<PAGE>
As filed with the Securities and Exchange Commission on January 8, 2001
Registration No. 333-47682
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
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 Classification Identification No.)
Code Number)
1900 East Golf Road, Suite 900
Schaumburg, Illinois 60173
(847) 944-2900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Timothy M. Yager
iPCS, Inc.
1900 East Golf Road, Suite 900
Schaumburg, Illinois 60173
(847) 944-2900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
Paul W. Theiss
Robert J. Wild
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603-3441
Telephone (312) 782-0600
Facsimile (312) 701-7711
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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. [X]
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. [_]
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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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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is incomplete and may be changed. The +
+securities may not be sold until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion--January 8, 2001
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Prospectus
, 2001
[LOGO]
COMMON STOCK
WARRANTS TO PURCHASE COMMON STOCK
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The Offering:
. This prospectus relates to the resale of up to 300,000 warrants to
purchase shares of our common stock by the holders named under the heading
"Warrantholders" in this prospectus or in an accompanying supplement to
this prospectus.
. This prospectus also relates to the offer and sale of 2,982,699 shares of
our common stock which are initially issuable upon the exercise of the
warrants
. All of the warrants and shares of our common stock being registered may be
offered and sold from time to time by the named holders.
Trading Market:
. There is no public market for the warrants or the shares of common stock
to be issued upon exercise of the warrants. We do not intend to apply, and
are not obligated to apply, for listing of the warrants or our common
stock on any securities exchange or any automated quotation system.
Risk Factors:
. See "Risk Factors" on page 6 of this prospectus for a discussion of risks
that you should consider before purchasing the warrants and/or shares of
common stock.
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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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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 6
Forward-Looking Statements........ 21
Use of Proceeds................... 22
Dividend Policy................... 22
Capitalization.................... 23
Selected Financial Data........... 24
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 26
Business.......................... 37
The Sprint PCS Agreements......... 59
Description of Our Indebtedness... 69
Management........................ 78
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Principal Stockholders............. 89
Certain Relationships and Related
Transactions...................... 91
Regulation of the Wireless
Telecommunications Industry....... 94
Warrantholders..................... 99
Description of Warrants............ 102
Description of Capital Stock....... 106
Certain United States Federal
Income Tax Considerations......... 111
Plan of Distribution............... 119
Where You Can Find More
Information....................... 120
Legal Matters...................... 121
Experts............................ 121
Index to Financial Statements...... F-i
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information that we believe is especially important
concerning our business and this offering of warrants and common stock. It does
not contain all of the information that may be important to your investment
decision. You should read the entire prospectus, including "risk factors" and
our financial statements and related notes, before deciding to invest in either
the warrants or common stock.
The Company
Overview
We are a Sprint PCS affiliate with the exclusive right to market 100%
digital personal communication services, or PCS, wireless phone service under
the Sprint and Sprint PCS brand names to a total population of more than 7.0
million in 35 markets consisting of mid-sized cities and rural areas in
Illinois, Michigan, Iowa and eastern Nebraska. We began providing service in
December 1999 and, as of September 30, 2000, had launched service in fifteen
markets covering approximately 2,097,000 residents and had over 25,000
customers. As of November 30, 2000, we had launched three additional markets
covering approximately 1,390,000 residents. By the end of the third quarter of
2001, we plan to offer service on our network, which we refer to as providing
coverage, to the portions of our territory where approximately 67% of the total
population resides in our territory, at which time our planned network build-
out will be substantially complete.
In January 1999, we entered into our long-term affiliation agreements with
Sprint PCS for our initial territory of 15 markets with a total population of
over 2.8 million in the states of Illinois and Iowa. Following our successful
initial launch, Sprint PCS selected us to be the exclusive Sprint PCS affiliate
for 20 additional markets with a total population of over 4.2 million in the
states of Michigan, Iowa and Nebraska. As part of this expansion, we have
purchased from Sprint PCS network assets under construction in four markets in
Michigan. In addition, we have been granted the option, but do not have the
obligation, to add to our territory the Iowa City and Cedar Rapids, Iowa
markets that Sprint PCS launched in February 1997 and to purchase from Sprint
PCS related assets in those markets. Those markets have a total population of
approximately 405,000 and had over 11,000 Sprint PCS subscribers as of
September 30, 2000.
We are among 18 companies which are referred to generally as Sprint PCS
affiliates. Each Sprint PCS affiliate has the exclusive right to market PCS
under the Sprint and Sprint PCS brand names in certain portions of the United
States. We believe that the 18 companies are unrelated to Sprint PCS and
unrelated to each other except that one Sprint affiliate has announced
agreements to acquire two other Sprint PCS affiliates.
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, but does not include, several important markets
owned and operated by Sprint PCS including Chicago, Detroit, Des Moines,
Indianapolis, Omaha and St. Louis and contains more than 1,700 miles of heavily
traveled interstates. Our territory also includes over 40 colleges and
universities with a total enrollment of approximately 200,000 students.
1
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From our inception through September 30, 2000, we have not generated
significant revenues and have generated significant net operating losses. We
expect to continue to generate significant net operating losses through a
portion of 2003, after which time we expect to have achieved break-even
operating cash-flow.
Business Strategy
Our business strategy is focused on fully leveraging our strategic
relationship with Sprint PCS and also includes:
. executing an integrated local marketing strategy which includes
establishing a total of up to 17 Sprint PCS stores in our territory,
advertising on local radio, TV, and print media and sponsoring important
local and regional events;
. continuing to rapidly construct our network using experienced strategic
partners and high speed wireless data and Internet wireless technology
commonly referred to as "3G" technology; and
. continuing to evaluate opportunities for transactions to strategically
expand our territory and business combinations with other Sprint PCS
affiliates.
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We are a Delaware corporation. Our principal executive offices are located
at 1900 East Golf Road, Suite 900, Schaumburg, Illinois 60173, and our
telephone number is (847) 944-2900.
2
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Summary Financial Data
The selected summary financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data", for, and as of the end
of, the period from January 22, 1999 (date of inception) to December 31, 1999
and the nine-month period ended September 30, 2000 are derived from the
financial statements of iPCS, Inc. and its subsidiaries and predecessor, 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 nine-month period ended September 30, 2000 and the related notes of
iPCS, Inc. and its subsidiaries and predecessor and the independent auditors'
report of Deloitte & Touche, LLP.
The selected summary unaudited financial data presented below, for, and as
of the end of, the period from January 22, 1999 (date of inception) through
September 30, 1999 are derived from our unaudited financial statements included
in this prospectus. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, that management considers necessary to
a fair presentation of financial position and results of operations. Operating
results for the nine-month period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2000.
<TABLE>
<CAPTION>
Period from Period from
January 22, 1999 January 22, 1999
(date of (date of Nine-month
inception) inception) period
through through ended
December 31, 1999 September 30, 1999 September 30, 2000
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations
Data:
Revenues.............. $ 215 $ -- $ 12,638
Cost of service....... 1,695 531 9,981
Total operating
expenses............. 4,858 1,534 43,269
Net loss.............. (4,380) (1,283) (36,002)
Net loss available to
common stockholders.. (4,380) (1,283) (83,270)
Other Data:
Pro forma basic and
diluted net loss per
share of common
stock(1)............. $ (0.10) $ (0.03) $ (1.86)
======= ======= ========
</TABLE>
3
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<TABLE>
<CAPTION>
As of As of
December 31, September 30,
1999 2000
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 2,733 $108,233
Property and equipment including construction
in
progress, net................................ 39,106 100,359
Total assets.................................. 44,843 240,226
Long-term debt................................ 27,571 129,794
Total liabilities............................. 35,723 159,529
Redeemable preferred stock.................... -- 47,268
Equity........................................ 9,120 33,429
</TABLE>
--------------------
(1) Pro forma basic and diluted net loss per share of common stock is computed
by dividing net loss available to common stockholders by the assumed number
of common shares outstanding as if the reorganization had occurred upon the
inception of Illinois PCS, LLC. For more information on the reorganization,
please see "Certain Relationships and Related Transactions--Formation of
Illinois PCS, LLC."
4
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Summary Of The Terms Of The Warrants
Warrants Offered...................... 300,000 warrants which will entitle
the holders to purchase an
aggregate of 2,982,699 shares of
our common stock, representing an
aggregate of approximately 4% of
our issued and outstanding common
stock on a fully diluted basis,
assuming exercise of all
outstanding options and warrants to
purchase common stock and the
conversion into shares of common
stock of the $120.0 million of the
convertible preferred stock issued
to the investor group led by
Blackstone.
Exercise Price........................ Each warrant will entitle the
holder to purchase shares of our
common stock at an exercise price
of $5.50 per share, subject to
adjustment as provided in the
warrant agreement.
Exercise.............................. The warrants may be exercised at
any time on or after July 15, 2001
and prior to July 15, 2010.
Warrants that are not exercised by
July 15, 2010 will expire.
Separation Date....................... The warrants were separated from
the units on September 12, 2000.
5
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RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information contained in this prospectus before purchasing either the
warrants or common stock being offered.
Risks Particular to iPCS
We have substantial debt which we may not be able to service and which could
adversely affect our financial health and prevent us from fulfilling our
obligations under the senior discount notes
We have entered into an amended and restated credit agreement with Toronto
Dominion (Texas), Inc. and GE Capital Corporation to provide a senior secured
credit facility with an aggregate commitment of $140.0 million. Under our
current business plan, we expect to incur substantial additional indebtedness
before achieving break-even operating cash flow, including $140.0 million of
borrowings under the senior secured credit facility in addition to the $300.0
million of principal amount at maturity of our senior discount notes currently
outstanding.
Our ability to make payments on our debt depends upon our future operating
performance which is subject to general economic and competitive conditions and
to financial, business and other factors, many of which we cannot control. If
the cash flow from our operating activities is insufficient, we may take
actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance our debt, selling assets or operations or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow us to service our debt obligations. Further, we may be unable to take any
of these actions on satisfactory terms, in a timely manner or at all. If we are
unable to pay our debts as they become due, it is likely that all of our
indebtedness would become accelerated and our lenders, or Sprint PCS by virtue
of its right to purchase our obligations under the senior secured credit
facility upon an acceleration of our debt, would control our assets.
If we do not meet all of the conditions required under the senior secured
credit facility, we may not be able to draw down all of the funds under such
facility and, as a result, we may not be able to complete the build-out of our
network which may result in the termination of the Sprint PCS agreements and we
would no longer be able to offer Sprint PCS products and services or conduct
our business as it is presently conducted
Our senior secured credit facility provides for aggregate borrowings of
$140.0 million. Borrowings under the senior secured credit facility are subject
to our meeting all of the borrowing conditions specified in the financing
documents.
The amended and restated credit agreement for the senior secured credit
facility provides that funding at each funding date will be subject to certain
conditions, including the following:
. the absence of any default or event of default;
. the continuing accuracy of all other representations and warranties; and
. no material adverse change.
If these conditions are not satisfied at each funding date, our senior lenders
are not required to lend any or all of the remaining amounts, and if other
sources of funds are not available, we may not have sufficient funds to
complete the build-out of our network. If we do not have sufficient funds to
complete our network build-out, we may be in breach of the Sprint PCS
agreements and in default under our senior secured credit facility.
6
<PAGE>
If we default under our senior secured credit facility or the indenture, our
lenders may declare our debt immediately due and payable and result in our
lenders controlling our assets and the termination of the Sprint PCS Agreements
Our senior secured credit agreement and the indenture require that we comply
with specified financial ratios, performance covenants and not be in breach of
our Sprint PCS agreements. If we were to breach our Sprint PCS agreements or
fail to comply with the covenants in either the indenture or the senior secured
credit agreement, our lenders may accelerate all of our obligations under both
the senior secured credit facility and the senior discount notes. If this were
to occur, we would be unable to pay our all of our debts and our lenders would
acquire control of our assets, subject to Sprint PCS' right to purchase amounts
outstanding under our senior secured credit facility. Further, Sprint PCS may
terminate the Sprint PCS agreements and we would no longer be able to offer
Sprint PCS products and services or conduct our business as it is presently
conducted.
Our indebtedness places restrictions on us which limit our operating
flexibility and which will limit our ability to pay principal, interest and
liquidated damages on the senior discount notes
The indenture governing the senior discount notes and the senior secured
credit agreement impose material operating and financial restrictions on us.
These restrictions, subject to ordinary course of business exceptions, may
limit our ability to engage in some transactions, including the following:
. designated types of mergers or consolidations;
. paying dividends or other distributions to our stockholders;
. making investments;
. selling assets;
. repurchasing our common stock;
. changing lines of business;
. borrowing additional money; and
. transactions with affiliates.
These restrictions could limit our ability to obtain additional debt
financing, repurchase stock, refinance or pay principal or interest on our
outstanding debt, consummate acquisitions for cash or debt or react to changes
in our operating environment.
An event of default under the senior secured credit facility may prohibit us
and our wholly owned subsidiaries which are our guarantors from paying the
senior discount notes or the guarantees of the senior discount notes as well as
liquidated damages with respect to our failure to file or cause or maintain the
effectiveness of certain registration statements with respect to the senior
discount notes.
7
<PAGE>
The terms of our convertible preferred stock and related agreements may be
adverse to your interests
The terms of the convertible preferred stock provide the investor group led
by Blackstone the right, among other things, to:
. designate two members of our board of directors;
. approve or disapprove certain significant corporate actions and
transactions;
. receive dividends in the form of additional shares of our convertible
preferred stock, which may increase and accelerate upon a change in
control; and
. require us to redeem the convertible preferred stock or to force the sale
of the company in certain circumstances.
Consequently, the investor group led by Blackstone will have a substantial
amount of control over the conduct of our business and may make decisions to
further its own objectives which may be adverse to your interests.
We may need more capital than we currently project to build out our network
and a delay or failure to obtain additional capital could adversely affect our
revenues or result in the termination of the Sprint PCS agreements
The build-out of our network will require substantial capital. Additional
funds would be required in the event of:
. significant departures from the current business plan, including any
Sprint PCS approved expansion of our territory, whether through
acquisitions or the grant of additional licensed territories;
. unforeseen delays;
. cost overruns;
. unanticipated expenses;
. regulatory changes;
. engineering design changes and required technological upgrades; and
. other technological risks.
Due to our leveraged capital structure, additional capital may not be
available or, if available, may not be obtained on a timely basis and on terms
acceptable to us or within limitations permitted under our senior secured
credit facility or the covenants with respect to the senior discount notes.
Failure to obtain additional capital, should the need for it develop, could
result in the delay or abandonment of our build-out and expansion plans. If we
do not have sufficient funds to complete our build-out, we may be in breach of
the Sprint PCS agreements.
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
8
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cash flow from operating activities through a portion of 2003 while we develop
and construct our network and build our customer base. As we build out our
network and provide services to increasing numbers of customers, the
achievement of break-even operating cash flow and our operating profitability
will depend upon many factors, including, among others, our ability to market
our services, achieve our projected market penetration and manage customer
turnover rates. If we do not achieve and maintain operating profitability and
positive cash flow from operating activities on a timely basis, we may not be
able to meet our debt service requirements.
If we fail to complete the build-out of our network, or if our build-out is
delayed, Sprint PCS may terminate the Sprint PCS agreements, and we would no
longer be able to offer the Sprint PCS products and services or conduct our
business as it is presently conducted
Our long-term affiliation agreements with Sprint PCS, which we refer to as
the Sprint PCS agreements, require us to build our network in accordance with
Sprint PCS' technical and coverage requirements. The Sprint PCS agreements also
require that we provide network coverage in our initial 15 markets to a
specified percentage, ranging from 42% to 88%, of the population by specified
dates. In our 20 expansion markets we are required to build out specified
cities and traffic arteries by certain dates. Regulatory changes, engineering
design changes and/or required technological upgrades could all affect the
number and location of our towers as well as our ability to obtain sufficient
rights to meet our build-out requirements. A failure to meet our build-out
requirements or if our build-out is delayed 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 would no longer be
able to offer Sprint PCS products and services or conduct our business as it is
presently conducted.
Buy-out provisions of the Sprint PCS agreements may diminish the valuation of
our company in the event of the termination or non-renewal of the Sprint PCS
agreements and the market value of our common stock
Provisions of the Sprint PCS agreements could affect the valuation of our
company, and could therefore, among other things, lead to a reduction in the
market price of our securities and decrease our ability to raise additional
capital. In the event the Sprint PCS agreements are terminated, then subject to
the requirements of applicable law, Sprint PCS may purchase our operating
assets or capital stock for 72% or, in the event of non-renewal, at least 80%
of the entire business value which is generally the fair market value of our
wireless business valued on a going concern basis as determined by an
independent appraiser. To the extent that the appraiser considers the trading
price of our common stock as a criteria of the fair market value, such trading
price may itself already have been discounted by investors because of this buy-
out provision and consequently this buy-out provision may operate to
disproportionately reduce the value. In addition, Sprint PCS must approve any
change of control of our company and consent to any assignment of the Sprint
PCS agreements to another entity. Sprint PCS also has been granted a right of
first refusal if we decide to sell our operating assets. We are also subject to
a number of restrictions on the transfer of our business including a
prohibition on selling our company or our operating assets to a number of
identified and as yet to be identified competitors of Sprint PCS or Sprint.
These and other restrictions in the Sprint PCS agreements may limit the
saleability and/or reduce the value a buyer may be willing to pay for
9
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our company or our operating assets and may reduce the entire business value of
our company. For further information on the buy-out provisions of the Sprint
PCS agreements, see "The Sprint PCS Agreements--The Management Agreement."
If Sprint PCS fails to perform its obligations under the Sprint PCS agreements
resulting in the termination of our strategic relationship with Sprint PCS, we
would no longer be able to conduct our business as it is presently conducted
Because we do not own any licenses to operate a wireless PCS network, our
ability to offer Sprint PCS products and services on the portion of the Sprint
PCS network located within our territory, which we refer to as our network, is
dependent on the Sprint PCS agreements remaining in effect and not being
terminated. The Sprint PCS agreements can be terminated for breach of any
number of material terms. We are also dependent on Sprint PCS' ability to
perform its obligations under the Sprint PCS agreements. The termination of the
Sprint PCS agreements or if Sprint PCS failed to perform its obligations under
the Sprint PCS agreements would severely restrict our ability to conduct our
business as it is presently conducted.
If Sprint PCS does not complete the construction of its PCS network, we may
not be able to attract and retain customers, which would adversely affect our
revenues
Sprint PCS' network may not provide coverage to the same extent as its
competitors, which could adversely affect our ability to attract and retain our
customers. Sprint PCS is creating a PCS network through its own construction
efforts and those of its affiliates. Today, neither Sprint PCS nor any other
PCS service provider offers PCS services in every area of the United States.
Sprint PCS has entered into affiliation agreements similar to ours with
companies in other territories pursuant to its nationwide PCS network build-out
strategy. Our business and results of operations are dependent on the
development and operation of the portions of the Sprint PCS national network
located outside our territory, consisting of Sprint PCS' own network and the
networks of its other affiliates. Sprint PCS and its affiliate program are
subject, to varying degrees, to the economic, administrative, logistical,
regulatory and other risks described in this prospectus. Sprint PCS' and its
other affiliates' PCS operations may not be successful.
We have a limited operating history and if we do not successfully manage our
anticipated rapid growth, we may not be able to complete our network by our
target date, if at all, which may result in the termination of the Sprint PCS
agreements, and we would no longer be able to offer Sprint PCS products and
services or conduct our business as it is presently conducted
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 November 30, 2000, we had launched Sprint PCS service in eighteen markets
covering approximately 3,487,000 residents. In other portions of our territory
we have not yet completed our site acquisition and cell site engineering, nor
have we commenced construction of portions of our network. We will require
additional expenditures of significant funds for the continued development,
construction, testing, deployment and operation of our network. These
activities are expected to place significant demands on our managerial,
operational and financial resources.
10
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If we fail to meet the technical standards described in the Sprint PCS
agreements, Sprint PCS may terminate the Sprint PCS agreements and purchase our
operating assets or capital stock at a discount, and we would no longer be able
to offer Sprint PCS products and services or conduct our business as it is
presently conducted
The Sprint PCS agreements require us to build out our network in accordance
with Sprint PCS' technical requirements. Sprint PCS can, at any time with at
least 30 days' prior notice to us, adjust the technical requirements for the
network. A failure to meet these technical requirements would constitute a
breach of the Sprint PCS agreements and could lead to their termination. If the
Sprint PCS agreements are terminated, we may be required to sell our operating
assets or capital stock at a price equal to 72% of our entire business value.
In addition, we would no longer be able to offer Sprint PCS products and
services or conduct our business as it is presently conducted.
The inability to use Sprint PCS' back office services and third-party vendors'
back office systems could disrupt our business resulting in a loss of our
customers and an increase in our operating expenses
Our operations could be disrupted if Sprint PCS is unable to maintain and
expand its internal support services to support the continued expansion of
Sprint PCS' business. These services include customer activation, billing and
customer care. Additionally, Sprint PCS has relied on third-party vendors for a
significant number of important functions and components of its internal
support systems and may continue to rely on these vendors in the future. We
depend on Sprint PCS' willingness to continue to offer such services to us and
to provide these services at competitive rates. The Sprint PCS agreements
provide that, upon nine months' prior written notice, Sprint PCS may elect to
terminate any such service. If Sprint PCS terminates a service for which we
have not developed a cost-effective alternative, our operating costs may
increase beyond our expectations and impact our results of operations.
We depend on other telecommunications companies for certain services, which if
delayed could delay our planned network build-out, our planned addition of
customers and our planned increase in revenues
We depend on other telecommunications companies to provide facilities and
transport to interconnect portions of our network and to connect our network
with the landline telephone system. U.S. West Communications, Ameritech and GTE
are our primary suppliers of facilities and transport. Without these services,
we could not offer Sprint PCS services to our customers in certain areas.
From time to time we have experienced delays in obtaining facilities and
transport from these companies and we may continue to experience delays in the
future. If this happens, our build-out plans could be affected and our business
may suffer.
11
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Sprint PCS may make business decisions that would not be in our best interests
which may adversely affect our relationships with our customers, increase our
expenses and/or decrease our revenues
Sprint PCS, under the Sprint PCS agreements, has a substantial amount of
control over the conduct of our business. Accordingly, Sprint PCS may make
decisions that adversely affect our business, such as the following:
. Sprint PCS could price its national plans based on its own objectives and
could set price levels that may not be economically sufficient for our
business;
. Sprint PCS could decide not to renew the Sprint PCS agreements or to no
longer perform its obligations, which would severely restrict our ability
to conduct our business;
. Sprint PCS could change the per-minute rate for Sprint PCS roaming fees
and raise the costs for Sprint PCS to perform back office services;
. Sprint PCS may withhold its consent and prohibit us from selling non-
Sprint PCS approved equipment;
. Subject to limitations under the Sprint PCS agreements, Sprint PCS may
alter its network and technical requirements or request that we build out
additional areas within our territory, which could result in increased
equipment and build-out costs or in Sprint PCS terminating the Sprint PCS
agreements; and
. Sprint or Sprint PCS could make decisions which could adversely affect
the Sprint and Sprint PCS brand names, products or services.
We may not receive as much Sprint PCS roaming revenue as we anticipate and our
non-Sprint PCS roaming revenue is likely to be low, adversely affecting our
revenues, and we may have higher payments to Sprint PCS for usage by our
customers of the Sprint PCS network than we anticipate
We are paid a fee from Sprint PCS or a Sprint PCS affiliate for every minute
a Sprint PCS subscriber based outside of our territory uses our network.
Similarly, we pay a fee to Sprint PCS or a Sprint PCS affiliate for every
minute that a Sprint PCS subscriber based in our territory, which we refer to
as our customer, uses the Sprint PCS network outside our territory. Sprint PCS
roaming occurs whenever a Sprint PCS subscriber uses a portion of the Sprint
PCS network outside of the subscribers' assigned calling area. Our customers
may use the Sprint PCS network outside our territory more frequently than we
anticipate and Sprint PCS subscribers from outside our territory may use our
network less frequently than we anticipate. Sprint PCS could also change the
current fee for each Sprint PCS roaming minute billed. As a result, we may
receive less Sprint PCS roaming revenue attributable to the use of our network
by Sprint PCS subscribers who are not our customers than we anticipate or we
may have to pay more Sprint PCS roaming fees attributable to our customers'
usage of portions of the Sprint PCS network other than our network than we
anticipate.
A portion of our revenue may be derived from payments by other wireless
service providers for use by their subscribers of our network, which we refer
to as non-Sprint PCS roaming. However, the technology used in the Sprint PCS
network is not compatible with the technology used by certain other systems,
which diminishes the ability of other wireless service providers' subscribers
to use our
12
<PAGE>
network, and Sprint PCS has entered into few agreements that enable customers
of other wireless carriers to roam onto the Sprint PCS network. As a result,
the non-Sprint PCS roaming revenue that we will receive is likely to be low
relative to other wireless service providers. For more information on roaming
revenue, see "Business--Roaming Revenue." For further information on the Sprint
PCS network technology, see "Business--CDMA Technology."
We may have difficulty in obtaining infrastructure equipment and handsets
which are in short supply which could result in delays in our network build-
out, disruption of service or loss of customers
If we are not able to acquire the equipment required to build out our
network in a timely manner, we may be unable to provide wireless communications
services or to meet the requirements of the Sprint PCS agreements. The demand
for the equipment that we require to construct our network is considerable, and
manufacturers of this equipment could have substantial order backlogs.
Accordingly, the lead time for the delivery of this equipment may be longer
than anticipated. In addition, the demand for specific types of handsets is
strong and the manufacturers of those handsets may have to distribute their
limited supply of products among their numerous customers. Some of our
competitors purchase large quantities of equipment and handsets and may have
established relationships with the manufacturers. Consequently, they may
receive priority in the delivery of equipment and handsets. If we cannot obtain
equipment or handsets in a timely manner, we could suffer delays in the build-
out of our network, disruptions in service and a reduction in customers.
Sprint PCS' vendor discounts may be discontinued, which would increase our
equipment costs and require more capital than we project to build out our
network
We intend to purchase our infrastructure equipment under Sprint PCS' vendor
agreements that include significant volume discounts. If Sprint PCS were unable
to continue to obtain vendor discounts for its affiliates, the loss of vendor
discounts would increase our equipment costs.
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. As of September 30, 2000, we have a remaining commitment to purchase
$19.8 million of equipment and services from Nortel and to purchase $13.0
million of equipment from Lucent, have retained other consultants and
contractors, and expect to retain additional consultants and contractors, to
assist in the design and engineering of our systems, to construct cell sites,
switch facilities and towers, to lease cell sites from and to deploy our
network systems, and we will continue to be significantly dependent upon them
in order to fulfill our build-out obligations.
We may not be able to compete with larger, more established wireless providers
who have the resources to competitively price their products and services which
could impair our ability to attract customers
Our ability to compete will depend, in part, on our ability to anticipate
and respond to various competitive factors affecting the telecommunications
industry, including new services that may be
13
<PAGE>
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by competitors. We compete in each
of our markets with two cellular providers, both of which have their
infrastructure in place and have been operational for a number of years. They
have significantly greater financial and technical resources than we do and
could offer more attractive pricing options. We expect that existing cellular
providers will upgrade their systems and provide expanded, digital services to
compete with the Sprint PCS products and services that we offer. These cellular
providers generally require their customers to enter into long-term contracts,
which may make it more difficult for us to attract customers away from them.
Sprint PCS generally does not require its subscribers to enter into long-term
contracts, which may make it easier for other wireless providers to attract
Sprint PCS subscribers away from Sprint PCS. We will also compete with one or
more PCS providers, other wireless providers and other communications companies
in certain of our markets. While Sprint PCS has licenses covering 30 MHz of
spectrum throughout most of our territory, it has licenses covering only 10 MHz
or 20 MHz in parts of Illinois. Some of our competitors will have access to
more licensed spectrum in parts of Illinois where we offer service and
therefore provide greater network call volume capacity than our network when
network usage begins to reach or exceed the capacity of our licensed spectrum.
The inability to accommodate increases in call volume capacity results in more
dropped or disconnected calls. In addition, any competitive difficulties that
Sprint PCS may experience could also harm our competitive position and success.
For further information on the Sprint PCS licensed spectrum in our markets, see
"Business--Markets"
Our services may not be broadly used and accepted by consumers which could
have an adverse effect on our results of operations
PCS systems have a limited operating history. The extent of potential demand
for PCS in our markets cannot be estimated with any degree of certainty. If we
are unable to establish and successfully market PCS, we may not be able to
attract and retain customers in sufficient numbers to operate our business
successfully.
There is no uniform signal transmission technology and the technology used on
our network may become obsolete thereby substantially increasing our equipment
expenditures to replace it
The wireless telecommunications industry is experiencing significant
technological change and evolving industry standards. We employ a digital
wireless communications technology selected by Sprint PCS for its network. This
selected technology, code division multiple access, known as CDMA, is
relatively new. CDMA may not provide the advantages expected by Sprint PCS. In
addition to CDMA, there are two other principal signal transmission
technologies: time division multiple access, or TDMA, and global system for
mobile communications, or GSM. None of the signal transmission technologies are
compatible with each other. If one of these technologies, or another
technology, becomes the preferred industry standard, we would be at a
competitive disadvantage and competitive pressures may require Sprint PCS to
change its digital technology which, in turn, may require us to make changes in
our network equipment at substantially increased costs. We may not be able to
respond to such pressures and implement new technology on a timely basis, or at
an acceptable cost.
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<PAGE>
Our projected build-out plan does not cover all of our territory, which could
make it difficult to maintain a profitable customer base
Our projected build-out plan does not cover all areas of our territory. Upon
completion of our projected build-out plan, we expect to cover 67% of the
residents in our territory. As a result, our
build-out plan may not adequately serve the needs of the potential customers in
our territory or attract enough customers to operate our business successfully.
Accordingly, we may have to cover a greater percentage of our territory than we
anticipate, which we may not have the financial resources to complete or may be
unable to do profitably.
Parts of our territory have limited licensed spectrum, and this may affect the
quality of our service or, in the event of termination of the Sprint PCS
agreements, restrict our ability to purchase spectrum licenses from Sprint PCS
in those areas, which would place us at a competitive disadvantage
While Sprint PCS has licenses covering 30 MHz of spectrum throughout most of
our territory, it has licenses covering only 10 MHz or 20 MHz in parts of
Illinois. In the future, as the number of our customers in those areas
increases, this limited licensed spectrum may not be able to accommodate
increases in call volume and may lead to more dropped calls than in other parts
of our territory. If Sprint PCS were to terminate the Sprint PCS agreements,
Sprint PCS would have no obligation to sell us spectrum licenses in areas where
Sprint PCS owns less than 20 MHz of spectrum. Accordingly, it is likely that we
would be unable to operate our business in certain portions of Illinois.
If Sprint PCS subscribers are not able to roam efficiently onto other wireless
networks, prospective subscribers could be deterred from subscribing to Sprint
PCS services and thereby reduce our anticipated revenues and customers
The Sprint PCS network, of which we form a part, operates at a different
frequency and uses a different signal transmission technology than analog
cellular and other digital systems. To access another provider's analog
cellular, TDMA or GSM digital systems when outside the territory served by the
Sprint PCS network, a Sprint PCS subscriber is required to utilize a dual-
band/dual-mode handset compatible with that provider's system. Generally,
because dual-band/dual-mode handsets incorporate two radios rather than one,
they are more expensive and may be larger and heavier than single-band/single-
mode handsets. The Sprint PCS network does not allow for call hand-off between
the Sprint PCS network and another wireless network, thus requiring a
subscriber to end a call in progress on the Sprint PCS network and initiate a
new call when outside the territory served by the Sprint PCS network. In
addition, the quality of the service provided by a network provider during a
roaming call may not be the same as the quality of the service provided by the
Sprint PCS network. The price of a roaming call may not be competitive with
prices of other wireless companies for roaming calls, and Sprint PCS
subscribers may not be able to use Sprint PCS' advanced features, such as
voicemail notification, while roaming.
15
<PAGE>
Non-renewal or revocation by the Federal Communications Commission of the
Sprint PCS licenses would significantly harm our business because we would no
longer be able to provide service
We do not own any licenses to operate a wireless network. We are dependent
on Sprint PCS' licenses, which are subject to renewal and revocation. Sprint
PCS' licenses in our territory will begin
to expire in 2007 but may be renewed for additional ten year terms. There may
be opposition to renewal of Sprint PCS' licenses upon their expiration and the
Sprint PCS licenses may not be renewed. The FCC has adopted specific standards
that apply to PCS license renewals. Failure by Sprint PCS to comply with these
standards in our territory could cause revocation or forfeiture of the Sprint
PCS licenses for our territory or the imposition of fines on Sprint PCS by the
FCC.
If Sprint PCS does not maintain control over its licensed spectrum, the Sprint
PCS agreements may be terminated which would result in our inability to provide
service
The FCC requires that licensees like Sprint PCS maintain control of their
licensed spectrum and not delegate control to third-party operators or managers
like us. Although the Sprint PCS agreements reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot assure you that the FCC will agree with us. If the FCC were
to determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the Sprint PCS agreements to comply with applicable law. If
we cannot agree with Sprint PCS to modify the Sprint PCS agreements, they may
be terminated. If the Sprint PCS agreements are terminated, we would no longer
be a part of the Sprint PCS network and we would have extreme difficulty in
conducting our business.
The loss of our officers and skilled employees that we depend upon to operate
our business could reduce our ability to offer Sprint PCS products and services
and impair our financial performance
The loss of one or more key employees could impair our ability to offer
Sprint PCS products and services. Our business is managed by a small number of
executive officers. We believe that our future success will also depend in
large part on our continued ability to attract and retain highly qualified
technical and management personnel. We believe that there is and will continue
to be intense competition for qualified personnel in the PCS equipment and
services industry as the PCS market continues to develop. We may not be
successful in retaining our key personnel or in attracting and retaining other
highly qualified technical and management personnel.
Unauthorized use of our network could disrupt our business and increase our
costs of network operations
We will likely incur costs associated with the unauthorized use of our
network, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud impacts interconnection
costs, capacity costs, administrative costs, fraud prevention costs and
payments to other carriers for unbillable fraudulent roaming. Although we
believe that we have implemented appropriate controls to minimize the effect to
us of fraudulent usage, we cannot assure you that we will be successful.
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<PAGE>
Expanding our territory may have a material adverse effect on our business and
reduce the market value of our notes, warrants and common stock
As part of our strategy, we may expand our territory through the grant of
additional markets from Sprint PCS or through acquisitions of other Sprint PCS
affiliates. These transactions may require the approval of Sprint PCS and
commonly involve a number of risks, including:
. difficulty of assimilating acquired operations and personnel;
. diversion of management attention;
. disruption of ongoing business;
. inability to retain key personnel;
. inability to successfully incorporate acquired assets and rights into our
service offerings;
. inability to maintain uniform standards, controls, procedures and
policies; and
. impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In
connection with these transactions, we may also issue additional equity
securities, incur additional debt or incur significant amortization expenses
related to goodwill and other intangible assets.
Our certificate of incorporation and by-laws include provisions that may
discourage, delay and/or restrict any sale of our operating assets or common
stock to the possible detriment of our stockholders
Provisions of our certificate of incorporation and by-laws could operate to
discourage, delay or make more difficult a change in control of our company.
Our certificate of incorporation, which contains a provision acknowledging the
terms of the Sprint PCS agreements and a consent and agreement pursuant to
which Sprint PCS may buy our operating assets, has been duly authorized and
approved by our board of directors and our stockholders. This provision is
intended to permit the sale of our operating assets pursuant to the terms of
the Sprint PCS agreements or a consent and agreement with our lenders without
further stockholder approval. These restrictions, in addition to the
restrictions in the Sprint PCS agreements could, among other things,
discourage, delay or make more difficult any sale of our operating assets or
common stock. This could have a material adverse effect on the value of our
operating assets and common stock and could reduce the price of our company in
the event of a sale. See "Description of Capital Stock."
Industry Risks
We may experience a high rate of customer turnover, which would increase our
costs of operations and reduce our revenue and prospects for growth
Our efforts to minimize customer turnover may not be successful. As a result
of customer turnover, we lose the revenue attributable to such customers and
increase our costs of establishing and growing our customer base. The PCS
industry has experienced a higher rate of customer
17
<PAGE>
turnover as compared to cellular industry averages. The rate of customer
turnover may be the result of one or more of the following factors, several of
which are not within our ability to address:
. extent of network coverage;
. reliability issues such as blocked calls, dropped calls and handset
problems;
. non-use of phones;
. change of employment;
. non-use of customer contracts by PCS providers and the use of contracts
by other wireless providers;
. lack of affordability;
. customer care concerns; and
. other competitive factors.
Wireless providers offering services based on lower cost structures or
alternative technologies may reduce demand for PCS and reduce our revenue
because of their ability to provide services at lower prices or their use of
more popular technologies
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades
in existing analog wireless systems, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences. There is also uncertainty as to the extent of
customer demand as well as the extent to which airtime and monthly recurring
charges may continue to decline. As a result, our future prospects and those of
the industry, and the success of PCS and other competitive services, remain
uncertain.
We may not be able to respond to the recent trend in the consolidation of the
wireless communications industry, or compete with potential acquirors for
acquisitions, which could result in a reduction of our subscribers, decline in
prices for our products and services
There has been a recent trend in the wireless communications industry
towards consolidation of wireless service providers through joint ventures,
mergers and acquisitions. We expect this consolidation to lead to larger
competitors over time. Several large competitors already exist, such as AT&T
Wireless with over 12 million subscribers, Cingular Wireless, the recent
combination of the wireless assets of BellSouth and SBC, with over 19 million
subscribers and Verizon Wireless, the recent partnership of Bell Atlantic-GTE
and Vodafone AirTouch with over 26 million subscribers. We may not be able to
respond to pricing pressures that may result from a consolidation in our
industry, which could result in a reduction of new subscribers and cause market
prices for our products and services to decline in the future. Also, if we
expand our operations through acquisitions, we will compete with other
potential acquirors, some of which may have greater financial or operational
resources than us.
Regulation by government agencies may increase our costs of providing service
or require us to change our services which could impair our financial
performance
The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC, the Federal Aviation
18
<PAGE>
Administration, generally referred to as the FAA, and, depending on the
jurisdiction, state and local regulatory agencies and legislative bodies.
Adverse decisions regarding these regulatory requirements could negatively
impact our operations and cost of doing business.
Use of hand-held phones may pose health risks which could result in the
reduced use of our services or liability for personal injury claims
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health problems, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may discourage use
of wireless handsets or expose us to potential litigation.
Risks Relating to the Offering
Our existing stockholders, management and directors are able to control the
outcome of significant matters presented to stockholders as a result of their
ownership position and, as a result, potentially impair the attractiveness of
us as a take-over target
Our existing stockholders, management and directors will beneficially own
approximately 94% of our outstanding common stock on a diluted basis.
Consequently, such persons, as a group, are 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."
The warrants and the underlying common stock are not listed on a securities
exchange nor is there any assurance that either will be listed, so you may be
unable to sell your warrants or the underlying common stock at the price you
desire or at all
We cannot assure you that a liquid market will develop for the warrants or
the underlying common stock, that you will be able to sell the warrants or the
underlying common stock at a particular time, if at all, or that the prices
that you receive when you sell will be favorable. There has been no public
market for the warrants or the underlying common stock. The initial purchasers
of the warrants are currently making a market in the warrants, but they are not
obligated to do so and may cease market-making at any time. In addition, such
market-making activity will be subject to limits imposed by the Securities Act
of 1933 and other regulations, and may be limited during the pendency of any
shelf registration statement. We do not intend to apply (and are not obligated
to apply) for listing of the warrants or the underlying common stock on any
securities exchange or any automated quotation system. Therefore, we cannot
assure you as to the liquidity of any trading market for the warrants or the
underlying common stock. Future trading prices of the warrants or the
underlying common stock will depend on many factors, including our operating
performance and financial condition and the market for similar securities.
You may not receive a return on investment in the warrants through either
dividends paid on the common stock or the exercise of your warrants and 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. In addition, our existing indebtedness
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<PAGE>
restricts, and we anticipate our future indebtedness may restrict, our ability
to pay dividends. Therefore, you will not receive a return on your investment
in the common stock underlying our warrants by exercising them and receiving a
payment of dividends of the common stock.
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<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 achieve break-even
operating cash flow; and
. other statements, including statements containing words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend"
and other similar words that signify forward-looking statements.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements.
Specific factors that might cause such a difference include, but are not
limited to:
. our dependence on our affiliation with Sprint PCS;
. the need to successfully complete the build-out of our network;
. our lack of operating history and anticipation of future losses;
. our dependence on Sprint PCS' back office services;
. potential fluctuations in our operating results;
. our potential need for additional capital;
. our potential inability to expand our services and related products in
the event of substantial increases in demand for these services and
related products;
. our competition; and
. our ability to attract and retain skilled personnel.
See additional discussion under "Risk Factors" beginning on page 6.
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<PAGE>
USE OF PROCEEDS
All of the warrants offered under this prospectus are being sold by the
warrantholders. We will not receive any proceeds from the sale of the warrants.
Upon an exercise of the warrants, we will receive the exercise price of the
warrants. There is no assurance that all or any of the warrants will be
exercised prior to their expiration nor any assurance of the timing of our
receipt of exercise proceeds. Assuming that all the warrants were exercised, we
would receive aggregate proceeds of approximately $16.4 million. Because of the
unpredictability of the amount of proceeds and the timing of receipt, we
currently intend to use the proceeds to fund anticipated operating losses and
working capital requirements.
DIVIDEND POLICY
We intend to retain our future earnings, if any, to fund the development and
growth of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. Our future decisions concerning the
payment of dividends on the common stock will depend upon our results of
operations, financial condition and capital expenditure plans, as well as such
other factors that the board of directors, in its sole discretion, may consider
relevant. In addition, provisions of the senior secured credit agreement and
indenture governing the senior discount notes restrict, and we anticipate our
future indebtedness may restrict, our ability to pay dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2000:
<TABLE>
<CAPTION>
As of
September 30,
2000
(In
thousands)
<S> <C>
Cash and cash equivalents........................................ $108,233
========
Long-term debt:
Senior secured credit facility................................. --
Senior discount notes.......................................... $129,794
--------
Total long-term debt......................................... 129,794
Redeemable preferred stock, par value $0.01 per share, 75,000,000
shares authorized; 9,090,909 shares issued and outstanding...... 47,268
Stockholders' equity:
Common stock, par value $0.01 per share, 300,000,000 shares
authorized; 44,869,643 shares outstanding..................... 449
Additional paid-in capital..................................... 79,403
Unearned compensation.......................................... (6,041)
Accumulated deficit............................................ (40,382)
--------
Total stockholders' equity................................... 33,429
--------
Total capitalization....................................... $210,491
========
</TABLE>
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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", for, and as of the end of, the
period from January 22, 1999 (date of inception) to December 31, 1999 and the
nine-month period ended September 30, 2000 are derived from the financial
statements of iPCS, Inc. and its subsidiaries and predecessor, 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 nine-month period ended September 30, 2000 and the related notes of
iPCS, Inc. and its subsidiaries and predecessor and the independent auditors'
report of Deloitte & Touche, LLP.
The selected unaudited financial data presented below, for, and as of the
end of, the period from January 22, 1999 (date of inception) through September
30, 1999 are derived from our unaudited financial statements included in this
prospectus. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, that management considers necessary to
a fair presentation of financial position and results of operations. Operating
results for the nine-month period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2000.
<TABLE>
<CAPTION>
Period from Period from
January 22, 1999 January 22, 1999
(date of (date of
inception) inception) Nine-month period
through through ended
December 31, 1999 September 30, 1999 September 30, 2000
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations
Data:
Revenues.............. $ 215 $ -- $ 12,638
Cost of service....... 1,695 531 9,981
Total operating
expenses............. 4,858 1,534 43,269
Net loss.............. (4,380) (1,283) (36,002)
Net loss available to
common stockholders.. (4,380) (1,283) (83,270)
Other Data:
Pro forma basic and
diluted net loss per
share of common
stock(1)............. $ (0.10) $ (0.03) $ (1.86)
======= ======= ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
1999 2000
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......................... $ 2,733 $108,233
Property and equipment including construction in
progress, net..................................... 39,106 100,359
Total assets....................................... 44,843 240,226
Long-term debt..................................... 27,571 129,794
Total liabilities.................................. 35,723 159,529
Redeemable preferred stock......................... -- 47,268
Equity............................................. 9,120 33,429
</TABLE>
---------------------
(1) Pro forma basic and diluted net loss per share of common stock is computed
by dividing net loss available to common stockholders by the assumed number
of common shares outstanding as if the reorganization had occurred upon the
inception of Illinois PCS, LLC. For more information on the reorganization,
please see "Certain Relationships and Related Transactions--Formation of
Illinois PCS, LLC."
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and the related notes included elsewhere in this
prospectus.
Overview
On January 22, 1999 we entered into the Sprint PCS agreements whereby we
became the exclusive Sprint PCS affiliate with the right to market 100%
digital, 100% PCS wireless products and services under the Sprint and Sprint
PCS brand names in fifteen markets in Illinois and Iowa. In March 2000, the
Sprint PCS agreements were amended to add twenty additional markets to our
territory that increased the size of our territory from a total population of
2.8 million to a total population of 7.0 million.
Under the Sprint PCS agreements, we manage our network utilizing Sprint PCS'
licensed spectrum as well as using the Sprint and Sprint PCS brand names during
our affiliation with Sprint PCS. We also buy our network equipment, handsets
and accessories at the same discounted rates offered by vendors to Sprint PCS
based on its large volume purchases. These discounts reduce the overall capital
required to build our network and significantly reduce our costs of handsets
and accessories. Additionally, we have access to Sprint PCS national marketing
support and distribution programs. While we must support Sprint PCS' regional
and national pricing plans, we also have the flexibility to offer local pricing
plans with prior approval from Sprint PCS. However, if Sprint PCS were to price
its regional or national pricing plans based upon its own objectives, it could
set price levels that may not be economically sufficient for our business and
could potentially impact our results from operations. Sprint PCS collects all
revenues from our customers and remits the net amount to us. An affiliation fee
of 8% of collected service revenues from Sprint PCS customers based in our
territory, excluding outbound roaming, and from non-Sprint PCS customers who
roam onto our network, is retained by Sprint PCS and recorded as a cost of
service. Revenues generated from the sale of handsets and accessories, inbound
and outbound Sprint PCS roaming fees, and from roaming services provided to
Sprint PCS customers who are not based in our territory are not subject to the
8% affiliation fee.
Under the Sprint PCS agreements, we contract with Sprint PCS to provide back
office services such as customer activation, billing, collections and customer
care. We currently purchase these services from Sprint PCS to take advantage of
Sprint PCS' economies of scale, to accelerate our build-out and market launches
and to lower our initial capital requirements. The cost for these services is
primarily calculated on a per customer and per transaction basis and is
recorded as an operating expense. Sprint PCS may change the cost for these
services once in every 12-month period. The Sprint PCS agreements also provide
that with nine months' prior written notice, Sprint PCS may terminate offering
any service. If Sprint PCS were to terminate a service for which we have not
yet developed a cost-effective alternative, our operating costs may increase
beyond our expectations and negatively impact our results of operations. It is
not possible, however, to estimate with certainty the extent of any increase in
our operating costs.
Since the date of inception, we have incurred substantial costs to negotiate
the Sprint PCS agreements and our debt financing, to design, engineer and build
out our network in our initial
26
<PAGE>
territory and to open our retail stores. We launched service in our first two
markets, Bloomington, Illinois and the Quad Cities (Rock Island and Moline,
Illinois; and Davenport and Bettendorf, Iowa) in December 1999. In the first
nine months of 2000, we launched service in the remaining thirteen markets of
our initial territory. As of September 30, 2000, our network in those markets
covered approximately 2,097,000 residents, or approximately 75% of a total
population of 2,783,000, and we had over 25,000 customers. In November 2000, we
launched service in three additional markets, Grand Rapids, Saginaw-Bay City
and Muskegon, Michigan. With these three new markets launched, our network now
covers approximately 3,487,000 residents or approximately 75% of a total
population of 4,671,000. We believe we were in compliance with the material
requirements under the Sprint PCS agreements.
For the nine months ended September 30, 2000, we recorded a net loss of
approximately $36.0 million on total revenues of approximately $12.6 million.
For the period January 22, 1999 (date of inception) through September 30, 1999,
we had no revenues and our net loss was approximately $1.3 million. As of
September 30, 2000, our accumulated deficit was approximately $40.4 million and
we had incurred approximately $105.9 million of capital expenditures and
construction in progress related to the build-out of our network. While we
anticipate operating losses to continue, we expect revenue to increase
substantially as the number of our customers increase. All costs of start-up
and organizational activities have been expensed as incurred in accordance with
American Institute of Certified Public Accountants Statement of Position No.
98-5, "Reporting on the Costs of Start-Up Activities."
Results of Operations
For the nine-month period ended September 30, 2000 compared with the period
January 22, 1999 (date of inception) through September 30, 1999
Net loss. From the date of inception, our operating activities have been
directed towards the development of our business including executing our build-
out plan and developing our network infrastructure. For the nine-month period
ended September 30, 2000, we recorded a net loss of approximately $36.0 million
on total revenues of approximately $12.6 million. The loss was caused primarily
by cost of services exceeding service revenues, handset subsidies, selling,
general and administrative expenses, depreciation and amortization associated
with the markets launched in 1999 and 2000 and an extraordinary loss on the
early extinguishment of debt related to the write-off of the unamortized
deferred financing costs of the Nortel credit facility. In addition, we
recorded non-cash compensation expense of approximately $8.5 million and
related taxes of approximately $1.6 million associated with the issuance of a
1.5% ownership interest in our predecessor, Illinois PCS, LLC, to our President
and Chief Executive Officer. We also recorded approximately $2.2 million of
non-cash compensation expense, which is related to the amortization of the
deferred compensation expense associated with the stock options granted in July
2000. Our net loss for the period ended September 30, 1999 was approximately
$1.3 million and was comprised primarily of network build-out, selling, and
general and administrative expenses associated with the preparation of the
launch of our initial markets.
Service revenues. For the nine-months ended September 30, 2000, service
revenue totaled approximately $10.7 million and was comprised of customer
revenue of approximately $6.4 million and roaming revenue of approximately $4.3
million. For the period ended September 30, 1999, we
27
<PAGE>
had no service revenue as we had not yet launched service. The number of our
subscribers increased from approximately 1,900 at December 31, 1999 to over
25,000 at September 30, 2000. Our average monthly revenue per user, including
long distance and roaming, for the nine-months ended September 30, 2000 was
approximately $108. Without roaming revenue, average monthly revenue per user
was approximately $65.
. Customer revenue consists of services billed to our customers for monthly
Sprint PCS service in our territory under a variety of service plans.
These plans generally mirror national plans offered by Sprint PCS.
. We receive Sprint PCS roaming revenue at a per-minute rate from Sprint
PCS or another Sprint PCS affiliate when Sprint PCS subscribers outside
of our territory use our network. Pursuant to the Sprint PCS agreements,
Sprint PCS can change this per-minute rate after December 31, 2001.
. Roaming revenue also includes non-Sprint PCS roaming revenue from other
wireless service providers other than Sprint PCS, when those providers'
subscribers roam on our network as well as roaming revenue from our
customers when they roam on non-Sprint PCS networks.
Equipment and other revenue. We record 100% of the revenue from the sale of
equipment, net of an allowance for returns as equipment revenue. Equipment and
other revenue from the sale of phones and accessories, net of a sales
allowance, totaled approximately $1.9 million for the nine months ended
September 30, 2000. For the period ended September 30, 1999, we had no
equipment and other revenue because we had not yet launched service.
Cost of service. Cost of providing service to Sprint PCS customers in our
territory totaled approximately $10.0 million and $0.5 million for the nine-
months ended September 30, 2000 and the period ended September 30, 1999,
respectively. Cost of service includes billing, customer care, network
monitoring, cost of operations, fees related to facilities and other transport
lines, interconnection fees, Sprint PCS roaming fees, non-Sprint PCS roaming
fees and other expenses related to operations. We pay Sprint PCS roaming fees
when our customers use the Sprint PCS network outside our territory. We pay
non-Sprint PCS roaming fees to other wireless service providers when our
customers use their network. Also included in the cost of service expenses for
the nine-month period ended September 30, 2000 is the 8% of collected revenue
retained by Sprint PCS in the amount of approximately $0.5 million. For the
period, 45% of the total cost of service was paid to Sprint.
Cost of equipment. Cost of equipment sold for the nine-months ended
September 30, 2000 totaled approximately $5.1 million. There was no cost of
equipment expense recorded for same period in 1999 because we had not yet
launched service. Because we subsidize the price of handsets for competitive
reasons, we expect and have budgeted for the cost of handsets to continue to
exceed the retail sales price for the foreseeable future.
Selling expenses. Selling expenses include advertising and promotional
costs, salaries, sales commissions, and expenses related to our distribution
channels. For the nine-months ended September 30, 2000, selling expenses
totaled approximately $5.7 million compared with approximately $0.1 million for
the period ended September 30, 1999. The increase in costs is substantially due
to the launching of fifteen markets beginning in December 1999.
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General and administrative expenses. General and administrative expenses
were approximately $16.9 million for the nine-month period ended September 30,
2000 and approximately $0.8 million for the period ended September 30, 1999.
Included in general and administrative costs are finance and executive salaries
and bonuses, employee benefit costs, legal fees and other professional service
fees. Also included in the nine-months ended September 30, 2000 is non-cash
compensation expense and taxes on non-cash compensation expense totaling
approximately $12.3 million. Of this amount, approximately $8.5 million was the
non-cash compensation expense which related to a one-time charge for the
issuance of a 1.5% ownership interest to our President and Chief Executive
Officer based on an expected initial public offering price, and approximately
$1.6 million of withholding taxes we have paid in connection with the issuance
of this 1.5% ownership interest. The other $2.2 million of non-cash
compensation expense is related to the amortization of the deferred
compensation expense associated with the stock options granted in July 2000. We
apply the provisions of Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees". Deferred compensation expense is recorded for
the difference between the exercise price and the fair market value of our
common stock at the date of grant, and is amortized as non-cash compensation
expense over the vesting period of the options. We did not grant any options
during the same period in 1999. The remaining increase in general and
administrative expenses is due to the launching of fifteen markets beginning in
December 1999.
Depreciation and amortization. Depreciation and amortization expense for the
nine-months ended September 30, 2000 totaled approximately $5.5 million. We
begin to depreciate the assets for each market only after we launch service in
that market. We recorded $16,500 of amortization expense for the period ended
September 30, 1999.
Interest income. For the nine-months ended September 30, 2000, interest
income was approximately $1.9 million and was earned on the investment of
available funds. For the period ended September 30, 1999, interest income was
$56,000. The increase in interest income is because of the investment of the
proceeds of the senior discount notes received in July 2000.
Interest expense. For the nine-months ended September 30, 2000, interest
expense was approximately $6.3 million, net of capitalized interest of
approximately $1.5 million. For the period ended September 30, 1999, interest
expense was $7,000. In 1999, interest expense related to the Nortel credit
facility. Interest expense in 2000 is related both to the Nortel financing and
the senior discount notes.
Gain on tower sales. For the nine-months ended September 30, 2000, thirty-
seven towers were sold to American Tower for approximately $9.3 million
resulting in a gain of approximately $3.7 million, of which approximately $0.5
million was recognized at the time of the sale and the remainder was deferred
and is being amortized as a reduction in rental expense over the initial lease
term of ten years for the related towers. For the period ended September 30,
1999, we sold ten towers for $2.5 million resulting in a gain of approximately
$1.1 million of which approximately $0.2 million was recognized and the
remainder was deferred.
Extraordinary item. In connection with the refinancing of the Nortel credit
facility with the Toronto Dominion (Texas), Inc. and GE Capital Corporation
credit facility, we recorded an extraordinary loss on the early extinguishment
of debt of approximately $1.5 million in the nine-
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<PAGE>
months ended September 30, 2000 related to the write-off of the unamortized
deferred financing costs of the Nortel credit facility.
Results of Operations
For the period January 22, 1999 (date of inception) through December 31, 1999
Net loss. From the date of inception, our operating activities were directed
towards the development of our business, including our build-out plan and
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 revenue, which during the period totaled $71,000,
consisted of customer revenue of approximately $28,000 and roaming revenue of
approximately $43,000 all of which relate to our initial market launches in
December 1999.
Equipment and other revenue. We record 100% of the revenue from the sale of
equipment, net of an allowance for returns as equipment revenue. The amount
recorded during the period totaled $144,000.
Cost of service. Cost of service totaled $1.7 million, which related to
providing Sprint PCS services in our territory. Cost of services include
billing, customer care, 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.
Also included in the cost of service expenses is the 8% of collected revenue
retained by Sprint PCS. For the period, 7% of the total cost of service was
paid to Sprint.
Cost of equipment. Cost of equipment totaled $484,000, which includes the
cost of accessories, the cost of handsets, and handset subsidies.
Selling expenses. Selling expenses totaling $778,000 during the period
included advertising expenses, promotion costs, salaries and 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.
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.
Interest income. Interest income totaling $89,000 was generated on the
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.
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<PAGE>
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 our
reorganization from a limited liability company into a C corporation holding
company structure. Prior to July 12, 2000, the date of the reorganization, the
owners of our predecessor limited liability company recorded our tax losses on
their own income tax returns. Subsequent to this date, we are accounting for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." No benefit for federal income taxes has
been recorded as of September 30, 2000, as the net deferred tax asset
generated, primarily from temporary differences related to the net operating
loss carry forwards, was offset by a full valuation allowance because it is not
considered more likely than not that these benefits will be realized due to our
losses since inception.
Liquidity and Capital Resources
From the date of inception through July 12, 2000, we financed our operations
through an aggregate of $30.0 million of equity contributions from our owners
and through financing provided by Nortel. As of July 12, 2000, we had a $48.0
million credit facility with Nortel, of which approximately $40.3 million had
been drawn. On July 12, 2000, we closed our offering of 300,000 units
consisting of our 14% senior discount notes due 2010 and warrants to purchase
2,982,699 shares of our common stock for gross proceeds of approximately $152.3
million. The Nortel facility was repaid in full with funds from the unit
offering. Also on July 12, 2000, we entered into a definitive agreement with an
investor group led by The Blackstone Group pursuant to which we issued $50.0
million of our redeemable convertible preferred stock and received net proceeds
of approximately $46.4 million. Pursuant to a commitment under that agreement,
on December 28, 2000, the investor group purchased an additional $70.0 million
of our redeemable convertible preferred stock from which we received net
proceeds of approximately $65.8 million. We have made a subordinated loan of
the net proceeds to our wholly owned subsidiary iPCS Wireless, Inc.
In addition on July 12, 2000, we entered into our senior secured credit
facility, which was documented as an amended and restated credit agreement,
with Toronto Dominion (Texas), Inc. and GE Capital Corporation for a $140.0
million senior secured credit facility to replace the Nortel financing. On
December 29, 2000, we borrowed $25.0 million under the senior secured credit
facility.
The senior secured credit agreement provides for two different tranches of
borrowings totaling $140.0 million. The Tranche A Commitment provides for
borrowings up to $90.0 million and the Tranche B Commitment provides for
borrowings up to $50.0 million.
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Commencing March 31, 2004, and on the last day of each calendar quarter
ending during the periods set forth below, the Tranche A commitment as of
March 30, 2004 shall be automatically and permanently reduced by the
percentage amount set forth below for the quarters indicated:
. for the four quarters commencing with the fiscal quarter ending March 31,
2004, 2.50% per quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.5% per quarter.
Commencing March 31, 2004, we must begin to repay, in quarterly
installments, the principal on all borrowings outstanding as of March 30, 2004
made under the Tranche B Commitment. A fixed percentage on all Tranche B
borrowings will be due each quarter as follows:
. for the first four quarters commencing with the fiscal quarter ending
March 31, 2004, 2.50% of the principal balance of the loan is due per
quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.5% per quarter.
If we borrow the maximum amount under Tranche B, the aggregate amount
required to be repaid for each of the four periods above will be $5.0 million,
$7.5 million, $25.0 million, and $12.5 million, respectively.
Any principal that has not been paid by the maturity date, June 30, 2008,
is due at that time.
We may voluntarily prepay any of the loans at any time. Tranche A permits
reborrowings on a revolving basis but amounts repaid under Tranche B may not
be reborrowed.
We will have to make mandatory prepayments under certain circumstances,
including among others:
. 50% of our excess annual cash flow as computed under the senior secured
credit agreement, commencing April 30, 2004 with respect to the fiscal
year ending December 31, 2003;
. any amount in excess of $1.0 million per calendar year received as net
proceeds of asset sales outside the ordinary course of business or
insurance proceeds subject to certain exceptions, to the extent not
reinvested in property or assets within a stated period of time;
. 50% of the net proceeds of any equity issuance by us or any subsidiary
excluding the committed issuance of the convertible preferred stock, an
initial public offering and any offering to a borrower or guarantor party
to the senior secured financing; and
. 100% of the net proceeds of a debt issuance by us or any subsidiary
excluding permitted indebtedness.
All prepayments described above are applied to the outstanding loan
balances pro rata between Tranche A and Tranche B and pro rata across the
maturities.
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From the date of the senior secured credit agreement through and including
the date on which EBITDA is greater than zero for two consecutive fiscal
quarters, we may borrow money at the lesser of either:
. a base rate loan with an interest rate equal to 2.75% plus the higher of:
. the prime rate of the Toronto-Dominion Bank, New York Branch or
. the federal funds effective rate plus 0.5%; or
. a Eurodollar loan with an interest rate equal to the London interbank
offered rate, plus 3.75%.
After the date on which EBITDA is greater than zero for two consecutive fiscal
quarters, the base rate margin will range from 2.750% to 2.250% and the
Eurodollar loan margin will range from 3.750% to 3.250%, depending upon our
leverage ratio as of the most recently ended fiscal quarter.
We will use borrowings under the senior secured credit facility to finance
capital expenditures, certain acquisitions and investments for working capital
needs and other general corporate purposes.
The senior discount notes mature on July 15, 2010, carry a coupon rate of
14%, and provide for interest deferral for the first five years. The senior
discount notes will accrete in value at a rate of 14% per annum until July 15,
2005, after which, interest will begin to accrue and will be payable
semiannually beginning on January 15, 2006.
We believe that the net proceeds from our sale of senior discount notes, the
net proceeds of our private placement of redeemable convertible preferred stock
to an investor group led by The Blackstone Group and borrowings under our
senior secured credit facility, the availability of which is subject to certain
conditions, will be adequate to fund our network build out, anticipated
operating losses, working capital requirements and other capital needs through
2003.
Net cash used in operating activities was approximately $3.9 million from
the date of inception through December 31, 1999 and was approximately $11.9
million for the nine months ended September 30, 2000. Cash used in operating
activities was primarily attributable to operating losses, depreciation and
amortization, non-cash interest, non-cash compensation expense and working
capital needs.
Net cash used in investing activities was approximately $32.8 million from
the date of inception through December 31, 1999 and approximately $60.2 million
for the nine months ended September 30, 2000. The expenditures were related
primarily to the purchase of our network infrastructure equipment, offset by
the proceeds of tower sales, and the purchase of network assets in Michigan
from Sprint PCS.
Net cash provided by financing activities from the date of inception through
December 31, 1999 was approximately $39.5 million and approximately $177.6
million for the nine months ended September 30, 2000 and consisted primarily of
equity contributions and debt borrowings offset by repayments and debt issuance
costs. The significant increase in cash provided by financing activities in
2000 is related to the proceeds from the sale of redeemable convertible
preferred stock and the issuance of our senior discount notes offset by the
repayment in full of the Nortel debt of approximately $40.3 million.
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In May 1999, we signed a tower sale and leaseback agreement with American
Tower Corporation. We have agreed to construct between 60 and 80 wireless
communications towers, sell the towers to American Tower and then lease back
tower space from American Tower. We expect the average construction costs for
each tower to be approximately $150,000. Under the agreement we will receive
approximately $250,000 for each tower sold to American Tower and we will pay
rent in the amount of $1,100 per month, which increases at an annual rate of 3%
per annum, for tower space and no more than $350 per month for each
corresponding ground lease.
As of September 30, 2000, we had received $13.0 million related to the sale
of fifty-five towers under this agreement and had incurred an aggregate of
approximately $8.3 million of costs to construct such towers. American Tower
has also provided us with a one-time advance of $2.0 million. This advance was
a prepayment of American Tower's obligations under the agreement, and will be
credited ratably toward the purchase price of the fifty-third through sixtieth
towers. As of November 30, 2000, we sold the fifty-third through sixtieth
towers and as a result the $2.0 million advance on tower sales was reduced to
zero.
As of September 30, 2000, our primary source of liquidity is approximately
$108.2 million in cash and cash equivalents.
Option Territory
As part of Sprint PCS' agreement to grant us expansion territory, we have
been granted the option, but do not have the obligation, to add to our
territory the Iowa City and Cedar Rapids, Iowa markets that have already been
launched by Sprint PCS and to purchase from Sprint PCS related assets in those
markets. These markets, which were launched by Sprint PCS in February 1997,
have a total population of approximately 405,000 and had over 11,000 Sprint PCS
subscribers as of September 30, 2000. Our option expires on January 31, 2001.
The purchase price payable by us for the purchase of assets upon exercise of
the option would be payable within 90 days of the date we exercise the option
as a condition to adding the Iowa City and Cedar Rapids Iowa markets to our
territory. The purchase price for the assets and subscriber accounts of $28.8
million is subject to an upward adjustment based upon the number of subscribers
in the two additional markets at the option exercise date. We would become the
manager of all Sprint PCS subscribers in these markets upon the closing of the
asset purchase. We have not determined whether we will exercise this option,
and our decision will depend upon an ongoing analysis of the option territory
and whether exercising this option is consistent with the best use of our
capital.
Seasonality
The wireless industry has historically experienced higher customer additions
and handset sales in the fourth calendar quarter as compared to the other three
calendar quarters. A number of factors contribute to this including:
. the primary focus on retail distribution, which is dependent upon the
year-end holiday shopping season;
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. competitive pricing pressures; and
. aggressive marketing and promotions initiated during the period.
Quantitative and Qualitative Disclosures About Market Risk.
We do not engage in commodity futures trading activities and do not enter
into derivative financial instrument transactions for trading or other
speculative purposes. We also do not engage in transactions in foreign
currencies that could expose us to market risk.
We are subject to interest rate risk on our senior secured credit facility
and any future financing requirements. Our variable rate debt consists of
borrowings made under our senior secured credit facility as to which no
borrowings have been made at September 30, 2000. The senior secured credit
facility requires us to enter into an interest rate protection agreement within
six months after July 12, 2000, the effective date, to fix the interest rate of
at least 50% of debt that does not have a fixed interest rate. To date, we have
not entered into such an agreement, but we expect to do so prior to the date
required.
The following table presents the estimated future outstanding long-term debt
at the end of each year and future required annual principal payments for each
year then ended associated with our senior secured credit facility based on our
projected level of long-term indebtedness:
<TABLE>
<CAPTION>
Years Ending December 31,
----------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Senior discount
notes(1)............... $132,581 $144,428 $157,334 $171,393 $186,708 $300,000
Fixed interest rate.... 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%
Principal payments..... -- -- -- -- -- $300,000
Senior secured credit
facility(2)............ $ 25,000 $ 50,000 $140,000 $126,000 $105,000 --
Variable interest
rate(3)............... 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Principal payments..... -- -- -- $ 14,000 $ 21,000 $105,000
</TABLE>
--------------------
(1) The amounts presented for December 31, 2000 and subsequent periods
represent year-end balances of the senior discount notes by amortizing the
discount utilizing the effective interest method over the term of the
senior discount notes.
(2) The amounts presented for December 31, 2000 and subsequent periods
represent estimated year-end long-term debt balances under our senior
secured financing based upon a projection of the funds borrowed under that
facility pursuant to such current network build-out plan.
(3) Interest rate on our senior secured financing equals the lesser of either:
. a base rate loan with an interest rate equal to the higher of
. the prime rate of the Toronto-Dominion Bank, New York Branch plus
2.75% or
. the federal fund effective rate plus 0.5%; or
. the London interbank offered rate plus 3.75%. The London interbank
offered rate is assumed to equal 6.25% for all periods presented.
Our primary market risk exposure relates to:
. the interest rate risk on our long-term and short-term borrowings; and
. the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants.
We manage the interest rate risk on our outstanding long-term and short-term
debt through the use of fixed and variable rate debt and interest rate caps
under the senior secured credit agreement. While we
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cannot predict our ability to refinance existing debt or the impact interest
rate movements will have on our existing debt, we continue to evaluate our
financial position on an ongoing basis.
Inflation
Management believes that inflation has not had, and will not have, a
material adverse effect on our results of operations.
Effect of Recently Issued Accounting Pronouncements
On July 8, 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 defers the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," to all
fiscal years beginning after June 15, 2000. We are currently evaluating the
impact of adoption of SFAS No. 133. Our adoption is not expected to have a
material effect on our results of operations, financial position, or cash
flows.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board Opinion 25" ("Opinion 25"). FIN
44 clarifies (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000; however, certain conclusions in
FIN 44 cover specific events that occur after either December 15, 1998, or
January 12, 2000. To the extent that FIN 44 covers events occurring during the
period after December 15, 1998, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying FIN 44 will be recognized on a
prospective basis from July 1, 2000. We do not expect FIN 44 to have a material
effect on our results of operations, financial position, or cash flows.
On December 3, 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin specifically addresses revenue recognition
requirements for nonrefundable fees, such as activation fees, collected by a
company upon entering into an arrangement with a customer, such as an
arrangement to provide telecommunications services. On June 26, 2000, the SEC
released SAB 101B, which delays the required implementation of SAB 101 until no
later than the fourth quarter of fiscal years ending on or after December 31,
2000. We do not expect the effects of this bulletin will have a material effect
on our results of operations, financial position, or cash flows.
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BUSINESS
References to total population and residents are based on January 1, 1999
population estimates compiled by Rand McNally Commercial Atlas & Marketing
Guide, 2000 Edition. References to markets reflect whole or partial basic
trading areas, or BTAs, as defined by the Federal Communications Commission.
Overview
We have the exclusive right to market 100% digital, 100% PCS, under the
Sprint and Sprint PCS brand names to a total population of more than 7.0
million in the midwestern United States. We offer the same bundled national
pricing plans and use the same sales and marketing strategies, national sales
and distribution channels, centralized billing and customer care as Sprint PCS.
We began providing service in December 1999 and, as of September 30, 2000, had
launched service in fifteen markets covering approximately 2,097,000 residents
and had over 25,000 customers. As of November 30, 2000, we had launched three
additional markets covering approximately 1,390,000 residents. By the end of
the third quarter of 2001, we plan to offer service on our network, which we
refer to as providing coverage, to the portions of our territory where
approximately 67% of the total population resides in our territory, at which
time our planned network build-out for all of our current markets will be
substantially complete.
In January 1999, we entered into the Sprint PCS agreements whereby we became
the exclusive Sprint PCS affiliate for our initial territory of 15 markets with
a total population of over 2.8 million in the states of Illinois and Iowa. As
of September 30, 2000, we have launched service in all of our initial markets,
thereby substantially completing our network build-out in our initial
territory. At such time, we are providing coverage to approximately 2.1 million
residents or approximately 75% of the total population residing in our initial
territory. Following our successful initial launch, Sprint PCS selected us to
be the exclusive Sprint PCS affiliate for 20 additional markets with a total
population of over 4.2 million in the states of Michigan, Iowa and Nebraska. As
part of this expansion, we have purchased from Sprint PCS network assets under
construction in four markets in Michigan. In addition, we have been granted the
option, but do not have the obligation, to add to our territory the Iowa City
and Cedar Rapids, Iowa markets that Sprint PCS launched in February 1997 and to
purchase from Sprint PCS related assets in those markets. Those markets have a
total population of approximately 405,000 and had over 11,000 Sprint PCS
subscribers as of September 30, 2000.
Our territory includes markets in Illinois, including Peoria, Springfield,
Champaign-Urbana, Decatur-Effingham, Bloomington and the Quad Cities (Rock
Island and Moline, Illinois; and Davenport and Bettendorf, Iowa); Michigan,
including Grand Rapids, Saginaw-Bay City, Muskegon and Traverse City; Iowa,
including Waterloo-Cedar Falls and Dubuque; and eastern Nebraska. We anticipate
our territory will generate significant roaming revenues for us from Sprint PCS
subscribers not based in our territory who use our network. Our territory is
adjacent to, but does not include, several important markets owned and operated
by Sprint PCS including Chicago, Detroit, Des Moines, Indianapolis, Omaha and
St. Louis. We benefit from more than 1,700 miles of heavily traveled
interstates in our territory which connect major metropolitan and industrial
areas of the midwestern United States. Over 40 colleges and universities are
located in our territory with a total enrollment of approximately
200,000 students.
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The Sprint PCS agreements impose obligations and restrictions on us. We are
required to comply with requirements for launch dates, coverage and technical
standards of the network build-out, customer service standards, and
participation in Sprint PCS national and regional distribution and national
accounts programs. We are prohibited from offering Sprint PCS products and
services outside our territory and on a non-branded, "private label" basis. For
further information regarding the terms of the Sprint PCS agreements, see "The
Sprint PCS Agreements--The Management Agreement." If the Sprint PCS agreements
terminate, we will not enjoy the benefits as discussed below of our affiliation
and such termination will permit Sprint PCS to purchase our operating assets or
capital stock at a substantial discount from our fair market value. For further
information regarding risks related to our relationship with Sprint PCS, see
"Risk Factors--Risks Particular to iPCS."
Competitive Strengths
Benefits of our Long-Term Strategic Relationship with Sprint PCS
Our long-term strategic relationship with Sprint PCS allows us to offer high
quality, nationally branded wireless services more quickly, at a lower cost and
with lower initial capital requirements than would otherwise be possible. The
benefits of our affiliation with Sprint PCS include the following:
Exclusive provider of Sprint PCS products and services. We are the exclusive
provider of Sprint PCS' 100% digital, 100% PCS wireless products and services
in our territory. We market these products and services exclusively under the
Sprint and Sprint PCS brand names.
Immediate brand name recognition and national advertising support. We
benefit from the strength and reputation of the Sprint and Sprint PCS brand
names. Sprint PCS' extensive national advertising campaigns and established
marketing programs are provided to us at no additional cost under our
agreements with Sprint PCS. We offer the same strategic pricing plans,
promotional campaigns and handset and accessory promotions as Sprint PCS, and
have the flexibility to add pricing plans and marketing promotions that target
local market needs.
Nationwide digital PCS network. Our network operates with Sprint PCS'
national network and will significantly extend Sprint PCS' coverage in the
midwestern United States, which we believe is important to Sprint PCS' regional
and national growth strategy. Sprint PCS provides nationwide service through
its own 100% digital PCS network in major U.S. metropolitan areas, affiliating
with other companies like us mainly in and around smaller U.S. metropolitan
areas and roaming agreements for the use other providers' analog cellular or
CDMA PCS networks. Our ability to provide our customers with access to Sprint
PCS' national network represents a competitive advantage over other national
and regional providers of wireless services.
Established and available distribution channels. We benefit from immediate
access to Sprint PCS' existing sales and distribution agreements with major
national retailers who have existing store locations in our territory and
Sprint PCS' other national sales and distribution channels, including:
. the sales and distribution agreements with major national third-party
retailers which collectively provide us with access to over 300 stores in
our territory;
. Sprint PCS' national inbound telemarketing sales force;
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. 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.
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. We expect to be the first national PCS entrant
in all of our markets and the first or second PCS entrant in all but four of
our markets in central Illinois, where we are third. Existing PCS competition
is limited to regional carriers with small service territories and PrimeCo,
which only provides service in five of our markets in Illinois. 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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Potential for significant Sprint PCS roaming revenue. We receive Sprint PCS
roaming revenue from Sprint PCS subscribers based outside our territory who
roam on our network. Our territory is adjacent to and connects, but does not
include, several major markets owned and operated by Sprint PCS, including
Chicago, Detroit, St. Louis, Indianapolis, Omaha and Des Moines. These market
areas contain approximately 20 million residents. Our network contains over
1,700 interstate miles which connect these major Sprint PCS markets. The
interstate corridors in our territory include:
<TABLE>
<CAPTION>
Approximate Approximate
total interstate miles interstate
between major miles covered
Interstate Major Destination Cities destinations by iPCS
<S> <C> <C> <C>
I-57 Chicago, IL to Memphis, TN............ 524 244
I-74 Moline, IL to Cincinnati, OH.......... 421 220
I-55 Chicago, IL to St. Louis, MO.......... 285 179
I-80 Chicago, IL to Des Moines, IA......... 340 158
I-35 Minneapolis, MN to Kansas City, MO.... 440 133
I-80 Omaha, NE to Cheyenne, WY............. 497 131
I-75 Detroit, MI to Mackinaw City, MI...... 291 120
I-72 Springfield, IL to Champaign, IL...... 87 87
I-70 St. Louis, MO to Indianapolis, IN..... 234 84
I-64 St. Louis, MO to Louisville, KY....... 259 83
I-39 Rockford, IL to Bloomington, IL....... 130 77
I-29 Omaha, NE to Kansas City, MO.......... 187 77
I-96 Muskegon, MI to Detroit, MI........... 190 76
I-196 Benton Harbor, MI to Grand Rapids, MI. 78 46
I-380 Iowa City, IA to Waterloo, IA......... 82 33
----- -----
Total...................................... 4,045 1,748
===== =====
</TABLE>
For a more detailed description of Sprint PCS roaming revenue, see "--Roaming
Revenue."
Significant Sprint PCS national accounts opportunities. We participate in
Sprint PCS' national accounts program which targets large companies. Several
Fortune 500 companies such as State Farm Insurance, Archer Daniels Midland, Dow
Chemical, John Deere and Caterpillar, as well as a number of other large
companies, have their headquarters in our territory. Participation in Sprint
PCS' national accounts program provides us an opportunity to participate in
selling efforts focused on those companies. We have been working with Sprint
PCS' national accounts team to attract, service and retain large companies with
headquarters in our territory and have either already targeted, or expect to
target in the near future, each such company. To date, we service employees of
John Deere on an individual basis through Sprint PCS' national accounts program
and have bid, and expect to continue to bid for the business of these national
account companies located 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.
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Execution of our initial territory network build-out plan. In January 1999,
we entered into the Sprint PCS agreements for our initial territory in Illinois
and Iowa. Within ten months and ahead of the build-out requirements under the
Sprint PCS agreements, we completed network construction and began providing
commercial service in two of these markets covering over 590,000 residents. As
of November 30, 2000, we had launched Sprint PCS service in eighteen markets
covering approximately 3,487,000 residents. We are using the same
implementation methodologies for the network construction in all markets in our
territory.
Fully financed business plan. We believe that the net proceeds from our sale
of the senior discount notes, the private placement of $120.0 million of
convertible preferred stock to an investor group led by Blackstone, and
anticipated borrowings under our new senior secured facility will be adequate
to fund our network buildout, anticipated operating losses, working capital
requirements and other capital needs.
Business Strategy
We believe that the following elements of our business strategy will enable
us to continue to rapidly build out our network and launch additional markets,
distinguish our wireless service offerings from those of our competitors and
compete successfully in the wireless communications marketplace.
Fully leverage our strategic relationship with Sprint PCS. We are
capitalizing on the extensive benefits of our strategic relationship with
Sprint PCS. These benefits allow us to provide a seamless offering of products
and services in our territory under the Sprint and Sprint PCS brand names that
are indistinguishable from those offered by Sprint PCS nationwide. We take full
advantage of Sprint PCS' national marketing programs and established sales and
distribution channels to increase our sales. We use Sprint PCS' back office
services, including customer activation, billing and 24 hours a day, 7 days a
week customer care, and Sprint PCS' national network control center, which is
responsible in conjunction with our switching centers for continually
monitoring the performance of our network and providing rapid response for
systems maintenance needs. The use of these back office services from Sprint
PCS significantly reduces our overhead costs. We take advantage of
significantly discounted prices for network equipment, handsets and accessories
under Sprint PCS' vendor contracts, which further reduces our costs.
Execute an integrated local marketing strategy. Our marketing strategy
leverages Sprint and Sprint PCS' nationwide presence and brand names while at
the same time establishing a strong local presence in each of our markets. We
emphasize the improved clarity and quality, enhanced features and favorable
pricing of Sprint PCS products and services and replicate the marketing
strategies that have resulted in Sprint PCS becoming the fastest growing U.S.
wireless carrier. In addition, on the local level, we are:
. establishing a total of up to 17 Sprint PCS sales and service centers in
markets within our territory;
. establishing local third-party sales and distribution relationships on an
as-needed basis;
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. directing our media efforts at the community level by advertising in
local publications, radio and television; and
. sponsoring local and regional events.
Continue to execute build-out plan and rapid deployment. We plan to continue
the rapid construction and build-out of our technologically advanced 100%
digital, 100% PCS wireless network. Our strategy is to build out network
service to metropolitan areas and the interstates and primary roads connecting
these areas, and then to cover the smaller population and business centers. We
intend to continue to rely on experienced third-party strategic partners for
radio frequency design, network engineering and optimization, site acquisition,
project management and construction management services.
Explore strategic opportunities to expand our territory. We continually
evaluate expansion opportunities and, subject to the availability of financing,
may strategically expand our territory. We have been granted the option, but do
not have the obligation, to purchase the Iowa City and Cedar Rapids, Iowa
markets that have already been launched by Sprint PCS. For more information on
the option, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Option Territory."
Sprint PCS
Sprint PCS, a wholly owned subsidiary of Sprint, operates the only
nationwide 100% digital, 100% PCS wireless network in the United States. Sprint
PCS provides nationwide service through its own PCS network in major
metropolitan markets throughout the United States, 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 and has entered into roaming agreements for the use of
other providers' amalog cellular or CDMA PCS networks. The Sprint PCS network,
including the portions of the network owned, constructed and operated by the 18
affiliates, operates the largest 100% digital, 100% PCS nationwide wireless
network in the United States, already serving the majority of the nation's
metropolitan areas including more than 4,000 cities and communities across the
country. Sprint PCS has licensed PCS coverage of nearly 270 million people in
all 50 states, Puerto Rico and the U.S. Virgin Islands. 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
approximately 8.4 million customers as of September 30, 2000. The following
table, showing the quarterly end-of-period subscriber data for Sprint PCS,
illustrates Sprint PCS' subscriber growth from the beginning of 1997 to the end
of the third quarter of 2000 and may not reflect Sprint PCS' future subscriber
growth nor our subscriber growth.
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[Bar Chart of Subscriber Growth]
Q1 97 192
Q2 97 347
Q3 97 570
Q4 97 887
Q1 98 1,114
Q2 98 1,370
Q3 98 1,750
Q4 98 2,586
Q1 99 3,350
Q2 99 3,967
Q3 99 4,687
Q4 99 5,723
Q1 00 6,554
Q2 00 7,437
Q3 00 8,352
Markets
Our territory includes 35 markets containing a total population of over 7.0
million residents in:
. Illinois, including Peoria, Springfield, Champaign-Urbana, Decatur-
Effingham, Bloomington and the Quad Cities (Rock Island and Moline,
Illinois; and Davenport and Bettendorf, Iowa);
. Michigan, including Grand Rapids, Saginaw-Bay City, Muskegon and Traverse
City;
. Iowa, including Waterloo-Cedar Falls and Dubuque; and
. eastern Nebraska.
We are the exclusive provider of Sprint PCS products and services in these
markets which are adjacent to several major metropolitan operational markets
in the midwestern United States which are owned and operated by Sprint PCS
including Chicago, Detroit, Des Moines, Indianapolis, Omaha and St. Louis. We
believe connecting existing Sprint PCS markets is important to Sprint PCS'
strategy to provide seamless, nationwide PCS service. We have been granted the
option, but do not have the obligation, to add to our territory the Iowa City
and Cedar Rapids, Iowa markets that Sprint PCS launched in February 1997 and
to purchase from Sprint PCS related assets and subscriber accounts in those
markets. These markets have a total population of approximately 405,000 and
had over 11,000 Sprint PCS subscribers as of September 30, 2000.
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<PAGE>
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. Our expected commercial launch of network coverage is
scheduled to occur prior to the launch dates required by the Sprint PCS
agreements. As of November 30, 2000, we have launched the following markets:
.Galesburg, Illinois;
.Davenport, Iowa/Moline, Illinois; .Clinton, Iowa/Sterling,
Illinois;
.Bloomington, Illinois; .Mt. Vernon-Centralia,
Illinois;
.Danville, Illinois;
.Peoria, Illinois;
.Jacksonville, Illinois;
.Springfield, Illinois;
.Mattoon, Illinois;
.St. Louis, Missouri (partial);
.Grand Rapids, Michigan;
.LaSalle-Peru-Ottawa-Streator, Illinois;
.Saginaw-Bay City, Michigan;
.Decatur-Effingham, Illinois; and
.Muskegon, Michigan.
.Champaign-Urbana, Illinois;
.Kankakee, Illinois;
The number of our 25,000 customers as of September 30, 2000 who are located
in these launched markets varies based upon the total population of the market,
how long the markets have been launched and the extent of our marketing efforts
to date in such markets. The estimated covered population represents the total
potential customers rather than our expected customers in such markets.
<TABLE>
<CAPTION>
Estimated
Estimated Covered Population as
Basic Trading Area Market MHz of Estimated Total Covered a Percentage of
(1) Spectrum Population (2) Population (3) Total Population
<S> <C> <C> <C> <C>
Davenport, IA/Moline, IL. 30 430,000 380,000 88%
Bloomington, IL.......... 10 232,000 210,000 91%
------- -------
Total Year 1999........ 662,000 590,000 89%
======= =======
Peoria, IL............... 10 465,000 320,000 69%
Springfield, IL.......... 10 266,000 215,000 81%
St. Louis, MO
(partial) (3)........... 30 47,000 22,000 47%
------- -------
Subtotal (Q1 2000)...... 778,000 557,000 72%
------- -------
LaSalle-Peru-Ottawa-
Streator, IL............ 20 152,000 120,000 79%
Decatur-Effingham, IL.... 10 248,000 176,000 71%
Champaign-Urbana, IL..... 10 219,000 190,000 87%
Kankakee, IL............. 20 135,000 96,000 71%
Galesburg, IL............ 10 74,000 47,000 64%
------- -------
Subtotal (Q2 2000)...... 828,000 629,000 76%
Clinton, IA/Sterling, IL. 30 147,000 100,000 68%
Mt. Vernon-Centralia, IL. 30 122,000 62,000 51%
Danville, IL............. 20 112,000 68,000 61%
Jacksonville, IL......... 10 71,000 35,000 49%
Mattoon, IL.............. 10 63,000 56,000 89%
------- -------
Subtotal (Q3 2000)...... 515,000 321,000 62%
------- -------
------- -------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Estimated
Estimated Covered Population as
Basic Trading Area Market MHz of Estimated Total Covered a Percentage of
(1) Spectrum Population (2) Population (3) Total Population
<S> <C> <C> <C> <C>
Grand Rapids, MI......... 30 1,036,000 850,000 82%
Saginaw-Bay City, MI..... 30 632,000 400,000 63%
Muskegon, MI............. 30 220,000 140,000 64%
--------- ---------
Subtotal (Q4 2000)...... 1,888,000 1,390,000 74%
--------- ---------
Total Year 2000........ 4,671,000 3,487,000 75%
========= =========
Lansing, MI (partial)
(3)..................... 30 62,000 43,000 69%
Battle Creek, MI
(partial)(3)............ 30 55,000 20,000 36%
--------- ---------
Subtotal (Q1 2001)...... 117,000 63,000 54%
--------- ---------
Waterloo-Cedar Falls, IA. 30 261,000 153,000 59%
Traverse City, MI........ 30 236,000 105,000 44%
Dubuque, IA.............. 30 178,000 107,000 60%
Des Moines, IA
(partial)(3)............ 30 171,000 82,000 48%
Burlington, IA........... 30 137,000 97,000 71%
Mount Pleasant, MI....... 30 129,000 79,000 61%
Ottumwa, IA.............. 30 124,000 66,000 53%
Marshalltown, IA......... 30 57,000 34,000 60%
--------- ---------
Subtotal (Q2 2001)...... 1,293,000 723,000 56%
--------- ---------
Omaha, NE (partial) (3).. 30 249,000 118,000 47%
Grand Island-Kearney, NE. 30 147,000 95,000 65%
Fort Dodge, IA........... 30 128,000 47,000 37%
Mason City, IA........... 30 116,000 50,000 43%
Norfolk, NE.............. 30 112,000 40,000 36%
Lincoln, NE (partial)
(3)..................... 30 98,000 27,000 28%
Hastings, NE............. 30 72,000 39,000 54%
--------- ---------
Subtotal (Q3 2001)...... 922,000 416,000 45%
--------- ---------
Total Year 2001........ 7,003,000 4,689,000 67%
========= =========
</TABLE>
---------------------
(1) Expected commercial launch dates for these markets may change based on a
number of factors, including shifts in populations, target markets or
network focus, changes or advances in technology, acquisition of other
markets and delays in market build-out due to reasons identified in "Risk
Factors--Risks Particular to iPCS."
(2) Estimated population is based on January 1, 1999 estimates compiled by Rand
McNally Commercial Atlas & Marketing Guide, 2000 Edition.
(3) Estimated covered population for these markets reflects only those
residents which are expected to be covered, not the total population in the
entire basic trading area.
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Network Build-Out Plan
In December 1999, we launched service in the Bloomington, Illinois and the
Quad Cities (Rock Island and Moline, Illinois; and Davenport and Bettendorf,
Iowa) markets covering over 590,000 residents. By the end of March 2000, we
launched service in the Peoria and Springfield, Illinois and St. Louis,
Missouri markets covering approximately 557,000 residents. By the end of June
2000, we launched service in the LaSalle-Peru-Ottawa-Streator, Illinois,
Decatur-Effingham, Illinois, Champaign-Urbana, Illinois, Kankakee, Illinois and
Galesburg, Illinois markets covering approximately 629,000 residents. As of
September 30, 2000, we substantially completed the build-out of all remaining
metropolitan markets and major interstate routes in our initial territory. Our
initial territory covers approximately 2.1 million residents or 75% of the
total population residing in our initial territory. As of November 30, 2000, we
had launched Sprint PCS service in eighteen markets covering approximately
3,487,000 residents.
Following our successful build-out and initial launch, Sprint PCS agreed to
amend the Sprint PCS agreements to expand our territory to include 20
additional markets with a total population of approximately 4.2 million in the
states of Michigan, Iowa and Nebraska. As part of this expansion, we have
purchased from Sprint PCS network assets under construction in four markets in
Michigan.
By the end of the third quarter of 2001, we plan to be substantially
complete with our build-out and we anticipate covering 4.7 million residents,
or 67% of the total population, in our territory. Our build-out plan exceeds
the network build-out requirements under the Sprint PCS agreements.
As part of the expansion of our territory, we have been granted the option,
but do not have the obligation, to add to our territory the Iowa City and Cedar
Rapids, Iowa markets that have already been launched by Sprint PCS. These
markets have a total population of approximately 405,000 and had 11,000 Sprint
PCS subscribers as of September 30, 2000. Our option expires on January 31,
2001. The purchase price payable by us for the purchase of assets and
subscriber accounts upon exercise of the option of $28.8 million in January,
2001 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 completed 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. For our Illinois and
Iowa markets, 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.
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CMS identifies and acquires the sites on which we locate the towers,
antennae and other equipment necessary for the operation of our network. After
radio frequency design identifies the general geographic area in which to
locate cell sites, CMS surveys potential sites to identify two potential tower
sites within each geographic search area. CMS evaluates the alternative sites
within each of the identified geographic search areas, giving consideration to
various engineering criteria as well as the costs to be incurred to acquire and
construct a tower on the site. We pay CMS fixed fees for its services.
For our Michigan markets we have engaged Trintel Communications to provide
construction and project management services similar to those provided by CMS.
For our Michigan and Iowa markets, Tricom is also providing site acquisition
services.
We acquire and make operational a cell site in three ways:
. co-location on an existing tower owned by third parties;
. construction of a new tower ourselves; or
. construction of a new tower by an independent build-to-suit company.
Generally, we prefer to co-locate with other wireless carriers or tower
companies by leasing space on an existing tower or building. The advantages of
co-location are that there are lower construction costs to us associated with
the building of a tower and any zoning difficulties have likely already been
resolved. In situations where co-location is not appropriate, we will acquire
the site and hire third parties to construct the tower. Upon completion, we
generally sell the tower and lease it back from the buyer. We have entered into
a tower sale and lease-back agreement with American Tower Corporation, one of
the largest tower companies in the United States, for the towers that we
construct in our initial territory. We believe that we have a favorable lease
rate for the towers subject to the sale lease-back agreement. These leases run
for initial terms of ten years with three additional five-year renewal terms.
By structuring our sale and lease-back on this basis, we are able to retain
complete control of the tower site selection process and retain the flexibility
of not having our capital tied up in tower ownership.
In situations where we determined that neither co-location nor site
acquisition was appropriate, we would arrange for the construction of a tower
on a build-to-suit basis by an independent tower construction company who would
acquire the site, build the tower and lease it to us. The principal advantage
of this method is that it reduces our capital expenditures.
We expect that approximately 590 sites will be required to achieve our
planned 67% coverage of the residents in our territory. Of those 590 sites, we
believe that approximately 300 will be co-location sites. We plan to construct
towers for the remaining 290 sites. We plan to sell and lease back 80 towers
under our existing agreement with American Tower.
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
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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 $8.0 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 have entered into leases for a switching center in Grand Rapids,
Michigan and in Davenport, Iowa.
Interconnection. Our network connects to the landline telephone system
through local exchange carriers. Through our Sprint PCS agreements, we benefit
from Sprint PCS-negotiated interconnection agreements with local exchange
carriers.
Long distance and back haul. We have entered into an agreement with Sprint,
which provides us long distance services at the same preferred rates made
available to Sprint PCS.
Network communications equipment. Nortel and Lucent (in our Michigan
markets) 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.
Nortel Equipment Agreement
We have entered into a three year equipment purchase agreement with Nortel
for our network equipment and infrastructure, including switches and base
station controllers for our initial territory. Pursuant to the equipment
agreement, Nortel also provides installation services for the equipment and
grants us a nonexclusive license to use all the software associated with the
Nortel equipment. As of September 30, 2000, we have a remaining commitment to
purchase $19.8 million of equipment and services from Nortel. We submit
purchase orders to Nortel for the equipment and services as needed. Under the
agreement, we receive a discount on the network equipment and services because
of our affiliation with Sprint PCS. If our affiliation with Sprint PCS ends,
Nortel has the right to either terminate the agreement or, with our consent,
modify the agreement to establish new prices, terms and conditions.
Lucent Equipment Agreement
In July 2000, we entered into an equipment purchase agreement with Lucent
Technologies Inc. for our network equipment and infrastructure in which we
committed to purchase one switch and 100 base station controllers for our
Michigan markets within the first year of the agreement and an
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additional 32 base station controllers during the second year. In addition, we
have agreed to use Lucent's equipment exclusively in the construction of our
network located within the state of Michigan. As of September 30, 2000, we have
purchased approximately $4.2 million of equipment and have a remaining
commitment to purchase $13.0 million. Lucent is obligated to Sprint PCS to
enter into this agreement with us because we are a Sprint PCS affiliate. By our
purchase agreement with Lucent, we are subject to the terms and conditions of a
procurement and services contract between Lucent and Sprint PCS which expires
on January 31, 2006 and which provides that the equipment which we purchase
will be in conformance with the technical standards of the Sprint PCS network
and at prices consistent with those negotiated by Sprint PCS.
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 has licensed PCS
coverage of nearly 270 million people in all 50 states, Puerto Rico and the
U.S. Virgin Islands and provides service through its own 100% digital, 100% PCS
wireless network and through affiliating with other companies and roaming
agreements for the use of other providers' analog cellular or CDMA PCS
networks. 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.
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
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ID, call waiting, call forwarding and three-way calling. The increased capacity
of CDMA technology allows Sprint PCS to offer high usage subscriber plans at
per-minute rates lower than analog cellular and certain digital products. All
of Sprint PCS' current national plans:
. include minutes that can be used on any portion of the nationwide Sprint
PCS network with no roaming charges for the subscriber;
. offer advanced features and generally require no long-term contracts;
. offer a selection of handsets to meet the needs of individual consumers
and businesses; and
. provide a limited-time, money back guarantee on Sprint PCS handsets.
In addition, Sprint PCS' Free and Clear pricing plans include long distance
calling from anywhere on the Sprint PCS network to anywhere in the United
States.
Advanced handsets and longer battery life. We primarily offer a selection of
dual-band handsets with various advanced features and technology, such as
Internet readiness described in "--Access to the Sprint PCS Wireless Web"
above. All handsets are equipped with pre-programmed features such as caller
ID, call waiting, phone books, speed dial and last number redial and are sold
under the Sprint and Sprint PCS brand names. CDMA handsets weighing
approximately 5 to 7 ounces offer up to five days of standby time and
approximately four hours of talk time. We also offer dual-band/dual-mode
handsets that allow customers to make and receive calls on both PCS and
cellular frequency bands with the applicable digital or analog technology.
These handsets allow roaming on cellular networks where Sprint PCS digital
service is not available. When roaming in analog markets, stand-by and talk
times are greatly reduced.
Improved voice clarity and quality. We believe that CDMA technology offers
significantly improved voice clarity and quality, compared to existing analog,
and TDMA and GSM digital
networks, more powerful error correction, less susceptibility to call fading
and enhanced interference rejection, all of which result in fewer dropped
calls. See "--CDMA Technology" for a discussion of the reasons CDMA technology
offers improved voice clarity and quality.
Privacy and security. Sprint PCS provides secure voice transmissions encoded
into a digital form to prevent eavesdropping and unauthorized cloning of
subscriber identification numbers.
Easy activation. Customers can purchase a shrink-wrapped Sprint PCS handset
off the shelf at a retail location and activate their service by calling
customer service, which can activate the handset over the air. We believe over-
the-air activation reduces the training requirements for salespersons at the
national retailer locations. Our customers can also activate their service at
any of Sprint PCS sales and service centers with the assistance of trained
customer service representatives.
Customer care. Sprint PCS provides customer care services to our customers
under the Sprint PCS agreements. Sprint PCS offers 24 hours a day, seven days a
week customer care. Our customers can call the Sprint PCS toll-free customer
care number from anywhere. All Sprint PCS phones are pre-programmed with a
speed dial feature that allows our customers to easily reach customer care at
any time on the Sprint PCS network. In addition, our customers can also obtain
customer service and assistance at any Sprint PCS store throughout the country.
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Other services. In addition to these services, we may also offer wireless
local loop services in our territory. Wireless local loop is both a wireless
alternative and supplemental service for the landline-based telephones in homes
and businesses. We also believe that new features and services will be
developed on the Sprint PCS nationwide network to take advantage of CDMA
technology. As a leading wireless provider, Sprint PCS conducts ongoing
research and development to produce innovative services that give Sprint PCS a
competitive advantage. We offer a portfolio of products and services developed
by Sprint PCS to accommodate the growth in, and the unique requirements of,
high speed data traffic. We provide a number of applications for wireless data
services including facsimile and Internet access.
Roaming Revenue
Sprint PCS Roaming
When Sprint PCS subscribers based outside of our territory use our network,
we collect roaming revenue from Sprint PCS based on a per-minute fee and when
our customers use the Sprint PCS network outside of our territory, we pay to
Sprint PCS roaming charges based on a per-minute fee. Pursuant to the Sprint
PCS agreements, Sprint PCS has the discretion to change the per-minute roaming
rate for Sprint PCS roaming fees after December 31, 2001. Because we serve
smaller metropolitan areas adjacent to larger metropolitan areas, we believe
inbound Sprint PCS roaming will exceed outbound Sprint PCS roaming. See "Risk
Factors--Risks Particular to iPCS--We may not receive as much Sprint PCS
roaming revenue as we anticipate, our non-Sprint PCS roaming revenue is likely
to be low adversely affecting our revenues, and we may have higher payments to
Sprint PCS for usage by our customers of the Sprint PCS network than we
anticipate."
Non-Sprint PCS Roaming
The term "non-Sprint PCS roaming" is used when non-Sprint PCS subscribers
use our network and when our customers use a non-Sprint PCS network. Pursuant
to roaming agreements between Sprint PCS and other wireless service providers,
when other wireless service provider subscribers use our network, we earn
roaming revenue. These wireless service providers must pay fees for their
subscribers' use of our network, and as part of our collected revenues, we are
entitled to 92% of the fees. Currently, pursuant to the Sprint PCS agreements,
Sprint PCS bills these wireless service providers for these fees. When wireless
service providers provide service to our customers, we pay those service
providers roaming fees and our customers incur roaming fees at rates specified
in their contracts. As a result, we retain the collection risk from our
customers for non-Sprint PCS roaming charges incurred by them. We are entitled
to 100% of the non-Sprint PCS roaming fees collected from our customers.
Currently, pursuant to the Sprint PCS agreements, Sprint PCS bills our
customers for the roaming fees, and pays us the fees it has collected on a
monthly basis.
Marketing Strategy
Our marketing and sales strategy utilizes Sprint PCS' proven strategies and
developed national sales and distribution channels tailored to our specific
territory.
Use Sprint PCS' brand equity and marketing. We feature exclusively and
prominently the nationally recognized Sprint and Sprint PCS brand names in our
marketing effort. From our customers' point of view, they use our network and
the Sprint PCS national network seamlessly as a unified nationwide network.
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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 ten Sprint PCS stores and plan
to open an additional six or seven 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.
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 95 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.
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Other national third-party retail stores. In addition to RadioShack, we
benefit from the sales and distribution agreements established by Sprint PCS
with other national retailers which currently include Best Buy, Circuit City,
Kmart, Staples, Target, Office Max, Office Depot and Ritz Camera. These
retailers and others have over 200 additional retail stores in our territory to
which we have access. We believe the number of stores will increase over time
as Sprint PCS adds national retailers and as these national retailers add
stores in our territory.
Local third-party retail stores. We benefit from the sales and distribution
agreements which we enter into with local retailers in our territory. We have
entered into sales and distribution agreements with over 50 local stores in our
territory and expect the number to increase.
Sprint PCS stores. We currently own and operate ten Sprint PCS stores in our
territory and plan to open an additional six or seven stores as we continue to
launch service in additional markets. These stores are located in metropolitan
markets within our territory, providing us with a strong local presence and a
high degree of visibility. We train our sales representatives to be informed
and persuasive advocates for Sprint PCS' services. Following the Sprint PCS
model, these stores have been designed to facilitate retail sales, bill
collection and customer service.
National accounts and direct selling. We participate in Sprint PCS' national
accounts program. Sprint PCS has a national accounts team which focuses on the
corporate headquarters of large
companies. Several Fortune 500 companies such as State Farm Insurance, Archer
Daniels Midland, Dow Chemical, John Deere and Caterpillar, as well as other
large companies, have their headquarters in our territory. In addition, once a
Sprint PCS national account manager reaches an agreement with any company
headquartered outside of our territory, we service the offices and subscribers
of that company located in our territory. Participation in Sprint PCS' national
accounts program provides us an opportunity to participate in selling efforts
focused on these companies. Our direct sales force will target the employees of
these companies in our territory and cultivate other local business customers.
Inbound telemarketing. Sprint PCS provides inbound telemarketing sales to
answer our prospective customers' calls. As the exclusive provider of Sprint
PCS products and services in our territory, we use the national Sprint 1-800-
480-4PCS number campaigns that generate call-in leads. These leads are then
handled by Sprint PCS' inbound telemarketing group and the new subscriber
becomes our customer.
Electronic commerce. Sprint PCS launched an Internet site in December 1998
at www.sprintpcs.com, which contains information on Sprint PCS products and
services. A visitor to Sprint PCS' Internet site can order and pay for a
handset and select a rate plan. Subscribers visiting the site can review the
status of their account, including the number of minutes used in the current
billing cycle. Site visitors in our territory who purchase products and
services over the Sprint PCS Internet site will be our customers.
CDMA Technology
The Sprint PCS national network uses digital code division multiple access,
or CDMA, as its signal transmission technology. There are two other principal
signal transmission technologies: time division multiple access, or TDMA, and
global system for mobile communications, or GSM. Major wireless providers who
use TDMA technology include AT&T Wireless and Cingular Wireless. Major
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wireless providers who use GSM technology include BellSouth, VoiceStream
Communications, Omnipoint and Aerial. We believe that CDMA provides important
system performance benefits such as:
Greater capacity. We believe, based on studies by CDMA manufacturers, that
CDMA systems can provide system capacity that is approximately seven to ten
times greater than that of current analog technology and approximately three
times greater than TDMA or GSM systems.
Privacy and security. One of the benefits of CDMA technology is that it
combines a constantly changing coding scheme with a low power signal to enhance
call security and privacy.
Soft hand-off. CDMA systems transfer calls throughout the CDMA network using
a technique referred to as a soft hand-off, which connects a mobile customer's
call with a new base station while maintaining a connection with the base
station currently in use. CDMA networks monitor the quality of the transmission
received by multiple base stations simultaneously to select a better
transmission path and to ensure that the network does not disconnect the call
in one cell unless replaced by a stronger signal from another base station.
Analog, TDMA and GSM networks use a "hard hand-off" and disconnect the call
from the current base station as it connects with a new one without any
simultaneous connection to both base stations.
Simplified frequency planning. Frequency planning is the process used to
analyze and test alternative patterns of frequency use within a wireless
network to minimize interference and maximize capacity. Unlike TDMA and GSM-
based systems, CDMA-based systems can reuse the same subset of allocated
frequencies in every cell, substantially reducing the need for costly frequency
reuse patterning and constant frequency plan management.
Longer battery life. Due to their greater efficiency in power consumption,
CDMA handsets can provide longer standby time and more talk time availability
when used in the digital mode than handsets using alternative digital or analog
technologies.
While CDMA has the inherent benefits discussed above, TDMA networks are
generally less expensive when overlaying existing analog systems since the TDMA
spectrum usage is more compatible with analog spectrum planning. Multi-vendor
equipment has only recently become available for CDMA, while GSM has had the
technology available; as a result, GSM is used more widely throughout the world
than CDMA and as a result currently offers greater economies of scale for
handset and equipment purchases. A standards process is also underway which
will allow wireless handsets to support analog, TDMA and GSM technologies in a
single unit.
Competition
We compete in our territory with regional and national cellular, PCS and
other wireless providers. Verizon Wireless (formerly AirTouch, GTE Wireless,
ALLTEL and Ameritech Cellular) provides cellular service in each of our major
markets. Cingular Wireless (formerly SBC/CellularOne) covers much of central
Illinois and Nebraska but does not provide service in Peoria, the Quad Cities
or in Michigan. Other cellular providers such as US Cellular and CenturyTel
have similar limited coverage areas. PCS competitors such as NPI Wireless,
Omnipoint, Iowa Wireless, PrimeCo and Amica Wireless operate in certain
portions of our territory but none provides the scope of coverage that we offer
in these markets. Of the PCS providers, only AT&T Wireless
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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 five of our
Illinois markets.
Our ability to compete effectively with these other providers will depend on
a number of factors, including the continued success of CDMA technology in
providing better call clarity and quality as compared to analog cellular
systems, Sprint PCS' competitive pricing with various options suiting
individual customer's calling needs, the continued expansion and improvement of
the Sprint PCS nationwide network, our extensive direct and indirect sales
channels, our centralized Sprint PCS customer care systems, and our selection
of handset options.
Currently, we believe that our most formidable competition is from cellular
providers, many of which have been operating in our markets and building their
customer bases for a number of years and have greater financial resources and
customer bases. Some of our competitors have access to more licensed spectrum
than the 10 or 20 MHz licensed to Sprint PCS in certain markets in parts of
Illinois. Some of our competitors also have established infrastructures,
marketing programs and brand names. In addition, certain competitors may be
able to offer coverage in areas not served by our network, or, because of their
calling volumes or their affiliations with, or ownership of wireless
providers, may be able to offer roaming rates that are lower than those offered
by Sprint PCS. PCS operators will likely compete with us in providing some or
all of the services available through the Sprint PCS network and may provide
services that we do not. Additionally, we expect that existing cellular
providers will continue to upgrade their systems to provide digital wireless
communication services competitive with Sprint PCS.
The following table details our primary operational competitors within each
of our three primary geographical markets: Illinois and the Iowa Quad Cities
markets (total population of approximately 2.8 million), Michigan markets
(total population of approximately 2.4 million) and Iowa and Nebraska markets
(total population of approximately 1.8 million) and the type of wireless
commercial service (cellular, PCS or enhanced specialized mobile radio service,
or ESMR), that each of our competitors deploys:
COMPETITORS BY GEOGRAPHIC MARKET
<TABLE>
<CAPTION>
Cellular/
PCS/
Primary ESMR
Geographic Market Competitors Service
<S> <C> <C>
Illinois (including Iowa Quad Cities markets) Verizon Wireless Cellular
Cingular Wireless Cellular
USCellular Cellular
Amica Wireless PCS
Iowa Wireless PCS
PrimeCo PCS
Nextel ESMR
</TABLE>
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<TABLE>
<CAPTION>
Cellular/
PCS/
Primary ESMR
Geographic Market Competitors Service
<S> <C> <C>
Michigan markets Verizon Wireless Cellular
CenturyTel Cellular
NPI Wireless PCS
OmniPoint PCS
Nextel ESMR
Iowa and Nebraska markets Verizon Wireless Cellular
Cingular Wireless Cellular
USCellular Cellular
Iowa Wireless PCS
</TABLE>
We also face limited competition from "resellers" which provide wireless
service to customers but do not hold FCC licenses or own facilities. Instead,
the reseller buys blocks of wireless telephone numbers and capacity from a
licensed carrier and resells service through its own distribution network to
the public. Thus, a reseller is both a customer of a wireless licensee's
services and also a competitor of that and other licensees. The FCC requires
all cellular and PCS licensees to permit resale of carrier service to a
reseller. Currently, we do not use resellers to market our services.
Although Sprint PCS is required to resell PCS in our markets, currently there
is no reseller of Sprint PCS in our markets. Any reseller of Sprint PCS could
not use the Sprint PCS service marks in our markets except for the limited
purpose of describing their handsets as operational on the Sprint PCS network.
In addition, we will compete with paging, dispatch and other mobile
telecommunications companies in our markets. Potential users of PCS systems may
find their communications needs satisfied by other current and developing
technologies. One or two-way paging or beeper services that feature voice
messaging and data display as well as tone-only service may be adequate for
potential customers who do not need immediate two-way voice communications.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While few of
these technologies and services are currently operational in areas outside our
territory, others are being developed or may be developed in the future.
Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
PCS. Based upon increased competition, we anticipate that market prices for
two-way wireless voice and data services generally will decline in the future.
We will compete to acquire and retain customers principally on the basis of
services and features, the size and location of our territory, network coverage
and reliability, customer care and pricing. Our ability to compete successfully
will also depend, in part, on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by competitors.
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Industry Background
Wireless communications systems use a variety of radio frequencies to
transmit voice and data. Broadly defined, the wireless communications industry
includes one-way radio applications, such as paging or beeper services, and
two-way radio applications, such as cellular telephone services, PCS and
enhanced specialized mobile radio services.
Since the introduction of commercial cellular service in 1983, the wireless
communications industry has experienced dramatic growth. The number of wireless
subscribers for cellular, PCS and enhanced specialized mobile radio service has
increased from an estimated 203,600 in June 1985 to an estimated 97.0 million
as of June 2000, 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>
Year Ended December 31,
-----------------------------------------
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
Wireless Industry Statistics(1)
Total service revenues (in billions). $14.2 $19.1 $23.6 $27.5 $33.1 $40.0
Wireless subscribers at end of period
(in millions)....................... 24.1 33.8 44.0 55.3 69.2 86.0
Subscriber growth.................... 50.8% 40.0% 30.4% 25.6% 25.1% 24.3%
Average local monthly bill(2)........ $56.21 $51.00 $47.70 $42.78 $39.43 $41.24
</TABLE>
---------------------
(1) Reflects domestic commercial cellular, enhanced specialized mobile radio
service and PCS providers.
(2) Does not include revenue from roaming and long distance.
Paul Kagan Associates, Inc., an independent media and telecommunications
research firm, estimates in its publication, Kagan's Wireless Telecom
Investor--September 1999, that the number of wireless users will increase to
approximately 169.1 million by the end of 2003 and 235.1 million by the end of
2009. This growth is expected to be driven largely by a substantial projected
increase in PCS users who are forecast to account for approximately 37.5% of
total wireless users in 2003 and 47.9% in 2009, representing a significant
increase from approximately 17.6% as of the end of 1999. Paul Kagan Associates,
Inc. projects that total wireless industry penetration, defined as the number
of wireless subscribers nationwide divided by total United States population,
will grow from an estimated 31.1% in 1999 to 77.6% in 2009.
We believe that a significant portion of the predicted growth in the
consumer market for wireless telecommunications will result from:
. anticipated declines in costs of service;
. increased product offerings; and
. increased awareness of the productivity, convenience and privacy benefits
associated with the services offered by PCS providers.
We also believe that the rapid growth in the use of notebook computers and
personal digital assistants, combined with emerging software applications for
wireless delivery of electronic mail, fax and database searching, will
contribute to the growing demand for wireless services.
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Intellectual Property
"Sprint," the Sprint diamond design logo, "Sprint PCS," "Sprint Personal
Communications Services," "The Clear Alternative to Cellular" and "Experience
the Clear Alternative to Cellular Today" are service marks registered with the
United States Patent and Trademark Office. These service marks are owned by
Sprint. Pursuant to the Sprint PCS agreements we have the right to use royalty-
free these service marks and certain other service marks of Sprint in
connection with marketing, offering and providing licensed services to end-
users and resellers, solely within our territory.
Sprint PCS has agreed not to grant to any other person a right or license to
provide or resell, or act as agent for any person offering, licensed services
under these service marks within our territory except as to Sprint PCS'
marketing to national accounts and the limited right of resellers of Sprint PCS
to inform their customers of handset operation on the Sprint PCS network. In
all other instances, Sprint PCS reserves for itself and its affiliates the
right to use the licensed marks in providing its services, subject to its
exclusivity obligations described above, whether within or without our
territory.
The Sprint PCS agreements contain numerous restrictions with respect to the
use and modification of any of the Sprint service marks. See "The Sprint PCS
Agreements--The Trademark and Service Mark License Agreements."
This prospectus includes product names, trade names and trademarks of other
companies. We do not have any rights with respect to these product names, trade
names and trademarks.
Employees
As of November 30, 2000, we employed 141 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 1900 East Golf Road, Suite 900,
Schaumburg, Illinois 60173 as well as administrative office space at 121 West
First Street, Suite 200, Geneseo, Illinois 61254. We also lease space in 19
locations in our territory, primarily for our Sprint PCS stores, project
offices and switching centers. As of September 30, 2000, we leased space on 184
towers and owned 80 towers. We believe our leased property is in good operating
condition and is currently suitable and adequate for our business operations.
Legal Proceedings
We are not aware of any pending legal proceedings against us which,
individually or in the aggregate, are likely, in the opinion of management, to
have a material adverse effect on our financial condition or results of
operations.
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THE SPRINT PCS AGREEMENTS
The following is a summary of the material terms and provisions of the
Sprint PCS agreements and the consent and agreement modifying the Sprint PCS
management agreement. We have filed the Sprint PCS agreements and will file a
consent and agreement as exhibits to the registration statement of which this
prospectus is a part and urge you to review them carefully.
Overview of Sprint PCS Relationship and Agreements
Under the Sprint PCS agreements, we will exclusively market PCS services
under the Sprint and Sprint PCS brand names in our territory. The Sprint PCS
agreements require us to interface with the Sprint PCS wireless network by
building our network to operate on the 10 to 30 MHz of PCS frequencies licensed
to Sprint PCS in the 1900 MHz range. The Sprint PCS agreements also give us
access to Sprint PCS' equipment discounts, roaming revenue from Sprint PCS
customers traveling into our territory, and various other back office services.
The Sprint PCS agreements provide strategic advantages, including avoiding the
need to fund up-front spectrum acquisition costs and the costs of establishing
billing and other customer services infrastructure. The Sprint PCS agreements
have initial terms of 20 years with three 10-year renewals which will lengthen
the contracts to a total term of 50 years. The Sprint PCS agreements will
automatically renew for each additional 10-year term unless we or Sprint PCS
provide the other with two years' prior written notice to terminate the Sprint
PCS agreements.
We have four major agreements with Sprint and Sprint PCS, collectively, the
"Sprint PCS agreements":
. the management agreement;
. the services agreement;
. the trademark and service mark license agreement with Sprint; and
. the trademark and service mark license agreement with Sprint PCS.
In addition, Sprint PCS has entered into a consent and agreement that
modifies our management agreement for the benefit of the lenders under our
senior secured credit facility and any refinancing.
The Management Agreement
Under our management agreement with Sprint PCS, we have agreed to:
. construct and manage a network in our territory in compliance with Sprint
PCS' PCS licenses and the terms of the management agreement;
. distribute, during the term of the management agreement, Sprint PCS
products and services;
. use Sprint PCS' and our own distribution channels in our territory;
. conduct advertising and promotion activities in our territory; and
. manage that portion of Sprint PCS' customer base assigned to our
territory.
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.
Network build-out. The management agreement specifies the terms of the
Sprint PCS affiliation, including the required network build-out plan. We have
agreed to cover a specified percentage of the population at coverage levels
ranging from 42% to 88% within each of the 15 markets which make up our initial
territory by specified dates beginning December 1999 and ending December 2002.
The aggregate coverage requirement is 73% of the population in our initial
territory of 2.8 million residents by December 2002. For our 20 additional
markets containing 4.2 million residents in the states of Michigan, Iowa and
Nebraska which we acquired in March 2000, we are required to meet a build-out
schedule of cities and traffic arteries by certain dates beginning July 2001
and ending December 2004. For more information on the build-out schedule, see
"Business--Markets." We have agreed to operate our network, if technically
feasible and commercially reasonable, to provide for a seamless handoff of a
call initiated in our territory to a neighboring Sprint PCS network.
At any time after January 22, 2001, Sprint PCS can decide to expand the
coverage requirements of our territory by providing us with written notice as
long as the expanded coverage requirements are for proposed areas in which a
tower would cover at least 10,000 residents. We have 90 days after receiving
notice from Sprint PCS to determine whether we will build out the proposed
area. If we fail to build out the proposed area, we may be in breach of the
Sprint PCS agreements and Sprint will have the right to terminate the Sprint
PCS agreements and to purchase all of our operating assets at 80% of the entire
business value. As of January 22, 1999, Sprint PCS has identified nine cities
in our territory that meet the expanded coverage requirements criteria.
However, Sprint PCS cannot require us to build out these cities until after
December 31, 2002.
Products and services. The management agreement identifies the products and
services that we can offer in our territory. These services include, but are
not limited to, Sprint PCS consumer and business products and services
available as of the date of the agreement, or as modified by Sprint PCS. We are
allowed to sell wireless products and services that are not Sprint PCS products
and services if those additional products and services do not otherwise violate
the terms of the agreement, cause distribution channel conflicts, materially
impede the development of the Sprint PCS network or, in Sprint PCS' sole
determination, cause consumer confusion with Sprint PCS' products and services.
We may cross-sell services such as Internet access, customer premises
equipment, and prepaid phone cards with Sprint, Sprint PCS and other Sprint PCS
affiliates. If we decide to use third parties to provide these services, we
must give Sprint PCS an opportunity to provide the services on the same terms
and conditions. We cannot offer wireless local loop services specifically
designed for the competitive local exchange market in areas where Sprint owns
the local exchange carrier unless we name the Sprint owned local exchange
carrier as the exclusive distributor or Sprint PCS approves the terms and
conditions. However, there are no markets in our territory where Sprint is the
local telephone company.
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National sales programs. We will participate in the Sprint PCS sales
programs for national sales to customers, and will pay the expenses and receive
the compensation from national accounts located in our territory. We must use
Sprint's long distance service which we can buy at the same prices offered to
Sprint PCS.
Service pricing, roaming and fees. We must offer Sprint PCS subscriber
pricing plans designated for regional or national offerings, including Sprint
PCS' Free and Clear plans. We are permitted to establish our own local price
plans for Sprint PCS' products and services offered only in our territory,
subject to the terms of the agreement, consistency with Sprint PCS' regional
and national pricing plans, regulatory requirements and Sprint PCS' approval.
We are entitled to receive from Sprint PCS an amount equal to 92% of collected
revenues which relate to our customers' use of our network and to revenues from
non-Sprint PCS subscribers roaming onto our network. We are entitled to receive
100% of roaming revenues (except for taxes) which relate to our customers'
usage of the Sprint PCS network outside of our territory, our customers' usage
of a non-Sprint PCS network, and the usage of our network by Sprint PCS
subscribers. We are also entitled to receive 100% of the proceeds from the
sales of handsets and accessories and proceeds from sales not in the ordinary
course of business. Although many Sprint PCS subscribers will purchase a
bundled pricing plan that allows roaming anywhere on the Sprint PCS' and
affiliates' network without incremental roaming charges, we will earn roaming
revenues from every minute based on an established per-minute rate for Sprint
PCS' or its affiliates' subscribers roaming in our territory. Similarly, we
will pay for every minute our subscribers use the Sprint PCS nationwide network
outside our territory. The analog roaming rates applicable to use by our
customers of third-party providers' networks are set under Sprint PCS' third-
party roaming agreements.
Advertising and promotions. Sprint PCS is responsible for all national
advertising and promotion of the Sprint PCS products and services. We are
responsible for advertising and promotion in our territory, including the pro
rata cost of any promotion or advertising done by any third-party retailers in
our territory pursuant to a national cooperative advertising agreement with
Sprint. Sprint PCS' service area includes the urban markets around our
territory. Sprint PCS will pay for advertising in these markets. Given the
proximity of these markets to ours, we expect considerable spill-over from
Sprint PCS' advertising in surrounding urban markets.
Program requirements. We 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. Sprint PCS program requirements with respect to
such standards as dropped calls, blocked calls, origination failures,
interference and switch maintenance applicable to us are not more stringent
than the requirements applicable to Sprint PCS as to the portions of the
network it owns and operates and to other Sprint PCS affiliates with respect to
the portion of the Sprint PCS network which they own and operate. We do not
believe that the program requirements applicable to us under the Sprint PCS
agreements are more restrictive than what Sprint PCS experiences or that
experienced by the wireless industry in general. Moreover, we do not believe
that standards for customer service, should we elect not to acquire such
services from Sprint PCS, would be substantially restrictive nor is
participation in the
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national accounts program burdensome. We have the right to appeal to Sprint
PCS' management adjustments which could cause an unreasonable increase in cost
to us if the adjustment:
. causes us to incur a cost exceeding 5% of the sum of our equity plus our
outstanding long-term debt, or
. causes our operating expenses to increase by more than 10% on a net
present value basis.
If Sprint PCS denies our appeal, we must then comply with the program
adjustment, or Sprint PCS has the right to exercise the termination rights
described below.
Non-competition. We may not offer Sprint PCS products and services outside
our territory without the prior written approval of Sprint PCS. Within our
territory we may offer, market or promote telecommunications products and
services only under the Sprint PCS brands, our own brand, brands of related
parties of ours or other products and services approved under the management
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 a right 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;
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. 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:
. the original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint PCS or
. 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;
. require us to purchase, subject to governmental approval, up to 10MHz of
licensed spectrum for an amount equal to the greater of:
. the original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint; or
. 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:
. the original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint PCS; or
. 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
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. require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of:
. the original cost to Sprint PCS of the license plus any microwave
relocation costs paid by Sprint PCS; or
. 10% of our entire business value.
Determination of Entire Business Value. If the entire business value is to
be determined, we and Sprint PCS will each select one independent appraiser and
the two appraisers will select a third appraiser. The three appraisers will
determine the entire business value based on the fair market value on a going
concern basis using the following guidelines:
. the entire business value is based on the price a willing buyer would pay
a willing seller for the entire on-going business;
. then-current customary means of valuing a wireless telecommunications
business will be used;
. the business is conducted under the Sprint and Sprint PCS brands and the
Sprint PCS agreements;
. that we own the spectrum and frequencies presently owned by Sprint PCS
that we use subject to the Sprint PCS agreements; and
. the valuation will not include any value for businesses not directly
related to the Sprint PCS products and services, and such businesses will
not be included in the sale.
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
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or any other agreement between Sprint PCS and us, except Sprint PCS will not
indemnify us for any claims arising solely from our negligence or willful
misconduct.
The Services Agreement
The services agreement outlines various back office services provided by
Sprint PCS and available to us at established rates. Sprint PCS can change any
or all of the service rates one time in each 12 month period. Some of the
available services include: billing, customer care, activation, credit checks,
maintenance of a customer database for call billing, voice mail, prepaid
services, directory assistance, operator services, roaming fees, roaming
clearinghouse fees, interconnect fees and inter-service area fees. Sprint PCS
offers three packages of available services. Each package identifies which
services must be purchased from Sprint PCS and which may be purchased from a
vendor or provided in-house. Essentially, services such as billing, activation
and customer care must either all be purchased from Sprint PCS or we may
provide those services ourselves. We have chosen to initially buy these
services from Sprint PCS but may develop an independent capability with respect
to these services over time. Sprint PCS may contract with third parties to
provide expertise and services identical or similar to those to be made
available or provided to us. We have agreed not to use the services received
under the services agreement in connection with any other business or outside
our territory. We may discontinue use of any service upon three months' prior
written notice. Sprint PCS may discontinue a service provided that Sprint PCS
provides us with nine months' prior notice.
We have agreed with Sprint PCS to indemnify each other as well as officers,
directors, employees and certain other related parties and their officers,
directors and employees for violations 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
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connection with a material breach of the trademark license agreements. In
addition, we have agreed to indemnify Sprint and Sprint PCS from any loss
suffered by reason of our use of the licensed marks or marketing, promotion,
advertisement, distribution, lease or sale of any Sprint or Sprint PCS products
and services other than losses arising solely out of our use of the licensed
marks in compliance with certain guidelines.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if we file for bankruptcy, materially breach the agreement or our
management agreement is terminated. We can terminate the trademark and service
mark license agreements upon Sprint's or Sprint PCS' abandonment of the
licensed marks or if Sprint or Sprint PCS files for bankruptcy, or the
management agreement is terminated.
Consent and Agreement for the Benefit of the Holders of the Senior Secured
Credit Facility
Sprint PCS has entered into a consent and agreement for the benefit of the
holders of the indebtedness under the senior secured credit facility which we
refer to as the Senior Secured Consent, which has been acknowledged by us, and
modifies Sprint PCS' rights and remedies under our management agreement, for
the benefit of the existing and future holders of indebtedness under our senior
secured credit facility and any refinancing thereof.
The Senior Secured Consent provides for the following:
. Sprint PCS' consent to the pledge of substantially all of our assets,
including our rights in the Sprint PCS agreements;
. that the Sprint PCS' agreements may not be terminated by Sprint PCS until
our senior secured credit facility is satisfied in full pursuant to the
terms of the Senior Secured Consent, unless our subsidiaries or assets
are sold to a purchaser who does not continue to operate the business as
a Sprint PCS network, which sale requires the approval of the
administrative agent (Toronto Dominion (Texas), Inc. is the initial
administrative agent as discussed in more detail in "Description of Our
Indebtedness--The Senior Secured Credit Facility");
. for Sprint PCS to maintain 10MHz of PCS spectrum in all of our markets
until our senior secured facility is satisfied or our operating assets
are sold after our default under our senior secured credit facility;
. for redirection of payments due to us under the management agreement from
Sprint PCS to the administrative agent during the continuation of our
default under our senior secured credit facility;
. for Sprint PCS and the administrative agent to provide to each other
notices of default by us under the Sprint PCS management agreement and
senior secured credit facility, respectively;
. the ability to appoint interim replacements, including Sprint PCS or a
designee of the administrative agent, to operate our portion of the
Sprint PCS network under the Sprint PCS agreements after an acceleration
of our senior secured credit facility or an event of termination under
the Sprint PCS agreements;
. subject to certain requirements and limitations, the ability of the
administrative agent or Sprint PCS to assign the Sprint PCS agreements
and sell our assets or the equity interests of our
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operating subsidiaries to a qualified purchaser that is not a major
competitor of Sprint PCS or Sprint, free of the restrictions on assignment
and change of control in the management agreement, if our senior secured
credit facility has been accelerated after our default; and
. subject to certain requirements and limitations, that if Sprint PCS
enters consent and agreement documents with similarly situated lenders
that have provisions that are more favorable to the lender, Sprint PCS
will give the administrative agent written notice of the amendments and
will amend the Senior Secured Consent in the same manner at the
administrative agent's request.
Sprint PCS' Right to Purchase on Acceleration of Amounts Outstanding under our
Senior Secured Credit Facility
Subject to the requirements of applicable law, so long as our senior
secured credit facility remains outstanding, Sprint PCS has the right to
purchase our operating assets or the equity interests of our operating
subsidiaries, upon its receipt of notice of an acceleration of our senior
secured credit facility, under the following terms:
. Sprint PCS elects to make such a purchase within 60 days of the
acceleration notice or the filing of a bankruptcy petition, whichever is
earlier;
. the purchase price is the greater of an amount equal to 72% of our entire
business value or the amount we owe under our senior secured credit
facility;
. if Sprint PCS has given notice of its intention to exercise the purchase
right, then the administrative agent is prohibited from enforcing its
security interest for a period or 120 days after the acceleration or
until Sprint PCS rescinds its intention to purchase, whichever is
earlier; and
. if we receive a written offer that is acceptable to us to purchase our
operating assets or the equity interests of our operating subsidiaries
after the acceleration, then Sprint PCS has the right to purchase our
operating assets or the equity interests of our operating subsidiaries on
terms at least as favorable to us as the offer we receive. Sprint PCS
must agree to purchase the operating assets or the equity interests of
our operating subsidiaries within 14 business days of its receipt of the
offer, on acceptable conditions, and in an amount of time acceptable to
us.
Sale of Operating Assets or the Interests of Our Operating Subsidiary to Third
Parties
If Sprint PCS does not purchase our operating assets or the equity
interests of our operating subsidiaries after an acceleration of the
obligations under our senior secured credit facility, then the administrative
agent may sell the operating assets or equity interests. Subject to the
requirements of applicable law (including the law relating to foreclosures of
security interests), the administrative agent has two options:
. to sell the assets or equity interests to an entity that satisfies the
following requirements to be our successor under the Sprint PCS
agreements:
. the entity must not have materially breached any material agreement
with Sprint;
. the entity cannot be one of the competitors named in the Senior
Secured Consent;
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. the entity must have the financial ability to perform the Sprint PCS
agreements; and
. the entity must agree to be bound by the terms of the Sprint PCS
agreements; or
. to sell the assets or equity interests to any third-party provided:
. Sprint PCS may terminate the Sprint PCS agreements;
. such third-party may purchase Spectrum from Sprint PCS; and
. the purchase agreement transferring the assets or equity interests is
consistent with the terms of the Senior Secured Consent.
Option Territory
As part of the expansion of our territory, we have been granted the option,
but do not have the obligation, to add to our territory the Iowa City and Cedar
Rapids, Iowa markets that have already been launched by Sprint PCS and to
purchase from Sprint PCS related assets and subscriber accounts in those
markets. These markets have a total population of approximately 405,000 and had
over 11,000 Sprint PCS subscribers as of September 30, 2000. 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 of $28.8 million in January, 2001 is
subject to adjustment such that it will not be less than:
. $19,945,600, plus
. 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.
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DESCRIPTION OF OUR INDEBTEDNESS
The Senior Secured Credit Facility
General
Our wholly owned subsidiary, iPCS Wireless, Inc. entered into a definitive
amended and restated credit agreement with Toronto Dominion (Texas), Inc. and
GE Capital Corporation for a $140.0 million senior secured credit facility.
This facility constitutes senior debt secured by a first priority security
interest in substantially all of our assets. The senior secured credit
agreement provides that we and all of our current and future subsidiaries
guarantee this senior secured credit facility.
Amount and Purpose of Loans
The senior secured credit agreement provides for two different tranches of
borrowings totaling $140.0 million. The Tranche A commitment provides for
borrowings up to $90.0 million and the Tranche B commitment provides for
borrowings up to $50.0 million. This facility will be used to finance capital
expenditures, certain acquisitions and investments for working capital needs
and other general corporate purposes. See "Business--Nortel Equipment
Agreement."
The amounts that can be borrowed will be further limited to a borrowing
base. The borrowing base is defined as 100% of the gross book value of all
property, plant and equipment owned by iPCS Wireless, Inc. and its subsidiaries
equipment used in our network. We will have the option to reduce the amount of
any of the commitments, and to avoid the periodic fee charged on those
unborrowed amounts. Any reduction must be at least $3.0 million. Any such
reduction cannot be reinstated. Tranche A permits reborrowings on a revolving
basis but amounts repaid under Tranche B may not be reborrowed.
Commitment Termination
The Tranche A commitment is scheduled to terminate on June 30, 2008;
The Tranche A commitment may also terminate:
. if we voluntarily terminate such commitment; and
. if the administrative agent terminates the Tranche A commitment due to
the occurrence of an event of default under the senior secured credit
agreement.
The Tranche B commitment is reduced by undrawn amounts on June 30, 2001. The
undrawn portion of the Tranche B commitment may also terminate:
. if we voluntarily terminate such commitment; and
. if the administrative agent terminates the Tranche B commitment due to
the occurrence of an event of default under the credit agreement.
Syndication
TD Securities (USA) Inc. and GE Capital Corporation are permitted to
syndicate the loan to other lenders.
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Loans and Interest Options
We have multiple interest rate options available under the senior secured
credit agreement:
. from the date of the closing of the senior secured credit agreement
through and including the date on which EBITDA is greater than zero for
two consecutive fiscal quarters, we may borrow money as either:
. a base rate loan with an interest rate equal to 2.75% plus the higher
of
. the prime or base rate of the Toronto-Dominion Bank, New York
Branch; or
. the federal funds effective rate plus 0.5%; or
. a Eurodollar loan with an interest rate equal to the London interbank
offered rate, plus 3.75%;
and after the date on which EBITDA is greater than zero for two
consecutive fiscal quarters, the margin for base rate loans and
Eurodollar loans will be determined based upon the leverage ratio as of
the end of the fiscal quarter most recently ended.
. we may convert a base rate loan to a Eurodollar loan if we meet specific
conditions, or a Eurodollar loan to a base rate loan, from time to time;
. we pay accrued interest either on the last day of each quarter for base
rate loans, the last day of the interest period for Eurodollar loans or,
in the case of an interest period greater than three months, at three
month intervals after the first day of such interest period;
. we pay interest due upon any prepayment or conversion from one interest
type to another; and
. we pay all outstanding interest on the maturity date.
Accordingly, if we were to have borrowed money on September 30, 2000 under
the senior secured credit facility, the interest rate on such borrowed funds
would have been 10.37%. After the date on which EBITDA is greater than zero for
two consecutive fiscal quarters, the base rate margin will range from 2.750% to
2.250% and the Eurodollar loan margin will range from 3.750% to 3.250%,
depending upon our leverage ratio as of the most recently ended fiscal quarter.
Payment of Principal
Scheduled Payments. Commencing March 31, 2004, we must begin to repay, in
quarterly installments, the principal on all Tranche B borrowings outstanding
as of March 30, 2004. A fixed percentage is due each quarter:
. for the first four quarters, commencing with the fiscal quarter ended
March 31, 2004, 2.50% of the principal balance of the loan is due per
quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.5% per quarter.
Any principal that has not been paid by June 30, 2008, the maturity date, is
due at that time.
Commencing March 31, 2004, and on the last day of each calendar quarter
ending during the periods set forth below, the Tranche A commitment as of March
30, 2004 shall be automatically and permanently reduced by the percentage
amount set forth below for the quarters indicated:
. for the four quarters commencing with the fiscal quarter ending March 31,
2004, 2.50% per quarter;
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. for quarters five through eight, 3.75% per quarter; and
. for quarters nine through sixteen, 6.25% per quarter.
. for the last two quarters, 12.5% per quarter.
Optional Prepayments. We may voluntarily prepay any of the loans at any
time. Tranche A permits reborrowing on a revolving basis but amounts repaid
under Tranche B may not be reborrowed.
Mandatory Prepayments. We will also make mandatory prepayments under certain
circumstances, including among others:
. 50% of our excess annualized cash flow as computed under the senior
secured credit agreement, commencing on April 30, 2004 with respect to
the fiscal year ended December 31, 2003;
. any amount in excess of $1.0 million per calendar year received as net
proceeds of asset sales outside the ordinary course of business or
insurance proceeds, to the extent not reinvested in property or assets;
. 50% of the net proceeds of any equity issuance by us or any subsidiary
excluding the committed issuance of the convertible preferred stock or an
initial public offering and any offering to a borrower or a guarantor
party to the senior secured financing; and 100% of the net proceeds of a
debt issuance by us or any subsidiary excluding permitted debt.
All prepayments described above are applied to the outstanding loan balances
pro rata between Tranche A and Tranche B and pro rata across maturities.
Collateral
Our senior secured credit facility is secured by:
. a perfected first priority lien on substantially all of our current and
future assets, and the assets and stock of future subsidiaries;
. a collateral assignment of our affiliation agreements with Sprint PCS and
all our other material contracts; and
. guarantees from all our future direct or indirect subsidiaries.
We are obligated to grant to the administrative agent a first lien mortgage
on any material real property we acquire.
Conditions
We must meet certain conditions at the dates we obtain any borrowings
including:
. that there has been no default that is continuing;
. a reaffirmation of representations; and
. that there has not been a material adverse effect, as defined in the
senior secured credit agreement.
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Negative Covenants
Other Debt. Other than purchase money debt not to exceed $10.0 million in
principal, iPCS Wireless, Inc. has agreed not to, nor to permit any of its
subsidiaries to, incur additional indebtedness.
Organizational Issues and Capital Stock. We have agreed, with an exception
for mergers of subsidiaries of iPCS Wireless, Inc. into iPCS Wireless, Inc. or
its wholly owned subsidiaries, not to:
. become a party to a merger or a consolidation;
. wind-up, dissolve or liquidate; or
. acquire all or a material or substantial part of the business or
properties of another person except for acquisitions from Sprint PCS
which are currently permitted under the Sprint PCS agreements.
Restricted Payments. iPCS Wireless, Inc. has agreed not to, nor to permit
any of its subsidiaries to, make any "restricted payments." Restricted payments
include the following:
. dividends or distributions on account of shares of capital stock, except
a dividend payable solely in shares of stock;
. any redemption, conversion, exchange, retirement, sinking fund, or other
similar purchase of shares of capital stock;
. any payment or prepayment of principal, premium, if any, or interest on,
any subordinated debt;
. any redemption, conversion, exchange, purchase, retirement or defeasance
of, or payments with respect to, any subordinated debt; and
. any payment made to retire any outstanding warrants, options or other
rights to acquire capital stock.
The foregoing restriction will not prevent iPCS Wireless, Inc. from making
dividends to us to service scheduled cash interest payments on the senior
discount notes and to pay liquidated damages, up to a maximum of $500,000, upon
the occurrence of registration defaults under the registration rights
agreements applicable to the senior discount notes and accompanying warrants
provided no event of default or event which, with the passage of time or the
giving of notice or both, would constitute an event of default under the senior
secured credit facility exists at the time of any such dividend or would result
from any such dividend. iPCS Wireless, Inc. may make payments under
subordinated guarantees consistent with the applicable subordination
provisions.
Modification of Agreements. We have agreed that, with limited exceptions, we
will not consent to or implement any termination, amendment, modification,
supplement or waiver of:
. our affiliation agreements with Sprint PCS;
. our business plan;
. any senior notes indenture or the senior discount notes; or
. any material contract.
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Other Negative Covenants. We and the operating subsidiaries have agreed not
to:
. dispose of property;
. 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 and fees payable by iPCS
Wireless, Inc. to us and fees paid by iPCS Equipment, Inc. to iPCS
Wireless, Inc.;
. take certain actions that would violate ERISA;
. prepay fees owed to Sprint PCS;
. grant liens on assets;
. make investments, loans or advances;
. prepay other debt, other than in connection with certain refinancings and
the prepayment of any senior notes;
. permit subsidiaries to enter into dividend restrictions;
. enter into negative pledge or similar arrangements; or
. modify charter documents.
Financial and Operating Covenants
We are subject to financial and operating covenants which are set forth
below according to whether they are applicable prior to June 30, 2003 or
thereafter including:
Applicable until June 29, 2003:
. a maximum ratio of total debt to total capitalization at our level;
. a maximum ratio of senior debt to total capitalization of iPCS Wireless,
Inc. and its subsidiaries;
. minimum annualized EBITDA for iPCS Wireless, Inc. and its subsidiaries
for each quarter or maximum annualized EBITDA losses;
. maximum cumulative capital expenditures for iPCS Wireless, Inc. and its
subsidiaries not to exceed a specified amount;
. minimum quarterly revenue for iPCS Wireless, Inc. and its subsidiaries;
and
. minimum number of subscribers.
Applicable as of and after June 30, 2003:
. a maximum ratio of total debt to annualized earnings before interest,
taxes, depreciation and amortization, referred to as EBITDA, for iPCS
Wireless, Inc. and its subsidiaries for each quarter;
. minimum quarterly interest coverage rates for iPCS Wireless, Inc. and its
subsidiaries which is the ratio of EBITDA to consolidated interest
expense;
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. minimum quarterly fixed charge coverage ratio for iPCS Wireless, Inc. and
its subsidiaries, which is the ratio of EBITDA to consolidated fixed
charges;
. minimum ratio of senior funded indebtedness to annualized EBITDA for iPCS
Wireless, Inc. and its subsidiaries; and
. maximum ratio of annualized EBITDA to all principal payments and interest
scheduled to be made on indebtedness during the next twelve month period.
As of September 30, 2000, we were in compliance with the covenants in effect
as of such date under the senior secured credit facility and the indenture
governing the senior discount notes.
Events of Default
In addition to failing to perform, observe or comply with the covenants,
agreements and terms of the senior secured credit agreement, it is an event of
default under the senior secured credit agreement if any party with financial
responsibility for the loans, iPCS Wireless, Inc. or any signatory to the
Sprint PCS agreements, becomes insolvent, commences or suffers bankruptcy or
similar proceedings or suffers other indicia of extreme financial duress.
Other events of default include:
. an attachment against our property that is not released within 30 days
and the amount claimed in the proceeding is greater than $1.0 million;
. a judgment against us of greater than $1.0 million remains undischarged
for a period of time;
. failure to pay other loans as they become due or a default that permits
acceleration of other debt with respect to debt of at least $1.0 million;
. a breach by us under the consent and agreement among Sprint, holders of
indebtedness under the senior secured credit facility and iPCS Wireless,
Inc. or the Sprint PCS agreements;
. any change in control of us; or
. any material adverse change occurs, which effect is broadly defined in
the senior secured credit agreement to include things that could
reasonably be expected to have a material adverse effect on our business
or our ability to repay the loan.
A change in control will occur if:
. any person or group, other than our existing owners, acquires more
than 35% of our equity;
. our directors who were elected or approved by the owners as of the
date of the senior secured credit agreement, or any directors who are
approved by such directors, cease for any reason to constitute at
least a majority of our board of directors;
. we cease to own all of the capital stock of iPCS Wireless, Inc. or
any subsidiary of iPCS Wireless, Inc.; or
. the completion of any transactions that result in any person or group
owning more of our equity than our existing owners.
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Senior Discount Notes
On July 12, 2000, we issued 300,000 units consisting of senior discount
notes due July 15, 2010 and warrants to purchase 2,982,699 shares of our common
stock, which yielded gross proceeds of $152.3 million. The senior discount
notes were issued under an indenture, dated as of July 12, 2000, by and among
us, iPCS Equipment, Inc. and iPCS Wireless, Inc. and BNY Midwest Trust Company,
formerly known as CTC Illinois Trust Company, as trustee. The senior discount
notes:
. mature on July 15, 2010 and are limited to an aggregate principal amount
at maturity of $300.0 million;
. are general, unsecured obligations of us, equal in right of payment to
all of our senior debt and senior in right of payment to all of our
subordinated debt;
. accrue interest at a rate of 14% per annum, computed on a semiannual
basis calculated beginning July 15, 2005 and interest will be payable in
cash beginning January 15, 2006, and semiannually on each January 15 and
July 15; and
. are guaranteed by our domestic subsidiaries on a senior subordinated
basis.
We may elect to redeem all or part of the senior discount notes at any time
on or after July 15, 2005 and before maturity, at the following redemption
prices:
<TABLE>
<CAPTION>
Redemption Price
per $1,000 of
Year Beginning Principal Amount
<S> <C>
July 15, 2005............................................ $1,070.00
July 15, 2006............................................ 1,046.67
July 15, 2007............................................ 1,023.33
July 15, 2008 and thereafter............................. 1,000.00
</TABLE>
In addition, on or before July 15, 2003, we may redeem up to 35% of the
principal amount at maturity of senior discount notes issued under the
indenture, at a redemption price equal to $1,140 for each $1,000 of accreted
value of a senior discount note to the redemption date, with the net proceeds
of one or more equity offerings. However, at least 65% of the aggregate
principal amount at maturity of senior discount notes issued under the
indenture must remain outstanding immediately after giving effect to the
redemption.
If a change of control occurs, each noteholder may require us to repurchase
its senior discount notes. The repurchase price will be:
. $1,010 per $1,000 of accreted value of the senior discount notes, if the
repurchase occurs before July 15, 2005, or
. $1,010 per $1,000 of principal amount of the senior discount notes, plus
any accrued interest, if the repurchase occurs on or after July 15, 2005.
A change of control will occur if:
. we sell substantially all of our and our subsidiaries' assets;
. we adopt a plan for our liquidation or dissolution;
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. any person or group of persons, other than certain current stockholders
or their affiliates, become the beneficial owner of more than 50% of the
voting power of our stock; or
. a majority of our board of directors no longer consists of continuing
directors, which are directors who were serving on July 12, 2000, or who
were nominated to serve as a director by a majority of the continuing
directors at the time. Changes in directors elected by particular
investors, such as holders of our convertible preferred stock, are
ignored for purposes of determining continuing directors.
Our senior secured credit facility prohibits the purchase of outstanding
notes before repayment of the borrowings under the credit facility.
We are also required to offer to repurchase the senior discount notes if all
or some of the net proceeds of an asset sale are not used to acquire an entity
engaged in a permitted business, to purchase other long-term assets used or
useful in a permitted business or to repay any senior indebtedness.
The indenture contains restrictive covenants which, among other things,
restrict us and our restricted subsidiaries' ability to:
. incur additional indebtedness or issue preferred stock;
. pay dividends, make investments or redeem or retire stock;
. cause encumbrances or restrictions to exist on the ability of its
subsidiaries to pay dividends and make investments in, or transfer
property or assets;
. create liens on their assets;
. sell assets;
. engage in transactions with affiliates;
. engage in businesses other than a permitted business; or
. engage in mergers or consolidations.
The indenture also provides for customary events of default, including
cross-defaults, judgment defaults and events of bankruptcy. In addition the
indenture provides for an event of default if we have not received at least
$70.0 million in gross cash proceeds by December 31, 2000 from one or more
equity offerings or, in certain circumstances, if an event of termination has
occurred under the Sprint PCS agreements. The sale of our redeemable
convertible preferred stock to an investor group led by The Blackstone Group on
December 28, 2000 avoided the event of default related to the required equity
offering. In the case of an event of default, our trustee or the holders of at
least 25% in principal amount of the outstanding senior discount notes may
declare the senior discount notes immediately due and payable. We are currently
in compliance with all covenants under the indenture governing the senior
discount notes.
We are required, under the terms of a registration rights agreement, to:
. file an exchange offer registration statement on or before October 10,
2000 covering the exchange of the senior discount notes for registered
notes;
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. use our reasonable best efforts to cause the exchange offer registration
statement to be declared effective under the Securities Act within 180
days of the offering of the senior discount notes;
. use our reasonable best efforts to cause the exchange offer registration
statement to be effective continuously;
. keep the exchange offer open for a period of not less than 20 business
days; and
. cause the exchange offer to be consummated no later than the 30th
business day after the registration statement is declared effective.
We may also be required to file a shelf registration statement to register
for public resale the senior discount notes held by any holder who may not
otherwise participate in the exchange offer.
If we fail to file the exchange offer or shelf registration statement, or
fail to cause the exchange offer or shelf registration statement to become
effective, or fail to consummate the exchange offer, in each case by the
deadlines as specified above, a registration default shall be deemed to have
occurred and we will be required to pay liquidated damages to each holder of
the senior discount notes. The liquidated damages payable to each holder of the
senior discount notes will be in an amount equal to $0.05 per week per $1,000
in principal amount of the senior discount notes held by such holder for each
week or portion thereof that the registration default continues for the first
90-day period immediately following the occurrence of such registration
default. This amount will increase by an additional $0.05 per week per $1,000
in principal amount of the notes with respect to each subsequent 90-day period,
up to a maximum amount equal to $0.50 per $1,000 in principal amount of the
senior discount notes. The provision for liquidated damages will continue until
such registration default has been cured. We will not be required to pay
liquidated damages for more than one registration default at any given time. No
liquidated damages are currently payable.
We paid fees to our initial purchasers of the senior discount notes and
warrants of approximately $6.1 million which will be amortized as interest
expense over the term of the financing using the effective interest method.
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MANAGEMENT
Directors, Executive Officers and Other Key Employees
The following table presents information with respect to our directors,
executive officers and other key employees.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Timothy M. Yager 31 President, Chief Executive Officer and
Director
Linda K. Wokoun 45 Executive Vice President, Chief Operating
Officer
Stebbins B. Chandor, Jr. 40 Senior Vice President, Chief Financial
Officer
Anthony R. Muscato 52 Senior Vice President, Chief Technical
Officer
William W. King, Jr. 61 Vice President, Strategic Planning and
Director
Leroy R. Horsman 56 Vice President, Sales & Marketing
Patricia M. Greteman 39 Controller
Alan C. Anderson 62 Chairman of the Board of Directors
Donald L. Bell 55 Director
Michael S. Chae 32 Director
Brian J. Gernant 42 Director
Lawrence H. Guffey 32 Director
Robert W. Schwartz 61 Director
George Patrick Tays 48 Director
</TABLE>
Timothy M. Yager has been President, Chief Executive Officer and Manager of
Illinois PCS, LLC since January 1999 and has been President, Chief Executive
Officer and Director of iPCS, Inc. since its formation. From January 1995 to
January 1999, he was the Senior Vice President of Geneseo Communications, Inc.,
an independent telephone company in Illinois. During this time, he founded and
was also the Chief Operating Officer, General Manager and later the President
of GenSoft Systems, Inc., a subsidiary of Geneseo Communications, Inc. that
designs software to provide information and billing services to the
telecommunications industry. Prior to January 1995, Mr. Yager was a Project
Manager at Geneseo Telephone Company. He was elected to the Board of Directors
of Cambridge Telcom in April 1997. Mr. Yager is the son-in-law of Mr. Anderson,
our Chairman.
Linda K. Wokoun has been Executive Vice President, Chief Operating Officer
of iPCS, Inc. (and its predecessor) since March 2000. From April 1996 to
January 2000, she served as Vice President--Wireless Operations for Ameritech
Cellular, which prior to its merger with SBC, served over 3 million cellular
and 1.5 million paging customers. Ms. Wokoun served as Ameritech Cellular's
Vice President of Marketing from November 1994 to April 1996 and Vice
President--General Manager Missouri (CyberTel, an Ameritech Company) from
September 1992 to November 1994. Ms. Wokoun has held a variety of operations,
marketing and business development roles in her 20 year telecommunications
career.
Stebbins B. Chandor, Jr. has been Senior Vice President, Chief Financial
Officer of iPCS, Inc. (and its predecessor) since March 2000. From August 1995
to March 2000, he was Senior Vice President and Chief Financial Officer for
Metro One Telecommunications, Inc., a publicly traded provider of enhanced
directory assistance and information services to the wireless
telecommunications industry. From June 1985 to August 1995, Mr. Chandor served
in various
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corporate finance capacities with BA Securities, Inc., a wholly-owned
subsidiary of BankAmerica Corporation, and affiliated or predecessor firms
including Bank of America and Continental Bank N.A.
Anthony R. Muscato, has been Senior Vice President, Chief Technology Officer
of iPCS, Inc. (and its predecessor) since March 2000. From October 1999 until
March 2000, he served as Vice President of Merger Integration for GTE Wireless.
From February 1991 to March 1999, Mr. Muscato served in a variety of positions
with Ameritech Cellular, most recently as Vice President of Business Transition
for Ameritech Cellular. From October 1997 to March 1999, he served as Vice
President of Network Planning, Engineering and Operations and from June 1996 to
October 1997, he served as Vice President of Network Planning. From October
1992 to June 1996, Mr. Muscato served as Director of Engineering and Operations
for the Illinois market and from February 1991 to October 1992, he served as
Director of Engineering. Prior to this Mr. Muscato served in a number of
positions in network operations, business marketing, corporate strategy,
residence installation and maintenance and information technology at Ameritech
and its predecessor company, Illinois Bell Telephone Company.
William W. King, Jr. has been Vice President, Strategic Planning of Illinois
PCS, LLC since February 1999, and has been Vice President, Strategic Planning
and Director of iPCS, Inc. since its formation. From July 1994 to February
1999, he served as the Director of Wireless Services for Cathey, Hutton &
Associates, a telecommunications consultant to independent telephone and
wireless companies and other entrepreneurial clients. From July 1990 to March
1994, Mr. King was the President and Chief Operating Officer of Cellular
Communications of Puerto Rico. Prior to this, since July 1962, Mr. King has
held various leadership positions for AT&T where he rose to the level of Area
Vice President and Chief Operating Officer of AT&T of Puerto Rico/Virgin
Islands.
Leroy R. Horsman has been Vice President, Sales & Marketing of iPCS, Inc.
(and its predecessor) since April 2000. Mr. Horsman has more than twenty-five
years of experience in the commercial radio and wireless industries. From
August 1998 to April 2000, Mr. Horsman was Vice President of Sales for Emerald
Bay Systems, Inc. which was acquired by Decide.com. From May 1995 to August
1998, Mr. Horsman served as Regional Sales Manager for Andrew Corporation. From
1993 to 1995, Mr. Horsman developed a consulting practice and was involved in
the early stages of application development, new product development, and
network implementation projects for SMR networks, location systems, and other
non-voice wireless applications. From 1988 to 1993, Mr. Horsman held a position
with Cellular Data, Inc., in Palo Alto, California, a start-up wireless packet
data technology company. From 1986 to 1988, Mr. Horsman served as the Director
of Sales and Marketing for Southwestern Bell Mobile Systems in Dallas/Fort
Worth, Texas. In 1981, Mr. Horsman joined NEC where he was instrumental in the
deployment of early digital paging systems and cellular phones. From 1973 to
1981, Mr. Horsman worked at Motorola C&E in Dallas, Texas.
Patricia M. Greteman has been the Controller of Illinois PCS, LLC since May
1999 and has held the same position with iPCS, Inc. since its formation. From
May 1993 to April 1999, she served as the Controller of ACC of Kentucky, LLC, a
cellular carrier covering a territory with over 1 million total residents. From
November 1991 to April 1992, Ms. Greteman served as the Controller of Arch
Mineral Corporation's Catenary Coal Company. From August 1989 to October 1991,
she served as the Assistant Controller of Arch of Kentucky.
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Alan C. Anderson has served as a representative of an owner of Illinois PCS,
LLC since January 1999 and as Chairman of the Board of Directors of iPCS, Inc.
since its formation March 2000. Mr. Anderson is President and CEO of Geneseo
Communications, Inc., a telecommunications holding company, and has served in
that position since November 1994. From 1981 through 1994, Mr. Anderson held
various positions, including General Manager, with Geneseo Telephone Company.
He has served as General Manager of Cambridge Telcom, Inc., a
telecommunications holding company, since 1987 and from 1985 to 1987 Mr.
Anderson served as Assistant General Manager of Cambridge Telephone Company.
Since April 1996, Mr. Anderson has served as Vice President, General Manager,
Secretary and Treasurer of Henry County Communications, Inc., and from July
1981 until April 1996 he was Vice President and General Manager of Henry County
Telephone Company. In addition, Mr. Anderson serves on the Illinois Telephone
Association Board of Directors; he served as President of the Board of
Directors in 1990 and 1991. He has served on the Board of Directors of Central
Trust and Savings Bank since 1992 and currently serves on the Board of
Directors of Central Bank Corporation, Celebrate Communications, LLC and
GenSoft Systems, Inc. Prior to July 1981, Mr. Anderson served as an officer of
the U.S. Air Force. Mr. Anderson is the father-in-law of Mr. Yager, our
President, Chief Executive Officer and a Director.
Donald L. Bell has served as a representative of an owner of Illinois PCS,
LLC since January 1999 and as a Director of iPCS, Inc. since its formation. He
also serves as Vice President and CEO of Cass Communications Management, Inc, a
telecommunications company, since January 1994. Mr. Bell has served in various
positions for Cass Communications for the past 30 years, including Plant
Manager, Operational Manager, Vice President of Cass Telephone Company and
President of Cass Long Distance Company. He served on the Board of Directors of
Illinois 4 Limited Partnership, a telecommunications company, from 1986 to
1993. In addition, Mr. Bell has served as President of Illinois Independent
Telephone Association since May 1994. Mr. Bell has served as a member of the
Board of Directors of the Illinois Telecommunications Association since June
1991 and he is also a Director of Cass Telephone Company, Cass Communications
Management and Cass Long Distance Company.
Michael S. Chae has served as a Director of iPCS, Inc. since August 2000.
Mr. Chae also serves as a Principal of the Blackstone Group in its Principal
Investment Group. Since joining Blackstone in 1997, Mr. Chae has worked on many
of Blackstone's principal investments, including Centennial Communications,
PaeTec Communications, U.O.L., and American Axle & Manufacturing. Prior to
joining Blackstone, Mr. Chae worked as an Associate at the Carlyle Group, L.P.,
a Washington, D.C. based private equity investment firm from 1993 to 1994, and
prior to that was an Analyst at Dillon, Read & Co. from 1991 to 1993.
Brian J. Gernant has served as a Director of iPCS, Inc. since March 2000.
Mr. Gernant also serves as Director of Geneseo Communications, Inc., a
telecommunications holding company, and has served in that position since July
1998. Mr. Gernant is the Branch Manager, Vice President-Investments of the
Geneseo, Illinois office of A.G. Edwards & Sons Inc. Since March, 1995,
Mr. Gernant has been employed by A.G. Edwards and has been a Branch Manager
since January 1997. A.G. Edwards & Sons, Inc. has not performed any due
diligence, expresses no opinion and makes no recommendations regarding
participation in this exchange offer.
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Lawrence H. Guffey has served as a Director of iPCS, Inc. since August 2000.
Mr. Guffey also serves as a Senior Managing Director of the Blackstone Group in
its Principal Investment Group with responsibility for the day-to-day
management of the investment activities of Blackstone Communications Partners I
L.P. Since joining Blackstone in 1991, Mr. Guffey has worked on virtually all
of Blackstone's communications-related principal investments, including Bresnan
Communications, Centennial Communications, CommNet Cellular, Enterprise
Software, Iusacell, LiveWire, PaeTec Communications, TW Fanch-one and -two,
U.O.L., and USRadio. Mr. Guffey also has experience in the firm's real estate
investing area, working on the Westridge Court and Savers Savings investments.
His advisory experience includes PaineWebber's acquisition of Kidder Peabody,
the sale of certain assets of Digital Equipment Corporation and several other
transactions in the communications, media, and technology sectors. Mr. Guffey
currently serves as a Director of Centennial Communications, FiberNet, L.L.C.,
and Enterprise Software, Inc., a LiveWire media company. Prior to joining
Blackstone in 1991, Mr. Guffey was a financial analyst with Trammell Crow
Ventures, a real estate principal investing firm.
Robert W. Schwartz has served as a representative of an owner of Illinois
PCS, LLC since January 1999 and as a Director of iPCS, Inc. since its
formation. Mr. Schwartz has served as President and Manager of Madison
Telephone Company, a telecommunications company, since August 1985. Mr.
Schwartz has served on the Board of Directors of Madison Telephone Company
since 1984. Since March 1997, he has served as President and Manager of Madison
Communications Company, a telecommunications company which he founded in 1997.
Mr. Schwartz is also the founder and President of Schwartz Ventures, Inc., a
position he has held since 1964. He has served on the Board of Directors of
Madison Communications Company since March 1994. Mr. Schwartz also has served
as a member of the Board of Directors and as President and Manager of Madison
Network Systems, since August 1995. Mr. Schwartz serves on the Board of
Directors of the Illinois Telephone Association where he is the current
Chairman, and of the Illinois Independent Telephone Association, and he has
served on the Board of Directors of Clover Leaf Bank since 1965. Mr. Schwartz
is the General Manager of Technology Group, L.L.C., which was formed in
December 1999.
George Patrick Tays has served as a representative of an owner of Illinois
PCS, LLC since January 1999 and as a Director of iPCS, Inc. since its
formation. Mr. Tays has served as General Manager of Montrose Mutual Telephone
Company and Montrose Mutual PCS, Inc., a telecommunications company, since
September 1992. Prior to this and since November 1989 he has served as
Assistant Secretary and Assistant Treasurer of the Board of Directors of
Montrose Mutual Telephone Company. He served in the paging and cellular
department of Illinois Consolidated Telephone Company, a telecommunications
company, from June 1987 to September 1992.
Board of Directors
The board of directors is currently fixed at nine members. Pursuant to the
provisions of the certificate of designations for the convertible preferred
stock, the holders of the convertible preferred stock have the right to elect
two individuals. See "Description of Capital Stock--Convertible Preferred
Stock." If our outstanding convertible preferred stock is converted into common
stock, Blackstone, instead of the holders of the convertible preferred stock,
will be entitled to designate the two individuals for election to the board of
directors as long as Blackstone beneficially owns 8% or
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more of our outstanding common stock and one individual as long as Blackstone
owns less than 8% but more than 4% of our outstanding common stock. See
"Certain Relationships and Related Transactions--Stockholders Agreement." The
board of directors is divided into three classes. Brian J. Gernant, Robert W.
Schwartz and George Patrick Tays constitute Class I and will stand for election
at the annual meeting of stockholders to be held in 2001. Alan C. Anderson,
William W. King, Jr., and Michael S. Chae constitute Class II and will stand
for election at the annual meeting of stockholders to be held in 2002.
Donald L. Bell, Timothy M. Yager and Lawrence H. Guffey constitute Class III
and will stand for election at the annual meeting of stockholders to be held in
2003. After their initial term, directors in each class will serve for a term
of three years, or until his or her successor has been elected and qualified
and will be compensated at the discretion of the board of directors.
The audit committee consists of Messrs. Gernant, Schwartz and Tays. The
compensation committee consists of Messrs. Bell and Gernant.
The audit committee is responsible for recommending to the board of
directors the engagement of our independent auditors and reviewing with the
independent auditors the scope and results of the audits, our internal
accounting controls, audit practices and the professional services furnished by
the independent auditors.
The compensation committee is responsible for reviewing and approving all
compensation arrangements for our officers, and is also responsible for
administering our incentive stock plan.
Compensation Committee Interlocks and Insider Participation
We did not have a compensation committee during the year ended December 31,
1999. Representatives of the owners of Illinois PCS, LLC made all compensation
decisions. Other than Mr. Yager, who is a Director, and Mr. Anderson who is a
director and the General Manager of
Cambridge Telcom, Inc., none of our executive officers served as a director or
member of the compensation committee or other board committee performing
equivalent functions of another corporation whose executive officers served as
a representative of an owner.
Limitation on Liability and Indemnification
Our amended and restated certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Our certificate
of incorporation provides that we shall indemnify our directors and executive
officers and may indemnify our other officers and employees and agents and
other agents to the fullest extent permitted by law. Our certificate of
incorporation also permits us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless or whether the certificate of
incorporation would permit indemnification.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
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Executive Compensation
The following table sets forth a summary of the annual, long-term and all
other compensation for our Chief Executive Officer and for our four most highly
compensated executive officers, other than our Chief Executive Officer during
fiscal 2000, for the years indicated. These five persons are referred to
collectively as the "Named Executive Officers".
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Fiscal Securities All Other
Name and Principal Year Ended Other Annual Underlying Compensation
Position December 31, Salary($) Bonus($) Compensation($) Options(#) ($)(1)
------------------------ ------------ --------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Timothy M. Yager........ 2000 $226,539 $400,000 $ 60,360(2) 500,000 $3,557,433
President and Chief 1999 100,295 24,000 -- -- 909(3)
Executive Officer
Linda K. Wokoun......... 2000 $150,000 $ -- $ 3,592(4) 300,000 $75
Executive Vice
President
and Chief Operating
Officer
Stebbins B. Chandor,
Jr..................... 2000 $133,269 $ -- $ 2,819(4) 250,000 $79,106
Senior Vice President
and
Chief Financial Officer
Anthony R. Muscato...... 2000 $131,250 $ -- $ 2,903(4) 75,000 $115
Senior Vice President
and Chief Technical
Officer
William W. King, Jr. ... 2000 $150,000 $ -- $ -- 150,000 $396
Vice President, 1999 89,105 18,333 -- -- 644(5)
Strategic Planning
</TABLE>
---------------------
(1) During fiscal 2000, consists of $3,524,752 related to the 1.5% membership
interest in our predecessor Illinois PCS, LLC granted to Mr. Yager,
relocation expenses of $22,454 for Mr. Yager, tax planning expenses of
$6,185 for Mr. Yager, relocation expenses of $79,056 for Mr. Chandor, the
taxable portion of life insurance coverage for Mr. Yager, Ms. Wokoun and
Messrs. Chandor, Muscato and King of $4,042, $75, $50, $115 and $396,
respectively.
(2) Consists of country club expenses of $56,020, the imputed value of Mr.
Yager's personal use of a company automobile for 7 months and a monthly car
allowance for 5 months.
(3) Consists of the taxable portion of life insurance coverage and the imputed
value of Mr. Yager's personal use of a company automobile.
(4) Consists of a monthly car allowance.
(5) Consists of the taxable portion of life insurance coverage.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information concerning options granted during
fiscal 2000 to the Named Executive Officers.
<TABLE>
<CAPTION>
Potential Realizable
Value at
Assumed Annual Rates
of Stock
Price Appreciation for
Individual Grants Option Term(2)
---------------------------------------------------- ----------------------
% of Potential
Total Realizable
Options Value at
Number of Granted Assumed
Securities to Exercise Initial
Underlying Employees or Base Public
Options in Fiscal Price Expiration Offering
Name Granted(#) Year ($/Share) Date Price(1) 5%($) 10%($)
------------------------ ---------- --------- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Timothy M. Yager........ 500,000 31.5% $5.50 07/12/10 $2,650,000 $6,046,031 $11,512,025
Linda K. Wokoun......... 300,000 18.9 5.50 07/12/10 1,590,000 3,627,619 6,907,215
Stebbins B. Chandor, Jr. 250,000 15.7 5.50 07/12/10 1,325,000 3,023,015 5,756,013
Anthony R. Muscato...... 75,000 4.7 5.50 07/12/10 397,500 906,905 1,726,804
William W. King, Jr..... 150,000 9.4 5.50 07/12/10 795,000 1,813,809 3,453,608
</TABLE>
---------------------
(1) Calculated based upon 90% of $12.00 per share, the midpoint of the range of
the expected offering prices as of July 12, 2000, the date of grant, of a
planned initial public offering.
(2) The potential realizable value of a grant is the product of: (a) the
difference between (i) the product of the per-share market price at the
time of the grant (the assumed initial public offering price) and the sum
of 1 plus the stock appreciation rate compounded annually over the term of
the option (here, 5% and 10%) and (ii) the per-share exercise price of the
option and (b) the number of securities underlying the grant at fiscal
year-end.
Aggregated Fiscal Year-End Option Values
The following table provides summary information regarding options held by
our Named Executive Officers as of December 31, 2000. There was no public
market for our common stock as of December 31, 2000 and no shares of common
stock have been sold. No options are considered to be in-the-money because the
exercise price exceeded the estimated fair value of our common stock as of
December 31, 2000.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Value Underlying Unexercised The-Money Options at
Shares Acquired Realized Options at Fiscal Year End Fiscal Year End($)
Name on Exercise(#) ($) Exercisable/Unexercisable(1) Exercisable/Unexercisable
------------------------ --------------- -------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
Timothy M. Yager........ -- -- 250,000/500,000 $0/$0
Linda K. Wokoun......... -- -- 56,250/300,000 0/ 0
Stebbins B. Chandor,
Jr..................... -- -- 46,875/250,000 0/ 0
Anthony R. Muscato...... -- -- 14,063/ 75,000 0/ 0
William W. King, Jr..... -- -- 65,625/150,000 0/ 0
</TABLE>
---------------------
(1) Options vest 6.25% per quarter from the date of hire.
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<PAGE>
Compensation of Directors
During 1999, we did not compensate the representatives of our owners who
functioned in a manner comparable to a board of directors. Non-employee
directors will be paid $1,000 and
reimbursed for their expenses for attendance at board meetings and paid $500
for telephonic board meetings. Each non-employee director as of July 12, 2000
has been granted stock options to purchase 15,000 shares of our common stock at
$5.50 per share, the price at which we sold our convertible preferred stock.
Discretionary grants of stock options may be made to non-employee directors
under the 2000 Long Term Incentive Stock Plan from time to time, subject to the
approval of the full board.
Employment Agreements
We have entered into a three year employment agreement with Timothy M.
Yager, our President and Chief Executive Officer on substantially the terms set
forth below. The term will be automatically renewed for successive one year
periods absent 90 days advance notice from one party to the other. Mr. Yager's
employment agreement provides for an initial minimum annual base salary of
$225,000. Under the employment agreement, Mr. Yager is also entitled to
performance based and other bonuses, benefits, such as retirement, health and
other fringe benefits, which are provided to other executive employees,
reimbursement of business expenses and limited reimbursement of legal and
financial planning expenses. Mr. Yager is also entitled to a car allowance,
reimbursement for certain relocation expenses, payment of limited country club
dues and assessments and a company-paid term life insurance policy. We have
granted Mr. Yager a total of 500,000 stock options under our 2000 Long Term
Incentive Stock Plan at an exercise price of $5.50 per share, the price per
share at which the convertible preferred stock was sold. The details regarding
these options are discussed in the next section. Based upon the expected
offering price of a planned initial public offering, we will recognize
compensation expense of approximately $2,650,000 over the vesting period of the
options.
Under the employment agreement, Mr. Yager's employment may be terminated by
him or us at any time and for any reason. If his employment is terminated for
any reason, he will be entitled to payment of his accrued but unpaid salary,
vacation pay, unreimbursed business expenses and other items earned and owed to
him by us. If his employment is terminated as a result of death or disability,
he, or in the event of his death, his estate will be paid his salary through
the first anniversary of the date his death or termination for disability
occurs, and he will receive a lump sum payment of his target incentive bonus.
If Mr. Yager's employment is terminated by us for reasons other than for cause,
or if he terminates his employment following a material breach by us of the
employment agreement which is not cured within 30 days or within 60 days after
we relocate our business outside of the Chicago metropolitan area, he will be
entitled to continuing payments of his salary through the first anniversary of
his termination, continuation of health benefits for him and his dependents for
the same period, a lump sum payment of his target incentive bonus and continued
vesting of his stock options during the severance period. All severance
payments pursuant to the employment agreement terminate in the event Mr. Yager
violates the confidentiality, noncompetition or nonsolicitation provisions of
the employment agreement.
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<PAGE>
The employment agreement contains special provisions that apply in the event
of a change in control of the company. The agreement provides that if, during
the one year period following a change in control, Mr. Yager's employment is
terminated by us for reasons other than for cause or if he terminates for good
reason, he will be entitled to a lump sum payment equal to two years of his
salary, a lump sum payment of his target incentive bonus, which will be set
annually by the
compensation committee, continuation of his and his dependents health benefits
at the employee rate for a period of two years following his termination and
immediate vesting of his unvested stock options. In the event that, in
connection with a change in control, any payments or benefits to which Mr.
Yager is entitled from us constitute excess golden parachute payments under
applicable IRS rules, he will receive a payment from us in an amount which is
sufficient to pay the parachute excise tax that he will have to pay on those
parachute payments. In addition, we will pay him an amount sufficient for him
to pay the income tax and related employment taxes that he will have to pay
related to our reimbursement to him of the parachute excise tax. For purposes
of the employment agreement, the term "change in control" has the same meaning
as for the 2000 Long Term Incentive Stock Plan, discussed below.
If Mr. Yager's employment terminates for any reason other than those
discussed above, he is not entitled to any severance benefits under the
employment agreement.
Pursuant to the employment agreement, Mr. Yager has agreed to keep all of
our confidential information secret and he has agreed that, while he is
employed by us and for a period of 12 months after his termination of
employment, he will not compete with us in the wireless telecommunications
business in any of the basic trading areas in which we have been granted the
right to carry on the wireless telecommunications business, he will not solicit
our customers for a competitive business and he will not solicit our employees.
We have entered into an employment agreement with Linda K. Wokoun, our
Executive Vice President, Chief Operating Officer, which agreement is
substantially the same as Mr. Yager's agreement except for the compensation
package (including options and bonus opportunities), job duties and the
duration (12 months) of post-termination health benefits in the event of a
covered termination. Ms. Wokoun's annual base salary is $200,000 and we have
granted her a total of 300,000 stock options which have an exercise price of
$5.50 per share.
We have entered into an employment agreement with Stebbins B. Chandor, Jr.,
our Senior Vice President, Chief Financial Officer, which agreement is
substantially the same as Ms. Wokoun's agreement except for the compensation
package (including options and bonus opportunities) and job duties. Mr.
Chandor's annual base salary is $175,000 and we have granted him a total of
250,000 stock options which have an exercise price of $5.50 per share.
We have entered into an employment agreement with William W. King, Jr., our
Vice President, Strategic Planning and Director, which agreement is
substantially the same as Ms. Wokoun's agreement except for the compensation
package (including options and bonus opportunities) and job duties. Mr. King's
annual base salary is $150,000 and we have granted him a total of 150,000 stock
options which have an exercise price of $5.50 per share.
We have also entered into employment agreements with Messrs. Muscato and
Horsman and Ms. Greteman. These agreements are substantially the same as the
agreements with Ms. Wokoun except
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<PAGE>
for the compensation package (including options and bonus opportunities) and
job duties. In addition, Ms. Greteman's agreement provides for the payment of
severance benefits in the event that Ms. Greteman terminates employment because
her job duties are required to be performed more than 50 miles from Geneseo,
Illinois. We have granted an aggregate of 1,558,750 stock options which have
an exercise price of $5.50 per share under these agreements. Based upon the
expected offering price of a planned initial public offering, we will recognize
total aggregate compensation expense of approximately $8,260,000 over the
vesting period of the options.
2000 Long Term Incentive Stock Plan
As of July 11, 2000, the board of directors adopted and the stockholders
have approved, the amended and restated 2000 Long Term Incentive Stock Plan, or
the 2000 Plan. Under the 2000 Plan, we may grant stock options, stock
appreciation rights, shares of common stock and performance units to our
employees, consultants and directors. The total number of shares of our common
stock that we may award under the 2000 Plan is 6,500,000 shares, which will be
increased on December 31 of each year beginning on December 31, 2000 by a
number of shares equal to 1% of the number of our shares then outstanding, up
to a maximum of 8,000,000 shares. The number of shares and the price at which
shares of stock may be purchased under the 2000 Plan may be adjusted under
certain circumstances, such as in the event of a corporate restructuring. The
maximum number of shares of common stock that any individual participant may
receive each year under the 2000 Plan is 650,000, and there is no limit on cash
payouts for grants or awards under this plan each year to any of our key
executive officers.
Our compensation committee administers our 2000 Plan. The 2000 Plan
essentially gives the compensation committee sole discretion and authority to
select those employees to whom awards will be made, to designate the number of
shares covered by each award, to establish vesting schedules and terms of each
award, to specify all other terms of awards, and to interpret the 2000 Plan.
Options awarded under the 2000 Plan may be either incentive stock options or
nonqualified stock options; provided that incentive stock options may only be
awarded to our employees. The compensation committee has determined that
options awarded pursuant to the terms of the employment agreements entered into
in connection with the reorganization shall be incentive stock options to the
extent possible. Incentive stock options are intended to satisfy the
requirements of Section 422 of the Internal Revenue Code. Nonqualified stock
options are not intended to satisfy Section 422 of the Internal Revenue Code.
Stock appreciation rights may be granted in connection with options, or may be
granted as free-standing awards. Exercise of an option will result in the
corresponding surrender of the attached stock appreciation right. At a minimum,
the exercise price of an option or stock appreciation right must be at least
equal to the greater of:
. the fair market value of a share of common stock on the date on which the
option or stock appreciation right is granted and
. the par value of a share of common stock on that date.
Options and stock appreciation rights will be exercisable in accordance with
the terms set by the compensation committee when granted and will expire on the
date determined by the compensation committee. All options and stock
appreciation rights must expire no later than ten years after they are
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<PAGE>
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.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of common stock as of December 31, 2000 with respect to:
. each person who, to our knowledge, is the beneficial owner of 5% or more
of the outstanding common stock;
. each of the directors;
. the chief executive officer; and
. all executive officers and directors as a group.
<TABLE>
<CAPTION>
Number of
Shares Beneficially Percentage of
Name and Address (1) Owned (2) Ownership
<S> <C> <C>
Geneseo Communications, Inc................... 15,468,809 22.8%
111 E. 1st Street
Geneseo, Illinois 61254
Cambridge Telcom, Inc......................... 13,258,979 19.5
111 E. 1st Street
Geneseo, Illinois 61254
The Blackstone Group.......................... 18,472,727 27.2
345 Park Avenue
New York, New York 10154 (3)
Trust Company of the West..................... 4,618,182 6.8
11100 Santa Monica Boulevard, Suite 2000
Los Angeles, California 90025 (4)
Cass Communications Management, Inc........... 4,419,660 6.5
100 Redbud Road
Virginia, Illinois 62691
Technology Group, LLC......................... 4,419,660 6.5
118 E. State Street
Hamel, Illinois 62046
Montrose Mutual PCS, Inc...................... 4,419,660 6.5
102 N. Main Street
Dieterich, Illinois 62424
Respond Communications, Inc. ................. 4,419,660 6.5
102 N. Main Street
Dieterich, Illinois 62424 (5)
Timothy M. Yager (6).......................... 923,045 1.4
William W. King, Jr. (7)...................... 75,000 *
Alan C. Anderson (8).......................... 28,729,664 42.3
Donald L. Bell (9)............................ 4,421,535 6.5
Michael S. Chae (10).......................... 18,472,727 27.2
Brian J. Gernant (11)......................... 1,875 *
Gerald S. Gill II (12)........................ 4,419,660 6.5
Lawrence H. Guffey (10)....................... 18,472,727 27.2
Robert W. Schwartz (13)....................... 4,421,535 6.5
George Patrick Tays (14)...................... 4,421,535 6.5
All executive officers and directors
as a group (12 persons) (15).................. 61,584,103 90.0
</TABLE>
---------------------
*Less than one percent.
89
<PAGE>
(1) Except as otherwise indicated below, the address for each executive officer
and director is 1900 East Golf Road, Suite 900, Schaumburg, Illinois 60173.
(2) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act. A person is deemed to be the beneficial owner of
any shares of common stock if such person has or shares the right to vote
or dispose of such common stock, or has the right to acquire beneficial
ownership at any time within 60 days of the date of the table.
(3) Of the 18,472,727 shares, 8,543,636 are held by Blackstone Communications
Partners I L.P. ("BCOM"), 7,348,936 are held by Blackstone iPCS Capital
Partners L.P. ("BICP") and 2,580,155 are held by Blackstone/iPCS L.L.C.
("BLLC"). Blackstone Communications Management Associates I L.L.C. is the
general partner of BCOM. Blackstone Media Management Associates III L.L.C.
is the general partner of BICP. Blackstone Media Management Associates III
L.L.C. is the manager of BLLC. Messrs. Peter G. Peterson and Stephen A.
Schwarzman are the founding members of Blackstone, and as such may also be
deemed to share beneficial ownership of the shares held by each of these
entities.
(4) Consists of shares held by the following affiliates of Trust Company of the
West: TCW/Crescent Mezzanine Partners II, L.P., TCW Crescent Mezzanine
Trust II, TCW Leveraged Income Trust, L.P., TCW Leveraged Income Trust II,
L.P., TCW Leveraged Income Trust IV, L.P., TCW Shared Opportunity Fund II,
L.P., Shared Opportunity Fund IIB, L.L.C. and TCW Shared Opportunity Fund
III, L.P.
(5) 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.
(6) Consists of 673,045 shares held individually by Mr. Yager and 250,000
shares issuable pursuant to options exercisable within 60 days.
(7) Consists of shares issuable pursuant to options exercisable within 60 days.
(8) Consists of 28,727,788 shares beneficially owned by Geneseo Communications,
Inc. and Cambridge Telcom, Inc. and 1,875 shares issuable pursuant to
options exercisable within 60 days. 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.
(9) Consists of 4,419,660 shares beneficially owned by Cass Communications
Management, Inc. and 1,875 shares issuable pursuant to options exercisable
within 60 days. Mr. Bell is the Vice President and CEO of Cass
Communications Management, Inc., and is the beneficial owner of the shares
owned by Cass Communications Management, Inc. Mr. Bell disclaims beneficial
ownership of these shares. Mr. Bell's address is the same as the address
for Cass Communications Management, Inc.
(10) Mr. Chae and Mr. Guffey do not own any shares of record. BCOM, BICP and
BLLC, affiliates of Mr. Chae and Mr. Guffey, own all of the shares held by
Blackstone. Mr. Chae and Mr. Guffey disclaim beneficial ownership of such
shares.
(11) Consists of shares issuable pursuant to options within 60 days.
(12) Consists of shares beneficially owned by Cass Communications Management,
Inc. Mr. Gill is the beneficial owner of a majority of the outstanding
shares of Cass Communications Management, Inc. Mr. Gill disclaims
beneficial ownership of certain shares owned by Cass Communications
Management, Inc. attributable to the shares of Cass Communications
Management, Inc. which are held in trusts for the benefit of members of
Mr. Gill's family. The address for Mr. Gill is the same as the address for
Cass Communications Management, Inc.
(13) Consists of 4,419,660 shares beneficially owned by Technology Group, LLC
and 1,875 shares issuable pursuant to options exercisable within 60 days.
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.
(14) Consists of 4,419,660 shares beneficially owned by Montrose Mutual PCS,
Inc. and 1,875 shares issuable pursuant to options exercisable within 60
days. 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.
(15) Consists of 451,563 shares issuable pursuant to options exercisable within
60 days and 61,132,540 shares beneficially owned by all executive officers
and directors as a group.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Formation of Illinois PCS, LLC
Geneseo Communications, Inc., Cambridge Telcom, Inc., Cass Communications
Management, Inc., Schwartz Ventures, Inc. (which transferred its ownership to
its affiliate Technology Group, LLC), Montrose Mutual PCS, Inc., and Gridley
Enterprises, Inc. formed Illinois PCS, LLC in January 1999. Those investors
received membership interests in exchange for their capital contributions. As
of February 29, 2000 the members agreed to admit Timothy M. Yager, our
President and Chief Executive Officer, as a new member owning a 1.5% interest,
and to reduce their membership interests in aggregate by 1.5%. Mr. Yager agreed
to cancel his management agreement with Illinois PCS, LLC in exchange for his
1.5% membership interest and certain other consideration. For the nine-months
ended September 30, 2000, we have recorded compensation expense in the amount
of approximately $8.5 million resulting from the issuance of this membership
interest to Mr. Yager. For further information on the compensation expense, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
The members have contributed all unfunded equity commitments. The
obligations of the members of Illinois PCS, LLC to contribute capital and the
other provisions contained in the formation documents of Illinois PCS, LLC have
been eliminated as of July 12, 2000 when we consummated the reorganization from
a limited liability company to a holding company structure.
Issuance of Convertible Participating Preferred Stock
An investor group led by Blackstone has purchased $120.0 million of our
convertible preferred stock. On July 12, 2000 we issued 9,090,909 shares of our
Series A-1 Convertible Participating Preferred Stock at a purchase price of
$5.50 per share and on December 28, 2000 we issued 14,000,000 shares of our
Series A-2 Convertible Participating Preferred Stock at a purchase price of
$5.00 per share to the investor group. The issuance of our Series A-1 Preferred
Stock and Series A-2 Preferred Stock has yielded gross proceeds to us of $50.0
million and $70.0 million, respectively. For more information relating to the
terms of the Series A-1 Preferred Stock and the Series A-2 Preferred Stock, see
"Description of Capital Stock."
Investment Agreement
In the preferred stock investment agreement between us and the investor
group, we agreed to refrain from taking certain actions with respect to our
business, our capital stock and other aspects of our operations without the
prior approval of Blackstone. These actions include:
. the declaration or payment of dividends or distributions;
. the issuance of notes or debt securities containing equity features prior
to December 31, 2000, or the issuance of any equity securities which
would be senior to, or on parity with, the preferred stock;
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<PAGE>
. the making of investments in third parties;
. the incurrence of any additional indebtedness in excess of $10.0 million;
or
. the issuance or sale of any shares of our or our subsidiaries' capital
stock prior to December 31, 2000, other than in a public offering of our
common stock, pursuant to an employee benefit plan or in connection with
a merger or acquisition.
The approval rights of Blackstone and most of their other rights relating to
their ownership of our capital stock will terminate upon the earlier to occur
of:
. the closing of an underwritten public offering of our common stock in
which we receive aggregate gross proceeds of at least $50.0 million and
in which the per share price in the offering is at least two times the
weighted average of the issuance price of all shares of Series A-1
Preferred Stock and Series A-2 Preferred Stock (the weighted average is
initially $5.20 per share), subject to adjustment; and
. our consummation of a transaction that results in a change of control.
Stockholders Agreement
At the date of the purchase and sale of our Series A-1 Preferred Stock, we
entered into a stockholders agreement with the investor group, Geneseo
Communications, Inc. and Cambridge Telcom, Inc. which provides:
. limitations on the transfer of any of our securities by each of Geneseo
and Cambridge for a period of six months after the expiration of any
lock-up period required by our underwriter in an initial public offering;
. tag-along rights in favor of the investor group allowing it to
participate in sales of our capital stock by Geneseo or Cambridge;
. until an initial public offering or a change of control transaction,
drag-along rights in favor of Geneseo and Cambridge requiring the
investor group to sell all of our capital stock owned by it;
. the right of Blackstone to designate up to two members of our Board of
Directors;
. preemptive rights granting the investor group the right to subscribe for
and purchase upon the same terms and conditions, a portion of any equity
securities we issue prior to an initial public offering of our common
stock that yields gross proceeds to us of at least $30.0 million;
. the right of the investor group to request that we use our best efforts
to complete an initial public offering of our common stock if we have not
done so prior to July 12, 2002;
. the right of the investor group to approve any merger, consolidation,
sale of assets or other business combination transaction or issuance of
securities that would:
. have adverse tax consequences to the holders of the Series A-1
Preferred Stock or Series A-2 Preferred Stock; or
. involve consideration other than cash or shares of common stock of
the acquiring company, or involve cash and/or shares of common
stock of the acquiring company that values Blackstone's investment
in us at less than the greater of $11.00 per share of common stock
owned by it, subject to dilution adjustment, and an internal rate
of return on its investment of an annual rate of 35%; and
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. if we have not completed one or more public offerings of our common stock
resulting in gross proceeds of $50.0 million or consummated a business
combination transaction with a publicly traded company with a market
capitalization in excess of $200 million and a public float valued in
excess of $50.0 million prior to July 12, 2005, the investor group has
the right to request that we either repurchase its capital stock at fair
market value or, if we fail to repurchase their capital stock, force a
sale of our company.
Registration Rights Agreement
We have granted to the holders of our Series A-1 Preferred Stock and our
Series A-2 Preferred Stock, the following registration rights, exercisable at
any time after an initial public offering of our common stock:
. demand registration rights that entitle Blackstone to require us to
register, under the Securities Act, on up to three occasions and at our
expense, the resale of the investor group's shares of common stock; and
. piggyback registration rights that entitle the investor group to require
us to include their shares of common stock in a registration of any of
our equity securities, other than pursuant to the registration of the
warrants comprising part of the units or the warrants issued to Sprint
PCS.
These registration rights extend to all of the common stock that the
investor group may acquire upon the conversion of their Series A-1 Preferred
Stock and their Series A-2 Preferred Stock. These registration rights are
subject to the underwriters' right to limit the number of shares included in
any underwritten 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 commercial mobile radio service, commonly referred to as
CMRS, spectrum to be used for the transmission of programming material
targeted to a limited audience;
. impose fines and forfeitures for violations of any of the FCC's rules; and
. regulate the technical standards of PCS networks.
The FCC prohibits a single entity from having an attributable interest
(usually 20% or greater) in broadband PCS, cellular and specialized mobile
radio service, or SMR, licenses totaling more than 45 MHz in any urban areas,
and 55 MHz in rural areas. Interests held by passive institutional investors,
small companies and rural telephone companies are not usually deemed
attributable for purposes of this prohibition if such interests do not exceed
40%.
Transfers and Assignments of PCS Licenses
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a PCS license. Non-
controlling interests in an entity that holds a PCS license or operates PCS
networks generally may be bought or sold without prior FCC approval. In
addition, a recent FCC order requires only post-consummation notification of
certain pro forma assignments or transfers of control.
Conditions of PCS Licenses
All PCS licenses are granted for 10-year terms conditioned upon timely
compliance with the FCC's build-out requirements. Pursuant to the FCC's build-
out requirements, all 30 MHz broadband PCS licensees must construct facilities
that offer coverage to one-third of the population within 5 years and to two-
thirds of the population within 10 years, and all 10 MHz broadband PCS
licensees must construct facilities that offer coverage to at least one-quarter
of the population within 5 years or make a showing of "substantial service"
within that 5 year period. Rule violations could result in license revocations.
The FCC also requires licensees to maintain a certain degree of control over
their licenses. The Sprint PCS agreements reflect an alliance that the parties
believe meets the FCC requirements for licensee control of licensed spectrum.
If the FCC were to determine that the Sprint
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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 agreements
as necessary to cause the agreements to comply with applicable law and to
preserve to the extent possible the economic arrangements set forth in the
agreements. If the agreements cannot be modified, the agreements may be
terminated pursuant to their terms. In addition to revoking the licenses, the
FCC could also impose monetary penalties on us.
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:
. provided "substantial service" during its license term; and
. substantially complied with all applicable laws and FCC rules and
policies.
The FCC's rules define "substantial service" in this context as service that is
sound, favorable and substantially above the level of mediocre service that
might minimally warrant renewal.
Interconnection
The FCC has the authority to order interconnection between commercial mobile
radio service, or CMRS, providers (which includes us) and any other common
carrier. The FCC has ordered local exchange carriers to provide reciprocal
compensation to CMRS providers for the termination of traffic. Under these new
rules, we benefit from interconnection agreements negotiated by Sprint PCS for
our network with Ameritech, U.S. West, GTE and several smaller independent
local exchange carriers. Interconnection agreements are negotiated on a state-
wide basis. If an agreement cannot be reached, parties to interconnection
negotiations can submit outstanding disputes to state authorities for
arbitration. Negotiated interconnection agreements are subject to state
approval.
Other FCC Requirements
The FCC has divided the 120 MHz of spectrum allocated to Broadband PCS into
six frequency blocks, A through F. Through Sprint PCS, we operate under blocks
A, B and D. Broadband PCS providers generally are prohibited from unreasonably
restricting resale of their services and from unreasonably discriminating
against resellers. These prohibitions on a provider's restriction of resale
will expire November 24, 2002 unless the FCC extends them. The FCC recently
decided that these prohibitions apply to services and not to equipment such as
handsets, whether alone or in bundled packages.
The FCC also adopted rules that require local exchange and most CMRS
carriers, including us, to program their networks to allow customers to change
service providers without changing telephone numbers, which is referred to as
service provider number portability. Most CMRS carriers are required to
implement nationwide roaming by November 24, 2002 as well. The FCC currently
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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.
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 by October 1, 2001. Further
waivers of the enhanced emergency 911 capability requirements may be obtained
by individual carriers by filing a waiver request.
On June 10, 1999, the FCC initiated a regulatory proceeding seeking comment
from the public on a number of issues related to competitive access to
multiple-tenant buildings, including the following:
. the FCC's tentative conclusion that the Communications Act of 1934, as
amended, requires utilities to permit telecommunications carriers
access to rooftop and other rights-of-way in multiple tenant buildings
under just, reasonable and nondiscriminatory rates, terms and
conditions; and
. whether building owners that make access available to a
telecommunications carrier should be required to make access available
to all other telecommunications carriers on a nondiscriminatory basis,
and whether the FCC has the authority to impose such a requirement.
This proceeding could affect the availability and pricing of sites for our
antennae and those of our competitors.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act was enacted in 1994 to
preserve electronic surveillance capabilities by law enforcement officials in
the face of rapidly changing telecommunications technology. The Communications
Assistance Act requires telecommunications carriers, including us, to modify
their equipment, facilities, and services to allow for authorized electronic
surveillance based on either industry or FCC standards. In 1997, industry
standard-setting organizations developed interim standards for wireline,
cellular, and broadband PCS carriers to comply with the Communications
Assistance Act. In August 1999, the FCC supplemented the interim industry
standards with additional standards. For interim industry standards, the
deadline for compliance is June 30, 2000, and for the additional standards
established by the FCC, the deadline is September 30, 2001. Due to required
hardware changes that have not yet been developed and implemented by switch
manufacturers, we have joined with Sprint PCS to request an extension of time
for compliance with these requirements. We may be granted extensions for
compliance, or we may be subject to penalties if we fail to comply, including
being assessed fines or having conditions put on our licenses.
Other Federal Regulations
Wireless systems, which we use in the provision of our services, must comply
with certain FCC and FAA regulations regarding the siting, lighting and
construction of transmitter towers and
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antennas. The FCC also requires that aggregate radio wave emissions from every
site location meet certain standards. Although we believe that our existing
networks meet these standards, a site audit may reveal the need to reduce or
modify emissions at one or more sites. This would increase our costs and have a
material adverse affect on our operations. In addition, these regulations will
also affect site selection for new network build-outs and may increase the
costs of building out our network. The increased costs and delays from these
regulations may have a material adverse affect on our operations. In addition,
certain FCC environmental regulations may cause certain cell site locations to
become subject to regulation under the National Environmental Policy Act. The
FCC is required to implement this statute by requiring carriers to meet certain
land use and radio frequency standards.
Review of Universal Service Requirements
The FCC and the states are required to establish a universal service program
to ensure that affordable, quality telecommunications services are available to
all Americans. Sprint PCS is required to contribute to the federal universal
service program as well as existing state programs. The FCC has determined that
Sprint PCS' contribution to the federal universal service program is a variable
percentage of interstate end-user telecommunications revenues and is
approximately 5.5% for the third quarter of 2000. 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.
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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:
. market conditions fail to protect subscribers from unjust and
unreasonable rates or rates that are unjustly or unreasonably
discriminatory; or
. 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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WARRANTHOLDERS
Set forth below is information with respect to the number of warrants and
shares of our common stock issuable upon exercise of the warrants owned by each
of the warrantholders. The warrants are being registered to permit the resale
of the warrants by the warrantholders and our offer and sale of the shares of
our common stock to be issued upon the exercise of the warrants. See "Plan of
Distribution."
We have filed with the SEC a registration statement, of which this
prospectus forms a part, with respect to the resale of the warrants and the
offer and sale of the shares of our common stock issued upon the exercise of
the warrants from time to time, under Rule 415 under the Securities Act, in the
over-the-counter market, in privately negotiated transactions, in underwritten
offerings or by a combination of these methods for sale, and have agreed to use
our best efforts to keep this registration statement effective until the date
on which all of the warrants or shares of our common stock issued upon exercise
of the warrants have been sold pursuant to this registration statement or the
warrants have expired, though we are required to keep this registration
statement effective so long as any affiliate of ours holds warrants or shares
of our common stock issued upon exercise of the warrants.
The warrants and the shares of our common stock issued upon the exercise of
the warrants offered by this prospectus may be offered from time to time by the
persons or entities named below:
<TABLE>
<CAPTION>
Number of Percentage
Warrants of
Owned Number of Number of Outstanding
Prior to Warrants Shares Issuable Warrants
The to be Upon Exercise Owned After
Name and Address of Holder Offering Offered of Warrants Offering
<S> <C> <C> <C> <C>
American Express Trust Company........ 3,525 3,525 35,047 --
3922 AXP Financial Center
Minneapolis, MN 55474
The Bank of New York.................. 84,200 84,200 837,144 --
925 Patterson Plank Road
Secaucus, NJ 07094
Bankers Trust Company................. 7,920 7,920 78,743 --
648 Grassmere Park Drive
Nashville, TN 37211
Bear, Stearns Securities Corp......... 6,775 6,775 67,359 --
925 Patterson Plank Road
Secaucus, NJ 07094
Boston Safe Deposit and Trust Company. 6,630 6,630 65,918 --
c/o Mellon Bank, N.A.
Pittsburgh, PA 15259
</TABLE>
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<TABLE>
<CAPTION>
Number of Percentage
Warrants of
Owned Number of Number of Outstanding
Prior to Warrants Shares Issuable Warrants
The to be Upon Exercise Owned After
Name and Address of Holder Offering Offered of Warrants Offering
<S> <C> <C> <C> <C>
Brown Brothers Harriman & Co... 1,100 1,100 10,937 --
63 Wall Street 8th Floor
New York, NY 10005
Chase Bank of Texas, N.A....... 4,210 4,210 41,857 --
P. O. Box 2558
Houston, TX 77252
Chase Manhattan Bank........... 10,025 10,025 99,672 --
4 New York Plaza
New York, NY 10004
Chase Manhattan Bank Trust..... 5,250 5,250 52,197 --
4 New York Plaza
New York, NY 10004
Citibank, N.A.................. 25,850 25,850 257,009 --
3800 Citicorp Center Tampa
Tampa, FL 33610
Donaldson, Lufkin and Jenrette. 65,675 65,675 652,963 --
Securities Corporation
1 Pershing Plaza
Jersey City, NJ 07399
FirStar Bank, N.A.............. 4,750 4,750 47,226 --
425 Walnet Street
Cincinnati, OH 45201
FUNB--Phila Main............... 2,750 2,750 27,341 --
123 South Broad Street
Philadelphia, PA 19109
Investors Bank & Trust......... 14,250 14,250 141,678 --
200 Clarendon Street
Boston, MA 02116
Mercantile--Safe Deposit &
Trust Company.................. 1,600 1,600 15,908 --
766 Old Hammonds Ferry Road
Linthicum, MD 21090
Northern Trust Company......... 1,760 1,760 17,499 --
801 S. Canal
Chicago, IL 60607
</TABLE>
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<TABLE>
<CAPTION>
Number of Percentage
Warrants of
Owned Number of Number of Outstanding
Prior to Warrants Shares Issuable Warrants
The to be Upon Exercise Owned After
Name and Address of Holder Offering Offered of Warrants Offering
<S> <C> <C> <C> <C>
PNC Bank, National Association. 490 490 4,872 --
1600 Market Street, 29th Floor
Philadelphia, PA 19103
SSB-Trust Custody.............. 4,025 4,025 40,018 --
225 Franklin Street
Boston, MA 02110
State Street Bank and Trust
Company........................ 34,255 34,255 340,575 --
1776 Heritage Drive
Quincy, MA 02171
Swiss American Securities,
Inc............................ 150 150 1,491 --
100 Wall Street
New York, NY 10005
U.S. Bank National Association. 14,810 14,810 147,246 --
601 Second Avenue South
Minneapolis, MN 55402
</TABLE>
Because the selling holders may, under this prospectus, offer all or some
portion of the warrants or the common stock issued upon exercise of the
warrants, no estimate can be given as to the number of the warrants or shares
of common stock issued upon exercise of the warrants that will be held by the
selling holders upon termination of any sales. In addition, the selling holders
above may have sold, transferred or otherwise disposed of all or any portion of
their warrants, since the date on which they provided the information regarding
their warrants, in transactions exempt from the registration requirements of
the Securities Act. See "Plan of Distribution."
Only selling holders identified above who beneficially own the securities
set forth opposite each selling holder's name in the table above on the
effective date of the registration statement of which this prospectus forms a
part may sell those securities under the registration statement. Prior to any
use of this prospectus in connection with an offering of the warrants and/or
the shares of our common stock issued upon exercise of the warrants by any
holder not identified above, this prospectus will be supplemented to set forth
the name and number of warrants and/or shares of our common stock beneficially
owned by the selling holder intending to sell such warrants and/or shares of
common stock, and the number of warrants and/or shares of common stock to be
offered. The prospectus supplement will also disclose whether any selling
holder selling in connection with the prospectus supplement has held any
position or office with, been employed by or otherwise has had a material
relationship with, us or any of our subsidiaries or affiliates during the three
years prior to the date of the prospectus supplement if this information has
not been disclosed in this prospectus.
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DESCRIPTION OF WARRANTS
We issued the warrants pursuant to a warrant agreement with ChaseMellon
Shareholder Services, L.L.C. as warrant agent. The following description is a
summary of the material provisions of the warrant agreement. We urge you to
read the warrant agreement because it defines your rights as a holder of these
warrants.
General
Each warrant entitles the holder to receive 9.94233 shares of our common
stock, or warrant shares, at an exercise price of $5.50 per share. Assuming
that all of the outstanding warrants are exercised, the holders of the warrants
would be entitled to purchase approximately 4% of the issued and outstanding
shares of our common stock on a fully diluted basis. The warrants will be
exercisable at any time on or after July 15, 2001 and will automatically expire
at 5:00 p.m. New York City time on July 15, 2010.
The warrants may be exercised by surrendering the warrant certificates with
the accompanying form of election to purchase, together with payment of the
exercise price. Payment of the exercise price may be made at the holder's
election:
. by tendering senior discount notes having an aggregate accreted value or
aggregate principal amount, plus any accrued and unpaid interest, equal
to the exercise price; or
. in cash or by certified or official bank check to the order of iPCS.
Upon surrender of the warrant certificate and payment of the exercise price, we
will deliver stock certificates representing the number of whole warrant shares
to which the holder is entitled. If less than all of the warrants are to be
exercised, a new warrant certificate will be issued for the remaining number of
warrants. Holders of warrants will be able to exercise their warrants only if a
registration statement relating to the common stock underlying the warrants is
then in effect, or the exercise of such warrants is exempt from the
registration requirements of the Securities Act or the securities laws of the
states in which the various holders of the warrants reside.
No fractional warrant shares will be issued upon exercise of the warrants.
Instead, we will pay to the holder of the warrant an amount in cash equal to
the current market value of any such fractional warrant shares less a
corresponding fraction of the exercise price.
In the event of the liquidation, dissolution or winding up of iPCS, the
holders of the warrants will not be entitled to share in the assets of iPCS. If
a bankruptcy or reorganization is commenced by or against iPCS, a bankruptcy
court may hold that unexercised warrants are executory contracts which may be
subject to rejection by iPCS and the holders of the warrants may, even if
sufficient funds are available, receive nothing or less than they would be
entitled to if they had exercised their warrants prior to the commencement of
any such case.
In the event of a taxable distribution to holders of iPCS common stock that
results in an adjustment to the number of warrant shares, the holders of the
warrants may, in certain circumstances, be deemed to have received a dividend
subject to United States federal income tax. See "Certain United States Federal
Income Tax Considerations."
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No Rights As Stockholders
The holders of unexercised warrants will have no right to vote on matters
submitted to our stockholders and will have no right to receive dividends.
Adjustments
The number of warrant shares purchasable upon exercise of warrants will be
subject to adjustment in several circumstances including, among others, the
following:
. the payment by us of dividends or other distributions;
. changes in our capitalization;
. the issuance of common stock or securities convertible into common stock
at a price which is less than the then fair market value based upon the
sale price to a party not related to us or a determination by our
Directors who do not have an interest in this transaction, subject to
limited exceptions; and
. other events that could have the effect of depriving holders of the
warrants of the benefit of all or a portion of the purchase rights
evidenced by the warrants.
No adjustment need be made for any of the above transactions if holders of
warrants participate in the transaction on a basis the Board of Directors
determines to be fair and appropriate. In addition, no adjustment need be made
for the adoption of a shareholder's rights plan or the issuance of rights under
such a plan.
In the case of a consolidation or merger of iPCS, or the sale of all or
substantially all of the assets of iPCS to another corporation,
. each warrant will then represent the right to receive the kind and
amount of shares of stock or other securities or property to which the
warrantholder would have been entitled had the warrant been exercised
immediately prior to such transaction, and
. if iPCS does not survive in any transaction, the surviving entity will
assume the obligations of iPCS under the warrant agreement.
Reservation of Shares
We have authorized and will at all times reserve and keep available such
number of shares of iPCS common stock as will be issuable upon the exercise of
all outstanding warrants.
Amendment
From time to time, iPCS and the warrant agent, without the consent of the
holders of the warrants, may amend or supplement the warrant agreement for
several purposes, including curing defects or inconsistencies or making changes
that do not adversely affect the legal rights of any warrantholder. Any
amendment or supplement that adversely affects the legal rights of the
warrantholders requires the written consent of a majority of the holders of the
then outstanding warrants, excluding any warrants held by iPCS or any of its
affiliates.
Reports
So long as any of the warrants remain outstanding, we will, upon request,
furnish to the registered holders of the warrants, all quarterly and annual
financial information that would be
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required to be contained in a filing with the Securities and Exchange
Commission on Forms 10-Q and 10-K as if we were required to file such forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report by our certified independent accountants; and all current reports that
would be required to be filed with the Securities and Exchange Commission, on
Form 8-K as if we were required to file such reports. In addition, whether or
not required by the rules and regulations of the Securities and Exchange
Commission, we will file a copy of all such information and reports with the
Securities and Exchange Commission for public availability, unless the
Securities and Exchange Commission will not accept such a filing, and make
such information available to securities analysts and prospective investors
upon request.
Registration of the Warrant Shares
Under the terms of the warrant registration rights agreement dated July 12,
2000, we agreed to:
. file the registration statement of which this prospectus is a part;
. use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act within 180
days after the date of the closing of our unit offering; and
. keep the shelf registration statement continuously effective until the
date on which all of the warrants or shares of common stock issuable
upon exercise of the warrants have been sold pursuant to the shelf
registration statement or the warrants have expired.
We may suspend the effectiveness of any shelf registration statement or
amendment to the shelf registration statement, suspend the use of any
prospectus and shall not be required to amend or supplement the shelf
registration statement, any related prospectus or any document incorporated by
reference other than an effective registration statement being used for an
underwritten offering in the event that, and for periods not to exceed 60
consecutive days and no more than two times in any calendar year if:
. an event or circumstance occurs and is continuing as a result of which
the shelf registration statement, any related prospectus or any document
incorporated by reference or proposed to be filed would, in our good
faith judgment, contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements, in
the light of the circumstances under which they were made, not
misleading; and
. we determine in our good faith judgment that the disclosure of such
event at such time would have a material adverse effect on our
business, operations, or prospects, or
. the disclosure otherwise relates to a material business transaction or
development which has not yet been publicly disclosed.
Each holder of warrants or warrant shares that sells pursuant to the shelf
registration statement generally will:
. be required to be named as a selling holder in the related prospectus
and to deliver a prospectus to the purchaser;
. be subject the civil liability provisions under the Securities Act in
connection with such shares;
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. be bound by the provisions of the warrant agreement which are applicable
to such holder; and
. be required to deliver information to be used in connection with the
shelf registration statement.
Liquidated Damages
The warrant agreement provides that if we fail to:
. file a Shelf Registration Statement with respect to the common stock
underlying the warrants within 90 days after the date of the closing of
our unit offering,
. use our reasonable best efforts to have the Securities and Exchange
Commission declare the shelf registration statement effective within 180
days after the date of the closing of our unit offering, or
. keep the shelf registration statement continuously effective until the
date on which all of the warrants or warrant shares have been sold
pursuant to the shelf registration statement or the warrants have
expired,
then in each case described above, each a warrant registration default, iPCS
will be required to pay liquidated damages to each warrantholder from the first
occurrence of a warrant registration default.
The liquidated damages paid to each warrantholder will be equal to $0.03 per
week per warrant for each week or portion of a week that the warrant
registration default continues for the first 90-day period immediately
following the warrant registration default. This amount will increase by an
additional $0.02 per week per warrant with respect to each subsequent 90-day
period, up to a maximum amount equal to $0.07 per week per warrant. The
provision for liquidated damages will continue until the warrant registration
default has been cured. iPCS will not be required to pay liquidated damages for
more than one warrant registration default at any given time.
Liquidated damages accrued as of January 15 or July 15 of each year will be
payable on such date. All accrued liquidated damages shall be paid by iPCS to
holders entitled to liquidated damages in accordance with the terms of the
warrant registration rights agreement. No liquidated damages are currently
payable.
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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 375,000,000 shares of authorized capital stock,
including 300,000,000 shares of common stock, par value $0.01 per share, and
75,000,000 shares of preferred stock, par value $0.01 per share. As of December
31, 2000, there were 44,869,643 shares of common stock and 23,090,909 shares of
convertible preferred stock issued and outstanding. As of that date there were
seven holders of record of the outstanding shares of common stock and seventeen
holders of record of the convertible preferred stock.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have any
cumulative rights. Subject to the rights of the holders of any series of
preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available therefor. Holders of shares of common stock have no preemptive or
other similar rights. If we liquidate, dissolve or wind up, the holders of
shares of common stock are entitled to share ratably in the assets which are
legally available for distribution, if any, remaining after the payment or
provision for the payment of all debts and other liabilities and the payment
and setting aside for payment of any preferential amount due to the holders of
shares of any series of preferred stock.
Preferred Stock
Under our certificate of incorporation, the board of directors is
authorized, subject to certain limitations prescribed by law and without
further stockholder approval, to issue up to an aggregate of 75,000,000 shares
of preferred stock. The preferred stock may be issued in one or more series.
Each series may have different rights, preferences and designations and
qualifications, limitations and restrictions that may be established by our
board of directors without approval from the stockholders. These rights,
designations and preferences include:
. number of shares to be issued;
. dividend rights;
. dividend rates;
. conversion rights;
. voting rights;
. liquidation preferences; and
. terms of redemption.
If our board of directors decides to issue any preferred stock, it could
have the effect of delaying or preventing another party from taking control of
us. This is because the terms of the preferred stock 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.
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Series A-1 Preferred Stock and Series A-2 Preferred Stock
With respect to dividends and distributions upon our liquidation, winding-up
and dissolution, the Series A-1 Preferred Stock ranks senior to our common
stock and on parity with the Series A-2 Preferred Stock. In addition, upon our
liquidation, holders of Series A-1 Preferred Stock and Series A-2 Preferred
Stock will be entitled to receive a liquidation preference of approximately
$50.0 million and $70.0 million, respectively, plus dividends of 7.5% per year.
The Series A-1 Preferred Stock and Series A-2 Preferred Stock have a term
which expires on July 12, 2011, and we will be obligated to redeem all
outstanding shares of Series A-1 Preferred Stock and Series A-2 Preferred Stock
on July 12, 2011 for an aggregate amount equal to their respective accrued
liquidation preference. At any time and from time to time prior to the
redemption date, holders of the Series A-1 Preferred Stock and Series A-2
Preferred Stock may, at their option, convert all or any such shares into
shares of our common stock. The conversion price is subject to adjustment upon
the occurrence of certain events, including the following:
. certain issuances of additional shares of common stock, or securities
convertible into shares of common stock, at a price below $5.50 per
share;
. a stock split or combination; and
. certain dividends and distributions.
Each share of Series A-1 Preferred Stock and Series A-2 Preferred Stock
shall automatically convert into shares of our common stock upon the earlier to
occur of the following:
. the closing of an underwritten public offering of our common stock in
which we receive aggregate gross proceeds of at least $50.0 million and
in which the per share price at which such shares are sold in the
offering is at least $11.00 per share, subject to adjustment;
. upon our consummation of a transaction with a public company that results
in a change of control; and
. upon our consummation of a transaction with a private company that
results in a change of control and with respect to which the investor
group has not waived its right to receive the special dividend payable by
us upon such change of control.
Dividends
Dividends shall be payable semiannually on each share of Series A-1
Preferred Stock and Series A-2 Preferred Stock at a rate of 7.5% per year and,
when paid, shall be paid only in additional shares of Series A-1 Preferred
Stock or Series A-2 Preferred Stock, respectively. Such dividends will accrue
daily whether or not we have earnings or profit, whether or not there are funds
legally available for payment of such dividends and whether or not dividends
are declared. Dividends shall accumulate and compound semi-annually. In
addition to the 7.5% dividend, when and if our Board of Directors declares a
dividend payable with respect to the then outstanding shares of our common
stock, the holders of the Series A-1 Preferred Stock and Series A-2 Preferred
Stock shall be entitled to the amount of dividends per share as would be
payable on the number of shares of our common stock into which such share of
Series A-1 Preferred Stock or Series A-2 Preferred Stock could then be
converted. Upon the occurrence of a change of control prior to July 12, 2005,
we will be obligated to pay a special dividend to each holder of Series A-1
Preferred Stock and Series A-2 Preferred
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Stock, except as to any changes of control in connection with a business
combination with a private company as to which the investor group waives its
right to receive such dividend, in an amount equal to the amount of all unpaid
dividends that would have been payable through July 12, 2005.
With respect to our Series A-1 Preferred Stock and Series A-2 Preferred
Stock, a "change of control" occurs upon the happening of any of the following
events:
. any person who is not currently a holder of our stock is or becomes a
beneficial owner of more than 50% of the aggregate voting power of our
securities;
. Geneseo, Cambridge and their affiliates collectively do not beneficially
own more shares of our voting securities than any other person, other
than the investor group and its affiliates, which person beneficially
owns more than 35% of our voting securities;
. any transaction occurs that results in our stockholders immediately prior
to such transaction being the holders of less than 50% of the aggregate
voting power of the securities of the resulting company after such
transaction;
. a majority of the members of our Board of Directors consists of
individuals who are neither members of the Board on the closing date or
appointed by the investor group, full time employees or directors of one
of our stockholders at such time or an individual who was requested to be
placed on the Board by a stockholder;
. a merger, consolidation, sale of assets or other similar business
combination transaction is consummated and, as a direct result, Mr. Yager
ceases to be our Chief Executive Officer or that of our successor; or
. any liquidation, dissolution or winding up of us, or a dividend or
distribution to our stockholders of more than 50% of our assets.
Voting
Holders of our Series A-1 Preferred Stock and Series A-2 Preferred Stock
shall be entitled to vote on all matters submitted to a vote of our
stockholders as if the holders of Series A-1 Preferred Stock and Series A-2
Preferred Stock had converted their shares immediately prior to the vote. In
addition, the vote of at least a majority of the then outstanding shares of
Series A-1 Preferred Stock or Series A-2 Preferred Stock, voting together as a
single class, respectively shall be necessary for effecting or validating the
following actions:
. any amendment, alteration or change to the rights, preferences,
privileges or powers of the Series A-1 Preferred Stock or Series A-2
Preferred Stock in any manner that adversely affects the shares of such
series;
. any increase or decrease in the total number of authorized or issued
shares of Series A-1 Preferred Stock or Series A-2 Preferred Stock, other
than the dividend issuances of such shares;
. any authorization, creation or issuance of any senior or parity
securities, other than in the case of the Series A-1 Preferred Stock, the
issuance of Series A-2 Preferred Stock;
. any redemption, acquisition or other purchase of any shares of our, or
any of our subsidiary's, capital stock or other equity security, subject
to some exceptions;
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. any change of our certificate of incorporation or bylaws that would
adversely affect the holders of the Series A-1 Preferred Stock or Series
A-2 Preferred Stock; or
. any voluntary liquidation, dissolution or winding up of us.
Warrants
Sprint Warrants
As additional consideration to Sprint Spectrum L.P. for its agreement to
expand our initial territory by the additional 20 markets, we have issued to
Sprint Spectrum L.P., or any of its designees controlled by, or under common
control with, Sprint Spectrum L.P. warrants for 1,151,938 shares. The warrants
are exercisable by Sprint Spectrum L.P. at an exercise price of $4.95 per share
beginning on or after July 15, 2001 and expiring on July 15, 2007. Sprint
Spectrum L.P. may transfer its rights with respect to the warrants only to a
company that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with Sprint Spectrum
L.P., and any warrants so transferred will be subject to the exercise time
periods. At such time as we become eligible to file a registration statement on
Form S-3, Sprint Spectrum L.P. will be entitled to demand registration rights
for the underlying common stock until the common stock may be sold without
registration.
Delaware Law and Certain Charter and By-Law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a certain period of time.
That period is three years after the date of the transaction in which the
person became an interested stockholder, unless the interested stockholder
attained that status with the approval of the board of directors or unless the
business combination is approved in a prescribed manner. A "business
combination" includes certain mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
his or her affiliates and associates, owns, or owned within three years prior,
15% or more of the corporation's voting stock.
Our certificate of incorporation and by-laws provide for the division of the
board of directors into three classes, as nearly equal in size as possible,
with each class beginning its three year term in a different year. See
"Management--Board of Directors." A director may be removed only for cause by
the affirmative vote of the holders of at least 80% of the voting power of all
of the then-outstanding shares of capital stock entitled to vote generally for
the election of directors voting together as a single class.
Our certificate of incorporation will also require a stockholder who intends
to nominate a candidate for election or to raise new business at a stockholder
meeting to give at least 90 days' advance notice to the Secretary. The notice
provision will require a stockholder who desires to raise new business to
provide us certain information concerning the nature of the new business, the
stockholder and the stockholder's interest in the business matter. Similarly, a
stockholder wishing to nominate any person for election as a director will need
to provide us with certain information concerning the nominee and the proposing
stockholder.
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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 the chairman of the board, president and chief executive officer
or by the board pursuant to a resolution adopted by a majority of the board of
directors, or as otherwise provided in the by-laws. These provisions could have
the effect of delaying until the next annual stockholders meeting stockholder
actions that are favored by the holders of a majority of the outstanding voting
securities. These provisions may also discourage another person or entity from
making an offer to stockholders for the common stock. This is because the
person or entity making the offer, even if it acquired a majority of our
outstanding voting securities, would be unable to call a special meeting of the
stockholders and would further be unable to obtain unanimous written consent of
the stockholders. As a result, any meeting as to matters they endorse,
including the election of new directors or the approval of a merger, would have
to wait for the next duly called stockholders meeting.
The DGCL provides that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or by-laws, unless the corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage.
Our certificate of incorporation requires the affirmative vote of the holders
of at least 80% of the outstanding voting stock to amend or repeal any of the
provisions of the certificate of incorporation described above. The 80% vote is
also required to amend or repeal any of our by-law provisions described above.
The by-laws may also be amended or repealed by the board of directors. The 80%
stockholder vote would be in addition to any separate vote that each class of
preferred stock is entitled to that might in the future be required in
accordance with the terms of any preferred stock that might be outstanding at
the time any amendments are submitted to stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This general discussion of certain U.S. federal income and estate tax
considerations relates to the acquisition, ownership and disposition of a
warrant, and of a share of common stock acquired upon exercise of a warrant. If
you:
. acquired the original warrant for cash on its original issuance at the
issue price of the unit consisting of an original note and original
warrants; or
. if you hold the warrant and any common stock acquired on exercise of the
warrant as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended,
you are subject to this discussion.
This discussion is based upon the Internal Revenue Code, Treasury
regulations, Internal Revenue Service rulings and pronouncements and judicial
decisions now in effect, each of which is subject to change at any time by
legislative, administrative, or judicial action, possibly with retroactive
effect. The discussion does not discuss every aspect of U.S. federal income and
estate taxation that may be relevant to a particular taxpayer in light of its
personal circumstances or to persons who are otherwise subject to special tax
treatment. For example, you may be subject to special rules not discussed here
if you are:
. a bank or a broker-dealer;
. an insurance company;
. a pension or other employee benefit plan;
. a tax exempt organization or entity;
. a U.S. expatriate;
. a trader in securities that elects mark-to-market accounting treatment;
. a person holding warrants or common stock as a part of a hedging or
conversion transaction or a straddle;
. a hybrid entity or an owner of interests therein; or
. a holder whose functional currency is not the U.S. dollar.
In addition, this discussion does not address the effect of any applicable
foreign, state, local or other tax laws. We have not sought and will not seek
any rulings from the Internal Revenue Service concerning the tax consequences
of the acquisition, ownership or disposition of a warrant or a share of common
stock acquired on exercise of a warrant and, accordingly, we cannot assure you
that the Internal Revenue Service will not successfully challenge the tax
consequences described below. We urge you to consult your tax advisor with
respect to the U.S. federal income and estate tax considerations relevant to
holding and disposing of a warrant or a share of common stock as well as any
tax considerations applicable under the laws of any foreign, state, local or
other taxing jurisdiction.
U.S. Holders
If you are a "U.S. Holder," as defined below, this section applies to you.
Otherwise, the section "Non-U.S. Holders" applies to you. You are a U.S. Holder
if you are the beneficial owner of a
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warrant or share of common stock acquired on exercise of a warrant and you are:
. a citizen or resident of the United States, including an individual
deemed to be a resident alien under the "substantial presence" test of
Section 7701(b) of the Code;
. a corporation or partnership, including an entity treated as a
corporation or partnership for U.S. federal income tax purposes, created
or organized in the United States or under the laws of the United States
or of any state thereof or the District of Columbia, unless, in the case
of a partnership, Treasury regulations provide otherwise;
. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
. a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust. Notwithstanding the
preceding clause, to the extent provided in Treasury regulations, certain
trusts in existence on August 20, 1996, and treated as U.S. persons prior
to that date that elect to continue to be treated as U.S. persons, shall
also be considered U.S. persons.
Tax Treatment of Warrants. A U.S. Holder will recognize gain or loss upon a
sale, redemption, lapse or other taxable disposition of a warrant in an amount
equal to the difference between the sum of the amount of cash and the fair
market value of any property received for the warrant and the U.S. Holder's tax
basis in the warrant. A U.S. Holder's tax basis in a warrant will equal that
portion of the issue price of a unit consisting of a note and a warrant that
was allocated to the warrant based upon the relative fair market values of the
note and the warrants comprising the unit. Because the unit was issued for
money, the "issue price" of the unit was the first price at which a substantial
amount of the units was sold for money. For purposes of determining the issue
price of the units, sales to bond houses, brokers, or similar persons or
organizations acting in the capacity as underwriters, placement agents or
wholesalers are ignored.
Under Treasury regulations, we have allocated the issue price of the units
between the notes and the warrants. That allocation will be binding on all
holders of units, unless a holder explicitly discloses on a form prescribed by
the IRS and attached to the holder's timely-filed U.S. federal income tax
return for the taxable year that includes the acquisition date of the unit that
its allocation of the issue price of a unit is different from the issuer's
allocation. Our allocation is not, however, binding on the IRS. Based on our
allocation, the initial tax basis of each warrant was $34.43.
The gain or loss upon a sale, redemption, lapse or other taxable disposition
of a warrant will be capital gain or loss if the common stock to which the
warrant relates would be a capital asset in the hands of the warrantholder and
will be long-term capital gain or loss if the holding period for the warrant
exceeds one year. If the warrants are not exercised and are allowed to expire,
the warrants will be deemed to have been sold or exchanged on the expiration
date resulting in a loss equal to the U.S. Holder's tax basis in the warrants.
Any loss to the U.S. Holder will be a capital loss, and the classification of
the loss as long-term or short-term will depend upon the date the warrants were
acquired and the length of time the warrants were held. We will not recognize
any gain or loss upon the termination, exercise or expiration of any warrants.
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No gain or loss will be recognized to a U.S. Holder of warrants on such
holder's purchase of the common stock for cash upon exercise of the warrants
other than any gain or loss attributable to the receipt of cash in lieu of a
fractional share of common stock upon exercise. The initial adjusted tax basis
of the common stock so acquired would be equal to the adjusted tax basis of the
exercised warrants plus the exercise price less any cash received in lieu of a
fractional share. For tax purposes, the holding period of the common stock
acquired upon the exercise of the warrants will not include the holding period
of the warrants.
A U.S. Holder who exercises warrants without payment of cash pursuant to a
cashless exercise will not recognize gain or loss upon such exercise, and a
U.S. Holder's basis in the common stock received in the cashless exercise will
equal such holder's basis in the warrants surrendered therefor. With respect to
a cashless exercise of a warrant, a U.S. Holder may be able to take the
position that the holding period of shares of common stock received in exchange
for the surrender of one or more warrants includes the holding period of the
warrants so surrendered.
An adjustment to the exercise price of the warrants, or the failure to make
an adjustment, in certain circumstances, may result in a constructive
distribution to the holders of the warrant that could be taxable as a dividend
under Section 305 of the Code. In that event, a holder's tax basis in the
warrant would increase by the amount of the dividend.
Payments on warrant registration default. We believe that if liquidated
damages are in fact paid to holders of warrants because of a warrant
registration default, the additional amounts so paid would be taxable to a U.S.
Holder as ordinary income in accordance with such holder's method of
accounting.
Tax Treatment of Common Stock Acquired on Exercise of a Warrant. Cash
distributed on common stock will be treated as a dividend to the extent of our
current and accumulated earnings and profits attributable to the distribution
as determined under U.S. federal income tax principles. If the amount of a
distribution exceeds our current and accumulated earnings and profits
attributable to the distribution, the distribution next will be treated as a
nontaxable return of capital and will be applied against and reduce your
adjusted tax basis in the common stock, but not below zero. If the distribution
exceeds both our current and accumulated earnings and profits attributable to
the distribution and your adjusted tax basis in your common stock, the excess
will be treated as capital gain and will be either long-term or short-term
capital gain depending on whether your holding period for that common stock is
or not more than one year.
Corporate holders of common stock generally should be eligible for the 70%
dividends-received deduction with respect to the portion of any distribution on
the stock taxable as a dividend. However, corporate investors should consider
certain provisions that may limit the availability of a dividends-received
deduction, including but not limited to the holding period rules of section
246(c) of the Internal Revenue Code, the rules of section 246A that reduce the
dividends-received deduction on dividends on certain debt-financed stock, and
the rules in section 1059 of the Internal Revenue Code that reduce the basis of
stock and may require recognition of taxable gain in respect of certain
extraordinary dividends, as well as the effect of the dividends-received
deduction on the determination of alternative minimum tax liability.
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If you sell or dispose of your common stock in a taxable transaction, you
will recognize capital gain or loss equal to the difference between the sum of
the cash and the fair market value of any property received and your tax basis
in the common stock. A U.S. Holder's tax basis in shares of common stock
acquired upon exercise of a warrant will be determined in the manner set forth
in "--U.S. Holders--Tax Treatment of Warrants" above. The gain or loss will be
long-term capital gain or loss if your holding period for your stock exceeds
one year. For corporate taxpayers, long-term capital gains are taxed at the
same rate as ordinary income. For individual taxpayers, net capital gains--the
excess of the taxpayer's net long-term capital gains over short-term capital
losses--are subject to a maximum tax rate of 20%. The deductibility of capital
losses is restricted and generally may be used only to reduce capital gains to
the extent thereof.
Information Reporting; Backup Withholding. We are required to furnish to
record holders of common stock, other than corporations and other exempt
holders, and to the Internal Revenue Service, information with respect to
dividends paid on the common stock.
Certain U.S. Holders may be subject to backup withholding at the rate of 31%
with respect to dividends paid on common stock or with respect to proceeds
received from a disposition of a warrant or a share of common stock. Generally,
backup withholding applies only if:
. the payee fails to furnish a correct taxpayer identification number to
the payor in the manner required or fails to demonstrate that it
otherwise qualifies for an exemption;
. the Internal Revenue Service notifies the payor that the taxpayer
identification number furnished by the payee is incorrect;
. the payee has failed to report properly the receipt of a "reportable
payment" on one or more occasions, and the Internal Revenue Service has
notified the payor that withholding is required; or
. the payee fails in certain circumstances, to provide a certified
statement, signed under penalties of perjury, that the taxpayer
identification number furnished is the correct number and that the holder
is not subject to backup withholding.
Backup withholding is not an additional tax but, rather, is a method of tax
collection. A U.S. Holder will be entitled to credit any amount withheld under
the backup withholding rules against its actual tax liability, provided the
required information is furnished to the Internal Revenue Service.
Non-U.S. Holders
The following discussion is limited to U.S. federal income and estate tax
consequences relevant to a Non-U.S. Holder. As used herein, a "Non-U.S. Holder"
is a beneficial owner of a warrant, or share of common stock acquired on
exercise of a warrant, that, for U.S. federal income tax purposes, is
. a nonresident alien individual;
. a corporation or partnership (or an entity treated as a corporation or
partnership) created or organized in or under the law of a country (or a
political subdivision thereof) other than the United States; or
. a foreign estate or trust, which generally is an estate or trust that is
not a U.S. Holder.
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For purposes of the withholding tax discussed below other than backup
withholding, a Non-U.S. Holder includes a nonresident fiduciary of an estate or
trust. This discussion does not address tax consequences relevant to an
expatriate or former long-term resident of the United States or to a person who
holds a warrant or share of common stock through a partnership. A person who
holds a warrant or share of common stock through a hybrid entity (that is, an
entity that is fiscally transparent for U.S. federal income tax purposes but
not for foreign tax purposes) may not be entitled to the benefits of a tax
treaty. For example, a person who is a partner in a foreign partnership or
beneficiary of a foreign trust or estate and who is subject to U.S. federal
income tax because of his own status, for example, as a U.S. resident or a
foreign person engaged in trade or business in the United States, may be
subject to U.S. federal income tax even though the foreign partnership, trust
or estate is not itself subject to U.S. federal income tax.
For purposes of the following discussion, "U.S. trade or business income" of
a Non-U.S. Holder generally means a dividend on common stock or gain on a sale,
exchange or retirement of a warrant or share of common stock if the dividend or
gain is
. effectively connected with a trade or business conducted by the Non-U.S.
Holder within the United States, and
. in most cases of a resident of a country with which the United States has
an income tax treaty, attributable to a permanent establishment (or fixed
base) of the Non-U.S. Holder in the United States.
Tax Treatment of Warrants. The cash exercise of a warrant will not, and the
cashless exercise of a warrant should not, be a taxable disposition of the
warrant for the exercising Non-U.S. Holder, except with respect to cash, if
any, received in lieu of a fractional share. The Internal Revenue Service may
argue, however, that the surrender of one or more warrants in payment of the
exercise price of another warrant upon a cashless exercise results in a taxable
disposition to the exercising Non-U.S. Holder in an amount equal to the
difference between the exercise price deemed paid and the tax basis in the
warrants surrendered as a payment of the exercise price. In general, a Non-U.S.
Holder will not be subject to U.S. federal income tax upon a taxable
disposition of a warrant, except as described in "Certain United States Federal
Income Tax Considerations--Non-U.S. Holders--Taxable Disposition of a Warrant
or Share of Common Stock" below.
An adjustment to the exercise price of the warrants, or the failure to make
an adjustment, in certain circumstances may result in a constructive
distribution to the holders of the warrants that could be taxable as a dividend
under Section 305 of the Code. In that event, a holder's tax basis in the
warrant would increase by the amount of the dividend.
Payments on warrant registration default. We believe that liquidated damages
paid in the case of a warrant registration default will be characterized as
ordinary income consistent with the discussion above under "--U.S. Holders--Tax
Treatment of Warrants--Payments on warrant registration default". A Non-U.S.
Holder will be subject to a 30% U.S. withholding tax on such payments, unless
such payments are income effectively connected with a United States trade or
business of the Non-U.S. Holder, in which case such payments would be subject
to U.S. federal income tax on a net basis unless exempt pursuant to a tax
treaty because such payments are not attributable to a U.S. permanent
establishment maintained by the Non-U.S. Holder.
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Dividends on Common Stock. If a warrant is exercised, a Non-U.S. Holder of
common stock generally will be subject to withholding of U.S. federal income
tax on actual or deemed dividend distributions at a 30% rate or a lower rate
that an applicable income tax treaty may specify. If a dividend were considered
to be income effectively connected with a Non-U.S. Holder's conduct of a United
States trade or business, the dividend would not be subject to this withholding
but, as described below, would be subject to U.S. federal income tax on a net
basis unless exempt pursuant to a tax treaty because it is not attributable to
a U.S. permanent establishment maintained by the Non-U.S. Holder. Non-U.S.
Holders should consult their tax advisors on their entitlement to benefits
under a relevant income tax treaty. For dividends paid after December 31, 2000,
a Non-U.S. Holder of common stock that claims the benefit of an income tax
treaty rate generally will be required to satisfy applicable certification and
other requirements. A Non-U.S. Holder of common stock that is eligible for a
reduced rate of U.S. withholding tax under an income tax treaty may obtain a
refund or credit of any excess amounts withheld by filing an appropriate claim
for a refund with the IRS.
Dividends that are U.S. trade or business income are generally subject to
U.S. federal income tax on a net income basis at graduated rates in the same
manner that a U.S. taxpayer is subject to tax and will be exempt from the
withholding tax described above. In the case of a Non-U.S. Holder that is a
corporation, U.S. trade or business income under circumstances also will be
subject to an additional branch profits tax at a 30% rate or, if applicable, a
lower treaty rate. To claim an exemption from withholding because a dividend is
U.S. trade or business income, a Non-U.S. Holder must satisfy applicable
certification and other requirements.
Taxable Disposition of a Warrant or Share of Common Stock. Subject to the
discussion below of backup withholding, you generally will not be subject to
U.S. federal income tax on any gain recognized upon a sale, redemption, lapse
or other taxable disposition of a warrant or upon a sale, exchange or other
taxable disposition of our common stock. However, you will be subject to
federal income tax on the gain if:
. the gain is U.S. trade or business income in which case, if you are a
foreign corporation or a foreign entity treated as a corporation, you may
also be subject to the branch profits tax at a 30% rate or, if
applicable, a lower treaty rate;
. you are a non-resident alien individual, you are present in the United
States for 183 or more days in the taxable year of disposition and either
(a) you have a "tax home" in the United States for U.S. federal income
tax purposes or (b) the gain is attributable to an office or other fixed
place of business you maintain in the United States; or
. we are a "United States real property holding corporation" within the
meaning of section 897(c) of the Internal Revenue Code, or we have been a
United States real property holding corporation at any time during the
shorter of the five year period ending on the date of your sale or other
disposition and the period you have held the warrant or common stock that
is sold or otherwise disposed of. We believe that we currently are not a
United States real property holding corporation, and we do not anticipate
becoming one. No assurance, however, can be provided that we will not
become a United States real property holding corporation in the future.
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A Non-U.S. Holder's tax basis in a warrant will be equal to the portion of
the holder's tax basis in a unit that is allocated to the note and the warrant
as described in "Certain United States Federal Income Tax Considerations--U.S.
Holders--Tax Treatment of Warrants" above. A Non-U.S. Holder's tax basis in
shares of common stock acquired upon exercise of a warrant will be determined
in the manner set forth in "--U.S. Holders--Tax Treatment of Warrants" above.
Federal Estate Tax. In the case of an individual who is not a citizen of the
United States and who is not domiciled in the United States at the time of
death,
. a warrant that is owned, or treated as owned, at the time of death may be
subject to U.S. federal estate tax, except as an applicable estate tax
treaty provides to the contrary; and
. a share of our common stock will be subject to U.S. federal estate tax,
except as an applicable estate tax treaty provides to the contrary.
In the case of an individual who is not a citizen of the United States but
who is domiciled in the United States at the time of death, a warrant and a
share of our common stock will be subject to U.S. federal estate tax,
regardless of whether the individual is not a resident of the United States,
except as an applicable estate tax treaty provides to the contrary.
Information Reporting; Backup Withholding. In the case of payments of
dividends on shares of our common stock, we generally must report to the
Internal Revenue Service the total amount of tax withheld from dividends
distributed to Non-U.S. Holders. In addition, we must report annually to the
Internal Revenue Service and to each Non-U.S. Holder the amount of dividends
distributed to and the tax withheld with respect to such holder. Backup
withholding generally will not apply to dividends distributed to Non-U.S.
Holders that are subject to the 30% withholding tax discussed above or that are
not so subject because a tax treaty applies that reduces or eliminates such
withholding.
Under temporary U.S. Treasury Department regulations, these information
reporting and backup withholding requirements will apply, however, to the gross
proceeds paid to a Non-U.S. Holder on the disposition of the warrants or shares
of common stock by or through a United States office of a United States or
foreign broker, unless the holder certifies to the broker under penalties of
perjury as to its name, address and status as a foreign person or the holder
otherwise establishes an exemption and provided that the broker does not have
actual knowledge that the holder is a United States person or that the
conditions of any other exemption are not in fact satisfied. Information
reporting requirements, but not backup withholding, will also apply to a
payment of the proceeds of a disposition of the warrants or shares of common
stock by or through a foreign office of a United States broker or foreign
brokers with certain types of relationships to the United States, unless such
broker has documentary evidence in its file that the holder of the warrants or
shares of common stock is not a United States person and such broker has no
actual knowledge to the contrary or the holder otherwise establishes an
exception. Neither information reporting nor backup withholding generally will
apply to a payment of the proceeds of a disposition of the warrants or shares
of common stock by or through a foreign office of a foreign broker that is not
subject to the preceding sentence.
The U.S. Treasury Department recently promulgated final regulations
regarding the withholding and information reporting rules relating to Non-U.S.
Holders discussed above. In general, the final
117
<PAGE>
regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The final regulations are
generally effective for payments made after December 31, 2000, subject to
certain transition rules. Non-U.S. Holders should consult their own tax
advisors with respect to the impact, if any, of the new final regulations.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or as a credit against the Non-U.S.
Holder's U.S. federal income tax liability, provided the requisite procedures
are followed.
118
<PAGE>
PLAN OF DISTRIBUTION
The warrants and the shares of our common stock issued upon the exercise of
the warrants offered hereby may be sold by the warrantholders from time to time
in:
. transactions in the over-the-counter market;
. negotiated transactions;
. underwritten offerings; or
. a combination of such methods of sale.
The warrantholders may sell the warrants and the shares of our common stock
issued upon the exercise of the warrants at:
. fixed prices which may be changed;
. market prices prevailing at the time of sale;
. prices related to prevailing market prices; or
. negotiated prices.
The warrantholders may effect these transactions by selling the warrants and
shares of our common stock issued upon the exercise of the warrants to or
through broker-dealers, and these broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the warrantholders
and/or the purchasers of the warrants for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
We are required to keep this registration statement effective until the
earlier of:
(1) July 15, 2010;
(2) the date on which all of the warrants shall have been exercised; or
(3) the date on which all of the warrants or shares of our common stock
issued upon exercise of the warrants can be sold without registration under
the Securities Act of 1933 and without restriction as to the manner, timing
or volume of any such sale.
However, as long as any affiliate of ours holds warrants or shares of our
common stock issued upon exercise of the warrants, we will be required to keep
this registration statement effective.
In order to comply with the applicable securities laws of particular states,
if applicable, the warrants and shares of our common stock will be sold in the
jurisdictions only through registered or licensed brokers or dealers. In
addition, in particular states, the warrants and shares of our common stock may
not be sold unless they have been registered or qualified for sale in the
applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
The warrantholders and any broker-dealers or agents that participate with
the warrantholders in the distribution of the warrants or the shares of our
common stock issued upon the exercise of the warrants may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, and
119
<PAGE>
any commissions received by them and any profit on the resale of the warrants
or the shares of our common stock issued upon the exercise of the warrants
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act of 1933.
Each warrantholder will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder, which
provisions may limit the timing of purchases and sales of shares of our common
stock by the warrantholders.
We will pay for all costs of the registration of the warrants, including,
without limitation, SEC filing fees and expenses of compliance with state
securities or "blue sky" laws; except that, the selling holders will pay all
underwriting discounts and selling commissions, if any. We have agreed to
indemnify the selling holders against particular civil liabilities, including
some liabilities under the Securities Act of 1933, or we will compensate them
for some of these liabilities incurred in connection therewith.
WHERE YOU CAN FIND MORE INFORMATION
As a result of our registration of our senior discount notes, we will be
subject to the periodic reporting and other informational requirements of the
Exchange Act of 1934. We will file annual, quarterly and special reports and
other information with the SEC. In addition, we have agreed pursuant to the
warrant agreement, whether or not we are required to do so by the rules and
regulations of the SEC, for so long as any warrants remain outstanding, to
furnish to the Warrant Agent and the holders of the warrants and file with the
SEC, unless the SEC will not accept such a filing,
. all quarterly and annual financial information that would be required to
be contained in a filing with the SEC on Forms 10-Q and 10-K if we were
required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by our certified
independent public accountants and
. all reports that would be required to be filed with the SEC on Form 8-K
if we were required to file such reports.
In addition, for so long as any of our senior discount notes remain
outstanding, we have agreed to make available to any prospective purchaser or
beneficial owner of any of those securities in connection with any sale
thereof, the information required by Rule 144A(d)(4) under the Securities Act.
We have filed a registration statement on Form S-1 with the SEC to register
under the Securities Act the resale of the warrants and the offer and sale of
the common stock issuable upon exercise of the warrants. This prospectus
constitutes a part of that registration statement. As allowed by the SEC's
rules, this prospectus does not contain all the information set forth in the
registration statement, certain parts of which have been omitted in accordance
with the rules and regulations of the SEC. Please refer to the registration
statement and related exhibits and schedules filed therewith for further
information with respect to us and the warrants and common stock offered
hereby. Statements contained herein concerning the provisions of any document
are not necessarily complete
120
<PAGE>
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the registration statement or otherwise filed by us with the SEC
and each such statement is qualified in its entirety by such reference.
You may read and copy any document we file at the SEC's public reference
rooms located at 450 5th Street, N.W., Washington, D.C. 20549, at 7 World Trade
Center, Suite 1300, New York, New York 10048 and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our
SEC filings are also available to the public from commercial document retrieval
services and at the web site maintained by the SEC at: http://www.sec.gov. This
information is available without charge upon written or oral request to:
iPCS, Inc.
1900 East Golf Road, Suite 900
Schaumburg, Illinois 60173
Attention: Chief Financial Officer
(847) 944-2900
You should rely only on the information provided in this prospectus or any
prospectus supplement. We have not authorized anyone else to provide you with
different information. We may not make an offer of the warrants and common
stock in any state where the offer is not permitted. The delivery of this
prospectus does not, under any circumstances, mean that there has not been a
change in our affairs since the date of this prospectus. It also does not mean
that the information in this prospectus is correct after this date.
LEGAL MATTERS
Mayer, Brown & Platt, Chicago, Illinois will pass upon the validity of, and
certain legal matters concerning, the warrants and common stock.
EXPERTS
The consolidated financial statements of iPCS, Inc. and Subsidiaries and
Predecessor as of September 30, 2000 and December 31, 1999, and for the nine-
month period ended September 30, 2000 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.
121
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
Index To Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................. F-1
Consolidated Balance Sheets as of September 30, 2000 and December 31,
1999.................................................................... F-2
Consolidated Statements of Operations for the Nine-Month Period Ended
September 30, 2000, for the Period from January 22, 1999 (date of
inception) through September 30, 1999 (unaudited) and for the Period
from January 22, 1999 (date of inception) through
December 31, 1999....................................................... F-3
Consolidated Statements of Redeemable Preferred Stock and Equity for the
Nine-Month Period Ended September 30, 2000 and for the Period from
January 22, 1999 (date of inception) through December 31, 1999.......... F-4
Consolidated Statements of Cash Flows for the Nine-Month Period Ended
September 30, 2000, for the Period from January 22, 1999 (date of
inception) through September 30, 1999 (unaudited) and for the Period
from January 22, 1999 (date of inception) through
December 31, 1999....................................................... F-5
Notes to Consolidated Financial Statements............................... F-6
</TABLE>
F-i
<PAGE>
INDEPENDENT AUDITORS' REPORT
iPCS, Inc.
Schaumburg, Illinois
We have audited the accompanying consolidated balance sheets of iPCS, Inc.
and Subsidiaries and Predecessor (the "Company") as of September 30, 2000 and
December 31, 1999, and the related consolidated statements of operations,
redeemable preferred stock and equity, and of cash flows for the nine-month
period ended September 30, 2000 and 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September
30, 2000 and December 31, 1999, and the results of its operations and its cash
flows for the nine-month period ended September 30, 2000 and for the period
from January 22, 1999 (date of inception) through December 31, 1999 in
conformity with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Davenport, Iowa
November 14, 2000, except for Note 18,
as to which the date is December 29, 2000
F-1
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $108,233 $ 2,733
Accounts receivable, less allowance: 2000--$169;
1999--$1........................................... 3,405 92
Other receivables................................... 180 39
Inventories......................................... 705 927
Prepaid expenses and other assets................... 2,691 432
-------- -------
Total current assets............................... 115,214 4,223
Property and equipment including construction in
progress, net....................................... 100,359 39,106
Financing costs, less accumulated amortization:
2000--$205; 1999--$66............................... 9,818 1,514
Intangible assets, net............................... 14,835 --
-------- -------
Total assets....................................... $240,226 $44,843
======== =======
<CAPTION>
Liabilities, Redeemable Preferred Stock and Equity
<S> <C> <C>
Current Liabilities:
Accounts payable.................................... $ 18,960 $ 3,839
Accrued expenses.................................... 1,473 393
Accrued interest.................................... -- 265
Deferred revenue.................................... 521 --
Advance on tower sales.............................. 1,250 2,000
-------- -------
Total current liabilities.......................... 22,204 6,497
Deferred gain on tower sales......................... 4,704 1,655
Accrued interest..................................... 2,827 --
Long-term debt....................................... 129,794 27,571
-------- -------
Total liabilities.................................. 159,529 35,723
-------- -------
Redeemable preferred stock, $0.01 par value;
75,000,000 shares authorized; 9,090,909 shares
issued and outstanding.............................. 47,268 --
-------- -------
Commitments and Contingencies
Equity:
Common stock, $0.01 par value; 300,000,000 shares
authorized; 44,869,643 shares issued and
outstanding........................................ 449 --
Additional paid in capital.......................... 79,403 --
Contributed capital--Predecessor Company............ -- 13,500
Unearned compensation............................... (6,041) --
Accumulated deficit................................. (40,382) (4,380)
-------- -------
Total equity....................................... 33,429 9,120
-------- -------
Total liabilities, redeemable preferred stock and
equity............................................ $240,226 $44,843
======== =======
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Period from For the Period from
January 22, 1999 January 22, 1999
For the Nine-Month (date of inception) (date of inception)
Period Ended through through
September 30, 2000 September 30, 1999 December 31, 1999
(Unaudited)
<S> <C> <C> <C>
Revenues:
Service................ $ 10,746 $ -- $ 71
Equipment and other.... 1,892 -- 144
---------- ---------- ----------
Total revenues........ 12,638 -- 215
---------- ---------- ----------
Operating Expenses:
Cost of service
(excluding non-cash
compensation of $106
in 2000).............. 9,981 531 1,695
Cost of equipment...... 5,097 -- 484
Selling (excluding non-
cash compensation of
$71 in 2000).......... 5,695 143 778
General and
administrative:
Non-cash compensation. 10,686 -- --
Taxes on non-cash
compensation......... 1,567 -- --
Other general and
administrative....... 4,694 844 1,520
Depreciation and
amortization.......... 5,549 16 381
---------- ---------- ----------
Total operating
expenses............. 43,269 1,534 4,858
---------- ---------- ----------
Loss from operations.... (30,631) (1,534) (4,643)
Other Income (Expense):
Interest income........ 1,949 56 89
Interest expense....... (6,259) (7) --
Other income........... 424 202 174
---------- ---------- ----------
Loss Before
Extraordinary Item..... (34,517) (1,283) (4,380)
Extraordinary item--loss
on early
extinguishment of debt. (1,485) -- --
---------- ---------- ----------
Net Loss................ $ (36,002) $ (1,283) $ (4,380)
========== ========== ==========
Loss before
extraordinary item..... $ (34,517) $ (1,283) $ (4,380)
Beneficial conversion
feature related to
redeemable preferred
stock.................. (46,387) -- --
Dividends and accretion
on redeemable preferred
stock.................. (881) -- --
---------- ---------- ----------
Loss available to common
stockholders........... (81,785) (1,283) (4,380)
Extraordinary item...... (1,485) -- --
---------- ---------- ----------
Net loss available to
common stockholders.... $ (83,270) $ (1,283) $ (4,380)
========== ========== ==========
Pro forma weighted
average common shares
outstanding
(unaudited)............ 44,869,643 44,869,643 44,869,643
========== ========== ==========
</TABLE>
Pro forma basic and
diluted loss per share
of common stock
(unaudited):
Loss available to
common stockholders
before extraordinary
item.................. $ (1.83) $ (0.03) $ (0.10)
Extraordinary item..... $ (0.03) -- --
Net loss available to
common stockholders... $ (1.86) $ (0.03) $ (0.10)
See notes to consolidated financial statements.
F-3
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Contributed
Redeemable Additional Capital -
Preferred Stock Common Stock Paid in Predecessor Unearned
Shares Amount Shares Amount Capital Company Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 22, 1999
(DATE OF INCEPTION)................. -- $ -- -- $-- $ -- $ -- $ --
Members' contributions.............. -- -- -- -- -- 13,500 --
Net loss............................ -- -- -- -- -- -- --
--------
BALANCE AT JANUARY 1, 2000........... -- -- -- -- -- 13,500 --
Members' contributions from January
1, 2000 to July 11, 2000........... -- -- -- -- -- 16,500 --
Issuance of 1.5% interest in
Predecessor Company to Mr. Yager... -- -- -- -- -- 8,480 --
Reorganization of Predecessor
Company to C Corporation........... -- -- 44,869,643 449 38,031 (38,480) --
Sale of redeemable preferred stock.. 9,090,909 46,387 -- -- -- -- --
Beneficial conversion feature
related to redeemable preferred
stock.............................. -- -- -- -- 46,387 -- --
Accretion of redeemable preferred
stock beneficial conversion
feature............................ -- -- -- -- (46,387) -- --
Accrued dividends on redeemable
preferred stock.................... -- 812 -- -- (812) -- --
Accretion to redemption amount of
redeemable preferred stock......... -- 69 -- -- (69) -- --
Grant of stock options.............. -- -- -- -- 8,247 -- (8,247)
Amortization of unearned
compensation....................... -- -- -- -- -- -- 2,206
Issuance of warrants in connection
with the senior discount notes..... -- -- -- -- 24,859 -- --
Issuance of warrants to Sprint PCS.. -- -- -- -- 9,147 -- --
Net loss............................ -- -- -- -- -- -- --
--------- ------- ---------- ---- -------- -------- --------
BALANCE AT SEPTEMBER 30, 2000........ 9,090,909 $47,268 44,869,643 $449 $ 79,403 $ -- $ (6,041)
--------------------------------------------------
========= ======= ========== ==== ======== ======== ========
<CAPTION>
Accumulated
Deficit
<S> <C>
BALANCE AT JANUARY 22, 1999
(DATE OF INCEPTION)................. $ --
Members' contributions.............. --
Net loss............................ (4,380)
-----------
BALANCE AT JANUARY 1, 2000........... (4,380)
Members' contributions from January
1, 2000 to July 11, 2000........... --
Issuance of 1.5% interest in
Predecessor Company to Mr. Yager... --
Reorganization of Predecessor
Company to C Corporation........... --
Sale of redeemable preferred stock.. --
Beneficial conversion feature
related to redeemable preferred
stock.............................. --
Accretion of redeemable preferred
stock beneficial conversion
feature............................ --
Accrued dividends on redeemable
preferred stock.................... --
Accretion to redemption amount of
redeemable preferred stock......... --
Grant of stock options.............. --
Amortization of unearned
compensation....................... --
Issuance of warrants in connection
with the senior discount notes..... --
Issuance of warrants to Sprint PCS.. --
Net loss............................ (36,002)
-----------
BALANCE AT SEPTEMBER 30, 2000........ $(40,382)
--------------------------------------------------
===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the
For the Period from
Period from January 22,
January 22, 1999 (date
For the Nine- 1999 (date of of
Month Period inception) inception)
Ended through through
September 30, September 30, December 31,
2000 1999 1999
(Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss............................. $(36,002) $ (1,283) $ (4,380)
Adjustments to reconcile net loss to
net cash flows from operating
activities:
Depreciation and amortization....... 5,549 -- 381
Loss on disposal of property and
equipment.......................... 56 -- --
Gain on tower sales................. (479) (202) (174)
Amortization of deferred gain on
tower sales........................ (180) (22)
Amortization of financing costs..... 234 16 --
Non-cash interest................... 2,322 -- --
Extraordinary loss on early
extinguishment of debt............. 1,485 -- --
Non-cash compensation............... 10,686 -- --
Changes in assets and liabilities:
Accounts receivable................ (3,313) (1) (92)
Other receivables.................. (141) -- (39)
Inventories........................ 222 -- (927)
Prepaid expenses and other assets.. (2,259) (306) (432)
Accounts payable, accrued expenses
and accrued interest.............. 9,395 618 1,758
Deferred revenue................... 521 -- --
-------- -------- --------
Net cash flows from operating
activities....................... (11,904) (1,158) (3,927)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures................. (64,741) (15,475) (39,331)
Microwave relocation costs........... (453) -- --
Intangible acquired in purchase of
network assets...................... (3,526) -- --
Proceeds from tower sales............ 8,500 2,500 4,500
Advance on tower sales............... -- 2,000 2,000
-------- -------- --------
Net cash flows from investing
activities....................... (60,220) (10,975) (32,831)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt......... 165,106 8,568 27,571
Repayment of Nortel debt............. (40,346) -- --
Debt issuance costs.................. (10,023) (1,580) (1,580)
Proceeds from sale of redeemable
preferred stock, net of offering
costs of $3,613..................... 46,387 -- --
Members' contributions............... 16,500 10,500 13,500
-------- -------- --------
Net cash flows from financing
activities....................... 177,624 17,488 39,491
-------- -------- --------
Increase in cash and cash equivalents. 105,500 5,355 2,733
Cash and cash equivalents at beginning
of period............................ 2,733 -- --
-------- -------- --------
Cash and cash equivalents at end of
period............................... $108,233 $ 5,355 $ 2,733
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS OPERATIONS
Illinois PCS, LLC was formed in January 1999 as an Illinois limited
liability company for the purpose of becoming a provider of wireless personal
communication services ("PCS"). On July 12, 2000, Illinois PCS, LLC (the
"Predecessor Company") reorganized its business into a C Corporation in which
members of the Predecessor Company received 44,869,643 shares of common stock
of iPCS, Inc. in exchange for their ownership interests in the Predecessor
Company. The ownership percentages among the members following the
reorganization remained consistent with the ownership percentages at December
31, 1999 as adjusted for the effects of the agreement described in Note 14. As
of July 12, 2000, the Predecessor Company merged with and into iPCS Wireless,
Inc., a wholly owned subsidiary of iPCS, Inc., and iPCS Equipment, Inc. was
also formed and is a wholly owned subsidiary of iPCS Wireless, Inc. iPCS
Wireless, Inc. will continue the activities of the Predecessor Company and, for
accounting purposes, this transaction was accounted for as a reorganization of
the Predecessor Company into a C Corporation. iPCS, Inc. and its subsidiaries,
including the Predecessor Company, are collectively referred to as the
"Company."
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, as amended, provide
the Company with the exclusive right to build, own and manage a wireless voice
and data services network in 35 basic trading areas ("BTAs") located in
Illinois, Iowa, Michigan and Nebraska under the Sprint PCS brand.
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.
In the notes to the consolidated financial statements, the nine-month period
ended September 30, 2000 is referred to as the "period ended September 30,
2000" and the period from January 22, 1999 (date of inception) through
December 31, 1999 is referred to as the "period ended December 31, 1999."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements of the Company include its
subsidiaries, iPCS Wireless, Inc. and iPCS Equipment, Inc., and the Predecessor
Company. All significant intercompany accounts or balances have been eliminated
in consolidation.
F-6
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Basis of Presentation of Unaudited Interim Financial Information:
The accompanying unaudited interim consolidated financial statements for the
period from January 22, 1999 (date of inception) through September 30, 1999
have been prepared in accordance with rules issued by the Securities and
Exchange Commission for preparing interim financial information and, therefore,
do not include all information and footnotes necessary for a presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. All adjustments, consisting of normal
recurring accruals, which, in the opinion of management, are necessary for a
fair presentation of financial position and results of operations have been
included.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
F-7
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 21 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 its construction in progress activities.
Interest capitalized for the periods ended September 30, 2000 and December 31,
1999 totaled approximately $1,467,000 and $471,000, respectively. 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.
Intangible Assets--Microwave Clearing Costs:
Microwave clearing costs represent costs incurred to relocate incumbent
carriers from Sprint PCS' spectrum. In accordance with the Sprint PCS
agreement, the Company reimburses Sprint PCS 50% of these microwave clearing
costs. The Company amortizes the microwave relocation costs over the remaining
term of the Sprint PCS agreement.
Income Taxes:
Prior to July 12, 2000, the Predecessor Company operated as a limited
liability company ("LLC") and, as result, its losses were included in the
income tax returns of its members. Therefore, the accompanying consolidated
financial statements do not include any income tax amounts prior to July 12,
2000. Subsequent to July 12, 2000, the date of reorganization as discussed in
Note 1, the Company became a C Corporation and began accounting for income
taxes in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." Deferred income taxes are provided for
the tax consequences in future years of temporary differences between the tax
basis of assets and liabilities and their financial reporting amounts, based on
enacted tax laws and tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. Income tax expense is the tax payable for the year and
the change during the period in deferred tax assets and liabilities. The
Company has not provided any pro forma income tax information because any net
deferred tax asset would have been offset by a full valuation allowance due to
the Company's losses since inception.
F-8
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the Company's territory, excluding outbound roaming,
and from non-Sprint PCS subscribers who roam onto the Company's 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 the Company's territory are not subject to the 8% affiliation
fee.
Sprint PCS pays the Company a Sprint PCS roaming fee for each minute that a
Sprint PCS subscriber based outside of the Company's territory roams onto the
Company's network. Revenues from these services are recognized as the services
are performed. Similarly, the Company pays roaming fees to Sprint PCS when a
Sprint PCS subscriber based in the Company's territory roams on the Sprint PCS
network outside of the Company's territory. These costs are included as cost of
services when incurred.
Equipment revenues consisting of proceeds from sales of handsets and
accessories are recorded net of an allowance for sales returns. The allowance
is estimated based on Sprint PCS' handset return policy, which allowed
customers to return handsets for a full refund within 14 days of purchase at
September 30, 2000 and within 30 days of purchase at December 31, 1999. 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 $2,637,000 and $171,000 for the periods
ended September 30, 2000 and December 31, 1999, respectively.
F-9
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Stock Compensation:
As allowed by SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123"), the Company has chosen to account for compensation expense
associated with its stock option plan in accordance with Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. The Company will disclose pro forma net loss as if
compensation expense had been determined consistent with SFAS No. 123.
Comprehensive Income:
A statement of comprehensive income has not been included in the
accompanying consolidated financial statements since the Company does not have
any "Other Comprehensive Income" to report.
Accretion on Redeemable Preferred Stock:
Up to the date of redemption, the Company accretes the carrying value of the
redeemable preferred stock to the redemption amount by the effective interest
method.
Cumulative Dividends on Redeemable Preferred Stock:
Cumulative dividends on the redeemable preferred stock are recorded as a
charge to additional paid-in-capital and an increase to the carrying value of
the Redeemable Preferred Stock as the dividends are earned by the holders.
Pro Forma Loss Per Share (Unaudited):
Pro forma basic and diluted loss per share are calculated by dividing the
net loss available to common stockholders by the pro forma weighted average
number of shares of common stock of iPCS, Inc. as if the shares of common stock
of iPCS, Inc. into which the Predecessor Company's members' interests were
converted had been outstanding for all of the periods presented. The
calculation was made in accordance with SFAS No. 128, "Earnings Per Share." The
pro forma basic and diluted loss per share are the same because the inclusion
of the incremental potential common shares from any assumed conversion of
redeemable preferred stock or exercise of options and warrants is antidilutive.
F-10
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Potential common shares excluded from the pro forma loss per share
computations because they were antidilutive are as follows:
<TABLE>
<S> <C>
Convertible preferred stock..................................... 9,090,909
Options......................................................... 1,556,000
Warrants........................................................ 4,134,637
----------
Total......................................................... 14,781,546
==========
</TABLE>
Recently Issued Accounting Pronouncements:
In June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," an amendment of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal years
beginning after June 15, 2000. The Company is currently evaluating the impact
of adoption of SFAS No. 133 and SFAS No. 138. The adoption is not expected to
have a material effect on the Company's results of operations, financial
position, or cash flows.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board Opinion 25" ("Opinion 25"). FIN
44 clarifies (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000; however, certain conclusions in
this FIN 44 cover specific events that occur after either December 15, 1998, or
January 12, 2000. To the extent that FIN 44 covers events occurring during the
period after December 15, 1998, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying FIN 44 will be recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 will not have a
material effect on the Company's results of operations, financial position, or
cash flows.
On December 3, 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This bulletin specifically addresses revenue recognition
requirements for nonrefundable fees, such as activation fees, collected by a
company upon entering into an arrangement with a customer, such as an
arrangement to provide telecommunications services. On June 26, 2000, the SEC
released SAB 101B, which delays the required implementation of SAB 101 until no
later than the fourth quarter of fiscal years ending on or after December 31,
2000. The Company does not expect the effects of this bulletin to have a
material effect on the Company's results of operations, financial position, or
cash flows.
F-11
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED 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 non-Sprint 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-12
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED 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 for the periods ended September
30, 2000 and December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Period Ended Period Ended
September 30, December 31,
2000 1999
<S> <C> <C>
Amounts included in the Consolidated
Statements of Operations:
Cost of service............................. $4,475 $115
Cost of equipment........................... 5,023 222
Selling expense............................. 695 81
General and administrative expense.......... 22 7
Amount included in the Consolidated
Balance Sheets:
Inventory................................... 668 918
</TABLE>
F-13
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amounts due from and due to Sprint PCS are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
Due from Sprint PCS............................. $3,664 $ 92
Due to Sprint PCS............................... 4,834 663
</TABLE>
4. PROPERTY AND EQUIPMENT INCLUDING CONSTRUCTION IN PROGRESS
Property and equipment including construction in progress consists of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
Network assets................................. $ 65,576 $22,737
Computer equipment............................. 1,435 675
Furniture, fixtures, office equipment and
leasehold improvements........................ 2,539 626
-------- -------
Total property and equipment................... 69,550 24,038
Less accumulated depreciation and amortization. (5,541) (315)
-------- -------
Property and equipment, net.................... 64,009 23,723
Construction in progress (network build-out)... 36,350 15,383
-------- -------
Property and equipment including construction
in progress, net.............................. $100,359 $39,106
======== =======
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
2000
<S> <C>
Exclusive provider rights which arose with the issuance of
warrants to Sprint PCS (see Note 6)....................... $ 9,147
Exclusive provider rights which arose with the purchase of
assets from Sprint PCS (see Note 6)....................... 3,526
Microwave clearing costs................................... 2,337
-------
Total intangible assets.................................... 15,010
Less accumulated amortization.............................. (175)
-------
Intangible assets, net..................................... $14,835
=======
</TABLE>
F-14
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. AMENDMENT TO SPRINT PCS AGREEMENT
On March 8, 2000, the Company entered into an amendment to the Sprint PCS
agreements to expand its service area to include 20 BTAs located in Michigan,
Iowa and Nebraska (the "Expansion"). In connection with the Expansion, the
Company agreed to purchase certain network assets under construction in three
BTAs in Michigan, for a purchase price to be determined on the closing date
based upon the assets to be purchased and the stage of completion of those
assets as of the closing date. In addition, in connection with the Expansion,
the Company was granted an option, exercisable by the Company at any time prior
to January 31, 2001, to add the Iowa City and Cedar Rapids, Iowa BTAs to its
service area, for an initial purchase price of $25.2 million escalating monthly
to a purchase price of $28.8 million if the option is exercised during January
2001. The purchase price is subject to an upward adjustment based upon the
number of subscribers in the two additional markets at the option exercise
date. As consideration to be the exclusive provider of Sprint PCS services in
the Expansion territory, the Company committed to grant to Sprint PCS a warrant
to acquire 2% of the equity of the Company at the earliest of July 15, 2000,
the closing of an initial public offering, or the consummation of a private
placement of equity in an amount equal to at least $70.0 million. In connection
with the closing of the sale of the convertible preferred stock discussed in
Note 13, the Company issued Sprint PCS a warrant to acquire 1,151,938 shares of
common stock of the Company on July 12, 2000 at an exercise price of $4.95 per
share. The warrants are exercisable by Sprint PCS beginning on or after July
15, 2001 and expiring on July 15, 2007. The fair value of the warrants, as
determined using the Black-Scholes model, was approximately $9.1 million and
was recorded as an increase to paid in capital with a corresponding amount
recorded as an intangible asset representing the right to be the exclusive
provider of Sprint PCS services in the Expansion territory. Such intangible
asset is being amortized over a life of 18.5 years, which is the remaining term
of the Sprint PCS agreement. The fair value of the warrants was calculated
using the following assumptions:
(1) risk free interest rate of 6.35%;
(2) stock price based on a planned initial public offering;
(3) dividend yield of 0%;
(4) life of 7 years; and
(5) volatility of 40%.
Also, on July 12, 2000 the Company purchased the assets under construction
in Michigan from Sprint PCS for approximately $12.7 million. The Company
allocated approximately $9.2 million of the purchase price to property based on
the fair value of the assets acquired, with the excess amount of $3.5 million
allocated to the intangible asset representing the right to be the exclusive
provider of Sprint PCS services in Michigan. The intangible asset is being
amortized over a life of 18.5 years, which is the remaining term of the Sprint
PCS agreement.
F-15
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. DEFERRED GAIN ON TOWER SALES
On May 28, 1999 the Company signed a tower sale and leaseback agreement with
American Tower Corporation ("American Tower"). Under the agreement, the Company
will locate sites for, develop and construct between sixty and eighty wireless
communication towers and then sell the towers to American Tower. The term of
this agreement will expire at the earliest of the final tower sale or December
31, 2000. The purchase price of each tower is $250,000. At September 30, 2000,
a total of fifty-five towers have been sold to American Tower.
In 1999, American Tower advanced $2.0 million to the Company for the
purchases of the fifty-third through sixtieth towers. Should the Company not
construct and sell the required number of towers to American Tower by December
31, 2000, the Company will be required to repay the advance plus accrued
interest at 5%. The Company sold the fifty-third, fifty-fourth and fifty-fifth
towers. Accordingly, the advance on tower sales was reduced by approximately
$0.8 million and the advance on tower sales at September 30, 2000 is
approximately $1.2 million.
During the nine-month period ended September 30, 2000, thirty-seven towers
were sold to American Tower for approximately $9.3 million, resulting in a gain
of approximately $3.7 million, of which approximately $0.5 million was
recognized at the time of the sale and the remainder was deferred and is being
amortized as a reduction to rental expense over the initial lease term of ten
years. 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 to rental expense over the
initial lease term of ten years.
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.
8. INCOME TAXES
Because the Predecessor Company was a nontaxable entity, the results
presented below relate solely to the period from July 12, 2000 to September 30,
2000.
The income tax expense (benefit) for the period differed from the amounts
computed by applying the statutory U.S. Federal income tax rate of 35% as set
forth below:
<TABLE>
<CAPTION>
Period Ended
September 30,
2000
<S> <C>
U.S. Federal statutory rate.................................. 35.00 %
Change in valuation allowance for deferred tax assets........ (35.00)%
------
Effective tax rate........................................... 0.00 %
======
</TABLE>
F-16
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of significant temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
2000
<S> <C>
Deferred tax assets:
Nondeductible accrued liabilities.......................... $ 375
Deferred transaction costs................................. 795
Nondeductible compensation expense......................... 948
Deferred gain on tower sales............................... 2,023
Net operating loss carryforward............................ 5,490
Other...................................................... 76
-------
Total gross deferred tax assets............................. 9,707
Less valuation allowance.................................... (5,830)
-------
Net deferred tax assets..................................... 3,877
-------
Deferred tax liabilities:
Intangible assets.......................................... (30)
Capitalized interest....................................... (793)
Property and equipment..................................... (2,452)
Other...................................................... (602)
-------
Total gross deferred tax liabilities........................ (3,877)
-------
Net deferred tax liabilities................................ $ --
=======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. No benefit for federal
income taxes has been recorded for the period ended September 30, 2000 as the
net deferred tax asset generated, primarily from temporary differences related
to the net operating loss carryforwards, was offset by a full valuation
allowance because it is not considered more likely than not that these benefits
will be realized due to the Company's losses since inception. At September 30,
2000, the Company has net operating loss carry forwards for federal income tax
purposes of approximately $12.8 million which are available to offset future
taxable income through 2020.
9. DEBT
Senior Discount Notes and Warrants
On July 12, 2000, the Company issued 300,000 units consisting of $300.0
million 14% senior discount notes due July 15, 2010 (the "Notes") and warrants
to purchase 2,982,699 shares of common stock. The warrants become exercisable
at any time after July 15, 2001 for a period of ten years from the date of
issuance. The Notes were issued at a substantial discount such that the Company
received gross proceeds from the issuance of the units of approximately $152.3
million. On
F-17
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
July 15, 2005 the Company will begin accruing cash interest on the principal
amount of the Notes at the rate of 14% per annum, compounded semi-annually,
payable beginning January 15, 2006, and on each January 15 and July 15
thereafter. The Company is amortizing the discount on the Notes as interest
expense over the period from date of issuance to the maturity date utilizing
the effective interest method. For the period ended September 30, 2000, the
Company recorded approximately $1.8 million, net of capitalized interest of
approximately $0.3 million, as interest expense related to the amortization of
the discount and recorded accrued interest of approximately $2.8 million
utilizing the effective interest method.
The Notes are a general unsecured obligation, subordinated in right of
payment to all senior debt, including all obligations under the credit
facility. The Notes Indenture contains covenants which restrict the Company's
ability to incur additional indebtedness, pay dividends, merge, dispose of its
assets, and certain other matters as defined in the Indenture. During the first
36 months, the Company may redeem up to 35% of the Accreted Value of Notes (as
defined in the Notes agreement) at a redemption price of 114% with the net cash
proceeds of one or more equity offerings excluding the first $70.0 million of
equity offerings. After July 15, 2005, the Notes may be redeemed at a price of
107% beginning in 2005, 105% beginning in 2006, 102% beginning in 2007 and 100%
thereafter. Upon a change in control as defined in the Notes agreement, the
Company will be required to make an offer to purchase the Notes at a price
equal to 101% of the Accreted Value of Notes (as defined in the Notes
agreement) on any purchase date prior to July 15, 2005 or 101% of the aggregate
principal amount therefor, plus accrued and unpaid interest and Liquidated
Damages (as defined in the Notes agreement), if any, to the date of purchase if
on or after July 15, 2005.
The Company allocated approximately $24.9 million to the fair value of the
warrants, as determined by using the Black-Scholes model, and recorded a
discount on the Notes, which is being recognized as interest expense over the
period from date of issuance to the maturity date. For the period ended
September 30, 2000, the Company recorded approximately $0.3 million as interest
expense related to the amortization of the value of the warrants.
The fair value of the warrants was calculated using the following
assumptions:
(1) risk free interest rate of 6.35%;
(2) stock price based on a planned initial public offering;
(3) dividend yield of 0%;
(4) life of 10 years; and
(5) volatility of 40%.
The Company incurred approximately $6.1 million of costs associated with the
issuance of the Notes. Those costs consisted of investment banker fees, legal
fees and other issuance costs that have been capitalized and are being
amortized to interest expense using the effective interest method over the term
of the Notes.
F-18
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Nortel Credit Facility
Effective May 14, 1999, the Company entered into a credit facility agreement
(the "Nortel Credit Facility") with Nortel Networks Inc. ("Nortel"). The
proceeds were used to purchase equipment and to fund the construction of the
Company's portion of the Sprint PCS network. The financing terms permitted the
Company 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 required minimum equipment purchases of $32 million (see Note 11).
The Company could 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 were based on the
Libor rate plus 4 percent (10% at December 31, 1999). Accrued interest was
generally payable quarterly. Interest incurred and capitalized for the period
ended December 31, 1999 totaled $471,000. The Company had outstanding
borrowings under the Nortel Credit Facility of approximately $27.6 million at
December 31, 1999.
On July 12, 2000, the Nortel Credit Facility was repaid in full with the
proceeds from the issuance of the Notes. In connection with the early
extinguishment of the Nortel Credit Facility, the Company recorded an
extraordinary loss of approximately $1.5 million related to the write-off of
the unamortized deferred financing costs at July 12, 2000.
An unused facility commitment fee ranging from 0.75% to 1.5% on the daily
average unused portion of the Nortel Credit Facility was due on a quarterly
basis. The commitment fee expense for the periods ended September 30, 2000 and
December 31, 1999 was approximately $81,000 and $81,000, respectively.
For the period ended December 31, 1999, the Company incurred approximately
$1.6 million of a loan origination fee and debt issue costs associated with
obtaining the Nortel Credit Facility which was capitalized.
Senior Secured Credit Facility
On July 12, 2000, the Company entered into an amended and restated credit
facility with Toronto Dominion (Texas), Inc. and GE Capital Corporation for a
$140.0 million senior secured credit facility ("credit facility") to replace
the Nortel Credit Facility. The credit facility permits the Company to borrow
up to $140.0 million through two tranches (Tranche A--$90.0 million and Tranche
B--$50.0 million) upon the Company meeting certain conditions, including a sale
of equity securities with gross proceeds of at least $70.0 million. The credit
facility contains certain financial ratios and other financial conditions
similar to the Nortel Credit Facility and is collateralized by all of the
Company's assets and assignment of the Sprint PCS Agreements. Since the Company
has not met the condition of a sale of equity securities, no amounts have been
available to be borrowed under this credit facility as of September 30, 2000.
F-19
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commencing March 31, 2004, and on the last day of each calendar quarter
ending during the periods set forth below, the Tranche A commitment as of
March 30, 2004 shall be automatically and permanently reduced by the
percentage amount set forth below for the quarters indicated:
. for the four quarters commencing with the fiscal quarter ending March
31, 2004, 2.50% per quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.50% per quarter.
The Tranche B commitment shall be automatically and permanently reduced (i)
to $25,000,000 on December 31, 2000 unless the aggregate amount of Tranche B
loans outstanding on December 31, 2000 is greater than or equal to $25,000,000
and (ii) by the amount of any available Tranche B commitment as of and on June
30, 2001.
Commencing March 31, 2004, the Company must begin to repay, in quarterly
installments, the principal on all borrowings outstanding as of March 30, 2004
made under the Tranche B commitment. A fixed percentage on all Tranche B
borrowings will be due each quarter as follows:
. for the first four quarters commencing with the fiscal quarter ending
March 31, 2004, 2.50% of the principal balance of the loan is due per
quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.50% per quarter.
If the Company borrows the maximum amount under Tranche B, the aggregate
amount required to be repaid for each of the four periods above will be $5.0
million, $7.5 million, $25.0 million, and $12.5 million, respectively.
Any principal that has not been paid by the maturity date, June 30, 2008,
is due at that time.
The Company may voluntarily prepay any of the loans at any time. Tranche A
permits reborrowings on a revolving basis but amounts repaid under Tranche B
may not be reborrowed.
The Company will have to make mandatory prepayments under certain
circumstances, including among others:
. 50% of the Company's excess annual cash flow as computed under the
senior secured credit agreement, commencing April 30, 2004 with respect
to the fiscal year ending December 31, 2003;
. Any amount in excess of $1.0 million per calendar year received as net
proceeds of asset sales outside the ordinary course of business or
insurance proceeds subject to certain exceptions, to the extent not
reinvested in property or assets within a stated period of time;
F-20
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. 50% of the net proceeds of any equity issuance excluding the committed
issuance of the convertible preferred stock, an initial public offering
and any offering to a borrower or guarantor party to the senior secured
financing; and
. 100% of the net proceeds of a debt issuance excluding permitted
indebtedness.
All prepayments described above are applied to the outstanding loan balances
pro rata between Tranche A and Tranche B and pro rata across the maturities.
From the date of the senior secured credit agreement through and including
the date on which earnings before interest, taxes and depreciation and
amortization ("EBITDA") is greater than zero for two consecutive fiscal
quarters, the Company may borrow money at the lesser of either:
. A base rate loan with an interest rate equal to 2.75% plus the higher
of:
. The prime rate of the Toronto-Dominion Bank, New York Branch or
. The federal funds effective rate plus 0.5%; or
. A Eurodollar loan with an interest rate equal to the London interbank
offered rate, plus 3.75%.
After the date of which EBITDA is greater than zero for two consecutive
fiscal quarters, the base rate margin will range from 2.750% to 2.250% and the
Eurodollar loan margin will range from 3.75% to 3.250%, depending upon the
leverage ratio as of the most recently ended fiscal quarter.
The Company incurred approximately $4.0 million of costs associated with
obtaining the credit facility. Those costs consisted of loan origination fees,
legal fees and other debt issuance costs that have been capitalized and are
being amortized to interest expense using the effective interest method over
the term of the credit facility.
An unused facility commitment fee ranging from 1.0% 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 September 30, 2000 was
approximately $473,000.
As a condition of the credit facility, Sprint PCS has entered into a consent
and agreement with the lenders 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 the lenders. 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 credit facility is satisfied or
the Company's assets are sold pursuant to the terms of the consent and
assignment with the lenders.
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 September 30, 2000, the Company was in compliance
with those covenants.
F-21
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. LEASE COMMITMENTS
The Company is obligated under noncancelable operating lease agreements for
offices, stores, network equipment space and cell sites. At September 30, 2000,
the future minimum annual lease payments under these noncancelable operating
lease agreements are as follows (in thousands):
<TABLE>
<S> <C>
September 30,
2001.............................................................. $ 4,132
2002.............................................................. 4,152
2003.............................................................. 3,916
2004.............................................................. 3,310
2005.............................................................. 2,304
Thereafter........................................................ 7,593
-------
Total............................................................ $25,407
=======
</TABLE>
Rental expense was approximately $1,742,000 and $446,000 for the periods
ended September 30, 2000 and December 31, 1999, respectively, of which
approximately $40,000 and $31,000, respectively, was paid to one of the
Company's stockholders/members. Included in minimum lease commitments is
approximately $487,000 and $527,000 for the periods ended September 30, 2000
and December 31, 1999, respectively, payable to one of the Company's
stockholders/members.
11. PURCHASE COMMITMENTS
On May 24, 1999 the Company entered into a three-year $32 million agreement
with Nortel for the purchase of network equipment and infrastructure, including
switches and base station controllers. On July 11, 2000 the amount was
increased from $32 million to $60 million. Nortel did provide financing to the
Company until July 12, 2000 for these purchases pursuant to the Nortel Credit
Facility discussed in Note 9. 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. As of September 30, 2000, the Company has a remaining commitment to
purchase approximately $19.8 million of equipment and services from Nortel.
In July 2000 the Company entered into an equipment purchase agreement with
Lucent Technologies Inc. ("Lucent") for the purchase of network equipment and
infrastructure which includes one switch and 100 base station controllers for
the Michigan markets within the first year of the agreement and an additional
32 base station controllers during the second year. In addition, the Company
has agreed to use Lucent's equipment exclusively in the construction of the
Company's network located within the state of Michigan. As of September 30,
2000, the Company has purchased approximately $4.2 million of equipment and has
a remaining commitment to purchase
F-22
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately $13.0 million of equipment. The Company has entered into this
agreement with Lucent as an additional affiliate of Sprint PCS and is subject
to the terms and conditions of a procurement and services contract between
Lucent and an affiliate of Sprint PCS which will expire on January 31, 2006.
12. 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
$28,000 and $14,000 for the periods ended September 30, 2000 and December 31,
1999, respectively.
13. REDEEMABLE PREFERRED STOCK
Contemporaneously with the issuance of the 300,000 units discussed in Note
9, the Company issued to an investor group 9,090,909 shares of Series A-1
convertible participating preferred stock ("Series A-1 preferred stock") at a
purchase price of $5.50 per share, yielding gross proceeds of $50.0 million.
Each share of Series A-1 preferred stock is convertible into one share of
common stock. In addition, the investor group has agreed to purchase 14,000,000
shares of Series A-2 preferred stock at a purchase price of $5.00 per share,
subject to certain conditions, unless the Company completes a public offering
yielding gross proceeds of $30.0 million or more prior to December 31, 2000.
The holders of Series A-1 preferred stock have conversion rights and voting
rights of common stockholders on an as-converted basis. Each share of Series A-
1 preferred stock shall automatically convert into common stock under certain
conditions including a public offering of securities with gross proceeds of $50
million or a change of control. In the event that the Company has not completed
an initial public offering of common stock or consummated a business
transaction meeting certain criteria by the fifth anniversary of the
investment, the investor group has the right to request the Company to
repurchase the Series A-1 preferred stock at fair market value, unless the
Company's Board of Directors determines, in its sole discretion, that it is not
in the Company's best interests to do so, whereupon the investor group would
have the right to force a sale of the Company subject to the rights of Sprint
and Sprint PCS under the Sprint PCS Agreements. The Series A-1 preferred stock
has a mandatory redemption for cash at an amount equal to the stated value plus
accrued dividends on July 12, 2011. The Company accretes the carrying value of
the Series A-1 preferred stock (net of offering costs incurred) to the
redemption amount by the effective interest method. During the period ended
September 30, 2000, the Company recorded approximately $69,000 of accretion on
the Series A-1 preferred stock.
The Company allocated the entire net proceeds received from the issuance of
Series A-1 preferred stock of approximately $46.4 million to the beneficial
conversion feature on the issuance of
F-23
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Series A-1 preferred stock. The beneficial conversion feature was calculated at
the issuance date of the Series A-1 preferred stock based on the difference
between the conversion price of $5.50 per share and estimated fair market value
of the common stock at that date. This amount, however, was limited to the
proceeds received from issuing the beneficial convertible security. As the
Series A-1 preferred stock was immediately convertible, the Company also
recorded accretion of approximately $46.4 million to additional paid-in
capital.
The Series A-1 preferred stock bears cumulative dividends, whether or not
declared, at the rate of 7.5% of the preferred liquidation preference per year
and, when paid, shall be paid only in additional shares of Series A-1 preferred
stock. Dividends shall accumulate and compound semi-annually. The preferred
liquidation preference is equal to $5.50 per share plus any accrued but unpaid
dividends on such share of Series A-1 preferred stock. Dividends on each share
shall accrue on a daily basis and be cumulative from the date of original
issue. If there is a public offering prior to December 31, 2000 of at least
$50.0 million and the price per share is $11.00 per share, then the dividends
on the Series A-1 preferred stock will be cancelled. During the period ended
September 30, 2000, the Company recorded approximately $0.8 million for accrued
dividends on Series A-1 preferred stock as a charge to additional paid in
capital.
In addition to the 7.5% dividend, when and if the Board of Directors
declares a dividend payable with respect to the then outstanding shares of
common stock, the holders of the Series A-1 preferred stock shall be entitled
to the amount of dividends per share as would be payable on the number of
shares of our common stock into which such shares of Series A-1 preferred stock
could then be converted. Upon the occurrence of a change of control prior to
July 12, 2005, the Company will be obligated to pay a special dividend to each
holder of Series A-1 preferred stock (except as to any changes of control in
connection with a business combination with a private company as to which the
investor group waives its right to receive such dividend) in an amount equal to
the amount of all unpaid dividends that would have been payable through July
12, 2005.
14. EQUITY
The Predecessor Company was organized as a LLC and, as such, had no
outstanding stock. Owners (members) actually held a membership interest in the
LLC. As a result, the investment of those members in the Predecessor Company is
reflected as Contributed Capital--Predecessor Company in the accompanying
consolidated balance sheet and consolidated statement of redeemable preferred
stock and equity as of December 31, 1999.
On March 12, 1999, the Company entered into a management agreement (the
"Management Agreement") with Mr. Yager to act as the Manager of the Predecessor
Company. The Management Agreement entitled Mr. Yager to a cash bonus equal to
2.5% of the fair market value of the Company in the event of a Transfer (as
defined in the Management Agreement) of all or substantially all of the assets
of the Company, or 2.5% of the fair market value of any transferred interests
in the Company, in excess of the applicable member's cumulative contributions.
Effective as of February 29, 2000, Mr. Yager and the Company agreed to
terminate the Management Agreement,
F-24
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and in exchange therefor Mr. Yager received a 1.5% ownership interest in the
Predecessor Company. In addition, the Company paid the withholding tax
obligation arising by reason of the issuance of the 1.5% ownership interest to
Mr. Yager, and the federal and state taxes on the issuance of the ownership
interest and payment of the withholding tax obligation. Based upon the expected
offering price of the initial public offering as determined on April 24, 2000,
the Company recorded non-cash compensation expense of approximately $8.5
million related to the ownership interest granted and recorded general and
administrative expense of approximately $1.6 million related to taxes paid by
the Company on behalf of Mr. Yager for the period ended September 30, 2000.
On July 11, 2000, the Board of Directors approved the amended and restated
2000 Long Term Incentive Stock Plan. Under the plan, the Company may grant
stock options, stock appreciation rights, shares of common stock and
performance units to employees, consultants and directors. The total number of
shares of common stock that can be awarded under the plan is 6,500,000 shares,
which will be increased on December 31 of each year beginning on December 31,
2000 by a number of shares equal to 1% of the number of shares then
outstanding, up to maximum of 8,000,000. On July 12, 2000, the Board of
Directors granted options to members of management, employees and directors to
acquire 1,558,750 shares of common stock with an exercise price of $5.50 per
share.
At September 30, 2000, the following is a summary of options outstanding and
exercisable:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <C> <C>
Outstanding at beginning of period..................... -- $--
Granted............................................... 1,558,750 5.50
Exercised............................................. -- --
Forfeited............................................. (2,750) 5.50
--------- ----
Outstanding at end of period........................... 1,556,000 5.50
========= ====
Options exercisable.................................... 390,702
Weighted-average remaining contractual life............ 9.8 years
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for its employee and
director stock options. Compensation expense is determined as the excess of the
fair value of the Company's common stock at date of grant over the exercise
price. Based upon the expected offering price of a planned initial public
offering, the Company recognized total unearned compensation expense of
approximately $8.3 million related to these grants on July 12, 2000. This
amount is being amortized as compensation expense over the vesting period of
the options; such vesting period begins on the employee's date of hire and
extends for four years. For directors and all future grants to employees, the
vesting period begins on the date of grant and extends for four years. Total
non-cash compensation expense related to such options was approximately $2.2
million for the period ended September 30, 2000.
F-25
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
If compensation expense for the stock option grants had been determined
based on fair value at the grant date consistent with the requirements of SFAS
No. 123, "Accounting for Stock Based Compensation," the Company's net loss
applicable to common stockholders and net loss per share would have been the
pro forma amounts indicated below for the period ended September 30, 2000:
<TABLE>
<S> <C>
Net loss applicable to common stockholders:
As reported................................................ $(83,269,695)
Pro forma.................................................. $(83,902,022)
Basic and diluted loss per common share:
As reported................................................ $ (1.86)
Pro forma.................................................. $ (1.87)
</TABLE>
The Company's calculation of fair value of the options was made using the
Black-Scholes model with the following assumptions:
(1) risk free interest rate of 6.35%;
(2) stock price based on a planned initial public offering;
(3) dividend yield of 0%;
(4) life of 4 years; and
(5) volatility of 40%.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made pursuant to SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments." Fair value estimates are subject to inherent
limitations. Estimates of fair value are made at a specific point in time,
based on relevant market information and information about the financial
instrument. The estimated fair values of financial instruments are not
necessarily indicative of amounts the Company might realize in actual market
transactions. Estimates of fair value are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates. The carrying amounts at September 30, 2000 and December 31,
1999 for cash and cash equivalents, accounts receivable, other receivables,
accounts payable, accrued liabilities, and variable rate long-term debt are
reasonable estimates of their fair values. The carrying amount of fixed-rate
long-term debt at September 30, 2000 is believed to approximate fair value
because such debt was discounted to reflect market interest rate at inception
and such discount is believed to be approximate for valuation of this debt.
F-26
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Period Ended Period Ended
September 30, December 31,
2000 1999
(In thousands)
<S> <C> <C>
Supplemental disclosure of cash flow information--
cash paid for interest............................. $ 1,971 $ 206
Supplemental schedule of noncash investing and
financial activities:
Accounts payable incurred for the acquisition of
property, equipment and construction in progress.. $10,223 $2,739
Accounts payable incurred for the acquisition of
microwave relocation costs........................ 1,884 --
Accrued dividends on redeemable preferred stock.... 812 --
Accretion to the redemption amount of preferred
stock............................................. 69 --
Grant of stock options............................. 8,247 --
Issuance of warrants in connection with the senior
discount notes.................................... 24,859 --
Issuance of warrants to Sprint PCS................. 9,147 --
</TABLE>
17. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
<TABLE>
<CAPTION>
Balance
Beginning Costs and at end of
of Period Expenses Write-Offs Period
<S> <C> <C> <C> <C>
Period ended December 31, 1999
allowance for doubtful accounts...... $-- $ 1 $ -- $ 1
==== ==== ===== ====
Period ended September 30, 2000
allowance for doubtful accounts...... $ 1 $305 $(137) $169
==== ==== ===== ====
</TABLE>
18. SUBSEQUENT EVENTS
On November 21, 2000, the Company sold eighteen towers to American Tower for
approximately $4.8 million, of which approximately $3.6 million was received in
cash and approximately $1.2 million represented a reduction in the advance on
tower sales. This transaction resulted in a gain of approximately $1.7 million,
of which approximately $0.3 million was recognized at the time of the sale and
the remainder was deferred and is being amortized as a reduction to rental
expense over the initial lease term of ten years. As discussed in Note 7, in
1999, American Tower advanced $2.0 million to the Company for the purchases of
the fifty-third through sixtieth towers. The advance on tower sales of
approximately $1.2 million remaining at September 30, 2000 was reduced to zero
because the fifty-sixth through sixtieth towers were among the eighteen towers
sold by the Company on November 21, 2000.
F-27
<PAGE>
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On December 28, 2000, the Company issued to an investor group 14,000,000
shares of Series A-2 convertible participating preferred stock ("Series A-2
preferred stock") at a purchase price of $5.00 per share, yielding gross
proceeds of $70.0 million; net proceeds were approximately $65.8 million. Each
share of Series A-2 preferred stock is convertible into one share of common
stock.
The holders of Series A-2 preferred stock have the same rights as the
holders of Series A-1 preferred stock as to conversion and voting as common
stockholders on an as-converted basis discussed in Note 13. In addition, the
Series A-2 preferred stock has the same dividend rights as the Series A-1
preferred stock except that the preferred liquidation preference is equal to
$5.00 per share plus any accrued but unpaid dividends on such share of Series
A-2 preferred stock. The Series A-2 preferred stock has a mandatory redemption
for cash at an amount equal to the stated value plus accrued dividends on July
12, 2011. The Company will accrete the carrying value of the Series A-2
preferred stock (net of offering costs incurred) to the redemption amount by
the effective interest method.
On December 29, 2000, the Company borrowed $25.0 million pursuant to the
terms of the credit facility discussed in Note 9.
F-28
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
, 2001
300,000 Warrants
2,982,699 Shares of Common Stock
Issuable Upon Exercise of Warrants
[iPCS Logo]
----------------------------------------
PROSPECTUS
----------------------------------------
--------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any of the sales made hereunder after the date of this prospectus shall create
an implication that the information contained herein or our affairs have not
changed since the date hereof.
--------------------------------------------------------------------------------
<PAGE>
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 expected to be
incurred in connection with the issuance and distribution of the securities to
be registered:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $ 4,331
Legal fees and expenses........................................ 50,000*
Accounting fees and expenses................................... 25,000*
Printing and engraving expenses................................ 25,000*
Transfer agent and registrar fees.............................. 5,000*
Miscellaneous expenses......................................... 10,669*
--------
Total........................................................ $120,000*
========
</TABLE>
---------------------
*Estimated expenses
Item 14. Indemnification of Directors and Officers
The Amended and Restated 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 or her 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 Amended and Restated 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
II-1
<PAGE>
fact that he or she is or was a 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 or she 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 or her 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.
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
Set forth below is a description of the registrant's sales of unregistered
securities during the past three years.
1. iPCS, Inc., a Delaware corporation ("iPCS") was formed on March 7, 2000.
On July 12, 2000 Illinois PCS, LLC merged with and into iPCS Wireless, Inc., a
wholly owned subsidiary of iPCS, Inc. as described in the prospectus. In
connection with this reorganization into a holding company structure, iPCS
issued 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 who received iPCS common stock in connection with the
reorganization, the consideration received by iPCS for such common stock and
the number of shares of common stock issued are set forth in the table below.
II-2
<PAGE>
The Reorganization
<TABLE>
<CAPTION>
Percentage of
Number of Membership Interest
Shares of Received in
Nature of our Exchange for our
Party Receiving Securities Consideration Common Stock Common Stock (1)
<S> <C> <C> <C>
Geneseo Communications,
Inc...................... Membership Interest 15,468,809 34.5%
Cambridge Telcom, Inc..... Membership Interest 13,258,979 29.6%
Cass Communications
Management, Inc.......... Membership Interest 4,419,660 9.9%
Technology Group, LLC..... Membership Interest 4,419,660 9.9%
Montrose Mutual PCS, Inc.. Membership Interest 4,419,660 9.9%
Gridley Enterprises, Inc.. Membership Interest 2,209,830 4.9%
Timothy M. Yager.......... Membership Interest 673,045 1.5%
</TABLE>
---------------------
(1) Exceeds 100% because of rounding.
2. On July 12, 2000, the registrant issued 9,090,909 shares of its Series A-
1 Convertible Participating Preferred Stock (the "Series A-1 Preferred Stock")
at a purchase price of $5.50 per share. The purchasers of the Series A-1
Preferred Stock and the amount purchased are listed in the table below.
<TABLE>
<CAPTION>
Name of Purchaser Number of Shares
<S> <C>
Blackstone/iPCS L.L.C.................................... 1,015,809
Blackstone iPCS Capital Partners L.P..................... 2,893,282
Blackstone Communications Partners I L.P................. 3,363,636
TCW/Crescent Mezzanine Partners II, L.P.................. 731,722
TCW/Crescent Mezzanine Trust II.......................... 177,370
TCW Leveraged Income Trust, L.P.......................... 90,909
TCW Leveraged Income Trust II, L.P....................... 90,909
TCW Leveraged Income Trust IV, L.P....................... 90,909
TCW Shared Opportunity Fund II, L.P...................... 181,818
Shared Opportunity Fund IIB, L.L.C....................... 90,909
TCW Shared Opportunity Fund III, L.P..................... 363,636
</TABLE>
3. On July 12, 2000, the registrant issued 300,000 units ("Units")
consisting of $300,000,000 principal amount of 14% Senior Discount Notes due
2010 and warrants to purchase 2,982,699 shares of common stock at an exercise
price of $5.50 per share. The issuance of the Units yielded gross proceeds to
us of $152.3 million and net proceeds of $146.3 million. The warrants are not
exercisable until July 15, 2001. The initial purchasers of the Units and the
amount purchased are listed in the table below.
<TABLE>
<CAPTION>
Name of Purchaser Number of Units
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation....... 255,000
TD Securities (USA) Inc................................... 45,000
</TABLE>
4. On July 12, 2000, the registrant issued to Sprint Spectrum L.P. (or any
of its designees controlled by, or under common control with, Sprint Spectrum
L.P.) warrants to purchase 1,151,938 shares of common stock at an exercise
price of $4.95 in exchange for its agreement to expand our territory by an
additional 20 markets. The warrants will be exercisable beginning on or after
July 15, 2001 and expire on July 15, 2007.
II-3
<PAGE>
5. On July 12, 2000, the registrant granted employee stock options to
purchase, in the aggregate, 1,558,750 shares of common stock at an exercise
price of $5.50. The vesting period for employee stock options begins on the
employee's date of hire and extends for four years. For directors, the vesting
period begins on the date of grant and extends for four years.
None of the foregoing transactions involved any public offering, and
issuances of securities in connection with such transactions were made in
reliance on Section 4(2) under the Securities Act of 1933 (the "Act") and/or
Regulation D promulgated under the Act and as to transactions described in
paragraph 3, Rule 144A promulgated under the Act. These sales were made without
general solicitation or advertising. The acquirors in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to sell or for sale in connection with any distribution
thereof. All acquirors had adequate access, through their relationship with us,
to information about us. In addition, exemption from the registration
provisions of the Securities Act for the transactions described in paragraph 5
was claimed under Section 3(b) of the Securities Act on the basis that such
securities were sold pursuant to a written compensatory benefit plan or
pursuant to a written contract relating to compensation and not for capital
raising purposes under Rule 701 of the Securities Act.
6. On December 28, 2000, the registrant issued 14,000,000 shares of its
Series A-2 Convertible Participating Preferred Stock (the "Series A-2 Preferred
Stock") at a purchase price of $5.00 per share. The purchasers of the Series A-
2 Preferred Stock and the amount purchased are listed in the table below.
<TABLE>
<CAPTION>
Name of Purchaser Number of Shares
<S> <C>
Blackstone/iPCS L.L.C.................................... 1,564,346
Blackstone iPCS Capital Partners L.P..................... 4,455,654
Blackstone Communications Partners I L.P................. 5,180,000
TCW/Crescent Mezzanine Partners II, L.P.................. 1,126,851
TCW/Crescent Mezzanine Trust II.......................... 273,149
TCW Leveraged Income Trust, L.P.......................... 186,660
TCW Leveraged Income Trust II, L.P....................... 186,660
TCW Leveraged Income Trust IV, L.P....................... 186,680
TCW Shared Opportunity Fund II, L.P...................... 140,000
Shared Opportunity Fund IIB, L.L.C....................... 140,000
TCW Shared Opportunity Fund III, L.P..................... 560,000
</TABLE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
2.1** --Contribution Agreement dated as of July 12, 2000 by and
among iPCS, Inc. and members of Illinois PCS, LLC.
3.1** --Amended and Restated Certificate of Incorporation of
iPCS, Inc. as amended.
3.2** --Amended and Restated Bylaws of iPCS, Inc.
3.3** --Certificate of Designations of the Series A-1
Convertible Participating Preferred Stock.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
3.4** --Certificate of Incorporation of iPCS Wireless, Inc.
3.5** --Bylaws of iPCS Wireless, Inc.
3.6** --Certificate of Incorporation of iPCS Equipment, Inc.
3.7** --Bylaws of iPCS Equipment, Inc.
4.1** --Specimen Common Stock Certificate.
4.2** --14% Senior Discount Notes due 2010 Indenture dated as of
July 14, 2000 by and among, iPCS, Inc., as issuer iPCS
Equipment, Inc. and iPCS Wireless, Inc. as guarantors and
CTC Illinois Trust Company, as trustee.
5.1*** --Opinion of Mayer, Brown & Platt.
10.1**+ --Sprint PCS Management Agreement, as amended, dated as of
January 22, 1999 by and among Sprint Spectrum, LP,
SprintCom, Inc., WirelessCo, LP and Illinois PCS, LLC, as
amended by Addendum I, Addendum II, Amended and Restated
Addendum III and Addendum IV thereto.
10.2**+ --Sprint PCS Services Agreement dated as of January 22,
1999 by and between Sprint Spectrum, LP and Illinois PCS,
LLC.
10.3**+ --Sprint Trademark and Service Mark License Agreement
dated as of January 22, 1999 by and between Sprint
Communications Company, LP and Illinois PCS, LLP.
10.4** --Sprint Spectrum Trademark and Service Mark License
Agreement dated as of January 22, 1999 by and between
Sprint Spectrum LP and Illinois PCS, LLC.
10.5** --Amended and Restated Consent and Agreement dated as of
July 12, 2000 by and between Sprint Spectrum, LP,
SprintCom, Inc., Sprint Communications Company, LP,
WirelessCo, LP, and Toronto Dominion (Texas), Inc. and
the lenders party thereto.
10.6** --Amended and Restated Credit Agreement dated as of July
12, 2000 by and among iPCS Wireless, Inc., as borrower,
iPCS, Inc. and iPCS Equipment, Inc. as guarantors, the
lenders named therein, Toronto Dominion (Texas),
Inc., as administrative agent, and GE Capital
Corporation, as syndication agent, for a $140.0 million
credit facility.
10.7** --iPCS, Inc. Amended and Restated 2000 Long Term Incentive
Plan.
10.8** --Amended and Restated Employment Agreement effective as
of July 1, 2000 by and between Illinois PCS, LLC, Timothy
M. Yager and iPCS, Inc.
10.9** --Amended and Restated Employment Agreement effective as
of July 1, 2000 by and between Illinois PCS, LLC, William
W. King, Jr. and iPCS, Inc.
10.10** --Warrant for the Purchase of shares of Common Stock dated
as of July 12, 2000 by and between Sprint Spectrum L.P.
and iPCS, Inc.
10.11** --Agreement Regarding Construction, Sale and Leaseback of
Towers dated as of May 28, 1999 by and between American
Tower Corporation and Illinois PCS, LLC.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
10.12* --Lease dated as of June 1, 1999 by and between Gridley
Enterprises, Inc. and Illinois PCS, LLC.
10.13** --Amended and Restated Employment Agreement effective as
of July 1, 2000 by and between Illinois PCS, LLC, Leroy
R. Horsman and iPCS, Inc.
10.14** --Amended and Restated Employment Agreement effective as
of July 1, 2000 by and between Illinois PCS, LLC, Jeffrey
Pinegar and iPCS, Inc.
10.15** --Amended and Restated Employment Agreement effective as
of July 1, 2000 by and between Illinois PCS, LLC, Linda
K. Wokoun and iPCS, Inc.
10.16** --Amended and Restated Employment Agreement effective as
of July 1, 2000 by and between Illinois PCS, LLC,
Stebbins B. Chandor, Jr. and iPCS, Inc.
10.17** --Amended and Restated Employment Agreement effective as
of July 1, 2000 by and between Illinois PCS, LLC, Anthony
R. Muscato and iPCS, Inc.
10.18** --Purchase Agreement dated as of July 12, 2000 for
$300,000,000, 300,000 Units consisting of 14% Senior
Discount Notes Due 2010 and warrants to purchase
2,982,699 shares of Common Stock.
10.19** --Amended and Restated Employment Agreement effective as
of July 1, 2000 by and between Illinois PCS LLC, Patricia
M. Greteman and iPCS, Inc.
10.20**+ --CDMA 1900 SprintCom Additional Affiliate Supply
Agreement dated as of May 24, 1999 between Illinois PCS,
LLC and Nortel Networks Inc.
10.21**+ --Amendment No. 1 to 1900 CDMA Additional Affiliate Supply
Agreement dated as of July 11, 2000 between Illinois PCS,
LLC and Nortel Networks Inc.
10.22** --Warrant Registration Rights Agreement dated as of July
12, 2000 by and among iPCS, Inc., Donaldson Lufkin &
Jenrette Securities Corporation and TD Securities
Corporation (USA) Inc.
10.23** --Warrant Agreement dated as of July 12, 2000 by and
between iPCS, Inc. and ChaseMellon Shareholder Services,
L.L.C., as warrant agent.
10.24** --A/B Exchange Registration Rights Agreement dated as of
July 12, 2000 by and among iPCS, Inc., iPCS Equipment,
Inc., iPCS Wireless, Inc. and Donaldson Lufkin & Jenrette
Securities Corporation and TD Securities (USA) Inc.
10.25** --Form of Global Note
10.26** --Form of Global Warrant
10.27** --Investment Agreement dated as of July 12, 2000 by and
among iPCS, Inc., Blackstone/iPCS LLC, Blackstone iPCS
Capital Partners LP, Blackstone Communications Partners I
LP, TCW/Crescent Mezzanine Partners II, LP, TCW/Crescent
Mezzanine Trust II, TCW Leveraged Income Trust LP, TCW
Leveraged Income Trust LP II, LP, TCW Leveraged Income
Trust IV, LP, TCW Shared Opportunity Fund II, LP, Shared
Opportunity Fund IIB, LLC and TCW Shared Opportunity Fund
III, LP.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
10.28** --Stockholders Agreement dated as of July 12, 2000 by and
between iPCS, Inc. and certain of its stockholders.
10.29** --Registration Rights Agreement dated as of July 12, 2000
by and among iPCS, Inc., Blackstone/iPCS LLC, Blackstone
iPCS Capital Partners LP, Blackstone Communications
Partners I LP, TCW/Crescent Mezzanine Partners II, LP,
TCW/Crescent Mezzanine Trust II, TCW Leveraged Income
Trust LP, TCW Leveraged Income Trust LP II, LP, TCW
Leveraged Income Trust IV, LP, TCW Shared Opportunity
Fund II, LP, Shared Opportunity Fund IIB, LLC and TCW
Shared Opportunity Fund III, LP.
10.30** --Asset Purchase Agreement dated as of July 12, 2000 by
and among Sprint Spectrum LP, Sprint Spectrum Equipment
Company, LP, Sprint Spectrum Realty Company, LP and iPCS
Wireless, Inc.
10.31** --Design, Development, Engineering, Construction and
Oversight Services Agreement, dated as of February, 1999,
by and between Illinois PCS, LLC and Communication
Management Specialists.
10.32** --Interim Network Operating Agreement dated as of July 12,
2000 by and between Sprint Spectrum LP and iPCS Wireless,
Inc.
10.33** --Consulting Agreement dated as of April 20, 1999 by and
between WaveLink Engineering and Illinois PCS, LLC.
10.34**+ --Construction and Oversight Services Agreement dated as
of September 1, 2000 by and between iPCS Wireless, Inc.
and SDS Wireless, Inc.
10.35**+ --Build to Suit Agreement dated as of September 1, 2000 by
and between iPCS Wireless, Inc. and Trinity Wireless
Towers, Inc.
10.36** --Additional Affiliate Agreement dated as of July 12, 2000
by and between iPCS Wireless, Inc. and Lucent
Technologies Inc.
21.1** --Subsidiaries of iPCS, Inc.
23.1 --Consent of Deloitte & Touche, LLP.
23.2*** --Consent of Mayer, Brown & Platt (contained in legal
opinion filed as Exhibit 5.1).
24.1*** --Powers of Attorney.
25.1** --Form T-1 Statement of eligibility under The Trust
Indenture Act of 1939 of BNY Midwest Trust Company.
</TABLE>
---------------------
*Previously filed as an exhibit to the registrant's registration statement
on Form S-1 (Registration No. 333-32064).
**Previously filed as an exhibit to the registrant's registration statement
on Form S-4 (Registration No. 333-47688).
***Previously filed.
+Confidential treatment has been requested on portions of these documents.
(b) Financial Statement Schedules:
No financial statement schedules are filed because the required
information is not applicable or is included in the financial statements or
related notes.
II-7
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by iPCS pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(5) 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.
II-8
<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 8th day of January, 2001.
iPCS, INC.
/s/ Timothy M. Yager
By: _________________________________
Timothy M. Yager
President, Chief Executive
Officer
and Director
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 January 8, 2001
____________________________________ Officer, (Principal
Timothy M. Yager Executive Officer) and
Director
/s/ Stebbins B. Chandor, Jr.* Senior Vice President, Chief January 8, 2001
____________________________________ Financial Officer
Stebbins B. Chandor, Jr. (Principal Financial and
Accounting Officer)
/s/ William W. King, Jr.* Vice President, Strategic January 8, 2001
____________________________________ Planning and Director
William W. King, Jr.
/s/ Alan C. Anderson* Director January 8, 2001
____________________________________
Alan C. Anderson
/s/ Donald L. Bell* Director January 8, 2001
____________________________________
Donald L. Bell
/s/ Michael S. Chae* Director January 8, 2001
____________________________________
Michael S. Chae
/s/ Brian J. Gernant* Director January 8, 2001
____________________________________
Brian J. Gernant
/s/ Lawrence H. Guffey* Director January 8, 2001
____________________________________
Lawrence H. Guffey
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Robert W. Schwartz* Director January 8, 2001
____________________________________
Robert W. Schwartz
/s/ George Patrick Tays* Director January 8, 2001
____________________________________
George Patrick Tays
</TABLE>
Timothy M. Yager, by signing his name hereto, does sign and execute this
third amendment to the registration statement on behalf of each of the above
named officers and directors of the registrant as this 8th day of January,
2001, pursuant to the powers of attrrneys executed on behalf of each of such
officers and directors previously filed with the Securities and Exchange
Commission.
<TABLE>
<S> <C>
/s/ Timothy M. Yager
*By: ______________________________________
Timothy M. Yager
</TABLE>
II-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
2.1** --Contribution Agreement dated as of July 12, 2000 by and
among iPCS, Inc. and members of Illinois PCS, LLC.
3.1** --Amended and Restated Certificate of Incorporation of iPCS,
Inc. as amended.
3.2** --Amended and Restated Bylaws of iPCS, Inc.
3.3** --Certificate of Designations of the Series A-1 Convertible
Participating Preferred Stock.
3.4** --Certificate of Incorporation of iPCS Wireless, Inc.
3.5** --Bylaws of iPCS Wireless, Inc.
3.6** --Certificate of Incorporation of iPCS Equipment, Inc.
3.7** --Bylaws of iPCS Equipment, Inc.
4.1** --Specimen Common Stock Certificate.
4.2** --14% Senior Discount Notes due 2010 Indenture dated as of
July 14, 2000 by and among, iPCS, Inc., as issuer iPCS
Equipment, Inc. and iPCS Wireless, Inc. as guarantors and CTC
Illinois Trust Company, as trustee.
5.1*** --Opinion of Mayer, Brown & Platt.
10.1**+ --Sprint PCS Management Agreement, as amended, dated as of
January 22, 1999 by and among Sprint Spectrum, LP, SprintCom,
Inc., WirelessCo, LP and Illinois PCS, LLC, as amended by
Addendum I, Addendum II, Amended and Restated Addendum III
and Addendum IV thereto.
10.2**+ --Sprint PCS Services Agreement dated as of January 22, 1999
by and between Sprint Spectrum, LP and Illinois PCS, LLC.
10.3**+ --Sprint Trademark and Service Mark License Agreement dated as
of January 22, 1999 by and between Sprint Communications
Company, LP and Illinois PCS, LLP.
10.4** --Sprint Spectrum Trademark and Service Mark License Agreement
dated as of January 22, 1999 by and between Sprint Spectrum
LP and Illinois PCS, LLC.
10.5** --Amended and Restated Consent and Agreement dated as of July
12, 2000 by and between Sprint Spectrum, LP, SprintCom, Inc.,
Sprint Communications Company, LP, WirelessCo, LP, and
Toronto Dominion (Texas), Inc. and the lenders party thereto.
10.6** --Amended and Restated Credit Agreement dated as of July 12,
2000 by and among iPCS Wireless, Inc., as borrower, iPCS,
Inc. and iPCS Equipment, Inc. as guarantors, the lenders
named therein, Toronto Dominion (Texas),
Inc., as administrative agent, and GE Capital Corporation, as
syndication agent, for a $140.0 million credit facility.
10.7** --iPCS, Inc. Amended and Restated 2000 Long Term Incentive
Plan.
10.8** --Amended and Restated Employment Agreement effective as of
July 1, 2000 by and between Illinois PCS, LLC, Timothy M.
Yager and iPCS, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
10.9** --Amended and Restated Employment Agreement effective as of
July 1, 2000 by and between Illinois PCS, LLC, William W.
King, Jr. and iPCS, Inc.
10.10** --Warrant for the Purchase of shares of Common Stock dated as
of July 12, 2000 by and between Sprint Spectrum L.P. and
iPCS, Inc.
10.11** --Agreement Regarding Construction, Sale and Leaseback of
Towers dated as of May 28, 1999 by and between American Tower
Corporation and Illinois PCS, LLC.
10.12* --Lease dated as of June 1, 1999 by and between Gridley
Enterprises, Inc. and Illinois PCS, LLC.
10.13** --Amended and Restated Employment Agreement effective as of
July 1, 2000 by and between Illinois PCS, LLC, Leroy R.
Horsman and iPCS, Inc.
10.14** --Amended and Restated Employment Agreement effective as of
July 1, 2000 by and between Illinois PCS, LLC, Jeffrey
Pinegar and iPCS, Inc.
10.15** --Amended and Restated Employment Agreement effective as of
July 1, 2000 by and between Illinois PCS, LLC, Linda K.
Wokoun and iPCS, Inc.
10.16** --Amended and Restated Employment Agreement effective as of
July 1, 2000 by and between Illinois PCS, LLC, Stebbins B.
Chandor, Jr. and iPCS, Inc.
10.17** --Amended and Restated Employment Agreement effective as of
July 1, 2000 by and between Illinois PCS, LLC, Anthony R.
Muscato and iPCS, Inc.
10.18** --Purchase Agreement dated as of July 12, 2000 for
$300,000,000, 300,000 Units consisting of 14% Senior Discount
Notes Due 2010 and warrants to purchase 2,982,699 shares of
Common Stock.
10.19** --Amended and Restated Employment Agreement effective as of
July 1, 2000 by and between Illinois PCS LLC, Patricia M.
Greteman and iPCS, Inc.
10.20**+ --CDMA 1900 SprintCom Additional Affiliate Supply Agreement
dated as of May 24, 1999 between Illinois PCS, LLC and Nortel
Networks Inc.
10.21**+ --Amendment No. 1 to 1900 CDMA Additional Affiliate Supply
Agreement dated as of July 11, 2000 between Illinois PCS, LLC
and Nortel Networks Inc.
10.22** --Warrant Registration Rights Agreement dated as of July 12,
2000 by and among iPCS, Inc., Donaldson Lufkin & Jenrette
Securities Corporation and TD Securities Corporation (USA)
Inc.
10.23** --Warrant Agreement dated as of July 12, 2000 by and between
iPCS, Inc. and ChaseMellon Shareholder Services, L.L.C., as
warrant agent.
10.24** --A/B Exchange Registration Rights Agreement dated as of July
12, 2000 by and among iPCS, Inc., iPCS Equipment, Inc., iPCS
Wireless, Inc. and Donaldson Lufkin & Jenrette Securities
Corporation and TD Securities (USA) Inc.
10.25** --Form of Global Note
10.26** --Form of Global Warrant
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
<C> <S> <C>
10.27** --Investment Agreement dated as of July 12, 2000 by and among
iPCS, Inc., Blackstone/iPCS LLC, Blackstone iPCS Capital
Partners LP, Blackstone Communications Partners I LP,
TCW/Crescent Mezzanine Partners II, LP, TCW/Crescent
Mezzanine Trust II, TCW Leveraged Income Trust LP, TCW
Leveraged Income Trust LP II, LP, TCW Leveraged Income Trust
IV, LP, TCW Shared Opportunity Fund II, LP, Shared
Opportunity Fund IIB, LLC and TCW Shared Opportunity Fund
III, LP.
10.28** --Stockholders Agreement dated as of July 12, 2000 by and
between iPCS, Inc. and certain of its stockholders.
10.29** --Registration Rights Agreement dated as of July 12, 2000 by
and among iPCS, Inc., Blackstone/iPCS LLC, Blackstone iPCS
Capital Partners LP, Blackstone Communications Partners I LP,
TCW/Crescent Mezzanine Partners II, LP, TCW/Crescent
Mezzanine Trust II, TCW Leveraged Income Trust LP, TCW
Leveraged Income Trust LP II, LP, TCW Leveraged Income Trust
IV, LP, TCW Shared Opportunity Fund II, LP, Shared
Opportunity Fund IIB, LLC and TCW Shared Opportunity Fund
III, LP.
10.30** --Asset Purchase Agreement dated as of July 12, 2000 by and
among Sprint Spectrum LP, Sprint Spectrum Equipment Company,
LP, Sprint Spectrum Realty Company, LP and iPCS Wireless,
Inc.
10.31** --Design, Development, Engineering, Construction and Oversight
Services Agreement, dated as of February, 1999, by and
between Illinois PCS, LLC and Communication Management
Specialists.
10.32** --Interim Network Operating Agreement dated as of July 12,
2000 by and between Sprint Spectrum LP and iPCS Wireless,
Inc.
10.33** --Consulting Agreement dated as of April 20, 1999 by and
between WaveLink Engineering and Illinois PCS, LLC.
10.34**+ --Construction and Oversight Services Agreement dated as of
September 1, 2000 by and between iPCS Wireless, Inc. and SDS
Wireless, Inc.
10.35**+ --Build to Suit Agreement dated as of September 1, 2000 by and
between iPCS Wireless, Inc. and Trinity Wireless Towers, Inc.
10.36** --Additional Affiliate Agreement dated as of July 12, 2000 by
and between iPCS Wireless, Inc. and Lucent Technologies Inc.
21.1** --Subsidiaries of iPCS, Inc.
23.1 --Consent of Deloitte & Touche, LLP.
23.2*** --Consent of Mayer, Brown & Platt (contained in legal opinion
filed as Exhibit 5.1).
24.1*** --Powers of Attorney.
25.1** --Form T-1 Statement of eligibility under The Trust Indenture
Act of 1939 of BNY Midwest Trust Company.
</TABLE>
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<PAGE>
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*Previously filed as an exhibit to the registrant's registration statement
on Form S-1 (Registration No. 333-32064) .
**Previously filed as an exhibit to the registrant's registration statement
on Form S-4 (Registration No. 333-47688).
***Previously filed.
+Confidential treatment has been requested on portions of these documents.
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