher of
-- the prime rate of the Toronto-Dominion Bank, New York Branch plus
2.75% or
-- the federal fund effective rate plus 0.5%; or
-- the London interbank offered rate plus 3.75%. The London interbank
offered rate is assumed to equal 6.25% for all periods presented.
Our primary market risk exposure relates to:
-- the interest rate risk on our long-term and short-term borrowings; and
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<PAGE>
-- the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants.
We manage the interest rate risk on our outstanding long-term and short-
term debt through the use of fixed and variable rate debt and interest rate caps
under the senior secured credit agreement. While we cannot predict our ability
to refinance existing debt or the impact interest rate movements will have on
our existing debt, we continue to evaluate our financial position on an ongoing
basis.
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<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
Set forth below is a description of our sales of unregistered equity
securities during the three months ended September 30, 2000.
On July 12, 2000, Illinois PCS, LLC merged with and into iPCS Wireless,
Inc., a wholly owned subsidiary of iPCS, Inc. In connection with this
reorganization into a holding company structure, we issued 44,869,643
unregistered shares of common stock to the owners of Illinois PCS, LLC in
exchange for 100% of the limited liability company membership interests of
Illinois PCS, LLC.
The persons who received our common stock in connection with the
reorganization, the consideration received by us for such common stock and the
number of shares of common stock issued are set forth in the table below.
<TABLE>
<CAPTION>
Party Receiving Securities Number of Percentage of
Nature of Shares of our Membership Interest
Consideration Common Stock Received in
to be Issued Exchange for our
Common Stock (1)
<S> <C> <C> <C>
Geneseo Communications, Inc.................... Membership 15,468,809 34.5%
Interest
Cambridge Telcom, Inc.......................... Membership 13,258,979 29.6%
Interest
Cass Communications Management, Inc............ Membership 4,419,660
Interest 9.9%
Technology Group, LLC.......................... Membership 4,419,660 9.9%
Interest
Montrose Mutual PCS, Inc....................... Membership 4,419,660 9.9%
Interest
Gridley Enterprises, Inc....................... Membership 2,209,830 4.9%
Interest
</TABLE>
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<PAGE>
Timothy M. Yager.................... Membership 673,045 1.5%
Interest
------------------------------
(1) Exceeds 100% because of rounding.
On July 12, 2000, we issued 9,090,909 shares of Series A-1 Convertible
Participating Preferred Stock (the "Preferred Stock") at a purchase price of
$5.50 per share for aggregate proceeds of $50.0 million less approximately $3.6
million in underwriting discounts, commissions and other offering expenses. The
terms pursuant to which the Preferred Stock is convertible into common stock are
set forth in Note 10 to our unaudited consolidated financial statements. The
purchasers of the Preferred Stock and the amount purchased are listed in the
table below.
<TABLE>
<CAPTION>
Name of Purchaser Number of Shares
<S> <C>
Blackstone/iPCS L.L.C............................................... 1,015,809
Blackstone iPCS Capital Partners L.P................................ 2,893,282
Blackstone Communications Partners I L.P............................ 3,363,636
TCW/Crescent Mezzanine Partners II, L.P............................. 731,722
TCW/Crescent Mezzanine Trust II..................................... 177,370
TCW Leveraged Income Trust, L.P..................................... 90,909
TCW Leveraged Income Trust II, L.P.................................. 90,909
TCW Leveraged Income Trust IV, L.P.................................. 90,909
TCW Shared Opportunity Fund II, L.P................................. 181,818
Shared Opportunity Fund IIB, L.L.C.................................. 90,909
TCW Shared Opportunity Fund III, L.P................................ 363,636
</TABLE>
On July 12, 2000, we issued 300,000 units ("Units") consisting of
$300,000,000 principal amount of 14% Senior Discount Notes due 2010 and warrants
to purchase 2,982,699 shares of common stock at an exercise price of $5.50 per
share. The issuance of the Units yielded gross proceeds to us of $152.3 million
and net proceeds of $146.3 million. The warrants are not exercisable until July
15, 2001. The initial purchasers of the Units and the amount purchased are
listed in the table below.
<TABLE>
<CAPTION>
Name of Purchaser Number of Units
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................. 255,000
TD Securities (USA) Inc............................................. 45,000
</TABLE>
On July 12, 2000, we issued to Sprint Spectrum L.P. (or any of its
designees controlled by, or under common control with, Sprint Spectrum L.P.) a
warrant to purchase 1,151,938 shares of common stock at an exercise price of
$4.95 in exchange for its agreement to expand our territory by an additional 20
markets. The warrants will be exercisable beginning on or after July 15, 2001
and expire on July 15, 2007.
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<PAGE>
On July 12, 2000, we granted options to members of management, employees
and directors to purchase, in the aggregate, 1,558,750 shares of common stock at
an exercise price of $5.50. The vesting period for employee stock options begins
on the employee's date of hire and extends for four years. For directors, the
vesting period begins on the date of grant and extends for four years.
None of the foregoing transactions involved any public offering, and
issuances of securities in connection with such transactions were made in
reliance on Section 4(2) under the Securities Act of 1933 (the "Act") and/or
Regulation D promulgated under the Act and as to the Units described above, Rule
144A promulgated under the Act. These sales were made without general
solicitation or advertising. The acquirors in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to sell or for sale in connection with any distribution thereof. All
acquirors had adequate access, through their relationship with us, to
information about us. In addition, exemption from the registration provisions of
the Act for the grant of stock options claimed under Section 3(b) of the Act on
the basis that such securities were sold pursuant to a written compensatory
benefit plan or pursuant to a written contract relating to compensation and not
for capital raising purposes under Rule 701 of the Act.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Exhibit Title
Number
2.1* -Contribution Agreement dated as of July 12, 2000 by and among iPCS,
Inc. and members of Illinois PCS, LLC.
3.1* -Amended and Restated Certificate of Incorporation of iPCS, Inc. as
amended.
3.2* -Amended and Restated Bylaws of iPCS, Inc.
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<PAGE>
Exhibit Exhibit Title
Number
3.3* -Certificate of Designations of the Series A-1 Convertible
Participating Preferred Stock.
3.4* -Certificate of Incorporation of iPCS Wireless, Inc.
3.5* -Bylaws of iPCS Wireless, Inc.
3.6* -Certificate of Incorporation of iPCS Equipment, Inc.
3.7* -Bylaws of iPCS Equipment, Inc.
4.1* -Specimen Common Stock Certificate.
4.2* -14% Senior Discount Notes due 2010 Indenture dated as of July 14,
2000 by and among, iPCS Equipment, Inc. and iPCS Wireless, Inc. as
Guarantors and CTC Illinois Trust Company, as trustee.
10.1* -Sprint PCS Management Agreement, as amended, dated as of January 22,
1999 by and between Sprint Spectrum, LP, SprintCom, Inc., WirelessCo,
LP and Illinois PCS, LLC, as amended by Addendum I, Addendum II,
Amended and Restated Addendum III and Addendum IV thereto.
10.2* -Sprint PCS Services Agreement dated as of January 22, 1999 by and
between Sprint Spectrum, LP and Illinois PCS, LLC.
10.3* -Sprint Trademark and Service Mark License Agreement dated as of
January 22, 1999 by and between Sprint Communications Company, LP and
Illinois PCS, LLP.
10.4* -Sprint Spectrum Trademark and Service Mark License Agreement dated as
of January 22, 1999 by and between Sprint Spectrum, LP and Illinois
PCS, LLP.
10.5* -Amended and Restated Consent and Agreement dated as of July 12, 2000
by and between Sprint Spectrum, LP, SprintCom, Inc., Sprint
Communications Company, LP, WirelessCo, LP, and Toronto Dominion
(Texas), Inc. and the Lenders party thereto.
10.6* -Amended and Restated Credit Agreement dated as of July 12, 2000 by
and between iPCS Wireless, Inc., as borrower, iPCS, Inc. and iPCS
Equipment, Inc. as Guarantors, the lenders named therein, Toronto
Dominion (Texas), Inc., as administrative agent, and GE Capital
Corporation, for a $140.0 million credit facility.
32
<PAGE>
Exhibit Exhibit Title
Number
10.8* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Timothy M. Yager.
10.9* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and William W. King, Jr.
10.10* -Warrant for the Purchase of shares of Common Stock dated as of July
12, 2000 by and between Sprint Spectrum L.P. and iPCS, Inc.
10.11* -Agreement Regarding Construction, Sale and Leaseback of Towers dated
as of May 28, 1999 by and between American Tower Corporation and
Illinois PCS, LLC.
10.12* -Lease dated as of June 1, 1999 by and between Gridley Enterprises,
Inc. and Illinois PCS, LLC.
10.13* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Leroy R. Horsman.
10.14* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Jeffrey Pinegar.
10.15* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Linda K. Wokoun.
10.16* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Stebbins B. Chandor, Jr.
10.17* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Anthony R. Muscato.
10.18* -Purchase Agreement dated as of July 12, 2000 for 14% Senior Discount
Notes Due 2010
10.19* -Employment Agreement effective as of July 1, 2000 by and between
iPCS, Inc. and Patricia M. Greteman.
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<PAGE>
Exhibit Exhibit Title
Number
10.20* -CDMA 1900 SprintCom Additional Affiliate Supply Agreement between
Illinois PCS, L.L.C. and Nortel Networks Inc.
10.21* -Amendment No. 1 to 1900 CDMA Additional Affiliate Supply Agreement
between Illinois PCS, LLC and Nortel Networks Inc.
10.22* -Warrant Registration Rights Agreement
10.23* -Warrant Agreement
10.24* -A/B Exchange Registration Rights Agreement
10.25* -Global Notes
10.26* -Global Warrants
10.27* -Investment Agreement dated as of July 12, 2000, by and among iPCS,
Inc., Blackstone/iPCS LLC, Blackstone iPCS Capital Partners LP,
Blackstone Communications Partners I LP, TCW/Crescent Mezzanine
Partners II, LP, TCW/Crescent Mezzanine Trust II, TCW Leveraged
Income Trust LP, TCW Leveraged Income Trust LP II, LP, TCW Leveraged
Income Trust IV, LP, TCW Shared Opportunity Fund II, LP, Shared
Opportunity Fund IIB, LLC and TCW Shared Opportunity Fund III, LP.
10.28* -Stockholders Agreement dated as of July 12, 2000, by and between
iPCS, Inc. and certain of its stockholders.
10.29* -Registration Rights Agreement dated as of July 12, 2000 by and among
iPCS, Inc., Blackstone/iPCS LLC, Blackstone iPCS Capital Partners LP,
BlackstoneCommunications Partners I LP, TCW/Crescent Mezzanine
Partners II, LP, TCW/Crescent Mezzanine Trust II, TCW Leveraged
Income Trust LP, TCW Leveraged Income Trust LP II, LP, TCW Leveraged
Income Trust IV, LP, TCW Shared Opportunity Fund II, LP, Shared
Opportunity Fund IIB, LLC and TCW Shared Opportunity Fund III, LP.
10.30* -Asset Purchase Agreement, dated as of July 12, 2000, by and among
Sprint Spectrum L P, Sprint Spectrum Equipment Company, LP, Sprint
Spectrum Realty Company, LP and iPCS Wireless, Inc.
10.31* -Design, Development, Engineering, Construction and Oversight
Services
34
<PAGE>
Exhibit Exhibit Title
Number
Agreement, dated as of February, 1999, by and between Illinois PCS,
LLC and Communication Management Specialists.
10.32* -Interim Network Operating Agreement, dated as of July 12, 2000, by
and between Sprint Spectrum LP and iPCS Wireless, Inc.
10.33* -Consulting Agreement, dated as of April 20, 1999, by and between
WaveLink Engineering and Illinois PCS, LLC.
27.1 -Financial Data Schedule.
_______________________
* Incorporated by reference to exhibits filed with registrant's Form S-4
(Registration No. 333-47688).
(b) Reports on Form 8-K.
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
iPCS, INC.,
Registrant
By: /s/ Timothy M. Yager
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Timothy M. Yager
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Stebbins B. Chandor, Jr.
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Stebbins B. Chandor, Jr.
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
November 14, 2000
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INDEX TO EXHIBITS
Exhibit Exhibit Title
Number
2.1* -Contribution Agreement dated as of July 12, 2000 by and among iPCS,
Inc. and members of Illinois PCS, LLC.
3.1* -Amended and Restated Certificate of Incorporation of iPCS, Inc. as
amended.
3.2* -Amended and Restated Bylaws of iPCS, Inc.
3.3* -Certificate of Designations of the Series A-1 Convertible
Participating Preferred Stock.
3.4* -Certificate of Incorporation of iPCS Wireless, Inc.
3.5* -Bylaws of iPCS Wireless, Inc.
3.6* -Certificate of Incorporation of iPCS Equipment, Inc.
3.7* -Bylaws of iPCS Equipment, Inc.
4.1* -Specimen Common Stock Certificate.
4.2* -14% Senior Discount Notes due 2010 Indenture dated as of July 14,
2000 by and among, iPCS Equipment, Inc. and iPCS Wireless, Inc. as
Guarantors and CTC Illinois Trust Company, as trustee.
10.1* -Sprint PCS Management Agreement, as amended, dated as of January 22,
1999 by and between Sprint Spectrum, LP, SprintCom, Inc., WirelessCo,
LP and Illinois PCS, LLC, as amended by Addendum I, Addendum II,
Amended and Restated Addendum III and Addendum IV thereto.
10.2* -Sprint PCS Services Agreement dated as of January 22, 1999 by and
between Sprint Spectrum, LP and Illinois PCS, LLC.
10.3* -Sprint Trademark and Service Mark License Agreement dated as of
January 22, 1999 by and between Sprint Communications Company, LP and
Illinois PCS, LLP.
10.4* -Sprint Spectrum Trademark and Service Mark License Agreement dated
as of January 22, 1999 by and between Sprint Spectrum, LP and
Illinois PCS, LLP.
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Exhibit Exhibit Title
Number
10.5* -Amended and Restated Consent and Agreement dated as of July 12, 2000
by and between Sprint Spectrum, LP, SprintCom, Inc., Sprint
Communications Company, LP, WirelessCo, LP, and Toronto Dominion
(Texas), Inc. and the Lenders party thereto.
10.6* -Amended and Restated Credit Agreement dated as of July 12, 2000 by
and between iPCS Wireless, Inc., as borrower, iPCS, Inc. and iPCS
Equipment, Inc. as Guarantors, the lenders named therein, Toronto
Dominion (Texas), Inc., as administrative agent, and GE Capital
Corporation, for a $140.0 million credit facility.
10.7* -iPCS, Inc. 2000 Long Term Incentive Plan.
10.8* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Timothy M. Yager.
10.9* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and William W. King, Jr.
10.10* -Warrant for the Purchase of shares of Common Stock dated as of July
12, 2000 by and between Sprint Spectrum L.P. and iPCS, Inc.
10.11* -Agreement Regarding Construction, Sale and Leaseback of Towers dated
as of May 28, 1999 by and between American Tower Corporation and
Illinois PCS, LLC.
10.12* -Lease dated as of June 1, 1999 by and between Gridley Enterprises,
Inc. and Illinois PCS, LLC.
10.13* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Leroy R. Horsman.
10.14* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Jeffrey Pinegar.
10.15* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Linda K. Wokoun.
10.16* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Stebbins B. Chandor, Jr.
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Exhibit Exhibit Title
Number
10.17* -Amended and Restated Employment Agreement effective as of July 1,
2000 by and between iPCS, Inc. and Anthony R. Muscato.
10.18* -Purchase Agreement dated as of July 12, 2000 for 14% Senior Discount
Notes Due 2010
10.19* -Employment Agreement effective as of July 1, 2000 by and between
iPCS, Inc. and Patricia M. Greteman.
10.20* -CDMA 1900 SprintCom Additional Affiliate Supply Agreement between
Illinois PCS, L.L.C. and Nortel Networks Inc.
10.21* -Amendment No. 1 to 1900 CDMA Additional Affiliate Supply Agreement
between Illinois PCS, LLC and Nortel Networks Inc.
10.22* -Warrant Registration Rights Agreement
10.23* -Warrant Agreement
10.24* -A/B Exchange Registration Rights Agreement
10.25* -Global Notes
10.26* -Global Warrants
10.27* -Investment Agreement dated as of July 12, 2000, by and among iPCS,
Inc., Blackstone/iPCS LLC, Blackstone iPCS Capital Partners LP,
Blackstone Communications Partners I LP, TCW/Crescent Mezzanine
Partners II, LP, TCW/Crescent Mezzanine Trust II, TCW Leveraged
Income Trust LP, TCW Leveraged Income Trust LP II, LP, TCW Leveraged
Income Trust IV, LP, TCW Shared Opportunity Fund II, LP, Shared
Opportunity Fund IIB, LLC and TCW Shared Opportunity Fund III, LP.
10.28* -Stockholders Agreement dated as of July 12, 2000, by and between
iPCS, Inc. and certain of its stockholders.
10.29* -Registration Rights Agreement dated as of July 12, 2000 by and among
iPCS, Inc., Blackstone/iPCS LLC, Blackstone iPCS Capital Partners LP,
BlackstoneCommunications Partners I LP, TCW/Crescent Mezzanine
Partners II, LP, TCW/Crescent Mezzanine Trust II, TCW Leveraged
Income Trust LP, TCW Leveraged Income Trust LP II, LP, TCW Leveraged
Income Trust IV, LP, TCW Shared Opportunity Fund II, LP, Shared
Opportunity Fund IIB, LLC and TCW Shared Opportunity Fund III, LP.
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Exhibit Exhibit Title
Number
10.30* -Asset Purchase Agreement, dated as of July 12, 2000, by and among
Sprint Spectrum L P, Sprint Spectrum Equipment Company, LP, Sprint
Spectrum Realty Company, LP and iPCS Wireless, Inc.
10.31* -Design, Development, Engineering, Construction and Oversight
Services Agreement, dated as of February, 1999, by and between
Illinois PCS, LLC and Communication Management Specialists.
10.32* -Interim Network Operating Agreement, dated as of July 12, 2000, by
and between Sprint Spectrum LP and iPCS Wireless, Inc.
10.33* -Consulting Agreement, dated as of April 20, 1999, by and between
WaveLink Engineering and Illinois PCS, LLC.
27.1 -Financial Data Schedule.
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* Incorporated by reference to exhibits filed with registrant's Form S-4
(Registration No. 333-47688).
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