<PAGE>
As filed with the Securities and Exchange Commission on July 19, 2000
Registration No. 333-32064
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2 to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
iPCS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 4812 36-4350876
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Identification No.)
Classification Code
Number)
121 West First Street
Suite 200
Geneseo, Illinois 61254
(309) 945-1650
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Timothy M. Yager
iPCS, Inc.
121 West First Street
Suite 200
Geneseo, Illinois 61254
(309) 945-1650
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Paul W. Theiss Gary P. Cullen
Robert J. Wild Skadden, Arps, Slate, Meagher & Flom
Mayer, Brown & Platt (Illinois)
190 South LaSalle Street 333 West Wacker Drive
Chicago, Illinois 60603-3441 Chicago, Illinois 60606
(312) 782-0600 (312) 407-0700
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by US federal securities law to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- July , 2000
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--------------------------------------------------------------------------------
Prospectus
, 2000
[IPCS LOGO]
8,333,333 Shares of Common Stock
--------------------------------------------------------------------------------
The Offering: Proposed Symbol & Market:
. We are offering . IPCS/Nasdaq National Market
8,333,333 shares
of our common
stock.
. We have granted
the underwriters
an option to
purchase up to
1,250,000
additional shares
of our common
stock to cover
over-allotments.
. This is our
initial public
offering. We
anticipate the
initial public
offering price
will be between
$11.00 and $13.00
per share.
. Closing: , 2000.
--------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
-------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to iPCS:
</TABLE>
--------------------------------------------
This investment involves risk. See "Risk Factors" beginning on page 5.
--------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete, nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
The Robinson-Humphrey Company
DLJdirect Inc.
<PAGE>
INSIDE FRONT COVER PICTURES
--PICTURES OF TWO WIRELESS HANDSETS
--MAP OF OUR NETWORK COVERAGE AREA AND INSET MAP OF UNITED STATES
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 5
Forward-Looking Statements........ 20
Use of Proceeds................... 21
Dividend Policy................... 21
Capitalization.................... 22
Dilution.......................... 24
Selected Financial Data........... 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 28
Business.......................... 38
The Sprint PCS Agreements......... 60
Description of Our Indebtedness... 68
Management........................ 78
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Principal Stockholders.............. 87
Certain Relationships and Related
Transactions....................... 88
Regulation of the Wireless
Telecommunications Industry........ 93
Description of Capital Stock........ 97
Shares Eligible for Future Sale..... 104
Certain United States Federal Tax
Considerations for Non-U.S. Holders
of Our Common Stock................ 106
Underwriting........................ 109
Legal Matters....................... 112
Experts............................. 112
Available Information............... 112
Index to Financial Statements....... F-1
</TABLE>
----------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any of the sales made hereunder after the date of this prospectus shall create
an implication that the information contained herein or our affairs have not
changed since the date hereof.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights more detailed information appearing in other
sections of this prospectus. The other information is important, so please read
this entire prospectus carefully.
Unless otherwise indicated, the information in this prospectus assumes the
underwriters' over-allotment option will not be exercised.
The Company
Overview
We are a Sprint PCS affiliate with the exclusive right to market 100%
digital personal communication services, or PCS, under the Sprint and Sprint
PCS brand names to a total population of more than 7.0 million in 35 markets
consisting of mid-sized cities and rural areas in Illinois, Michigan, Iowa and
eastern Nebraska. We began providing service in December 1999 and, as of June
30, 2000, had launched service in ten markets covering approximately 1,776,000
residents and had over 14,000 customers. By the end of the third quarter of
2001, we plan to be providing coverage to approximately 67% of the total
population of over 7.0 million in our territory, at which time our planned
network build-out will be substantially complete.
In January 1999, we entered into our long-term affiliation agreements with
Sprint PCS for our initial territory of 15 markets with a total population of
over 2.8 million in the states of Illinois and Iowa. We have completed all
radio frequency design, network design, site acquisition and engineering for
each of these 15 markets. By the end of September 2000, we plan to have
launched service in all of our remaining initial markets, thereby substantially
completing our network build-out in our initial territory. At such time, we
will be providing coverage to approximately 2.1 million residents or
approximately 75% of the total population in our initial territory. Following
our successful initial launch, Sprint PCS selected us to be the exclusive
Sprint PCS affiliate for 20 additional markets with a total population of over
4.2 million in the states of Michigan, Iowa and Nebraska. As part of this
expansion, we have purchased from Sprint PCS network assets under construction
in four markets in Michigan. In addition, 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 Sprint PCS launched in February 1997 and to purchase
from Sprint PCS related assets in those markets. Those markets have a total
population of approximately 405,000 and had over 6,600 Sprint PCS subscribers
as of December 31, 1999.
We anticipate our territory will generate significant roaming revenues for
us from Sprint PCS subscribers not based in our territory who use our network.
Our territory is adjacent to several important markets owned and operated by
Sprint PCS including Chicago, Detroit, Des Moines, Indianapolis, Omaha and St.
Louis and contains more than 1,700 miles of heavily traveled interstates. Our
territory also includes over 40 colleges and universities with a total
enrollment of approximately 200,000 students.
1
<PAGE>
From our inception through March 31, 2000, we have not generated significant
revenues and have generated significant net operating losses. We believe that
the net proceeds of this offering, together with the net proceeds from our sale
of senior discount notes, the net proceeds of our private placement of
convertible preferred stock to an investor group led by affiliates of 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 buildout, anticipated operating losses,
working capital requirements and other capital needs through 2003.
Competitive Strengths
We receive substantial benefits from our long-term affiliation agreements
with Sprint PCS, including:
. the exclusive right to use Sprint PCS' licensed spectrum and to use the
Sprint and Sprint PCS brand names in our territory;
. access to Sprint PCS' 100% digital, 100% PCS national network, including
Sprint PCS' Wireless Web service;
. access to over 300 retail locations for the sale and distribution of
Sprint PCS products and services in our territory under Sprint PCS'
existing sales and distribution agreements; and
. the ability to purchase proven back office services from Sprint PCS at
rates reflecting Sprint PCS' economies of scale.
Business Strategy
Our business strategy is focused on fully leveraging our strategic
relationship with Sprint PCS and also includes:
. executing an integrated local marketing strategy which includes
establishing 19 Sprint PCS stores in our territory, advertising on local
radio, TV, and print media and sponsoring important local and regional
events;
. continuing to rapidly construct our network using experienced strategic
partners and third-generation compatible wireless technology; and
. continuing to evaluate opportunities for transactions to strategically
expand our territory and business combinations with other Sprint PCS
affiliates.
Recent Developments
The following transactions were consummated on July 12, 2000.
We closed our offering of 300,000 units consisting of 14% senior discount
notes due 2010 and warrants to purchase 2,982,699 shares of our common stock.
The senior discount notes offering generated proceeds to us of approximately
$152.3 million ($146.2 million after fees and expenses).
We entered into a definitive agreement with an investor group led by
Blackstone under which we issued 9,090,909 shares of our convertible preferred
stock, for gross proceeds of $50.0 million. The agreement includes a commitment
by the investor group to purchase, subject to certain
2
<PAGE>
conditions, an additional 14,000,000 shares for $70.0 million of our
convertible preferred stock in the event that we do not complete an initial
public offering with gross proceeds of at least $30.0 million prior to December
31, 2000. The completion of this offering will therefore eliminate our
obligation to sell, and Blackstone's obligation to purchase, the additional
14,000,000 shares of convertible preferred stock. The completion of this
offering at an initial public offering price of $12.00 per share, the midpoint
of the range set forth on the cover page of this prospectus, will automatically
convert the 9,090,909 outstanding shares of preferred stock into an equal
number of shares of common stock. The purchase price per share of the $50.0
million of our convertible preferred stock issued on July 12, 2000 was $5.50
per share and the purchase price of the additional 14,000,000 shares of our
convertible preferred stock to be issued, if it occurs, will be $5.00 per
share.
We entered into a definitive credit agreement with Toronto Dominion (Texas),
Inc. and GE Capital for a new senior secured credit facility with an aggregate
commitment of $140.0 million. iPCS Wireless, Inc., our wholly owned operating
subsidiary, is the borrower under this facility, and we have provided a senior
subordinated guarantee. Under the terms of this senior secured credit facility,
amounts will not be permitted to be borrowed under the facility until a
specified amount of additional equity is invested in iPCS Wireless, Inc. and
certain other conditions have been satisfied.
We closed our purchase from Sprint PCS of network assets under construction
in four markets in Michigan for approximately $12.7 million.
We reorganized the business of Illinois PCS, LLC, an Illinois limited
liability company, into a holding company structure of which iPCS, Inc., the
legal entity that is selling its common stock in this offering, is the parent.
In connection with the reorganization, the owners of Illinois PCS, LLC
contributed their limited liability company membership interests to iPCS, Inc.
and in exchange received 44,869,643 shares of common stock of iPCS, Inc. in the
same percentages as their membership interests in Illinois PCS, LLC immediately
prior to the reorganization. After the contribution of membership interests,
Illinois PCS, LLC was merged with and into iPCS Wireless, Inc., with iPCS
Wireless, Inc. succeeding to the business of Illinois PCS, LLC as a wholly
owned subsidiary of iPCS, Inc.
----------------
We are a Delaware corporation. Our principal executive offices are located
at 121 West First Street, Suite 200, Geneseo, Illinois 61254, and our telephone
number is (309) 945-1650.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common Stock Offered......................... 8,333,333 shares
Common Stock to be Outstanding after the
Offering.................................... 62,293,885 shares
Proposed Nasdaq National Market Symbol....... "IPCS"
Risk Factors................................. See "Risk Factors" beginning on page 5 for
a discussion of the material factors that
you should consider before purchasing
shares of our common stock.
Dividend Policy.............................. We do not intend to pay cash dividends on
our common stock in the foreseeable future.
See "Dividend Policy" for more information.
Use of Proceeds.............................. We will use the proceeds from this sale of
our common stock, together with proceeds
from the issuance of our senior discount
notes, the private placement of our
convertible preferred stock and available
borrowings under our senior secured
financing, to fund the following:
. capital expenditures, including the
build-out of our network;
. operating losses and working capital
requirements; and
. general corporate purposes.
See "Use of Proceeds" for more detailed
information.
</TABLE>
Unless otherwise indicated, the share information in this prospectus assumes
the mandatory conversion of 9,090,909 shares of our convertible preferred stock
into 9,090,909 shares of common stock at the closing of this offering and
excludes:
. up to 1,250,000 shares that may be issued to the underwriters to cover
over-allotments. See "Underwriting."
. 6,500,000 shares of our common stock reserved for issuance under our
amended and restated 2000 Long Term Incentive Stock Plan, including
1,558,750 options which we have granted in July 2000. See "Management--
2000 Long Term Incentive Stock Plan."
. 1,151,938 shares of our common stock issuable to Sprint PCS upon the
exercise of a warrant issued in July 2000 at an exercise price of $4.95
per share. See "Description of Capital Stock--Warrants."
. 2,982,699 shares of our common stock issuable to holders of warrants
issued in connection with our senior discount notes upon the exercise of
warrants issued at an exercise price of $5.50 per share. See "Description
of Capital Stock--Warrants."
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information contained in this prospectus before purchasing the common
stock we are offering.
Risks Particular to iPCS
We may not achieve or sustain operating profitability or positive cash flow
from operating activities which may reduce the market value of our common stock
Our operating history is limited. We initiated commercial operations in our
first two markets in December 1999. We expect to incur significant operating
losses and to generate significant negative cash flow from operating activities
while we develop and construct our network and build our customer base. As we
build out our network and provide services to increasing numbers of customers,
the achievement of break-even operating cash flow and our operating
profitability will depend upon many factors, including, among others, our
ability to market our services, achieve our projected market penetration and
manage customer turnover rates. If we do not achieve and maintain operating
profitability and positive cash flow from operating activities on a timely
basis, we may not be able to meet our debt service requirements.
If we fail to complete the build-out of our network, Sprint PCS may terminate
the Sprint PCS agreements, and we would no longer be able to offer the Sprint
PCS products and services which would severely restrict our ability to conduct
our business
Our long-term affiliation agreements with Sprint PCS, which we refer to as
the Sprint PCS agreements, require us to build our network in accordance with
Sprint PCS' technical and coverage requirements. The Sprint PCS agreements also
require that we provide network coverage in our initial 15 markets to a
specified percentage, ranging from 42% to 88%, of the population by specified
dates. In our 20 expansion markets we are required to build out specified
cities and traffic arteries by certain dates. A failure to meet our build-out
requirements for any one of the individual markets in our territory, or to meet
Sprint PCS' technical requirements, could constitute a breach of the Sprint PCS
agreements and could lead to their termination. If the Sprint PCS agreements
are terminated, we will no longer be able to offer Sprint PCS products and
services.
Buy-out provisions of the Sprint PCS agreements may diminish the valuation of
our company in the event of the termination or non-renewal of the Sprint PCS
agreements and the market value of our common stock
Provisions of the Sprint PCS agreements could affect the valuation of our
company, and could therefore, among other things, lead to a reduction in the
market price of our securities and decrease our ability to raise additional
capital. In the event the Sprint PCS agreements are terminated, then subject to
the requirements of applicable law, Sprint PCS may purchase our operating
assets or capital stock for 72% or, in the event of non-renewal, at least 80%
of the entire business value which is generally the fair market value of our
wireless business valued on a going concern basis as determined by an
independent appraiser. To the extent that the appraiser considers the trading
price of our common stock as a criteria of the fair market value, such trading
price may itself already have been discounted by investors because of this buy-
out provision and consequently this buy-out provision may operate to
disproportionately reduce the value. In addition, Sprint PCS must approve
5
<PAGE>
any change of control of our company and consent to any assignment of the
Sprint PCS agreements to another entity. Sprint PCS also has been granted a
right of first refusal if we decide to sell our operating assets. We are also
subject to a number of restrictions on the transfer of our business including a
prohibition on selling our company or our operating assets to a number of
identified and as yet to be identified competitors of Sprint PCS or Sprint.
These and other restrictions in the Sprint PCS agreements may limit the
saleability and/or reduce the value a buyer may be willing to pay for our
company or our operating assets and may reduce the entire business value of our
company. For further information on the buy-out provisions of the Sprint PCS
agreements, see "The Sprint PCS Agreements--The Management Agreement."
The termination of our strategic relationship with Sprint PCS or Sprint PCS'
failure to perform its obligations under the Sprint PCS agreements would
severely restrict our ability to conduct our business
Because we do not own any licenses to operate a wireless PCS network, our
ability to offer Sprint PCS products and services on the portion of the Sprint
PCS network located within our territory, which we refer to as our network, is
dependent on the Sprint PCS agreements remaining in effect and not being
terminated. The Sprint PCS agreements can be terminated for breach of any
number of material terms. We are also dependent on Sprint PCS' ability to
perform its obligations under the Sprint PCS agreements. The termination of the
Sprint PCS agreements or the failure of Sprint PCS to perform its obligations
under the Sprint PCS agreements would severely restrict our ability to conduct
our business.
If Sprint PCS does not complete the construction of its PCS network, we may
not be able to attract and retain customers, which would adversely affect our
revenues
Sprint PCS' network may not provide coverage to the same extent as its
competitors, which could adversely affect our ability to attract and retain our
customers. Sprint PCS is creating a PCS network through its own construction
efforts and those of its affiliates. Today, neither Sprint nor any other PCS
service provider offers PCS services in every area of the United States. Sprint
PCS has entered into affiliation agreements similar to ours with companies in
other territories pursuant to its nationwide PCS network build-out strategy.
Our business and results of operations are dependent on the development and
operation of the portions of the Sprint PCS national network located outside
our territory, consisting of Sprint PCS' own network and the networks of its
other affiliates. Sprint PCS and its affiliate program are subject, to varying
degrees, to the economic, administrative, logistical, regulatory and other
risks described in this prospectus. Sprint PCS' and its other affiliates' PCS
operations may not be successful.
We have a limited operating history and if we do not successfully manage our
anticipated rapid growth, we may not be able to complete our network by our
target date, if at all, which may result in the termination of the Sprint PCS
agreements which would severely restrict our ability to conduct our business
Our performance as a PCS provider will depend on our ability to successfully
manage the network build-out process, attract and retain customers, implement
operational and administrative systems, expand our base of employees and train
and manage our employees, including engineering, marketing and sales personnel.
As of June 30, 2000, we had launched Sprint PCS service in ten of our initial
15 markets covering approximately 1,776,000 residents. In other portions of our
territory
6
<PAGE>
we have not yet completed our radio frequency design, network design and site
acquisition and cell site engineering, nor have we commenced construction of
portions of our network. We will require additional expenditures of significant
funds for the continued development, construction, testing, deployment and
operation of our network. These activities are expected to place significant
demands on our managerial, operational and financial resources.
The inability to use Sprint PCS' back office services and third-party vendors'
back office systems could disrupt our business resulting in a loss of our
customers and an increase in our operating expenses
Our operations could be disrupted if Sprint PCS is unable to maintain and
expand its internal support services to support the continued expansion of
Sprint PCS' business. These services include, customer activation, billing and
customer care. Additionally, Sprint PCS has relied on third-party vendors for a
significant number of important functions and components of its internal
support systems and may continue to rely on these vendors in the future. We
depend on Sprint PCS' willingness to continue to offer such services to us and
to provide these services at competitive rates. The Sprint PCS agreements
provide that, upon nine months' prior written notice, Sprint PCS may elect to
terminate any such service. If Sprint PCS terminates a service for which we
have not developed a cost-effective alternative, our operating costs may
increase beyond our expectations and impact our results of operations.
We depend on other telecommunications companies for certain services, which if
delayed could delay our planned network build-out, our planned addition of
customers and our planned increase in revenues
We depend on other telecommunications companies to provide facilities and
transport to interconnect portions of our network and to connect our network
with the landline telephone system. U.S. West Communications, Ameritech and GTE
are our primary suppliers of facilities and transport. Without these services,
we could not offer Sprint PCS services to our customers in certain areas.
From time to time we have experienced delays in obtaining facilities and
transport from these companies and we may continue to experience delays in the
future. If this happens, our build-out plans could be affected and our business
may suffer.
Sprint PCS may make business decisions that would not be in our best interests
which may adversely affect our relationships with our customers, increase our
expenses and/or decrease our revenues
Sprint PCS, under the Sprint PCS agreements, has a substantial amount of
control over the conduct of our business. Accordingly, Sprint PCS may make
decisions that adversely affect our business, such as the following:
. Sprint PCS could price its national plans based on its own objectives and
could set price levels that may not be economically sufficient for our
business;
. Sprint PCS could decide not to renew the Sprint PCS agreements or to no
longer perform its obligations, which would severely restrict our ability
to conduct our business;
7
<PAGE>
. Sprint PCS could change the per-minute rate for Sprint PCS roaming fees
and raise the costs for Sprint PCS to perform back office services;
. Sprint PCS may withhold its consent and prohibit us from selling non-
Sprint PCS approved equipment;
. Subject to limitations under the Sprint PCS agreements, Sprint PCS may
alter its network and technical requirements or request that we build out
additional areas within our territory, which could result in increased
equipment and build-out costs or in Sprint PCS terminating the Sprint PCS
agreements; and
. Sprint or Sprint PCS could make decisions which could adversely affect
the Sprint and Sprint PCS brand names, products or services.
We have substantial debt which we may not be able to service and which could
adversely affect our financial health and result in our lenders controlling our
assets
As of March 31, 2000, our outstanding long-term debt under our prior vendor
financing facility with Nortel Networks Inc. was approximately $29.1 million.
We have entered into a credit agreement with Toronto Dominion (Texas), Inc. and
GE Capital to provide a new senior secured credit facility with an aggregate
commitment of $140.0 million. Under our current business plan, we expect to
incur substantial additional indebtedness before achieving break-even operating
cash flow, including $140.0 million of borrowings under the senior secured
credit facility in addition to the $300.0 million of principal amount at
maturity of our senior discount notes.
Incurring substantial debt will have a number of important consequences for
our operations and our investors, including the following:
. we will have to dedicate a substantial portion of any cash flow from
operations to the payment of interest on, and principal of, our debt,
which will reduce funds available for other purposes;
. we may not have sufficient funds to pay interest on, and principal of,
our debt;
. we may not be able to obtain additional financing for any unanticipated
capital requirements, capital expenditures, working capital requirements
or other corporate purposes;
. due to the liens on substantially all of our assets and the pledges of
equity ownership of any existing subsidiary and any future subsidiaries
that secure our senior debt, lenders may control our assets or our
subsidiaries' assets upon a default; and
. some of our debt, including borrowings under our senior secured facility,
will be at variable rates of interest, which could result in higher
interest expense in the event of increases in market interest rates.
Our ability to make payments on our debt depends upon our future operating
performance which is subject to general economic and competitive conditions and
to financial, business and other factors, many of which we cannot control. If
the cash flow from our operating activities is insufficient, we may take
actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance our debt, selling assets or operations or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow us to service our debt obligations. Further, we may be
8
<PAGE>
unable to take any of these actions on satisfactory terms, in a timely manner
or at all. The senior secured facility and the indenture governing the senior
discount notes may limit our ability to take some of these actions. Under our
current business plan, we expect to incur substantial debt before achieving
break-even cash flow.
Sprint PCS has contractual rights that would be triggered by an acceleration
of the maturity of our borrowings under the senior secured facility, pursuant
to which Sprint PCS may purchase our obligations under the senior secured
facility and obtain the rights of a senior lender. To the extent Sprint PCS
purchases these obligations, Sprint PCS' rights as a senior lender would enable
it to exercise rights with respect to our assets and its continuing
relationship with us in a manner not otherwise permitted under the Sprint PCS
agreements.
If we do not meet all of the conditions required under the senior secured
facility, we may not be able to draw down any or all of the funds under such
facility and, as a result, we may not be able to complete the build-out of our
network which may result in the termination of the Sprint PCS agreements
Our senior secured credit facility provides for aggregate borrowings of
$140.0 million. Borrowings under the senior secured credit facility are subject
to our meeting all of the borrowing conditions specified in the financing
documents. No borrowing under the senior secured credit facility will be
available unless we have contributed as equity to our wholly owned subsidiary,
iPCS Wireless, Inc., the net proceeds from a $70.0 million equity offering.
The credit agreement for the senior secured credit facility provides that
funding at each funding date will be subject to certain conditions, including
the following:
. the absence of any default or event of default;
. the continuing accuracy of all other representations and warranties; and
. no material adverse change.
If these conditions are not satisfied at each funding date, our senior secured
lenders are not required to lend any or all of the remaining amounts, and if
other sources of funds are not available, we may not have sufficient funds to
complete the build-out of our network. If we do not have sufficient funds to
complete our network build-out, we may be in breach of the Sprint PCS
agreements and in default under our senior secured financing.
Our new indebtedness will place restrictions on us which may limit our
operating flexibility and which will limit our ability to pay principal,
interest and liquidated damages on the senior discount notes
The indenture governing the senior discount notes and the senior secured
credit agreement impose material operating and financial restrictions on us.
These restrictions, subject to ordinary course of business exceptions, may
limit our ability to engage in some transactions, including the following:
. designated types of mergers or consolidations;
9
<PAGE>
. paying dividends or other distributions to our stockholders;
. making investments;
. selling assets;
. repurchasing our common stock;
. changing lines of business;
. borrowing additional money; and
. transactions with affiliates.
These restrictions could limit our ability to obtain debt financing,
repurchase stock, refinance or pay principal or interest on our outstanding
debt, consummate acquisitions for cash or debt or react to changes in our
operating environment.
An event of default under the senior secured credit facility may prohibit us
and our wholly owned subsidiaries which are our guarantors from paying the
senior discount notes or the guarantees of the senior discount notes as well as
liquidated damages with respect to our failure to file or cause or maintain the
effectiveness of certain registration statements with respect to the senior
discount notes and the warrants.
We may need more capital than we currently project to build out our network
and a delay or failure to obtain additional capital could adversely affect our
revenues or result in the termination of the Sprint PCS agreements
The build-out of our network will require substantial capital. Additional
funds would be required in the event of:
. significant departures from the current business plan, including any
Sprint PCS approved expansion of our territory, whether through
acquisitions or the grant of additional licensed territories;
. unforeseen delays;
. cost overruns;
. unanticipated expenses;
. regulatory changes;
. engineering design changes and required technological upgrades; and
. other technological risks.
Due to our leveraged capital structure, additional financing may not be
available or, if available, may not be obtained on a timely basis and on terms
acceptable to us or within limitations permitted under our senior secured
facility or the covenants with respect to the notes. Failure to obtain
additional financing, should the need for it develop, could result in the delay
or abandonment of our build-out and expansion plans. If we do not have
sufficient funds to complete our build-out, we may be in breach of the Sprint
PCS agreements.
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<PAGE>
We may not receive as much Sprint PCS roaming revenue as we anticipate, our
non-Sprint PCS roaming revenue is likely to be low, adversely affecting our
revenues, and we may have higher payments to Sprint PCS for usage by our
customers of the Sprint PCS network than we anticipate
We are paid a fee from Sprint PCS or a Sprint PCS affiliate for every minute
a Sprint PCS subscriber based outside of our territory uses our network.
Similarly, we pay a fee to Sprint PCS or a Sprint PCS affiliate for every
minute that a Sprint PCS subscriber based in our territory, which we refer to
as our customer, uses the Sprint PCS network outside our territory. Sprint PCS
roaming occurs whenever a Sprint PCS subscriber uses a portion of the Sprint
PCS network outside of the subscribers' assigned calling area. Our customers
may use the Sprint PCS network outside our territory more frequently than we
anticipate and Sprint PCS subscribers from outside our territory may use our
network less frequently than we anticipate. Sprint PCS could also change the
current fee for each Sprint PCS roaming minute billed. As a result, we may
receive less Sprint PCS roaming revenue attributable to the use of our network
by Sprint PCS subscribers who are not our customers than we anticipate or we
may have to pay more Sprint PCS roaming fees attributable to our customers'
usage of portions of the Sprint PCS network other than our network than we
anticipate.
A portion of our revenue may be derived from payments by other wireless
service providers for use by their subscribers of our network, which we refer
to as non-Sprint PCS roaming. However, the technology used in the Sprint PCS
network is not compatible with the technology used by certain other systems,
which diminishes the ability of other wireless service providers' subscribers
to use our network, and Sprint PCS has entered into few agreements that enable
customers of other wireless carriers to roam onto the Sprint PCS network. As a
result, the non-Sprint PCS roaming revenue that we will receive is likely to be
low relative to other wireless service providers. For more information on
roaming revenue, see "Business--Roaming Revenue." For further information on
the Sprint PCS network technology, see "Business--CDMA Technology."
We may have difficulty in obtaining infrastructure equipment and handsets
which are in short supply which could result in delays in our network build-
out, disruption of service or loss of customers
If we are not able to acquire the equipment required to build out our
network in a timely manner, we may be unable to provide wireless communications
services or to meet the requirements of the Sprint PCS agreements. The demand
for the equipment that we require to construct our network is considerable, and
manufacturers of this equipment could have substantial order backlogs.
Accordingly, the lead time for the delivery of this equipment may be longer
than anticipated. In addition, the demand for specific types of handsets is
strong and the manufacturers of those handsets may have to distribute their
limited supply of products among their numerous customers. Some of our
competitors purchase large quantities of equipment and handsets and may have
established relationships with the manufacturers. Consequently, they may
receive priority in the delivery of equipment and handsets. If we cannot obtain
equipment or handsets in a timely manner, we could suffer delays in the build-
out of our network, disruptions in service and a reduction in customers.
Sprint PCS' vendor discounts may be discontinued, which would increase our
equipment costs and require more capital than we project to build out our
network
We intend to purchase our infrastructure equipment under Sprint PCS' vendor
agreements that include significant volume discounts. If Sprint PCS were unable
to continue to obtain vendor discounts for its affiliates, the loss of vendor
discounts would increase our equipment costs.
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<PAGE>
The failure of our vendors, consultants or contractors to perform their
obligations may delay the build-out of our network which may lead to a breach
of the Sprint PCS agreements
The failure by any of our vendors, consultants or contractors to fulfill
their contractual obligations to us could materially delay the build-out of our
network. In connection with the amended and restated credit agreement with
Nortel, we have committed to purchase an additional $32.8 million of equipment
from Nortel and have retained other consultants and contractors, and expect to
retain additional consultants and contractors, to assist in the design and
engineering of our systems, to construct cell sites, switch facilities and
towers, to lease cell sites from and to deploy our network systems, and we will
continue to be significantly dependent upon them in order to fulfill our build-
out obligations.
We may not be able to compete with larger, more established wireless providers
who have the resources to competitively price their products and services which
could impair our ability to attract customers
Our ability to compete will depend, in part, on our ability to anticipate
and respond to various competitive factors affecting the telecommunications
industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors. We compete in each of our markets with two cellular
providers, both of which have their infrastructure in place and have been
operational for a number of years. They have significantly greater financial
and technical resources than we do and could offer more attractive pricing
options. We expect that existing cellular providers will upgrade their systems
and provide expanded, digital services to compete with the Sprint PCS products
and services that we offer. These cellular providers generally require their
customers to enter into long-term contracts, which may make it more difficult
for us to attract customers away from them. Sprint PCS generally does not
require its subscribers to enter into long-term contracts, which may make it
easier for other wireless providers to attract Sprint PCS subscribers away from
Sprint PCS. We will also compete with one or more PCS providers, other wireless
providers and other communications companies in certain of our markets. While
Sprint PCS has licenses covering 30 MHz of spectrum throughout most of our
territory, it has licenses covering only 10 MHz or 20 MHz in parts of Illinois.
Some of our competitors will have access to more licensed spectrum in parts of
Illinois where we offer service and therefore provide greater network call
volume capacity than our network when network usage begins to reach or exceed
the capacity of our licensed spectrum. The inability to accommodate increases
in call volume capacity results in more dropped or disconnected calls. In
addition, any competitive difficulties that Sprint PCS may experience could
also harm our competitive position and success. For further information on the
Sprint PCS licensed spectrum in our markets, see "Business--Markets."
Our services may not be broadly used and accepted by consumers which could
have an adverse effect on our results of operations
PCS systems have a limited operating history. The extent of potential demand
for PCS in our markets cannot be estimated with any degree of certainty. If we
are unable to establish and successfully market PCS, we may not be able to
attract and retain customers in sufficient numbers to operate our business
successfully.
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<PAGE>
There is no uniform signal transmission technology and the technology used on
our network may become obsolete thereby substantially increasing our equipment
expenditures to replace it
The wireless telecommunications industry is experiencing significant
technological change and evolving industry standards. We employ a digital
wireless communications technology selected by Sprint PCS for its network. This
selected technology, code division multiple access, known as CDMA, is
relatively new. CDMA may not provide the advantages expected by Sprint PCS. In
addition to CDMA, there are two other principal signal transmission
technologies: time division multiple access, or TDMA, and global system for
mobile communications, or GSM. None of the signal transmission technologies are
compatible with each other. If one of these technologies, or another
technology, becomes the preferred industry standard, we would be at a
competitive disadvantage and competitive pressures may require Sprint PCS to
change its digital technology which, in turn, may require us to make changes in
our network equipment at substantially increased costs. We may not be able to
respond to such pressures and implement new technology on a timely basis, or at
an acceptable cost.
Our projected build-out plan does not cover all of our territory, which could
make it difficult to maintain a profitable customer base
Our projected build-out plan does not cover all areas of our territory. Upon
completion of our projected build-out plan, we expect to cover 67% of the
residents in our territory. As a result, our build-out plan may not adequately
serve the needs of the potential customers in our territory or attract enough
customers to operate our business successfully. Accordingly, we may have to
cover a greater percentage of our territory than we anticipate, which we may
not have the financial resources to complete or may be unable to do profitably.
Parts of our territory have limited licensed spectrum, and this may affect the
quality of our service or, in the event of termination of the Sprint PCS
agreements, restrict our ability to purchase spectrum licenses from Sprint PCS
in those areas, which would place us at a competitive disadvantage
While Sprint PCS has licenses covering 30 MHz of spectrum throughout most of
our territory, it has licenses covering only 10 MHz or 20 MHz in parts of
Illinois. In the future, as the number of our customers in those areas
increases, this limited licensed spectrum may not be able to accommodate
increases in call volume and may lead to more dropped calls than in other parts
of our territory. If Sprint PCS were to terminate the Sprint PCS agreements,
Sprint PCS would have no obligation to sell us spectrum licenses in areas where
Sprint PCS owns less than 20 MHz of spectrum. Accordingly, it is likely that we
would be unable to operate our business in certain portions of Illinois.
If Sprint PCS subscribers are not able to roam efficiently onto other wireless
networks, prospective subscribers could be deterred from subscribing to Sprint
PCS services and thereby reduce our anticipated revenues and customers
The Sprint PCS network, of which we form a part, operates at a different
frequency and uses a different signal transmission technology than analog
cellular and other digital systems. To access
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<PAGE>
another provider's analog cellular, TDMA or GSM digital systems when outside
the territory served by the Sprint PCS network, a Sprint PCS subscriber is
required to utilize a dual-band/dual-mode handset compatible with that
provider's system. Generally, because dual-band/dual-mode handsets incorporate
two radios rather than one, they are more expensive and may be larger and
heavier than single-band/single-mode handsets. The Sprint PCS network does not
allow for call hand-off between the Sprint PCS network and another wireless
network, thus requiring a subscriber to end a call in progress on the Sprint
PCS network and initiate a new call when outside the territory served by the
Sprint PCS network. In addition, the quality of the service provided by a
network provider during a roaming call may not be the same as the quality of
the service provided by the Sprint PCS network. The price of a roaming call may
not be competitive with prices of other wireless companies for roaming calls,
and Sprint PCS subscribers may not be able to use Sprint PCS' advanced
features, such as voicemail notification, while roaming.
Non-renewal or revocation by the Federal Communications Commission of the
Sprint PCS licenses would significantly harm our business because we would no
longer be able to provide service
We do not own any licenses to operate a wireless network. We are dependent
on Sprint PCS' licenses, which are subject to renewal and revocation. Sprint
PCS' licenses in our territory will begin to expire in 2007 but may be renewed
for additional ten year terms. There may be opposition to renewal of Sprint
PCS' licenses upon their expiration and the Sprint PCS licenses may not be
renewed. The FCC has adopted specific standards that apply to PCS license
renewals. Failure by Sprint PCS to comply with these standards in our territory
could cause revocation or forfeiture of the Sprint PCS licenses for our
territory or the imposition of fines on Sprint PCS by the FCC.
If Sprint PCS does not maintain control over its licensed spectrum, the Sprint
PCS agreements may be terminated which would result in our inability to provide
service
The FCC requires that licensees like Sprint PCS maintain control of their
licensed spectrum and not delegate control to third-party operators or managers
like us. Although the Sprint PCS agreements reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot assure you that the FCC will agree with us. If the FCC were
to determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the Sprint PCS agreements to comply with applicable law. If
we cannot agree with Sprint PCS to modify the Sprint PCS agreements, they may
be terminated. If the Sprint PCS agreements are terminated, we would no longer
be a part of the Sprint PCS network and we would have extreme difficulty in
conducting our business.
The loss of our officers and skilled employees that we depend upon to operate
our business could reduce our ability to offer Sprint PCS products and services
and impair our financial performance
The loss of one or more key employees could impair our ability to offer
Sprint PCS products and services. Our business is managed by a small number of
executive officers. We believe that our
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<PAGE>
future success will also depend in large part on our continued ability to
attract and retain highly qualified technical and management personnel. We
believe that there is and will continue to be intense competition for qualified
personnel in the PCS equipment and services industry as the PCS market
continues to develop. We may not be successful in retaining our key personnel
or in attracting and retaining other highly qualified technical and management
personnel.
Unauthorized use of our network could disrupt our business and increase our
costs of network operations
We will likely incur costs associated with the unauthorized use of our
network, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud impacts interconnection
costs, capacity costs, administrative costs, fraud prevention costs and
payments to other carriers for unbillable fraudulent roaming. Although we
believe that we have implemented appropriate controls to minimize the effect to
us of fraudulent usage, we cannot assure you that we will be successful.
Expanding our territory may have a material adverse effect on our business and
reduce the market value of our common stock
As part of our strategy, we may expand our territory through the grant of
additional markets from Sprint PCS or through acquisitions of other Sprint PCS
affiliates. We will evaluate strategic acquisitions and alliances principally
relating to our current operations. These transactions may require the approval
of Sprint PCS and commonly involve a number of risks, including:
. difficulty of assimilating acquired operations and personnel;
. diversion of management attention;
. disruption of ongoing business;
. inability to retain key personnel;
. inability to successfully incorporate acquired assets and rights into our
service offerings;
. inability to maintain uniform standards, controls, procedures and
policies; and
. impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In
connection with these transactions, we may also issue additional equity
securities, incur additional debt or incur significant amortization expenses
related to goodwill and other intangible assets.
Our certificate of incorporation and by-laws include provisions that may
discourage, delay and/or restrict any sale of our operating assets or common
stock to the possible detriment of our stockholders
Provisions of our certificate of incorporation and by-laws could operate to
discourage, delay or make more difficult a change in control of our company.
Our certificate of incorporation, which contains a provision acknowledging the
terms of the Sprint PCS agreements and a consent and agreement pursuant to
which Sprint PCS may buy our operating assets, has been duly authorized and
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<PAGE>
approved by our board of directors and our stockholders. This provision is
intended to permit the sale of our operating assets pursuant to the terms of
the Sprint PCS agreements or a consent and agreement with our lenders without
further stockholder approval. These restrictions, in addition to the
restrictions in the Sprint PCS agreements could, among other things,
discourage, delay or make more difficult any sale of our operating assets or
common stock. This could have a material adverse effect on the value of our
operating assets and common stock and could reduce the price of our company in
the event of a sale. See "Description of Capital Stock."
Industry Risks
We may experience a high rate of customer turnover, which would increase our
costs of operations and reduce our revenue and prospects for growth
Our efforts to minimize customer turnover may not be successful. As a result
of customer turnover, we lose the revenue attributable to such customers and
increase our costs of establishing and growing our customer base. The PCS
industry has experienced a higher rate of customer turnover as compared to
cellular industry averages. The rate of customer turnover may be the result of
one or more of the following factors, several of which are not within our
ability to address:
. extent of network coverage;
. reliability issues such as blocked calls, dropped calls and handset
problems;
. non-use of phones;
. change of employment;
. non-use of customer contracts by PCS providers and the use of contracts
by other wireless providers;
. lack of affordability;
. customer care concerns; and
. other competitive factors.
Because the wireless industry has been historically dependent on fourth
calendar quarter results, our failure to acquire significantly more customers
in this quarter could have a disproportionately negative effect on the market
value of our common stock
The industry has experienced higher customer additions and handset sales in
the fourth calendar quarter as compared to the other three calendar quarters.
The price of our common stock may drop and our overall results of operations
could be significantly reduced if we have a worse than expected fourth calendar
quarter for any reason, including the following:
. our inability to match or beat pricing plans offered by competitors;
. our failure to adequately promote Sprint PCS' products, services and
pricing plans;
. our inability to obtain an adequate supply or selection of handsets;
. a downturn in the economy of some or all of the markets in our territory;
or
. a poor holiday shopping season.
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Wireless providers offering services based on lower cost structures or
alternative technologies may reduce demand for PCS and reduce our revenue
because of their ability to provide services at lower prices or their use of
more popular technologies
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades
in existing analog wireless systems, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences. There is also uncertainty as to the extent of
customer demand as well as the extent to which airtime and monthly recurring
charges may continue to decline. As a result, our future prospects and those of
the industry, and the success of PCS and other competitive services, remain
uncertain.
Regulation by government agencies may increase our costs of providing service
or require us to change our services which could impair our financial
performance
The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC, the Federal Aviation Administration, generally referred to
as the FAA, and, depending on the jurisdiction, state and local regulatory
agencies and legislative bodies. Adverse decisions regarding these regulatory
requirements could negatively impact our operations and cost of doing business.
Use of hand-held phones may pose health risks which could result in the
reduced use of our services or liability for personal injury claims
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health problems, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may discourage use
of wireless handsets or expose us to potential litigation.
Risks Relating to the Offering
Our existing stockholders, management and directors will be able to control
the outcome of significant matters presented to stockholders as a result of
their ownership position upon the completion of this offering and, as a result,
potentially impair the attractiveness of us as a take-over target
Upon completion of this offering, our existing stockholders, management and
directors will beneficially own approximately 79% of our outstanding common
stock on a diluted basis, or approximately 78% if the underwriters' over-
allotment option is exercised in full. Consequently, such persons, as a group,
may be able to control the outcome of matters submitted for stockholder action
including the election of members to our board of directors and the approval of
significant change in control transactions. This may have the effect of
delaying or preventing a change in control. See "Management" and "Principal
Stockholders."
An active market for the common stock may not develop which may inhibit the
ability of our stockholders to sell common stock and reduce its market value
following this offering
An active or liquid trading market in our common stock may not develop upon
completion of this offering, or if it does develop, it may not continue. The
initial public offering price of our
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common stock will be determined through our negotiations with the underwriters
and may be higher than the market price of common stock after this offering.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price.
The price of our common stock may be more volatile than the equity securities
of established companies and such volatility may disproportionately reduce the
market value of our common stock at certain times
The market price of our common stock could be subject to significant
fluctuations in response to various factors, including:
. variations in our, or Sprint PCS', quarterly operating results;
. announcements of technological innovations or new products and services
by us, Sprint PCS or our competitors;
. our or Sprint PCS' failure to achieve operating results consistent with
securities analysts' projections;
. the operating and stock price performance of other companies that
investors may deem comparable to us or Sprint PCS;
. announcements by us or Sprint PCS of joint development efforts or
corporate partnerships in the wireless telecommunications market;
. market conditions in the technology, telecommunications and other growth
sectors; and
. rumors relating to us, Sprint PCS or our competitors.
The stock market has experienced extreme price volatility. Under these
market conditions, stock prices of many growth stage companies have often
fluctuated in a manner unrelated or disproportionate to the operating
performance of such companies. Since we are a growth stage company, our common
stock may be subject to greater price volatility than the stock market as a
whole.
Purchasers in this offering will experience dilution
The initial public offering price will be substantially higher than the net
tangible book value per share of the outstanding common stock immediately after
the offering. Any common stock you purchase in the offering will have a post-
offering net tangible book value of $3.08 per share which is $8.92 less per
share than the price you paid for the share, assuming an initial public
offering price of $12.00 per share, the midpoint of the range set forth on the
cover page of this prospectus. You will experience dilution in the event of the
exercise of employee and director stock options which we have granted, the
Sprint PCS warrant, and the warrants issued in connection with the senior
discount notes offering. See "Dilution."
Possible future sales of our common stock by management and other affiliates
could cause the market price of our common stock to decrease
A substantial number of shares of our common stock could be sold into the
public market after this offering. The occurrence of such sales, or the
perception that such sales could occur, could
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<PAGE>
materially and adversely affect our stock price and could impair our ability to
obtain capital through an offering of equity securities. The shares of common
stock being sold in this offering will be freely transferable under the
securities laws immediately after issuance, except for any shares sold to our
"affiliates." All of our existing stockholders, our senior management and our
directors have either entered into or have agreed to enter into written "lock-
up" agreements that provide that, for a period of 180 days from the date of
this prospectus, they will not, among other things, sell their shares without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Upon the expiration of the 180 day lock-up period, an additional
53,960,552 shares of our common stock will be eligible for sale in the public
market subject, in most cases, to holding period requirements and volume and
other restrictions under federal securities laws, and subject to certain
restrictions contained in the Stockholders Agreement. See "Description of
Capital Stock" and "Shares Eligible for Future Sale."
You may not receive a return on investment through dividend payments nor upon
the sale of your shares
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Instead, we intend to retain future earnings to fund our
growth. Therefore, you will not receive a return on your investment in our
common stock through the payment of dividends. You also may not realize a
return on your investment upon selling your shares.
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FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations,
which are "forward-looking statements." Any statement in this prospectus 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
. our ability to attract and retain skilled personnel.
See additional discussion under "Risk Factors" beginning on page 5.
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USE OF PROCEEDS
The net proceeds from this offering, after deducting underwriting discounts
and commissions and estimated offering expenses, will be approximately $91.5
million, or approximately $105.5 million if the underwriters' over-allotment
option is exercised in full, assuming an initial public offering price of
$12.00 per share, the midpoint of the range set forth on the cover page of this
prospectus. We intend to use the net proceeds from this offering, together with
the net proceeds of our senior discount notes offering, the net proceeds of our
private placement of $50.0 million of convertible preferred stock to an
investor group led by Blackstone, and anticipated borrowings under our new
senior secured credit facility (the availability of which is subject to certain
conditions), to fund:
. net capital expenditures, including the build-out of our network,
including amounts already expended for the purchase of the Michigan
assets from Sprint PCS on July 12, 2000, totaling approximately $184.5
million;
. net interest expense of $3.6 million as well as fees and expenses related
to our senior secured credit facility; and
. anticipated operating losses and working capital requirements totaling
approximately $61.6 million.
Pending such uses, we expect to invest the net proceeds from this offering
in short-term investment grade securities.
We will retain broad discretion in the allocation of the net proceeds of
this offering. The foregoing discussion represents our best estimate of the
allocation of such net proceeds based upon our current business plan. Actual
expenditures may vary substantially from these estimates and we may find it
necessary or advisable to reallocate the net proceeds within the above-
described categories or to use portions thereof for other purposes. The timing
and the coverage of our build-out plan may change due to various reasons,
including shifts in populations or network focus, changes or advances in
technology, acquisition of other markets, businesses, products or technologies
and factors causing a delay in the build-out of some markets. Any changes in
the timing or build-out plan may cause changes in our use of the net proceeds.
Additionally, we may use a portion of the net proceeds to acquire or invest in
businesses, products or technologies that are complementary to our business, or
to repurchase a portion of our outstanding senior discount notes as permitted
by the senior discount notes indenture.
DIVIDEND POLICY
We intend to retain our future earnings, if any, to fund the development and
growth of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. Our future decisions concerning the
payment of dividends on the common stock will depend upon our results of
operations, financial condition and capital expenditure plans, as well as such
other factors that the board of directors, in its sole discretion, may consider
relevant. In addition, provisions of the senior secured credit agreement and
indenture governing the senior discount notes restrict, and we anticipate our
future indebtedness may restrict, our ability to pay dividends.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and actual
capitalization as of March 31, 2000 and as adjusted to reflect the following:
. the sale of 8,333,333 shares of our common stock in this offering,
assuming an initial public offering price of $12.00 per share, the
midpoint of the range set forth on the cover of this prospectus;
. receipt of gross proceeds of $152.3 million from our senior discount
notes offering;
. receipt of gross proceeds of $50.0 million from our private placement of
convertible preferred stock to an investor group led by Blackstone and
the conversion of all outstanding shares of convertible preferred stock;
. additional equity contributions of $10.0 million from our founders since
March 31, 2000;
. repayment of obligations owed under the Nortel financing of $29.1 million
at March 31, 2000;
. fees and expenses related to this offering, our senior discount notes
offering, our private placement of convertible preferred stock and our
senior secured credit facility totaling approximately $22.5 million; and
. the purchase from Sprint PCS of network assets under construction in four
markets in Michigan for approximately $12.7 million.
<TABLE>
<CAPTION>
As of March 31, 2000
------------------------
As
Actual(1) Adjusted
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 2,118 $250,101
======== ========
Long-term debt:
Nortel financing..................................... $ 29,136 $ --
Senior secured credit facility....................... -- --
Senior discount notes (2)............................ -- 127,472
-------- --------
Total long-term debt............................... 29,136 127,472
Mandatory redeemable convertible preferred stock, no
shares issued and outstanding (3)..................... -- --
Stockholders' equity:
Preferred stock, par value $.01 per share, 75,000,000
shares authorized; no shares issued and outstanding. -- --
Common stock, par value $.01 per share, 300,000,000
shares authorized; 44,869,643 shares outstanding,
actual 62,293,885 shares outstanding, as adjusted... 449 623
Additional paid-in capital (2)(4).................... 28,031 210,463
Accumulated deficit.................................. (19,452) (19,452)
-------- --------
Total stockholders' equity......................... 9,028 191,634
-------- --------
Total capitalization............................. $ 38,164 $319,106
======== ========
</TABLE>
---------------------
(1) Reflects the reorganization into a holding company structure as if it had
occurred as of March 31, 2000.
22
<PAGE>
(2) As adjusted reflects $152.3 million of gross proceeds at issuance of the
units less a $24.8 million unrecognized discount associated with the value
of warrants issued in connection with the senior discount notes. The
unrecognized discount has been allocated to additional paid-in capital.
(3) As adjusted reflects that this offering at an initial public offering price
equal to or in excess of $11.00 per share automatically converts the
9,090,909 issued and outstanding shares of convertible preferred stock into
shares of common stock.
(4) As adjusted reflects the value associated with the warrants issued to
Sprint PCS of $9.1 million.
23
<PAGE>
DILUTION
Our net tangible book value at March 31, 2000 was $9.0 million or $0.17 per
share of common stock, after giving effect to the reorganization to form the
holding company. Net tangible book value per share represents the amount of
total tangible assets less total liabilities, divided by the number of shares
outstanding. After giving effect to:
. the sale in this offering of 8,333,333 shares of our common stock
assuming an initial public offering price of $12.00 per share, the
midpoint of the range set forth on the cover page of this prospectus, and
the receipt of proceeds therefrom;
. the deduction of underwriting discounts and commissions and estimated
offering expenses of $8.5 million;
. additional equity contributions of $10.0 million after March 31, 2000 but
prior to the closing of this offering;
. the effect of the conversion of convertible preferred stock into shares
of our common stock less estimated offering expenses of $2.9 million
related to issuance;
. the value associated with the warrants issued to Sprint PCS of $9.1
million; and
. the value associated with the warrants issued in connection with the
units offering of $24.8 million.
our as-adjusted net tangible book value as of March 31, 2000 would have been
approximately $191.6 million, or $3.08 per share. This represents an immediate
dilution of $8.92 per share to new purchasers of our common stock in the
offering and an immediate increase in net tangible book value to existing
stockholders of $2.91 per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $12.00
Net tangible book value per share as of March 31, 2000......... $ .17
Increase in net tangible book value per share attributable to
the offering.................................................. 2.91
-----
As adjusted net tangible book value per share after the
offering...................................................... 3.08
------
Dilution per share to new purchasers of our common stock....... $ 8.92
======
</TABLE>
The following table summarizes, on an as-adjusted basis as of March 31,
2000, the number of shares of our common stock purchased, the total
consideration paid and the average price per share paid by our existing
stockholders and by new purchasers of our common stock in this offering
assuming an initial public offering price of $12.00 per share, the midpoint of
the range set forth on the cover page of this prospectus, before the deduction
of underwriting discounts and commissions and estimated offering expenses of
$8.5 million payable by us:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ ------------------- Per
Number Percent Amount Percent Share
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)... 53,960,552 86.6% $ 80,000,000 44.4% $ 1.48
New purchasers of our common
stock...................... 8,333,333 13.4 100,000,000 55.6 12.00
---------- ----- ------------ ----- ------
Total..................... 62,293,885 100.0% $180,000,000 100.0% $ 2.89
========== ===== ============ ===== ======
</TABLE>
24
<PAGE>
---------------------
(1) Reflects the reorganization to form a holding company structure as if it
had occurred as of March 31, 2000, includes the additional equity
contributions of $10.0 million after March 31, 2000 but prior to the
closing of this offering and the issuance of $50.0 million of our
convertible preferred stock to an investor group led by Blackstone.
The foregoing tables assume no exercise of the underwriters' over-allotment
option and no exercise of employee and director stock options, the Sprint PCS
warrant or the warrants issued in connection with the senior discount notes
offering. Neither the employee and director stock options, the Sprint PCS
warrant nor the warrants issued in connection with the senior discount notes
offering are currently exercisable. See "Management--2000 Long Term Incentive
Stock Plan," "Management--Employment Agreements" and "Description of Capital
Stock--Warrants."
25
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data," for, and as of the end of, the
period from January 22, 1999 (date of inception) to December 31, 1999 are
derived from the financial statements of Illinois PCS, LLC, the predecessor to
iPCS, Inc., which have been audited by Deloitte & Touche LLP, independent
auditors.
It is important that you also read "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial statements for
the period from January 22, 1999 (date of inception) through December 31, 1999
and the related notes of Illinois PCS, LLC and the independent auditors' report
of Deloitte & Touche, LLP.
The selected unaudited financial data presented below as of March 31, 2000
and for the three months ended March 31, 2000 and the period ended March 31,
1999, are derived from our unaudited financial statements included in this
prospectus. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, that management considers necessary to
a fair presentation of financial position and results of operations. Operating
results for the three-month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2000.
<TABLE>
<CAPTION>
Period from Period from For
January 22, 1999 January 22, 1999 the
(date of (date of three-month
inception) inception) period
through through ended
December 31, 1999 March 31, 1999 March 31, 2000
(In thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations
Data:
Revenues.................. $ 215 $ -- $ 1,592
Cost of service........... 1,695 59 1,746
Total operating expenses.. 4,858 393 16,492
Operating loss............ (4,643) (393) (14,900)
Net loss.................. (4,380) (392) (15,072)
Other Data:
Pro forma basic and
diluted loss per share of
common stock(1).......... $ (0.10) $ (0.01) $ (0.34)
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
As of
December 31, As of March 31, 2000
1999 -------------------------
As
Actual Actual Adjusted(2)
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............. $ 2,733 $ 2,118 $250,101
Property and equipment including
construction in progress, net......... 39,106 48,454 61,135(3)
Total assets........................... 44,843 53,834 334,776
Long-term debt......................... 27,571 29,136 127,472
Total liabilities...................... 35,723 44,806 143,142
Mandatory redeemable convertible
preferred stock....................... -- -- --
Equity................................. 9,120 9,028 191,634
</TABLE>
26
<PAGE>
---------------------
(1) Pro forma basic and diluted loss per share of common stock is computed by
dividing net loss by the assumed number of common shares outstanding as if
the reorganization to form a holding company structure had occurred upon
the inception of Illinois PCS, LLC.
(2) As adjusted Balance Sheet Data reflects (a) receipt of gross proceeds of
approximately $152.3 million ($146.2 million after fees and expenses) from
the senior discount notes offering less a $24.8 million unrecognized
discount associated with the value of warrants issued in connection with
the senior discount notes. The unrecognized discount has been allocated to
additional paid-in capital, (b) receipt of $50.0 million ($47.1 million
after fees and expenses) from our private placement to an investor group
led by Blackstone of convertible preferred stock, (c) deferred financing
costs of $11.1 million related to the senior discount notes and the senior
secured credit facility, (d) additional equity contributions received from
our founders of $10.0 million since March 31, 2000, (e) the payment of
approximately $12.7 million to purchase from Sprint PCS network assets
under construction in four markets in Michigan, (f) repayment of
obligations owed under the Nortel financing of $29.1 million at March 31,
2000 and (g) the value associated with the warrants issued to Sprint PCS of
$9.1 million. For more information on the senior secured credit facility,
see "Description of Our Indebtedness--The Senior Secured Credit Facility."
In addition, adjusted reflects that this offering at an initial public
offering price of $12.00 per share, the midpoint of the range set forth on
the cover page of this prospectus, causes the convertible preferred stock
to automatically convert into shares of common stock.
(3) Assumes the increase is equal to the purchase price of the Sprint PCS
network assets under construction in four markets in Michigan. The amount
actually to be included will be subject to our purchase price allocation
which will be based on the fair value market of the assets acquired with
any excess amount over fair market value being allocated to an intangible
asset.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and the related notes included elsewhere in this
prospectus.
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 15 markets in Illinois and Iowa. In March 2000, the Sprint
PCS agreements were amended to add 20 additional markets to our territory which
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
royalty-free during our affiliation with Sprint PCS. We also have access to
Sprint PCS' national marketing support and distribution programs and we buy our
network equipment, handsets and accessories at the same discounted rates
offered by vendors to Sprint PCS based on its large volume purchases. 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
subscribers based in our territory, excluding outbound roaming, and from non-
Sprint PCS subscribers 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.
Since the date of inception, we have incurred substantial costs to negotiate
the Sprint PCS agreements and the Nortel financing, to design, engineer and
build-out our network in our initial territory and to open retail stores. Prior
to launching service in Bloomington, Illinois and the Quad Cities (Rock Island
and Moline, Illinois; and Davenport and Bettendorf, Iowa) markets in December
1999, we did not have any markets in operation. We launched service in our
first two markets in December 1999 and have since commenced offering service in
eight additional markets. Our network covers approximately 1,776,000 residents,
or approximately 78% of a total population of 2,268,000 in those markets, and
we had over 14,000 customers as of June 30, 2000. For the period January 22,
1999 (date of inception) through December 31, 1999, we had not generated
significant revenues from customers and our net loss was $4.4 million. Through
March 31, 2000, we had incurred $47.9 million of capital expenditures and
construction in progress expenses related to the build-out of our network.
While we anticipate operating losses to continue, based upon the subscriber
additions
28
<PAGE>
experienced by Sprint PCS and other affiliates and our limited experience to
date, we expect revenue to increase substantially as the number of our
customers increases. 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 period January 22, 1999 (date of inception) through December 31, 1999
Net loss. 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. Our net loss from the date of inception
through December 31, 1999 was $4.4 million and was comprised primarily of
service and equipment expenses as well as selling, general and administrative
expenses associated with the preparation of our initial market launches.
Service revenues. Service revenues, which during the period totaled $71,000,
consisted of customer revenue of approximately $28,000, Sprint PCS roaming
revenue of approximately $41,000, and non-Sprint PCS roaming revenue and long
distance revenue of approximately $2,000, all of which relate to our initial
market launches in December 1999.
. Customer revenue consists of services billed to our customers for monthly
Sprint PCS service in our territory under a variety of service plans as
well as roaming and long distance revenues from our customers when they
roam on non-Sprint PCS networks.
. We receive Sprint PCS roaming revenue at a per-minute rate from Sprint
PCS or another Sprint PCS affiliate when Sprint PCS subscribers based
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.
. Non-Sprint PCS roaming revenue includes payments from wireless service
providers, other than Sprint PCS, when those providers' subscribers roam
on our network.
Equipment revenues. We record 100% of the revenue from the sale of
equipment, net of an allowance for returns, as equipment revenues. The amount
recorded during this period totaled $144,000.
Cost of service. Cost of service expenses totaled $1.7 million which related
to providing Sprint PCS services in our territory. Cost of service expenses
also include billing, network monitoring, cost of operations, fees related to
facilities and other transport lines, inter-connection 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 cost
of service expenses is the 8% of collected revenue retained by Sprint PCS.
29
<PAGE>
Cost of equipment. Cost of equipment totaled $484,000 which includes the
cost of accessories, the cost of handsets and handset subsidies. 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 totaling $778,000 during the period
included advertising expenses, promotion costs, sales commissions and expenses
related to our distribution channels.
General and administrative expenses. General and administrative expenses
totaling $1.5 million included administrative and executive salaries, employee
benefit costs, legal and other professional service fees, and loan commitment
fees.
Depreciation and amortization. Depreciation and amortization during the
period totaled $381,000. Depreciation is calculated using the straight line
method over the useful life of the asset. We begin to depreciate the assets for
each market only after we launch service in that market.
Interest income. Interest income totaling $89,000 was generated on
investment of funds during the period.
Interest expense. Interest expense, which totaled $471,000 during this
period, was capitalized and related primarily to the Nortel financing.
Gain on tower sales. For the period ended December 31, 1999, eighteen towers
were sold to American Tower for $4.5 million in cash, resulting in a gain of
$1.9 million, of which $174,000 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 three-month period ended March 31, 2000 compared with the period
January 22, 1999 (date of inception) through March 31, 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 three-month
period ended March 31, 2000, we recorded a loss of approximately $15.1 million
on total revenues of approximately $1.6 million. The loss was caused primarily
by costs of service revenues exceeding service revenues, handset subsidies,
selling, general and administrative expenses and depreciation and amortization
associated with the markets launched in 1999 and 2000 and the 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 Illinois PCS, LLC to our President and Chief Executive Officer. Our
net loss for the period ended March 31, 1999 was $392,000 and was comprised
primarily of selling, general and administrative expenses associated with the
preparation of our initial markets.
Service and equipment revenues. For the three-month period ended March 31,
2000, service revenue totaled approximately $1.2 million and was comprised of
customer revenue of $687,000,
Sprint PCS roaming revenue of approximately $492,000 and non-Sprint PCS roaming
and long distance revenue of $32,000. The number of our subscribers increased
from approximately 1,900 at December 31, 1999 to over 6,600 at March 31, 2000.
Our average monthly revenue per customer,
30
<PAGE>
including long distance and roaming revenue, was $102.75 for the three-month
period ended March 31, 2000. For the period ended March 31, 1999 we had no
service and equipment revenues because we had not yet launched service.
Equipment revenues. Equipment revenues totaled approximately $379,000 for
the three-month period ended March 31, 2000. For the period ended March 31,
1999 we had no equipment revenues because we had not yet launched service.
Cost of service. Cost of service expenses, which relates to providing Sprint
PCS services in our territory, for the three-month period ended March 31, 2000
totaled approximately $1.7 million and totaled approximately $59,000 for the
period ended March 31, 1999. Also included in the cost of service expenses is
the 8% fee of collected revenue retained by Sprint PCS in the amount of $53,000
for the three-month period ended March 31, 2000. There was no Sprint PCS fee
expense recorded for the period ended March 31, 1999 because we had not yet
launched service.
Cost of equipment. Cost of equipment sold for the three-month period ended
March 31, 2000 totaled approximately $982,000. There was no cost of equipment
expense recorded for the period ended March 31, 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 include advertising and promotional
costs, sales commissions, and expenses related to our distribution channels.
For the three-month period ended March 31, 2000, selling expenses totaled
approximately $1.1 million compared with $1,000 for the period ended March 31,
1999 and increased due to the costs related to the launch of operations in
December 1999 and in the first quarter of 2000.
General and administrative expenses. General and administrative expenses
were approximately $11.3 million for the three-month period ended March 31,
2000 and $333,000 for the period ended March, 31, 1999. Included in general and
administrative expenses are finance and executive salaries and bonuses,
employee benefit costs, legal and other professional service fees, and loan
commitment fees. The increase experienced in the three-month period ended March
31, 2000 was due to the hiring of additional personnel, the non-cash
compensation expense for the three-month period ended March 31, 2000 of
approximately $8.5 million which related to a one time charge for the issuance
of the 1.5% ownership interest to our President and Chief Executive Officer
based on the expected initial public offering price, and approximately $1.6
million related to the withholding taxes we have agreed to pay in connection
with the issuance of the 1.5% ownership interest.
Depreciation and amortization. Depreciation and amortization expense for the
three-month period ended March 31, 2000 totaled approximately $1.3 million. We
begin to depreciate the assets when we launch service in a market. There was no
depreciation and amortization expense recorded for the period ended March 31,
1999 because we had not yet launched service.
Interest income. For the three-month period ended March 31, 2000, interest
income totaled approximately $43,000 and was generated on the investment of
funds. For the period ended March 31, 1999, interest income totaled
approximately $1,000.
31
<PAGE>
Interest expense. For the three-month period ended March 31, 2000, interest
of approximately $629,000 was capitalized and approximately $206,000 was
recorded as expense. Interest incurred relates primarily to the Nortel
financing.
Gain on tower sales. For the three-month period ended March 31, 2000, eight
towers were sold to American Tower for approximately $2.0 million in cash,
resulting in a total gain of approximately $736,000 which is being amortized
over the initial lease term of ten years. We did not sell any towers to
American Tower during the period ended March 31, 1999.
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. For the period presented, the owners of our predecessor
limited liability company recorded our tax losses on their own income tax
returns. Subsequent to our reorganization, we will account for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Had we applied the provisions of SFAS No. 109
for the period from the date of inception through December 31, 1999 and for the
three-month period ended March 31, 2000 and the period ended March 31, 1999,
the deferred tax asset generated, primarily from temporary differences related
to the treatment of start-up costs and from net operating loss carry forwards,
would have been offset by a full valuation allowance and therefore, there would
have been no difference to the financial statements had we been a corporation
for such period.
Liquidity and Capital Resources
From the date of inception through July 12, 2000, we financed our operations
through equity contributions from our owners and through financing provided by
Nortel. As of March 31, 2000 we had received $20.0 million of equity
contributions from our owners and had unfunded equity commitments of $10.0
million. Since March 31, 2000, we received the remaining $10.0 million of
equity commitments. As of March 31, 2000, we had a $48.0 million credit
facility with Nortel, of which $29.1 million had been drawn. We have entered
into an amended and restated credit agreement with Toronto Dominion (Texas),
Inc. and GE Capital for a $140.0 million senior secured credit facility to
replace the Nortel financing, and the Nortel facility has been repaid in full.
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.
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
31, 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 30,
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.
32
<PAGE>
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 paid 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 ended December 31, 2003;
. any amount in excess of $1,000,000 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 committed issuance of the convertible preferred stock or 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 this offering and certain other 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 margin for base rate loans and Eurodollar loans will be
determined based upon the leverage ratio as of the end of the fiscal quarter
most recently ended.
All borrowings under the Nortel financing were based on the London
interbank offered rate plus 4%. At March 31, 2000, this rate was 10.13%.
33
<PAGE>
As of March 31, 2000, we were in compliance with the covenants under the
Nortel financing.
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. For more information on the senior
secured facility, see "Description of Our Indebtedness--The Senior Secured
Credit Facility."
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 $152.3 million.
Also on July 12, 2000, we entered into a definitive agreement with an
investor group led by Blackstone under which we issued $50.0 million of our
convertible preferred stock. The agreement includes a commitment by the
investor group to purchase, subject to certain conditions, an additional $70.0
million of our convertible preferred stock in the event that we do not complete
an initial public offering with gross proceeds of at least $30.0 million prior
to December 31, 2000. The completion of this offering will eliminate our
obligation to sell, and Blackstone's obligation to purchase, the additional
$70.0 million of convertible preferred stock. The completion of this offering
at an initial public offering price of $11.00 per share or greater will result
in the automatic conversion of the 9,090,909 outstanding shares of convertible
preferred stock into common stock.
Net cash used by operating activities was $3.9 million from the date of
inception through December 31, 1999 and $2.0 million for the three-month period
ended March 31, 2000. Cash used in operating activities was attributable to
operating losses and working capital needs.
Net cash used in investing activities was $32.8 million from the date of
inception through December 31, 1999 and $6.6 million for the three-month period
ended March 31, 2000. The expenditures were related primarily to the purchase
of our network infrastructure equipment.
Net cash provided by financing activities from the date of inception through
December 31, 1999 was $39.5 million and $8.1 million for the three-month period
ended March 31, 2000 and consisted primarily of equity contributions and
borrowings under the Nortel financing.
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.
Through March 31, 2000 we had received $6.5 million related to the sale of
towers under this agreement and had incurred $3.9 million to construct such
towers. American Tower has also provided us with a one time advance of $2.0
million. This advance is a prepayment of American Towers' obligations under the
agreement, and will be credited ratably toward the purchase price of the fifty-
third through sixtieth towers upon the sale of each such tower. In the event of
a default by us that results in a termination of the agreement prior to the
construction of the fifty-third tower, we must refund the entire amount of the
$2.0 million advance plus accrued interest at a rate of 5% per annum. The term
of this agreement will expire at the earlier of the final tower sale or
December 31, 2000. As of March 31, 2000, we had sold 26 towers to American
Tower.
34
<PAGE>
As of March 31, 2000, our primary sources of liquidity were $2.1 million in
cash and $18.9 million of unused capacity under the $48.0 million Nortel credit
facility. We also had $10.0 million of unfunded equity commitments.
2000 Long Term Incentive Stock Plan
We have granted options to employees and directors to acquire an aggregate
of 1,558,750 shares of our common stock at an exercise price of $5.50 per
share.
Sources and Uses of Funds
The following table sets forth our estimated sources and uses of funds from
April 1, 2000 through December 31, 2003:
<TABLE>
<CAPTION>
Amount
Sources: (In millions)
<S> <C>
Cash on hand at April 1, 2000..................................... $ 2.1
Gross proceeds of this offering................................... 100.0
Gross proceeds from senior discount notes......................... 152.3
Gross proceeds from convertible preferred stock (1)............... 50.0
Gross proceeds from our senior secured credit facility (2)........ 140.0
Equity contributions from founders................................ 10.0
------
Total sources................................................... $454.4
======
Uses:
Capital expenditures, net (3)..................................... $184.5
Repayment of Nortel financing..................................... 29.1
Interest expense, net............................................. 3.6
Fees and expenses (4)............................................. 22.5
Working capital and operating losses.............................. 61.6
------
Total uses...................................................... 301.3
Cash on hand at December 31, 2003............................... 153.1
------
Total uses and cash on hand at December 31, 2003.............. $454.4
======
</TABLE>
---------------------
(1) We have received $50.0 million from an investor group led by Blackstone
($47.1 million after fees and expenses) and we have a commitment from the
investor group, subject to certain conditions, to purchase an additional
$70.0 million. The additional $70.0 million issuance is not reflected above
because the completion of this offering will eliminate our obligation to
sell, and Blackstone's obligation to purchase, such shares.
(2) Borrowings under the senior secured credit facility are subject to certain
conditions and will not be permitted until a specified amount of equity is
invested.
(3) Capital expenditures, assumed to be net of the proceeds from the sale of 74
towers for $16.3 million, include the amounts related to the build-out of
our network and the purchase of assets under construction in four markets
in Michigan. We paid approximately $12.7 million for these Michigan network
assets.
(4) Fees and expenses include underwriting discounts and commissions and
estimated offering expenses for this offering, origination and other
estimated fees and expenses related to the senior secured credit facility
and fees and estimated expenses related to our private placement of
convertible preferred stock.
The actual funds required to build-out our network and to fund operating
losses, working capital needs and other capital needs may vary materially from
these estimates, and additional funds could be required because of an expansion
of our territory, unforeseen delays, cost overruns, unanticipated expenses,
regulatory changes, a need for additional towers, engineering design changes
and required
35
<PAGE>
technological upgrades and other technological risks. In light of these
considerations, we intend to monitor the public equity market for opportunities
to advantageously issue equity.
Option Territory
As part of the expansion of our 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 6,600 Sprint PCS subscribers as of December
31, 1999. 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 upward adjustment based upon the number of
subscribers in the two additional markets at the option exercise date, as
described more fully under "The Sprint PCS Agreements--Option Territory." 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 option territory and whether exercising this option is our best use of
capital. We do not expect to reach a determination until after the completion
of this offering.
Regulatory Developments
See "Regulation of the Wireless Telecommunications Industry" for a
discussion of regulatory developments that could have a future impact on us.
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 increasing use of retail distribution, which is dependent upon the
year-end holiday shopping season;
. competitive pricing pressures; and
. aggressive marketing and promotions initiated during the period.
Quantitative and Qualitative Disclosure 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 financing and any
future financing requirements. Our variable rate debt consists of borrowings
made under our senior secured financing. The senior secured financing 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
the total debt. To date, we have not entered into such an agreement.
36
<PAGE>
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 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... -- $162,994 $186,612 $213,652 $244,610 $280,054 --
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
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
. 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.
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 issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Deferral of the Effective
Date of SFAS 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.
37
<PAGE>
BUSINESS
References to total population and residents are based on January 1, 1999
population estimates compiled by Rand McNally Commercial Atlas & Marketing
Guide, 2000 Edition. References to markets reflect whole or partial basic
trading areas, or BTAs, as defined by the Federal Communications Commission.
Overview
We have the exclusive right to market 100% digital, 100% PCS, under the
Sprint and Sprint PCS brand names to a total population of more than 7.0
million in the midwestern United States. We offer the same bundled national
pricing plans and use the same sales and marketing strategies, national sales
and distribution channels, centralized billing and customer care as Sprint PCS.
We began providing service in December 1999 and, as of June 30, 2000, had
launched service in ten markets covering approximately 1,776,000 residents and
had over 14,000 customers. By the end of the third quarter of 2001, we plan to
be providing coverage to approximately 67% of the total population of over 7.0
million in our territory, at which time our planned network build-out for all
of our current markets will be substantially complete.
In January 1999, we entered into the Sprint PCS agreements whereby we became
the exclusive Sprint PCS affiliate for our initial territory of 15 markets with
a total population of over 2.8 million in the states of Illinois and Iowa. We
have completed all radio frequency design, network design, site acquisition and
engineering for each of these 15 markets. By the end of September 2000, we plan
to have launched service in all of our remaining initial markets, thereby
substantially completing our network build-out in our initial territory. At
such time, we will be providing coverage to approximately 2.1 million residents
or approximately 75% of the total population in our initial territory.
Following our successful initial launch, Sprint PCS selected us to be the
exclusive Sprint PCS affiliate for 20 additional markets with a total
population of over 4.2 million in the states of Michigan, Iowa and Nebraska. As
part of this expansion, we have purchased from Sprint PCS network assets under
construction in four markets in Michigan. In addition, 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 Sprint PCS launched in February 1997 and to
purchase from Sprint PCS related assets in those markets. Those markets have a
total population of approximately 405,000 and had over 6,600 Sprint PCS
subscribers as of December 31, 1999.
Our territory includes markets in Illinois, including Peoria, Springfield,
Champaign-Urbana, Decatur-Effingham, Bloomington and the Quad Cities (Rock
Island and Moline, Illinois; and Davenport and Bettendorf, Iowa); Michigan,
including Grand Rapids, Saginaw-Bay City, Muskegon and Traverse City; Iowa,
including Waterloo-Cedar Falls and Dubuque; and eastern Nebraska. We anticipate
our territory will generate significant roaming revenues for us from Sprint PCS
subscribers not based in our territory who use our network. Our territory is
adjacent to several important markets owned and operated by Sprint PCS
including Chicago, Detroit, Des Moines, Indianapolis, Omaha and St. Louis. We
benefit from more than 1,700 miles of heavily traveled interstates in our
territory which connect major metropolitan and industrial areas of the
midwestern United States. Over 40 colleges and universities are located in our
territory with a total enrollment of approximately 200,000 students.
38
<PAGE>
The Sprint PCS agreements impose obligations and restrictions on us. We are
required to comply with requirements for launch dates, coverage and technical
standards of the network build-out, customer service standards, and
participation in Sprint PCS national and regional distribution and national
accounts programs. We are prohibited from offering Sprint PCS products and
services outside our territory and on a non-branded, "private label" basis. For
further information regarding the terms of the Sprint PCS agreements, see "The
Sprint PCS Agreements--The Management Agreement." If the Sprint PCS agreements
terminate, we will not enjoy the benefits as discussed below of our affiliation
and such termination will permit Sprint PCS to purchase our operating assets or
capital stock at a substantial discount from our fair market value. For further
information regarding risks related to our relationship with Sprint PCS, see
"Risk Factors--Risks Particular to iPCS."
Competitive Strengths
Benefits of our Long-Term Strategic Relationship with Sprint PCS
Our long-term strategic relationship with Sprint PCS allows us to offer high
quality, nationally branded wireless services more quickly, at a lower cost and
with lower initial capital requirements than would otherwise be possible. The
benefits of our affiliation with Sprint PCS include the following:
Exclusive provider of Sprint PCS products and services. We are the exclusive
provider of Sprint PCS' 100% digital, 100% PCS wireless products and services
in our territory. We market these products and services exclusively under the
Sprint and Sprint PCS brand names.
Immediate brand name recognition and national advertising support. We
benefit from the strength and reputation of the Sprint and Sprint PCS brand
names. Sprint PCS' extensive national advertising campaigns and established
marketing programs are provided to us at no additional cost under our
agreements with Sprint PCS. We offer the same strategic pricing plans,
promotional campaigns and handset and accessory promotions as Sprint PCS, and
have the flexibility to add pricing plans and marketing promotions that target
local market needs.
Nationwide digital PCS network. Our network operates with Sprint PCS'
national network and will significantly extend Sprint PCS' coverage in the
midwestern United States, which we believe is important to Sprint PCS' regional
and national growth strategy. Our ability to provide our customers with access
to Sprint PCS' national network represents a competitive advantage over other
national and regional providers of wireless services.
Established and available distribution channels. We benefit from immediate
access to Sprint PCS' existing sales and distribution agreements with major
national retailers who have existing store locations in our territory and
Sprint PCS' other national sales and distribution channels, including:
. the sales and distribution agreements with major national third-party
retailers which collectively provide us with access to over 300 stores in
our territory;
. Sprint PCS' national inbound telemarketing sales force;
. Sprint PCS' national accounts sales team; and
. Sprint PCS' electronic commerce sales platform.
39
<PAGE>
Sprint PCS back office services. We utilize Sprint PCS' established back
office services, including customer activation, billing and 24 hours a day, 7
days a week customer care to service our customers more effectively and
economically. Use of these services has enabled us to accelerate the launch of
our commercial PCS operations and significantly reduced our capital
expenditures and operating costs compared with establishing and operating our
own back office systems.
Sprint PCS Wireless Web. We support and market the Sprint PCS Wireless Web
service on our network. The Sprint PCS Wireless Web allows customers with data
capable or web-browser enabled handsets to connect to the Internet and browse
specially designed text-based web sites, including Yahoo!, Amazon.com,
Bloomberg.com, CNN Interactive, MapQuest.com, Fox Sports, Ameritrade,
InfoSpace.com and Weather.com. For more information on the Sprint PCS Wireless
Web, see "--Products and Services--Access to the Sprint PCS Wireless Web."
Sprint PCS licenses and long-term commitment. Sprint PCS has funded the
purchases of the licenses covering our territory at a cost of over $40.5
million. As a Sprint PCS affiliate, we did not have to fund these expenditures,
thereby reducing our start-up costs. The Sprint PCS agreements are for a total
of 50 years, including an initial term of 20 years with three 10-year renewal
terms.
Better equipment availability and pricing. We are able to acquire our
network equipment, handsets and accessories more quickly and at a significantly
lower cost than we would without our strategic relationship with Sprint PCS. We
purchase our network equipment, handsets and accessories under Sprint PCS'
vendor contracts that provide for volume discounts. These discounts
significantly reduce the overall capital required to build our network and
significantly reduce our costs of handsets and accessories.
Availability of technology and service advances developed by Sprint PCS. We
benefit from Sprint PCS' extensive research and development effort, which
provides us with ongoing access to new technological products and enhanced
service features without significant research and development expenditures of
our own. We have immediate access to any developments produced by Sprint PCS
for use in our network.
Other Competitive Strengths
In addition to the advantages provided by our strategic relationship with
Sprint PCS, we have:
Fewer competitors and fragmented competition. We face fewer competitors in
our markets than is generally the case for wireless service providers operating
in larger metropolitan markets. Our markets have a limited presence of national
wireless service providers. No single cellular or PCS competitor or affiliated
group of competitors has existing operations covering more than 2.3 million of
the residents within our territory. We expect to be the first national PCS
entrant in all of our markets and the first or second PCS entrant in all but
four of our markets in central Illinois, where we are third. Existing PCS
competition is limited to regional carriers with small service territories and
PrimeCo, which only provides service in five of our markets in Illinois. AT&T
Wireless is the only cellular or PCS competitor to hold licenses in all of our
markets, although it is not currently operating in any of our markets. We
believe that our most extensive competition comes from the established regional
cellular carriers in each of our markets, although their coverage is
fragmented.
40
<PAGE>
Potential for significant Sprint PCS roaming revenue. We receive Sprint PCS
roaming revenue from Sprint PCS subscribers based outside our territory who
roam on our network. Our territory is adjacent to and connects several major
markets owned and operated by Sprint PCS, including Chicago, Detroit, St.
Louis, Indianapolis, Omaha and Des Moines. These market areas contain
approximately 20 million residents. Our network contains over 1,700 interstate
miles which connect these major Sprint PCS markets. The interstate corridors in
our territory include:
<TABLE>
<CAPTION>
Approximate Approximate
total interstate miles interstate
between major miles covered
Interstate Major Destination Cities destinations by iPCS
<S> <C> <C> <C>
I-57 Chicago, IL to Memphis, TN............ 524 244
I-74 Moline, IL to Cincinnati, OH.......... 421 220
I-55 Chicago, IL to St. Louis, MO.......... 285 179
I-80 Chicago, IL to Des Moines, IA......... 340 158
I-35 Minneapolis, MN to Kansas City, MO.... 440 133
I-80 Omaha, NE to Cheyenne, WY............. 497 131
I-75 Detroit, MI to Mackinaw City, MI...... 291 120
I-72 Springfield, IL to Champaign, IL...... 87 87
I-70 St. Louis, MO to Indianapolis, IN..... 234 84
I-64 St. Louis, MO to Louisville, KY....... 259 83
I-39 Rockford, IL to Bloomington, IL....... 130 77
I-29 Omaha, NE to Kansas City, MO.......... 187 77
I-96 Muskegon, MI to Detroit, MI........... 190 76
I-196 Benton Harbor, MI to Grand Rapids, MI. 78 46
I-380 Iowa City, IA to Waterloo, IA......... 82 33
----- -----
Total...................................... 4,045 1,748
===== =====
</TABLE>
For a more detailed description of Sprint PCS roaming revenue, see "--Roaming
Revenue."
Significant Sprint PCS national accounts opportunities. We participate in
Sprint PCS' national accounts program which targets large companies. Several
Fortune 500 companies such as State Farm Insurance, Archer Daniels Midland, Dow
Chemical, John Deere and Caterpillar, as well as a number of other large
companies, have their headquarters in our territory. Participation in Sprint
PCS' national accounts program provides us an opportunity to participate in
selling efforts focused on those companies. We have been working with Sprint
PCS' national accounts team to attract, service and retain large companies with
headquarters in our territory. In addition, we target other national account
companies with significant operations in our territory to offer service under
the terms of their national account agreements.
41
<PAGE>
Execution of our initial territory network build-out plan. In January 1999,
we entered into the Sprint PCS agreements for our initial territory in Illinois
and Iowa. Within ten months and ahead of the build-out requirements under the
Sprint PCS agreements, we completed network construction and began providing
commercial service in two of these markets covering over 590,000 residents. As
of June 30, 2000, we had launched Sprint PCS service in ten markets covering
approximately 1,776,000 residents and had over 14,000 customers. We are using
the same implementation methodologies for the network construction in all
markets in our territory.
Fully financed business plan. We believe that the net proceeds of this
offering, together with the net proceeds of our sale of the senior discount
notes, the private placement of $50.0 million of convertible preferred stock to
an investor group led by Blackstone, and anticipated borrowings under our new
senior secured facility (the availability of which is subject to certain
conditions) will be adequate to fund our network buildout, anticipated
operating losses, working capital requirements and other capital needs.
Business Strategy
We believe that the following elements of our business strategy will enable
us to continue to rapidly build out our network and launch additional markets,
distinguish our wireless service offerings from those of our competitors and
compete successfully in the wireless communications marketplace.
Fully leverage our strategic relationship with Sprint PCS. We are
capitalizing on the extensive benefits of our strategic relationship with
Sprint PCS. These benefits allow us to provide a seamless offering of products
and services in our territory under the Sprint and Sprint PCS brand names that
are indistinguishable from those offered by Sprint PCS nationwide. We take full
advantage of Sprint PCS' national marketing programs and established sales and
distribution channels to increase our sales. We use Sprint PCS' back office
services, including customer activation, billing and 24 hours a day, 7 days a
week customer care, and Sprint PCS' national network control center, which is
responsible in conjunction with our switching centers for continually
monitoring the performance of our network and providing rapid response for
systems maintenance needs. The use of these back office services from Sprint
PCS significantly reduces our overhead costs. We take advantage of
significantly discounted prices for network equipment, handsets and accessories
under Sprint PCS' vendor contracts, which further reduces our costs.
Execute an integrated local marketing strategy. Our marketing strategy
leverages Sprint and Sprint PCS' nationwide presence and brand names while at
the same time establishing a strong local presence in each of our markets. We
emphasize the improved clarity and quality, enhanced features and favorable
pricing of Sprint PCS products and services and replicate the marketing
strategies that have resulted in Sprint PCS becoming the fastest growing U.S.
wireless carrier. In addition, on the local level, we are:
. establishing 19 Sprint PCS sales and service centers in markets within
our territory;
. establishing local third-party sales and distribution relationships on an
as-needed basis;
42
<PAGE>
. directing our media efforts at the community level by advertising in
local publications, radio and television; and
. sponsoring local and regional events.
Continue to execute build-out plan and rapid deployment. We plan to continue
the rapid construction and build-out of our technologically advanced 100%
digital, 100% PCS wireless network. Our strategy is to build out network
service to metropolitan areas and the interstates and primary roads connecting
these areas, and then to cover the smaller population and business centers. We
intend to continue to rely on experienced third-party strategic partners for
radio frequency design, network engineering and optimization, site acquisition,
project management and construction management services.
Explore strategic opportunities to expand our territory. We continually
evaluate expansion opportunities and, subject to the availability of financing,
may strategically expand our territory. We have been granted the option, but do
not have the obligation, to purchase the Iowa City and Cedar Rapids, Iowa
markets that have already been launched by Sprint PCS. For more information on
the option, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Option Territory."
Sprint PCS
Sprint PCS, a wholly owned subsidiary of Sprint, operates the only
nationwide 100% digital, 100% PCS wireless network in the United States and has
licenses to provide wireless service nationwide including Hawaii, Puerto Rico
and the U.S. Virgin Islands. Sprint PCS operates its PCS network in major
metropolitan markets throughout the United States and has entered into
agreements with affiliates with territories ranging in total population from
300,000 to 9.9 million to build out and manage networks in smaller metropolitan
areas and along major highways. The Sprint PCS network uses CDMA technology
nationwide.
Sprint PCS launched its first commercial PCS service in the United States in
November 1995 and has experienced rapid growth, providing service to over 6.5
million customers as of March 31, 2000. For each of the six calendar quarters
prior to and including the quarter ended March 31, 2000, Sprint PCS has
recorded the largest number of new subscribers added by a U.S. wireless
services provider. In the fourth quarter of 1999, Sprint PCS added over 1
million subscribers, the largest single quarter ever recorded by a U.S.
wireless service provider. The Sprint PCS network (including the portions of
the network owned, constructed and operated by the 18 affiliates) operates the
largest 100% digital, 100% PCS nationwide wireless network in the United
States, already serving the majority of the nation's metropolitan areas
including more than 4,000 cities and communities across the country. Sprint PCS
has licensed PCS coverage of nearly 270 million people in all 50 states, Puerto
Rico and the U.S. Virgin Islands. However, Sprint PCS does not currently offer
PCS services in every state in the United States. The following table, showing
the quarterly end-of-period subscriber data for Sprint PCS, illustrates Sprint
PCS' subscriber growth from the beginning of 1997 to the end of the first
quarter of 2000.
43
<PAGE>
[Bar Chart of Subscriber Growth]
Statements in this prospectus regarding Sprint Corporation or the Sprint PCS
group of companies, which we refer to as Sprint PCS, are derived from
information contained in the periodic reports and other documents filed with
the Securities and Exchange Commission by Sprint and Sprint PCS, or press
releases issued by Sprint and Sprint PCS.
Markets
Our territory includes 35 markets containing a total population of over 7.0
million residents in Illinois, including Peoria, Springfield, Champaign-Urbana,
Decatur-Effingham, Bloomington and the Quad Cities (Rock Island and Moline,
Illinois; and Davenport and Bettendorf, Iowa); Michigan, including Grand
Rapids, Saginaw-Bay City, Muskegon and Traverse City; Iowa, including Waterloo-
Cedar Falls and Dubuque; and eastern Nebraska. We are the exclusive provider of
Sprint PCS products and services in these markets which are adjacent to several
major metropolitan operational markets in the midwestern United States which
are owned and operated by Sprint PCS including Chicago, Detroit, Des Moines,
Indianapolis, Omaha and St. Louis. We believe connecting existing Sprint PCS
markets is important to Sprint PCS' strategy to provide seamless, nationwide
PCS service. 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
Sprint PCS launched in February 1997 and to
44
<PAGE>
purchase from Sprint PCS related assets and subscriber accounts in those
markets. These markets have a total population of approximately 405,000 and had
over 6,600 Sprint PCS subscribers as of December 31, 1999.
The following table lists in order of the calendar quarter of actual or
expected commercial launch of network coverage, the market, megahertz of
spectrum, estimated total population, estimated covered population and
estimated covered population as a percentage of total population for each of
the markets that comprise our territory, but does not include the Iowa City and
Cedar Rapids, Iowa markets that we have the option to add to our territory as
described above. As of June 30, 2000, we have launched the following markets:
Davenport, Iowa/Moline, Illinois; Bloomington, Illinois; Peoria, Illinois;
Springfield, Illinois; St. Louis, Missouri (partial); LaSalle-Peru-Ottawa-
Streator, Illinois; Decatur-Effingham, Illinois; Champaign-Urbana, Illinois;
Kankakee, Illinois; and Galesburg, Illinois. The number of our 14,000 customers
as of June 30, 2000 who are located in these launched markets varies based upon
the total population of the market, how long the markets have been launched and
the extent of our marketing efforts to date in such markets. The estimated
covered population represents the total potential customers rather than our
expected customers in such markets.
<TABLE>
<CAPTION>
Estimated
Estimated Covered Population as
Basic Trading Area Market MHz of Estimated Total Covered a Percentage of
(1) Spectrum Population (2) Population (3) Total Population
<S> <C> <C> <C> <C>
Davenport, IA/Moline, IL. 30 430,000 380,000 88%
Bloomington, IL.......... 10 232,000 210,000 91%
--------- ---------
Total Year 1999........ 662,000 590,000 89%
========= =========
Peoria, IL............... 10 465,000 320,000 69%
Springfield, IL.......... 10 266,000 215,000 81%
St. Louis, MO
(partial) (3)........... 30 47,000 22,000 47%
--------- ---------
Subtotal (Q1 2000)...... 778,000 557,000 72%
--------- ---------
LaSalle-Peru-Ottawa-
Streator, IL............ 20 152,000 120,000 79%
Decatur-Effingham, IL.... 10 248,000 176,000 71%
Champaign-Urbana, IL..... 10 219,000 190,000 87%
Kankakee, IL............. 20 135,000 96,000 71%
Galesburg, IL............ 10 74,000 47,000 64%
--------- ---------
Subtotal (Q2 2000)...... 828,000 629,000 76%
--------- ---------
Clinton, IA/Sterling, IL. 30 147,000 100,000 68%
Mt. Vernon-Centralia, IL. 30 122,000 62,000 51%
Danville, IL............. 20 112,000 68,000 61%
Jacksonville, IL......... 10 71,000 35,000 49%
Mattoon, IL.............. 10 63,000 56,000 89%
--------- ---------
Subtotal (Q3 2000)...... 515,000 321,000 62%
--------- ---------
Total Year 2000........ 2,783,000 2,097,000 75%
========= =========
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Estimated
Estimated Covered Population as
Basic Trading Area Market MHz of Estimated Total Covered a Percentage of
(1) Spectrum Population (2) Population (3) Total Population
<S> <C> <C> <C> <C>
Grand Rapids, MI......... 30 1,036,000 850,000 82%
Saginaw-Bay City, MI..... 30 632,000 400,000 63%
Muskegon, MI............. 30 220,000 140,000 64%
Lansing, MI (partial)
(3)..................... 30 62,000 43,000 69%
Battle Creek, MI
(partial)(3)............ 30 55,000 20,000 36%
--------- ---------
Subtotal (Q1 2001)...... 2,005,000 1,453,000 72%
--------- ---------
Waterloo-Cedar Falls, IA. 30 261,000 153,000 59%
Traverse City, MI........ 30 236,000 105,000 44%
Dubuque, IA.............. 30 178,000 107,000 60%
Des Moines, IA
(partial)(3)............ 30 171,000 82,000 48%
Burlington, IA........... 30 137,000 97,000 71%
Mount Pleasant, MI....... 30 129,000 79,000 61%
Ottumwa, IA.............. 30 124,000 66,000 53%
Marshalltown, IA......... 30 57,000 34,000 60%
--------- ---------
Subtotal (Q2 2001)...... 1,293,000 723,000 56%
--------- ---------
Omaha, NE (partial) (3).. 30 249,000 118,000 47%
Grand Island-Kearney, NE. 30 147,000 95,000 65%
Fort Dodge, IA........... 30 128,000 47,000 37%
Mason City, IA........... 30 116,000 50,000 43%
Norfolk, NE.............. 30 112,000 40,000 36%
Lincoln, NE (partial)
(3)..................... 30 98,000 27,000 28%
Hastings, NE............. 30 72,000 39,000 54%
--------- ---------
Subtotal (Q3 2001)...... 922,000 416,000 45%
--------- ---------
Total Year 2001........ 7,003,000 4,689,000 67%
========= =========
</TABLE>
---------------------
(1) Expected commercial launch dates for these markets may change based on a
number of factors, including shifts in populations, target markets or
network focus, changes or advances in technology, acquisition of other
markets and delays in market build-out due to reasons identified in "Risk
Factors--Risks Particular to iPCS."
(2) Estimated population is based on January 1, 1999 estimates compiled by Rand
McNally Commercial Atlas & Marketing Guide, 2000 Edition.
(3) Estimated covered population for these markets reflects only those
residents which are expected to be covered, not the total population in the
entire basic trading area.
Network Build-Out Plan
In December 1999, we launched service in the Bloomington, Illinois and the
Quad Cities (Rock Island and Moline, Illinois; and Davenport and Bettendorf,
Iowa) markets covering over 590,000 residents. By the end of March 2000, we
launched service in the Peoria and Springfield, Illinois and St. Louis,
Missouri markets covering approximately 557,000 residents. By the end of June
2000, we launched service in the LaSalle-Peru-Ottawa-Streator, Illinois,
Decatur-Effingham, Illinois, Champaign-Urbana, Illinois, Kankakee, Illinois and
Galesburg, Illinois markets covering approximately 629,000 residents. By the
end of September 2000, we expect to have substantially
46
<PAGE>
completed the build-out of all remaining metropolitan markets and major
interstate routes in our initial territory. After completing the build-out of
our initial territory we will be covering approximately 2.1 million residents
or 75% of the total population of our initial territory.
Following our successful build-out and initial launch, Sprint PCS agreed to
amend the Sprint PCS agreements to expand our territory to include 20
additional markets with a total population of approximately 4.2 million in the
states of Michigan, Iowa and Nebraska. As part of this expansion, we have
purchased from Sprint PCS network assets under construction in four markets in
Michigan.
By the end of the third quarter of 2001, we plan to be substantially
complete with our build-out and we anticipate covering 4.7 million residents,
or 67% of the total population, in our territory. Our build-out plan exceeds
the network build-out requirements under the Sprint PCS agreements.
As part of the expansion of our 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. These
markets have a total population of approximately 405,000 and had 6,600 Sprint
PCS subscribers as of December 31, 1999. Our option expires on January 31,
2001. The purchase price payable by us for the purchase of assets and
subscriber accounts upon exercise of the option was initially approximately
$25.2 million and increases monthly to a purchase price of approximately $28.8
million in January, 2001. The purchase price is subject to upward adjustment
based upon the number of subscribers in the two additional markets at the
option exercise date, as described more fully under "The Sprint PCS
Agreements--Option Territory." We would become the manager of all Sprint PCS
subscribers in these markets upon the closing of the asset purchase.
As part of our network build-out strategy, we entered into certain
outsourcing relationships with third parties to assist us in building out our
network. We believe that these relationships have resulted in a more timely,
efficient and cost effective build-out process.
Radio frequency design. Wavelink Engineering has been contracted to provide
all radio frequency design, engineering and optimization for our initial
territory. Wavelink has performed radio frequency design services for Sprint
PCS as well as other Sprint PCS affiliates. Based upon its engineering designs,
Wavelink assisted us in determining the required number of cell sites to
operate the network and identified the general geographic areas in which each
of the required cell sites would be located. Wavelink has also performed
optimization tests prior to and after our market launches.
Site acquisition, project management and construction. Communications
Management Specialists, Inc., or CMS, was engaged to provide "turn-key" site
acquisition, project management and construction management services for our
initial territory. CMS has performed similar services for Sprint PCS as well as
other Sprint PCS affiliates.
CMS identifies and acquires the sites on which we locate the towers,
antennae and other equipment necessary for the operation of our network. After
radio frequency design identifies the general geographic area in which to
locate cell sites, CMS surveys potential sites to identify two potential tower
sites within each geographic search area. CMS evaluates the alternative sites
within each of the identified geographic search areas, giving consideration to
various engineering criteria as well as the costs to be incurred to acquire and
construct a tower on the site. We pay CMS fixed fees for its services.
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<PAGE>
We acquire and make operational a cell site in three ways:
. co-location on an existing tower owned by third parties;
. construction of a new tower ourselves; or
. construction of a new tower by an independent build-to-suit company.
Generally, we prefer to co-locate with other wireless carriers or tower
companies by leasing space on an existing tower or building. The advantages of
co-location are that there are lower construction costs to us associated with
the building of a tower and any zoning difficulties have likely already been
resolved. In situations where co-location is not appropriate, we will acquire
the site and hire third parties to construct the tower. Upon completion, we
generally sell the tower and lease it back from the buyer. We have entered into
a tower sale and lease-back agreement with American Tower Corporation, one of
the largest tower companies in the United States, for the towers that we
construct in our initial territory. We believe that we have a favorable lease
rate for the towers subject to the sale lease-back agreement. These leases run
for initial terms of ten years with three additional five-year renewal terms.
By structuring our sale and lease-back on this basis, we are able to retain
complete control of the tower site selection process and retain the flexibility
of not having our capital tied up in tower ownership.
In situations where we determined that neither co-location nor site
acquisition was appropriate, we would arrange for the construction of a tower
on a build-to-suit basis by an independent tower construction company who would
acquire the site, build the tower and lease it to us. The principal advantage
of this method is that it reduces our capital expenditures.
We expect that approximately 580 sites will be required to achieve our
planned 67% coverage of the residents in our territory. Of those 580 sites, we
believe that approximately 350 will be co-location sites. We plan to construct
towers for the remaining 230 sites. Of the 230 towers, we plan to sell and
lease back 100 towers under our existing agreement with American Tower. The
remaining 130 new towers may be sold to a tower company or we may choose to
build in accordance with a traditional build-to-suit arrangement.
Microwave relocation. Prior to the FCC's auction of PCS licenses in the 1850
to 1970 MHz frequency bandwidths, various fixed microwave operators used these
frequencies. The FCC has established procedures for PCS licensees to relocate
these existing microwave paths, generally at the PCS licensee's expense. Sprint
PCS relocates the microwave paths that use bandwidth owned by Sprint PCS, and
is analyzing these relocations as we continue the build-out of our network.
Sprint PCS is also paying for a portion of the relocation costs. Sprint PCS has
completed relocation for all microwave paths in our initial territory. Some
microwave clearing has been completed in our expansion territory. After
adjusting for all cost sharing for relocations performed by other PCS licensees
and from Sprint PCS, we expect to spend a total of approximately $2.0 million
for microwave relocation expenses.
Switching centers. We will use three switching centers to provide service to
our network. Each switching center will serve several purposes, including,
among other things, routing calls, managing call handoff, managing access to
landlines and providing access to voice mail. In November 1999, we commenced
operations at our first switching center in Gridley, Illinois to support our
initial
48
<PAGE>
territory. We will construct an additional switching center in Michigan and
another in a location to be determined.
Interconnection. Our network connects to the landline telephone system
through local exchange carriers. Through our Sprint PCS agreements, we benefit
from Sprint PCS-negotiated interconnection agreements with local exchange
carriers.
Long distance and back haul. We have entered into an agreement with Sprint,
which provides us long distance services at the same preferred rates made
available to Sprint PCS.
Network communications equipment. Nortel supplies the radio base stations,
switches and other related PCS transmission equipment, software and services
necessary for our network build-out. Nortel has assigned a dedicated project
management team to assist us in the installation and testing of the
transmission equipment.
Network monitoring systems. We utilize Sprint PCS' Network Operations
Control Center for around-the-clock monitoring as well as our own switching
center capabilities for our network base stations and switches.
Nortel Equipment Agreement
We have entered into a three year equipment purchase agreement with Nortel
for our network equipment and infrastructure, including switches and base
station controllers for our initial territory. Pursuant to the equipment
agreement, Nortel also provides installation services for the equipment and
grants us a nonexclusive license to use all the software associated with the
Nortel equipment. During the remaining term of the agreement, we have committed
to purchase $32.8 million of equipment and services from Nortel. We submit
purchase orders to Nortel for the equipment and services as needed. Under the
agreement, we receive a discount on the network equipment and services because
of our affiliation with Sprint PCS. If our affiliation with Sprint PCS ends,
Nortel has the right to either terminate the agreement or, with our consent,
modify the agreement to establish new prices, terms and conditions.
Products and Services
We offer established Sprint PCS products and services throughout our
territory under the Sprint and Sprint PCS brand names. Our products and
services are designed to mirror the service offerings of Sprint PCS and to
integrate with the Sprint PCS nationwide network. Sprint PCS operates the
largest 100% digital, 100% PCS nationwide wireless network in the United
States, already serving the majority of the nation's metropolitan areas
including more than 4,000 cities and communities across the country. Sprint PCS
has licensed PCS coverage of nearly 270 million people in all 50 states, Puerto
Rico and the U.S. Virgin Islands. The Sprint PCS service package we offer
includes the following:
100% digital wireless mobility with national service. Our network is part of
the largest 100% digital, 100% PCS wireless network in the nation. We offer
enhanced voice clarity, advanced features and simple, affordable Sprint PCS'
Free and Clear pricing plans. These plans include long distance and wireless
airtime minutes for use throughout the Sprint PCS network at no additional
charge.
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<PAGE>
Access to the Sprint PCS Wireless Web. We support and market the Sprint PCS
Wireless Web throughout our network. The Sprint PCS Wireless Web allows
subscribers with data capable handsets to connect their portable computers or
personal digital assistants to the Internet. Sprint PCS subscribers with data
capable handsets also have the ability to receive periodic information updates
such as stock prices, airline schedules, sports scores and weather reports
directly on their handsets. Sprint PCS subscribers with web-browser enabled
handsets have the ability to connect to and browse specially designed text-
based Internet sites on an interactive basis. Sprint PCS has agreements with
Internet providers including Yahoo!, Amazon.com, Bloomberg.com, CNN
Interactive, MapQuest.com, Fox Sports, Ameritrade, InfoSpace.com and
Weather.com to provide services for the Sprint PCS Wireless Web. Sprint PCS
offers various pricing options including a fixed number of updates or a bundle
of data minutes as add-ons to existing Sprint PCS' Free and Clear pricing plans
or a bundle of minutes for a set price that can be used for either data or
voice.
Nationwide service. Our customers are able to use Sprint PCS services
throughout the Sprint PCS network. Dual-band/dual-mode handsets allow roaming
on wireless networks where Sprint PCS is not available and with which Sprint
PCS has roaming agreements. When roaming outside the Sprint PCS network,
additional roaming fees are billed to Sprint PCS subscribers.
Pricing and features. Sprint PCS' pricing plans are typically structured
with monthly recurring charges, large local calling areas, bundles of minutes
and service features such as voicemail, caller ID, call waiting, call
forwarding and three-way calling. The increased capacity of CDMA technology
allows Sprint PCS to offer high usage subscriber plans at per-minute rates
lower than analog cellular and certain digital products. All of Sprint PCS'
current national plans:
. include minutes that can be used on any portion of the nationwide Sprint
PCS network with no roaming charges for the subscriber;
. offer advanced features and generally require no long-term contracts;
. offer a selection of handsets to meet the needs of individual consumers
and businesses; and
. provide a limited-time, money back guarantee on Sprint PCS handsets.
In addition, Sprint PCS' Free and Clear pricing plans include long distance
calling from anywhere on the Sprint PCS network to anywhere in the United
States.
Advanced handsets and longer battery life. We primarily offer a selection of
dual-band handsets with various advanced features and technology, such as
Internet readiness described in "--Access to the Sprint PCS Wireless Web"
above. All handsets are equipped with pre-programmed features such as caller
ID, call waiting, phone books, speed dial and last number redial and are sold
under the Sprint and Sprint PCS brand names. CDMA handsets weighing
approximately 5 to 7 ounces offer up to five days of standby time and
approximately four hours of talk time. We also offer dual-band/dual-mode
handsets that allow customers to make and receive calls on both PCS and
cellular frequency bands with the applicable digital or analog technology.
These handsets allow roaming on cellular networks where Sprint PCS digital
service is not available. When roaming in analog markets, stand-by and talk
times are greatly reduced.
Improved voice clarity and quality. We believe that CDMA technology offers
significantly improved voice clarity and quality, compared to existing analog,
and TDMA and GSM digital
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<PAGE>
networks, more powerful error correction, less susceptibility to call fading
and enhanced interference rejection, all of which result in fewer dropped
calls. See "--CDMA Technology" for a discussion of the reasons CDMA technology
offers improved voice clarity and quality.
Privacy and security. Sprint PCS provides secure voice transmissions encoded
into a digital form to prevent eavesdropping and unauthorized cloning of
subscriber identification numbers.
Easy activation. Customers can purchase a shrink-wrapped Sprint PCS handset
off the shelf at a retail location and activate their service by calling
customer service, which can activate the handset over the air. We believe over-
the-air activation reduces the training requirements for salespersons at the
national retailer locations. Our customers can also activate their service at
any of Sprint PCS sales and service centers with the assistance of trained
customer service representatives.
Customer care. Sprint PCS provides customer care services to our customers
under the Sprint PCS agreements. Sprint PCS offers 24 hours a day, seven days a
week customer care. Our customers can call the Sprint PCS toll-free customer
care number from anywhere. All Sprint PCS phones are pre-programmed with a
speed dial feature that allows our customers to easily reach customer care at
any time on the Sprint PCS network. In addition, our customers can also obtain
customer service and assistance at any Sprint PCS store throughout the country.
Other services. In addition to these services, we may also offer wireless
local loop services in our territory. Wireless local loop is both a wireless
alternative and supplemental service for the landline-based telephones in homes
and businesses. We also believe that new features and services will be
developed on the Sprint PCS nationwide network to take advantage of CDMA
technology. As a leading wireless provider, Sprint PCS conducts ongoing
research and development to produce innovative services that give Sprint PCS a
competitive advantage. We offer a portfolio of products and services developed
by Sprint PCS to accommodate the growth in, and the unique requirements of,
high speed data traffic. We provide a number of applications for wireless data
services including facsimile and Internet access.
Roaming Revenue
Sprint PCS Roaming
When Sprint PCS subscribers based outside of our territory use our network,
we collect roaming revenue from Sprint PCS based on a per-minute fee and when
our customers use the Sprint PCS network outside of our territory, we pay to
Sprint PCS roaming charges based on a per-minute fee. Pursuant to the Sprint
PCS agreements, Sprint PCS has the discretion to change the per-minute roaming
rate for Sprint PCS roaming fees after December 31, 2001. Because we serve
smaller metropolitan areas adjacent to larger metropolitan areas, we believe
inbound Sprint PCS roaming will exceed outbound Sprint PCS roaming. See "Risk
Factors--Risks Particular to iPCS--We may not receive as much Sprint PCS
roaming revenue as we anticipate, our non-Sprint PCS roaming revenue is likely
to be low adversely affecting our revenues, and we may have higher payments to
Sprint PCS for usage by our customers of the Sprint PCS network than we
anticipate."
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Non-Sprint PCS Roaming
The term "non-Sprint PCS roaming" is used when non-Sprint PCS subscribers
use our network and when our customers use a non-Sprint PCS network. Pursuant
to roaming agreements between Sprint PCS and other wireless service providers,
when other wireless service provider subscribers use our network, we earn
roaming revenue. These wireless service providers must pay fees for their
subscribers' use of our network, and as part of our collected revenues, we are
entitled to 92% of the fees. Currently, pursuant to the Sprint PCS agreements,
Sprint PCS bills these wireless service providers for these fees. When wireless
service providers provide service to our customers, we pay those service
providers roaming fees and our customers incur roaming fees at rates specified
in their contracts. As a result, we retain the collection risk from our
customers for non-Sprint PCS roaming charges incurred by them. We are entitled
to 100% of the non-Sprint PCS roaming fees collected from our customers.
Currently, pursuant to the Sprint PCS agreements, Sprint PCS bills our
customers for the roaming fees, and pays us the fees it has collected on a
monthly basis.
Marketing Strategy
Our marketing and sales strategy utilizes Sprint PCS' proven strategies and
developed national sales and distribution channels tailored to our specific
territory.
Use Sprint PCS' brand equity and marketing. We feature exclusively and
prominently the nationally recognized Sprint and Sprint PCS brand names in our
marketing effort. From our customers' point of view, they use our network and
the Sprint PCS national network seamlessly as a unified nationwide network.
Pricing. Our use of the Sprint PCS national pricing strategy offers our
customers simple, easy-to-understand service plans. Sprint PCS' pricing plans
are typically structured with monthly recurring charges, large local calling
areas, bundles of minutes and service features such as voicemail, caller ID,
call waiting, call forwarding and three-way calling. Lower per-minute rates
relative to analog cellular providers are possible in part because the CDMA
system that Sprint PCS utilizes has greater capacity than current analog
cellular systems, enabling Sprint PCS to market high usage customer plans at
lower prices. In addition, Sprint PCS' national Free and Clear plans, which
offer simple, affordable plans for every consumer and business customer,
include long distance calling from anywhere on its nationwide network.
Local focus. Our local focus enables us to supplement Sprint PCS' marketing
strategies with our own strategies tailored to each of our specific markets.
These include attracting local businesses as agents to enhance our sales and
distribution channels and drawing on our management team's experience in the
midwestern United States. We use local radio, television and newspaper
advertising to sell our products and services in each of our markets. We have
established a local sales force to execute our marketing strategy through our
Sprint PCS stores. We currently own and operate five Sprint PCS stores and plan
to open an additional 14 stores throughout our territory. We also employ a
direct sales force dedicated to business sales.
Advertising and promotions. Sprint PCS uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote
its products. We benefit from this national advertising in our territory at no
additional cost to us. Sprint PCS also runs numerous promotional
52
<PAGE>
campaigns which provide customers with benefits such as additional features at
the same rate, free minutes of use for limited time periods or special prices
on handsets and other accessories. We are able to purchase promotional
materials related to these programs from Sprint PCS at their cost. In addition,
RadioShack and national third-party retail stores in our territory run numerous
promotional campaigns.
Sponsorships. Sprint PCS sponsors numerous national, regional and local
events. These sponsorships provide Sprint PCS with brand name and product
recognition in high profile events, provide a forum for sales and promotional
events and enhance our promotional efforts in our territory. Additionally, we
sponsor other local events in our territory to increase customer awareness of
the Sprint PCS network.
Bundling of services. We plan to take advantage of the complete array of
communications services offered by bundling Sprint PCS services with other
Sprint products, such as long distance and Internet access for homes and
businesses.
Sales and Distribution
Our sales and distribution plan mirrors Sprint PCS' proven multiple channel
sales and distribution plan. Key elements of our sales and distribution plan
consist of the following:
Sprint store within a RadioShack store. Sprint has an exclusive arrangement
with RadioShack to install a "store within a store," making Sprint PCS the
exclusive brand of PCS sold through RadioShack stores where Sprint PCS service
is available. RadioShack has over 100 stores in our territory which will be
available to offer Sprint PCS products and services to our customers once we
have launched service in the market where the store is located.
Other national third-party retail stores. In addition to RadioShack, we
benefit from the sales and distribution agreements established by Sprint PCS
with other national retailers which currently include Best Buy, Circuit City,
Kmart, Staples, Target, Office Max, Office Depot and Ritz Camera. These
retailers and others have over 200 additional retail stores in our territory to
which we have access. We believe the number of stores will increase over time
as Sprint PCS adds national retailers and as these national retailers add
stores in our territory.
Local third-party retail stores. We benefit from the sales and distribution
agreements which we enter into with local retailers in our territory. We have
entered into sales and distribution agreements with over 16 local stores in our
territory and expect the number to increase.
Sprint PCS stores. We currently own and operate five Sprint PCS stores in
our territory and plan to open an additional 14 stores as we continue to launch
service in additional markets. These stores are located in metropolitan markets
within our territory, providing us with a strong local presence and a high
degree of visibility. We train our sales representatives to be informed and
persuasive advocates for Sprint PCS' services. Following the Sprint PCS model,
these stores have been designed to facilitate retail sales, bill collection and
customer service.
National accounts and direct selling. We participate in Sprint PCS' national
accounts program. Sprint PCS has a national accounts team which focuses on the
corporate headquarters of large
53
<PAGE>
companies. Several Fortune 500 companies such as State Farm Insurance, Archer
Daniels Midland, Dow Chemical, John Deere and Caterpillar, as well as other
large companies, have their headquarters in our territory. In addition, once a
Sprint PCS national account manager reaches an agreement with any company
headquartered outside of our territory, we service the offices and subscribers
of that company located in our territory. Participation in Sprint PCS' national
accounts program provides us an opportunity to participate in selling efforts
focused on these companies. Our direct sales force will target the employees of
these companies in our territory and cultivate other local business customers.
Inbound telemarketing. Sprint PCS provides inbound telemarketing sales to
answer our prospective customers' calls. As the exclusive provider of Sprint
PCS products and services in our territory, we use the national Sprint 1-800-
480-4PCS number campaigns that generate call-in leads. These leads are then
handled by Sprint PCS' inbound telemarketing group and the new subscriber
becomes our customer.
Electronic commerce. Sprint PCS launched an Internet site in December 1998
at www.sprintpcs.com, which contains information on Sprint PCS products and
services. A visitor to Sprint PCS' Internet site can order and pay for a
handset and select a rate plan. Subscribers visiting the site can review the
status of their account, including the number of minutes used in the current
billing cycle. Site visitors in our territory who purchase products and
services over the Sprint PCS Internet site will be our customers.
CDMA Technology
The Sprint PCS national network uses digital code division multiple access,
or CDMA, as its signal transmission technology. There are two other principal
signal transmission technologies: time division multiple access, or TDMA, and
global system for mobile communications, or GSM. Major wireless providers who
use TDMA technology include AT&T Wireless and SBC/CellularOne. Major wireless
providers who use GSM technology include BellSouth, VoiceStream Communications,
Omnipoint and Aerial. We believe that CDMA provides important system
performance benefits such as:
Greater capacity. We believe, based on studies by CDMA manufacturers, that
CDMA systems can provide system capacity that is approximately seven to ten
times greater than that of current analog technology and approximately three
times greater than TDMA or GSM systems.
Privacy and security. One of the benefits of CDMA technology is that it
combines a constantly changing coding scheme with a low power signal to enhance
call security and privacy.
Soft hand-off. CDMA systems transfer calls throughout the CDMA network using
a technique referred to as a soft hand-off, which connects a mobile customer's
call with a new base station while maintaining a connection with the base
station currently in use. CDMA networks monitor the quality of the transmission
received by multiple base stations simultaneously to select a better
transmission path and to ensure that the network does not disconnect the call
in one cell unless replaced by a stronger signal from another base station.
Analog, TDMA and GSM networks use a "hard hand-off" and disconnect the call
from the current base station as it connects with a new one without any
simultaneous connection to both base stations.
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Simplified frequency planning. Frequency planning is the process used to
analyze and test alternative patterns of frequency use within a wireless
network to minimize interference and maximize capacity. Unlike TDMA and GSM-
based systems, CDMA-based systems can reuse the same subset of allocated
frequencies in every cell, substantially reducing the need for costly frequency
reuse patterning and constant frequency plan management.
Longer battery life. Due to their greater efficiency in power consumption,
CDMA handsets can provide longer standby time and more talk time availability
when used in the digital mode than handsets using alternative digital or analog
technologies.
While CDMA has the inherent benefits discussed above, TDMA networks are
generally less expensive when overlaying existing analog systems since the TDMA
spectrum usage is more compatible with analog spectrum planning. Multi-vendor
equipment has only recently become available for CDMA, while GSM has had the
technology available; as a result, GSM is used more widely throughout the world
than CDMA and as a result currently offers greater economies of scale for
handset and equipment purchases. A standards process is also underway which
will allow wireless handsets to support analog, TDMA and GSM technologies in a
single unit.
Competition
We compete in our territory with regional and national cellular, PCS and
other wireless providers. The cellular providers in our territory serve
different geographic segments of our territory, with no cellular carrier
providing complete coverage throughout our territory. SBC/CellularOne covers
much of central Illinois and Nebraska but does not provide service in Peoria,
the Quad Cities or in Michigan. Other cellular providers such as ALLTEL,
Ameritech, CenturyTel, AirTouch and GTE Wireless all have similar limited
coverage areas. Other PCS competitors such as NPI Wireless, Omnipoint, Iowa
Wireless, PrimeCo and Amica Wireless operate in certain portions of our
territory but none provides the scope of coverage that we offer in these
markets. Of the PCS providers, only AT&T Wireless holds licenses to provide
service in all of our markets, however it currently does not provide service in
any of the markets in our territory. Nextel and Nextel Partners provide service
in our Michigan markets, and we believe are building networks in five of our
Illinois markets.
Our ability to compete effectively with these other providers will depend on
a number of factors, including the continued success of CDMA technology in
providing better call clarity and quality as compared to analog cellular
systems, Sprint PCS' competitive pricing with various options suiting
individual customer's calling needs, the continued expansion and improvement of
the Sprint PCS nationwide network, our extensive direct and indirect sales
channels, our centralized Sprint PCS customer care systems, and our selection
of handset options.
Currently, we believe that our most formidable competition is from cellular
providers, many of which have been operating in our markets and building their
customer bases for a number of years and have greater financial resources and
customer bases. Some of our competitors have access to more licensed spectrum
than the 10 or 20 MHz licensed to Sprint PCS in certain markets in parts of
Illinois. Some of our competitors also have established infrastructures,
marketing programs and brand names. In addition, certain competitors may be
able to offer coverage in areas not served by our network, or, because of their
calling volumes or their affiliations with, or ownership of wireless
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<PAGE>
providers, may be able to offer roaming rates that are lower than those offered
by Sprint PCS. PCS operators will likely compete with us in providing some or
all of the services available through the Sprint PCS network and may provide
services that we do not. Additionally, we expect that existing cellular
providers will continue to upgrade their systems to provide digital wireless
communication services competitive with Sprint PCS.
The following table details our primary operational competitors within each
of our three primary geographical markets: Illinois and the Iowa Quad Cities
markets (total population of approximately 2.8 million), Michigan markets
(total population of approximately 2.4 million) and Iowa and Nebraska markets
(total population of approximately 1.8 million) and the type of wireless
commercial service (cellular, PCS or enhanced specialized mobile radio service,
or ESMR), that each of our competitors deploys:
COMPETITORS BY GEOGRAPHIC MARKET
<TABLE>
<CAPTION>
Cellular/
PCS/
Primary ESMR
Geographic Market Competitors Service
<S> <C> <C>
Illinois (including Iowa Quad Cities markets) ALLTEL Cellular
Ameritech Cellular
CellularOne Cellular
GTE Wireless Cellular
USCellular Cellular
Amica Wireless PCS
Iowa Wireless PCS
PrimeCo PCS
Nextel ESMR
Michigan markets AirTouch Cellular
CenturyTel Cellular
NPI Wireless PCS
OmniPoint PCS
Nextel ESMR
Iowa and Nebraska markets ALLTEL Cellular
CellularOne Cellular
USCellular Cellular
Iowa Wireless PCS
</TABLE>
We also face limited competition from "resellers" which provide wireless
service to customers but do not hold FCC licenses or own facilities. Instead,
the reseller buys blocks of wireless telephone numbers and capacity from a
licensed carrier and resells service through its own distribution network to
the public. Thus, a reseller is both a customer of a wireless licensee's
services and also a competitor of that and other licensees. The FCC requires
all cellular and PCS licensees to permit resale of carrier service to a
reseller. Currently, we do not use resellers to market our services.
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Although Sprint PCS is required to resell PCS in our markets, currently there
is no reseller of Sprint PCS in our markets. Any reseller of Sprint PCS could
not use the Sprint PCS service marks in our markets except for the limited
purpose of describing their handsets as operational on the Sprint PCS network.
In addition, we will compete with paging, dispatch and other mobile
telecommunications companies in our markets. Potential users of PCS systems may
find their communications needs satisfied by other current and developing
technologies. One or two-way paging or beeper services that feature voice
messaging and data display as well as tone-only service may be adequate for
potential customers who do not need immediate two-way voice communications.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While few of
these technologies and services are currently operational in areas outside our
territory, others are being developed or may be developed in the future.
Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
PCS. Based upon increased competition, we anticipate that market prices for
two-way wireless voice and data services generally will decline in the future.
We will compete to acquire and retain customers principally on the basis of
services and features, the size and location of our territory, network coverage
and reliability, customer care and pricing. Our ability to compete successfully
will also depend, in part, on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by competitors.
Industry Background
Wireless communications systems use a variety of radio frequencies to
transmit voice and data. Broadly defined, the wireless communications industry
includes one-way radio applications, such as paging or beeper services, and
two-way radio applications, such as cellular telephone services, PCS and
enhanced specialized mobile radio services.
Since the introduction of commercial cellular service in 1983, the wireless
communications industry has experienced dramatic growth. The number of wireless
subscribers for cellular, PCS and enhanced specialized mobile radio service has
increased from an estimated 203,600 in June 1985 to an estimated 86.0 million
as of December 1999, according to the Cellular Telecommunications Industry
Association, an international association for the wireless industry. The
following chart sets forth statistics for the domestic wireless telephone
industry as a whole, as published by the Cellular Telecommunications Industry
Association.
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<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
Wireless Industry Statistics(1)
Total service revenues (in billions). $14.2 $19.1 $23.6 $27.5 $33.1 $40.0
Wireless subscribers at end of period
(in millions)....................... 24.1 33.8 44.0 55.3 69.2 86.0
Subscriber growth.................... 50.8% 40.0% 30.4% 25.6% 25.1% 24.3%
Average local monthly bill(2)........ $56.21 $51.00 $47.70 $42.78 $39.43 $41.24
</TABLE>
---------------------
(1) Reflects domestic commercial cellular, enhanced specialized mobile radio
service and PCS providers.
(2) Does not include revenue from roaming and long distance.
Paul Kagan Associates, Inc., an independent media and telecommunications
research firm, estimates in its publication, Kagan's Wireless Telecom
Investor--September 1999, that the number of wireless users will increase to
approximately 169.1 million by the end of 2003 and 235.1 million by the end of
2009. This growth is expected to be driven largely by a substantial projected
increase in PCS users who are forecast to account for approximately 37.5% of
total wireless users in 2003 and 47.9% in 2009, representing a significant
increase from approximately 17.6% as of the end of 1999. Paul Kagan Associates,
Inc. projects that total wireless industry penetration, defined as the number
of wireless subscribers nationwide divided by total United States population,
will grow from an estimated 31.1% in 1999 to 77.6% in 2009.
We believe that a significant portion of the predicted growth in the
consumer market for wireless telecommunications will result from:
. anticipated declines in costs of service;
. increased product offerings; and
. increased awareness of the productivity, convenience and privacy benefits
associated with the services offered by PCS providers.
We also believe that the rapid growth in the use of notebook computers and
personal digital assistants, combined with emerging software applications for
wireless delivery of electronic mail, fax and database searching, will
contribute to the growing demand for wireless services.
Intellectual Property
"Sprint," the Sprint diamond design logo, "Sprint PCS," "Sprint Personal
Communications Services," "The Clear Alternative to Cellular" and "Experience
the Clear Alternative to Cellular Today" are service marks registered with the
United States Patent and Trademark Office. These service marks are owned by
Sprint. Pursuant to the Sprint PCS agreements we have the right to use royalty-
free these service marks and certain other service marks of Sprint in
connection with marketing, offering and providing licensed services to end-
users and resellers, solely within our territory.
Sprint PCS has agreed not to grant to any other person a right or license to
provide or resell, or act as agent for any person offering, licensed services
under these service marks within our territory except as to Sprint PCS'
marketing to national accounts and the limited right of resellers of Sprint
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PCS to inform their customers of handset operation on the Sprint PCS network.
In all other instances, Sprint PCS reserves for itself and its affiliates the
right to use the licensed marks in providing its services, subject to its
exclusivity obligations described above, whether within or without our
territory.
The Sprint PCS agreements contain numerous restrictions with respect to the
use and modification of any of the Sprint service marks. See "The Sprint PCS
Agreements--The Trademark and Service Mark License Agreements."
This prospectus includes product names, trade names and trademarks of other
companies. We do not have any rights with respect to these product names, trade
names and trademarks.
Employees
As of June 30, 2000, we employed 86 full-time employees. None of our
employees is represented by a labor union. We believe that our relations with
our employees are good.
Properties
We lease our principal executive offices at 121 West First Street, Suite
200, Geneseo, Illinois 61254. We also lease space in 15 locations in Illinois,
primarily for our Sprint PCS stores, project offices and a switching center. As
of June 30, 2000, we leased space on 81 towers and owned 75 towers. We believe
our leased property is in good operating condition and is currently suitable
and adequate for our business operations. We are also seeking executive office
space in the Chicago metropolitan area.
Legal Proceedings
We are not aware of any pending legal proceedings against us which,
individually or in the aggregate, are likely, in the opinion of management, to
have a material adverse effect on our financial condition or results of
operations.
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THE SPRINT PCS AGREEMENTS
The following is a summary of the material terms and provisions of the
Sprint PCS agreements and the consent and agreement modifying the Sprint PCS
management agreement. We have filed the Sprint PCS agreements and will file a
consent and agreement as exhibits to the registration statement of which this
prospectus is a part and urge you to review them carefully.
Overview of Sprint PCS Relationship and Agreements
Under the Sprint PCS agreements, we will exclusively market PCS services
under the Sprint and Sprint PCS brand names in our territory. The Sprint PCS
agreements require us to interface with the Sprint PCS wireless network by
building our network to operate on the 10 to 30 MHz of PCS frequencies licensed
to Sprint PCS in the 1900 MHz range. The Sprint PCS agreements also give us
access to Sprint PCS' equipment discounts, roaming revenue from Sprint PCS
customers traveling into our territory, and various other back office services.
The Sprint PCS agreements provide strategic advantages, including avoiding the
need to fund up-front spectrum acquisition costs and the costs of establishing
billing and other customer services infrastructure. The Sprint PCS agreements
have initial terms of 20 years with three 10-year renewals which will lengthen
the contracts to a total term of 50 years. The Sprint PCS agreements will
automatically renew for each additional 10-year term unless we or Sprint PCS
provide the other with two years' prior written notice to terminate the Sprint
PCS agreements.
We have four major agreements with Sprint and Sprint PCS (collectively, the
"Sprint PCS agreements"):
. the management agreement;
. the services agreement;
. the trademark and service mark license agreement with Sprint; and
. the trademark and service mark license agreement with Sprint PCS.
In addition, Sprint PCS has entered into a consent and agreement that
modifies our management agreement for the benefit of the lenders under our
senior secured credit facility and any refinancing.
The Management Agreement
Under our management agreement with Sprint PCS, we have agreed to:
. construct and manage a network in our territory in compliance with Sprint
PCS' PCS licenses and the terms of the management agreement;
. distribute, during the term of the management agreement, Sprint PCS
products and services;
. use Sprint PCS' and our own distribution channels in our territory;
. conduct advertising and promotion activities in our territory; and
. manage that portion of Sprint PCS' customer base assigned to our
territory.
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Sprint PCS will monitor our network operations and has the right to
unconditional access to our network.
Exclusivity. We are designated as the only person or entity that can manage
or operate a PCS network for Sprint PCS in our territory. Sprint PCS is
prohibited from owning, operating, building or managing another wireless
mobility communications network in our territory while our management agreement
is in place and no event has occurred that would permit the agreement to
terminate. Sprint PCS is permitted under our agreement to make national sales
to companies in our territory, and as required by the FCC, to permit resale of
the Sprint PCS products and services in our territory.
Network build-out. The management agreement specifies the terms of the
Sprint PCS affiliation, including the required network build-out plan. We have
agreed to cover a specified percentage of the population at coverage levels
ranging from 42% to 88% within each of the 15 markets which make up our initial
territory by specified dates beginning December 1999 and ending December 2002.
The aggregate coverage requirement is 73% of the population in our initial
territory of 2.8 million residents by December 2002. For our 20 additional
markets containing 4.2 million residents in the states of Michigan, Iowa and
Nebraska which we acquired in March 2000, we are required to meet a build-out
schedule of cities and traffic arteries by certain dates beginning July 2001
and ending December 2004. We have agreed to operate our network, if technically
feasible and commercially reasonable, to provide for a seamless handoff of a
call initiated in our territory to a neighboring Sprint PCS network.
At any time after January 22, 2001, Sprint PCS can decide to expand the
coverage requirements of our territory by providing us with written notice as
long as the expanded coverage requirements are for proposed areas in which a
tower would cover at least 10,000 residents. We have 90 days after receiving
notice from Sprint PCS to determine whether we will build out the proposed
area. If we fail to build out the proposed area, we may be in breach of the
Sprint PCS agreements and Sprint will have the right to terminate the Sprint
PCS agreements and to purchase all of our operating assets at 80% of the entire
business value. As of January 22, 1999, Sprint PCS has identified nine cities
in our territory that meet the expanded coverage requirements criteria.
However, Sprint PCS cannot require us to build out these cities until after
December 31, 2002.
Products and services. The management agreement identifies the products and
services that we can offer in our territory. These services include, but are
not limited to, Sprint PCS consumer and business products and services
available as of the date of the agreement, or as modified by Sprint PCS. We are
allowed to sell wireless products and services that are not Sprint PCS products
and services if those additional products and services do not otherwise violate
the terms of the agreement, cause distribution channel conflicts, materially
impede the development of the Sprint PCS network or, in Sprint PCS' sole
determination, cause consumer confusion with Sprint PCS' products and services.
We may cross-sell services such as Internet access, customer premises
equipment, and prepaid phone cards with Sprint, Sprint PCS and other Sprint PCS
affiliates. If we decide to use third parties to provide these services, we
must give Sprint PCS an opportunity to provide the services on the same terms
and conditions. We cannot offer wireless local loop services specifically
designed for the competitive local exchange market in areas where Sprint owns
the local exchange carrier unless we name the Sprint owned local exchange
carrier as the exclusive distributor or Sprint PCS approves the terms and
conditions. However, there are no markets in our territory where Sprint is the
local telephone company.
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National sales programs. We will participate in the Sprint PCS sales
programs for national sales to customers, and will pay the expenses and receive
the compensation from national accounts located in our territory. We must use
Sprint's long distance service which we can buy at the same prices offered to
Sprint PCS.
Service pricing, roaming and fees. We must offer Sprint PCS subscriber
pricing plans designated for regional or national offerings, including Sprint
PCS' Free and Clear plans. We are permitted to establish our own local price
plans for Sprint PCS' products and services offered only in our territory,
subject to the terms of the agreement, consistency with Sprint PCS' regional
and national pricing plans, regulatory requirements and Sprint PCS' approval.
We are entitled to receive from Sprint PCS an amount equal to 92% of collected
revenues which relate to our customers' use of our network and to revenues from
non-Sprint PCS subscribers roaming onto our network. We are entitled to receive
100% of roaming revenues (except for taxes) which relate to our customers'
usage of the Sprint PCS network outside of our territory, our customers' usage
of a non-Sprint PCS network, and the usage of our network by Sprint PCS
subscribers. We are also entitled to receive 100% of the proceeds from the
sales of handsets and accessories and proceeds from sales not in the ordinary
course of business. Although many Sprint PCS subscribers will purchase a
bundled pricing plan that allows roaming anywhere on the Sprint PCS' and
affiliates' network without incremental roaming charges, we will earn roaming
revenues from every minute based on an established per-minute rate for Sprint
PCS' or its affiliates' subscribers roaming in our territory. Similarly, we
will pay for every minute our subscribers use the Sprint PCS nationwide network
outside our territory. The analog roaming rates applicable to use by our
customers of third-party providers' networks are set under Sprint PCS' third-
party roaming agreements.
Advertising and promotions. Sprint PCS is responsible for all national
advertising and promotion of the Sprint PCS products and services. We are
responsible for advertising and promotion in our territory, including the pro
rata cost of any promotion or advertising done by any third-party retailers in
our territory pursuant to a national cooperative advertising agreement with
Sprint. Sprint PCS' service area includes the urban markets around our
territory. Sprint PCS will pay for advertising in these markets. Given the
proximity of these markets to ours, we expect considerable spill-over from
Sprint PCS' advertising in surrounding urban markets.
Program requirements. We will comply with Sprint PCS' program requirements
for technical standards, customer service standards, national and regional
distribution and national accounts programs. Sprint PCS can adjust the program
requirements from time to time. We have the right to appeal to Sprint PCS'
management adjustments which could cause an unreasonable increase in cost to us
if the adjustment: (1) causes us to incur a cost exceeding 5% of the sum of our
equity plus our outstanding long-term debt, or (2) causes our operating
expenses to increase by more than 10% on a net present value basis. If Sprint
PCS denies our appeal, we must then comply with the program adjustment, or
Sprint PCS has the right to exercise the termination rights described below.
Non-competition. We may not offer Sprint PCS products and services outside
our territory without the prior written approval of Sprint PCS. Within our
territory we may offer, market or promote telecommunications products and
services only under the Sprint PCS brands, our own brand, brands of related
parties of ours or other products and services approved under the management
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agreement, except that no brand of a significant competitor of Sprint PCS or
its related parties may be used for those products and services. To the extent
we have or obtain licenses to provide PCS services outside our territory, we
may not use the spectrum to offer Sprint PCS products and services without
prior written consent from Sprint PCS.
Inability to use non-Sprint PCS brand. We may not market, promote,
advertise, distribute, lease or sell any of the Sprint PCS products and
services on a non-branded, "private label" basis or under any brand, trademark
or trade name other than the Sprint PCS brand, except for sales to resellers or
as otherwise permitted under the trademark and service mark license agreements.
Rights of first refusal. Sprint PCS has certain rights of first refusal to
buy our assets upon a proposed sale of all or substantially all of our assets.
Termination of management agreement. The management agreement can be
terminated as a result of:
. termination of Sprint PCS' PCS licenses;
. an uncured breach under the management agreement;
. bankruptcy of a party to the management agreement;
. the management agreement not complying with any applicable law in any
material respect;
. the termination of either of the trademark and service mark license
agreements; or
. our failure to obtain the financing necessary for the build-out of our
network and for our working capital needs.
The termination or non-renewal of the management agreement triggers certain
of our rights and those of Sprint PCS. The right of either party to require the
other to purchase or sell the operating assets, as discussed below, may not be
exercised, in the case of Sprint PCS, until January 21, 2002.
If we have the right to terminate the management agreement because of an
event of termination caused by a Sprint PCS breach under the management
agreement, we may generally:
. require Sprint PCS to purchase all of our operating assets used in
connection with our network for an amount equal to at least 80% of our
entire business value as defined below;
. if Sprint PCS is the licensee for 20MHz or more of the spectrum on the
date the management agreement was executed, require Sprint PCS to sell to
us, subject to governmental approval, up to 10MHz of licensed spectrum
for an amount equal to the greater of (1) the original cost to Sprint PCS
of the license plus any microwave relocation costs paid by Sprint PCS or
(2) 9% of our entire business value; or
. sue Sprint PCS for damages or submit the matter to arbitration and
thereby not terminate the management agreement.
If Sprint PCS has the right to terminate the management agreement because of
an event of termination caused by us, Sprint PCS may generally:
. require us to sell our operating assets to Sprint PCS for an amount equal
to 72% of our entire business value;
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. require us to purchase, subject to governmental approval, up to 10MHz of
licensed spectrum for an amount equal to the greater of (1) the original
cost to Sprint PCS of the license plus any microwave relocation costs
paid by Sprint or (2) 10% of our entire business value;
. take any action as Sprint PCS deems necessary to cure our breach of the
management agreement, including assuming responsibility for and operating
our network; or
. sue us for damages or submit the matter to arbitration and thereby not
terminate the management agreement.
Non-renewal. If Sprint PCS gives us timely notice that it does not intend to
renew the management agreement, we may:
. require Sprint PCS to purchase all of our operating assets used in
connection with our network for an amount equal to 80% of our entire
business value; or
. if Sprint PCS is the licensee for 20MHz or more of the spectrum on the
date the management agreement was executed, require Sprint PCS to sell to
us, subject to governmental approval, up to 10MHz of licensed spectrum
for an amount equal to the greater of (1) the original cost to Sprint PCS
of the license plus any microwave relocation costs paid by Sprint PCS or
(2) 10% of our entire business value.
If we give Sprint PCS timely notice of non-renewal, or we both give notice
of non-renewal, or the management agreement can be terminated for failure to
comply with legal requirements or regulatory considerations, Sprint PCS may:
. purchase all of our operating assets for an amount equal to 80% of our
entire business value; or
. require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of (1) the original cost to
Sprint PCS of the license plus any microwave relocation costs paid by
Sprint PCS or (2) 10% of our entire business value.
Determination of Entire Business Value. If the entire business value is to
be determined, we and Sprint PCS will each select one independent appraiser and
the two appraisers will select a third appraiser. The three appraisers will
determine the entire business value based on the fair market value on a going
concern basis using the following guidelines:
. the entire business value is based on the price a willing buyer would pay
a willing seller for the entire on-going business;
. then-current customary means of valuing a wireless telecommunications
business will be used;
. the business is conducted under the Sprint and Sprint PCS brands and the
Sprint PCS agreements;
. that we own the spectrum and frequencies presently owned by Sprint PCS
that we use subject to the Sprint PCS agreements; and
. the valuation will not include any value for businesses not directly
related to the Sprint PCS products and services, and such businesses will
not be included in the sale.
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The rights and remedies of Sprint PCS outlined in the management agreement
resulting from an event of termination of the management agreement have been
materially amended by the consent and agreement for the benefit of the holder
of the Nortel financing as discussed below. For more information on the Nortel
financing, see "Description of Our Indebtedness."
Insurance. We are required to obtain and maintain workers' compensation
insurance, commercial general liability insurance, business automobile
insurance, umbrella excess liability insurance and "all risk" property
insurance with financially reputable insurers who are licensed to do business
in all jurisdictions where any work is performed under the management agreement
and who are reasonably acceptable to Sprint PCS.
Indemnification. We have agreed to indemnify Sprint PCS and its directors,
employees and agents, and related parties of Sprint PCS and their directors,
employees and agents against any and all claims against any of the foregoing
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in the management agreement or any other
agreement between us and Sprint PCS, our ownership of the operating assets or
the actions or the failure to act of anyone who is employed or hired by us in
the performance of any work under this agreement, except we will not indemnify
Sprint PCS for any claims arising solely from the negligence or willful
misconduct of Sprint PCS. Sprint PCS has agreed to indemnify us and our
directors, employees and agents against all claims against any of the foregoing
arising from Sprint PCS' violation of any law and from Sprint PCS' breach of
any representation, warranty or covenant contained in this agreement or any
other agreement between Sprint PCS and us, except Sprint PCS will not indemnify
us for any claims arising solely from our negligence or willful misconduct.
The Services Agreement
The services agreement outlines various back office services provided by
Sprint PCS and available to us at established rates. Sprint PCS can change any
or all of the service rates one time in each 12 month period. Some of the
available services include: billing, customer care, activation, credit checks,
maintenance of a customer database for call billing, voice mail, prepaid
services, directory assistance, operator services, roaming fees, roaming
clearinghouse fees, interconnect fees and inter-service area fees. Sprint PCS
offers three packages of available services. Each package identifies which
services must be purchased from Sprint PCS and which may be purchased from a
vendor or provided in-house. Essentially, services such as billing, activation
and customer care must either all be purchased from Sprint PCS or we may
provide those services ourselves. We have chosen to initially buy these
services from Sprint PCS but may develop an independent capability with respect
to these services over time. Sprint PCS may contract with third parties to
provide expertise and services identical or similar to those to be made
available or provided to us. We have agreed not to use the services received
under the services agreement in connection with any other business or outside
our territory. We may discontinue use of any service upon three months' prior
written notice. Sprint PCS may discontinue a service provided that Sprint PCS
provides us with nine months' prior notice.
We have agreed with Sprint PCS to indemnify each other as well as officers,
directors, employees and certain other related parties and their officers,
directors and employees for violations
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of law or the services agreement except for any liabilities resulting from the
indemnitee's negligence or willful misconduct. The services agreement also
provides that no party to the agreement will be liable to the other party for
special, indirect, incidental, exemplary, consequential or punitive damages, or
loss of profits arising from the relationship of the parties or the conduct of
business under, or breach of, the services agreement except as may otherwise be
required by the indemnification provisions. The services agreement
automatically terminates upon termination of the management agreement and
neither party may terminate the services agreement for any reason other than
the termination of the management agreement.
The Trademark and Service Mark License Agreements
We have non-transferable, royalty-free licenses to use the Sprint and Sprint
PCS brand names and "diamond" symbol, and several other U.S. trademarks and
service marks such as "The Clear Alternative to Cellular" and "Clear Across the
Nation" on Sprint PCS products and services. We believe that the Sprint and
Sprint PCS brand names and symbols enjoy a very high degree of awareness,
providing us an immediate benefit in the market place. Our use of the licensed
marks is subject to our adherence to quality standards determined by Sprint and
Sprint PCS and use of the licensed marks in a manner which would not reflect
adversely on the image of quality symbolized by the licensed marks. We have
agreed to promptly notify Sprint and Sprint PCS of any infringement of any of
the licensed marks within our territory of which we become aware and to provide
assistance to Sprint and Sprint PCS in connection with Sprint's and Sprint PCS'
enforcement of their respective rights. We have agreed with Sprint and Sprint
PCS to indemnify each other for losses incurred in connection with a material
breach of the trademark license agreements. In addition, we have agreed to
indemnify Sprint and Sprint PCS from any loss suffered by reason of our use of
the licensed marks or marketing, promotion, advertisement, distribution, lease
or sale of any Sprint or Sprint PCS products and services other than losses
arising solely out of our use of the licensed marks in compliance with certain
guidelines.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if we file for bankruptcy, materially breach the agreement or our
management agreement is terminated. We can terminate the trademark and service
mark license agreements upon Sprint's or Sprint PCS' abandonment of the
licensed marks or if Sprint or Sprint PCS files for bankruptcy, or the
management agreement is terminated.
Consent and Agreement for the Benefit of the Holders of the Senior Secured
Facility
Sprint PCS has entered into a consent and agreement for the benefit of the
holders of the indebtedness under the senior secured facility which we refer to
as the Senior Secured Consent, which has been acknowledged by us, and modifies
Sprint PCS' rights and remedies under our management agreement, for the benefit
of the existing and future holders of indebtedness under our senior secured
facility and any refinancing thereof.
The Senior Secured Consent provides for the following:
. Sprint PCS' consent to the pledge of substantially all of our assets,
including our rights in the Sprint PCS agreements;
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. that the Sprint PCS' agreements may not be terminated by Sprint PCS until
our senior secured facility is satisfied in full pursuant to the terms of
the Senior Secured Consent, unless our subsidiaries or assets are sold to
a purchaser who does not continue to operate the business as a Sprint PCS
network, which sale requires the approval of the administrative agent
(Toronto Dominion (Texas), Inc. is the initial administrative agent as
discussed in more detail in "Description of Our Indebtedness--The Senior
Secured Credit Facility");
. for Sprint PCS to maintain 10MHz of PCS spectrum in all of our markets
until our senior secured facility is satisfied or our operating assets
are sold after our default under our senior secured facility;
. for redirection of payments due to us under the management agreement from
Sprint PCS to the administrative agent during the continuation of our
default under our senior secured facility;
. for Sprint PCS and the administrative agent to provide to each other
notices of default by us under the Sprint PCS management agreement and
senior secured facility, respectively;
. the ability to appoint interim replacements, including Sprint PCS or a
designee of the administrative agent, to operate our portion of the
Sprint PCS network under the Sprint PCS agreements after an acceleration
of our senior secured facility or an event of termination under the
Sprint PCS agreements;
. subject to certain requirements and limitations, the ability of the
administrative agent or Sprint PCS to assign the Sprint PCS agreements
and sell our assets or the equity interests of our operating subsidiaries
to a qualified purchaser that is not a major competitor of Sprint PCS or
Sprint, free of the restrictions on assignment and change of control in
the management agreement, if our senior secured facility has been
accelerated after our default; and
. subject to certain requirements and limitations, that if Sprint PCS
enters consent and agreement documents with similarly situated lenders
that have provisions that are more favorable to the lender, Sprint PCS
will give the administrative agent written notice of the amendments and
will amend the Senior Secured Consent in the same manner at the
administrative agent's request.
Sprint PCS' Right to Purchase on Acceleration of Amounts Outstanding under our
Senior Secured Facility
Subject to the requirements of applicable law, so long as our senior secured
facility remains outstanding, Sprint PCS has the right to purchase our
operating assets or the equity interests of our operating subsidiaries, upon
its receipt of notice of an acceleration of our senior secured facility, under
the following terms:
. Sprint PCS elects to make such a purchase within a specified period;
. the purchase price is the greater of an amount equal to 72% of our entire
business value or the amount we owe under our senior secured facility;
. if Sprint PCS has given notice of its intention to exercise the purchase
right, then the administrative agent is prohibited from enforcing its
security interest for a specified period after the acceleration or until
Sprint PCS rescinds its intention to purchase; and
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. if we receive a written offer that is acceptable to us to purchase our
operating assets or the equity interests of our operating subsidiaries
after the acceleration, then Sprint PCS has the right to purchase our
operating assets or the equity interests of our operating subsidiaries on
terms at least as favorable to us as the offer we receive. Sprint PCS
must agree to purchase the operating assets or the equity interests of
our operating subsidiaries within 14 business days of its receipt of the
offer, on acceptable conditions, and in an amount of time acceptable to
us.
Sale of Operating Assets or the Interests of Our Operating Subsidiary to Third
Parties
If Sprint PCS does not purchase our operating assets or the equity interests
of our operating subsidiaries after an acceleration of the obligations under
our senior secured facilities, then the administrative agent may sell the
operating assets or equity interests. Subject to the requirements of applicable
law (including the law relating to foreclosures of security interests), the
administrative agent has two options:
. to sell the assets or equity interests to an entity that meets the
requirements to be our successor under the Sprint PCS agreements; or
. to sell the assets or equity interests to any third-party, subject to
specified conditions.
Option Territory
As part of the expansion of our 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 and subscriber accounts in those
markets. These markets have a total population of approximately 405,000 and had
over 6,600 Sprint PCS subscribers as of December 31, 1999. Our option expires
on January 31, 2001. The purchase of these assets is a condition to adding
those markets to our territory, and would be payable within 90 days of the date
we exercise the option. The purchase price was initially $25.2 million and
increases monthly to a purchase price of $28.8 million in January, 2001;
provided, that the minimum purchase price will be (1) $19,945,600, plus (2) an
amount equal to the number of Sprint PCS subscribers in the two additional
markets at the time the option is exercised, multiplied by $700. We would
become the manager of all Sprint PCS subscribers in these markets upon the
closing of the asset purchase.
DESCRIPTION OF OUR INDEBTEDNESS
The Senior Secured Facility
General
Our wholly owned subsidiary, iPCS Wireless, Inc. entered into a definitive
credit agreement with Toronto Dominion (Texas), Inc. and GE Capital for a
$140.0 million senior secured facility. This facility constitutes senior debt
secured by a first priority security interest in substantially all of our
assets. The senior secured credit agreement provides that we and all of our
current and future subsidiaries guarantee this senior secured facility.
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Amount and Purpose of Loans
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. This facility will be used to finance capital
expenditures, certain acquisitions and investments for working capital needs
and other general corporate purposes. See "Business--Nortel Equipment
Agreement."
The amounts that can be borrowed will be further limited to a borrowing
base that will be computed at specified times, as provided in the senior
secured credit agreement. The borrowing base is defined as 100% of the gross
book value of equipment used in our network. We will have the option to reduce
the amount of any of the commitments, and to avoid the periodic fee charged on
those unborrowed amounts. Any reduction must be at least $3.0 million. Any
such reduction cannot be reinstated. Tranche A permits reborrowings on a
revolving basis but amounts repaid under Tranche B may not be reborrowed.
Commitment Termination
The Tranche A commitment is scheduled to terminate on June 30, 2008;
The Tranche A commitment may also terminate:
. if we voluntarily terminate any commitment; and
. if the administrative agent terminates the Tranche A commitment due to
the occurrence of an event of default under the senior secured credit
agreement.
The Tranche B commitment is reduced by undrawn amounts on June 30, 2001.
The undrawn portion of the Tranche B commitment may also terminate:
. on December 31, 2000 in an amount equal to $25.0 million if we have
borrowed less than $25.0 million on such date;
. if we voluntarily terminate any commitment; and
. if the administrative agent terminates the Tranche B commitment due to
the occurrence of an event of default under the credit agreement.
Syndication
TD Securities (USA) Inc. and GE Capital are permitted to syndicate the loan
to other lenders.
Loans and Interest Options
We have multiple interest rate options available under the credit
agreement:
. from the date of the closing 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 as either:
. a base rate loan with an interest rate equal to 2.75% plus the higher
of
. the prime or base rate of the Toronto-Dominion Bank, New York Branch;
or
. the federal funds effective rate plus 0.5%; or
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. a Eurodollar loan with an interest rate equal to the London interbank
offered rate, plus 3.75%;
and after the date on which EBITDA is greater than zero for two consecutive
fiscal quarters, the margin for base rate loans and Eurodollar loans will be
determined based upon the leverage ratio as of the end of the fiscal quarter
most recently ended.
. we may convert a base rate loan to a Eurodollar loan if we meet specific
conditions, or a Eurodollar loan to a base rate loan, from time to time;
. we pay accrued interest either on the last day of each quarter for base
rate loans, the last day of the interest period for Eurodollar loans or,
in the case of an interest period greater than three months, at three
month intervals after the first day of such interest period;
. we pay interest due upon any prepayment or conversion from one interest
type to another; and
. we pay all outstanding interest on the maturity date.
Payment of Principal
Scheduled Payments. Commencing March 31, 2004, we must begin to repay, in
quarterly installments, the principal on all Tranche B borrowings outstanding
as of March 30, 2004. A fixed percentage is due each quarter:
. for the first four quarters, commencing with the fiscal quarter ended
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.
Any principal that has not been paid by June 30, 2008, the maturity date, is
due at that time.
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; and
. for quarters nine through sixteen, 6.25% per quarter.
. for the last two quarters, 12.5% per quarter.
Optional Prepayments. We may voluntarily prepay any of the loans at any
time. Tranche A permits reborrowing on a revolving basis but amounts repaid
under Tranche B may not be reborrowed.
Mandatory Prepayments. We will also make mandatory prepayments under certain
circumstances, including among others:
. 50% of our excess annualized cash flow as computed under the senior
secured credit agreement, commencing on April 30, 2004 with respect to
the fiscal year ended December 31, 2003;
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. 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 committed issuance of the convertible preferred stock or an
initial public offering and any offering to a borrower or a guarantor
party to the senior secured financing; and 100% of the net proceeds of a
debt issuance by us or any subsidiary excluding this offering and certain
other permitted debt.
All prepayments described above are applied to the outstanding loan balances
pro rata between Tranche A and Tranche B and pro rata across maturities.
Collateral
Our senior secured facility is secured by:
. a perfected first priority lien on substantially all of our current and
future assets, and the assets and stock of future subsidiaries;
. a collateral assignment of our affiliation agreements with Sprint PCS and
all our other material contracts; and
. guarantees from all our future direct or indirect subsidiaries.
We are obligated to grant to the administrative agent a first lien mortgage
on any material real property we acquire.
Conditions
We must meet certain conditions at the dates we obtain any borrowings
including:
. that there has been no default that is continuing;
. a reaffirmation of representations;
. completion of this offering and the contribution of the proceeds as
equity to iPCS Wireless, Inc.; and
. that there has not been a material adverse effect, as defined in the
senior secured credit agreement.
Any drawing of borrowings under the senior secured credit agreement prior to
our receipt of gross proceeds of this offering of at least $70.0 million must
be placed into an escrow. We will not have access to funds while they are in
the escrow and such funds will serve as collateral to secure our obligations
under the senior secured credit agreement. Upon receipt of such gross proceeds
of at least $70.0 million, all funds in the escrow will, subject to certain
conditions, be released and be available to us.
Negative Covenants
Other Debt. With limited exceptions such as purchase money debt not to
exceed $10.0 million in principal, iPCS Wireless, Inc. has agreed not to, nor
to permit any of its subsidiaries to, incur additional debt.
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Organizational Issues and Capital Stock. We have agreed, with an exception
for mergers of subsidiaries of iPCS Wireless, Inc. into iPCS Wireless, Inc. or
its wholly owned subsidiaries and other limited exceptions, not to:
. become a party to a merger or a consolidation;
. wind-up, dissolve or liquidate; or
. acquire all or a material or substantial part of the business or
properties of another person except for acquisitions from Sprint PCS
which are currently permitted under the Sprint PCS agreements.
Restricted Payments. iPCS Wireless, Inc. has agreed not to, nor to permit
any of its subsidiaries to, make any "restricted payments." Restricted payments
include the following, subject to limited exceptions:
. dividends or distributions on account of shares of capital stock, except
a dividend payable solely in shares of stock;
. any redemption, conversion, exchange, retirement, sinking fund, or other
similar purchase of shares of capital stock;
. any payment or prepayment of principal, premium, if any, or interest on,
any subordinated debt;
. any redemption, conversion, exchange, purchase, retirement or defeasance
of, or payments with respect to, any subordinated debt; and
. any payment made to retire any outstanding warrants, options or other
rights to acquire capital stock.
The foregoing restriction will not prevent iPCS Wireless, Inc. from making
dividends to us to service scheduled cash interest payments on the senior
discount notes and to pay liquidated damages (up to a maximum of $500,000) upon
the occurrence of registration defaults under the registration rights
agreements applicable to the senior discount notes and accompanying warrants
provided no event of default or event which, with the passage of time or the
giving of notice or both, would constitute an event of default under the credit
facility exists at the time of any such dividend or would result from any such
dividend. iPCS Wireless, Inc. may make payments under subordinated guarantees
consistent with the applicable subordination provisions.
Modification of Agreements. We have agreed that, with limited exceptions, we
will not consent to or implement any termination, amendment, modification,
supplement or waiver of:
. our affiliation agreements with Sprint PCS;
. our business plan;
. any senior notes indenture or the senior discount notes; or
. any material contract.
Other Negative Covenants. We and the operating subsidiaries have agreed,
among other things, with limited exceptions, not to:
. dispose of property;
. enter into sale/leaseback transactions;
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. engage in any line of business other than operation of our network, and
related ownership and financing activities;
. conduct any activity on real property that would violate environmental
laws;
. pay management fees other than to Sprint PCS and certain fees payable by
iPCS Wireless, Inc. to us;
. take certain actions that would violate ERISA;
. prepay fees owed to Sprint PCS;
. grant liens on assets;
. make investments, loans or advances;
. prepay other debt, other than in connection with certain refinancings and
the prepayment of any senior notes in limited circumstances and other
limited exceptions;
. permit subsidiaries to enter into dividend restrictions;
. enter into negative pledge or similar arrangements; or
. modify charter documents.
Financial and Operating Covenants
We are subject to financial and operating covenants which are set forth
below according to whether they are applicable prior to June 30, 2003 or
thereafter including:
Applicable until June 30, 2003:
. a maximum ratio of total debt to total capitalization at our level;
. a maximum ratio of senior debt to total capitalization of iPCS Wireless,
Inc. and its subsidiaries;
. minimum annualized EBITDA for iPCS Wireless, Inc. and its subsidiaries
for each quarter or maximum annualized EBITDA losses;
. maximum cumulative capital expenditures for iPCS Wireless, Inc. and its
subsidiaries not to exceed a specified amount;
. minimum quarterly revenue for iPCS Wireless, Inc. and its subsidiaries;
and
. minimum number of subscribers.
Applicable as of and after June 30, 2003:
. a maximum ratio of total debt to annualized earnings before interest,
taxes, depreciation and amortization, referred to as EBITDA, for iPCS
Wireless, Inc. and its subsidiaries for each quarter;
. minimum quarterly interest coverage rates for iPCS Wireless, Inc. and its
subsidiaries which is the ratio of EBITDA to consolidated interest
expense;
. minimum quarterly fixed charge coverage ratio for iPCS Wireless, Inc. and
its subsidiaries, which is the ratio of EBITDA to consolidated fixed
charges;
. minimum ratio of senior funded indebtedness to annualized EBITDA for iPCS
Wireless, Inc. and its subsidiaries; and
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. maximum ratio of annualized EBITDA to all principal payments and interest
scheduled to be made on indebtedness during the next twelve month period.
Events of Default
In addition to failing to perform, observe or comply with the covenants,
agreements and terms of the senior secured credit agreement, it is an event of
default under the senior secured credit agreement if any party with financial
responsibility for the loans, iPCS Wireless, Inc. or any signatory to the
Sprint PCS agreements, becomes insolvent, commences or suffers bankruptcy or
similar proceedings or suffers other indicia of extreme financial duress.
Other events of default include:
. an attachment against our property that is not released within 30 days
and the amount claimed in the proceeding is greater than $1.0 million;
. a judgment against us of greater than $1.0 million remains undischarged
for a period of time;
. failure to pay other loans as they become due or a default that permits
acceleration of other debt with respect to debt of at least $1.0 million;
. a breach by us under the supply agreement with Nortel, the consent and
agreement among Sprint, holders of indebtedness under the senior secured
facility and iPCS Wireless, Inc. or the Sprint PCS agreements;
. any change in control of us; or
. any material adverse change occurs, which effect is broadly defined in
the credit agreement to include things that could reasonably be expected
to have a material adverse effect on our business or our ability to repay
the loan.
A change in control will occur if:
. any person or group acquires more than 35% of our equity (other than our
existing owners);
. our directors who were elected or approved by the owners as of the date
of the credit agreement (or any directors who are approved by such
directors), cease for any reason to constitute at least a majority of our
board of directors; or
. we cease to own all of the capital stock of iPCS Wireless, Inc. or any
subsidiary of iPCS Wireless, Inc.
. the completion of any transactions that result in any person or group
owning more of our equity than our existing owners.
Senior Discount Notes
On July 12, 2000, we issued 300,000 units consisting of senior discount
notes due July 15, 2010 and warrants to purchase 2,982,699 shares of our common
stock, which yielded gross proceeds of $152.3 million. The senior discount
notes were issued under an indenture, dated as of July 12, 2000, by and among
us, iPCS Equipment, Inc. and iPCS Wireless, Inc. and CTC Illinois Trust
Company, as trustee. The senior discount notes:
. mature on July 15, 2010 and are limited to an aggregate principal amount
at maturity of $300.0 million;
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. are general, unsecured obligations of us, equal in right of payment to
all of our senior debt and senior in right of payment to all of our
subordinated debt;
. accrue interest at a rate of 14% per annum, computed on a semiannual
basis, calculated from July 12, 2000, will not bear interest payable in
cash prior to January 15, 2006, and will bear interest payable
semiannually in cash on each January 15 and July 15, beginning July 15,
2005; and
. are guaranteed by our domestic subsidiaries and senior subordinated
basis.
We may elect to redeem all or part of the senior discount notes at any time
on or after July 15, 2005 and before maturity, at the following redemption
prices:
<TABLE>
<CAPTION>
Redemption Price
per $1,000 of
Year Beginning Principal Amount
<S> <C>
July 15, 2005............................................ $1,070.00
July 15, 2006............................................ 1,046.67
July 15, 2007............................................ 1,023.33
July 15, 2008 and thereafter............................. 1,000.00
</TABLE>
In addition, on or before July 15, 2003, we may redeem up to 35% of the
principal amount at maturity of senior discount notes issued under the
indenture, at a redemption price equal to $1,140 for each $1,000 of accreted
value of a senior discount note to the redemption date, with the net proceeds
of one or more equity offerings (excluding the first $70.0 million received
from this offering). However, at least 65% of the aggregate principal amount at
maturity of senior discount notes issued under the indenture must remain
outstanding immediately after giving effect to the redemption.
If a change of control occurs, each noteholder may require us to repurchase
its senior discount notes. The repurchase price will be:
. $1,010 per $1,000 of accreted value of the senior discount notes, if the
repurchase occurs before July 15, 2005, or
. $1,010 per $1,000 of principal amount of the senior discount notes, plus
any accrued interest, if the repurchase occurs on or after July 15, 2005.
A change of control will occur if:
. we sell substantially all of our and our subsidiaries' assets;
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. we adopt a plan for our liquidation or dissolution;
. any person or group of persons, other than certain current stockholders
or their affiliates, become the beneficial owner of more than 50% of the
voting power of our stock; or
. a majority of our board of directors no longer consists of continuing
directors, which are directors who were serving on July 12, 2000, or who
were nominated to serve as a director by a majority of the continuing
directors at the time. Changes in directors elected by particular
investors, such as holders of our convertible preferred stock, are
ignored for purposes of determining continuing directors.
Our senior secured credit facility prohibits the purchase of outstanding
notes before repayment of the borrowings under the credit facility.
We are also required to offer to repurchase the senior discount notes if all
or some of the net proceeds of an asset sale are not used to acquire an entity
engaged in a permitted business, to purchase other long-term assets used or
useful in a permitted business or to repay any senior indebtedness.
The indenture contains restrictive covenants which, among other things,
restrict us and our restricted subsidiaries' ability to:
. incur additional indebtedness or issue preferred stock;
. pay dividends, make investments or redeem or retire stock;
. cause encumbrances or restrictions to exist on the ability of its
subsidiaries to pay dividends and make investments in, or transfer
property or assets;
. create liens on their assets;
. sell assets;
. engage in transactions with affiliates;
. engage in businesses other than a permitted business; or
. engage in mergers or consolidations.
The indenture also provides for customary events of default, including
cross-defaults, judgment defaults and events of bankruptcy. In addition the
indenture provides for an event of default if we have not received at least
$70.0 million in gross cash proceeds by December 31, 2000 from one or more
equity offerings or, in certain circumstances, if an event of termination has
occurred under the Sprint PCS agreements. In the case of an event of default,
our trustee or the holders of at least 25% in principal amount of the
outstanding senior discount notes may declare the senior discount notes
immediately due and payable. We are currently in compliance with all covenants
under the indenture governing the senior discount notes.
We are required, under the terms of a registration rights agreement, to:
. file an exchange offer registration statement on or before October 10,
2000 covering the exchange of the senior discount notes for registered
notes;
. use our reasonable best efforts to cause the exchange offer registration
statement to be declared effective under the Securities Act on or before
January 8, 2001;
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. use our reasonable best efforts to cause the exchange offer registration
statement to be effective continuously;
. keep the exchange offer open for a period of not less than 20 business
days; and
. cause the exchange offer to be consummated no later than the 30th
business day after the registration statement is declared effective.
We may also be required to file a shelf registration statement to register
for public resale the senior discount notes held by any holder who may not
otherwise participate in the exchange offer.
If we fail to file the exchange offer or shelf registration statement, or
fail to cause the exchange offer or shelf registration statement to become
effective, or fail to consummate the exchange offer, in each case by the
deadlines as specified above, a registration default shall be deemed to have
occurred and we will be required to pay liquidated damages to each holder of
the senior discount notes. The liquidated damages payable to each holder of the
senior discount notes will be in an amount equal to $0.05 per week per $1,000
in principal amount of the senior discount notes held by such holder for each
week or portion thereof that the registration default continues for the first
90-day period immediately following the occurrence of such registration
default. This amount will increase by an additional $0.05 per week per $1,000
in principal amount of the notes with respect to each subsequent 90-day period,
up to a maximum amount equal to $0.50 per $1,000 in principal amount of the
senior discount notes. The provision for liquidated damages will continue until
such registration default has been cured. We will not be required to pay
liquidated damages for more than one registration default at any given time.
We paid fees to our initial purchasers of the senior discount notes and
warrants of approximately $6.1 million which will be amortized as interest
expense over the term of the financing using the effective interest method.
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MANAGEMENT
Directors, Executive Officers and Other Key Employees
The following table presents information with respect to our directors,
executive officers and other key employees.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Timothy M. Yager 30 President, Chief Executive Officer and
Director
Linda K. Wokoun 45 Executive Vice President, Chief Operating
Officer
Stebbins B. Chandor, Jr. 40 Senior Vice President, Chief Financial
Officer
Anthony R. Muscato 52 Senior Vice President, Chief Technical
Officer
William W. King, Jr. 61 Vice President, Strategic Planning and
Director
Leroy R. Horsman 56 Vice President, Sales & Marketing
Patricia M. Greteman 38 Controller
Alan C. Anderson 62 Chairman of the Board of Directors
Donald L. Bell 55 Director
Brian J. Gernant 42 Director
Robert W. Schwartz 61 Director
George Patrick Tays 48 Director
</TABLE>
Timothy M. Yager has been President, Chief Executive Officer and Manager of
Illinois PCS, LLC since January 1999 and has been President, Chief Executive
Officer and Director of iPCS, Inc. since its formation. From January 1995 to
January 1999, he was the Senior Vice President of Geneseo Communications, Inc.,
an independent telephone company in Illinois. During this time, he founded and
was also the Chief Operating Officer, General Manager and later the President
of GenSoft Systems, Inc., a subsidiary of Geneseo Communications, Inc. that
designs software to provide information and billing services to the
telecommunications industry. Prior to January 1995, Mr. Yager was a Project
Manager at Geneseo Telephone Company. He was elected to the Board of Directors
of Cambridge Telcom in April 1997. Mr. Yager is the son-in-law of Mr. Anderson,
our Chairman.
Linda K. Wokoun has been Executive Vice President, Chief Operating Officer
of iPCS, Inc. (and its predecessor) since March 2000. From April 1996 to
January 2000, she served as Vice President--Wireless Operations for Ameritech
Cellular, which prior to its merger with SBC, served over 3 million cellular
and 1.5 million paging customers. Ms. Wokoun served as Ameritech Cellular's
Vice President of Marketing from November 1994 to April 1996 and Vice
President--General Manager Missouri (CyberTel, an Ameritech Company) from
September 1992 to November 1994. Ms. Wokoun has held a variety of operations,
marketing and business development roles in her 20 year telecommunications
career.
Stebbins B. Chandor, Jr. has been Senior Vice President, Chief Financial
Officer of iPCS, Inc. (and its predecessor) since March 2000. From August 1995
to March 2000, he was Senior Vice President and Chief Financial Officer for
Metro One Telecommunications, Inc., a publicly traded provider of enhanced
directory assistance and information services to the wireless
telecommunications industry. From June 1985 to August 1995, Mr. Chandor served
in various
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corporate finance capacities with BA Securities, Inc., a wholly-owned
subsidiary of BankAmerica Corporation, and affiliated or predecessor firms
including Bank of America and Continental Bank N.A.
Anthony R. Muscato, has been Senior Vice President, Chief Technology Officer
of iPCS, Inc. (and its predecessor) since March 2000. From October 1999 until
March 2000, he served as Vice President of Merger Integration for GTE Wireless.
From February 1991 to March 1999, Mr. Muscato served in a variety of positions
with Ameritech Cellular, most recently as Vice President of Business Transition
for Ameritech Cellular. From October 1997 to March 1999, he served as Vice
President of Network Planning, Engineering and Operations and from June 1996 to
October 1997, he served as Vice President of Network Planning. From October
1992 to June 1996, Mr. Muscato served as Director of Engineering and Operations
for the Illinois market and from February 1991 to October 1992, he served as
Director of Engineering. Prior to this Mr. Muscato served in a number of
positions in network operations, business marketing, corporate strategy,
residence installation and maintenance and information technology at Ameritech
and its predecessor company, Illinois Bell Telephone Company.
William W. King, Jr. has been Vice President, Strategic Planning of Illinois
PCS, LLC since February 1999, and has been Vice President, Strategic Planning
and Director of iPCS, Inc. since its formation. From July 1994 to February
1999, he served as the Director of Wireless Services for Cathey, Hutton &
Associates, a telecommunications consultant to independent telephone and
wireless companies and other entrepreneurial clients. From July 1990 to March
1994, Mr. King was the President and Chief Operating Officer of Cellular
Communications of Puerto Rico. Prior to this, since July 1962, Mr. King has
held various leadership positions for AT&T where he rose to the level of Area
Vice President and Chief Operating Officer of AT&T of Puerto Rico/Virgin
Islands.
Leroy R. Horsman has been Vice President, Sales & Marketing of Illinois PCS,
LLC since April 2000. Mr. Horsman has more than twenty-five years of experience
in the commercial radio and wireless industries. From August 1998 to April
2000, Mr. Horsman was Vice President of Sales for Emerald Bay Systems, Inc.
which was acquired by Decide.com. From May 1995 to August 1998, Mr. Horsman
served as Regional Sales Manager for Andrew Corporation. From 1993 to 1995, Mr.
Horsman developed a consulting practice and was involved in the early stages of
application development, new product development, and network implementation
projects for SMR networks, location systems, and other non-voice wireless
applications. From 1988 to 1993, Mr. Horsman held a position with Cellular
Data, Inc., in Palo Alto, California, a start-up wireless packet data
technology company. From 1986 to 1988, Mr. Horsman served as the Director of
Sales and Marketing for Southwestern Bell Mobile Systems in Dallas/Fort Worth,
Texas. In 1981, Mr. Horsman joined NEC where he was instrumental in the
deployment of early digital paging systems and cellular phones. From 1973 to
1981, Mr. Horsman worked at Motorola C&E in Dallas, Texas.
Patricia M. Greteman has been the Controller of Illinois PCS, LLC since May
1999 and has held the same position with iPCS, Inc. since its formation. From
May 1993 to April 1999, she served as the Controller of ACC of Kentucky, LLC, a
cellular carrier covering a territory with over 1 million total residents. From
November 1991 to April 1992, Ms. Greteman served as the Controller of Arch
Mineral Corporation's Catenary Coal Company. From August 1989 to October 1991,
she served as the Assistant Controller of Arch of Kentucky.
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Alan C. Anderson has served as a representative of an owner of Illinois PCS,
LLC since January 1999 and as Chairman of the Board of Directors of iPCS, Inc.
since its formation March 2000. Mr. Anderson is President and CEO of Geneseo
Communications, Inc., a telecommunications holding company, and has served in
that position since November 1994. From 1981 through 1994, Mr. Anderson held
various positions, including General Manager, with Geneseo Telephone Company.
He has served as General Manager of Cambridge Telcom, Inc., a
telecommunications holding company, since 1987 and from 1985 to 1987 Mr.
Anderson served as Assistant General Manager of Cambridge Telephone Company.
Since April 1996, Mr. Anderson has served as Vice President, General Manager,
Secretary and Treasurer of Henry County Communications, Inc., and from July
1981 until April 1996 he was Vice President and General Manager of Henry County
Telephone Company. In addition, Mr. Anderson serves on the Illinois Telephone
Association Board of Directors; he served as President of the Board of
Directors in 1990 and 1991. He has served on the Board of Directors of Central
Trust and Savings Bank since 1992 and currently serves on the Board of
Directors of Central Bank Corporation, Celebrate Communications, LLC and
GenSoft Systems, Inc. Prior to July 1981, Mr. Anderson served as an officer of
the U.S. Air Force. Mr. Anderson is the father-in-law of Mr. Yager, our
President, Chief Executive Officer and a Director.
Donald L. Bell has served as a representative of an owner of Illinois PCS,
LLC since January 1999 and as a Director of iPCS, Inc. since its formation. He
also serves as Vice President and CEO of Cass Communications Management, Inc, a
telecommunications company, since January 1994. Mr. Bell has served in various
positions for Cass Communications for the past 30 years, including Plant
Manager, Operational Manager, Vice President of Cass Telephone Company and
President of Cass Long Distance Company. He served on the Board of Directors of
Illinois 4 Limited Partnership, a telecommunications company, from 1986 to
1993. In addition, Mr. Bell has served as President of Illinois Independent
Telephone Association since May 1994. Mr. Bell has served as a member of the
Board of Directors of the Illinois Telecommunications Association since June
1991 and he is also a Director of Cass Telephone Company, Cass Communications
Management and Cass Long Distance Company.
Brian J. Gernant has served as a Director of iPCS, Inc. since March 2000.
Mr. Gernant also serves as Director of Geneseo Communications, Inc., a
telecommunications holding company, and has served in that position since July
1998. Mr. Gernant is the Branch Manager, Vice President-Investments of the
Geneseo, Illinois office of A.G. Edwards & Sons Inc. Since March, 1995, Mr.
Gernant has been employed by A.G. Edwards and has been a Branch Manager since
January 1997. A.G. Edwards & Sons, Inc. has not performed any due diligence,
expresses no opinion and makes no recommendations regarding participation in
this offering.
Robert W. Schwartz has served as a representative of an owner of Illinois
PCS, LLC since January 1999 and as a Director of iPCS, Inc. since its
formation. Mr. Schwartz has served as President and Manager of Madison
Telephone Company, a telecommunications company, since August 1985. Mr.
Schwartz has served on the Board of Directors of Madison Telephone Company
since 1984. Since March 1997, he has served as President and Manager of Madison
Communications Company, a telecommunications company which he founded in 1997.
Mr. Schwartz is also the founder and President of Schwartz Ventures, Inc., a
position he has held since 1964. He has served on the Board of Directors of
Madison Communications Company since March 1994. Mr. Schwartz also has served
as a member of the Board of Directors and as President and Manager of Madison
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Network Systems, since August 1995. Mr. Schwartz serves on the Board of
Directors of the Illinois Telephone Association where he is the current
Chairman, and of the Illinois Independent Telephone Association, and he has
served on the Board of Directors of Clover Leaf Bank since 1965. Mr. Schwartz
is the General Manager of Technology Group, L.L.C., which was formed in
December 1999.
George Patrick Tays has served as a representative of an owner of Illinois
PCS, LLC since January 1999 and as a Director of iPCS, Inc. since its
formation. Mr. Tays has served as General Manager of Montrose Mutual Telephone
Company and Montrose Mutual PCS, Inc., a telecommunications company, since
September 1992. Prior to this and since November 1989 he has served as
Assistant Secretary and Assistant Treasurer of the Board of Directors of
Montrose Mutual Telephone Company. He served in the paging and cellular
department of Illinois Consolidated Telephone Company, a telecommunications
company, from June 1987 to September 1992.
Board of Directors
The board of directors is currently fixed at nine members. There are seven
directors currently comprising the board. Currently there are two vacancies on
the board. Pursuant to the provisions of the certificate of designations for
the convertible preferred stock, the holders of the convertible preferred stock
have the right to elect individuals for the two vacancies. See "Description of
Capital Stock--Convertible Preferred Stock." If our outstanding convertible
preferred stock is converted into common stock upon the consummation of this
offering, Blackstone, instead of the holders of the convertible preferred
stock, will be entitled to designate two individuals for election to the board
of directors pursuant to the Stockholders Agreement. See "Certain Relationships
and Related Transactions--Stockholders Agreement." The board of directors is
divided into three classes. Brian J. Gernant, Robert W. Schwartz and George
Patrick Tays constitute Class I and will stand for election at the annual
meeting of stockholders to be held in 2001. Alan C. Anderson, William W. King,
Jr., and a new director who will fill a vacancy on the board constitute Class
II and will stand for election at the annual meeting of stockholders to be held
in 2002. Donald L. Bell, Timothy M. Yager and a new director who will fill a
vacancy on the board will constitute Class III and will stand for election at
the annual meeting of stockholders to be held in 2003. After the initial term
following the offering, directors in each class will serve for a term of three
years, or until his or her successor has been elected and qualified and will be
compensated at the discretion of the board of directors.
The audit committee consists of Messrs. Gernant, Schwartz and Tays. The
compensation committee consists of Messrs. Bell and Gernant.
The audit committee is responsible for recommending to the board of
directors the engagement of our independent auditors and reviewing with the
independent auditors the scope and results of the audits, our internal
accounting controls, audit practices and the professional services furnished by
the independent auditors.
The compensation committee is responsible for reviewing and approving all
compensation arrangements for our officers, and is also responsible for
administering our incentive stock plan.
Compensation Committee Interlocks and Insider Participation
We did not have a compensation committee during the year ended December 31,
1999. Representatives of the owners of Illinois PCS, LLC made all compensation
decisions. Other than Mr. Yager, who is a Director, and Mr. Anderson who is a
director and the General Manager of
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Cambridge Telcom, Inc., none of our executive officers served as a director or
member of the compensation committee or other board committee performing
equivalent functions of another corporation whose executive officers served as
a representative of an owner.
Limitation on Liability and Indemnification
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Our certificate
of incorporation provides that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and agents and
other agents to the fullest extent permitted by law. Our certificate of
incorporation also permits us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless or whether the certificate of
incorporation would permit indemnification.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
Executive Compensation
The following table presents summary information with respect to the
compensation paid to our President, Chief Executive Officer and Director and
our Vice President, Strategic Planning and Director. None of our other
executive officers was paid salary and bonus which exceeded $100,000 during the
year ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Other Annual
Name and Principal Position Salary($) Bonus($) Compensation($)
<S> <C> <C> <C>
Timothy M. Yager........................... $100,295 $24,000 $909(1)
President, Chief Executive Officer and
Director
William W. King, Jr........................ 89,105 18,883 644(2)
Vice President, Strategic Planning and
Director
</TABLE>
---------------------
(1) Includes the imputed value of Mr. Yager's personal use of a company
automobile and life insurance premium.
(2) Includes life insurance premium.
As of February 29, 2000, Mr. Yager agreed to cancel his management agreement
with Illinois PCS, LLC in exchange for a 1.5% membership interest in Illinois
PCS, LLC and certain other consideration. We have recorded a non-cash
compensation expense for the three months ended March 31, 2000 in the amount of
approximately $8.5 million resulting from the issuance of this membership
interest to Mr. Yager.
Compensation of Directors
During 1999, we did not compensate the representatives of our owners who
functioned in a manner comparable to a board of directors. Non-employee
directors will be paid $1,000 and
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reimbursed for their expenses for attendance at board meetings and paid $500
for telephonic board meetings. Each non-employee director has been granted
stock options to purchase 15,000 shares of our common stock at $5.50 per share,
the price at which we sold our convertible preferred stock. Discretionary
grants of stock options may be made to non-employee directors under the 2000
Long Term Incentive Stock Plan from time to time, subject to the approval of
the full board.
Employment Agreements
We have entered into a three year employment agreement with Timothy M.
Yager, our President and Chief Executive Officer on substantially the terms set
forth below. The term will be automatically renewed for successive one year
periods absent 90 days advance notice from one party to the other. Mr. Yager's
employment agreement provides for an initial minimum annual base salary of
$225,000. Under the employment agreement, Mr. Yager is also entitled to
performance based and other bonuses, benefits (such as retirement, health and
other fringe benefits) which are provided to other executive employees,
reimbursement of business expenses and limited reimbursement of legal and
financial planning expenses. Mr. Yager is also entitled to a car allowance,
reimbursement for certain relocation expenses, payment of limited country club
dues and assessments and a company-paid term life insurance policy. We have
granted Mr. Yager a total of 500,000 stock options under our 2000 Long Term
Incentive Stock Plan at an exercise price of $5.50 per share, the price per
share at which the convertible preferred stock was sold. The details regarding
these options are discussed in the next section. Based upon the expected
offering price of a planned initial public offering, we will recognize
compensation expense of approximately $2,650,000 over the vesting period of the
options.
Under the employment agreement, Mr. Yager's employment may be terminated by
him or us at any time and for any reason. If his employment is terminated for
any reason, he will be entitled to payment of his accrued but unpaid salary,
vacation pay, unreimbursed business expenses and other items earned and owed to
him by us. If his employment is terminated as a result of death or disability,
he (or in the event of his death, his estate) will be paid his salary through
the first anniversary of the date his death or termination for disability
occurs, and he will receive a lump sum payment of his target incentive bonus.
If Mr. Yager's employment is terminated by us for reasons other than for cause,
or if he terminates his employment following a material breach by us of the
employment agreement which is not cured within 30 days or within 60 days after
we relocate our business outside of the Chicago metropolitan area, he will be
entitled to continuing payments of his salary through the first anniversary of
his termination, continuation of health benefits for him and his dependents for
the same period, a lump sum payment of his target incentive bonus and continued
vesting of his stock options during the severance period. All severance
payments pursuant to the employment agreement terminate in the event Mr. Yager
violates the confidentiality, noncompetition or nonsolicitation provisions of
the employment agreement.
The employment agreement contains special provisions that apply in the event
of a change in control of the company. The agreement provides that if, during
the one year period following a change in control, Mr. Yager's employment is
terminated by us for reasons other than for cause or if he terminates for good
reason, he will be entitled to a lump sum payment equal to two years of his
salary, a lump sum payment of his target incentive bonus, which will be set
annually by the
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compensation committee, continuation of his health benefits (for him and his
dependents) at the employee rate for a period of two years following his
termination and immediate vesting of his unvested stock options. In the event
that, in connection with a change in control, any payments or benefits to which
Mr. Yager is entitled from us constitute excess golden parachute payments under
applicable IRS rules, he will receive a payment from us in an amount which is
sufficient to pay the parachute excise tax that he will have to pay on those
parachute payments. In addition, we will pay him an amount sufficient for him
to pay the income tax and related employment taxes that he will have to pay
related to our reimbursement to him of the parachute excise tax. For purposes
of the employment agreement, the term "change in control" has the same meaning
as for the 2000 Long Term Incentive Stock Plan, discussed below.
If Mr. Yager's employment terminates for any reason other than those
discussed above, he is not entitled to any severance benefits under the
employment agreement.
Pursuant to the employment agreement, Mr. Yager has agreed to keep all of
our confidential information secret and he has agreed that, while he is
employed by us and for a period of 12 months after his termination of
employment, he will not compete with us in the wireless telecommunications
business in any of the basic trading areas in which we have been granted the
right to carry on the wireless telecommunications business, he will not solicit
our customers for a competitive business and he will not solicit our employees.
We have entered into an employment agreement with Linda K. Wokoun, our
Executive Vice President, Chief Operating Officer, which agreement is
substantially the same as Mr. Yager's agreement except for the compensation
package (including options and bonus opportunities), job duties and the
duration (12 months) of post-termination health benefits in the event of a
covered termination. Ms. Wokoun's annual base salary is $200,000 and we have
granted her a total of 300,000 stock options which have an exercise price of
$5.50 per share.
We have entered into an employment agreement with Stebbins B. Chandor, Jr.,
our Senior Vice President, Chief Financial Officer, which agreement is
substantially the same as Ms. Wokoun's agreement except for the compensation
package (including options and bonus opportunities) and job duties. Mr.
Chandor's annual base salary is $175,000 and we have granted him a total of
250,000 stock options which have an exercise price of $5.50 per share.
We have entered into an employment agreement with William W. King, Jr., our
Vice President, Strategic Planning and Director, which agreement is
substantially the same as Ms. Wokoun's agreement except for the compensation
package (including options and bonus opportunities) and job duties. Mr. King's
annual base salary is $150,000 and we have granted him a total of 150,000 stock
options which have an exercise price of $5.50 per share.
We have also entered into employment agreements with Messrs. Muscato and
Horsman and Ms. Greteman. These agreements are substantially the same as the
agreements with Ms. Wokoun except for the compensation package (including
options and bonus opportunities) and job duties. In addition, Ms. Greteman's
agreement provides for the payment of severance benefits in the event that Ms.
Greteman terminates employment because her job duties are required to be
performed more than 50 miles from Geneseo, Illinois. We have granted an
aggregate of 1,558,750 stock options which have
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an exercise price of $5.50 per share under these agreements. Based upon the
expected offering price of a planned initial public offering, we will recognize
total aggregate compensation expense of approximately $8,260,000 over the
vesting period of the options.
2000 Long Term Incentive Stock Plan
As of July 11, 2000, the board of directors adopted and the stockholders
have approved, the amended and restated 2000 Long Term Incentive Stock Plan, or
the 2000 Plan. Under the 2000 Plan, we may grant stock options, stock
appreciation rights, shares of common stock and performance units to our
employees, consultants and directors. The total number of shares of our common
stock that we may award under the 2000 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 our shares then outstanding, up
to a maximum of 8,000,000 shares. The number of shares (and the price at which
shares of stock may be purchased under the 2000 Plan) may be adjusted under
certain circumstances, such as in the event of a corporate restructuring. The
maximum number of shares of common stock that any individual participant may
receive each year under the 2000 Plan is 650,000, and there is no limit on cash
payouts for grants or awards under this plan each year to any of our key
executive officers.
Our compensation committee administers our 2000 Plan. The 2000 Plan
essentially gives the compensation committee sole discretion and authority to
select those employees to whom awards will be made, to designate the number of
shares covered by each award, to establish vesting schedules and terms of each
award, to specify all other terms of awards, and to interpret the 2000 Plan.
Options awarded under the 2000 Plan may be either incentive stock options or
nonqualified stock options; provided that incentive stock options may only be
awarded to our employees. The compensation committee has determined that
options awarded pursuant to the terms of the employment agreements entered into
in connection with the reorganization shall be incentive stock options to the
extent possible. Incentive stock options are intended to satisfy the
requirements of Section 422 of the Internal Revenue Code. Nonqualified stock
options are not intended to satisfy Section 422 of the Internal Revenue Code.
Stock appreciation rights may be granted in connection with options, or may be
granted as free-standing awards. Exercise of an option will result in the
corresponding surrender of the attached stock appreciation right. At a minimum,
the exercise price of an option or stock appreciation right must be at least
equal to the greater of:
. the fair market value of a share of common stock on the date on which the
option or stock appreciation right is granted and
. the par value of a share of common stock on that date.
Options and stock appreciation rights will be exercisable in accordance with
the terms set by the compensation committee when granted and will expire on the
date determined by the compensation committee. All options and stock
appreciation rights must expire no later than ten years after they are granted
under our plan. If a stock appreciation right is issued in connection with an
option, the stock appreciation right will expire when the related option
expires. Special rules and limitations apply to stock options which are
intended to be incentive stock options.
Under our 2000 Plan, our compensation committee may grant common stock to
participants. During the period that a stock award is subject to restrictions
or limitations, the participants may receive dividend rights relating to the
shares.
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The compensation committee may award participants performance units which
entitle the participant to receive value for the units at the end of a
performance period to the extent provided under the award. Our compensation
committee establishes the number of units and the performance measures and
periods when it makes an award.
All awards under the 2000 Plan will accelerate and become fully vested if a
change of control of our company occurs.
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PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of common stock as of July 15, 2000 with respect to:
. each person who, to our knowledge, is the beneficial owner of 5% or more
of the outstanding common stock;
. each of the directors;
. the chief executive officer; and
. all executive officers and directors as a group.
<TABLE>
<CAPTION>
Number of Percentage of Percentage of
Shares Beneficially Ownership Ownership
Name and Address (1) Owned (2) Prior to Offering After Offering
<S> <C> <C> <C>
Geneseo Communications, 15,468,809 28.7% 24.8%
Inc.......................
111 E. 1st Street
Geneseo, Illinois 61254
Cambridge Telcom, Inc..... 13,258,979 24.6 21.3
111 E. 1st Street
Geneseo, Illinois 61254
The Blackstone Group...... 7,272,727 13.5 11.7
345 Park Avenue
New York, New York 10154
(3)
Cass Communications 4,419,660 8.2 7.1
Management, Inc...........
100 Redbud Road
Virginia, Illinois 62691
Technology Group, LLC..... 4,419,660 8.2 7.1
118 E. State Street
Hamel, Illinois 62046
Montrose Mutual PCS, Inc.. 4,419,660 8.2 7.1
102 N. Main Street
Dieterich, Illinois 62424
Respond Communications, 4,419,660 8.2 7.1
Inc. .....................
102 N. Main Street
Dieterich, Illinois 62424
(4)
Timothy M. Yager.......... 673,045 1.3 1.1
William W. King, Jr. ..... -- -- --
Alan C. Anderson (5)...... 28,727,788 53.2 46.1
Donald L. Bell (6)........ 4,419,660 8.2 7.1
Brian J. Gernant.......... -- -- --
Gerald S. Gill II (7)..... 4,419,660 8.2 7.1
Robert W. Schwartz (8).... 4,419,660 8.2 7.1
George Patrick Tays (9)... 4,419,660 8.2 7.1
All executive officers and
directors
as a group (10 persons)... 42,659,813 79.1 68.5
</TABLE>
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(1) Except as otherwise indicated below, the address for each executive officer
and director is 121 West First Street, Suite 200, Geneseo, Illinois 61254.
(2) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act. A person is deemed to be the beneficial owner of
any shares of common stock if such person has or shares the right to vote
or dispose of such common stock, or has the right to acquire beneficial
ownership at any time within 60 days of the date of the table.
(3) Of the 7,272,727 shares, 3,272,727 are held by Blackstone Communications
Partners I L.P. ("BCOM"), 2,893,282 are held by Blackstone iPCS Capital
Partners L.P. ("BICP") and 1,106,718 are held by Blackstone/iPCS L.L.C.
("BLLC"). Blackstone Communications Management Associates I L.L.C. is the
general partner of BCOM. Blackstone Media Management Associates III L.L.C.
is the general partner of BICP. Blackstone Media Management Associates III
L.L.C. is the manager of BLLC. Messrs. Peter G. Peterson and Stephen A.
Schwarzman are the founding members of Blackstone, and as such may also be
deemed to share beneficial ownership of the shares held by each of these
entities.
(4) Consists of shares beneficially owned by Montrose Mutual PCS, Inc. Respond
Communications is a beneficial owner of these shares based on its 100%
ownership of Montrose Mutual PCS, Inc.
(5) Consists of shares beneficially owned by Geneseo Communications, Inc. and
Cambridge Telcom, Inc. Mr. Anderson is the President and CEO of Geneseo
Communications, Inc. and is the General Manager of Cambridge Telcom, Inc.,
and is the beneficial owner of the shares owned by each of these entities.
Mr. Anderson disclaims beneficial ownership of these shares. Mr. Anderson's
address is the same as the address for Geneseo Communications, Inc.
(6) Consists of shares beneficially owned by Cass Communications Management,
Inc. Mr. Bell is the Vice President and CEO of Cass Communications
Management, Inc., and is the beneficial owner of the shares owned by Cass
Communications Management, Inc. Mr. Bell disclaims beneficial ownership of
these shares. Mr. Bell's address is the same as the address for Cass
Communications Management, Inc.
(7) Consists of shares beneficially owned by Cass Communications Management,
Inc. Mr. Gill is the beneficial owner of a majority of the outstanding
shares of Cass Communications Management, Inc. Mr. Gill disclaims
beneficial ownership of certain shares owned by Cass Communications
Management, Inc. attributable to the shares of Cass Communications
Management, Inc. which are held in trusts for the benefit of members of Mr.
Gill's family. The address for Mr. Gill is the same as the address for Cass
Communications Management, Inc.
(8) Consists of shares beneficially owned by Technology Group, LLC. Mr.
Schwartz is a beneficial owner of the shares owned by Technology Group, LLC
by virtue of his position as Trustee of a family trust that owns
substantially all of the membership interests in Technology Group, LLC. Mr.
Schwartz disclaims beneficial ownership of these shares. Mr. Schwartz's
address is the same as the address for Technology Group, LLC.
(9) Consists of shares beneficially owned by Montrose Mutual PCS, Inc. Mr. Tays
is the General Manager of Montrose Mutual PCS, Inc., and is the beneficial
owner of the shares owned by Montrose Mutual PCS, Inc. Mr. Tays disclaims
beneficial ownership of these shares. Mr. Tays' address is the same as the
address for Montrose Mutual PCS, Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Formation of Illinois PCS, LLC
Geneseo Communications, Inc., Cambridge Telcom, Inc., Cass Communications
Management, Inc., Schwartz Ventures, Inc. (which transferred its ownership to
its affiliate Technology Group, LLC), Montrose Mutual PCS, Inc., and Gridley
Enterprises, Inc. formed Illinois PCS, LLC in January 1999. Those investors
received membership interests in exchange for their capital contributions. As
of February 29, 2000 the members agreed to admit Timothy M. Yager, our
President and Chief Executive Officer, as a new member owning a 1.5% interest,
and to reduce their membership interests in aggregate by 1.5%. Mr. Yager agreed
to cancel his management agreement with Illinois PCS, LLC in exchange for his
1.5% membership interest and certain other consideration. For the three-months
ended March 31, 2000, we have recorded compensation expense
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in the amount of approximately $8.5 million resulting from the issuance of this
membership interest to Mr. Yager. For further information on the compensation
expense, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
The members have contributed all unfunded equity commitments. The
obligations of the members of Illinois PCS, LLC to contribute capital and the
other provisions contained in the formation documents of Illinois PCS, LLC have
been eliminated as of July 12, 2000 when we consummated the reorganization from
a limited liability company to a holding company structure.
Issuance of Convertible Participating Preferred Stock
An investor group led by Blackstone has purchased $50.0 million and
committed to purchase an additional $70.0 million of our convertible preferred
stock. As of July 12, 2000, we have issued 9,090,909 shares of our Series A-1
Convertible Participating Preferred Stock at a purchase price of $5.50 per
share to the investor group. In the event that we do not complete an initial
public offering of our common stock yielding gross proceeds of $30.0 million or
more prior to December 31, 2000, and subject to certain other conditions
described below, the investor group will also purchase (and we will issue)
14,000,000 shares of a new issue of preferred stock, to be designated our
Series A-2 Convertible Participating Preferred Stock, at a purchase price of
$5.00 per share. The issuance of our Series A-1 Preferred Stock has yielded
gross proceeds to us of $50.0 million, and the future issuance of our Series A-
2 Preferred Stock, if it occurs, would yield gross proceeds to us of an
additional $70.0 million. For more information relating to the terms of the
Series A-1 Preferred Stock and the Series A-2 Preferred Stock, see "Description
of Capital Stock." The consummation of this offering will eliminate our
obligation to sell, and Blackstone's obligation to purchase, the additional
$70.0 million of convertible preferred stock.
Investment Agreement
In the preferred stock investment agreement between us and the investor
group, we agreed that we would not take specified actions relating to our
business, our capital stock and other aspects of our operations without the
prior approval of Blackstone. Among those actions are the following:
. the declaration or payment of certain dividends or distributions;
. the issuance of certain notes or debt securities containing equity
features prior to December 31, 2000, or the issuance of any equity
securities which would be senior to, or on parity with, the preferred
stock;
. subject to certain exceptions, the making of investments in third
parties;
. the incurrence of any indebtedness in excess of $10.0 million, other than
pursuant to the senior secured credit facility, the notes and certain
other exceptions; or
. subject to certain exceptions, the issuance or sale of any shares of our
capital stock or the capital stock of our subsidiaries prior to December
31, 2000, other than in a public offering of our common stock, pursuant
to an employee benefit plan or with respect to mergers and acquisitions.
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The approval rights of Blackstone and most of the other rights relating to
its ownership of our capital stock will terminate upon the earlier to occur of
(a) the closing of an underwritten public offering of our common stock in which
we receive aggregate gross proceeds of at least $50.0 million and in which the
per share price at which such shares are sold in the offering is at least
$11.00 per share (subject to adjustment), and (b) our consummation of certain
transactions that result in a change of control. The consummation of this
offering at an initial public offering price of $11.00 per share or greater
will cause these rights of the investor group to terminate.
The obligation of the investor group to purchase the Series A-2 Preferred
Stock is conditioned upon:
. us not having consummated, before December 31, 2000, an initial public
offering of our common stock yielding gross proceeds of $30.0 million or
more;
. certain of our representations and warranties in the investment agreement
being true and correct in all material respects (including our
representation that there has been no event, condition or change that
individually or in the aggregate has had or could reasonably be expected
to have a material adverse effect on the assets, business, properties,
liabilities, condition (financial or otherwise), results of operations or
prospects of us and our subsidiaries taken as a whole);
. the material performance by us of our obligations thereunder; and
. our delivery of customary legal opinions, closing certificates and
related closing materials.
The consummation of this offering will eliminate our obligation to sell, and
the investor group's obligation to purchase, the Series A-2 Preferred Stock.
Stockholders Agreement
In connection with the purchase and sale of our Series A-1 Preferred Stock,
we have entered into a stockholders agreement with the investor group, Geneseo
Communications, Inc. and Cambridge Telcom, Inc. which provides for, among other
things, the matters described below which are modified by the consummation of
this offering where indicated:
. limitations on the transfer of any of our securities by each of Geneseo
and Cambridge for six months after the expiration of a lock-up period
required by our underwriter in an initial public offering;
. tag-along rights in favor of the investor group allowing it to
participate in certain sales of our capital stock by Geneseo or
Cambridge;
. until an initial public offering or a change of control transaction,
drag-along rights in favor of Geneseo and Cambridge requiring the
investor group to sell all of our capital stock owned by it if Geneseo
and Cambridge accept an offer meeting certain criteria to sell all of our
capital stock owned by each of them;
. subject to certain requirements regarding ownership of our capital stock,
the right of Blackstone to designate up to two members of our Board of
Directors;
. preemptive rights granting the investor group the right to subscribe for
and purchase, at the same price per share and upon the same terms and
conditions, a portion of any equity securities we issue prior to an
initial public offering of our common stock that yields gross proceeds to
us of at least $30.0 million;
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. the right of the investor group to request that we use our best efforts
to complete an initial public offering of our common stock if we have not
done so within two years of the date of the purchase by the investor
group;
. the right of the investor group to approve any merger, consolidation,
sale of assets or other business combination transaction or issuance of
securities that would have certain tax consequences to the holders of the
Series A-1 Preferred Stock;
. in the event that, within five years of the date of the purchase by the
investor group, we have not completed one or more public offerings of our
common stock resulting in gross proceeds of $50 million or consummated a
business combination transaction with a publicly held company meeting
certain criteria, the investor group has the right to request that we
repurchase the preferred stock (and common stock issued upon conversion
thereof, if any) owned by the investor group at fair market value, unless
our Board of Directors determines, in its sole discretion, that it is not
in our best interests to do so, whereupon the investor group would have
the right to force a sale of our company (it being understood that any
such repurchase would be subject to the rights of Sprint under the Sprint
PCS agreements, as well as any restrictions on such repurchase or sale
contained in the indenture governing the senior discount notes, the
senior secured credit agreement or elsewhere and that any sale of our
company would be subject to the rights of Sprint under the Sprint PCS
agreements);
. after the closing of the purchase of the Series A-2 Preferred Stock, if
it occurs, and provided that all of the preferred stock previously issued
has not been converted to common stock, the right of the investor group
to approve certain changes of control that do not meet specified criteria
(this provision will cease to be effective upon completion of this
offering); and
. provided that all of the preferred stock previously issued has not been
converted to common stock, the right of the investor group to approve
certain business combination transactions that do not involve a change of
control (this provision will cease to be effective upon completion of
this offering at a purchase price equal to or greater than $11.00 per
share).
Registration Rights Agreement
In the registration rights agreement we have entered into as of July 12,
2000, we granted to the holders of our Series A-1 Preferred Stock (and, if
issued, our Series A-2 Preferred Stock) the following registration rights,
exercisable by them at any time after an initial public offering of our common
stock:
. demand registration rights that entitle Blackstone to require us to
register, at our expense, the resale of the shares of common stock of the
investor group under the Securities Act on up to three occasions,
including, if requested by Blackstone, on a continuous or delayed basis;
and
. piggyback registration rights that entitle the investor group to require
us to include, at our expense, their shares of common stock in a
registration of any of our equity securities for sale by us or by any of
our other security holders, other than in connection with an initial
public offering and other than pursuant to the registration of the
warrants comprising part of the units or the warrants issued to Sprint
PCS.
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The foregoing registration rights extend to all of the common stock that the
investor group or its successors may acquire upon the conversion of their
Series A-1 Preferred Stock and, if applicable, their Series A-2 Preferred
Stock. The foregoing registration rights are subject to the right of the
underwriters of any underwritten offering to limit the number of shares
included in such registration.
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REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
The FCC regulates the licensing, construction, operation, acquisition and
interconnection arrangements of wireless telecommunications systems in the
United States.
The FCC has promulgated, and is in the process of promulgating, a series of
rules, regulations and policies to, among other things:
. grant or deny licenses for PCS frequencies;
. grant or deny PCS license renewals;
. rule on assignments and/or transfers of control of PCS licenses;
. govern the interconnection of PCS networks with other wireless and wireline
carriers;
. establish access and universal service funding provisions;
. possibly facilitate the offering of Calling Party Pays as an optional
wireless service for consumers;
. possibly permit commercial mobile radio service, commonly referred to as
CMRS, spectrum to be used for the transmission of programming material
targeted to a limited audience;
. impose fines and forfeitures for violations of any of the FCC's rules; and
. regulate the technical standards of PCS networks.
The FCC prohibits a single entity from having an attributable interest
(usually 20% or greater) in broadband PCS, cellular and specialized mobile
radio service, or SMR, licenses totaling more than 45 MHz in any urban areas,
and 55 MHz in rural areas. Interests held by passive institutional investors,
small companies and rural telephone companies are not usually deemed
attributable for purposes of this prohibition if such interests do not exceed
40%.
Transfers and Assignments of PCS Licenses
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a PCS license. Non-
controlling interests in an entity that holds a PCS license or operates PCS
networks generally may be bought or sold without prior FCC approval. In
addition, a recent FCC order requires only post-consummation notification of
certain pro forma assignments or transfers of control.
Conditions of PCS Licenses
All PCS licenses are granted for 10-year terms conditioned upon timely
compliance with the FCC's build-out requirements. Pursuant to the FCC's build-
out requirements, all 30 MHz broadband PCS licensees must construct facilities
that offer coverage to one-third of the population within 5 years and to two-
thirds of the population within 10 years, and all 10 MHz broadband PCS
licensees must construct facilities that offer coverage to at least one-quarter
of the population within 5 years or make a showing of "substantial service"
within that 5 year period. Rule violations could result in license revocations.
The FCC also requires licensees to maintain a certain degree of control over
their licenses. The Sprint PCS agreements reflect an alliance that the parties
believe meets the FCC
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requirements for licensee control of licensed spectrum. If the FCC were to
determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control, the Sprint PCS agreements may be modified to cure
any purported deficiency regarding licensee control of the licensed spectrum.
PCS License Renewal
PCS licensees can renew their licenses for additional 10 year terms. PCS
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford PCS renewal applicants involved in comparative renewal hearings with a
"renewal expectancy." The renewal expectancy is the most important comparative
factor in a comparative renewal hearing and is applicable if the PCS renewal
applicant has: (1) provided "substantial service" during its license term; and
(2) substantially complied with all applicable laws and FCC rules and policies.
The FCC's rules define "substantial service" in this context as service that is
sound, favorable and substantially above the level of mediocre service that
might minimally warrant renewal.
Interconnection
The FCC has the authority to order interconnection between commercial mobile
radio service, or CMRS, providers (which includes us) and any other common
carrier. The FCC has ordered local exchange carriers to provide reciprocal
compensation to CMRS providers for the termination of traffic. Under these new
rules, we benefit from interconnection agreements negotiated by Sprint PCS for
our network with Ameritech, U.S. West, GTE and several smaller independent
local exchange carriers. Interconnection agreements are negotiated on a state-
wide basis. If an agreement cannot be reached, parties to interconnection
negotiations can submit outstanding disputes to state authorities for
arbitration. Negotiated interconnection agreements are subject to state
approval.
Other FCC Requirements
The FCC has divided the 120 MHz of spectrum allocated to Broadband PCS into
six frequency blocks, A through F. Through Sprint PCS, we operate under blocks
A, B and D. Broadband PCS providers generally are prohibited from unreasonably
restricting resale of their services and from unreasonably discriminating
against resellers. These prohibitions on a provider's restriction of resale
will expire November 24, 2002 unless the FCC extends them. The FCC recently
decided that these prohibitions apply to services and not to equipment such as
handsets, whether alone or in bundled packages.
The FCC also adopted rules that require local exchange and most CMRS
carriers, including us, to program their networks to allow customers to change
service providers without changing telephone numbers, which is referred to as
service provider number portability. Most CMRS carriers are required to
implement nationwide roaming by November 24, 2002 as well. The FCC currently
requires most CMRS providers to be able to deliver calls from their networks to
ported numbers anywhere in the country, and to contribute to the Local Number
Portability Fund.
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The FCC has adopted rules permitting broadband PCS and other CMRS providers
to provide wireless local loop and other fixed services that would directly
compete with the wireline services of local exchange carriers, or LECs. In June
1996, the FCC adopted rules requiring broadband PCS and other CMRS providers to
implement enhanced emergency 911 capabilities within 18 months after the
effective date of the FCC's rules. The full compliance with these rules must
occur by October 1, 2001. Further waivers of the enhanced emergency 911
capability requirements may be obtained by individual carriers by filing a
waiver request.
On June 10, 1999, the FCC initiated a regulatory proceeding seeking comment
from the public on a number of issues related to competitive access to
multiple-tenant buildings, including the following:
. the FCC's tentative conclusion that the Communications Act of 1934, as
amended, requires utilities to permit telecommunications carriers
access to rooftop and other rights-of-way in multiple tenant buildings
under just, reasonable and nondiscriminatory rates, terms and
conditions; and
. whether building owners that make access available to a
telecommunications carrier should be required to make access available
to all other telecommunications carriers on a nondiscriminatory basis,
and whether the FCC has the authority to impose such a requirement.
This proceeding could affect the availability and pricing of sites for our
antennae and those of our competitors.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act was enacted in 1994 to
preserve electronic surveillance capabilities by law enforcement officials in
the face of rapidly changing telecommunications technology. The Communications
Assistance Act requires telecommunications carriers, including us, to modify
their equipment, facilities, and services to allow for authorized electronic
surveillance based on either industry or FCC standards. In 1997, industry
standard-setting organizations developed interim standards for wireline,
cellular, and broadband PCS carriers to comply with the Communications
Assistance Act. In August 1999, the FCC supplemented the interim industry
standards with additional standards. For interim industry standards, the
deadline for compliance is June 30, 2000, and for the additional standards
established by the FCC, the deadline is September 30, 2001. Although we will be
able to offer traditional electronic surveillance capabilities to law
enforcement agencies, we may not meet the compliance deadlines of either June
30, 2000 or September 30, 2001, due to required hardware changes that have not
yet been developed and implemented by switch manufacturers. We intend to join
with Sprint PCS to request an extension of time for compliance with these
requirements. We may be granted extensions for compliance, or we may be subject
to penalties if we fail to comply, including being assessed fines or having
conditions put on our licenses.
Other Federal Regulations
Wireless systems, which we use in the provision of our services, must comply
with certain FCC and FAA regulations regarding the siting, lighting and
construction of transmitter towers and antennas. In addition, certain FCC
environmental regulations may cause certain cell site locations to
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become subject to regulation under the National Environmental Policy Act. The
FCC is required to implement this statute by requiring carriers to meet certain
land use and radio frequency standards.
Review of Universal Service Requirements
The FCC and the states are required to establish a universal service program
to ensure that affordable, quality telecommunications services are available to
all Americans. Sprint PCS is required to contribute to the federal universal
service program as well as existing state programs. The FCC has determined that
Sprint PCS' contribution to the federal universal service program is a variable
percentage of interstate end-user telecommunications revenues. Although many
states are likely to adopt a similar assessment methodology for intrastate
revenues, the states are free to calculate telecommunications service provider
contributions in any manner they choose as long as the process is not
inconsistent with the FCC's rules. At the present time it is not possible to
predict the extent of the Sprint PCS total federal and state universal service
assessments or its ability to recover from the universal service fund.
Partitioning; Disaggregation
The FCC has modified its rules to allow broadband PCS licensees to partition
their market areas and/or to disaggregate their assigned spectrum and to
transfer partial market areas or spectrum assignments to eligible third
parties.
Wireless Facilities Siting
States and localities are not permitted to regulate the placement of
wireless facilities so as to prohibit the provision of wireless services or to
discriminate among providers of such services. In addition, as long as a
wireless system complies with the FCC's rules, states and localities are
prohibited from using radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. The FCC is
considering numerous requests for preemption of local actions affecting
wireless facilities siting.
Equal Access
Wireless providers are not required to provide equal access to common
carriers for toll services. However, the FCC is authorized to require unblocked
access to toll carriers subject to certain conditions.
State Regulation of Wireless Service
Section 332 of the Communications Act preempts states from regulating the
rates and entry of CMRS providers. However, states may petition the FCC to
regulate such providers and the FCC may grant such petition if the state
demonstrates that (1) market conditions fail to protect subscribers from unjust
and unreasonable rates or rates that are unjustly or unreasonably
discriminatory, or (2) when CMRS is a replacement for landline telephone
service within the state. To date, the FCC has granted no such petition. To the
extent we provide fixed wireless service, we may be subject to additional state
regulation.
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DESCRIPTION OF CAPITAL STOCK
General
The following summarizes all of the material terms and provisions of our
capital stock. Prior to the closing of the offering, we will have 375,000,000
shares of authorized capital stock, including 300,000,000 shares of common
stock, par value $0.01 per share, and 75,000,000 shares of preferred stock, par
value $0.01 per share. As of July 15, 2000, there were 44,869,643 shares of
common stock and 9,090,909 shares of convertible preferred stock issued and
outstanding. As of that date there were seven holders of record of the
outstanding shares of common stock and 10 holders of record of the convertible
preferred stock.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have any
cumulative rights. Subject to the rights of the holders of any series of
preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available therefor. Holders of shares of common stock have no preemptive or
other similar rights. If we liquidate, dissolve or wind up, the holders of
shares of common stock are entitled to share ratably in the assets which are
legally available for distribution, if any, remaining after the payment or
provision for the payment of all debts and other liabilities and the payment
and setting aside for payment of any preferential amount due to the holders of
shares of any series of preferred stock.
Preferred Stock
Under our certificate of incorporation, the board of directors is
authorized, subject to certain limitations prescribed by law and without
further stockholder approval, to issue up to an aggregate of 75,000,000 shares
of preferred stock. The preferred stock may be issued in one or more series.
Each series may have different rights, preferences and designations and
qualifications, limitations and restrictions that may be established by our
board of directors without approval from the stockholders. These rights,
designations and preferences include:
. number of shares to be issued;
. dividend rights;
. dividend rates;
. conversion rights;
. voting rights;
. liquidation preferences; and
. terms of redemption.
If our board of directors decides to issue any preferred stock, it could
have the effect of delaying or preventing another party from taking control of
us. This is because the terms of the preferred stock
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could be designed to make it prohibitively expensive for any unwanted third-
party to make a bid for our shares. We have no present plans to issue any
shares of preferred stock.
Series A-1 Preferred Stock
Upon the closing of this offering at an initial public offering price of
$11.00 per share or greater, the Series A-1 Preferred Stock will automatically
convert into shares of common stock. With respect to dividends and
distributions upon our liquidation, winding-up and dissolution, the Series A-1
Preferred Stock ranks senior to our common stock and on parity with the Series
A-2 Preferred Stock, if issued. In addition, upon our liquidation, holders of
Series A-1 Preferred Stock will be entitled to receive a liquidation preference
of approximately $50.0 million, plus dividends of 7.5% per year.
The Series A-1 Preferred Stock has a term of eleven years, and we will be
obligated to redeem all outstanding shares of Series A-1 Preferred Stock on
July 12, 2011 for an aggregate amount equal to its accrued liquidation
preference. At any time and from time to time prior to the redemption date,
holders of the Series A-1 Preferred Stock may, at their option, convert all or
any such shares into shares of our common stock. The conversion price is
subject to adjustment upon the occurrence of certain events, including the
following: certain issuances of additional shares of common stock, or
securities convertible into shares of common stock, at a price below $5.50 per
share; a stock split or combination; and certain dividends and distributions.
Each share of Series A-1 Preferred Stock shall automatically convert into
shares of our common stock upon the earlier to occur of the following: (a) the
closing of an underwritten public offering of our common stock in which we
receive aggregate gross proceeds of at least $50.0 million and in which the per
share price at which such shares are sold in the offering is at least $11.00
per share (subject to adjustment); (b) upon our consummation of a transaction
with a public company that results in a change of control; and (c) upon our
consummation of a transaction with a private company that results in a change
of control (and with respect to which the investor group has not waived its
right to receive the special dividend payable by us upon such change of
control).
Dividends
Dividends shall be payable semiannually on each share of Series A-1
Preferred Stock at a rate of 7.5% per year and, when paid, shall be paid only
in additional shares of Series A-1 Preferred Stock. Such dividends will accrue
daily whether or not we have earnings or profit, whether or not there are funds
legally available for payment of such dividends and whether or not dividends
are declared. Dividends shall accumulate and compound semi-annually. In
addition to the 7.5% dividend, when and if our Board of Directors declares a
dividend payable with respect to the then outstanding shares of our 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 share of Series A-1 Preferred Stock could then
be converted. Upon the occurrence of a change of control prior to July 12,
2005, we will be obligated to pay, in addition to regular dividends, 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.
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With respect to our Preferred Stock, a "change of control" occurs upon the
happening of any of the following events:
. any person who is not currently a holder of our stock is or becomes a
beneficial owner of more than 50% of the aggregate voting power of our
securities or of our stockholders, Geneseo Communications, Inc. and
Cambridge Telcom, Inc.;
. Geneseo, Cambridge and their affiliates collectively do not beneficially
own more shares of our voting securities than any other person (other
than the investor group and its affiliates), which person beneficially
owns more than 35% of our voting securities;
. any transaction occurs that results in our stockholders or the
stockholders of Geneseo or Cambridge immediately prior to such
transaction being the holders of less than 50% of the aggregate voting
power of the securities of the resulting company after such transaction;
. a majority of the members of our Board of Directors consists of
individuals who are neither members of the Board on the closing date or
appointed by the investor group, full time employees or directors of one
of our stockholders at such time or an individual who was requested to be
placed on the Board by a stockholder;
. a merger, consolidation, sale of assets or other similar business
combination transaction is consummated and, as a direct result, Mr. Yager
ceases to be our Chief Executive Officer or that of our successor; or
. any liquidation, dissolution or winding up of us, or a dividend or
distribution to our stockholders of more than 50% of our assets.
Voting
Holders of our Series A-1 Preferred Stock shall be entitled to vote on all
matters submitted to a vote of our stockholders as if the holders of Series A-1
Preferred Stock had converted their shares immediately prior to the vote. In
addition, the vote of at least a majority of the then outstanding shares of
Series A-1 Preferred Stock, voting together as a single class, shall be
necessary for effecting or validating the following actions:
. any amendment, alteration or change to the rights, preferences,
privileges or powers of the Series A-1 Preferred Stock in any manner that
adversely affects the shares of such series;
. any increase or decrease in the total number of authorized or issued
shares of Series A-1 Preferred Stock, other than the dividend issuances
of such shares;
. any authorization, creation or issuance of any senior or parity
securities other than the issuance of Series A-2 Preferred Stock;
. any redemption, acquisition or other purchase of any shares of our, or
any of our subsidiary's, capital stock or other equity security, subject
to some exceptions;
. any change of our certificate of incorporation or bylaws that would
adversely affect the holders of the Series A-1 Preferred Stock; or
. any voluntary liquidation, dissolution or winding up of us.
Series A-2 Preferred Stock
The Series A-2 Preferred Stock shall have substantially the same rights,
preferences, powers, restrictions and limitations as the Series A-1 Preferred
Stock.
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Warrants
Sprint Warrants
As additional consideration to Sprint Spectrum L.P. for its agreement to
expand our initial territory by the additional 20 markets, we have issued to
Sprint Spectrum L.P., or any of its designees controlled by, or under common
control with, Sprint Spectrum L.P. warrants for 1,151,938 shares. The warrants
are exercisable by Sprint Spectrum L.P. at an exercise price of $4.95 per share
beginning on or after July 15, 2001 and expiring on July 15, 2007. Sprint
Spectrum L.P. may transfer its rights with respect to the warrants only to a
company that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with Sprint Spectrum
L.P., and any warrants so transferred will be subject to the exercise time
periods. At such time as we become eligible to file a registration statement on
Form S-3, Sprint Spectrum L.P. will be entitled to demand registration rights
for the underlying common stock until the common stock may be sold without
registration.
Unit Warrants
As part of our units offering, we issued and sold warrants to purchase an
aggregate of 2,982,699 shares of our common stock pursuant to a warrant
agreement between us and ChaseMellon Shareholder Services, L.L.C., as the
warrant agent. We have filed a copy of the warrant agreement as an exhibit to
the registration statement, which includes this prospectus.
The holders of the unit warrants are entitled, in the aggregate, to purchase
2,982,699 shares of our common stock, representing approximately 5% of the
issued and outstanding shares of our common stock on a fully diluted basis,
assuming exercise of the Sprint warrants and all options outstanding or that
have or may be issued under our 2000 Long Term Incentive Stock Plan. The unit
warrants become exercisable at any time after July 15, 2001 for a period of ten
years from the date of issuance. The unit warrants currently trade in the
Private Offerings and Resales trading through Automated Linkages (PORTAL)
market as part of the units with our senior discount notes and will not trade
separately until the separation date which shall be the earliest to occur of:
(1) January 8, 2001;
(2) the commencement of the exchange offer with respect to the senior
discount notes;
(3) the date a shelf registration with respect to the senior discount notes
is declared effective;
(4) upon an offer to purchase on a change of control or permitted optional
redemption of the senior discount notes;
(5) an event of default with respect to the senior discount notes; and
(6) a date determined by Donaldson, Lufkin & Jenrette Securities
Corporation in its sole discretion.
Each of the warrants, when exercised, will entitle the holder to receive
9.94233 fully paid and non-assessable shares of our common stock, at an
exercise price of $5.50 per share, subject to adjustment from time to time in
several circumstances including the following:
(1) the payment by us of dividends and other distributions on our common
stock;
(2) subdivision, combinations and reclassifications of our common stock;
(3) the issuance to all holders of common stock of such rights, options or
warrants entitling them to subscribe for our common stock or securities
convertible into, or exchangeable or
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exercisable for, our common stock at a price which is less than the fair
market value per share of our common stock;
(4) certain distributions to all holders of our common stock of any of our
assets or debt securities or any rights or warrants to purchase any
such securities, excluding those rights and warrants referred to in
clause (3) above;
(5) the issuance of shares of our common stock for consideration per share
less than the then fair market value per share of our common stock at
the time of issuance of such convertible or exchangeable security,
excluding securities issued in transactions referred to in clauses (1)
through (4) above, or (6) below; and
(6) the issuance of securities convertible into or exchangeable for our
common stock for a conversion or exchange price plus consideration
received upon issuance less than the then fair market value per share
of our common stock at the time of issuance of such convertible or
exchangeable security, excluding securities issued in transactions
referred to in (1) through (4) above.
The events described above are subject to certain exceptions described in
the warrant agreement including:
. issuances of options, convertible securities or common stock to
employees, directors or consultants of us or any of our subsidiaries
pursuant to a plan approved by our board of directors;
. rights to purchase common stock pursuant to a plan for reinvestment of
dividends or interest; and
. issuances of common stock, options or convertible securities in
connection with mergers and acquisitions with non-affiliated third
parties.
We are required, under the terms of a warrant registration rights agreement
to:
. file a shelf registration statement on or before October 10, 2000
covering the resale of the unit warrants, the issuance of the common
stock issuable upon exercise of the unit warrants and the resale of the
common stock issuable upon exercise of the unit warrants;
. use our reasonable best efforts to cause the shelf registration statement
to be declared effective under the Securities Act on or before January 8,
2000; and
. keep the shelf registration statement continuously effective until the
date on which all of the unit warrants or shares of common stock issuable
thereunder have been sold pursuant to the shelf registration statement or
the unit warrants have expired.
If we fail to file the registration statement, or fail to cause the
registration statement to become effective, or fail to maintain its
effectiveness as specified above, a registration default shall be deemed to
have occurred and we will be required to pay liquidated damages to each holder
of a unit warrant. The liquidated damages payable to each holder of a warrant
will be in an amount equal to $0.03 per week per unit warrant held by such
holder for each week or portion thereof that the registration default
continues for the first 90-day period immediately following the occurrence of
such registration default. This amount will increase by an additional $0.02
per week per warrant with
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respect to each subsequent 90-day period, up to a maximum amount equal to $0.07
per week per unit warrant. The provision for liquidated damages will continue
until such registration default has been cured. We will not be required to pay
liquidated damages for more than one registration default at any given time.
Delaware Law and Certain Charter and By-Law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a certain period of time.
That period is three years after the date of the transaction in which the
person became an interested stockholder, unless the interested stockholder
attained that status with the approval of the board of directors or unless the
business combination is approved in a prescribed manner. A "business
combination" includes certain mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
his or her affiliates and associates, owns, or owned within three years prior,
15% or more of the corporation's voting stock.
Our certificate of incorporation and by-laws provide for the division of the
board of directors into three classes, as nearly equal in size as possible,
with each class beginning its three year term in a different year. See
"Management--Board of Directors." A director may be removed only for cause by
the affirmative vote of the holders of at least 80% of the voting power of all
of the then-outstanding shares of capital stock entitled to vote generally for
the election of directors voting together as a single class.
Our certificate of incorporation will also require a stockholder who intends
to nominate a candidate for election or to raise new business at a stockholder
meeting to give at least 90 days' advance notice to the Secretary. The notice
provision will require a stockholder who desires to raise new business to
provide us certain information concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director will need
to provide us with certain information concerning the nominee and the proposing
stockholder.
Our certificate of incorporation empowers our board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include:
. comparison of the proposed consideration to be received by stockholders
in relation to the then current market price of our capital stock, our
estimated current value in a freely negotiated transaction and our
estimated future value as an independent entity; and
. the impact of a transaction on our employees, suppliers and customers and
its effect on the communities in which we operate.
The provisions described above could make it more difficult for a third-
party to acquire control of us and, furthermore, could discourage a third-party
from making any attempt to acquire control of us.
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Our certificate of incorporation provides that after the closing of the
initial public offering, any action required or permitted to be taken by our
stockholders may be taken only at a duly called annual or special meeting of
the stockholders, and that special meetings may be called only by the chairman
of the board, president and chief executive officer or by the board pursuant to
a resolution adopted by a majority of the board of directors, or as otherwise
provided in the by-laws. These provisions could have the effect of delaying
until the next annual stockholders meeting stockholder actions that are favored
by the holders of a majority of the outstanding voting securities. These
provisions may also discourage another person or entity from making an offer to
stockholders for the common stock. This is because the person or entity making
the offer, even if it acquired a majority of our outstanding voting securities,
would be unable to call a special meeting of the stockholders and would further
be unable to obtain unanimous written consent of the stockholders. As a result,
any meeting as to matters they endorse, including the election of new directors
or the approval of a merger, would have to wait for the next duly called
stockholders meeting.
The DGCL provides that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or by-laws, unless the corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage.
Our certificate of incorporation requires the affirmative vote of the holders
of at least 80% of the outstanding voting stock to amend or repeal any of the
provisions of the certificate of incorporation described above. The 80% vote is
also required to amend or repeal any of our by-law provisions described above.
The by-laws may also be amended or repealed by the board of directors. The 80%
stockholder vote would be in addition to any separate vote that each class of
preferred stock is entitled to that might in the future be required in
accordance with the terms of any preferred stock that might be outstanding at
the time any amendments are submitted to stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
Listing
Application will be made to have our common stock quoted on the Nasdaq
National Market under the symbol "IPCS."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect market prices of the common stock prevailing from time to
time. Furthermore, because only a limited number of shares will be available
for sale shortly after the consummation of our offering due to certain
contractual and legal restrictions on resale, as described below, sales of
substantial amounts of common stock in the public market after the restrictions
lapse could adversely affect the prevailing market price of the common stock
and our ability to raise equity capital in the future.
Upon completion of our offering, we will have outstanding an aggregate of
62,293,885 shares of common stock, assuming no exercise of the underwriters'
over-allotment option.
Sales of Restricted Shares; Options
All of the shares of common stock sold in the offering will be freely
tradeable under the Securities Act, unless purchased by our "affiliates," as
the Securities Act defines that term. In general, under Rule 144 as currently
in effect, a person or persons whose shares are aggregated, including an
affiliate, who has beneficially owned restricted stock for at least one year is
entitled to sell, within any three-month period, a number of such shares that
does not exceed the greater of:
. one percent of the then outstanding shares of common stock, or
. the average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of such sale is filed.
In addition, under Rule 144(k), a person who is not an affiliate and has not
been an affiliate for at least three months prior to the sale and who has
beneficially owned shares of restricted stock for at least two years may resell
such shares without compliance with the foregoing requirements. In meeting the
one and two year holding periods described above, a holder of restricted stock
can include the holding periods of a prior owner who was not an affiliate.
Additional shares of common stock are available for future grants under our
stock option plan. See "Management--2000 Long Term Incentive Stock Plan." We
intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issuable pursuant to our stock option plans that
do not qualify for an exemption under Rule 701 from the registration
requirements of the Securities Act. We expect to file these registration
statements as soon as practicable following the closing of our offering, and
such registration statements are expected to become effective upon filing.
Shares covered by these registration statements will thereupon be eligible for
sale in the public markets subject to the lock-up agreements, to the extent
applicable.
Lock-up Agreements
We and all of our current stockholders, members of our senior management and
our directors have agreed, pursuant to lock-up agreements, during the period
beginning from the date of this prospectus and continuing and including the
date 180 days after the date of this prospectus, not to directly or indirectly
offer, pledge, sell, contract to sell, grant any option, right or warrant to
104
<PAGE>
purchase, or otherwise dispose of any shares of common stock, including but not
limited to any common stock or securities convertible into or exercisable or
exchangeable for common stock which may be deemed to be beneficially owned in
accordance with the rules and regulations of the Securities and Exchange
Commission or enter into any swap or other agreement that transfers, in whole
or in part, the economic consequence of ownership of common stock, or make any
demand for, or exercise any right with respect to, the registration of common
stock or any securities convertible into or exercisable or exchangeable for
common stock, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation.
Following the 180 day lock-up period, 53,960,552 shares of common stock will
become eligible for sale, subject to compliance with Rule 144 of the Securities
Act as described above, and subject to certain restrictions contained in the
Stockholders Agreement. See "Certain Relationships and Related Transactions--
Stockholders Agreement."
105
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF OUR COMMON STOCK
The following is a general discussion of certain U.S. Federal tax
consequences of the ownership and disposition of a share of common stock by a
beneficial owner that is a non-U.S. holder. A non-U.S. holder is a person that
is not a citizen or resident of the United States, a corporation or partnership
created or organized in the United States or under the law of the United States
or of any State or political subdivision of the foregoing, any estate whose
income is includible in gross income for U.S. Federal income tax purposes
regardless of its source, or a United States trust. A United States trust is
any trust if:
. a court within the United States is able to exercise primary
supervision over the administration of the trust; and
. one or more U.S. persons have the authority to control all substantial
decisions of the trust.
The following summary does not furnish information in the level of detail or
with the attention to an investor's particular tax circumstances that would be
provided by an investor's own tax adviser. For example, this discussion does
not address state, local or non-U.S. tax considerations. Furthermore, the
following discussion is based on provisions of the U.S. Internal Revenue Code
of 1986, as amended, Treasury Regulations promulgated under the Internal
Revenue Code and administrative and judicial interpretations as of the date of
this prospectus, all of which are subject to change, possibly with retroactive
effect. Each prospective investor is urged to consult its own tax adviser with
respect to the U.S. Federal, state and local consequences of owning and
disposing of a share of common stock, as well as any tax consequences arising
under the laws of any other taxing jurisdiction.
U.S. Income and Estate Tax Consequences
Although it is not currently contemplated that we will pay dividends on
common stock, we may pay dividends in the future. Dividends paid to a non-U.S.
holder are subject to U.S. withholding tax at a 30% rate unless such non-U.S.
holder provides us or our paying agent, as the case may be, with a properly
executed:
. Internal Revenue Service Form W-8BEN, claiming an exemption from
withholding tax or a reduction in withholding tax under the benefit of a
tax treaty; or
. Internal Revenue Service Form W-8ECI, stating that the dividends paid by
us are not subject to withholding tax because they are effectively
connected with the conduct of a trade or business in the United States,
or if certain tax treaties apply, are attributable to a U.S. permanent
establishment of the non-U.S. holder.
In the case of a foreign partnership, the certification requirement would
generally be applied to the partners of the partnership unless the requirement
is applied to the foreign partnership itself under the applicable tax reporting
rules. A non-U.S. holder that is eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amount withheld by filing an appropriate claim for refund with the
Internal Revenue Service.
If you are a non-U.S. holder engaged in a trade or business in the United
States and dividends paid on the common stock are effectively connected with
the conduct of such trade or business or if
106
<PAGE>
you are a non-U.S. holder that maintains a U.S. permanent establishment to
which such dividends are attributable, although you will be exempt from the
withholding tax discussed above, you will be subject to United States Federal
income tax on your dividend income on a net income basis in the same manner as
if you were a United States person. In addition, if you are a foreign
corporation, you may be subject to a branch profits tax equal to 30%, or if
applicable, lower treaty rate, of your effectively connected earnings and
profits for the taxable year, subject to certain adjustments.
Under current law, a non-U.S. holder generally will not be subject to U.S.
Federal income tax on any capital gain realized on a sale or other disposition
of a share of common stock, unless:
. we are or have been during the five-year period ending on the date of
sale or other disposition a United States real property holding
corporation for U.S. Federal income tax purposes, which we do not believe
that we have been or are currently, and do not anticipate becoming;
. the gain is effectively connected with the conduct of a trade or business
within the United States of the non-U.S. holder and, if certain tax
treaties apply, is attributable to a United States permanent
establishment maintained by the non-U.S. holder;
. the non-U.S. holder is an individual who has been present in the United
States for 183 days or more in the taxable year; or
. the non-U.S. holder is subject to tax pursuant to the Internal Revenue
Code provisions applicable to certain U.S. expatriates.
Common stock owned or treated as owned by an individual who is a citizen or
resident, as specially defined for United States Federal estate tax purposes
and which definition is different than the definition of resident for United
States Federal income tax purposes, of the United States at the date of death,
or common stock subject to certain lifetime transfers made by that individual,
will be included in such individual's estate for United States Federal estate
tax, unless an applicable estate tax treaty provides otherwise.
Backup Withholding and Information Reporting
Dividends
Except as provided below, we must report annually to the Internal Revenue
Service and to each non-U.S. holder the amount of dividends paid to and the tax
withheld with respect to each holder. These information reporting requirements
apply regardless of whether withholding was reduced or eliminated by an
applicable tax treaty. Copies of these information returns may also be
available under the provisions of a specific treaty or agreement with the tax
authorities in the country in which the non-U.S. holder resides. In general,
backup withholding at a rate of 31% and additional information reporting will
apply to dividends paid on shares of common stock to holders that are not
exempt recipients and that fail to provide in the manner required certain
identifying information, such as the holder's name, address and taxpayer
identification number. Generally, individuals are not exempt recipients,
whereas corporations and certain other entities generally are exempt
recipients. However, dividends that are subject to U.S. withholding tax at the
30% statutory rate or at a reduced tax treaty rate are exempt from backup
withholding of U.S. Federal income tax and such additional information
reporting.
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<PAGE>
Broker Sales
If a non-U.S. holder sells shares of common stock through a U.S. office of a
U.S. or foreign broker, the broker is required to file an information return
and is required to withhold 31% of the sale proceeds unless the non-U.S. holder
is an exempt recipient or has provided the broker with the information and
statements, under penalties of perjury, necessary to establish an exemption
from backup withholding. If payment of the proceeds of the sale of a share by a
non-U.S. holder is made to or through the foreign office of a broker, that
broker will not be required to backup withhold or, except as provided in the
next sentence, to file information returns. In the case of proceeds from a sale
of a share by a non-U.S. holder paid to or through the foreign office of a U.S.
broker or a foreign office of a foreign broker that is:
. a controlled foreign corporation for U.S. tax purposes; or
. a person 50% or more of whose gross income for the three-year period
ending with the close of the taxable year preceding the year of payment,
or for the part of that period that the broker has been in existence, is
effectively connected with the conduct of a trade or business within the
United States, referred to as a foreign U.S. connected broker,
information reporting is required unless the broker has documentary evidence in
its files that the payee is not a U.S. person and certain other conditions are
met, or the payee otherwise establishes an exemption.
Under the recently finalized withholding tax regulations, certification on
Internal Revenue Service Form W-8 or other certification in the case of common
stock held in an offshore account will be required if:
. the sale occurs within the United States; or
. if the sale is made through a foreign U.S. connected broker.
Refunds
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder may be refunded or credited against the non-U.S. holder's U.S.
Federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
108
<PAGE>
UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement covering the common stock to be offered in this offering. Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., The
Robinson-Humphrey Company, LLC and DLJdirect Inc. are acting as representatives
of the underwriters. Each underwriter has severally agreed to purchase the
number of shares of common stock set forth opposite its name in the following
table.
<TABLE>
<CAPTION>
Underwriters Number of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............
Bear, Stearns & Co. Inc. ......................................
The Robinson-Humphrey Company, LLC.............................
DLJdirect Inc..................................................
---------
Total........................................................ 8,333,333
=========
</TABLE>
The underwriting agreement provides that if the several underwriters take
any of the shares set forth in the table above, then they must take all of
these shares. No underwriter is obligated to take any shares allocated to a
defaulting underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the
prior sale of such shares, and when, as and if such shares are delivered to and
accepted by them. The underwriters will initially offer to sell shares to the
public at the initial public offering price set forth on the cover page of this
prospectus. The underwriters may also sell shares to securities dealers at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell shares to certain other brokers or dealers
at a further discount of up to $ per share. After the initial public
offering, the underwriters may change the public offering price and other
selling terms. The underwriters do not intend to confirm sales to any accounts
over which they exercise discretionary authority.
An electronic prospectus will be available on the web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Other than the prospectus in electronic format, the information on
this web site relating to the offering is not part of this prospectus and has
not been approved or endorsed by iPCS or the underwriters, and should not be
relied on by prospective investors.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have the option to buy up to an additional
1,250,000 shares of common stock from us to cover such sales. They may exercise
this option during the 30-day period from the date of this prospectus. If any
shares are purchased with this option, the underwriters will purchase shares in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions that we will pay to the underwriters. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by iPCS
-------------------------
No exercise Full exercise
<S> <C> <C>
Per share............................................. $ $
-------- --------
Total............................................... $ $
======== ========
</TABLE>
109
<PAGE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be $1.5 million.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments that the underwriters may be required to make in respect of any of
those liabilities.
At our request, the underwriters have reserved shares of common stock for
sale at the initial public offering price to directors, officers, employees,
business associates and related persons of iPCS who have expressed an interest
in participating in the offering. We expect these persons to purchase no more
than 5% of the common stock offered in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. The underwriters will offer unpurchased
reserved shares to the general public on the same basis as the other offered
shares.
We and all of our current stockholders, members of senior management and
directors have agreed that, for a period of 180 days from the date of this
prospectus, we will not, without the prior written consent of Donaldson, Lufkin
& Jenrette Securities Corporation, do either of the following:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
In addition, during such period, except for the registration of shares
underlying options in our stock option plan, we have also agreed not to file
any registration statement with respect to, and each of our executive officers
and directors and of our stockholders have agreed not to make any demand for,
or exercise any right with respect to, the registration of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation.
Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise.
Application has been made to list our common stock for quotation on the
Nasdaq National Market under the symbol "IPCS." In order to meet the
requirements for listing the common stock on the Nasdaq National Market, the
underwriters have undertaken to sell lots of 100 to a minimum of 400 beneficial
owners.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction,
110
<PAGE>
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. This prospectus is not an offer to
sell or a solicitation of an offer to buy any shares of common stock included
in this offering in any jurisdiction where that would not be permitted or
legal.
We expect that delivery of the shares will be made to investors on or about
, 2000.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may create a syndicate short
position by making short sales of our common stock and may purchase shares of
our common stock on the open market to cover syndicate short positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Short
sales can be either "covered" or "naked." "Covered" short sales are sales made
in an amount not greater than the underwriters' over-allotment option to
purchase additional shares in the offering. "Naked" short sales are sales in
excess of the over-allotment option. A naked short position is more likely to
be created if the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market after pricing that
could adversely affect investors who purchase in the offering. The underwriters
may close out any covered short position by either exercising their over-
allotment option or purchasing shares in the open market. The underwriters must
close out any naked short position by purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. The underwriting syndicate
may reclaim selling concessions if the syndicate repurchases previously
distributed shares in syndicate covering transactions, in stabilization
transactions or in some other way or if Donaldson, Lufkin & Jenrette Securities
Corporation receives a report that indicates clients of such syndicate members
have "flipped" the shares. These activities may have the effect of raising or
maintaining the market price of our common stock or preventing or retarding a
decline in the market price of our common stock. As a result, the price of our
common stock may be higher than the price that might otherwise exist in the
open market. The underwriters are not required to engage in these activities
and may end any of these activities at any time. The underwriters may carry out
those transactions on the Nasdaq National Market, in the over-the-counter
market or otherwise.
In July 2000, Donaldson, Lufkin & Jenrette Securities Corporation acted as
an initial purchaser in connection with our sale of units consisting of senior
discount notes and warrants to purchase our common stock and received customary
fees in connection therewith. In addition, Donaldson, Lufkin & Jenrette
Securities Corporation acted as placement agent with respect to our sale of
convertible preferred stock and received customary fees and expenses in
connection therewith. Donaldson, Lufkin & Jenrette Securities Corporation has
in the past provided, and some of the underwriters and their respective
affiliates may in the future from time to time provide, investment banking and
general financing and banking services to us for which they have in the past
received, and may in the future receive, customary fees.
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
will be determined by negotiation among us and
111
<PAGE>
the representatives of the underwriters. Among the factors to be considered in
determining the public offering price are:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalization and stages of development of other companies
which the representatives of the underwriters believe to be comparable to
us; and
. estimates of our business potential.
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of common
stock offered hereby will be passed upon for us by Mayer, Brown & Platt,
Chicago, Illinois and for the underwriters by Skadden, Arps, Slate, Meagher &
Flom (Illinois), Chicago, Illinois.
EXPERTS
The financial statements of Illinois PCS, LLC as of December 31, 1999, and
for the period from January 22, 1999 (date of inception) through December 31,
1999, included in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to this offering. This prospectus does not
contain all of the information set forth in the registration statement. For
further information about us and our securities, see the registration statement
and its exhibits. This prospectus contains a description of the material terms
and features of all material contracts, reports or exhibits to the registration
statement required to be disclosed. However, as the descriptions are summaries
of the contracts, reports or exhibits, we urge you to refer to the copy of each
material contract, report and exhibit attached to the registration statement.
Copies of the registration statement, including exhibits, may be examined
without charge in the Public Reference Section of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Room 1024, Washington, DC 20549, and the
Securities and Exchange Commission's Regional Offices located at 500 West
Madison Street, Suite 1400, Chicago, IL 60601, and 7 World Trade Center, 13th
Floor, New York, NY 10048 or on the Internet at http://www.sec.gov. You can get
information about the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0300. Copies of all or a
portion of the registration statement can be obtained from the Public Reference
Section of the Securities and Exchange Commission upon payment of prescribed
fees.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will be
required to file periodic reports, proxy statements and other information with
the Securities and Exchange Commission.
112
<PAGE>
ILLINOIS PCS, LLC
Index To Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheet as of December 31, 1999..................................... F-3
Statement of Operations for the Period from January 22, 1999 (date of
inception)
through December 31, 1999................................................ F-4
Statement of Members' Equity for the Period from January 22, 1999 (date of
inception) through December 31, 1999..................................... F-5
Statement of Cash Flows for the Period from January 22, 1999 (date of
inception)
through December 31, 1999................................................ F-6
Notes to Financial Statements............................................. F-7
Unaudited Balance Sheet as of March 31, 2000.............................. F-20
Unaudited Statements of Operations for the Three-Month Period Ended March
31, 2000 and for the Period from January 22, 1999 (date of inception)
through March 31, 1999................................................... F-21
Unaudited Statements of Cash Flows for the Three-Month Period Ended March
31, 2000 and for the Period from January 22, 1999 (date of inception)
through March 31, 1999................................................... F-22
Notes to Unaudited Financial Statements................................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Illinois PCS, LLC
Geneseo, Illinois
We have audited the accompanying balance sheet of Illinois PCS, LLC (the
"Company") as of December 31, 1999 and the related statements of operations,
members' equity, and cash flows for the period from January 22, 1999 (date of
inception) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1999, and
the results of its operations and its cash flows for the period then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche llp
Davenport, Iowa
February 4, 2000, except for Notes 10 and 11, as to which the date is July 12,
2000
F-2
<PAGE>
ILLINOIS PCS, LLC
BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
As of
December 31,
1999
Assets
<S> <C>
Current Assets:
Cash and cash equivalents......................................... $ 2,733
Accounts receivable, less allowance of $1......................... 92
Other receivables................................................. 39
Inventories....................................................... 927
Prepaid expenses and other assets................................. 432
-------
Total current assets............................................. 4,223
Property and equipment including construction in progress, net..... 39,106
Financing costs, less accumulated amortization of $66.............. 1,514
-------
$44,843
=======
<CAPTION>
Liabilities and Members' Equity
<S> <C>
Current Liabilities:
Accounts payable.................................................. $ 3,839
Accrued expenses.................................................. 393
Accrued interest.................................................. 265
Advance on tower sales............................................ 2,000
-------
Total current liabilities........................................ 6,497
Deferred gain on tower sales....................................... 1,655
Long-term debt..................................................... 27,571
-------
Total liabilities................................................ 35,723
-------
Commitments and Contingencies
Members' equity.................................................... 9,120
-------
$44,843
=======
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ILLINOIS PCS, LLC
STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Period from
January 22, 1999
(date of inception)
through
December 31, 1999
<S> <C>
Revenues:
Service................................................... $ 71
Equipment................................................. 144
----------
Total revenues........................................... 215
----------
Operating Expenses:
Cost of service........................................... 1,695
Cost of equipment......................................... 484
Selling................................................... 778
General and administrative................................ 1,520
Depreciation and amortization............................. 381
----------
Total operating expenses................................. 4,858
----------
Loss from operations....................................... (4,643)
Other Income:
Interest income........................................... 89
Gain on tower sales....................................... 174
----------
Net loss................................................... $ (4,380)
==========
Pro forma basic and diluted loss per share of common stock
(unaudited)............................................... $ (0.10)
==========
Pro forma weighted average common shares outstanding
(unaudited)............................................... 44,869,643
==========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
ILLINOIS PCS, LLC
STATEMENT OF MEMBERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Balance
January 22, 1999 Transfer Balance
(date of Members' Net of December 31,
inception) Contributions Loss Interest 1999
<S> <C> <C> <C> <C> <C>
Geneseo Communications, Inc.. $-- $ 4,725 $(1,533) $ -- $3,192
Cambridge Telcom, Inc........ -- 4,050 (1,314) -- 2,736
Cass Communications, Inc..... -- 1,350 (438) -- 912
Schwartz Ventures, Inc....... -- 1,350 (438) (912) --
Technology Group, LLC........ -- -- -- 912 912
Montrose Mutual PCS, Inc..... -- 1,350 (438) -- 912
Gridley Enterprises, Inc..... -- 675 (219) -- 456
--- ------- ------- ----- ------
$-- $13,500 $(4,380) $ -- $9,120
=== ======= ======= ===== ======
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ILLINOIS PCS, LLC
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Period from
January 22, 1999
(date of inception)
through
December 31, 1999
<S> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $ (4,380)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization............................ 381
Amortization of deferred gain on tower sales............. (22)
Gain on tower sales...................................... (174)
Changes in assets and liabilities:
Accounts receivable..................................... (92)
Other receivables....................................... (39)
Inventories............................................. (927)
Prepaid expenses and other assets....................... (432)
Accounts payable, accrued expenses and accrued interest. 1,758
--------
Net cash flows from operating activities............... (3,927)
--------
Cash Flows from Investing Activities:
Capital expenditures...................................... (39,331)
Proceeds from tower sales................................. 4,500
Advance on tower sales.................................... 2,000
--------
Net cash flows from investing activities............... (32,831)
--------
Cash Flows from Financing Activities:
Proceeds from long-term borrowings........................ 27,571
Debt issuance costs....................................... (1,580)
Capital contributions..................................... 13,500
--------
Net cash flows from financing activities............... 39,491
--------
Increase in cash and cash equivalents...................... 2,733
Cash and cash equivalents at beginning of period........... --
--------
Cash and cash equivalents at end of period................. $ 2,733
========
Supplemental Disclosure:
Cash paid for interest.................................... $ 206
========
Supplemental Schedule of Noncash Investing and Financing
Activities:
Accounts payable incurred for the acquisition of property,
equipment and construction in progress................... $ 2,739
========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS
For the Period from January 22, 1999 (date of inception) through December 31,
1999
1. ORGANIZATION AND BUSINESS OPERATIONS
Illinois PCS, LLC (the "Company" or "Illinois PCS") was formed in January
1999 as an Illinois limited liability company for the purpose of becoming a
provider of wireless personal communication services ("PCS"). In January 1999,
the Company entered into affiliation agreements (the "Sprint PCS Agreements")
with Sprint Communications Company, L.P. ("Sprint") and Sprint Spectrum L.P.
and SprintCom, Inc., entities controlled by the PCS Group of Sprint ("Sprint
PCS"). The Sprint PCS Agreements provide the Company with the exclusive right
to build, own and manage a wireless voice and data services network in 15
basic trading areas ("BTAs") located in Illinois and Iowa under the Sprint PCS
brand.
The Operating Agreement of Illinois PCS, entered into on February 10, 1999
by the Company's members, provides for the governance and administration of
the Company's business, allocation of profits and losses, tax allocations,
transactions with partners, disposition of ownership interests and other
matters. The Operating Agreement generally provides for the allocation of
profits and losses pro-rata based upon each member's percentage interest as
defined in the Operating Agreement. The members have committed to contribute a
total of $30 million, of which $13.5 million was paid as of December 31, 1999.
The members of the Company have the following ownership interests as of
December 31, 1999:
<TABLE>
<S> <C>
Geneseo Communications, Inc........................................... 35%
Cambridge Telcom, Inc................................................. 30%
Cass Communications, Inc.............................................. 10%
Technology Group, LLC................................................. 10%
Montrose Mutual PCS, Inc.............................................. 10%
Gridley Enterprises, Inc.............................................. 5%
</TABLE>
On December 29, 1999, Schwartz Ventures, Inc. transferred its ownership
interest to its related entity, Technology Group, LLC.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, increasing competition and the cost associated with the
build-out of a PCS network. The Company's continuing operations are dependent
upon Sprint PCS' ability to perform its obligations under the Sprint PCS
Agreements and the ability of the Company to raise sufficient capital to fund
operating losses, to meet debt service requirements, and to complete the
build-out of its PCS network. Additionally, the Company's ability to attract
and maintain a sufficient customer base is critical to achieving breakeven
operating cash flow. Changes in technology, increased competition, or the
inability to obtain required financing or achieve breakeven operating cash
flow, among other factors, could have an adverse effect on the Company's
financial position and results of operations.
F-7
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Risk
The Company's operations as currently conducted rely heavily on critical
functions performed by Sprint PCS. The termination of the Company's strategic
relationship with Sprint PCS or Sprint PCS' failure to perform its obligations
under the Sprint PCS Agreements (see Note 3) would severely restrict the
Company's ability to conduct its business.
The Company maintains cash and cash equivalents in accounts with a financial
institution in excess of the amount insured by the Federal Deposit Insurance
Corporation. The Company monitors the financial stability of this institution
regularly and management does not believe there is significant credit risk
associated with deposits in excess of federally insured amounts.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments, with an original maturity of three months or less at the
time of purchase, to be a cash equivalent.
Inventories
Inventories consist of handsets and related accessories. Inventories
purchased for resale will be carried at the lower of cost, determined using
weighted average cost, or market, determined using replacement cost.
Property, Equipment and Construction in Progress
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Asset lives used by the Company are as
follows:
<TABLE>
<CAPTION>
Useful life:
<S> <C>
Network assets............................................. 3 to 15 years
Computer equipment......................................... 3 to 5 years
Furniture, fixtures, office equipment and leasehold
improvements.............................................. 5 to 7 years
</TABLE>
Construction in progress includes expenditures for the purchase of capital
equipment, design services, and construction services of the Company's network.
The Company capitalizes interest on
F-8
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
its construction in progress activities. Interest capitalized for the period
ended December 31, 1999 totaled approximately $471,000. When the network assets
are placed in service, the Company transfers the assets from construction in
progress to network assets and depreciates those assets over their estimated
useful life.
Financing Costs
Deferred financing costs are amortized as interest expense over the term of
the respective financing using the effective interest method.
Income Taxes
At December 31, 1999, Illinois PCS is organized as an Illinois limited
liability company. Therefore, the results of operations of the Company are
included in the income tax returns of its members. Accordingly, no provision
for income taxes has been recorded in the accompanying financial statements.
If the Company had been a C Corporation (see Note 10) subject to federal and
state income taxes from inception through December 31, 1999, Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109") would have resulted in a deferred tax asset primarily from temporary
differences related to the treatment of start-up costs and from net operating
loss carryforwards. The deferred tax asset would have been offset by a full
valuation allowance as there is not currently sufficient positive evidence as
required by SFAS No. 109 to substantiate recognition of the asset. The Company
has not provided any pro forma income tax information because such information
would not be significant to the accompanying financial statements due to the
Company's net loss.
Revenue Recognition
The Company began offering service to customers in December 1999.
The Company recognizes revenue as services are performed. Sprint PCS
collects all revenues from the Company's customers and remits the net amount to
the Company. An affiliation fee of 8% of collected service revenues from Sprint
PCS subscribers based in Illinois PCS' territory, excluding outbound roaming,
and from non-Sprint PCS subscribers who roam onto Illinois PCS' 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 Illinois PCS' territory are not subject to the 8% affiliation
fee.
Sprint PCS pays Illinois PCS a Sprint PCS roaming fee for each minute that a
Sprint PCS subscriber based outside of Illinois PCS' territory roams onto the
Company's network. Revenues from these services are recognized as the services
are performed. Similarly, Illinois PCS pays roaming fees to Sprint PCS when a
Sprint PCS subscriber based in Illinois PCS' territory roams on the Sprint PCS
network outside of Illinois PCS' territory. These costs are included as cost of
services when incurred.
F-9
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Equipment revenues consisting of proceeds from sales of handsets and
accessories was recorded net of an allowance for sales returns. The allowance
is estimated based on Sprint PCS' handset return policy during 1999, which
allowed customers to return handsets for a full refund within 30 days of
purchase. When handsets are returned to the Company, the Company may be able to
reissue the handsets in the future to other customers at little additional
cost. However, when handsets are returned to Sprint PCS for refurbishing, the
Company receives a credit from Sprint PCS, which is less than the amount the
Company originally paid for the handset.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The
Company has identified no such impairment losses.
Advertising Costs
The Company expenses advertising costs when the advertisement occurs. Total
advertising expense was approximately $171,000 for the period ended December
31, 1999.
Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities." This statement became effective January 1, 1999 and requires that
costs of start-up activities and organization costs be expensed as incurred.
The Company has expensed all costs of start-up activities and organization
costs.
Comprehensive Income
A statement of comprehensive income has not been included in the
accompanying financial statements since the Company does not have any "Other
Comprehensive Income" to report.
Impact of Recently Issued Accounting Pronouncements
On July 8, 1999, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Deferral of the Effective
Date of SFAS 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.
F-10
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. SPRINT PCS AGREEMENTS
In January 1999, the Company signed the following four agreements with
Sprint and Sprint PCS: management agreement, services agreement, trademark and
service license agreement with Sprint PCS, and the trademark and service
license agreement with Sprint. These agreements allow the Company to
exclusively offer Sprint PCS services in the Company's territory.
The management agreement has an initial term of 20 years with three 10-year
automatic renewals. The management agreement can be terminated as a result of
a number of events including an uncured breach of the management agreement or
bankruptcy of either party to the agreement. In the event that the management
agreement is terminated or not renewed, certain formulas apply to the
valuation and disposition of the Company's assets. The key clauses of the
management agreement are summarized as follows:
(a) Exclusivity: The Company is designated as the only person or entity
that can manage or operate a PCS network for Sprint PCS in the Company's
territory. Sprint PCS is prohibited from owning, operating, building or
managing another wireless mobility communications network in the Company's
territory while the management agreement is in place.
(b) Network build-out: The Company has agreed to build out the service
area network in accordance with build-out plans developed jointly by Sprint
PCS and the Company. Sprint PCS and the Company intend to expand network
coverage to build all cells that cover population areas of at least ten
thousand pops and all interstate and major highways.
(c) Products and services offered for sale: The management agreement
identifies the products and services that can be offered for sale in the
Company's territory. The Company cannot offer wireless local loop services
specifically designed for the competitive local market in areas where
Sprint owns the local exchange carrier unless the Sprint-owned local
exchange carrier is named as the exclusive distributor or Sprint PCS
approves the terms and conditions.
(d) Service pricing: The Company must offer Sprint PCS subscriber
pricing plans designated for regional or national offerings. With prior
approval from Sprint PCS, the Company is permitted to establish local price
plans for Sprint PCS products and services offered only in the Company's
territory. Sprint PCS will pay to the Company 92% of the Company's
collected service revenues and of its roaming revenues from nonSprint PCS
subscribers but will remit 100% of revenues derived from roaming of other
Sprint PCS customers and sales of handsets and accessories and proceeds
from sales not in the ordinary course of business.
(e) Roaming: When a Sprint PCS customer from outside of the Company's
territory roams onto the Company's network, the Company will earn roaming
revenues based on established rates. Similarly, the Company will pay Sprint
PCS when the Company's own subscribers use the Sprint PCS nationwide
network outside the Company's territory.
(f) Advertising and Promotion: Sprint PCS is responsible for all
national advertising and promotion of Sprint PCS products and services. The
Company is responsible for advertising and promotion in the Company's
territory.
F-11
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Program requirements including technical and customer care
standards: The Company will comply with Sprint PCS' program requirements
for technical standards, customer service standards, national and regional
distribution and national accounts programs.
(h) Non-competition: The Company may not offer Sprint PCS products and
services outside the Company's territory.
(i) Inability to use non-Sprint PCS brands: The Company may not market,
promote, advertise, distribute, lease or sell any of the Sprint PCS
products on a non-branded, "private label" basis or under any brand,
trademark or trade name other than the Sprint PCS brand, except for sales
to resellers.
(j) Rights of first refusal: Sprint PCS has certain rights of first
refusal to buy the Company's assets upon a proposed sale.
The services agreement outlines various support services such as activation,
billing, collections and customer care that will be provided to the Company by
Sprint PCS. These services are available to the Company at established rates.
Sprint PCS can change any or all of the service rates one time in each twelve
month period. The Company may discontinue the use of any service upon three
months written notice. Sprint PCS may discontinue a service provided that
Sprint PCS provides the Company with nine months' prior written notice. The
services agreement automatically terminates upon termination of the management
agreement.
The trademark and service mark license agreements with Sprint and Sprint PCS
provide the Company with non-transferable, royalty free licenses to use the
Sprint and Sprint PCS brand names, the "diamond" symbol and several other
trademarks and service marks. The Company's use of the licensed marks is
subject to adherence to quality standards determined by Sprint and Sprint PCS.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if the Company files for bankruptcy, materially breaches the
agreement or if the management agreement is terminated.
Amounts related to the Sprint PCS Agreements which were charged to cost of
services, cost of equipment, selling, and general and administrative expenses
for the period ended December 31, 1999 are approximately $115,000, $222,000,
$81,000 and $7,000, respectively. Inventory and property and equipment
purchases from Sprint PCS for the period ended December 31, 1999 are
approximately $918,000 and $108,000, respectively. Amounts due from and due to
Sprint PCS as of December 31, 1999 are approximately $92,000 and $663,000,
respectively.
F-12
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. PROPERTY AND EQUIPMENT INCLUDING CONSTRUCTION IN PROGRESS
Property and equipment including construction in progress consists of the
following at December 31, 1999 (dollars in thousands):
<TABLE>
<S> <C>
Network assets.................................................. $22,737
Computer equipment.............................................. 675
Furniture, fixtures, office equipment and leasehold
improvements................................................... 626
-------
Total property and equipment.................................... 24,038
Less accumulated depreciation and amortization.................. (315)
-------
Property and equipment, net..................................... 23,723
Construction in progress (network build-out).................... 15,383
-------
Property and equipment including construction in progress, net.. $39,106
=======
</TABLE>
5. LEASE COMMITMENTS
The Company is obligated under noncancelable operating lease agreements for
offices, stores, network equipment space and cell sites. Future minimum annual
lease payments under these noncancelable operating lease agreements for the
next five years and in the aggregate at December 31, 1999 are as follows
(dollars in thousands):
<TABLE>
<S> <C>
Years:
2000.............................................................. $1,255
2001.............................................................. 1,242
2002.............................................................. 1,221
2003.............................................................. 1,165
2004.............................................................. 733
Thereafter........................................................ 1,673
------
Total............................................................ $7,289
======
</TABLE>
Rental expense was approximately $446,000 for the period ended December 31,
1999, of which $31,000 was paid to one of the Company's members. Included in
minimum lease commitments is approximately $527,000 payable to one of the
Company's members.
6. FINANCING AGREEMENT
Effective May 14, 1999, the Company entered into a credit facility agreement
(the "Credit Facility") with Nortel Networks Inc. ("Nortel"). The proceeds are
to be used to purchase equipment and to fund the construction of the Company's
portion of the Sprint PCS network. The financing terms permit Illinois PCS to
borrow $48 million through three commitment tranches (Tranche A--$32 million,
Tranche B--$11 million and Tranche C--$5 million) through May 14, 2002, and
will require minimum equipment purchases of $32 million (see Note 9). Tranche B
and Tranche C can be borrowed to pay third party expenses, as defined in the
Credit Facility, but Tranche B is limited to a
F-13
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
borrowing base calculation that is computed as 50% of the amount paid to Nortel
to purchase equipment and services used in the Company's network.
The Credit Facility is collateralized by all of the Company's assets and
assignment of the Sprint PCS Agreements.
Each of the Company's members has pledged its ownership interest in the
Company to Nortel to collateralize the Company's obligations under the Credit
Facility. In addition, Nortel required the members to execute capital
contribution agreements to confirm their collective obligations to make capital
contributions of at least $30 million.
The Company may borrow money at the lesser of either: (1) a base rate loan
with an interest rate equal to 3 percent plus the higher of (A) the prime rate
of Citibank, N.A. (New York) or (B) the federal fund effective rate plus one
half of a percent; or (2) a London interbank offered rate (Libor), as adjusted
for reserve requirements, plus 4 percent. All borrowings to date have been
based on the Libor rate plus 4 percent (10% at December 31, 1999). Accrued
interest is generally payable quarterly. Interest incurred and capitalized for
the period ended December 31, 1999 totaled $471,000. The Credit Facility
requires the Company to enter into an interest rate protection agreement within
90 days after the initial funding date to fix the interest rate of at least 50%
of the total debt. The Company has not entered into such an agreement as of
February 4, 2000 and has received a waiver of this requirement until April 1,
2000.
An unused facility commitment fee ranging from 0.75% to 1.5% on the daily
average unused portion of the Credit Facility is due on a quarterly basis. The
commitment fee expense for the period ended December 31, 1999 was $81,000.
Principal is payable in 20 quarterly installments beginning September 30,
2002. Illinois PCS may voluntarily prepay any of the loans at any time, but any
amount repaid on Tranche A and Tranche C may not be reborrowed since there are
no revolving credit features. The Company may borrow, repay and reborrow the
Tranche B loans up to a maximum of $11 million through the second anniversary
of the closing date. The Company must make mandatory prepayments under certain
circumstances, including an annual amount payable, beginning March 31, 2002,
equal to 50% of its excess annual cash flow (as computed under the credit
agreement). All prepayments are applied to the outstanding loan balances in the
inverse order of maturity.
As a condition of the financing, Sprint PCS has entered into a consent and
agreement with Nortel that modifies Sprint PCS' rights and remedies under its
management agreement with the Company. Among other things, Sprint PCS consented
to the pledge of substantially all of the Company's assets, including the
management agreement, to Nortel. In addition, Sprint PCS may not terminate the
management agreement with the Company and must maintain 10 MHz of PCS spectrum
in the Company's markets until the Nortel financing is satisfied or Illinois
PCS' assets are sold pursuant to the terms of the consent and assignment with
Nortel.
F-14
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company incurred approximately $1.6 million of a loan origination fee
and debt issue costs associated with obtaining the Nortel financing which have
been capitalized.
Principal payments under the Nortel Credit Facility are due as follows for
the years ending December 31 (dollars in thousands):
<TABLE>
<S> <C>
2000.............................................................. $ --
2001.............................................................. --
2002.............................................................. 1,379
2003.............................................................. 3,446
2004.............................................................. 5,514
Thereafter........................................................ 17,232
-------
$27,571
=======
</TABLE>
The Company is required to maintain certain financial ratios and other
financial conditions including debt coverage ratios, minimum levels of revenue
and wireless subscribers, and limitations on capital expenditures.
Additionally, the Company has agreed not to merge, dispose of its assets, make
restricted payments, including dividends, and certain other matters as defined
in the Credit Facility. At December 31, 1999, the Company was in compliance
with those covenants or received a waiver of noncompliance for the interest
rate protection agreement described above.
7. EMPLOYEE BENEFITS
The Company has established a 401(k) plan (the "Plan") in which
substantially all employees may participate. The Plan allows eligible employees
to contribute up to 15% of their compensation and provides that the Company
will make matching contributions of 50% up to the first eight percent of an
employee's contribution. In addition, the Company may make discretionary
contributions to the Plan. Company contributions to the Plan were approximately
$14,000 for the period ended December 31, 1999.
8. AGREEMENT WITH AMERICAN TOWER
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. For the period ended
December 31, 1999, eighteen towers were sold to American Tower for $4.5 million
in cash, resulting in a gain of $1.9 million, of which $174,000 was recognized
at the time of the sale and the remainder
F-15
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
was deferred and is being amortized as a reduction to rental expense over the
initial lease term of ten years. American Tower has advanced $2,000,000 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%.
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.
9. COMMITMENTS
On March 12, 1999, the Company entered into a management agreement (the
"Management Agreement") with Mr. Yager to act as the Manager of Illinois PCS,
LLC. 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. (see
Note 10).
On May 24, 1999 the Company entered into a three-year $32 million agreement
with Nortel for network equipment and infrastructure, including switches and
base station controllers. Nortel provides financing to the Company for these
purchases pursuant to the Credit Facility discussed in Note 6. Under the
agreement, the Company receives a discount on the network equipment and
services because of the Sprint PCS affiliation, but pays a slight premium to
the discounted price on any equipment and services financed by Nortel. If the
Company's affiliation with Sprint PCS ends, Nortel has the right to either
terminate the agreement or, with the Company's consent, modify the agreement to
establish new prices, terms and conditions.
10. SUBSEQUENT EVENTS
Effective as of February 29, 2000, Mr. Yager and the Company agreed to
terminate Mr. Yager's Management Agreement, and in exchange therefor Mr. Yager
received a 1.5% ownership interest in Illinois PCS, LLC. In addition, the
Company agreed to pay 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 upon the expected offering price of a planned initial
public offering as determined on April 24, 2000, the Company recorded non-cash
compensation expense of approximately $8,480,000 related to the ownership
interest granted and recorded general and administrative expense of
approximately $1,567,000 related to taxes to be paid by the Company on behalf
of Mr. Yager. In addition, the Company granted a bonus of $400,000 on March 7,
2000 to Mr. Yager.
F-16
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
On March 8, 2000, the Company entered into an amendment to the Sprint PCS
agreements to expand its service area to include 20 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 four
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 a purchase price equal to approximately $25.2 million if the
option is exercised during March 2000, escalating monthly to a purchase price
of $28.8 million, subject to upward adjustment in the event the number of
subscribers significantly increases, if the option is exercised during January
2001. As consideration for the expansion, in connection with the closing of the
sale of the convertible preferred stock discussed below, 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
$9,147,000 and will be recorded as an intangible asset and amortized over a
life of 20 years. 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 is in the
process of determining the purchase price allocation which will be based on the
fair value of the assets acquired with any excess amount over fair value being
allocated to an intangible asset.
On May 5, 2000, the Board of Directors of iPCS, Inc. 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 iPCS, Inc.'s common stock with an exercise price of $5.50 per share. Based
upon the expected offering price of a planned initial public offering, the
Company will recognize compensation expense of approximately $8,300,000 over
the vesting period of the options.
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
F-17
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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 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 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. The Company is
obligated to file an exchange offer registration statement on or before October
10, 2000 covering the exchange of the Notes for registered notes. If the
Company fails to consummate the exchange offer, the Company is required to pay
liquidated damages of $.05 per week per $1,000 for a period of 90 days
increasing $.05 per week for each subsequent 90 day period until a maximum
amount equal to $.50 per $1,000 in principal amount of the Notes.
The Company allocated approximately $24.8 million to the fair value of the
warrants, as determined by using the Black-Scholes model, and recorded a
discount on the Notes, which will be recognized as interest expense over the
period from date of issuance to the maturity date. The fair value of the
warrant 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%.
Contemporaneously with the issuance of the Notes discussed above, 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 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 an initial public offering yielding
gross proceeds of $30 million or more prior to December 31, 2000.
The holders of Series A-1 preferred stock have conversion rights and voting
rights of common shareholders 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 with a minimum return to the Series A-1 preferred stockholders. In the
F-18
<PAGE>
ILLINOIS PCS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
event that the Company has not completed an initial public offering 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 allocated the entire net proceeds received from the issuance of
Series A-1 preferred stock of $47,100,000 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 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 $47,100,000 to additional paid-in capital.
On June 27, 2000, the Company received from Toronto Dominion, Inc. and GE
Capital a commitment for a $140 million senior secured credit facility ("credit
facility") to replace the Nortel Credit Facility which was repaid in full with
the proceeds from the issuance of the Notes. The amended and restated credit
facility was finalized and executed on July 12, 2000. The credit facility
permits the Company to borrow up to $140 million through two tranches (Tranche
A--$90 million and Tranche B--$50 million) upon the Company meeting certain
conditions, including a sale of equity securities with gross proceeds of at
least an additional $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.
11. REORGANIZATION AND PRO FORMA LOSS PER SHARE
iPCS, Inc. filed a registration statement for equity financing through an
initial public offering on March 9, 2000. As of July 12, 2000, the Company
reorganized its business into a C Corporation in which members of Illinois PCS,
LLC received 44,869,643 shares of common stock of iPCS, Inc. in exchange for
their ownership interests in the Company. The ownership percentages among the
Company's members following the reorganization remained consistent with the
ownership percentages described in Note 1 as adjusted for the effects of the
agreement described in the first paragraph of Note 10. As of July 12, 2000,
Illinois PCS, LLC merged with and into iPCS Wireless, Inc., a wholly owned
subsidiary of iPCS, Inc. iPCS, Inc. plans to utilize the proceeds from the
aforementioned offering to fund the build-out of the network.
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 number of shares of common stock of iPCS, Inc. into which
the 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 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 is antidilutive.
F-19
<PAGE>
ILLINOIS PCS, LLC
BALANCE SHEET
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
As of
March 31,
2000
Assets
<S> <C>
Current Assets:
Cash and cash equivalents............................................ $ 2,118
Accounts receivable, less allowance of $23........................... 229
Other receivables.................................................... 32
Inventories.......................................................... 741
Prepaid expenses and other assets.................................... 843
-------
Total current assets................................................ 3,963
Property and equipment including construction in progress, net........ 48,454
Financing costs, less accumulated amortization of $170................ 1,417
-------
$53,834
=======
<CAPTION>
Liabilities and Members' Equity
<S> <C>
Current Liabilities:
Accounts payable..................................................... $ 8,550
Accrued expenses..................................................... 2,480
Accrued interest..................................................... 275
Advance on tower sales............................................... 2,000
-------
Total current liabilities........................................... 13,305
Deferred gain on tower sales.......................................... 2,365
Long-term debt........................................................ 29,136
-------
Total liabilities................................................... 44,806
-------
Commitments and Contingencies
Members' equity....................................................... 9,028
-------
$53,834
=======
</TABLE>
See notes to unaudited financial statements.
F-20
<PAGE>
ILLINOIS PCS, LLC
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Period from
January 22, 1999
For the Three-Month (date of inception)
Period Ended through
March 31, 2000 March 31, 1999
<S> <C> <C>
Revenues:
Service............................... $ 1,213 $ --
Equipment............................. 379 --
---------- ----------
Total revenues....................... 1,592 --
---------- ----------
Operating Expenses:
Cost of service....................... 1,746 59
Cost of equipment..................... 982 --
Selling............................... 1,096 1
General and administrative:
Non-cash compensation................ 8,480 --
Taxes on non-cash compensation....... 1,567 --
Other general and administrative..... 1,277 333
Depreciation and amortization......... 1,344 --
---------- ----------
Total operating expenses............. 16,492 393
---------- ----------
Loss from operations................... (14,900) (393)
Other Income (Expense):
Interest income....................... 43 1
Interest expense...................... (206) --
Other income (expense)................ (9) --
---------- ----------
Net loss............................... $ (15,072) $ (392)
========== ==========
Pro forma basic and diluted loss per
share of common stock................. $ (0.34) $ (0.01)
========== ==========
Pro forma weighted average common
shares outstanding.................... 44,869,643 44,869,643
========== ==========
</TABLE>
See notes to unaudited financial statements.
F-21
<PAGE>
ILLINOIS PCS, LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
For the For the Period
Three-Month from January 22, 1999
Period Ended (date of inception)
March 31, 2000 through March 31, 1999
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................ $(15,072) $ (392)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization of
property and equipment................ 1,344 --
Amortization of deferred gain on tower
sales................................. (29) --
Amortization of financing costs........ 103 --
Non-cash compensation.................. 8,480 --
Changes in assets and liabilities:
Accounts receivable................... (137) --
Other receivables..................... 7 --
Inventories........................... 186 --
Prepaid expenses and other assets..... (411) (76)
Accounts payable, accrued expenses and
accrued interest..................... 3,469 133
-------- ------
Net cash flows from operating
activities.......................... (2,060) (335)
-------- ------
Cash Flows from Investing Activities:
Capital expenditures.................... (8,614) (549)
Proceeds from tower sales............... 2,000 --
-------- ------
Net cash flows from investing
activities.......................... (6,614) (549)
-------- ------
Cash Flows from Financing Activities:
Proceeds from long-term borrowings...... 1,565 --
Debt issuance costs..................... (6) --
Capital contributions................... 6,500 1,800
-------- ------
Net cash flows from financing
activities.......................... 8,059 1,800
-------- ------
Increase (decrease) in cash and cash
equivalents............................. (615) 916
Cash and cash equivalents at beginning of
period.................................. 2,733 --
-------- ------
Cash and cash equivalents at end of
period.................................. $ 2,118 $ 916
======== ======
Supplemental Disclosure:
Cash paid for interest.................. $ 720 $ --
======== ======
Supplemental Schedule of Noncash
Investing and Financing Activities:
Accounts payable incurred for the
acquisition of property, equipment and
construction in progress............... $ 6,078 $ --
======== ======
</TABLE>
See notes to unaudited financial statements.
F-22
<PAGE>
ILLINOIS PCS, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2000 and 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited 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. The accompanying unaudited financial statements should be read in
conjunction with the Company's audited financial statements and related notes
appearing elsewhere herein.
2. REORGANIZATION AND PRO FORMA LOSS PER SHARE
iPCS, Inc. filed a registration statement for equity financing through an
initial public offering on March 9, 2000. As of July 12, 2000, the Company
reorganized its business into a C Corporation in which members of Illinois PCS,
LLC received 44,869,643 shares of common stock of iPCS, Inc. in exchange for
their ownership interests in the Company. The ownership percentages among the
Company's 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 3. As of July 12, 2000, Illinois PCS, LLC merged
with and into iPCS Wireless, Inc. a wholly owned subsidiary of iPCS, Inc.
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
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 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 is antidilutive.
3. MEMBERS' EQUITY AND TRANSACTIONS
On March 12, 1999, the Company entered into a management agreement (the
"Management Agreement") with Mr. Yager to act as the Manager of Illinois PCS,
LLC. 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 Illinois PCS, LLC. In addition, the Company agreed
to pay 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 upon the expected offering
F-23
<PAGE>
ILLINOIS PCS, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(Continued)
price of the initial public offering as determined on April 24, 2000, the
Company recorded non-cash compensation expense of approximately $8,480,000
related to the ownership interest granted and recorded general and
administrative expense of approximately $1,567,000 related to taxes to be paid
by the Company on behalf of Mr. Yager. In addition, the Company granted a bonus
of $400,000 on March 7, 2000 to Mr. Yager.
On March 8, 2000, the Company entered into an amendment to the Sprint PCS
agreements to expand its service area to include 20 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, subject to upward adjustment in the event
the number of subscribers significantly increases, if the option is exercised
during January 2001. As consideration for the Expansion, in connection with the
closing of the sale of the convertible preferred stock discussed below, 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 $9,147,000 and will be recorded as an intangible asset and
amortized over a life of 20 years. 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 is in
the process of determining the purchase price allocation which will be based on
the fair value of the assets acquired with any excess amount over fair value
being allocated to an intangible asset.
The members contributed $6.5 million during the three-month period ended
March 31, 2000 raising the inception to date members' contribution to a total
of $20.0 million.
On May 5, 2000, the Board of Directors of iPCS, Inc. 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
F-24
<PAGE>
ILLINOIS PCS, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(Continued)
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 iPCS, Inc.'s common stock with an exercise price of
$5.50 per share. Based upon the expected offering price of a planned initial
public offering, the Company will recognize compensation expense of
approximately $8,300,000 over the vesting period of the options.
Contemporaneously with the issuance of the 300,000 units discussed in Note
4, 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 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 an initial public offering
yielding gross proceeds of $30 million or more prior to December 31, 2000.
The holders of Series A-1 preferred stock have conversion rights and voting
rights of common shareholders 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 with a minimum return to the Series A-1 preferred stockholders. In the
event that the Company has not completed an initial public offering 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 allocated the entire net proceeds received from the issuance of
Series A-1 preferred stock of $47,100,000 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 $47,100,000 to additional
paid-in capital.
4. DEBT
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
F-25
<PAGE>
ILLINOIS PCS, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(Continued)
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 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 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 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. The Company is
obligated to file an exchange offer registration statement on or before October
10, 2000 covering the exchange of the Notes for registered notes. If the
Company fails to consummate the exchange offer, the Company is required to pay
liquidated damages of $.05 per week per $1,000 for a period of 90 days,
increasing $.05 per week for each subsequent 90 day period until a maximum
amount equal to $.50 per $1,000 in principal amount of the Notes.
The Company allocated approximately $24.8 million to the fair value of the
warrants, as determined by using the Black-Scholes model, and recorded a
discount on the Notes, which will be recognized as interest expense over the
period from date of issuance to the maturity date.
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%.
On June 27, 2000, the Company received from Toronto Dominion, Inc. and GE
Capital a commitment for a $140 million senior secured credit facility ("credit
facility") to replace the Nortel Credit Facility which was repaid in full with
the proceeds from the issuance of the Notes. The amended and restated credit
facility was finalized and executed on July 12, 2000. The credit facility
permits the Company to borrow up to $140 million through two tranches (Tranche
A--$90 million and Tranche B--$50 million) upon the Company meeting certain
conditions, including a sale of equity securities with gross proceeds of at
least an additional $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.
5. AGREEMENT WITH AMERICAN TOWER
During the three-month period ended March 31, 2000, eight towers were sold
to American Tower for $2.0 million in cash, resulting in a gain of
approximately $736,000, which is being amortized as a reduction to rental
expense over the initial lease term of ten years. At March 31, 2000, a total of
twenty-six towers have been sold to American Tower.
F-26
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
, 2000
8,333,333 Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
The Robinson-Humphrey Company
DLJdirect Inc.
-------------------------------------------------------------------------------
Until (25 days after the date of this prospectus), all dealers
that effect transactions in these securities may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering or when selling
previously unsold allotments or subscriptions.
-------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities to be registered. All of
the amounts shown are estimated except for the Securities and Exchange
Commission registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 43,915
National Association of Securities Dealers, Inc. filing fee.... 17,135
Nasdaq National Market listing fees............................ 95,000
Printing and engraving expenses................................ 400,000
Legal fees and expenses........................................ 500,000
Accounting fees and expenses................................... 300,000
Transfer agent and registrar fees.............................. 15,000
Miscellaneous expenses......................................... 128,950
----------
Total........................................................ $1,500,000
==========
</TABLE>
---------------------
*To be supplied by amendment
Item 14. Indemnification of Directors and Officers
The Certificate of Incorporation of iPCS, Inc. ("iPCS") provides that the
liability of the directors of iPCS to iPCS or any of its stockholders for
monetary damages arising from acts or omissions occurring in their capacity as
directors shall be limited to the fullest extent permitted by the laws of
Delaware or any other applicable law. This limitation does not apply with
respect to any action in which a director would be liable under Section 174 of
the General Corporation Law of the State of Delaware nor does it apply with
respect to any liability in which a director:
. breached his duty of loyalty to iPCS or its stockholders;
. did not act in good faith or, in failing to act, did not act in good
faith;
. acted in a manner involving intentional misconduct or a knowing violation
of law or, in failing to act, shall have acted in a manner involving
intentional misconduct or a knowing violation of law; or
. derived an improper personal benefit.
iPCS's Certificate of Incorporation provides that iPCS shall indemnify its
directors, officers and employees and former directors, officers and employees
to the fullest extent permitted by the laws of Delaware or any other applicable
law. Pursuant to the provisions of Section 145 of the General Corporation Law
of the State of Delaware, iPCS has the power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or in the right
of iPCS) by reason of the fact that he is or was a
II-1
<PAGE>
director, officer, employee or agent of iPCS, against any and all expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding. The power to
indemnify applies only if such person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of iPCS and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of iPCS
as well, but only to the extent of defense and settlement expenses and not to
any satisfaction of a judgment or settlement of the claim itself and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct unless the court, in its
discretion, believes that in light of all the circumstances indemnification
should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Reference is made to the Form of Underwriting Agreement, to be filed as
Exhibit 1.1 to this registration statement, which provides for indemnification
by the Underwriters under certain circumstances of the directors and officers
of iPCS signing the registration statement and certain controlling persons of
iPCS against certain liabilities, including those arising under the Securities
Act.
iPCS has directors' and officers' liability insurance covering its directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling iPCS pursuant to
the foregoing provisions, iPCS has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities
iPCS, Inc., a Delaware corporation ("iPCS") was formed on March 7, 2000. It
has no assets and has not issued any shares of common stock. Immediately prior
to the closing of this initial public offering, Illinois PCS, LLC will become a
wholly owned subsidiary of iPCS, Inc. as described in the prospectus. In
connection with this reorganization into a holding company structure, iPCS will
issue unregistered shares of common stock to the owners of Illinois PCS, LLC in
exchange for their limited liability company membership interests of Illinois
PCS, LLC.
The persons to receive iPCS common stock in connection with the
reorganization, the consideration to be received by iPCS for such common stock
and the number of shares of common stock to be received are set forth in the
table below.
II-2
<PAGE>
Commencement of the Reorganization
<TABLE>
<CAPTION>
Number of Percentage of
Shares of Membership Interest
our Received in
Nature of Common Stock Exchange for our
Party Receiving Securities Consideration to be Issued Common Stock (1)
<S> <C> <C> <C>
Geneseo Communications,
Inc...................... Membership Interest 15,468,809 34.5%
Cambridge Telcom, Inc..... Membership Interest 13,258,979 29.6%
Cass Communications
Management, Inc.......... Membership Interest 4,419,660 9.9%
Technology Group, LLC..... Membership Interest 4,419,660 9.9%
Montrose Mutual PCS, Inc.. Membership Interest 4,419,660 9.9%
Gridley Enterprises, Inc.. Membership Interest 2,209,830 4.9%
Timothy M. Yager.......... Membership Interest 673,045 1.5%
</TABLE>
---------------------
(1) Exceeds 100% because of rounding.
None of the foregoing transactions will involve any public offering, and
issuances of securities in connection with such transactions will be made in
reliance on Section 4(2) under the Securities Act of 1933 (the "Act") and/or
Regulation D promulgated under the Act. These sales were made without general
solicitation or advertising. The recipients 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 recipients had adequate access, through their relationship with
us, to information about us.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
1.1* --Form of Underwriting Agreement.
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
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.
5.1* --Form of opinion of Mayer, Brown & Platt, regarding
legality of the Common Stock being issued.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S> <C>
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.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S> <C>
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.
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
21.1* --Subsidiaries of iPCS,
Inc.
23.1 --Consent of Deloitte &
Touche, LLP.
23.2 --Consent of Mayer,
Brown & Platt
(contained in legal
opinion filed as
Exhibit 5.1).
24.1 --Powers of Attorney
(set forth on the
signature page hereto).
27.1* --Financial Data
Schedule.
</TABLE>
---------------------
*to be filed by amendment.
**previously filed.
(b) Financial Statement Schedules:
No financial statement schedules are filed because the required
information is not applicable or is included in the financial statements or
related notes.
Item 17. Undertakings
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by iPCS pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-5
<PAGE>
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on the 19th day of July, 2000.
iPCS, INC.
/s/ Timothy M. Yager
By: _________________________________
Timothy M. Yager
President, Chief Executive Officer
and Director
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Timothy M. Yager President, Chief Executive July 19, 2000
____________________________________ Officer (Principal Executive
Timothy M. Yager Officer) and Director
/s/ Stebbins B. Chandor, Jr. Senior Vice President, Chief July 19, 2000
____________________________________ Financial Officer
Stebbins B. Chandor, Jr. (Principal Financial and
Accounting Officer)
/s/ William W. King, Jr.* Vice President, Strategic July 19, 2000
____________________________________ Planning and Director
William W. King, Jr.
/s/ Alan C. Anderson* Director July 19, 2000
____________________________________
Alan C. Anderson
/s/ Donald L. Bell* Director July 19, 2000
____________________________________
Donald L. Bell
/s/ Brian J. Gernant* Director July 19, 2000
____________________________________
Brian J. Gernant
/s/ Robert W. Schwartz* Director July 19, 2000
____________________________________
Robert W. Schwartz
/s/ George Patrick Tays* Director July 19, 2000
____________________________________
George Patrick Tays
</TABLE>
Timothy M. Yager, by signing his name hereto, does sign and execute this
second amendment to the registration statement on behalf of each of the above-
named officers and directors of the registrant on this 19th day of July, 2000,
pursuant to powers of attorneys executed on behalf of each of such officers and
directors and previously filed with the Securities and Exchange Commission.
/s/ Timothy M. Yager
*By: _________________________________
Timothy M. Yager
Attorney-in-Fact
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S>
1.1* --Form of Underwriting Agreement.
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
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.
5.1* --Form of opinion of Mayer, Brown & Platt, regarding legality of the
Common Stock being issued.
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.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S>
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.
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
21.1* --Subsidiaries of iPCS, Inc.
23.1 --Consent of Deloitte & Touche, LLP.
23.2 --Consent of Mayer, Brown & Platt (contained in legal opinion filed
as Exhibit 5.1).
24.1 --Powers of Attorney (set forth on the signature page hereto).
27.1* --Financial Data Schedule.
</TABLE>
---------------------
*to be filed by amendment.
**previously filed.
2
