<PAGE>
As filed with the Securities and Exchange Commission on March 9, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Title of each class of maximum aggregate Amount of
securities to be registered offering price(1) registration fee
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<S> <C> <C>
Common Stock, $0.01 par value ........... $143,750,000 $37,950
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
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 -- March , 2000
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Prospectus
, 2000
[IPCS LOGO]
Shares of Common Stock
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The Company:
The Offering:
. We are the
exclusive Sprint . We are offering
PCS affiliate for shares
35 markets of our common
containing a total stock.
population of over
7.0 million in the
midwestern United
States.
. We have granted
the underwriters
an option to
purchase up to
additional shares
of our common
stock to cover
over-allotments.
. As a Sprint PCS
affiliate, we
market and sell
100% digital, 100%
PCS wireless
products and
services in our
territory under
the Sprint and
Sprint PCS brand
names.
. This is our
initial public
offering. We
anticipate the
initial public
offering price
will be between
$ and
$ per share.
. As of February 29,
2000, we had
launched Sprint
PCS service in
four markets
covering
approximately
805,000 residents
and had over 4,000
customers.
. Closing:
, 2000.
Proposed Symbol &
Market:
. IPCS/Nasdaq
National Market
--------------------------------------------
<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.
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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.
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Donaldson, Lufkin & Jenrette
The Robinson-Humphrey Company
DLJdirect Inc.
<PAGE>
[GRAPHICS TO COME]
--MAP OF NETWORK COVERAGE AREA
--NETWORK OPERATIONS CENTER
--CUSTOMERS USING SPRINT PCS PHONE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 5
Forward-Looking Statements........ 18
Use of Proceeds................... 19
Dividend Policy................... 19
Capitalization.................... 20
Dilution.......................... 21
Selected Financial Data........... 22
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 24
Industry Background............... 32
Business.......................... 33
The Sprint PCS Agreements......... 54
Description of Our Indebtedness... 62
Management........................ 69
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
The Reorganization.................. 76
Principal Stockholders.............. 77
Certain Relationships and Related
Transactions....................... 78
Regulation of the Wireless
Telecommunications Industry........ 79
Description of Capital Stock........ 83
Shares Eligible for Future Sale..... 86
Certain United States Federal Tax
Considerations for Non-U.S. Holders
of Our Common Stock................ 88
Underwriting........................ 91
Legal Matters....................... 93
Experts............................. 93
Available Information............... 94
Index to Financial Statements....... F-1
</TABLE>
----------------
This prospectus includes product names, trade names and trademarks of other
companies.
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified by more detailed information appearing in other
sections of this prospectus. The other information is important, so please read
this entire prospectus carefully.
Statements in this prospectus regarding Sprint Corporation or Sprint PCS are
derived from information contained in our long term affiliation agreements
(which we refer to as the Sprint PCS agreements) with the Sprint PCS group of
companies (which we refer to as Sprint PCS), 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. References to
iPCS, Inc. as a provider of personal communication services, commonly referred
to as PCS, or similar phrases mean our designing, constructing and managing a
PCS network in our territory according to the terms of the Sprint PCS
agreements. References to our network or similar phrases mean the portion of
the Sprint PCS national PCS network located, or to be located, within our
territory, and references to our customers mean Sprint PCS subscribers based in
our territory. Unless otherwise indicated, the information in this prospectus
assumes the underwriters' over-allotment option will not be exercised.
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.
The Company
Overview
We are one of the largest of the 18 Sprint PCS affiliates, with the
exclusive right to provide Sprint PCS products and services to a total
population of more than 7.0 million in the midwestern United States. We market
100% digital, 100% PCS wireless products and services under the Sprint and
Sprint PCS brand names. 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 that have made Sprint PCS the
fastest growing wireless company in the country. As of February 29, 2000, we
had launched Sprint PCS service in four markets covering approximately 805,000
residents and had over 4,000 customers.
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 our initial territory. By the end of June 2000, we plan to
launch service in six additional markets covering approximately 930,000
residents, substantially completing our network build-out 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 agreed to purchase from Sprint PCS certain
network assets under construction in three 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 have already been
launched by Sprint PCS and to purchase from Sprint PCS related assets in those
markets. These markets have a total
1
<PAGE>
population of over 405,000. By the end of the third quarter of 2001, we plan to
be providing coverage to approximately 65% of the total population of over 7.0
million in our territory, at which time our planned build-out for all of our
current markets will be substantially complete.
Our territory includes attractive 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 operational Sprint PCS markets,
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.
Competitive Strengths
We receive substantial benefits from our long-term relationship with Sprint
PCS, including:
. we have the exclusive right to use the Sprint and Sprint PCS brand names,
royalty-free, for the sale of Sprint PCS products and services in our
territory described above;
. we benefit from Sprint PCS' significant annual advertising expenditures
and national marketing and promotional programs, and have access to
Sprint PCS' marketing and promotional materials for use in our local
markets;
. our customers have access to Sprint PCS' 100% digital, 100% PCS national
network, including Sprint PCS' Wireless Web service, which represents a
significant marketing and service advantage over other wireless service
providers in our markets;
. we have access to approximately 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 with leading
national retailers, including RadioShack, Kmart, Staples, Target, Office
Max, Best Buy, Office Depot, Ritz Camera and Circuit City;
. we benefit from Sprint PCS' national inbound telemarketing operations,
electronic commerce sales platforms and national account sales
initiatives to expand our customer base;
. we purchase proven back office services, including customer activation,
billing and 24 hours a day, 7 days a week customer care from Sprint PCS
at rates reflecting Sprint PCS' economies of scale;
. we have the exclusive right to use Sprint PCS' licensed spectrum in our
markets described above;
. we purchase network equipment, handsets and other subscriber equipment
based on Sprint PCS' significantly discounted rates; and
. 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.
2
<PAGE>
In addition to the advantages provided by our strategic relationship with
Sprint PCS, we have:
. fewer competitors and fragmented competition within our markets;
. potential for significant Sprint PCS roaming revenue;
. opportunities to service national accounts which have headquarters or
offices in our territory;
. the proven ability to execute our business plan; and
. a fully financed business plan.
We intend to become the leading PCS provider in our territory by
successfully executing our business strategy, which includes:
. exclusively marketing 100% digital, 100% PCS services under the Sprint
and Sprint PCS brand names;
. offering the same national pricing plans and using the same sales and
marketing strategies, distribution channels and back office services as
Sprint PCS;
. executing an integrated local marketing strategy which will include
establishing 19 Sprint PCS stores in our territory, advertising on local
radio and TV and in 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
. continually evaluating opportunities to strategically expand our
territory.
The net proceeds of this offering, together with available borrowings under
our increased Nortel financing, are expected to total approximately $
million. We believe this will be adequate to fund our network build-out,
anticipated operating losses and working capital requirements through 2002, at
which point we expect to have achieved break-even operating cash flow.
----------------
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......................... shares
Common Stock to be Outstanding after the
Offering.................................... 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 available
borrowings under our increased Nortel
financing, to fund the following:
. capital expenditures, including the
build-out of our network and the purchase
of network assets under construction in
three markets in Michigan from Sprint PCS
in connection with the recent expansion
of our territory;
. 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
excludes:
. up to shares that may be issued to the underwriters to cover
over-allotments. See "Underwriting."
. shares of our common stock reserved for issuance under our 2000
Long Term Incentive Stock Plan. See "Management--2000 Long Term Incentive
Stock Plan."
. shares of our common stock issuable upon the exercise of
warrants to be issued at the closing date of this offering at an exercise
price of $ , assuming an initial public offering price of $ per
share, the midpoint of the range set forth on the cover page of this
prospectus. 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
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
Since we do not own any licenses to operate a wireless PCS network, our
ability to offer Sprint PCS products and services and our network's operation
are 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
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
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 February 29, 2000, we had launched Sprint PCS service in four markets
covering approximately 805,000 residents. In other portions of our territory we
have not yet completed our radio frequency design, network design and site
acquisition and cell site engineering,
5
<PAGE>
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
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
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.
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 Sprint PCS
products and services
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.
6
<PAGE>
Sprint PCS may make business decisions that would not be in our best interests
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;
. 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.
Our relationship with Sprint or its successor may be adversely affected by the
proposed merger of Sprint and MCI WorldCom
On October 5, 1999, Sprint and MCI WorldCom announced that the boards of
directors of both companies had approved a definitive merger agreement whereby
the two companies would merge to form a new company called WorldCom. Although
the companies have approved the merger, the completion of the merger is still
subject to various conditions, including the approvals of the shareholders of
both companies, the Federal Communications Commission, generally referred to as
the FCC, the Justice Department, various state governmental bodies and foreign
regulatory and antitrust authorities. If the merger is not consummated for
these or other reasons, Sprint's business may be adversely affected, which
could have a negative impact on us as a Sprint PCS affiliate. If the merger is
successfully completed, we expect our relationship with Sprint and Sprint PCS
to continue; however, we cannot be sure that the merger will not have a
negative impact on us as an affiliate of Sprint PCS or that WorldCom will
continue to manage the Sprint PCS affiliate program in the same manner as
Sprint PCS.
We have substantial debt which we may not be able to service and which may
result in our lenders controlling our assets in an event of default
As of December 31, 1999, our outstanding long-term debt under the Nortel
financing was approximately $27.6 million. Since December 31, 1999, we have
borrowed an additional $1.5 million under our Nortel financing. We are
negotiating an amended and restated credit agreement with Nortel to increase
the amount of the Nortel financing to $170.0 million, which will be effective
as of the closing of this offering to provide funds for the build-out of our
expansion territory. Under our current business plan, we expect to incur
substantial additional indebtedness before achieving
7
<PAGE>
break-even operating cash flow, including $ million of additional
borrowings under the increased Nortel financing.
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 Nortel financing, will
be at variable rates of interest, which could result in higher interest
expense in the event of increases in market interest rates.
Sprint PCS has contractual rights that would be triggered by an acceleration
of the maturity of our borrowings under the Nortel financing, pursuant to which
Sprint PCS may purchase our obligations under our Nortel financing and obtain
the rights of a senior lender. To the extent Sprint PCS purchases these
obligations, Sprint PCS' interests as a creditor could conflict with ours.
Sprint PCS' rights as a senior lender would enable it to exercise rights with
respect to our assets and continuing relationship with Sprint PCS in a manner
not otherwise permitted under the Sprint PCS agreements.
If we do not meet all of the conditions required under our Nortel financing,
we may not be able to draw down all of the funds under our Nortel financing
and, as a result, may not be able to complete the build-out of our network
We have a $48.0 million credit facility with Nortel of which $27.6 million
had been drawn as of December 31, 1999 and $29.1 million had been drawn as of
February 29, 2000. Presently we are negotiating to increase the size of this
financing to $170.0 million. The additional $18.9 million available under the
Nortel financing as of February 29, 2000 is subject to our meeting all of the
conditions specified in the financing documents and, in addition, is subject at
each funding date to the following conditions:
. that the representations and warranties in the financing documents are
true and correct; and
. the absence of a default under our financing documents.
If we do not meet these conditions at each funding date, Nortel may choose not
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
Nortel financing.
8
<PAGE>
We may not achieve or sustain operating profitability or positive cash flow
from operating activities
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
through 2002 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.
We may need more capital than we currently project to build out our network
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 Nortel financing.
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.
We may not receive as much Sprint PCS roaming revenue as we anticipate and our
non-Sprint PCS roaming revenue is likely to be low
We are paid a fee from Sprint PCS or a Sprint PCS affiliate for every minute
that 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 uses the Sprint PCS
network outside our territory. 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 used. As a result, we may receive less Sprint PCS roaming
revenue than we anticipate or we may have to pay more Sprint PCS roaming fees
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. However, the
technology used in the Sprint PCS network is
9
<PAGE>
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 handsets and infrastructure equipment,
which are in short supply
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
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.
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. We have retained Nortel and 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 and to deploy our network systems,
and we will be significantly dependent upon them in order to fulfill our build-
out obligations.
Certain provisions of the Sprint PCS agreements may diminish the valuation of
our company
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 prices of our securities and a decrease in our ability to raise
additional capital necessary to complete the build-out of our network. Under
the Sprint PCS agreements, subject to the requirements of applicable law, there
are circumstances under which Sprint PCS may purchase our operating assets or
capital stock for 72% or
10
<PAGE>
at least 80% of the "entire business value" of our company, as defined in the
Sprint PCS agreements. In addition, Sprint PCS must approve any change of
control of our company and consent to any assignment of the Sprint PCS
agreements. 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 its business and may reduce the
"entire business value" of our company.
We may not be able to compete with larger, more established businesses
offering similar products and services
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 will compete in each of our markets with two
cellular providers, both of which have an 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 and 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. 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
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.
The technology we use has limitations and could become obsolete
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. If
11
<PAGE>
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 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 65% 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 restrict our ability to purchase spectrum licenses
from Sprint PCS in those areas
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
The Sprint PCS network, of which we form a part, operates at a different
frequency and uses a different technology than many analog cellular and other
digital systems. To access another provider's analog cellular or non-CDMA
digital system outside of 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 and initiate a
new call when leaving the Sprint PCS network and entering another wireless
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.
12
<PAGE>
Non-renewal or revocation by the Federal Communications Commission of the
Sprint PCS licenses would significantly harm our business
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
The FCC requires that licensees like Sprint PCS maintain control of their
licensed systems 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
The loss of one or more key officers 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 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
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.
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<PAGE>
Risks associated with expanding our territory
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 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 our 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 also
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 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
Our efforts to minimize customer turnover may not be successful. 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:
. extent of network coverage;
14
<PAGE>
. reliability issues such as blocked calls, dropped calls and handset
problems;
. non-use of phones;
. change of employment;
. non-use of customer contracts;
. lack of affordability;
. customer care concerns; and
. other competitive factors.
The wireless industry is historically dependent on fourth calendar quarter
results
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.
Wireless providers offering services based on alternative technologies may
reduce demand for PCS
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
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.
15
<PAGE>
Use of hand-held phones may pose health risks
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
Upon completion of this offering, our existing stockholders, management and
directors will beneficially own approximately % of our outstanding common
stock on a diluted basis, or approximately % 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 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 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 volatile
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.
16
<PAGE>
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 will be
immediately after the offering. Any common stock you purchase in the offering
will have a post-offering net tangible book value per share of $ less than
the price you paid for the share, assuming an initial public offering price of
$ per share, the midpoint of the range set forth on the cover page of
this prospectus. 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 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, owners of 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 shares of our
common stock will be eligible for sale in the public market subject, in most
cases, to volume and other restrictions under federal securities laws. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."
You may not receive a return on investment through dividend payments or 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 and may not realize a return on
your investment even if you sell your shares.
17
<PAGE>
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 launch commercial
PCS service and achieve break-even operating cash flow;
. statements regarding the year 2000 date change; 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.
18
<PAGE>
USE OF PROCEEDS
The net proceeds from this offering, after deducting underwriting discounts
and commissions and estimated offering expenses, will be approximately $
million, or approximately $ million if the underwriters' over-allotment
option is exercised in full, assuming an initial public offering price of $
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 and borrowings
under the increased Nortel financing which we are negotiating, to fund:
. capital expenditures, including the build-out of our network, totaling
approximately $ million, and the purchase of network assets under
construction in three markets in Michigan from Sprint PCS in connection
with the recent expansion of our territory totaling approximately $
million;
. operating losses and working capital requirements totaling approximately
$ million;
. debt service payments, fees and expenses related to the increased Nortel
financing; and
. general corporate purposes.
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.
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, our Nortel financing restricts, and we anticipate our
future indebtedness may restrict, our ability to pay dividends.
19
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and actual
capitalization as of December 31, 1999 and as adjusted to reflect the
following:
. the sale of shares of our common stock in this offering,
assuming an initial public offering price of $ per share, the
midpoint of the range set forth on the cover of this prospectus, less
underwriting discounts and commissions and estimated offering expenses of
$ million;
. the purchase from Sprint PCS of network assets under construction in
three markets in Michigan estimated to be $ million; and
. the payment of fees and expenses related to the increased Nortel
financing.
<TABLE>
<CAPTION>
As of December 31,
1999
------------------
As
Actual(1) Adjusted
(In thousands)
<S> <C> <C>
Cash and cash equivalents................................... $ 2,733 $
======= =======
Long-term debt:
Nortel financing (2)...................................... $27,571 $
Stockholders' equity:
Preferred stock, par value $.01 per share,
shares authorized; no shares issued and outstanding...... -- --
Common stock, par value $.01 per share, shares
authorized; shares outstanding, actual;
shares outstanding, as adjusted..............
Additional paid-in capital................................
------- -------
Total stockholders' equity.............................. 9,120
------- -------
Total capitalization.................................. $36,691 $
======= =======
</TABLE>
- ---------------------
(1) Reflects the reorganization as if it had occurred as of December 31, 1999.
For more information on the reorganization, see "Reorganization."
(2) As adjusted reflects $ million of borrowings under Tranche C of the
Nortel financing for the payment of an origination fee and expenses related
to the increased Nortel financing. For more information on the Nortel
financing, see "Description of Our Indebtedness--The Nortel Credit
Facility."
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<PAGE>
DILUTION
Our net tangible book value at December 31, 1999 was $ million or $
per share of common stock, after giving effect to the reorganization to form
the holding company. For more information on the reorganization, see
"Reorganization." 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 shares of our common stock
assuming an initial public offering price of $ per share, the
midpoint of the range set forth on the cover page of this prospectus, and
the receipt of proceeds therefrom; and
. the deduction of underwriting discounts and commissions and estimated
offering expenses of $ million
our as-adjusted net tangible book value as of December 31, 1999 would have been
approximately $ million, or $ per share. This represents an immediate
dilution of $ 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 $ per share. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Net tangible book value per share as of December 31, 1999....... $
Increase in net tangible book value per share attributable to
the offering...................................................
-----
As adjusted net tangible book value per share after the
offering.......................................................
-----
Dilution per share to new purchasers of our common stock........ $
=====
</TABLE>
The following table summarizes, on an as-adjusted basis as of December 31,
1999, 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 $ 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
$ million payable by us:
<TABLE>
<CAPTION>
Shares Average
Purchased Total Consideration Price
-------------- ------------------- Per
Number Percent Amount Percent Share
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)... % $ % $
New purchasers of our common
stock......................
--- --- ---------- --------- ----
Total..................... % $ % $
=== === ========== ========= ====
</TABLE>
- ---------------------
(1) Reflects the reorganization to form a holding company structure as if it
had occurred as of December 31, 1999.
The foregoing tables assume no exercise of the underwriters' over-allotment
option and no exercise of stock options or the Sprint PCS warrants. Neither the
stock options nor the Sprint PCS warrants are currently exercisable. To the
extent that any shares are issued in connection with the underwriters' over-
allotment option as well as any exercise of stock options or the Sprint PCS
warrants, you will experience further dilution. See "Management--2000 Long Term
Incentive Stock Plan," "Management--Employment Agreements" and "Description of
Capital Stock--Warrants."
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<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" 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.
<TABLE>
<CAPTION>
Period from
January 22, 1999
(date of inception)
through
December 31, 1999
(In thousands, except
per share data)
<S> <C>
Statement of Operations Data:
Revenues............................................... $ 215
Cost of service........................................ 1,695
Total operating expenses............................... 4,858
Operating loss......................................... (4,643)
Net loss............................................... (4,380)
Other Data:
Basic and diluted net loss per share of common
stock(1).............................................. $
Pro forma basic and diluted net loss per share of
common stock(2)....................................... $
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1999
-------------------
As
Actual Adjusted(3)
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $ 2,733 $
Property and equipment including construction in
progress, net............................................ 39,106
Total assets.............................................. 44,843
Long-term debt............................................ 27,571
Total liabilities......................................... 35,723
Equity.................................................... 9,120
</TABLE>
- ---------------------
(1) Basic and diluted net loss per share of common stock is computed by
dividing net loss by the assumed number of common shares outstanding as if
the reorganization had occurred upon the inception of Illinois PCS, LLC.
(2) Pro forma basic and diluted net loss per share is computed as if the shares
in this offering were outstanding as of the inception of Illinois PCS, LLC.
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<PAGE>
(3) As adjusted Balance Sheet Data reflects (a) the sale in this offering of
shares of common stock at an initial public offering price of $
per share, the midpoint of the range set forth on the cover page of this
prospectus, less underwriting discounts and commissions and estimated
offering expenses of $ million, (b) the payment of $ million of the
offering proceeds to purchase network assets under construction in three
markets in Michigan, and (c) $ million of borrowings under Tranche C of
the Nortel financing related to the payment of an origination fee and
expenses related to the increased Nortel financing. For more information on
the Nortel financing, see "Description of Our Indebtedness--The Nortel
Credit Facility."
23
<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. The discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from the
results anticipated in these forward-looking statements as a result of factors
including, but not limited to, those under "Risk Factors" and 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 February 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.
Sprint PCS has invested $40.5 million to purchase the PCS licenses in our
territory and incurred additional expenses for microwave clearing. Under the
Sprint PCS agreements, we manage our network on Sprint PCS' licensed spectrum
as well as use 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. We record 100% of the revenues
from our customers, proceeds from the sale of handsets and accessories, and
roaming fees from Sprint PCS and other wireless service providers when their
customers use our network. Sprint PCS retains 8% of all collected service
revenue from our customers, excluding outbound roaming, and fees from wireless
providers other than Sprint PCS when their subscribers roam onto our network.
We report the amount retained by Sprint PCS as cost of service.
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
two additional markets. Our network covers approximately 805,000 residents, or
approximately 83% of a total population of 975,000 in those markets. 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. As of
24
<PAGE>
December 31, 1999, we incurred $39.4 million of capital expenditures and
construction in progress expenses related to the build-out of our network.
While we anticipate operating losses to continue, we expect revenue to increase
substantially as the number of our customers 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, Sprint PCS roaming revenue, non-Sprint PCS
roaming revenue and long distance revenue, 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.
. 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 and long distance revenue primarily
consists of fees collected from our customers when they roam on non-
Sprint PCS networks. However, it is possible that in some cases these
fees may be less than the amount we must pay to other wireless service
providers that provide service to our customers. Non-Sprint PCS roaming
revenue also 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
25
<PAGE>
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.
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, the cost of handsets
will continue to exceed the retail sales price.
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.
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 the
reorganization. For more information on the reorganization, see
"Reorganization." 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, 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.
26
<PAGE>
Liquidity and Capital Resources
Since the date of inception, we have financed our operations through equity
contributions from our owners and through financing provided by Nortel. As of
December 31, 1999 we had received $13.5 million of equity contributions from
our owners and had unfunded equity commitments of $16.5 million. As of
December 31, 1999, we had a $48.0 million credit facility with Nortel, of
which $27.6 million had been drawn. We are negotiating an amended and restated
credit agreement with Nortel to substantially increase the Nortel financing to
$170.0 million which will be effective as of the closing of this offering to
provide funds for the build-out of our expansion territory.
The credit agreement provides for three different tranches of borrowings
totaling $48.0 million. The Tranche A Commitment provides for borrowings up to
$32.0 million, the Tranche B Commitment provides for borrowings up to $11.0
million and the Tranche C Commitment provides for borrowings up to $5.0
million. Commencing September 30, 2002, we must begin to repay, in quarterly
installments, the principal on all borrowings made under the Tranche A or
Tranche B Commitment. A fixed percentage is due each quarter as follows:
. for the first four quarters, 2.50% of the principal balance of the loan
is due per quarter;
. for quarters five through eight, 3.75% per quarter; and
. for quarters nine through May 14, 2007, the maturity date, 6.25% per
quarter.
Any principal that has not been paid by the maturity date is due at that time.
We may voluntarily prepay any of the loans at any time, but any amount
repaid may not be reborrowed except Tranche B borrowings until May 14, 2001.
We also must make mandatory prepayments under certain circumstances,
including among others:
. 50% of our excess cash flow (as computed under the Nortel credit
agreement), commencing on March 31, 2002; and
. any amount in excess of $250,000 per calendar year received for asset
sales outside the ordinary course of business or insurance proceeds, to
the extent not reinvested in property or assets within a stated period
of time.
All prepayments are applied to the outstanding loan balances in the inverse
order of maturity.
The Nortel financing will be used to purchase equipment, pay interest and
cover approved working capital costs. For more information on the Nortel
facility, see "Description of Our Indebtedness--The Nortel Credit Facility."
Net cash used by operating activities was $3.9 million from the date of
inception through December 31, 1999. 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. The expenditures were related primarily
to the purchase of our network infrastructure equipment.
27
<PAGE>
Net cash provided by financing activities from the date of inception through
December 31, 1999 was $39.5 million consisting primarily of capital
contributions and borrowings under the Nortel financing.
On May 28, 1999 we signed a tower sale and leaseback agreement with American
Tower Corporation. Under this agreement, we will locate sites, develop and
construct between 60 and 80 wireless communication towers and then sell the
towers to American Tower. The term of this agreement will expire at the earlier
of the final tower sale or December 31, 2000. American Tower has advanced $2.0
million to the Company for the purchases of the fifty-third through sixtieth
towers. Should the Company not construct and sell the required number of towers
to American Tower by December 31, 2000, the Company will be required to repay
the advance plus accrued interest at 5%. As of December 31, 1999 we had sold 18
towers to American Tower.
As of December 31, 1999, our primary sources of liquidity were $2.7 million
in cash and $20.4 million of unused capacity under the $48.0 million Nortel
credit facility. We also had $16.5 million of unfunded equity commitments.
We anticipate that the proceeds from this offering, when combined with the
increased Nortel financing which we are negotiating, will be adequate to fund
our network build-out, anticipated operating losses and working capital
requirements through year 2002, at which point we expect to have achieved
break-even operating cash flow. The following table sets forth our estimated
sources and uses from January 1, 2000 through December 31, 2002:
<TABLE>
<CAPTION>
Amount
Sources: (In thousands)
<S> <C>
Cash on hand at January 1, 2000.................................. $ 2,733
Gross proceeds of this offering..................................
Proceeds from our Nortel financing...............................
Members' equity contributions....................................
--------
Total sources.................................................. $
========
Uses:
Capital expenditures, net (1).................................... $
Working capital and operating losses (2).........................
Debt service (3).................................................
Fees and expenses (4)............................................
--------
Total uses.....................................................
--------
Cash on hand at December 31, 2002..............................
--------
Total uses and cash on hand at December 31, 2002............. $
========
</TABLE>
- ---------------------
(1)Capital expenditures, assumed to be net of the proceeds from the sale of
towers for $ million, include the amounts related to the build-out of our
network and the purchase of assets under construction in three markets in
Michigan.
(2) Operating losses are defined as losses before interest, taxes, depreciation
and amortization.
(3) Debt service payments are composed of:
<TABLE>
<S> <C>
Interest payments.....................................................
Payment of Nortel financing principal.................................
</TABLE>
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<PAGE>
(4) Fees and expenses include estimated offering expenses and underwriting
discounts and commissions for this offering and origination and other fees
related to the increased Nortel financing.
The actual funds required to build-out our network and to fund operating
losses and working capital needs may vary materially from these estimates, and
additional funds could be required. For information see "Risk Factors--Risks
Particular to iPCS-- We may need more capital than we currently project to
build-out our network."
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 have a
total population of over 405,000. 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 would be
approximately $25.2 million if we exercise the option during March, 2000 and
increases monthly to a purchase price of $28.8 million if we exercise the
option during 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.
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.
Impact of Year 2000 Issue on the Operations and Financial Condition of iPCS
The year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four to
define the applicable year. Consequently, such software has the potential to
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We believe that our existing computer systems and software are year 2000
compliant. As we implement our own computer systems and software in the future,
we will assess year 2000
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<PAGE>
compliance prior to implementation. We have not incurred any costs nor
experienced any difficulties relating to year 2000 compliance. In the process
of designing and constructing our network, we have entered into material
agreements with several third-party vendors. We rely on them for all of our
important operating, computer and non-information technology systems. We are
therefore highly dependent on Sprint PCS and other vendors for remediation of
their network elements, computer systems, software applications and other
business systems. We purchase critical back office services from Sprint PCS,
and our network infrastructure equipment is contractually provided by Nortel.
If either Sprint PCS or Nortel is not year 2000 compliant, our operations may
be materially affected. We have contacted our third-party vendors and believe
that they are year 2000 compliant. However, we have no contractual or other
right to compel compliance by them.
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 Nortel financing and any future
financing requirements. Our variable rate debt consists of borrowings made
under our Nortel financing. The Nortel financing requires us 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. We have not
entered into such an agreement as February 4, 2000 and have received a waiver
of this requirement until April 1, 2000.
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 Nortel financing 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>
Nortel financing......... $27,571
Variable interest
rate(1).................
Principal payments....... -- -- -- 1,379 3,446 5,514 17,232
</TABLE>
- ---------------------
(1) Interest rate on our Nortel financing equals the lesser of either (1) a
base rate loan with an interest rate equal to the higher of (a) the prime
rate of Citibank, N.A. (New York), plus 3.0% or (b) the federal fund
effective rate plus .5%; or (2) the London Interbank Offered Rate
("LIBOR"), as adjusted for reserve requirements, plus 4.0%. LIBOR is
assumed to equal 6.0% 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 Nortel credit agreement. While we cannot predict our ability to
refinance existing debt or the impact interest rate movements will have on our
existing debt, we continue to evaluate our financial position on an ongoing
basis.
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<PAGE>
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 the Company's results of operations, financial position, or cash
flows.
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<PAGE>
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, wireless
personal communications services and enhanced specialized mobile radio service.
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 76.3 million
as of June 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.
<TABLE>
<CAPTION>
For the
Year Ended December 31, twelve month
---------------------------------- period ended
1994 1995 1996 1997 1998 June 30, 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 $37.2
Wireless subscribers at end of
period (in millions)......... 24.1 33.8 44.0 55.3 69.2 76.3
Subscriber growth............. 50.8% 40.0% 30.4% 25.6% 25.1% 25.4%
Average local monthly bill(2). $56.21 $51.00 $47.70 $42.78 $39.43 $40.24
</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--1998, 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.
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<PAGE>
BUSINESS
Overview
We are one of the largest of the 18 Sprint PCS affiliates, with the
exclusive right to provide Sprint PCS products and services to a total
population of more than 7.0 million in the midwestern United States. We market
100% digital, 100% PCS wireless products and services under the Sprint and
Sprint PCS brand names. 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 that have made Sprint PCS the
fastest growing wireless company in the country. As of February 29, 2000, we
had launched Sprint PCS service in four markets covering approximately 805,000
residents and had over 4,000 customers.
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 our initial territory. We successfully launched commercial
operations in two markets covering over 575,000 residents in December 1999 and
in two additional markets covering approximately 230,000 residents in February
2000. By the end of June 2000, we plan to launch service in six additional
markets covering approximately 930,000 residents, substantially completing our
network build-out 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 agreed to
purchase from Sprint PCS certain network assets under construction in three
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 have already been launched by Sprint PCS, which had a total
population of over 405,000. By the end of third quarter of 2001 we plan to be
providing service to approximately 65% of the total population of over 7.0
million in our territory, at which time our planned build-out for all of our
markets will be substantially complete.
Our territory includes attractive 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 operational Sprint PCS markets,
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.
Sprint PCS
Sprint is a diversified telecommunications service provider whose principal
activities include providing long distance service, PCS products and services,
local service, Internet access, product
33
<PAGE>
distribution and directory publishing, and other telecommunications services,
investments and alliances. 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 5.7
million customers as of December 31, 1999. For each of the six calendar
quarters prior to and including the quarter ended December 31, 1999, 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
inculding 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 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 1999.
<TABLE>
<CAPTION>
1997 1998 1999
--------------- ----------------------- -----------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total subscribers....... 192 347 570 887 1,114 1,370 1,750 2,586 3,350 3,967 4,687 5,723
</TABLE>
On October 5, 1999, Sprint and MCI WorldCom announced that the boards of
directors of both companies had approved a definitive merger agreement whereby
the two companies would merge to form a new company called WorldCom. The merger
is subject to various conditions, including the approvals of the shareholders
of both companies, the FCC, the Justice Department, various state government
bodies and foreign regulatory and antitrust authorities.
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.
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<PAGE>
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 and Sprint PCS' other national sales and distribution
channels, including:
. a sales and distribution agreement with RadioShack, which provides us
with access to nearly 100 stores in our territory on an exclusive basis
for PCS;
. the sales and distribution agreements with other major national third-
party retailers such as Kmart, Staples, Target, Office Max, Best Buy,
Office Depot, Ritz Camera and Circuit City, which collectively provide us
with access to over 200 stores in our territory;
. Sprint PCS' national inbound telemarketing sales force;
. Sprint PCS' national accounts sales team; and
. Sprint PCS' electronic commerce sales platform.
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.
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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 licenses covering more than 2.3 million of the
residents within our territory or operates in more than 11 of our 35 markets.
We expect that we will 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 they are 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.
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Opportunity 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
Sprint PCS markets that are already operational, including Chicago, Detroit,
St. Louis, Indianapolis, Omaha and Des Moines. These market areas contain
approximately 20 million residents. We are building our network to cover over
1,700 interstate miles between 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."
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.
Proven ability to execute our business 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
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providing commercial service in two of these markets covering over 575,000
residents. As of February 29, 2000, we had launched Sprint PCS service in four
markets covering approximately 805,000 residents and had over 4,000 customers.
We are using the same implementation methodologies for the network construction
in all markets in our territory.
Fully financed business plan. We anticipate that the proceeds of this
offering, when combined with the available borrowings under our increased
Nortel financing, will be adequate to fund our network build-out, anticipated
operating losses and working capital requirements through 2002, at which time
we expect to have achieved break-even operating cash flow.
Business Strategy
We intend to become the leading provider of PCS services in our territory.
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.
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 integrated marketing plan. Our marketing plan 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;
. directing our media efforts at the community level by advertising in
local publications, radio and television; and
. sponsoring local and regional events.
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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 in the future. 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."
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 markets in the midwestern United States where Sprint PCS has
already launched service and our network will connect these existing Sprint PCS
markets. 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 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 over
405,000.
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.
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<TABLE>
<CAPTION>
Estimated Covered Population as
MHz of Estimated Total Covered a Percentage of
BTA Market (1) Spectrum Population (2) Population (3) Total Population
<S> <C> <C> <C> <C>
Davenport, IA/Moline,
IL..................... 30 430,000 374,000 87%
Bloomington, IL......... 10 232,000 204,000 88%
--------- ---------
Total Year 1999....... 662,000 578,000 87%
========= =========
Peoria, IL.............. 10 465,000 320,000 69%
Springfield, IL......... 10 266,000 210,000 79%
LaSalle-Peru-Ottawa-
Streator, IL........... 20 152,000 119,000 78%
St. Louis, MO
(partial) (3).......... 30 47,000 20,000 43%
--------- ---------
Subtotal (Q1 2000)..... 930,000 669,000 72%
--------- ---------
Decatur-Effingham, IL... 10 248,000 169,000 68%
Champaign-Urbana, IL.... 10 219,000 187,000 85%
Kankakee, IL............ 20 135,000 93,000 69%
Galesburg, IL........... 10 74,000 42,000 57%
--------- ---------
Subtotal (Q2 2000)..... 676,000 491,000 73%
--------- ---------
Clinton, IA/Sterling,
IL..................... 30 147,000 96,000 65%
Mt. Vernon-Centralia,
IL..................... 30 122,000 57,000 47%
Danville, IL............ 20 112,000 66,000 59%
Jacksonville, IL........ 10 71,000 29,000 41%
Mattoon, IL............. 10 63,000 55,000 87%
--------- ---------
Subtotal (Q3 2000)..... 515,000 303,000 59%
--------- ---------
Total Year 2000....... 2,783,000 2,041,000 73%
========= =========
Grand Rapids, MI........ 30 1,036,000 830,000 80%
Saginaw-Bay City, MI.... 30 632,000 398,000 63%
Muskegon, MI............ 30 220,000 136,000 62%
Lansing, MI (partial)
(3).................... 30 62,000 39,000 63%
Battle Creek, MI
(partial)(3)........... 30 55,000 20,000 36%
--------- ---------
Subtotal (Q1 2001)..... 2,005,000 1,423,000 71%
--------- ---------
Waterloo-Cedar Falls,
IA..................... 30 261,000 150,000 57%
Traverse City, MI....... 30 236,000 102,000 43%
Dubuque, IA............. 30 178,000 106,000 60%
Des Moines, IA
(partial)(3)........... 30 171,000 79,000 46%
Burlington, IA.......... 30 137,000 93,000 68%
Mount Pleasant, MI...... 30 129,000 78,000 60%
Ottumwa, IA............. 30 124,000 64,000 52%
Marshalltown, IA........ 30 57,000 33,000 58%
--------- ---------
Subtotal (Q2 2001)..... 1,293,000 705,000 55%
--------- ---------
</TABLE>
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<TABLE>
<CAPTION>
Estimated Covered Population as
MHz of Estimated Total Covered a Percentage of
BTA Market (1) Spectrum Population (2) Population (3) Total Population
<S> <C> <C> <C> <C>
Omaha, NE (partial) (3). 30 249,000 114,000 46%
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 47,000 41%
Norfolk, NE............. 30 112,000 40,000 36%
Lincoln, NE (partial)
(3).................... 30 98,000 26,000 27%
Hastings, NE............ 30 72,000 38,000 53%
--------- ---------
Subtotal (Q3 2001)..... 922,000 407,000 44%
--------- ---------
Total Year 2001....... 7,003,000 4,576,000 65%
========= =========
</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 covered under the Sprint PCS agreements, 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 575,000 residents. In February 2000, we launched
service in the Springfield, Illinois and St. Louis, Missouri markets covering
approximately 230,000 residents. By the end of 2000, we will have substantially
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 2.0 million residents
or 73% 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
agreed to purchase from Sprint PCS network assets under construction in three
markets in Michigan. We anticipate closing on the purchase of those assets
concurrently with the closing of this offering.
By the end of the third quarter of 2001, we plan to be substantially
complete with our build-out and we anticipate covering 4.6 million residents,
or 65% 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 over 405,000. 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 would be approximately
$25.2 million if we exercise
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the option during March, 2000 and increases monthly to a purchase price of
$28.8 million if we exercise the option during 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 will 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.
We can 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.
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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 65% 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 territory. We will construct an additional switching center in Michigan
and another in a location to be determined.
Interconnection. Our digital PCS network will connect 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 will supply 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.
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Nortel Equipment Agreement
In May 24, 1999, we entered into a three year $32.0 million equipment
purchase agreement with Nortel for our network equipment and infrastructure,
including switches and base station controllers for our initial territory. In
connection with the increase of the Nortel financing to $ million, the
equipment purchase agreement has been extended until . 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 term of the agreement, we have
committed to purchase a specified amount of equipment and services from Nortel.
Nortel finances these purchases pursuant to the Nortel financing described in
"Description of Our Indebtedness--The Nortel Credit Facility." As of December
31, 1999, we have a remaining commitment of $ million to purchase equipment
and will have a remaining commitment of $ million under the amended
agreement. 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, but we must pay a
slight premium to the discounted price on any equipment and services financed
by Nortel. 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.
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.
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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 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.
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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
In addition to service revenue from our customers, we also collect roaming
revenue. The term "Sprint PCS roaming" is used when Sprint PCS subscribers
based outside of our territory use our network (inbound Sprint PCS roaming) and
when our customers use the Sprint PCS network outside of our territory
(outbound Sprint PCS roaming).
Sprint PCS pays us a per-minute fee for inbound Sprint PCS roaming.
Similarly, we pay a per-minute fee to Sprint PCS for outbound Sprint PCS
roaming. We are entitled to 100% of the revenues for both inbound and outbound
Sprint PCS roaming. 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 and our
non-Sprint PCS roaming revenue is likely to be low."
Non-Sprint PCS Roaming
The term "non-Sprint PCS roaming" is used when non-Sprint PCS subscribers
use our network (inbound non-Sprint PCS roaming) and when our customers use a
non-Sprint PCS network (outbound non-Sprint PCS roaming). Pursuant to roaming
agreements between Sprint PCS and other wireless service providers, when other
wireless service provider subscribers use our network, we earn inbound non-
Sprint PCS 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
outbound non-Sprint PCS roaming fees. We pay the other wireless service
providers for our customer use and our customers incur outbound non-Sprint PCS
roaming fees at rates specified in their
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contracts. As a result, we retain the collection risk from our customers for
outbound non-Sprint PCS roaming charges incurred by them. We are entitled to
100% of the outbound non-Sprint PCS roaming fees collected from our customers.
Currently, pursuant to the Sprint PCS agreements, Sprint PCS bills our
customers for the outbound non-Sprint PCS 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 that have made Sprint PCS
the fastest growing wireless company in the country. For each of the five
calendar quarters prior to and including the quarter ended December 31, 1999,
Sprint PCS has recorded the five largest numbers of new subscribers added in a
quarter by a U.S. wireless 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. We plan to enhance Sprint PCS' proven
strategies with strategies 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 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.
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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 Kmart, Staples, Target,
Office Max, Best Buy, Office Depot, Ritz Camera and Circuit City. 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 the 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 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
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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, technology. 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 time division multiple access, or TDMA, and global system
for mobile communications, 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.
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.
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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 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. For example, U.S. Cellular covers approximately 85% of the
population in Iowa but does not provide service in other key areas of our
territory such as Springfield, Decatur, Bloomington or Champaign-Urbana in
Illinois, and no markets in Michigan or Nebraska. SBC/Cellular One 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.
In addition, four cellular carriers (SBC/Cellular One, Ameritech, GTE Wireless
and ALLTEL) have entered into major transactions which we believe will affect
their branding and operations within our territory. Other PCS competitors such
as NPI Wireless, Omnipoint, Iowa Wireless, PrimeCo and Amica 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 financial resources and customer bases greater
than ours. 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 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.
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Michigan. In our Michigan markets, the two cellular carriers are CenturyTel
and AirTouch. CenturyTel provides service in all of our Michigan markets, but
unlike Sprint PCS, does not provide service in Detroit or in our Illinois, Iowa
or Nebraska markets. AirTouch only provides service in three of our Michigan
markets and does not provide any service in our Illinois, Iowa or Nebraska
markets. The only PCS providers in our Michigan markets are NPI Wireless and
Omnipoint. Both use GSM technology and neither provides service in more than
three of our Michigan markets, nor in each other's markets. Neither provides
service in any of our Illinois, Iowa or Nebraska markets. We believe Nextel
provides service in most or all of our Michigan markets.
Illinois. In our Illinois and Quad Cities, Iowa markets there are currently
five major cellular operators: SBC/Cellular One, GTE Wireless, Ameritech, U.S.
Cellular, and ALLTEL. None provides service to over half of the total
population in our initial territory. The only PCS operators in these markets
are Iowa Wireless, Amica Wireless, and PrimeCo. Iowa Wireless only operates in
our Quad Cities market, with no other operations in Illinois, Michigan or
Nebraska. They do operate in many of our Iowa markets, and we believe they have
an affiliation with VoiceStream. Amica Wireless operates in four of our central
Illinois markets but has no other operations in our other Illinois markets.
PrimeCo's only operations throughout our territory are in five of our central
Illinois markets, and we believe their coverage and sales distribution channels
are limited. We believe that neither Nextel nor Nextel Partners currently
operates in any of our Illinois or Quad Cities markets but that they have near
term plans to provide service in these markets and along the major interstate
routes. We believe their market strategy will focus on the business market
segment and that their prices will be higher than PCS or cellular.
Iowa. In Iowa, U.S. Cellular and ALLTEL both operate in all of our markets.
ALLTEL also has extensive coverage in Nebraska, but offers no service in either
the Quad Cities, Illinois or in any of our Michigan markets. U.S. Cellular's
only service in our markets outside of Iowa is in the Quad Cities, Peoria and
Galesburg, Illinois. Our only PCS competitor in Iowa is Iowa Wireless which
operates in most or all of our Iowa markets, but in no other markets throughout
our territory except for the Quad Cities. We do not believe Nextel or Nextel
Partners is operating in Iowa markets but we believe they have near term plans
in several of these markets.
Nebraska. In our Nebraska markets, our most significant competition is from
the two cellular operators, ALLTEL and Cellular One, which both have extensive
coverage throughout Nebraska. In addition, Nebraska Wireless Telephone Company
is offering limited PCS service in eastern Nebraska.
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.
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
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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.
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. We expect, pursuant to the Sprint PCS agreements, 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.
Except in certain instances, 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. 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."
Employees
As of February 29, 2000, we employed 57 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 eight locations in
Illinois, primarily for our Sprint PCS stores, project
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offices and a switching center. As of December 31, 1999, we leased space on 50
towers and owned 41 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 Nortel and the holders of
any refinancing of our Nortel financing.
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.
Sprint PCS will monitor our network operations and has the right to
unconditional access to our network.
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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. 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.
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 February 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.
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 premise 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, we do not currently serve any market 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 under the Sprint PCS agreements. Collected revenues include revenue
from Sprint PCS subscribers based in our territory, excluding outbound roaming,
and inbound non-Sprint PCS roaming. Outbound non-Sprint PCS roaming revenue,
inbound and outbound Sprint PCS roaming fees, proceeds from the sales of
handsets and accessories, proceeds from sales not in the ordinary course of
business and amounts collected with respect to taxes are not considered
collected revenues. Except in the case of taxes, we are entitled to 100% of
these revenues. 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 that a Sprint PCS subscriber not based in our territory and any
non-Sprint subscriber uses our network. We will earn revenues from Sprint PCS
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 own subscribers use the Sprint PCS nationwide network outside our
territory. The analog roaming rate onto a non-Sprint PCS provider's network is
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,
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brands of related parties of ours or other products and services approved under
the management 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 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 and 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,
handset logistics, home locator record, 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 Holder of Nortel Financing
Sprint PCS has entered into a consent and agreement with Nortel, which has
been acknowledged by us, that modifies Sprint PCS's rights and remedies under
our management agreement, for the benefit of Nortel and future holders of our
Nortel financing and any refinancing thereof referred to as the Nortel Consent,
which was a condition to the funding of any amounts under our Nortel financing.
The Nortel Consent generally provides, among other things, the following:
. Sprint PCS's 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 Nortel financing is satisfied in full pursuant to the terms of the
Nortel 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 (Nortel is
the initial administrative agent as discussed in more detail in
"Description of Our Indebtedness--The Nortel Credit Facility");
. for Sprint PCS to maintain 10MHz of PCS spectrum in all of our markets
until our Nortel financing is satisfied or our operating assets are sold
after our default under our Nortel financing;
. 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 Nortel financing;
. for Sprint PCS and the administrative agent to provide to each other
notices of default by us under the Sprint PCS management agreement and
Nortel financing, 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 financing from Nortel 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 partnership 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 Nortel financing 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 Nortel Consent and agreement in the same manner at the
administrative agent's request.
Sprint PCS' Right to Purchase on Acceleration of Amounts Outstanding under our
Nortel Financing
Subject to the requirements of applicable law, so long as our Nortel
financing remains outstanding, Sprint PCS has the right to purchase our
operating assets or the partnership interests of our operating subsidiaries,
upon its receipt of notice of an acceleration of our Nortel financing, 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 Nortel financing;
. 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 partnership interests of our operating
subsidiaries after the acceleration, then Sprint PCS has the right to
purchase our operating assets or the partnership 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
partnership 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 partnership
interests of our operating subsidiaries after an acceleration of the
obligations under our Nortel financing, then the administrative agent may sell
the operating assets or partnership 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 partnership interests to an entity that meets the
requirements to be our successor under the Sprint PCS agreements; or
. to sell the assets or partnership 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 over 405,000. 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 would be approximately
$25.2 million if we exercise the option during March, 2000 and increases
monthly to a purchase price of $28.8 million if we exercise the option during
January, 2001; provided, that the minimum purchase price will be (x)
$19,945,600, plus (y) 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 Nortel Credit Facility
General
Illinois PCS, LLC entered into a credit facility effective May 14, 1999 with
Nortel for $48.0 million. We are negotiating an amended and restated credit
agreement with Nortel to increase the credit facility to $170.0 million to be
effective as of the closing of this offering. As of December 31, 1999, we had
borrowed $27.6 million under the facility. This facility constitutes senior
debt secured by a first priority security interest in substantially all of our
assets. We have agreed that any future subsidiaries of ours will guarantee this
facility. Certain of the terms of the existing facility which
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relate to the limited liability company structure will not be applicable after
the closing of the offering.
Amount and Purpose of Loans
The credit agreement provides for three different tranches of borrowings
totaling $48.0 million. The Tranche A Commitment provides for borrowings up to
$32.0 million, the Tranche B Commitment provides for borrowings up to $11.0
million and the Tranche C Commitment provides for borrowings up to $5.0
million. This facility is used to purchase equipment and services from Nortel,
to fund other costs of the build-out of our network and to fund costs
associated with the financing. Nortel is the primary vendor of the equipment
and services necessary to install our network. See "Business--Nortel Equipment
Agreement."
The amount that can be borrowed under Tranche B, and the amount that can be
borrowed under Tranche C to pay third-party expenses, is further limited to a
borrowing base that is computed by the administrative agent at specified times,
as provided in the credit agreement. The borrowing base is defined as a
specified percentage of the amount paid to Nortel to purchase equipment and
services used in our network. We 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. This is not a revolving
credit arrangement so reductions cannot be reinstated except that borrowings
under Tranche B may be reborrowed at any time prior to May 14, 2001.
Commitment Termination
The Tranche A Commitment and the Tranche B Commitment are both scheduled to
terminate on May 14, 2002. The Tranche C Commitment is scheduled to terminate
on May 14, 2000. These commitments may also terminate:
. when any commitment is fully funded;
. upon a change in control of our company;
. if we voluntarily terminate any commitment; and
. if the administrative agent terminates one or all of the commitments due
to the occurrence of an event of default under the credit agreement.
A change in control will occur if:
. any person or group acquires more than 25% of our equity;
. our managers who were elected or approved by the owners as of May 14,
1999 (or any managers who are approved by such managers), cease for any
reason to constitute at least a majority of our managers;
. any person or group acquires more of our equity than is owned
collectively by specific persons delineated in the credit agreement or
Geneseo Communications, Inc. and Cambridge Telcom, Inc. combined own less
than 51% of our equity; or
. we cease to own all of the capital stock of any subsidiary of ours.
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Syndication
Nortel is permitted to syndicate the loan to other lenders. If the loan is
syndicated, then Nortel may be replaced as administrative agent by any
successor administrative agent, acting on behalf of the lenders in the
syndicated group.
Loans and Interest Options
We have multiple interest rate options available under the credit agreement:
. we may borrow money as either (1) a base rate loan with an interest rate
equal to 3.00% plus the higher of (A) the prime or base rate of Citibank,
N.A. (New York), or (B) the federal funds effective rate plus (0.5%); or
(2) a Eurodollar loan with an interest rate equal to the London interbank
offered rate, as adjusted for reserve requirements, plus 4.00%;
. we may convert a base rate loan to a Eurodollar loan, 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 may pay interest due on the loans with borrowings obtained under the
Tranche C Commitment until May 14, 2000;
. we pay interest due upon any prepayment or conversion from one interest
type to another; and
. we pay all outstanding interest on May 14, 2007, the maturity date.
Payment of Principal
Scheduled Payments. Commencing September 30, 2002, we must begin to repay,
in quarterly installments, the principal on all borrowings. A fixed percentage
is due each quarter:
. for the first four quarters, 2.5% of the principal balance of the loan is
due per quarter;
. for quarters five through eight, 3.75% per quarter; and
. for quarters nine through the maturity date, 6.25% per quarter.
Any principal that has not been paid by the maturity date is due at that time.
Optional Prepayments. We may voluntarily prepay any of the loans at any
time, but any amount repaid may not be reborrowed, except Tranche B borrowings
until May 14, 2001, because there are no other revolving credit features.
Mandatory Prepayments. We also must make mandatory prepayments under certain
circumstances, including among others:
. 50% of our excess cash flow, commencing on March 31, 2002; and
. any amount in excess of $250,000 per calendar year received for asset
sales or insurance proceeds, to the extent not reinvested in property or
assets within a stated period of time.
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All prepayments are applied to the outstanding loan balances in the inverse
order of maturity.
Fees
The credit agreement requires us to pay the following fees at various
times:
. an origination fee of 3% which was paid on May 14, 1999; and
. a fee on the unfunded portion of each commitment, computed by multiplying
the average daily unused amount of each commitment by a percentage which
decreases from 1.50% to 0.75% per year as the amount drawn increases.
This second fee is payable in arrears on the last day of each calendar quarter
until the termination of the relevant commitment. If the administrative agent
is not Nortel, we must also pay a separate annual agent's fee of $35,000 to
the administrative agent.
Board Observation Right
While there are any loans or commitments under the credit agreement, the
administrative agent is entitled to receive notices of our annual meetings of
owners and to have a non-voting observer in attendance at any of those
meetings. Such observer may share information learned at those meetings with
the administrative agent and lenders, but the information must be kept
confidential by those persons.
Collateral
Our Nortel financing is secured by:
. a perfected first priority lien on substantially all of our current and
future assets, and the assets 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, together with a mortgagee policy of
title insurance, a survey, an appraisal and an environmental survey.
Minimum Equity Requirements
As a closing condition of the credit facility, our owners have committed to
contribute $30.0 million in equity capital. As of February 29, 2000, equity
capital of $16.5 million has been contributed.
Conditions
We must meet certain conditions before we may obtain any future borrowings
under the credit agreement, including:
. that there has been no event of default;
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. a reaffirmation of representations;
. that we have a debt to contributed capital ratio of less than or equal to
a range of between 2.0 to 1.0 and 1.6 to 1.0 at various dates; and
. that there has not been a material adverse change, as defined in the
credit agreement.
Negative Covenants
Other Debt. With limited exceptions such as purchase money debt not to
exceed $1.0 million in principal on terms satisfactory to Nortel, we have
agreed not to incur additional debt.
Organizational Issues and Capital Stock. We have agreed, with an exception
for mergers with any of our future subsidiaries, 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.
Restricted Payments. We have agreed not to make any "restricted payments."
Restricted payments include:
. 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 any subordinated debt;
. any loan, advance or payment to any officer, director or stockholder,
except for reasonable compensation paid to officers or directors in the
ordinary course and temporary loans to such parties not to exceed
$100,000 in the aggregate outstanding at any time and distributions
calculated based on the amount of net income allocated to owners; and
. any payment made to retire any outstanding warrants, options or other
rights to acquire capital stock.
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; or
. any material contract.
Other Negative Covenants. We and the operating subsidiaries have agreed,
with limited exceptions, not to:
. dispose of property;
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. enter into sale/leaseback transactions;
. 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;
. terminate the agreement pursuant to which Nortel sells goods and services
to us relating to our network, before the earlier of May 14, 2002 or the
date that we had satisfied our purchase obligations of $32.0 million;
. 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;
. 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 including:
. a maximum ratio of total debt to total capitalization;
. a maximum ratio of total debt to annualized earnings before interest,
taxes, depreciation and amortization, referred to as EBITDA, for each
quarter;
. minimum annualized EBITDA for each quarter;
. minimum quarterly fixed charge coverage ratio, which is the ratio of
EBITDA plus cash and the unused portion of the loan to consolidated fixed
charges;
. maximum cumulative capital expenditures not to exceed a specified amount;
. minimum quarterly revenue;
. minimum number of subscribers; and
. maximum yearly payments under operating leases.
Events of Default
In addition to failing to perform, observe or comply with the covenants,
agreements and terms of the credit agreement, it is an event of default under
the credit agreement if any party with financial responsibility for the loans
or the outstanding, unsecured equity commitments, or Illinois PCS LLC, a
signatory to the Sprint PCS agreements, becomes insolvent, commences or suffers
bankruptcy proceedings or suffers other indicia of extreme financial duress.
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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 $250,000;
. a judgment against us of greater than $250,000;
. failure to pay other loans as they become due or a default that permits
acceleration of other debt;
. a breach by us under the supply agreement with Nortel, the consent and
agreement with Nortel 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, on our ability to
repay the loan, or on Nortel's collateral.
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MANAGEMENT
Directors and Executive Officers
The following table presents information with respect to our directors and
executive officers who, prior to the formation of iPCS, Inc. in March 2000,
have served Illinois PCS, LLC in comparable positions.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Timothy M. Yager 30 President, Chief Executive Officer, Chief
Financial Officer and Director
William W. King, Jr. 60 Vice President, Strategic Planning and
Director
Dow C. Costa 36 Vice President, Sales & Marketing
Alan C. Anderson 62 Chairman of the Board of Directors
Donald L. Bell 54 Director
Brian J. Gernant 42 Director
Robert W. Schwartz 60 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, Chief Financial 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.
William W. King, Jr. has been Vice President, Strategic Planning and
Director 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 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.
Dow C. Costa has been Vice President, Sales & Marketing of Illinois PCS, LLC
since July 1999 and has held the same position with iPCS, Inc. since its
formation. From March 1997 to July 1999, he was an employee of Sprint PCS where
he served as a Manager, Strategic Transactions until May 1998, and since then
as a Senior Manager, Affiliate Development. From September 1996 to January 1997
Mr. Costa was a wireless consultant for DC Consulting, serving the wireless
industry. From August 1994 to August 1996, Mr. Costa served as the Director,
Wireless Business Development for
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Paging Network, Inc. Prior to this, he held various management positions at
Geotek Communications, Inc., Lennox Industries and Southwestern Bell Mobile
Systems.
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, Chief Financial 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. Mr. Gernant participates in this offering solely in his
individual capacity, is not acting as a broker in this offering, and this
offering is not associated in any manner with A.G. Edwards & Sons, Inc. Mr.
Gernant's participation herein is not to be construed as a solicitation or
endorsement by A.G. Edwards & Sons, Inc. 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
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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
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 nine directors comprising the board of directors are divided into three
classes. , and constitute Class I and
will stand for election at the annual meeting of stockholders to be held in
2001. , and constitute Class II and
will stand for election at the annual meeting of stockholders to be held in
2002. , and 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 . The compensation committee
consists of .
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 the incentive stock plan (described below).
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 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.
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Limitation on Liability and Indemnification
Our 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.
We have entered into agreements to indemnify our directors and officers in
addition to indemnification provided for in our certificate of incorporation.
These agreements, among other things, indemnify our directors and officers for
certain expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by us or in our right, arising out of such person's services as a
director or officer of ours, any subsidiary of ours, or any other company or
enterprise to which the person provides services at our request. In addition,
we intend to obtain directors' and officers' insurance providing
indemnification for certain of our directors, officers and employees for
certain liabilities. We believe that these provisions, agreements and insurance
are necessary to attract and retain qualified directors and officers.
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 Chief Executive Officer. 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
Chief Financial Officer
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.
Compensation of Directors
During 1999, we did not compensate the member representatives who functioned
in a manner comparable to a board of directors. Following the closing of this
offering, directors will be reimbursed for their expenses of attendance at
board meetings and non-employee directors will be granted stock options under
our Directors' Stock Option Plan. Each non-employee director will be
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awarded a stock option to purchase shares of our common stock upon the closing
of the offering at an exercise price of $ , calculated as 90% of the midpoint
of the range set forth on the cover page of this prospectus and each new non-
employee director will be awarded a similar stock option at the time he or she
is elected to the Board. Discretionary grants of stock options may be made to
non-employee directors under our Director's Stock Option Plan from time to
time, subject to the approval of the full board.
Employment Agreements
We plan to enter 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 bonuses
in the discretion of the board of directors, 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 and a company-paid
term life insurance policy. In connection with this offering, Mr. Yager
received a one-time grant of stock options and will also be granted stock
options under our long-term incentive plan. The details regarding these options
are discussed in the next section.
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 or through the end of the employment period, if earlier, 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, he will be entitled to continuing
payments of his salary through the first anniversary of his termination or the
last day of the employment period or his death, if earlier, continuation of
health benefits for him and his dependents for the same period and a lump sum
payment of his target incentive bonus. 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 and continuation of
his health benefits (for him and his dependents) at the employee rate for a
period of two years following his termination. 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 parachute payments under applicable IRS
rules, he will receive a payment from us in an amount which is sufficient to
pay the excise tax that he will have to pay on
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those parachute payments (called the "excise tax gross-up payment") and the
income tax and related employment taxes that he will have to pay on the excise
tax gross-up payment. 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 also plan to enter into employment agreements with Mr. King, Mr. Costa, a
new Chief Financial Officer and a new Chief Operating Officer which are
substantially similar to the proposed employment agreement for Mr. Yager except
for individual compensation packages and job duties and post-termination
noncompetition and nonsolicitation period of 12 months. In addition, the
employment agreements for persons other than Mr. Yager provide that, following
a change in control, a termination by us for reasons other than cause or a
termination by the individual for good reason will entitle the individual to a
severance payment of one year of base salary and continuing health benefits for
one year (rather than two years as in Mr. Yager's agreement).
2000 Long Term Incentive Stock Plan
On , 2000, the board of directors adopted, and on ,
2000 the stockholders approved, a 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 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
, and the maximum cash payout for grants or awards under this plan
each year to any of our key executive officers is $ .
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. Incentive stock options are intended to satisfy the
requirements of Section 422 of the Internal
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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 (i) % 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 (ii) 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.
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.
Number of Securities
<TABLE>
<CAPTION>
Exercise
Underlying % of Total Granted Expiration Value at Date
Name Options Options Price Date of Grant(1)
<S> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
(1) Value at date of grant is based on the product of the public offering price
of $ per share minus the exercise price, multiplied by the number of
securities underlying the options granted.
Agreements for grants of options under the option plan include
confidentiality and noncompetition provisions. These provisions require that
for so as long as the employee works for us, and for a period of two years
after the employee's termination for any reason, the employee may
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not disclose in any way any confidential information. The agreements also
provide that for so long as the employee works for us and for a period of 18
months after the employee's termination for any reason, the employee is
prohibited from:
. engaging in the same business or in a similar capacity in our territory;
. soliciting business in competition with us; and
. hiring any of our employees or directly or indirectly causing any of our
employees to leave their employment to work for another employer.
For so long as the shares underlying the options are not registered with the
Securities and Exchange Commission, in the event of a breach of the
noncompetition provisions by an employee, we have the option to repurchase any
and all shares held by the employee at the employee's exercise price. We may,
at any time, pursue any other remedies provided by law or in equity.
THE REORGANIZATION
We are currently Illinois PCS, LLC, an Illinois limited liability company.
Immediately prior to the closing of this offering, we will reorganize the
business into the holding company structure outlined below. In connection with
the reorganization, the owners of Illinois PCS, LLC will contribute their
limited liability company membership interests to iPCS, Inc. and in exchange
will receive shares of common stock of iPCS, Inc. in the same percentages as
their membership interests in Illinois PCS, LLC immediately prior to the
closing of this offering. Unless otherwise indicated, information throughout
this prospectus assumes that the reorganization of our business from a limited
liability company into a holding company structure has already occurred.
iPCS, Inc. is the legal entity that is selling its common stock in this
offering. Illinois PCS, LLC is the legal entity that is the borrower under our
Nortel financing. Illinois PCS, LLC will be a wholly owned subsidiary of iPCS,
Inc. following the reorganization.
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PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of common stock as of February 29, 2000 and assumes that each owner of Illinois
PCS, LLC has received its proportionate number of shares of iPCS, Inc. common
stock as of such date, 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, 34.5%
Inc.......................
111 E. 1st Street
Geneseo, Illinois 61254
Cambridge Telcom, Inc..... 29.6
111 E. 1st Street
Geneseo, Illinois 61254
Cass Communications 9.9
Management, Inc...........
One Redbud Road
Virginia, Illinois 62691
Technology Group, LLC..... 9.9
118 E. State Street
Hamel, Illinois 62046
Montrose Mutual PCS, Inc.. 9.9
102 N. Main Street
Dieterich, Illinois 62424
Respond Communications, 9.9
Inc. .....................
102 N. Main Street
Dieterich, Illinois
62424(3)
Timothy M. Yager.......... 1.5
William W. King, Jr. ..... -- --
Alan C. Anderson (4)...... 64.1
Donald L. Bell (5)........ 9.8
Brian J. Gernant.......... -- --
Gerald E. Gill(6)......... 9.9
Robert W. Schwartz (7).... 9.8
George Patrick Tays (8)... 9.8
All executive officers and
directors
as a group ( persons).
</TABLE>
- ---------------------
*Less than one percent.
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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 voting power or
investment power with respect to such common stock, or has the right to
acquire beneficial ownership at any time within 60 days of the date of the
table. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct
the disposition of shares.
(3) 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.
(4) 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.
(5) 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, Inc.
(6) Consists of shares beneficially owned by Cass Communications, Inc. Mr. Gill
is the Chairman and majority shareholder of Cass Communications, Inc. and
is the beneficial owner of these shares. The address for Mr. Gill is the
same as the address for Cass Communications, Inc.
(7) 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.
(8) 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,
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, the Company's
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 the Company in exchange for his 1.5%
membership interest and certain other consideration. It is anticipated that the
Company will record significant compensation expense resulting from the
issuance of this membership interest to Mr. Yager.
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 will be eliminated when we reorganize from a limited liability company to a
holding company structure immediately prior to the closing of this offering.
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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 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 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 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
Broadband PCS providers, other than C, D, E and F block PCS licensees not
affiliated with cellular or A or B block PCS licensees, 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 in June 1996 that require local exchange and most
CMRS carriers to program their networks to allow customers to change service
providers without changing telephone numbers, which is referred to as service
provider number portability. The FCC requires most CMRS carriers to implement
wireless service provider number portability where requested in the top 100
metropolitan areas by November 24, 2002. CMRS providers outside those areas
must make arrangements with CMRS providers who have already implemented service
provider number portability by that date. 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. CALEA requires
telecommunications carriers 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
CALEA. In August 1999, the FCC supplemented the uncontested interim industry
standards with additional standards. Although the deadline established by CALEA
for meeting such standards was October 25, 1998, the FCC has granted an
extension of this deadline because CALEA-compliant equipment is not yet
available. For uncontested 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.
Other Federal Regulations
Wireless systems 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 become subject to regulation under the National
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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. We have shares of authorized capital stock, including
shares of common stock, par value $0.01 per share, and
shares of preferred stock, par value $0.01 per share. Immediately prior to the
closing of this offering, assuming the reorganization of our business into a
holding company structure as of there were shares of
common stock and no shares of preferred stock issued and outstanding. As of
that date there would have been holders of record of the outstanding
shares of common 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,
conversion, redemption, subscription or 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 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;
. right to convert the preferred shares into a different type of security;
. voting rights attributable to the preferred shares;
. right to set aside a certain amount of assets for payment relating to the
preferred shares; and
. prices to be paid upon redemption of the preferred shares or a bankruptcy
type event.
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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 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.
Warrants
As additional consideration to Sprint Spectrum L.P. for its agreement to
expand our territory, we will issue to Sprint Spectrum L.P., or any of its
designees controlled by, or under common control with, Sprint Spectrum L.P.
warrants for outstanding shares at the time of this offering. The
warrants will be exercisable by Sprint Spectrum L.P. beginning on or after July
15, 2001 and expiring on July 15, 2007. Upon completion of our offering, the
exercise price for the warrants will be $ , calculated based on an
assumed initial public offering price of $ per share, the midpoint of
the range set forth on the cover page of this prospectus. 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.
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 by-laws will also require a stockholder who intends to nominate a
candidate for election to the board of directors, 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.
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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.
Our certificate of incorporation provides that 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 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
.
Listing
Application will be made to have our common stock quoted on the Nasdaq
National Market under the symbol "IPCS."
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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
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
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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, shares of common stock
will become eligible for sale, subject to compliance with Rule 144 of the
Securities Act as described above.
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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
the Company 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 foreign
partnership is a qualified intermediary. 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.
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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 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:
. The Company is or has been during the five-year period ending on the date
of disposition a United States real property holding corporation for U.S.
Federal income tax purposes, which we do not believe that it has been or
is currently and does 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.
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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.
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.
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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, 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............
The Robinson-Humphrey Company, LLC.............................
DLJdirect Inc..................................................
-------
Total........................................................
=======
</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.
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
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>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be $ million.
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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, 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.
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We expect that delivery of the shares will be made to investors on or about
, 2000.
The underwriters may purchase and sell shares of common stock in the open
market in connection with this offering. These transactions may include short
sales, stabilizing transactions and purchases to cover 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.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or slowing a decline in the market price of the common
stock while the offering is in progress. The underwriters may also impose a
penalty bid, which means that an underwriter must repay to the other
underwriters a portion of the underwriting discount received by it. An
underwriter may be subject to a penalty bid if the representatives of the
underwriters, while engaging in stabilizing or short covering transactions,
repurchase shares sold by or for the account of that underwriter. These
activities may stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that otherwise might exist in the open market. If the underwriters
commence these activities, they may discontinue them at any time. The
underwriters may carry out these transactions on the Nasdaq National Market, in
the over-the-counter market or otherwise.
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 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.
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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.
94
<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
</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 Note 10, as to which the date is March 8, 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)
<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)
=======
</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 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--(Concluded)
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 the initial public
offering, the Company will record compensation expense related to the ownership
interest granted and related taxes paid by the Company on behalf of Mr. Yager.
F-16
<PAGE>
The Company plans to reorganize its business into a C Corporation in which
members of Illinois PCS, LLC will receive shares of common stock of iPCS, Inc.
in exchange for their ownership interests in the Company. iPCS, Inc. intends to
file a registration statement for equity financing through an initial public
offering. The ownership percentages among the Company's members following the
reorganization will remain consistent with the ownership percentages described
in Note 1 as adjusted for the effects of the agreement described in the
preceding paragraph. iPCS, Inc. plans to utilize the proceeds from the
aforementioned offering to fund the build-out of the network and acquire
certain network assets.
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 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 part of the Expansion, the Company granted to Sprint PCS a warrant to
acquire 2% of the equity of the Company at the earliest of July 15, 2000, the
closing of the initial public offering, or the consummation of a private
placement of equity in an amount equal to at least $70 million. The warrant's
exercise price will be 90% of the per share issuance price realized through a
private placement of equity or an initial public offering.
F-17
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
, 2000
Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
The Robinson-Humphrey Company
DLJdirect Inc.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.............. $37,950
National Association of Securities Dealers, Inc. filing fee...... 14,875
Nasdaq National Market listing fees.............................. *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Transfer agent and registrar fees................................ *
Miscellaneous expenses........................................... *
*
-------
Total.......................................................... $ *
=======
</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
<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 34.5%
Cambridge Telcom, Inc..... Membership Interest 29.6%
Cass Communications, Inc.. Membership Interest 9.9%
Technology Group, LLC..... Membership Interest 9.9%
Montrose Mutual PCS, Inc.. Membership Interest 9.9%
Gridley Enterprises, Inc.. Membership Interest 4.9%
Timothy M. Yager.......... Membership Interest 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
pursuant to valid exemptions under the Securities Act of 1933 (the "Act").
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
1.1* --Form of Underwriting Agreement.
2.1* --Form of Reorganization Agreement to be entered into
among iPCS, Inc. and owners of Illinois PCS, LLC.
3.1* --Certificate of Incorporation of iPCS.
3.2* --Form of Bylaws of iPCS.
4.1* --Specimen Common Stock Certificate.
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 and Amended and
Restated Addendum III 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S> <C>
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* --Consent and Agreement dated as of by and
between Nortel Networks, Inc., Sprint Spectrum, LP,
Sprint Communications Company, LP, WirelessCo, LP, and
SprintCom, Inc.
10.6* --Form of Credit Agreement by and between Illinois PCS,
Inc., as borrower, and Nortel Networks, Inc., as
administrative agent, for a $ credit facility,
to be executed prior to the closing of this offering.
10.7* --Form of iPCS, Inc. 2000 Long Term Incentive Plan.
10.8* --Employment Agreement effective as of by
and between iPCS and Timothy M. Yager.
10.9* --Employment Agreement effective as of by
and between iPCS and .
10.10* --Form of Warrant Agreement by and between Sprint Spectrum
L.P. and iPCS, Inc., to be executed prior to the closing
of this offering.
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.
21.1* --Subsidiaries of iPCS.
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.
(b) Financial Statement Schedules:
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated 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
II-4
<PAGE>
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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-5
<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 9th day of March, 2000.
iPCS, INC.
/s/ Timothy M. Yager
By: _________________________________
Timothy M. Yager
President, Chief Executive
Officer, Chief Financial Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and
directors of iPCS, Inc. hereby constitutes and appoints Timothy M. Yager, his
true and lawful attorney-in-fact and agent, with full power of substitution,
for him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute and file any and all documents relating to this
Registration Statement, including any and all amendments, exhibits and
supplements thereto and including any Registration Statement filed pursuant to
Rule 462(b) of the Securities Act of 1933, with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as he himself might or could do if personally present, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute, may
lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Timothy M. Yager President, Chief Executive March 9, 2000
____________________________________ Officer, Chief Financial
Timothy M. Yager Officer (Principal Executive
Officer and Principal
Financial and Accounting
Officer) and Director
/s/ William W. King, Jr. Vice President, Strategic March 9, 2000
____________________________________ Planning and Director
William W. King, Jr.
/s/ Alan C. Anderson Director March 9, 2000
____________________________________
Alan C. Anderson
/s/ Donald L. Bell Director March 9, 2000
____________________________________
Donald L. Bell
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Brian J. Gernant Director March 9, 2000
____________________________________
Brian J. Gernant
/s/ Robert W. Schwartz Director March 9, 2000
____________________________________
Robert W. Schwartz
/s/ George Patrick Tays Director March 9, 2000
____________________________________
George Patrick Tays
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
1.1* --Form of Underwriting Agreement.
2.1* --Form of Reorganization Agreement to be entered into among
iPCS, Inc. and owners of Illinois PCS, LLC.
3.1* --Certificate of Incorporation of iPCS.
3.2* --Form of Bylaws of iPCS.
4.1* --Specimen Common Stock Certificate.
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 and Amended and Restated
Addendum III 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* --Consent and Agreement dated as of by and
between Nortel Networks, Inc., Sprint Spectrum, LP, Sprint
Communications Company, LP, WirelessCo, LP, and SprintCom,
Inc.
10.6* --Form of Credit Agreement by and between Illinois PCS, Inc.,
as borrower, and Nortel Networks, Inc., as administrative
agent, for a $ credit facility, to be executed
prior to the closing of this offering.
10.7* --Form of iPCS, Inc. 2000 Long Term Incentive Plan.
10.8* --Employment Agreement effective as of by and
between iPCS and Timothy M. Yager.
10.9* --Employment Agreement effective as of by and
between iPCS and .
10.10* --Form of Warrant Agreement by and between Sprint Spectrum
L.P. and iPCS, Inc., to be executed prior to the closing of
this offering.
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.
21.1* --Subsidiaries of iPCS.
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.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of iPCS, Inc. on Form S-1
of our report dated February 4, 2000, except for Note 10, as to which the date
is March 8, 2000, relating to the financial statements of Illinois PCS, LLC
appearing in the Prospectus, which is a part of this Registration Statement, and
to the references to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Davenport, Iowa
March 8, 2000
