<PAGE> 1
As filed with the Securities and Exchange Commission on July 31, 1997.
Registration No. 333-31399
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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POWERTEL, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 4812 58-1944750
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
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1233 O.G. Skinner Drive, West Point, Georgia 31833
(706) 645-2000
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Allen E. Smith
President and Chief Executive Officer
Powertel, Inc.
1233 O.G. Skinner Drive
West Point, Georgia 31833
(706) 645-2000
(706) 645-9523 (Fax)
(Name, Address, Including Zip Code, and Telephone Number, Including Area
Code, of Agent for Service)
------------------------------------
With a Copy to:
Glenn W. Sturm, Esq. Jill F. Dorsey, Esq.
James Walker, Esq. Powertel, Inc.
Nelson Mullins Riley & Scarborough, L.L.P. 1233 O.G. Skinner Drive
First Union Plaza, Suite 1400 West Point, Georgia 31833
999 Peachtree Street, N.E. (706) 645-2000
Atlanta, Georgia 30309 (706) 645-9523 (Fax)
(404) 817-6000
(404) 817-6050 (Fax)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered Per Unit(1) Price(1) Registration Fee(2)
- --------------------------------------------------------------------------------------------------------------------------------
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11 1/8% Senior Notes Due 2007........... $300,000,000 100% $300,000,000 $90,909
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) under the Securities Act of 1933.
(2) Previously paid.
------------------------------------
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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
PROSPECTUS
OFFER TO EXCHANGE
All Outstanding
11 1/8% Senior Notes Due 2007
($300,000,000 principal amount outstanding)
for
11 1/8% Senior Notes Due 2007
which have been registered under the Securities Act
of
POWERTEL, INC.
------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 8, 1997, UNLESS EXTENDED.
------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE NEW NOTES OFFERED HEREBY.
------------------------------------
Powertel, Inc., a Delaware corporation (the "Company" or "Powertel"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal relating to the Exchange Offer (the "Letter of Transmittal"), to
exchange $1,000 principal amount of its 11 1/8% Senior Notes Due 2007 (the "New
Notes"), which will be registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which this
Prospectus is a part, for each
(cover continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Company will accept for exchange any and all validly tendered Old
Notes on or prior to 5:00 p.m., New York City time, on September 8, 1997 (if
and as extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See
"The Exchange Offer." Interest on the New Notes will be paid in cash at a rate
of 11 1/8% per annum on each June 1 and December 1 commencing December 1, 1997.
The New Notes may be redeemed at the option of the Company in whole or in part,
at any time on or after June 1, 2002 at 105.5625% of their principal amount,
plus accrued and unpaid interest, declining ratably to 100% of their principal
amount, plus accrued and unpaid interest, on or after June 1, 2004. In
addition, at any time prior to June 1, 2000, the Company may redeem up to 35%
of the aggregate principal amount of the New Notes with the proceeds of one or
more Public Equity Offerings (as defined herein), at 111.125% of their
principal amount; provided that after any such redemption, at least $195.0
million aggregate principal amount of Notes remains outstanding. See
"Description of the Notes."
This Prospectus, together with the Letter of Transmittal, is being sent
to all registered holders of Old Notes as of July 28, 1997. As of such date,
there were 40 registered holders of the Old Notes.
The Company will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US
A PROXY.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THIS EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
THE DATE OF THIS PROSPECTUS IS JULY 31, 1997.
<PAGE> 3
(cover continued from previous page)
$1,000 principal amount of its outstanding 11 1/8% Senior Notes Due 2007 (the
"Old Notes"), of which an aggregate of $300,000,000 in principal amount was
outstanding as of July 28, 1997.
The New Notes will be obligations of the Company entitled to the
benefits of the Indenture (as defined herein). The form and terms of the New
Notes are identical in all material respects to the form and terms of the Old
Notes except that the New Notes have been registered under the Securities Act.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture. Following
consummation of the Exchange Offer: (i) the holders of the Old Notes will
continue to be subject to the existing restrictions upon transfer thereof; (ii)
the Company will have no further obligation to such holders to provide for the
registration under the Securities Act of the Old Notes held by them; and (iii)
neither the New Notes nor the Old Notes will be entitled to the contingent
increase in interest rate provided for pursuant to the Old Notes. The Exchange
Offer is being made pursuant to the terms of the registration rights agreement
(the "Registration Rights Agreement") entered into among the Company and Morgan
Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated
and Oppenheimer & Co., Inc. (the "Placement Agents") pursuant to the terms of
the Placement Agreement dated June 5, 1997 among the Company and the Placement
Agents. The New Notes and the Old Notes are collectively referred to herein as
the "Notes." See "The Exchange Offer -- Purpose and Effect of the Exchange
Offer."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than broker-dealers, as set forth
below, and any such holder that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holder's
business and that such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes. Any holder who
tenders in the Exchange Offer with the intention to participate, or for the
purpose of participating, in a distribution of the New Notes or who is an
affiliate of the Company may not rely upon such interpretations by the staff of
the Commission and, in the absence of an exemption therefrom, must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction. Holders of Old Notes wishing
to accept the Exchange Offer must represent to the Company in the Letter of
Transmittal that such conditions have been met.
Each broker-dealer (other than an affiliate of the Company) that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date (as defined herein), it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." Any broker-dealer who is an affiliate
of the Company may not rely on such no-action letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON
REQUEST FROM POWERTEL, INC., 1233 O.G. SKINNER DRIVE, WEST POINT, GEORGIA 31833
(TELEPHONE (706) 645-2000) ATTENTION: LORENA G. TURNER -- ASSISTANT SECRETARY.
IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY AUGUST 14, 1997.
ii
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TABLE OF CONTENTS
PAGE PAGE
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Summary................................ The Preferred Stock Sales...................
Risk Factors........................... Management..................................
Certain Transactions........................
The Exchange Offer..................... Description of Certain Indebtedness.........
Use of Proceeds........................ Description of the Notes....................
Capitalization......................... Certain Federal Income Tax
Selected Historical Financial Considerations............................
Information.......................... Plan of Distribution........................
Pro Forma Financial Information........ Legal Matters...............................
Management's Discussion and Analysis Experts.....................................
of Financial Condition and Results Available Information.......................
of Operations........................ Incorporation of Certain Documents
Business............................... by Reference..............................
The Maine Disposition.................. Index to Consolidated Financial Statements.. F-1
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------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION NOT CONTAINED OR
INCORPORATED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL NOR
ALL OF THEM TOGETHER CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL OR ALL OF
THEM TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------------------
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
OLD NOTES PURSUANT TO THE EXCHANGE OFFER.
------------------------------------
Unless otherwise indicated, all population data set forth herein is
based on the 1996 Paul Kagan Associates, Inc. Cellular/PCS POP Book, and all
industry data set forth herein is based upon information compiled by the
Cellular Telecommunications Industry Association and/or Paul Kagan Associates,
Inc.
------------------------------------
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE SECURITIES LAWS. ALL STATEMENTS REGARDING THE COMPANY'S AND ITS
SUBSIDIARIES' EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY AND ITS SUBSIDIARIES BELIEVE
THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE
CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED HEREIN,
INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN
AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY, ITS
SUBSIDIARIES OR PERSONS ACTING ON THEIR BEHALF ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY SUCH CAUTIONARY STATEMENTS.
iii
<PAGE> 5
SUMMARY
The following information is qualified in its entirety by the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere or incorporated by reference in this Prospectus. Holders of
Old Notes contemplating tendering such Old Notes pursuant to the Exchange Offer
should carefully consider the factors set forth herein under the caption "Risk
Factors" and are urged to read this Prospectus in its entirety. Unless otherwise
indicated: (i) the information in this Prospectus, other than the historical
financial information, gives effect to the Maine Disposition, the Preferred
Stock Sales and the June Offering (each as defined below); and (ii) references
herein to the "Company" or "Powertel" refer to Powertel, Inc. and, where
appropriate, its subsidiaries. On June 25, 1997, the Company changed its name
from InterCel, Inc. to Powertel, Inc. The Common Stock of the Company is traded
on the Nasdaq Stock Market under the symbol "PTEL."
THE COMPANY
Powertel provides personal communications services ("PCS") in the
southeastern United States under the name "Powertel" and provides cellular
telephone service in contiguous portions of western Georgia and eastern Alabama
under the name "InterCel." Powertel's PCS licenses encompass a territory of
approximately 246,000 contiguous square miles with a population of approximately
24.3 million people and include licenses acquired in 1995 and 1996 to serve the
Major Trading Areas ("MTAs") of Atlanta, Georgia; Jacksonville, Florida;
Memphis, Tennessee/Jackson, Mississippi; and Birmingham, Alabama (the "Current
PCS Markets") and licenses to serve 13 Basic Trading Areas ("BTAs") in Kentucky
and Tennessee (together with the Current PCS Markets, the "PCS Markets") which
the Company acquired in the recent Federal Communications Commission (the "FCC")
auctions (the "D/E/F Auctions").
In the D/E/F Auctions, the Company acquired both the 10 MHz "D" block
and the 10 MHz "E" block licenses in each of the BTAs of Evansville, Indiana;
Lexington, Louisville, Bowling Green-Glasgow, Corbin, Madisonville, Owensboro,
Paducah-Murray-Mayfield and Somerset, Kentucky; Nashville and Cookeville,
Tennessee; and Hopkinsville, Kentucky-Clarksville, Tennessee; and the 10 MHz "E"
block license in the Knoxville, Tennessee BTA (collectively, the
"Kentucky/Tennessee BTAs"). The aggregate purchase price for the licenses, which
encompass an area of approximately 66,000 square miles with a population of
approximately 6.8 million people, was $31.2 million. With the addition of the
Kentucky/Tennessee BTAs, Powertel has one of the largest contiguous PCS
footprints in the southeastern United States. The Company expects its expanded
PCS footprint to provide a competitive advantage in attracting new PCS customers
in its markets.
Powertel first introduced its PCS services in October 1996 in
Jacksonville, Florida and Montgomery, Alabama and, to date, has launched its PCS
services in an additional 15 markets in Alabama, Florida, Georgia, Mississippi
and Tennessee. In all of these markets, the Company was the first to offer PCS
services commercially. Powertel intends to continue to rapidly build out its PCS
network and to launch its PCS services. As of March 31, 1997, the Company had
approximately 35,000 PCS subscribers.
Powertel intends to become a leading provider of wireless
telecommunications services in the southeastern United States by: (i) expanding
its market presence and subscriber base by offering significant value to its
customers; (ii) aggressively and creatively marketing a broad range of wireless
telecommunications services; and (iii) increasing cash flow margins by achieving
economies of scale and operating efficiencies and effectively implementing
technological advances. The Company believes that the market for wireless
telecommunications services will expand significantly as equipment costs and
service rates continue to decline, equipment becomes more convenient and
functional and wireless services become more diverse. The Company believes that
by expanding its presence in the southeastern United States it will be well
positioned to capitalize on this market opportunity and on the region's positive
demographics. The Company intends to build upon the extensive experience of its
management team in the telecommunications industry, the Company's experience and
reputation in the southeastern cellular market and its relationships with other
telecommunications providers to create a broad regional wireless
telecommunications company. The Company intends to continue to be among the
first PCS operators in its service areas to market advanced digital PCS wireless
systems with increased capacity, improved quality and greater functionality than
traditional analog cellular systems.
1
<PAGE> 6
PCS OPERATIONS
Markets. Powertel's licensed territory includes contiguous portions of
the following 12 southeastern states: Alabama; Arkansas; Florida; Georgia;
Illinois; Indiana; Kentucky; Louisiana; Mississippi; Missouri; South Carolina
and Tennessee. The Company currently provides PCS services in 17 markets in
Alabama, Florida, Georgia, Mississippi and Tennessee and is nearing completion
of its initial buildout of these areas. Generally, the "initial buildout" of a
licensed territory includes the construction of cell sites: (i) in metropolitan
areas with a population greater than 100,000 people; (ii) in certain smaller
cities that, due to location or demographics, the Company considers to be
strategically important; and (iii) along the major highway corridors connecting
such areas. Upon completion of the initial buildout of the Current PCS Markets
(excluding Albany, Georgia and Chattanooga, Tennessee), the Company expects to
be able to offer its PCS services in markets containing approximately 60% of the
population within the Current PCS Markets. This initial coverage is expected to
extend across 23 metropolitan areas and secondary cities within the Current PCS
Markets (Atlanta, Augusta, Macon, Savannah, Columbus and Athens, Georgia;
Memphis and Jackson, Tennessee; Jackson and Tupelo, Mississippi; Florence,
Huntsville, Anniston, Gadsden, Birmingham, Tuscaloosa, Montgomery and Dothan,
Alabama; and Panama City, Tallahassee, Jacksonville, St. Augustine and
Gainesville, Florida), as well as the major highway corridors connecting those
areas. The Company expects to complete the initial buildout of the Current PCS
Markets (excluding Albany, Georgia and Chattanooga, Tennessee) in late 1997 and
the Albany, Georgia and Chattanooga, Tennessee metropolitan areas in 1998. The
Company intends to commence the initial buildout of the Kentucky/Tennessee BTAs
in late 1997 and expects to begin offering commercial service in such BTAs in
the second half of 1998. Thereafter, based on customer demand and competitive
factors, Powertel intends to continue the buildout of its PCS System to enhance
and expand its coverage.
Strategy. Powertel's PCS strategy is to: (i) continue to rapidly build
out a high-quality PCS system and be among the first to offer PCS services in
the PCS Markets; (ii) offer a broad range of services, including enhanced
services; (iii) become a low-cost provider of digital wireless
telecommunications services; and (iv) expand the Company's regional market
presence by managing and affiliating with other PCS licensees (including
entering into roaming agreements), as well as potentially acquiring additional
strategic PCS licenses. Because the Company believes that being among the first
to offer PCS services in its PCS Markets is a significant competitive advantage,
it plans to continue to rapidly build out the metropolitan areas, certain
secondary cities and connecting highway corridors in its PCS Markets. The
Company intends to achieve significant market penetration by aggressively
marketing competitively priced PCS services, including enhanced services not
currently provided by analog or digital cellular operators, and by providing
superior customer service. The Company believes it can become a low-cost
provider of PCS services by generating economies of scale through operating in
contiguous market areas and focusing on customer acquisition and retention, as
it has done in its cellular business. The Company is pursuing strategic
relationships with other PCS licensees, including roaming agreements to expand
the area in which its customers may utilize PCS services, and may consider other
affiliations or the acquisition of additional licenses to further expand the
Company's licensed territory.
Services. The Company's PCS service offerings consist primarily of
wireline enhancement products in which PCS supplements a customer's landline
communications. The Company currently offers a full range of wireless
telecommunications services, including certain enhanced features and services
not currently provided by analog cellular operators. These enhanced features and
services include secure communications, sophisticated call management
(incorporating services such as caller I.D. and call forwarding), enhanced
battery life and a short message service which allows subscribers to send and
receive alphanumeric and text messages on their handsets. The Company intends to
expand its current offerings to include wireline replacement services that will
serve as the customer's primary mode of telecommunication.
Technology. Powertel has selected and implemented Global System for
Mobile Communications ("GSM") as the digital protocol for its PCS system because
it: (i) has been operating successfully in European and other countries for
approximately six years; (ii) offers enhanced features such as call encryption
and short messaging; and (iii) utilizes an open system architecture that allows
the Company to choose from a variety of equipment options and providers.
Currently, GSM-based systems are operating in more than 100 countries and were
the first PCS systems
2
<PAGE> 7
to be commercially deployed in the United States. According to data collected by
GSM North America, a group of GSM providers of which the Company is a member,
the GSM digital protocol has been implemented or chosen by licensees (including
winning bidders in the D/E/F Auctions) that cover markets with a population of
over 260 million people (representing over 98% of the population in the United
States). However, one of the GSM licensees, Pocket Communications, Inc.
("Pocket"), which recently filed for reorganization under Chapter 11 of the
United States Bankruptcy Code, has licenses in markets containing approximately
35 million people. Powertel has entered into roaming agreements with eight
GSM-based PCS providers in multiple markets in North America and expects to
begin offering roaming commercially in approximately 20 markets outside of the
Company's PCS footprint by the third quarter of 1997. The Company believes that
in the future its subscribers will be able to roam throughout most of the United
States, either on other GSM-based PCS systems or by using dual-mode (GSM/analog
cellular) telephones which are expected to be available in late 1997.
CELLULAR OPERATIONS
Markets. Powertel provides cellular telephone service in contiguous
portions of four Rural Service Areas ("RSAs") in western Georgia and eastern
Alabama (the "Cellular Markets") under the name "InterCel." The Cellular Markets
encompass approximately 2,900 square miles and have a population of
approximately 296,000 persons. As of December 31, 1996, the Company had
increased its cellular subscriber base in the Cellular Markets at a compound
annual rate of approximately 36.9% since 1991 and had achieved a market
penetration of approximately 7.5%. The Company increased revenue and earnings
before interest, taxes, depreciation and amortization in its Cellular Markets at
an average annual compound rate of approximately 32.8% and 215.8%, respectively,
from 1991 to 1996.
Strategy. Powertel's cellular strategy is to: (i) add new subscribers
and, through an emphasis on superior customer service, retain its existing
subscriber base; (ii) maintain a competitive wireless service as new
technologies and products enter the Cellular Markets; (iii) continue to upgrade
its cellular switching systems to capture roaming revenues from digital cellular
users roaming into the Cellular Markets and to offer digital services to its own
customers; and (iv) provide superior product features tailored to its customers'
needs at competitive prices.
Services. Powertel offers cellular telephones and accessories and a
full range of cellular telephone services, including call forwarding, call
waiting, three party conference calling and voice message storage and retrieval.
The Company has completed an initial upgrade of its cellular networks with
digital technology and is currently marketing its digital service in a limited
manner. Once improved handset equipment is available, which is expected in late
1997, and more complete digital coverage is available outside the Cellular
Markets, the Company expects to increase the marketing of its digital services.
Because its digital switches are capable of handling both analog and digital
transmissions, the Company will be able to continue to offer analog cellular
service to those customers who do not transfer to the digital service and will
be able to capture roaming revenues from users of both analog and digital
telephones.
Maine Disposition. In May 1997, the Company sold its cellular
operations in the State of Maine (the "Maine Disposition") for $77.2 million in
cash (which includes $5.4 million that is being held in escrow for
indemnification or purchase price adjustment obligations). The Company acquired
its Maine cellular operations in 1994 for $36.4 million. From its acquisition
through 1996, the Company increased its Maine cellular subscriber base at a
compound annual growth rate of approximately 39% and achieved a market
penetration of approximately 5%. See "The Maine Disposition."
3
<PAGE> 8
THE TRANSACTIONS
In order to concentrate the Company's focus on its markets in the
southeastern United States and to partially finance the Company's buildout and
operating costs and certain acquisition expenses associated with its PCS system,
the Company recently consummated the Maine Disposition and acquired the licenses
for the Kentucky/Tennessee BTAs and also consummated the following transactions
(collectively, with the Maine Disposition and the acquisition of the
Kentucky/Tennessee BTA licenses, the "Transactions"):
(i) pursuant to a stock purchase agreement dated as of May
23, 1997 between the Company and The Huff Alternative Income Fund,
L.P. ("Huff"), Huff purchased 50,000 shares of nonvoting Series C
Convertible Preferred Stock from the Company in a private placement
for an aggregate purchase price of $22.5 million in cash (the "Huff
Preferred Stock Sale");
(ii) pursuant to a stock purchase agreement dated as of May
23, 1997 between the Company and SCANA Communications, Inc., a wholly
owned subsidiary of SCANA Corporation ("SCANA"), SCANA purchased 50,000
shares of nonvoting Series D Convertible Preferred Stock from the
Company in a private placement for an aggregate purchase price of $22.5
million in cash (the "SCANA Preferred Stock Sale" and, together with
the Huff Preferred Stock Sale, the "Preferred Stock Sales"); and
(iii) the Company sold $300.0 million aggregate principal
amount of the Old Notes (the "Offering") of which approximately $89.6
million was used to purchase a portfolio of U.S. government securities
(the "Pledged Securities") that were pledged as security for the first
six scheduled interest payments on the Notes.
The Company currently estimates that capital expenditures will total
approximately $200.0 million in 1997 to complete the initial buildout of the
Company's PCS system (the "Current PCS System") in the Current PCS Markets
(excluding Albany, Georgia and Chattanooga, Tennessee) and the digital upgrade
of the Company's cellular system, and $150.0 million ($30.0 million in 1997 and
$120.0 million in 1998) relating to the initial buildout of its PCS system in
the Kentucky/Tennessee BTAs (the "Kentucky/Tennessee PCS System" and, together
with the Current PCS System, the "PCS System").
The Company believes that the net proceeds from the Offering, together
with the net proceeds from the Preferred Stock Sales, cash on hand (including
the proceeds from the Maine Disposition) and borrowings under its $165.0 million
credit agreement (the "Vendor Financing Agreement") with Ericsson Inc.
("Ericsson") and additional vendor financing, which the Company expects to be
available, will be sufficient to finance the development, construction and
operating costs associated with the initial buildout of the PCS Markets and the
completion of the digital upgrade of the Company's cellular system. Although the
Company is currently unable to predict with certainty the amount of expenditures
that may be made subsequent to the initial buildout of the PCS System, the
Company expects that it may require additional capital. Sources of additional
capital may include vendor financing, cash flow from operations, public and
private equity and debt financings and asset dispositions by the Company. The
Company may also require additional financing in the event it decides to make
additional acquisitions. The extent of additional financing required will depend
partially on the success of the Company's business. The Company currently has no
source of income or cash flows other than its cellular and newly launched PCS
operations and the interest income earned from investing the net proceeds from
the Maine Disposition and the remaining net proceeds from the 1996 Offerings (as
defined herein). There can be no assurance that additional financing will be
available to the Company or, if available, that it can be obtained on terms
acceptable to the Company and within the limitations contained in the Indenture,
the February 1996 Notes Indenture, the April 1996 Notes Indenture (each as
defined herein and, together with the Indenture, the "Indentures"), the Vendor
Financing Agreement or that may be contained in any future financing
arrangements. See "Risk Factors -- Significant Capital Requirements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
4
<PAGE> 9
<TABLE>
<CAPTION>
THE EXCHANGE OFFER
<S> <C>
The Exchange Offer..............................Pursuant to the Exchange Offer, $1,000 principal amount of New
Notes will be issued in exchange for each $1,000 principal amount
of Old Notes that are validly tendered and not withdrawn. As of
July 28, 1997, there were 40 registered holders of Old Notes,
and $300,000,000 aggregate principal amount of Old Notes were
outstanding. See "The Exchange Offer."
Holders of Old Notes whose Old Notes are not tendered and accepted
in the Exchange Offer will continue to hold such Old Notes and
will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture
governing the Old Notes and the New Notes. Following
consummation of the Exchange Offer, the holders of Old Notes
will continue to be subject to the existing restrictions upon transfer
thereof, and the Company will have no further obligation to such
holders to provide for the registration under the Securities Act of
the Old Notes held by them. Following the completion of the
Exchange Offer, none of the Notes will be entitled to the
contingent increase in interest rate provided pursuant to the
Old Notes.
Resale..........................................Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than broker-dealers, as
set forth below, and any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's
business and that such holder has no arrangement or understanding
with any person to participate in the distribution of such New
Notes. Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of participating, in
a distribution of the New Notes or who is an affiliate of the
Company may not rely upon such interpretations by the staff of the
Commission and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in such
instance may result in such holder incurring liabilities under the
Securities Act for which the holder is not indemnified by the
Company. Each broker-dealer (other than an affiliate of the
Company) that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the
Securities Act. The Company has agreed that, for
</TABLE>
5
<PAGE> 10
<TABLE>
<S> <C>
a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company
accept surrenders for exchange from, holders of Old Notes in any
jurisdiction in which this Exchange Offer or the acceptance thereof
would not be in compliance with the securities or blue sky laws
of such jurisdiction.
Expiration Date.................................The Exchange Offer will expire at 5:00 p.m., New York City time, on September 8,
1997, unless extended, in which case the term "Expiration Date"
shall mean the latest date and time to which the Exchange Offer is
extended. Any extension, if made, will be publicly announced
through a release to the Dow Jones News Service and as otherwise
required by applicable law or regulations.
Conditions to the Exchange
Offer.........................................The Exchange Offer is subject to certain conditions, which may be
waived by the Company. See "The Exchange Offer -- Conditions
of the Exchange Offer." The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered.
Procedures for Tendering
Old Notes.....................................Each holder of Old Notes wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of Transmittal,
or a facsimile thereof, together with such Old Notes and any
other required documentation to Bankers Trust Company, the
Exchange Agent, at the address set forth herein and therein. By
executing the Letter of Transmittal, each holder will represent to
the Company that, among other things, the New Notes acquired
pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, whether
or not such person is the holder, that neither the holder nor any
such other person has an arrangement or understanding with any
person to participate in the distribution of such New Notes and
that neither the holder nor any such other person is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities
Act. See "The Exchange Offer -- Terms of the Exchange Offer --
Procedures for Tendering Old Notes" and "The Exchange Offer --
Terms of the Exchange Offer -- Guaranteed Delivery Procedures."
Special Procedures for
Beneficial Owners.............................Any beneficial owner whose Old Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender such Old Notes in the
Exchange Offer should contact such registered holder promptly
and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on his
</TABLE>
6
<PAGE> 11
<TABLE>
<S> <C>
own behalf, such owner must, prior to completing and executing the Letter
of Transmittal and delivering his Old Notes, either make appropriate
arrangements to register ownership of the Old Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time and may not be
able to be completed prior to the Expiration Date. See "The Exchange Offer --
Terms of the Exchange Offer -- Procedures for Tendering Old Notes."
Guaranteed Delivery
Procedures....................................Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date, must tender their Old Notes
according to the guaranteed delivery procedures set forth in "The Exchange
Offer -- Terms of the Exchange Offer -- Guaranteed Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes.........................Subject to certain conditions (as described more fully in "The Exchange Offer --
Conditions of the Exchange Offer"), the Company will accept for exchange any
and all Old Notes which are properly tendered in the Exchange Offer and not
withdrawn, prior to 5:00 p.m., New York City time, on the Expiration Date. The
New Notes issued pursuant to the Exchange Offer will be delivered as promptly
as practicable following the Expiration Date.
Withdrawal Rights...............................Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time,
on the Expiration Date. See "The Exchange Offer -- Terms of
the Exchange Offer -- Withdrawal of Tenders of Old Notes."
Certain Federal Income Tax
Considerations................................For a discussion of certain federal income tax considerations relating
to the exchange of the New Notes for the Old Notes, see "Certain
Federal Income Tax Considerations."
Exchange Agent..................................Bankers Trust Company is the Exchange Agent. The address,
telephone number and facsimile number of the Exchange Agent
are set forth in "The Exchange Offer -- Exchange Agent."
</TABLE>
7
<PAGE> 12
SUMMARY OF TERMS OF THE NEW NOTES
The Exchange Offer applies to $300,000,000 aggregate principal amount
of Old Notes. The form and terms of the New Notes will be identical in all
material respects to the form and terms of the Old Notes except that: (i) the
New Notes will be registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof; and (ii) holders of the New Notes
will not be entitled to certain rights of holders of Old Notes under the
Registration Rights Agreement, which will terminate upon consummation of the
Exchange Offer. The New Notes will evidence the same debt as the Old Notes, will
be entitled to the benefits of the Indenture and will be treated as a single
class thereunder with any Old Notes that remain outstanding. Following the
Exchange Offer, none of the Notes will be entitled to the contingent increase in
interest rate provided for (in the event of a failure to consummate the Exchange
Offer in accordance with the terms of the Registration Rights Agreement)
pursuant to the Old Notes. See "Description of the Notes."
<TABLE>
<S> <C>
Issuer .......................................Powertel, Inc.
Securities Offered..............................$300,000,000 aggregate principal amount of 11 1/8% Senior Notes
due 2007.
Maturity........................................June 1, 2007
Interest .......................................Interest on the Notes is payable semiannually in cash on June 1 and
December 1 of each year, commencing December 1, 1997.
Optional Redemption.............................The Notes may be redeemed at any time on or after June 1, 2002, at
the option of the Company, in whole or in part, at 105.5625% of their
principal amount, plus accrued interest, declining to 100% of their principal
amount, plus accrued interest, on and after June 1, 2004. In addition, at any
time prior to June 1, 2000, up to 35% of the aggregate principal amount of the
Notes may be redeemed from the proceeds of one or more Public Equity Offerings
(as defined herein), at 111.125% of their principal amount; provided that
after any such redemption at least $195.0 million aggregate principal amount
of Notes remains outstanding.
Security........................................The Indenture will require the Company to purchase and pledge to the Trustee under
the Indenture, as security for the benefit of the holders of the Notes,
Pledged Securities consisting of U.S. government securities in an amount
sufficient to provide for the payment in full of the first six scheduled
interest payments due on the Notes. The Company used approximately $89.6
million of the net proceeds of the Offering to acquire the Pledged Securities.
Change of Control...............................Upon a Change of Control (as defined herein), the Company will be
required to make an offer to purchase the Notes at a purchase
price equal to 101% of their principal amount, plus accrued
interest. There can be no assurance that the Company will have
sufficient funds available at the time of any Change of Control to
make any required debt repayment (including repurchases of the
Notes). See "Description of the Notes -- Repurchase of Notes
upon a Change of Control."
Ranking.........................................The Notes will be unsecured (except as described above under
"-- Security") senior indebtedness of the Company ranking pari
passu with the Company's other unsubordinated unsecured
</TABLE>
8
<PAGE> 13
<TABLE>
<S> <C>
indebtedness and senior in right of payment to all subordinated indebtedness
of the Company. After giving pro forma effect to the Transactions and the
application of the proceeds thereof, at March 31, 1997, the Company would have
had $551.1 million of indebtedness outstanding other than the Notes (including
$104.2 million of secured indebtedness), and the Company would have had $61.2
million of availability under the Vendor Financing Agreement for the purchase
of PCS equipment and services. Under the Indenture, the Company is permitted
to incur additional indebtedness to finance the acquisition of inventory or
equipment and up to $25.0 million of indebtedness under one or more revolving
credit or working capital facilities and to secure such indebtedness. The
Notes will be effectively subordinated to such secured indebtedness to the
extent of such security interests. In addition, all existing and future
liabilities (including trade payables) of the Company's subsidiaries will be
effectively senior to the Notes. See "Risk Factors -- Ability to Service Debt;
Restrictive Covenants; Refinancing Risks," "-- Priority of Secured Debt;
Structural Subordination" and "Description of Certain Indebtedness."
Certain Covenants...............................The Indenture, pursuant to which the Old Notes have been issued and
the New Notes will be issued, contains certain covenants that,
among other things, will limit the ability of the Company to incur
indebtedness, pay dividends, prepay subordinated indebtedness,
repurchase capital stock, make investments, engage in transactions
with stockholders and affiliates, create liens, sell assets and engage
in mergers and consolidations. However, these limitations are
subject to a number of important qualifications and exceptions.
See "Description of the Notes -- Covenants."
Use of Proceeds.................................The Company will not receive any proceeds from the issuance of the
New Notes pursuant to this Prospectus.
Book-Entry; Delivery and
Form .......................................Transfers of Notes between participants in The Depository Trust
Company ("DTC") will be effected in the ordinary way in
accordance with DTC rules and will be settled in same-day funds.
See "Description of the Notes -- Book-Entry; Delivery and
Form."
</TABLE>
9
<PAGE> 14
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary financial and operating
information for the Company as of and for each of the years in the three-year
period ended December 31, 1996 and as of and for the three months ended March
31, 1997 and 1996. The summary historical financial information as of and for
the years ended December 31, 1996, 1995 and 1994 was derived from the Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus, which have been audited by Arthur Andersen LLP, independent public
accountants. The financial information as of and for the three months ended
March 31, 1997 and 1996 was derived from the unaudited financial statements of
the Company. In the opinion of management, the unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth herein. Operating results
shown in the following table will not be indicative of future performance due to
the capital requirements associated with the buildout of the Company's PCS
System.
The unaudited pro forma statement of operations data give effect to the
Transactions as if they occurred at January 1, 1996, and the unaudited pro forma
balance sheet data give effect to the Transactions as if they occurred at March
31, 1997. The unaudited pro forma financial information does not purport to
represent what the Company's results of operations or financial position would
have been if the Transactions had in fact occurred on such dates, nor does it
purport to indicate the future financial position or results of future
operations of the Company. The unaudited pro forma adjustments are based upon
currently available information and certain assumptions that management believes
to be reasonable. The selected historical and pro forma financial information
set forth below should be read in conjunction with "Use of Proceeds," "Selected
Historical Financial Information," "Pro Forma Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Transactions" and the Company's consolidated financial
statements and notes thereto and other financial and operating information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
PRO FORMA HISTORICAL
------------------------
1997 1997 1996
---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Service revenues......................... $ 10,677 $ 14,084 $ 6,996
Equipment sales ......................... 4,937 5,025 854
---------- ---------- -----------
Total revenues and sales .............. 15,614 19,109 7,850
---------- ---------- -----------
Cost of services ........................ 4,879 5,428 684
Cost of equipment sales ................. 11,602 11,987 694
Operations expenses ..................... 3,302 3,809 1,204
Selling and marketing ................... 4,562 5,237 1,274
General and administrative .............. 7,238 7,680 1,810
Depreciation ............................ 7,849 8,340 731
Amortization ............................ 1,014 1,178 881
---------- ---------- -----------
Total operating expenses .............. 40,446 43,659 7,278
---------- ---------- -----------
Operating income (loss) ................. (24,832) (24,550) 572
Interest (income) expense(b) ............ 10,927 4,543 (739)
Miscellaneous (income) expense .......... 586 473 303
---------- ---------- -----------
Income (loss) before income taxes ....... (36,345) (29,566) 1,008
Income tax (benefit) expense ............ -- -- 472
---------- ---------- -----------
Net income (loss) before cumulative
effect ................................ (36,345) (29,566) 536
Cumulative effect of change in
accounting principle, net of tax(c) ... -- -- (2,583)
---------- ---------- -----------
Net income (loss)........................ $ (36,345) $ (29,566) $ (2,047)
========== ========== ===========
OTHER FINANCIAL AND OPERATING DATA:
EBITDA(d)................................ $ (11,971) $ (12,244) $ 4,193
Ratio of earnings to fixed charges(e) ... -- -- --
Capital expenditures..................... $ 35,878 $ 36,209 $ 10,874
Cellular subscribers at end of period(f). 23,245 49,731 40,403
Net cellular population equivalents(g)... 295,600 737,800 737,800
PCS subscribers at end of period ........ 34,886 34,886 --
Net PCS population equivalents(g)........ 24,293,000 24,293,000 17,460,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
PRO HISTORICAL
FORMA ----------------------------------
1996(a) 1996 1995 1994
-------- --------- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Service revenues......................... $ 17,963 $ 31,875 $ 25,384 $ 18,903
Equipment sales ......................... 5,078 7,250 3,928 2,859
---------- ---------- --------- --------
Total revenues and sales .............. 23,041 39,125 29,312 21,762
---------- ---------- --------- --------
Cost of services ........................ 3,993 5,811 2,394 1,921
Cost of equipment sales ................. 9,866 11,653 3,127 2,391
Operations expenses ..................... 7,888 9,927 3,596 2,722
Selling and marketing ................... 10,828 13,301 4,280 3,405
General and administrative .............. 15,700 16,963 4,218 3,651
Depreciation ............................ 4,179 5,887 2,741 2,130
Amortization ............................ 1,733 4,214 2,360 1,543
---------- ---------- --------- --------
Total operating expenses .............. 54,187 67,756 22,716 17,763
---------- ---------- --------- --------
Operating income (loss) ................. (31,146) (28,631) 6,596 3,999
Interest (income) expense(b) ............ 10,553 (3,175) 1,657 635
Miscellaneous (income) expense .......... 1,666 1,226 (295) (48)
---------- ---------- --------- --------
Income (loss) before income taxes ....... (43,365) (26,682) 5,234 3,412
Income tax (benefit) expense ............ (1,654) (1,654) 2,230 1,535
---------- ---------- --------- --------
Net income (loss) before cumulative
effect ................................ (41,711) (25,028) 3,004 1,877
Cumulative effect of change in
accounting principle, net of tax(c) ... (765) (2,583) -- --
---------- ---------- --------- --------
Net income (loss)........................ $ (42,476) $ (27,611) $ 3,004 $ 1,877
========== ========== ========= ========
Other Financial and Operating Data:
EBITDA(d)................................ $ (4,602) $ (2,466) $ 11,992 $ 7,720
Ratio of earnings to fixed charges(e) ... -- -- 3.9x 5.5x
Capital expenditures..................... $ 227,101 $ 233,551 $ 7,661 $ 2,866
Cellular subscribers at end of period(f). 22,161 47,617 38,582 28,624
Net cellular population equivalents(g)... 295,600 737,800 732,900 728,200
PCS subscribers at end of period ........ 14,892 14,892 -- --
Net PCS population equivalents(g)........ 24,293,000 17,460,000 -- --
</TABLE>
10
<PAGE> 15
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------------------- -------------------------------
PRO FORMA HISTORICAL HISTORICAL
-------------------------------
1997 1997 1996 1995 1994
-------- ---------- ------ ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................$ 551,618 $ 200,646 $ 256,349 $ 977 $ 2,710
Property and equipment, net.................... 271,693 284,713 251,269 18,066 13,262
Licenses, goodwill and other intangibles, net.. 406,567 429,085 402,321 24,904 23,903
Total assets................................... 1,331,476 973,094 947,117 74,330 50,812
Long-term obligations.......................... 850,976 551,366 504,065 29,411 11,030
Retained earnings (accumulated deficit)........ (8,657) (52,332) (22,766) 4,845 1,841
Stockholders' equity........................... 465,937 377,487 407,007 36,674 33,374
</TABLE>
- -------------------
(a) Adjusted to reflect the pro forma effects of the Transactions, the 1996
Offerings and the Powertel Combination (as defined herein) as if they
occurred at January 1, 1996. See "Selected Historical Financial
Information" and "Pro Forma Financial Information."
(b) The Company had interest income of $3.3 million and $2.3 million for
the three months ended March 31, 1997 and 1996, respectively, $4.5
million for the three months ended March 31, 1997 on a pro forma basis,
and $17.3 million and $22.2 million for the year ended December 31,
1996 on a historical and pro forma basis, respectively. The Company had
no interest income for the years ended December 31, 1995 and 1994.
Excludes capitalized interest of $7.7 million, $6.7 million and $2.7
million for the three months ended March 31, 1997 on a pro forma basis,
and for the three months ended March 31, 1997 and 1996 on a historical
basis, respectively, and $29.0 million and $55.8 million for the year
ended December 31, 1996 on a historical and pro forma basis,
respectively. During the construction of the PCS System, the cost of
the PCS licenses and the costs related to construction expenditures are
considered to be assets qualifying for interest capitalization under
FASB Statement No. 34 "Capitalization of Interest Cost." Accordingly,
management expects that a majority of the interest on the February 1996
Notes, the April 1996 Notes, the Vendor Financing Agreement and the
Notes will be capitalized during the construction of the PCS System.
Pro forma interest expense will not be indicative of interest expense
that will be recognized as additional portions of the PCS System are
placed in service.
(c) During 1996, the Company changed its method of accounting for
costs incurred in connection with certain promotional programs under
which customers receive discounted cellular equipment or airtime usage
credits. Under its previous accounting method, all such costs were
deferred and amortized over the life of the related non-cancelable
cellular telephone service agreement. Under the new accounting method,
the costs are expensed as incurred.
(d) EBITDA represents earnings from continuing operations before interest
expense, income taxes, depreciation and amortization. EBITDA is
provided because it is a measure commonly used in the industry. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be considered an alternative to
net income as a measure of performance or to cash flow as a measure of
liquidity.
(e) Earnings were insufficient to cover fixed charges by $36.3 million,
$2.2 million and $56.2 million for the three months ended March 31,
1997 and 1996 and for the year ended December 31, 1996, respectively.
Earnings would have been insufficient to cover fixed charges by $44.0
million and $99.2 million for the three months ended March 31, 1997 and
for the year ended December 31, 1996, respectively, on a pro forma
basis. Earnings consist of income before income taxes, plus fixed
charges, except where capitalized. Fixed charges consist of interest
charges and amortization of debt issuance costs, in each case whether
expensed or capitalized, and the portion of rent expense under
operating leases representing interest.
(f) Cellular subscribers at end of period include 14,216, 20,288, 25,456,
21,320 and 26,486 subscribers in the State of Maine for the years ended
December 31, 1994, 1995 and 1996 and the three months ended March 31,
1996 and 1997, respectively. See "The Maine Disposition."
(g) Net Population Equivalents means the estimated population of the
license market area multiplied by the percentage ownership of the
license. The estimated population is based on the 1996 Paul Kagan
Associates, Inc. Cellular/PCS POP Book. The Company owns 100% of each
of its PCS licenses and 100% of each of its cellular licenses. For the
years ended December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997, Net Cellular Population Equivalents include
441,900, 442,000, 442,200, 442,000 and 442,200 population equivalents,
respectively, from the Company's Maine market areas. See "The Maine
Disposition."
11
<PAGE> 16
RISK FACTORS
An investment in the Notes involves a significant degree of risk. In
determining whether to make an investment in the Notes, prospective investors
should consider carefully all of the information set forth in this Prospectus
and, in particular, the following factors.
SIGNIFICANT CAPITAL REQUIREMENTS
The development, construction and start-up phase associated with the
implementation of the Company's PCS System will continue to require substantial
capital. The Company currently estimates that capital expenditures will total
approximately $200.0 million in 1997 to complete the initial buildout of the
Current PCS System (excluding Albany, Georgia and Chattanooga, Tennessee) and to
complete the digital upgrade of the Company's cellular system, and $150.0
million ($30.0 million in 1997 and $120.0 million in 1998) relating to the
initial buildout of the Kentucky/Tennessee PCS System. Upon completion of the
initial buildout of the Current PCS System (excluding Albany, Georgia and
Chattanooga, Tennessee), the Company expects to be able to offer PCS services in
markets containing approximately 60% of the population within the Current PCS
Markets. The initial coverage is expected to extend across 23 metropolitan areas
and secondary cities within the Current PCS Markets, as well as the major
highway corridors connecting those areas. The Company expects to complete the
initial buildout of the Current PCS System (excluding Albany, Georgia and
Chattanooga, Tennessee) in late 1997 and in the Albany, Georgia and Chattanooga,
Tennessee metropolitan areas in 1998. Upon the completion of the initial
buildout of the Kentucky/Tennessee PCS System, the Company expects to be able to
offer PCS services in markets containing approximately 55% of the population
within the PCS Markets. Thereafter, based on customer demand and competitive
factors, Powertel intends to continue to build out its PCS System to enhance and
expand its coverage.
The Company believes that the net proceeds from the Offering, together
with the net proceeds from the Preferred Stock Sales, cash on hand (including
the proceeds from the Maine Disposition) and borrowings under the Vendor
Financing Agreement and additional vendor financing, which the Company expects
to be available, will be sufficient to finance the development, construction and
operating costs associated with the initial buildout of the PCS Markets and the
completion of the digital upgrade of the Company's cellular system. Failure to
obtain such financing could result in the delay or abandonment of some or all of
the Company's development and expansion plans and expenditures, which could
limit the ability of the Company to meet its debt service obligations (including
its obligations with respect to the Notes) and could have a material adverse
effect on its business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Although the Company is currently unable to predict with certainty the
amount of expenditures that may be made subsequent to the initial buildout of
the PCS System, the Company expects that it may require additional capital.
Sources of additional capital may include vendor financing, cash flow from
operations, public and private equity and debt financings and asset dispositions
by the Company. The Company may also require additional financing in the event
it decides to make additional acquisitions. The extent of additional financing
required will depend partially on the success of the Company's business. The
Company currently has no sources of income or cash flows other than its cellular
and newly launched PCS operations and the interest income earned from investing
the net proceeds from the Maine Disposition, the approximately $290.8 million of
net proceeds from the Offering and the remaining net proceeds ($207.5 million as
of March 31, 1997) from the sale in 1996 of: (i) 7,124,322 shares of its common
stock, par value $.01 per share (the "Common Stock") in a public offering (the
"Stock Offering"); (ii) 35,747 units, consisting in the aggregate of $357.4
million principal amount at maturity of 12% Senior Discount Notes due February
2006 (the "February 1996 Notes") and 1,143,904 warrants (the "Warrants") to
purchase an equal number of shares of Common Stock at an exercise price of
$18.15 per share, subject to adjustment (the "Unit Offering"); and (iii) $360.0
million principal amount at maturity of the 12% Senior Discount Notes due May
2006 (the "April 1996 Notes") in a public offering (the "Debt Offering" and,
together with the Stock Offering and the Unit Offering, the "1996 Offerings").
There can be no assurance that additional financing will be available to the
Company or, if available, that it can be obtained on terms acceptable to the
Company and within the limitations contained in the Indentures, the Vendor
Financing Agreement or that may be contained in any future financing
arrangements.
12
<PAGE> 17
FUTURE OPERATING LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS
The Company had an operating loss of $24.6 million and negative EBITDA
of $12.2 million for the three months ended March 31, 1997 and had an operating
loss of $28.6 million and negative EBITDA of $2.5 million for the year ended
December 31, 1996. The Company expects to incur significant operating losses and
to generate negative cash flow from operating activities during the next several
years while it develops and constructs its PCS System and builds a PCS customer
base. These losses and negative cash flow are expected to increase during the
initial years of the PCS System buildout and operation. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flow from operating activities in the future. If the Company cannot achieve
profitability or positive cash flow from operating activities, it may not be
able to meet its debt service or working capital requirements (including its
obligations with respect to the Notes, the February 1996 Notes and the April
1996 Notes). See "-- PCS System Implementation Risks; Operational Risks,"
"Selected Historical Financial Information," "Pro Forma Financial Information"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS; REFINANCING RISKS
As of March 31, 1997, on a pro forma basis after giving effect to the
Transactions, the Company's total indebtedness would have been $851.1 million,
and its stockholders' equity would have been $465.9 million. The Company's
earnings were insufficient to cover fixed charges by $36.3 million and $56.2
million for the three months ended March 31, 1997 and the year ended December
31, 1996, respectively. On a pro forma basis after giving effect to the
Transactions, the Company's earnings would have been insufficient to cover fixed
charges by $44.0 million and $99.2 million for the three months ended March 31,
1997 and the year ended December 31, 1996, respectively. See "Capitalization"
and "Pro Forma Financial Information." In addition, the accretion of original
issue discount on the February 1996 Notes and the April 1996 Notes will cause an
increase in liabilities from March 31, 1997 of $266.2 million ($129.9 million by
February 1, 2001 with respect to the February 1996 Notes and $136.3 million by
May 1, 2001 with respect to the April 1996 Notes). The Company's total
indebtedness and debt service requirements will be substantially increased as a
result of the Offering, and the Company will continue to be subject to
significant financial restrictions and limitations.
The Indentures and Vendor Financing Agreement contain certain
restrictive covenants, and any additional financing agreements may contain
additional restrictive covenants. The restrictions contained in the Indentures
and the Vendor Financing Agreement will affect, and in some cases will
significantly limit or prohibit, among other things, the ability of the Company
to incur indebtedness, make prepayments of certain indebtedness, pay dividends,
make investments, engage in transactions with stockholders and affiliates, issue
capital stock, create liens, sell assets and engage in mergers and
consolidations. If the Company fails to comply with the restrictive covenants in
the Indentures, the Company's obligation to repay the Notes, the February 1996
Notes and the April 1996 Notes may be accelerated. However, the limitations set
forth in the Indentures will be subject to a number of important qualifications
and exceptions. In particular, while the Indentures restrict the Company's
ability to incur additional indebtedness by requiring compliance with specified
leverage ratios, they permit the Company and its subsidiaries to incur an
unlimited amount of additional indebtedness to finance the acquisition of
inventory or equipment and up to $25.0 million of additional indebtedness under
one or more revolving credit or working capital facilities and in each case to
secure such indebtedness. See "Description of Certain Indebtedness -- The
February 1996 Notes," "-- The April 1996 Notes" and "Description of the Notes."
In addition to the restrictive covenants described above, the Vendor Financing
Agreement requires the Company to maintain certain financial ratios. See
"Description of Certain Indebtedness -- The Vendor Financing Agreement." The
failure of the Company and its subsidiaries to maintain such ratios would
constitute events of default under the Vendor Financing Agreement,
notwithstanding the ability of the Company to meet its debt service obligations.
An event of default under the Vendor Financing Agreement would allow the lender
thereunder to accelerate the maturity of such indebtedness. In such event, a
significant portion of the Company's other indebtedness (including the Notes,
the February 1996 Notes and the April 1996 Notes) may become immediately due and
payable.
The successful implementation of the Company's PCS strategy is
necessary for the Company to be able to meet its debt service requirements. The
buildout of the PCS System may require substantial additional capital. See "--
Significant Capital Requirements." In addition, the Company's ability to satisfy
its obligations
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once the PCS System is operational will be dependent upon the Company's future
performance, which is subject to a number of factors, many of which are beyond
the Company's control. See "-- PCS System Implementation Risks; Operational
Risks." There can be no assurance that the Company can complete the PCS System
or that, once completed, the Company will generate sufficient cash flow from
operating activities to meet its debt service and working capital requirements.
The indebtedness under the Vendor Financing Agreement, the February 1996 Notes
and the April 1996 Notes will mature prior to the maturity of the Notes, and
such indebtedness and the Notes may need to be refinanced at their maturity. The
Company's ability to refinance its indebtedness will depend on, among other
things, its financial condition at the time, the restrictions in the instruments
governing its indebtedness and other factors, including market conditions,
beyond the control of the Company. In addition, in the event the implementation
of the PCS System is delayed or the Company does not generate sufficient cash
flow to meet its debt service requirements, the Company may need to seek
additional financing. There can be no assurance that any such financing or
refinancing could be obtained on terms that are acceptable to the Company. In
the absence of such financing or refinancing, the Company could be forced to
dispose of assets in order to make up for any shortfall in the payments due on
its indebtedness under circumstances that might not be favorable to realizing
the highest price for such assets. A substantial portion of the Company's assets
consist of intangible assets, principally licenses granted by the FCC, the value
of which will depend upon a variety of factors (including the success of the
Company's PCS and cellular businesses and the wireless telecommunications
industry in general). In addition, transfers of interests in such licenses are
subject to FCC approval. As a result, there can be no assurance that the
Company's assets could be sold quickly enough, or for sufficient amounts, to
enable the Company to meet its obligations (including its obligations with
respect to the Notes).
PRIORITY OF SECURED DEBT; STRUCTURAL SUBORDINATION
The Indentures do not limit the amount of indebtedness the Company may
incur to finance the acquisition of inventory or equipment and permit the
Company to secure such indebtedness. The Indentures also permit the Company to
incur up to $25.0 million of indebtedness under one or more revolving credit or
working capital facilities and to secure such indebtedness. The Company expects
to continue to finance the purchase of a substantial amount of equipment to
build its PCS System with indebtedness under the Vendor Financing Agreement. The
Company's obligations under the Vendor Financing Agreement are secured by all
tangible assets purchased with such financing and by a pledge of the stock of
the Company's subsidiaries that own the Company's PCS licenses for the Current
PCS Markets. The Company intends to pursue additional vendor financing
arrangements. The Company's obligations under any such future vendor financing
arrangement would likely be secured by both the tangible assets purchased with
such financing and by a pledge of stock in certain of the Company's subsidiaries
which own PCS licenses. In the event of a default on the Notes or a bankruptcy,
liquidation or reorganization of the Company, assets securing the Vendor
Financing Agreement or any future vendor financings will be available to satisfy
obligations of the secured debt before any payment could be made on the Notes,
the February 1996 Notes and the April 1996 Notes. Accordingly, there may only be
a limited amount of assets available to satisfy any claims of the holders of the
Notes upon an acceleration of the Notes. A significant portion of the Company's
assets are intangible assets including licenses and goodwill. In addition, to
the extent that the value of such collateral is insufficient to satisfy such
secured indebtedness, amounts remaining outstanding on such secured indebtedness
would be entitled to share pari passu with the Notes, the February 1996 Notes
and the April 1996 Notes with respect to any other assets of the Company.
Because the Indentures permit the Company or its subsidiaries to incur an
unlimited amount of indebtedness to finance the acquisition of inventory or
equipment, up to $25.0 million of indebtedness under one or more revolving
credit or working capital facilities and up to $50.0 million of additional
indebtedness, in the event any such indebtedness is incurred by the Company's
subsidiaries, such indebtedness will be effectively senior to the Notes.
RISKS RELATING TO SELECTION OF PCS DIGITAL PROTOCOL
When the FCC first licensed cellular systems in the United States, it
mandated all technical aspects of system operation and protocol to ensure
nationwide compatibility between all cellular carriers. However, the FCC has not
mandated the technology protocols for PCS operations, leaving each licensee free
to select among several competing technologies that have sufficient
technological differences to preclude their interoperability. This opportunity
to choose among technologies could be altered by certain actions the FCC may
take in its rulemaking to implement the Telecommunications Act of 1996, as
amended (the "1996 Telecommunications
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Act"). In order to promote network interconnectivity, the 1996
Telecommunications Act requires the FCC to oversee coordinated network planning
and participate in industry standards-setting organizations. Although the
Company believes that GSM offers the Company certain advantages over the other
two principal competing PCS technologies, there are also certain risks
associated with the deployment of GSM, including the potential that the
interconnectivity activities encouraged by the 1996 Telecommunications Act could
require technological overlays to permit interoperability with systems using
different technology protocols. Any such interoperability requirement could have
a material adverse effect on the Company's business, financial condition or
results of operations. See "-- Government Regulation."
In the event interoperability standards are not required, a risk
associated with the selection of GSM as the Company's PCS protocol is the
inability to implement reciprocal PCS roamer service to, and obtain PCS roamer
service from, other markets where a compatible PCS protocol has not been
implemented. In order for the Company's subscribers to roam in other wireless
markets (and vice versa), at least one PCS licensee in the other market must
utilize the GSM protocol, or the subscribers must use a handset that is capable
of operating on multiple technology platforms (i.e., dual-mode). Such dual-mode
handsets would permit the subscriber to use the existing analog cellular
wireless system in markets where a GSM system is not deployed. Such dual-mode
phones are not expected to be available until late 1997 and are expected to be
heavier and more expensive than single-mode (GSM only or cellular only) phones.
According to data collected by GSM North America, a group of GSM providers of
which the Company is a member, PCS licensees (including winning bidders in the
D/E/F Auctions) who have announced or otherwise indicated their choice of the
GSM protocol cover markets containing approximately 260 million persons, or
approximately 98% of the U.S. population. However, one of the GSM licensees,
Pocket, which recently filed for reorganization under Chapter 11 of the United
States Bankruptcy Code, has licenses in markets containing approximately 35
million people. The Company has entered into roaming agreements with several
GSM-based PCS providers and intends to pursue additional roaming arrangements
for areas where GSM-based PCS service may be offered in the future. However,
there can be no assurance that GSM-based PCS systems will be deployed in all of
these markets or that the Company will be successful in implementing roaming
arrangements for such markets.
PCS licensees choosing IS-136 technology, including AT&T Wireless PCS,
Inc. ("AT&T Wireless"), are expected to cover the entire U.S. population because
IS-136 handsets are currently capable of operating at both cellular and PCS
frequencies. See "Business - The Wireless Telecommunications Industry - Digital
Technology." PCS licensees, including PrimeCo Personal Communications, L.P.
("PrimeCo") and Sprint Spectrum, L.P. ("Sprint PCS"), have deployed, or publicly
announced that they intend to deploy, Code Division Multiple Access ("CDMA")
based PCS systems. Together, these CDMA-based PCS licensees are expected to
cover approximately 100% of the U.S. population. The fact that the Company's PCS
subscribers will not be able to roam into regions not served by GSM-based PCS
systems, unless the subscribers use dual-mode telephones (which are not yet
available) that would permit them to use the existing analog cellular wireless
system, may adversely affect the Company's ability to establish a PCS customer
base and to compete successfully in the PCS business with those PCS operators
offering greater roaming capabilities.
Finally, to the extent that most competitors in the PCS industry
utilize a competing technology that is not compatible with GSM, the Company's
business, financial condition and results of operations could be adversely
affected, and the Company's GSM-based system might be rendered obsolete. See "--
Competition," "Business -- The Wireless Telecommunications Industry -- Digital
Technology" and "Business -- PCS Operations."
PCS SYSTEM IMPLEMENTATION RISKS; OPERATIONAL RISKS
The Company's investment in the ownership, development and operation of
its PCS System involves a high degree of risk.
The Company expects to complete the initial buildout of its Current PCS
System (excluding Albany, Georgia and Chattanooga, Tennessee) in late 1997, at
which time the Company expects to be able to offer service in markets containing
approximately 60% of the population in the Current PCS Markets. This initial
coverage is expected to extend across 23 metropolitan areas and secondary cities
within the Current PCS Markets as well as the major highway corridors connecting
those areas. The Company expects to complete the initial
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<PAGE> 20
buildout of its PCS System in the Albany, Georgia and Chattanooga, Tennessee
metropolitan areas in 1998. The Company intends to commence the initial buildout
of the Kentucky/Tennessee PCS System in late 1997 and expects to begin offering
commercial service in such BTAs in the second half of 1998. There can be no
assurance that the Company will be able to implement the PCS System in any
particular market in accordance with its current buildout plan and schedule. If
the Company is not able to implement its PCS buildout plan, the Company may be
unable to provide services comparable to those provided by the cellular and
other PCS operators in the PCS Markets, and the Company's PCS subscriber growth
may be limited. In addition, FCC rules require all PCS licensees to meet certain
buildout and population coverage requirements. See "Business -- Regulation of
Wireless Telecommunications Systems." Failure to comply with these requirements
could cause revocation or forfeiture of the Company's PCS licenses or the
imposition of fines on the Company by the FCC.
The successful implementation of the PCS System will be dependent, to a
significant degree, upon the Company's ability to lease or acquire sites for the
location of its base station equipment. The site selection process requires the
negotiation of lease or acquisition agreements for over 1,800 sites for the
entire PCS System (approximately 1,200 and 1,500 sites by the end of 1997 and
1998, respectively) and, in many cases, requires the Company to obtain zoning
variances or other governmental approvals or permits. See "-- Necessity of
Zoning Approvals." As of March 31, 1997, the Company had leased or acquired
approximately 625 sites in the Current PCS Markets. The Company has retained
firms to provide site identification and acquisition services in each of the
Current PCS Markets and is in the process of hiring such firms for the
Kentucky/Tennessee BTAs. The Company expects that the site acquisition process
will continue throughout the buildout of the PCS System, as the Company expands
its geographic coverage. In addition to site selection, the buildout of the
Company's PCS System involves construction, base station and equipment
installation and systems testing and will require that the Company relocate
additional existing licensees operating fixed microwave systems in the Company's
licensed frequency band. The Company currently is in the site selection and
construction phase of its initial buildout of the Atlanta, Georgia MTA, which
initial buildout (excluding Albany, Georgia and Chattanooga, Tennessee) is
expected to be completed with a total of approximately 450 cell sites in 1997.
The Company currently is evaluating base station systems and other equipment and
is negotiating with equipment vendors for the Kentucky/Tennessee BTAs. Like site
acquisition, the Company expects that construction, installation, testing and
microwave relocation will continue throughout the buildout of the PCS System as
the Company expands its geographic coverage. See "-- Relocation of Fixed
Microwave Licensees." Each stage involves various risks and contingencies, many
of which are not within the control of the Company and all of which could
adversely affect the implementation of the Company's PCS System should there be
delays or other problems.
The Company considers several factors in determining the buildout
schedule and selection of sites for its PCS System in each metropolitan area,
including estimates of future market demand for its services. Market demand is
difficult to predict and may be affected by numerous factors, including
demographics, competition and marketing promotions of the Company and its
competitors. From November 29, 1996 to January 18, 1997, as part of a special,
limited-time promotion (the "Prestige Partners Promotion"), the Company offered
users unlimited local airtime throughout 1997 for $50 per month (with the
exception of certain subscribers in the Memphis area who were unable to obtain
the PCS handsets of their choice due to a handset shortage in that market and
for whom the promotional pricing extends through April 30, 1998). Customer
response to this promotion greatly exceeded the Company's expectations.
Accordingly, during certain peak usage times in suburban areas of two of the
Company's markets, customers experienced call blocking from certain cell sites.
Although the Company has taken measures, including accelerating capital
expenditures to increase capacity and establish fill-in cell sites, to
accommodate the large demand it has experienced in these areas and is continuing
to upgrade its switching equipment software to enable additional network
capacity, no assurance can be given that the Company's PCS System will not
experience similar capacity constraints in the future due to the difficulty in
predicting market demand and customer usage patterns. There can be no assurance
that any such capacity constraints will not have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company's success in the implementation and operation of its PCS
System also is subject to other factors beyond the Company's control. These
factors include, without limitation, changes in general and local economic
conditions, availability of equipment necessary to operate or use the PCS
System, changes in communications service rates charged by others, changes in
the supply and demand for PCS and the commercial
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<PAGE> 21
viability of PCS systems as a result of competing with wireline and wireless
operators in the same geographic area, demographic changes that might negatively
affect the potential market for PCS, changes in the federal and state regulatory
scheme affecting the operation of PCS systems (including the enactment,
implementation and interpretation of new statutes, including the 1996
Telecommunications Act, and the promulgation of changes in the interpretation or
enforcement of existing or new rules and regulations) and changes in technology
that have the potential of rendering obsolete the technology and equipment that
the Company intends to use to construct its PCS System. See "-- Risks Relating
to Selection of PCS Digital Protocol" and "-- Government Regulation." Although
the Company attempts to maintain multiple vendors for each required product,
certain of its inventory and equipment, which are important components of its
operations, are acquired from a limited number of sources. Some of the Company's
suppliers have limited resources and production capacity. During its Prestige
Partners Promotion, the Company was temporarily unable to obtain a sufficient
number of a certain brand of PCS handsets. If the suppliers are unable to meet
the Company's needs as it builds out its network infrastructure and sells
services and equipment, delays and increased costs in the expansion of the
Company's network infrastructure or losses of potential customers could result.
In addition, the extent of the potential demand for PCS cannot be estimated with
any degree of certainty. There can be no assurance that one or more of these
factors will not have an adverse effect on the Company's business, financial
condition or results of operations.
The development, construction and operation of its PCS System is
expected to place significant demands on the Company's management, operational
and financial resources. The Company's PCS System is much larger than its
existing cellular system and is expected to have significantly more customers.
The Company's future performance will depend, in part, on the Company's ability
to implement and improve its operational and financial systems and to expand,
train and manage its employee base, including customer support and marketing and
sales personnel. There can be no assurance that the Company will be able
successfully to manage expected operations. Any failure to effectively manage
growth (including implementing adequate systems, procedures and controls in a
timely manner) could have a material adverse effect on the Company's business,
financial condition or results of operations.
Although the Company believes it has carefully planned for the
implementation of the new operational structure that will be necessary as a
result of its entry into the PCS business, there can be no assurance that such
plans can be executed as envisioned, or that the implementation of those plans
will not have an adverse impact on the Company's existing operations.
LITIGATION
The Company, through its subsidiary Powertel/Birmingham, Inc.
("Powertel/Birmingham"), was served with a complaint filed on April 4, 1997 by
American Page One, Inc. d/b/a American Mobile Wireless Communications
("Plaintiff") in the Circuit Court of Macon County, Alabama. Plaintiff claims
that Powertel/Birmingham has breached its agency contract and has committed
other torts with respect to Plaintiff by failing to accurately track Plaintiff's
account with respect to inventory invoicing and commissions, failing to pay
timely commissions, failing to provide services to Plaintiff's customers in a
competent and accurate manner, billing Plaintiff's customers inaccurately and in
excessive amounts, and making false representations with regard to its customer
service and operational capabilities. Plaintiff is seeking unspecified damages.
While the Company believes that the claims are without merit and intends to
vigorously defend itself, there can be no assurance that these claims or the
loss of its agency relationship with Plaintiff will not result in a loss of
customers acquired from such agency relationship or otherwise have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company recently received a Civil Investigative Demand (the
"Demand") from the U.S. Department of Justice Antitrust Division (the "Antitrust
Division") requiring the Company to produce certain documents and answer certain
interrogatories in connection with the Antitrust Division's investigation of
possible bid rigging and market allocation for licenses auctioned by the FCC for
broadband PCS frequency blocks. The Company intends to cooperate fully with the
Antitrust Division's requests.
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NECESSITY OF ZONING APPROVALS
State and local authorities generally have broad power to establish
regulations concerning the use of land in their jurisdictions. These regulations
may restrict or prohibit the construction of antenna towers in certain locations
and, consequently, may limit the number of antenna sites available to the
Company. The Company has experienced and may in the future experience difficulty
in obtaining zoning approval for tower and antenna sites in certain locations
which may delay, or in certain cases prevent, the Company's construction of
towers and placement of antennae.
Under the 1996 Telecommunications Act, states may not restrict cell
siting or modification based upon the environmental effects of radio frequency
("RF") emissions if those emissions meet the standards which the FCC imposed in
1996. However, state and local governmental authorities continue to impose
regulations that expressly prohibit the construction of additional tower sites,
including several governmental authorities in the Company's PCS Markets. These
governmental moratoria are the subject of a Petition for Declaratory Ruling (the
"Petition") filed with the FCC by the Cellular Telecommunications Industry
Association ("CTIA"). The Petition argues that these restrictions effectively
impede the entry of new telecommunications services and providers and,
therefore, are in violation of the 1996 Telecommunications Act. CTIA is seeking
federal preemption of state and local siting and zoning moratoria regulation. In
certain cases, judicial proceedings are also pending to challenge a local
government's authority in this area. However, it is possible that local
governmental authorities may continue to adopt policies or moratoria on
construction of new towers or facilities which will delay or prevent the
construction of portions of the Company's PCS System. See "-- Radio Frequency
Emissions Concerns; Health Risks."
There can be no assurance that the application of zoning and other land
use regulations by state and local authorities will not have a material adverse
effect on the business, financial condition or results of operations of the
Company.
COMPETITION
The Company's PCS business will directly compete with multiple PCS
providers in each of its PCS Markets. While the FCC has initially provided for
six PCS licenses per market, it has recently amended its rules to allow an
existing PCS licensee to: (i) disaggregate its licenses by transferring part of
its spectrum to another entity; or (ii) partition its licenses by transferring
part of its geographic territory to another entity. The Company also expects
that existing cellular providers in the PCS Markets, some of which have an
infrastructure in place and have been operational for a number of years, will
continue to upgrade their systems to provide comparable services in competition
with its PCS System. Principal cellular providers in the PCS Markets are
AirTouch Communications, Inc. ("AirTouch"), GTE Mobile Communications
Corporation ("GTE Mobile"), Palmer Communications, Inc. ("Palmer"), BellSouth
Cellular Corp., operating as BellSouth Mobility, Inc. ("BellSouth Mobility"),
Alltel Mobile Communications, Inc. ("Alltel") and Century Cellunet, Inc.
Principal PCS competitors in the PCS Markets are PrimeCo, Sprint PCS and AT&T
Wireless. The Company may face additional competition from winning bidders in
the D/E/F Auctions. These potential competitors include Sprint PCS, Alltel and
BellSouth Wireless, Inc., a separate wireless subsidiary of BellSouth
Corporation ("BellSouth Wireless"), each of which was the winning bidder for 10
MHz licenses in many of the same BTA's in which the Company holds licenses.
The Company currently competes with other cellular licensees in each of
its Cellular Markets and expects to compete in its Cellular Markets with several
PCS licensees. Among the PCS operators expected to compete with the Company in
the Cellular Markets are AT&T Wireless and Sprint PCS.
The Company expects to compete with other communications technologies
that now exist, such as paging (including two-way digital paging), enhanced
specialized mobile radio ("ESMR") and domestic and global mobile satellite
service ("MSS"). As a result of advances in digital technology, ESMR operators
have begun to design and deploy digital mobile networks that increase the
frequency capacity of ESMR systems to a level that may be competitive with that
of cellular systems. A limited number of ESMR operators have recently begun
offering short messaging, data services and interconnected voice telephony
services on a widespread basis. Nextel Communications, Inc. ("Nextel") operates
digital mobile networks in most major U.S. markets, including in the
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<PAGE> 23
Atlanta market. Southern Communications Services, Inc. ("Southern
Communications") has introduced commercial two-way wireless service using ESMR
technology in Georgia (including the Atlanta area) and in Alabama, northern
Florida and southeastern Mississippi. In the future, cellular service and PCS
will also compete more directly with traditional landline telephone service
providers, utilities, local multipoint distribution service providers and cable
operators. The FCC has recently concluded an auction for 30 MHz of spectrum
located in the 2.3 GHz band, known as the Wireless Communications Service
("WCS"). These licenses were auctioned in 5 MHz and 10 MHz blocks in each
license area. The FCC has determined that WCS providers will be permitted to
offer a broad range of broadcast services, but has imposed certain restrictions
which the FCC has indicated will make the use of WCS spectrum for mobile
applications "prohibitively expensive" and "technologically infeasible." The FCC
has recently announced that it will auction two local multipoint distribution
service licenses (one 1,150 MHz block and one 150 MHz block) in each BTA. These
licenses will allow licensees to provide wireless cable, telephony, video
communications, data and other services. In addition, the Company may face
competition from technologies that may be introduced in the future. See "--
Government Regulation" and "Business -- Competition; Other Telecommunications
Technologies."
All of such competition will be intense and may lead to subscriber
attrition and require the Company to decrease the prices it charges to its
customers. The Company competes to attract and retain customers principally on
the basis of pricing, services and enhancements, its customer service and the
size and location of its service areas. The Company may need to reduce its
prices in order to meet reductions in rates by others. Such reductions could
adversely affect the Company. There can be no assurance that the Company will be
able to compete successfully in this environment or that new technologies and
products that are more commercially effective than the Company's technologies
and products will not be developed. In addition, many of the Company's
competitors have substantially greater financial, technical, marketing, sales,
manufacturing and distribution resources than those of the Company and have
significantly greater experience than the Company in testing new or improved
telecommunications products and services and obtaining regulatory approvals.
Some competitors are expected to market other services, such as cable television
access or landline local exchange or interexchange services, with their wireless
telecommunications service offerings. Several of the Company's competitors are
operating, or planning to operate, through joint ventures and affiliation
arrangements, wireless telecommunications systems that encompass most of the
United States. See "Business -- Competition; Other Telecommunications
Technologies."
RELOCATION OF FIXED MICROWAVE LICENSEES
For a period of up to five years from the grant of a PCS license, a PCS
licensee will be required to share spectrum with existing licensees that operate
certain fixed microwave systems within its license area. To secure a sufficient
amount of unencumbered spectrum to operate its PCS System efficiently, the
Company has relocated many of these incumbent licensees and will need to
relocate additional incumbent microwave users in its PCS Markets in the future
and in new markets as they are developed. In an effort to balance the competing
interests of existing microwave users and newly authorized PCS licensees, the
FCC adopted a transition plan to relocate such microwave operators to other
spectrum blocks. With regard to the Company's licenses for its Current PCS
Markets ("A" and "B" block PCS licenses), this transition plan allowed most
microwave users to operate in the PCS spectrum for a two-year voluntary
negotiation period and an additional one-year mandatory negotiation period. The
FCC recently shortened the voluntary negotiation period with respect to all
D/E/F block licenses, including the Company's licenses for the
Kentucky/Tennessee BTAs, to one year. For public safety entities dedicating a
majority of their system communications for police, fire or emergency medical
services operations, the voluntary negotiation period is three years. Parties
unable to reach agreement within these time periods may refer the matter to the
FCC for resolution, but the incumbent microwave user is permitted to continue
its operations until final FCC resolution of the matter. As of March 31, 1997,
the Company had signed microwave relocation agreements for 106 microwave links
at a cost of $29.2 million and estimates that it may be required to relocate
between 40 and 50 additional microwave links in the PCS Markets. There can be no
assurance that the Company will be successful in reaching timely agreements with
the remaining microwave licensees or that any such agreements will be on terms
favorable to the Company. Any delay in the relocation of such licensees may
adversely affect the Company's ability to commence timely commercial operation
of its PCS System. Furthermore, depending on the terms of such agreements, if
any, the Company's ability to operate its PCS System profitably may be adversely
affected. See "Business -- PCS Operations -- PCS System."
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SIGNIFICANT CHANGE IN WIRELESS TELECOMMUNICATIONS INDUSTRY
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 access rates
may continue to decline. As a result, the future prospects of the industry and
the Company and the success of PCS and other competitive services remain
uncertain.
RADIO FREQUENCY EMISSION CONCERNS; HEALTH RISKS
Media reports have suggested that RF emissions from wireless telephones
might be linked to cancer or have other adverse health consequences. The FCC has
recently conducted a rulemaking proceeding mandating acceptable levels of RF
emissions with respect to wireless communications equipment. Such FCC standards
are consistent with criteria established by the National Council on Radiation
Protection and Measurements and endorsed by the Environmental Protection Agency
and, in certain respects, are similar to existing standards developed by the
American National Standards Institute. The Company believes its equipment and
network comply with such standards. The 1996 Telecommunications Act further
mandates that state and local governments may not deny requests for facilities
siting, construction or modification based on the environmental effects of RF
emissions, so long as the facilities comply with the FCC's emissions standards.
Although the Company believes its wireless handsets comply with applicable
standards, concerns over RF emissions may have the effect of discouraging the
use of wireless communications services, such as PCS and cellular, which could
have an adverse effect on the Company's business, financial condition or results
of operations.
Certain interest groups have requested that the FCC investigate claims
that digital wireless handsets pose health concerns and cause interference with
hearing aids and other medical devices. The Center for the Study of
Electromagnetic Compatibility at the University of Oklahoma (the "Center"),
which was founded in 1994 with funds from the wireless industry, is studying
this issue. The Center recently released results from the first phase of its
study, which focused on the operation of handsets at maximum power. This study
indicated that the three wireless technologies tested, including GSM, caused
interference with hearing aids in some instances. In addition, the Personal
Communications Industry Association ("PCIA") announced in July 1995 that it was
undertaking an industry-wide study to gather information on possible PCS
interference with medical devices for all PCS standards. Results from
researchers working under the guidance of Wireless Technology Research LLC
indicate that digital wireless handsets may cause interference with some
pacemakers, although those results show that GSM handsets cause only minimal
interference. These researchers have recommended preliminarily that patients
dependent on pacemakers avoid using digital wireless telephones and that
nondependent patients keep such telephones away from their implanted devices. A
recent study reported in The Journal of Radiation Research found that
genetically-engineered mice (mice injected with a cancer causing gene) that were
exposed to wireless phone-like radio signals had a higher than normal cancer
rate and an increased incidence of tumors. The New England Journal of Medicine
recently published a study that found an increased risk of collision when using
a cellular telephone in a moving automobile. Such study found no causal link
between cellular telephone use in automobiles and automobile accidents, but only
found a relationship between the two events. Furthermore, the study considered a
cellular telephone to be in use at the time of an accident if it was in use
during the five minute period prior to the accident (and not necessarily in use
at the actual time of the accident).
These types of reports receive widespread media coverage and may have a
negative effect on demand for the Company's services, and may lead to claims
against the Company or government regulations, any of which could have an
adverse impact on the Company's business, financial condition or results of
operations. See "Business -- Regulation of the Wireless Telecommunications
Systems."
GOVERNMENT REGULATION
The licensing, construction, operation, acquisition and disposition of
PCS networks, as well as the number of PCS, cellular and other wireless
licensees permitted in each market, are regulated by the FCC. Changes in the
regulation of such activities could have a material adverse effect on the
Company's business,
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financial condition and results of operations. To the extent not otherwise
preempted by federal law, the states are permitted to regulate any other terms
and conditions of wireless services (other than market entry and rates), such
as, but not limited to, billing and consumer protection matters,
facilities-siting issues, transfer of control, bundling of services and
equipment, and availability of capacity on a wholesale basis. In addition, under
the 1996 Telecommunications Act, any agreement reached between a local exchange
carrier ("LEC") and another telecommunications carrier for interconnection,
provision of services, or access to network elements will have to be submitted
to the relevant state commission for approval.
The FCC also has the authority to revoke and renew licenses to provide
cellular and PCS services. The Company's cellular licenses for its Cellular
Markets will expire in 2000, its PCS licenses in its Current PCS Markets will
expire in 2005 and its PCS licenses in the Kentucky/Tennessee BTAs will expire
in 2007. Although the FCC will grant a preference, or "renewal expectancy," to
the existing cellular licensee upon a showing that it has (i) provided
"substantial" service during its past license term and (ii) substantially
complied with applicable FCC rules and policies and the Communications Act,
there can be no assurance that the Company's licenses will be renewed. See
"Business -- Regulation of Wireless Telecommunications Systems."
The recently enacted 1996 Telecommunications Act imposes on all
telecommunications carriers, including the Company, duties to: (i) interconnect
with other telecommunications carriers; (ii) employ technical standards and
features common with other networks; and (iii) ensure that service is accessible
to disabled persons, if readily achievable. Although the 1996 Telecommunications
Act prohibits the FCC from requiring wireless operators to provide subscribers
with equal access to long distance carriers, the 1996 Telecommunications Act
permits the FCC, if subscribers are denied access to their preferred long
distance carriers, to require unblocked access to the long distance carriers
through the use of carrier access codes. In addition, the 1996
Telecommunications Act contemplates that interstate telecommunications
providers, including providers such as the Company that are defined by the FCC
as commercial mobile radio service ("CMRS") providers, will "make an equitable
and non-discriminatory contribution" to support the cost of providing universal
service. The FCC has recently adopted a plan for the implementation of universal
service reform. While the plan does not impose a surcharge on wireless customers
in order to meet universal service funding goals, the FCC adopted a
competitively neutral contribution mechanism based on end-user
telecommunications revenues. The FCC has not yet adopted a method for
determining what percentage of revenues each carrier should contribute, but the
FCC has stated that it agrees with a previous finding of the Federal-State Joint
Board, established pursuant to the 1996 Telecommunications Act, that the 1996
Telecommunications Act does not preclude states from requiring CMRS providers
such as the Company to contribute to state support mechanisms. The Company
cannot predict the outcome of the implementation of the 1996 Telecommunications
Act or of the FCC's final order on universal service reform and the effect of
any resulting regulation on provision of cellular service or PCS, and there can
be no assurance that such laws will not adversely affect the Company's business,
financial condition or results of operations. See "Business -- Regulation of
Wireless Telecommunications Systems."
Under existing law, except in the case of a special finding of public
interest by the FCC, no more than 25% of the Company's capital stock may be
owned, directly or indirectly, or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. See "Business -Regulation of Wireless Telecommunications Systems."
If the foreign ownership of the Company were to exceed 25%, the FCC could revoke
the Company's FCC licenses if the FCC found the public interest would be served
by such revocation, although the Company could seek a waiver from the FCC of the
foreign ownership restrictions or take other actions to reduce the Company's
foreign ownership percentage in order to avoid the loss of its licenses. The
Company's Restated Certificate of Incorporation authorizes, and the Indentures
permit, the Board of Directors to cause the Company to redeem Common Stock at
its fair market value, or in certain cases the holder's purchase price, in order
to ensure compliance with the rules, regulations and policies of the FCC. The
restrictions on foreign ownership could also adversely affect the ability of the
Company to attract additional equity financing from entities that are, or are
owned by, non-U.S. persons.
DEPENDENCE ON KEY EMPLOYEES
The Company's affairs are managed by a small number of key management
personnel, the loss of any of whom could have an adverse impact on the Company.
The Company does not have any employment contracts with such persons, and it
does not intend to obtain "key man" insurance. There can be no assurance
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<PAGE> 26
that the Company can retain its key managerial and technical employees or that
it can attract, assimilate or retain other skilled technical personnel in the
future. Significant additional personnel also will be required to develop,
construct and operate the Company's PCS System. See "Management."
CONFLICTS OF INTEREST
As of May 15, 1997, ITC Holding Company, Inc. ("ITC Holding") owned
approximately 27.3%, SCANA owned approximately 16.7% (without taking into
consideration the Series B Convertible Preferred Stock or Series D Convertible
Preferred Stock) and Huff owned approximately 7.7% (without taking into
consideration the Series C Convertible Preferred Stock) of the outstanding
Common Stock. See "Security Ownership of Certain Beneficial Owners and
Management." The Company has adopted a policy requiring that any material
transaction between the Company and persons or entities affiliated with
officers, directors or principal stockholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arm's
length transactions with independent third parties. The Company expects to
resolve any potential conflicts of interest on a case-by-case basis, subject to
the applicable provisions of the Indentures, by taking into consideration
relevant factors and prevailing corporate practices.
Certain decisions concerning the operations or financial structure of
the Company may present conflicts of interest between the owners of the
Company's capital stock and the holders of the Notes. For example, if the
Company encounters financial difficulties, or is unable to pay its debts as they
mature, the interests of the Company's equity investors might conflict with
those of the holders of the Notes. In addition, the equity investors may have an
interest in pursuing acquisitions, divestitures, financings or other
transactions that, in their judgment, could enhance their equity investment,
even though such transactions might involve risk to the holders of the Notes.
LACK OF PUBLIC MARKET
The New Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the New Notes on
any national securities exchange or to seek approval for quotation through any
automated quotation system. The Company has been advised by the Placement Agents
that following completion of the Exchange Offer, the Placement Agents intend to
make a market in the New Notes. However, the Placement Agents are not obligated
to do so and any market-making activities with respect to the New Notes may be
discontinued at any time without notice. Accordingly, no assurance can be given
that an active public or other market will develop for the New Notes or as to
the liquidity of or the trading market for the New Notes. If a trading market
does not develop or is not maintained, holders of the New Notes may experience
difficulty in reselling the New Notes or may be unable to sell them at all. If a
market for the New Notes develops, any such market may cease to continue at any
time. If a public trading market develops for the New Notes, future trading
prices of the New Notes will depend on many factors, including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities and other factors, including the financial
conditions of the Company.
CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF THE OLD NOTES
In the event the Exchange Offer is consummated, the Company will not be
required to register any Old Notes not tendered and accepted in the Exchange
Offer. In such event, holders of Old Notes seeking liquidity in their investment
would have to rely on exemptions to the registration requirements under the
securities laws, including the Securities Act. Following the Exchange Offer,
none of the Notes will be entitled to the contingent increase in interest rate
provided for (in the event of a failure to consummate the Exchange Offer in
accordance with the terms of the Registration Rights Agreement) pursuant to the
Old Notes.
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<PAGE> 27
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by Powertel on June 10, 1997 to the Placement
Agents in reliance on Section 4(2) of the Securities Act. The Placement Agents
offered and sold the Old Notes only: (i) to "qualified institutional buyers" (as
defined in Rule 144A) ("QIBs") in compliance with Rule 144A; and (ii) outside
the United States to persons other than U.S. persons ("foreign purchasers"),
which term includes dealers or other professional fiduciaries in the United
States acting on a discretionary basis for foreign beneficial owners (other than
an estate or trust), in reliance upon Regulation S under the Securities Act.
In connection with the sale of the Old Notes, the Company and the
Placement Agents entered into a Registration Rights Agreement dated as of June
10, 1997 (the "Registration Rights Agreement"), which requires the Company: (i)
to cause the Old Notes to be registered under the Securities Act; or (ii) to
file with the Commission a registration statement under the Securities Act with
respect to an issue of new notes of the Company identical in all material
respects to the Old Notes and use its best efforts to cause such registration
statement to become effective under the Securities Act and, upon the
effectiveness of that registration statement, to offer to the holders of the Old
Notes the opportunity to exchange their Old Notes for a like principal amount of
New Notes, which will be issued without a restrictive legend and which may be
reoffered and resold by the holder without restrictions or limitations under the
Securities Act. A copy of the Registration Rights Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
Exchange Offer is being made pursuant to the Registration Rights Agreement to
satisfy the Company's obligations thereunder with regard to the Notes. The term
"holder" with respect to the Exchange Offer means any person in whose name Old
Notes are registered on the trustee's books or any other person who has obtained
a properly completed bond power from the registered holder, or any person whose
Old Notes are held of record by DTC who desires to deliver such Old Note by
book-entry transfer at DTC.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder thereof
(other than broker-dealers, as set forth below, and any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and that such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes. Any holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the New
Notes or who is an affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liabilities under the Securities Act for which
the holder is not indemnified by the Company. Each broker-dealer (other than an
affiliate of the Company) that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make the Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
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By tendering in the Exchange Offer, each holder of Old Notes will
represent to the Company that, among other things: (i) the New Notes acquired
pursuant to the Exchange Offer are being obtained in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the holder; (ii) neither the holder of Old Notes nor any such other person has
an arrangement or understanding with any person to participate in the
distribution of such New Notes; (iii) if the holder is not a broker-dealer, or
is a broker-dealer but will not receive New Notes for its own account in
exchange for Old Notes, neither the holder nor any such other person is engaged
in or intends to participate in the distribution of such New Notes; and (iv)
neither the holder nor any such other person is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or, if such holder is an
"affiliate," that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
Following the completion of the Exchange Offer, none of the Notes will
be entitled to the contingent increase in interest rate provided pursuant to the
Old Notes. Holders of Notes will not have any further registration rights, and
the Old Notes will continue to be subject to certain restrictions on transfer.
See "-- Consequences of Failure to Exchange." Accordingly, the liquidity of the
market for the Old Notes could be adversely affected. See "Risk Factors --
Consequences of the Exchange Offer on Non-Tendering Holders of the Old Notes."
Participation in the Exchange Offer is voluntary, and holders should
carefully consider whether to participate in the Exchange Offer. Holders of the
Old Notes are urged to consult their financial and tax advisors in making their
own decisions on whether to participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
General. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. Subject to the minimum denomination requirements
of the New Notes, the Company will issue $1,000 principal amount of New Notes in
exchange for each $1,000 principal amount of outstanding Old Notes accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer. However, Old Notes may be tendered only in amounts that
are integral multiples of $1,000 principal amount.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes except that: (i) the New Notes
will be registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof; and (ii) holders of the New Notes will
not be entitled to certain rights of holders of Old Notes under the Registration
Rights Agreement, which will terminate upon consummation of the Exchange Offer.
The New Notes will evidence the same debt as the Old Notes, will be entitled to
the benefits of the Indenture and will be treated as a single class thereunder
with any Old Notes that remain outstanding. The Exchange Offer is not
conditioned upon any minimum aggregate principal amount of Old Notes being
tendered for exchange.
As of July 28, 1997, $300,000,000 aggregate principal amount of the Old
Notes were outstanding, and there were 40 registered holders of the Old Notes.
This Prospectus, together with the Letter of Transmittal, is being sent to such
registered holders.
Holders of Old Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Exchange Act, and the rules and regulations of
the Commission thereunder. Old Notes which are not tendered for exchange in the
Exchange Offer will remain outstanding and interest thereon will continue to
accrue, but such Old Notes will not be entitled to any rights or benefits under
the Registration Rights Agreement.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for
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<PAGE> 29
the tendering holders for the purposes of receiving the New Notes from the
Company. If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "-- Fees and Expenses."
Expiration Date; Extensions; Amendments. The term "Expiration Date"
shall mean 5:00 p.m., New York City time, on September 8, 1997, unless the
Company, in its sole discretion, extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended. Although the Company has no current intention to
extend the Exchange Offer, the Company reserves the right to extend the
Exchange Offer at any time and from time to time by giving written notice to
the Exchange Agent and by timely public announcement communicated, unless
otherwise required by applicable law or regulation, by making a release to the
Dow Jones News Service. During any extension of the Exchange Offer, all Old
Notes previously tendered pursuant to the Exchange Offer and not withdrawn will
remain subject to the Exchange Offer. The date of the exchange of the New Notes
for Old Notes will be the first New York Stock Exchange trading day following
the Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions of
the Exchange Offer" shall not have been satisfied, by giving written notice of
such delay, extension or termination to the Exchange Agent or (ii) to amend the
terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by written notice thereof to the registered holders. If the Exchange Offer is
amended in any manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders, and the Company
will extend the Exchange Offer, depending upon the significance of the amendment
and the manner of disclosure to the registered holders, if the Exchange Offer
would otherwise expire during such period.
In all cases, issuance of the New Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of a properly completed and duly executed Letter
of Transmittal and all other required documents; provided, however, that the
Company reserves the absolute right to waive any conditions of the Exchange
Offer or defects or irregularities in the tender of Old Notes. If any tendered
Old Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Notes are submitted for a greater principal
amount than the holder desires to exchange, such unaccepted or non-exchanged Old
Notes or substitute Old Notes evidencing the unaccepted portion, as appropriate,
will be returned without expense to the tendering holder, unless otherwise
provided in the Letter of Transmittal, as promptly as practicable after the
expiration or termination of the Exchange Offer.
Interest on the New Notes. Holders of Old Notes that are accepted for
exchange will not receive accrued interest thereon at the time of exchange.
However, each New Note will bear interest from the most recent date to which
interest has been paid on the Old Notes or New Notes, or if no interest has been
paid on the Old Notes or the New Notes, from June 10, 1997.
Procedures for Tendering Old Notes. The tender to the Company of Old
Notes by a holder thereof pursuant to one of the procedures set forth below will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal. A holder of the Old Notes may tender such Old Notes by: (i)
properly completing and signing a Letter of Transmittal or a facsimile thereof
(all references in this Prospectus to a Letter of Transmittal shall be deemed to
include a facsimile thereof) and delivering the same, together with any
corresponding certificate or certificates representing the Old Notes being
tendered (if in certificated form) and any required signature
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guarantees, to the Exchange Agent at its address set forth in the Letter of
Transmittal on or prior to the Expiration Date (or complying with the procedure
for book-entry transfer described below); or (ii) complying with the guaranteed
delivery procedures described below.
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the New Notes to be issued in exchange therefor are to
be issued (and any untendered Old Notes are to be reissued) in the name of the
registered holder (which term, for the purposes described herein, shall include
any participant in DTC (also referred to as a book-entry facility) whose name
appears on a security listing as the owner of Old Notes), the signature of such
signer need not be guaranteed. In any other case, the tendered Old Notes must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to the Company and duly executed by the registered holder and the signature on
the endorsement or instrument of transfer must be guaranteed by a member firm of
a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" as
defined by Rule 17Ad-15 under the Exchange Act (any of the foregoing hereinafter
referred to as an "Eligible Institution"). If the New Notes or Old Notes not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the note register for the Old Notes, the signature in the
Letter of Transmittal must be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT
TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
The Company understands that the Exchange Agent has confirmed with DTC
that any financial institution that is a participant in DTC's system may utilize
DTC's Automated Tender Offer Program ("ATOP") to tender Old Notes. The Company
further understands that the Exchange Agent will request, within two business
days after the date the Exchange Offer commences that DTC establish an account
with respect to the Old Notes for the purpose of facilitating the Exchange
Offer, and any participant may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's ATOP procedures for transfer. However, the exchange of the Old Notes
so tendered will only be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message (as defined in the next sentence), and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by DTC and received by the Exchange Agent and
forming part of Book-Entry Confirmation, which states that DTC has received an
express acknowledgment from a participant tendering Old Notes which are the
subject of such Book-Entry Confirmation and that such participant has received
and agrees to be bound by the terms of the Letter of Transmittal and that the
Company may enforce such agreement against such participant.
A tender will be deemed to have been received as of the date when (i)
the tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC), is received by the
Exchange Agent or (ii) a Notice of Guaranteed Delivery or letter or facsimile
transmission to similar effect (as provided below) from an Eligible Institution
is received by the Exchange Agent. Issuances of New Notes in exchange for Old
Notes tendered pursuant to a Notice of Guaranteed Delivery or letter or
facsimile transmission to similar effect (as provided below) by an Eligible
Institution will be made only against submission of a duly signed Letter of
Transmittal (and any other required documents) and deposit of the tendered Old
Notes.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptance for
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exchange of which may, in the opinion of the Company's counsel, be unlawful.
The Company also reserves the absolute right to waive any of the conditions of
the Exchange Offer or any defect or irregularity in the tender of any Old
Notes. None of the Company, the Exchange Agent or any other person will be
under any duty to give notification of any defects or irregularities in tenders
or incur any liability for failure to give any such notification. Any Old Notes
received by the Exchange Agent that are not validly tendered and as to which
the defects or irregularities have not been cured or waived, or if Old Notes
are submitted in principal amount greater than the principal amount of Old
Notes being tendered by such tendering holder, such unaccepted or non-exchanged
Old Notes will be returned by the Exchange Agent to the tendering holder,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion (a)
to purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date and (b) to the extent permitted by applicable law, to
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers will differ from the terms
of the Exchange Offer.
Guaranteed Delivery Procedures. If the holder desires to accept the
Exchange Offer and time will not permit a Letter of Transmittal or Old Notes to
reach the Exchange Agent before the Expiration Date or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if the Exchange Agent has received at its office, on or prior to the
Expiration Date, a letter or facsimile transmission from an Eligible
Institution setting forth the name and address of the tendering holder, the
name(s) in which the Old Notes are registered and the certificate number(s) of
the Old Notes to be tendered, and stating that the tender is being made thereby
and guaranteeing that, within three New York Stock Exchange trading days after
the date of execution of such letter or facsimile transmission by the Eligible
Institution, such Old Notes, in proper form for transfer (or a confirmation of
book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC), will be delivered by such Eligible Institution together with a properly
completed and duly executed Letter of Transmittal (and any other required
documents). Unless Old Notes being tendered by the above-described method are
deposited with the Exchange Agent within the time period set forth above
(accompanied or preceded by a properly competed Letter of Transmittal and any
other required documents), the Company may, at its option, reject the tender.
Copies of a Notice of Guaranteed Delivery which may be used by Eligible
Institutions for the purposes described in this paragraph are available from
the Exchange Agent.
Terms and Conditions of the Letter of Transmittal. The Letter of
Transmittal contains, among other things, the following terms and conditions,
which are part of the Exchange Offer.
The party tendering Old Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Old Notes to the Company and irrevocably
constitutes and appoints the Exchange Agent as the Transferor's agent and
attorney-in-fact to cause the Old Notes to be assigned, transferred and
exchanged. The Transferor represents and warrants that it has full power and
authority to tender, exchange, assign and transfer the Old Notes and to acquire
New Notes issuable upon the exchange of such tendered Old Notes, and that, when
the same are accepted for exchange, the Company will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim. The
Transferor also warrants that it will, upon request, execute and deliver any
additional documents deemed by the Company to be necessary or desirable to
complete the exchange, assignment and transfer of tendered Old Notes or to
transfer ownership of such Old Notes on the account books maintained by DTC. All
authority conferred by the Transferor will survive the death, bankruptcy or
incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, personal representatives, executors, administrators,
successors, assigns, trustees in bankruptcy and other legal representatives of
such Transferor.
By executing a Letter of Transmittal, each holder will make to the
Company the representations set forth above under the heading "-- Purpose and
Effect of the Exchange Offer."
Withdrawal of Tenders of Old Notes. Except as otherwise provided
herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date.
27
<PAGE> 32
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must: (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor");
(ii) identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes); (iii) contain a statement that
such holder is withdrawing his election to have such Old Notes exchanged; (iv)
be signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes in the name of the person withdrawing the tender; and
(v) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. If Old Notes have been tendered pursuant
to the procedure for book-entry transfer, any notice of withdrawal must specify
the name and number of the account at the book-entry transfer facility. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer, and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering Old Notes" at any time prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, or any extension
of the Exchange Offer, the Company shall not be required to accept for exchange,
or exchange New Notes for, any Old Notes, and may terminate the Exchange Offer
as provided herein before the acceptance of such Old Notes, if:
(a) any statute, rule or regulation shall have been enacted,
or any action shall have been taken by any court or governmental
authority which, in the reasonable judgment of the Company, would
prohibit, restrict or otherwise render illegal consummation of the
Exchange Offer; or
(b) any change, or any development involving a prospective
change, in the business or financial affairs of the Company or any of
its subsidiaries has occurred which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed
with the Exchange Offer or materially impair the contemplated benefits
of the Exchange Offer to the Company; or
(c) there shall occur a change in the current interpretations
by the staff of the Commission which, in the Company's reasonable
judgment, might materially impair the Company's ability to proceed with
the Exchange Offer.
If the Company determines in its sole discretion that any of the above
conditions are not satisfied, the Company may: (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders; (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the Expiration
Date, subject, however, to the right of holders to withdraw such Old Notes (see
"-- Terms of the Exchange Offer -- Withdrawal of Tenders of Old Notes"); or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all validly tendered Old Notes which have not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, the Company will
promptly disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders, and the Company will extend the Exchange
Offer for a period of time, depending upon the significance of the waiver and
the manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such period.
28
<PAGE> 33
EXCHANGE AGENT
Bankers Trust Company has been appointed as Exchange Agent for the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notices of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
<TABLE>
<CAPTION>
BY MAIL: BY HAND: BY OVERNIGHT COURIER:
<S> <C> <C>
BT Services Tennessee, Inc. Bankers Trust Company BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust & Agency Group Corporate Trust & Agency Group
P.O. Box 292737 Receipt & Delivery Window Reorganization Group
Nashville, Tennessee 37229-2737 123 Washington Street, 1st Floor 648 Grassmere Park Road
(registered or certified New York, New York 10006 Nashville, Tennessee 37211
mail recommended)
</TABLE>
FACSIMILE TRANSMISSION:
(615) 835-3701
CONFIRM BY TELEPHONE:
(615) 835-3572
FOR INFORMATION WITH RESPECT TO THE EXCHANGE OFFER,
CALL THE EXCHANGE AGENT:
(800) 735-7777
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates. No additional compensation will be
paid to any such officers and employees for engaging in soliciting tenders.
The Company has not retained any dealer-manager or other soliciting
agent in connection with the Exchange Offer and will not make any payments to
brokers, dealers or others soliciting acceptance of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Old Notes and
in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and transfer agent and registrar, accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of the Old Notes pursuant to the Exchange Offer. If, however, New
Notes, or Old Notes for principal amounts not tendered or accepted for exchange,
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Old Notes tendered or if a transfer tax is
imposed for any reason other than the exchange of the Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
29
<PAGE> 34
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Old Notes may be resold only: (i) to
the Company or any subsidiary thereof; (ii) to a QIB in compliance with Rule
144A; (iii) to an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) under the Securities Act) that, prior to such
transfer, furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of the
Old Notes (the form of which letter can be obtained from the Trustee) and, if
such transfer is in respect of an aggregate principal amount of Old Notes at the
time of transfer of less than $100,000, an opinion of counsel acceptable to the
Company that such transfer is in compliance with the Securities Act; (iv)
outside the United States in compliance with Rule 904 under the Securities Act;
(v) pursuant to the exemption from registration provided by Rule 144 under the
Securities Act (if available); or (vi) pursuant to an effective registration
statement under the Securities Act. The liquidity of the Old Notes could be
adversely affected by the Exchange Offer. Following the consummation of the
Exchange Offer, holders of the Old Notes will have no further registration
rights under the Registration Rights Agreement and will not be entitled to the
contingent increase in the interest rate provided for in the Old Notes.
ACCOUNTING TREATMENT
The New Notes would be recorded at the same carrying value as the Old
Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The costs of the Exchange Offer and the unamortized
expenses related to the issuance of the Old Notes will be amortized over the
term of the New Notes.
30
<PAGE> 35
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as contemplated
in this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the term and form of which are identical in all material
respects to the New Notes. The Old Notes surrendered in exchange for New Notes
will be retired and canceled and cannot be reissued. Accordingly, issuance of
the New Notes will not result in any increase in the indebtedness of the
Company. The Company used approximately $89.6 million of the net proceeds from
the Offering to purchase the Pledged Securities, consisting of U.S. government
securities, to secure and fund the first six scheduled payments of interest on
the Notes. The Company intends to use the net proceeds from the Offering to
partially finance the development, construction and operating costs and certain
acquisition expenses associated with the Company's PCS System and the completion
of the digital upgrade of the Company's cellular system.
31
<PAGE> 36
CAPITALIZATION
The following table sets forth the historical cash and consolidated
capitalization of the Company as of March 31, 1997 and as adjusted to give
effect to the Transactions. This table should be read in conjunction with "Use
of Proceeds," "Selected Historical Financial Information," "Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "The Maine Disposition," "The Preferred Stock Sales" and
the Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS......................... $ 207,511 $ 500,217
========= ===========
RESTRICTED CASH FOR PAYMENT OF INTEREST(A)................................ $ -- $ 89,618
========= ===========
CASH HELD IN ESCROW(B).................................................... $ -- $ 5,405
========= ===========
CURRENT PORTION OF LONG-TERM DEBT......................................... $ 112 $ 112
LONG-TERM DEBT:
February 1996 Notes..................................................... 223,080 223,080
April 1996 Notes........................................................ 223,738 223,738
Notes................................................................... -- 300,000
Vendor Financing Agreement.............................................. 103,833 103,833
Other................................................................... 715 325
--------- -----------
Total long-term debt.................................................. 551,366 850,976
--------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock -- Series A, $.01 par value; 100,000 issued
and outstanding; convertible.......................................... 1 1
Preferred Stock -- Series B, $.01 par value; 100,000 issued
and outstanding; convertible.......................................... 1 1
Preferred Stock -- Series C, $.01 par value; 50,000 issued
and outstanding; convertible.......................................... -- 1
Preferred Stock -- Series D, $.01 par value; 50,000 issued
and outstanding; convertible.......................................... -- 1
Common Stock, $.01 par value, 55,000,000 shares authorized
and 26,864,511 shares issued and outstanding(c)....................... 269 269
Additional paid-in capital.............................................. 430,058 474,831
Accumulated deficit..................................................... (52,332) (8,657)
Deferred compensation................................................... (165) (165)
Treasury stock.......................................................... (345) (345)
--------- -----------
Total stockholders' equity............................................ 377,487 465,937
--------- -----------
Total capitalization............................................ $ 928,965 $ 1,317,025
========= ===========
</TABLE>
- --------------------
(a) Reflects the estimated portion of the net proceeds from the Offering to
be used to purchase Pledged Securities to secure the first six
scheduled interest payments on the Notes. See "Description of the Notes
-- Security."
(b) Reflects the $5.4 million of proceeds from the Maine Disposition that
is being held in escrow for indemnification or purchase price
adjustment obligations.
(c) Includes 35,000 shares outstanding as of March 31, 1997 under the
Company's 1995 Employee Restricted Stock Plan, but excludes 2,374,797
shares of Common Stock issuable upon exercise of stock options
outstanding as of March 31, 1997. See "Management." Also excludes: (i)
the 1,143,904 shares issuable upon exercise of the Warrants; (ii) the
9,090,900 shares of Common Stock issuable upon conversion of the Series
A Convertible Preferred Stock and Series B Convertible Preferred Stock;
and (iii) the 3,529,412 shares of Common Stock issuable upon conversion
of the Series C Convertible Preferred Stock and Series D Convertible
Preferred Stock. See "The Preferred Stock Sales."
32
<PAGE> 37
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth certain selected historical financial
information for the Company as of and for each of the years in the five-year
period ended December 31, 1996 and as of and for the three months ended March
31, 1997 and 1996. The financial information as of and for each of the years in
the five-year period ended December 31, 1996 was derived from the consolidated
financial statements and notes thereto of the Company, which have been audited
by Arthur Andersen LLP, independent public accountants. The financial
information as of and for the three months ended March 31, 1997 and 1996 was
derived from the unaudited financial statements of the Company. In the opinion
of management, the unaudited financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth herein. Operating results shown in the following table
will not be indicative of future performance due to the capital requirements
associated with the buildout of the Company's PCS System.
The selected historical financial information should be read in
conjunction with "Pro Forma Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto and other financial and
operating information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ ----------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenues ..................... $ 14,084 $ 6,996 $ 31,875 $ 25,384 $ 18,903 $ 8,228 $ 6,235
Equipment sales ...................... 5,025 854 7,250 3,928 2,859 1,121 925
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues and sales ............ 19,109 7,850 39,125 29,312 21,762 9,349 7,160
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of services ..................... 5,428 684 5,811 2,394 1,921 574 442
Cost of equipment sales .............. 11,987 694 11,653 3,127 2,391 1,010 828
Operations expenses .................. 3,809 1,204 9,927 3,596 2,722 1,333 1,214
Selling and marketing ................ 5,237 1,274 13,301 4,280 3,405 1,353 1,187
General and administrative ........... 7,680 1,810 16,963 4,218 3,651 1,562 1,379
Depreciation ......................... 8,340 731 5,887 2,741 2,130 953 832
Amortization ......................... 1,178 881 4,214 2,360 1,543 890 735
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses ............ 43,659 7,278 67,756 22,716 17,763 7,675 6,617
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) .............. (24,550) 572 (28,631) 6,596 3,999 1,674 543
Interest (income) expense(a) ......... 4,543 (739) (3,175) 1,657 635 46 131
Miscellaneous (income) expense ....... 473 303 1,226 (295) (48) 48 260
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes .... (29,566) 1,008 (26,682) 5,234 3,412 1,580 152
Income tax (benefit) expense ......... -- 472 (1,654) 2,230 1,535 567 52
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) before
cumulative effect ................... (29,566) 536 (25,028) 3,004 1,877 1,013 100
Cumulative effect of change in
accounting principle, net of tax(b) . -- (2,583) (2,583) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) .................... $ (29,566) $ (2,047) $ (27,611) $ 3,004 $ 1,877 $ 1,013 $ 100
=========== =========== =========== =========== =========== =========== ===========
Earnings per share:
Net income (loss) before cumulative
effect of change
in accounting principle ............. $ (1.10) $ .03 $ (1.00) $ .29 $ .19 $ .16 $ .02
Cumulative effect of change in
accounting principle, net of tax(b) . -- (.13) (.10) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per share .......... $ (1.10) $ (.10) $ (1.10) $ .29 $ .19 $ .16 $ .02
=========== =========== =========== =========== =========== =========== ===========
Average common and common
equivalent shares outstanding ....... 26,812,000 19,899,000 25,087,000 10,281,000 9,765,000 6,317,000 6,289,000
OTHER FINANCIAL AND OPERATING DATA:
EBITDA(c) ............................ $ (12,244) $ 4,193 $ (2,466) $ 11,992 $ 7,720 $ 3,469 $ 1,850
Ratio of earnings to fixed
charges(d) .......................... -- -- -- 3.9x 5.5x 27.3x 2.1x
Capital expenditures ................. $ 36,209 $ 10,874 $ 233,551 $ 7,661 $ 2,866 $ 1,105 $ 921
Cellular subscribers at end
of period(e) ........................ 49,731 40,403 47,617 38,582 28,624 10,590 7,447
Net cellular population
equivalents(f) ...................... 737,800 737,800 737,800 732,900 728,200 281,800 277,400
PCS Subscribers at end of period ..... 34,886 -- 14,892 -- -- -- --
Net PCS population equivalents(f) .... 24,293,000 17,460,000 17,460,000 -- -- -- --
</TABLE>
33
<PAGE> 38
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, -----------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ............ $ 200,646 $ 256,349 $ 977 $ 2,710 $ 547 $ 908
Property and equipment, net 284,713 251,269 18,066 13,262 5,545 5,394
Licenses, goodwill and other
intangibles, net .......... 429,085 402,321 24,904 23,903 -- --
Total assets ............... 973,094 947,117 74,330 50,812 10,517 8,721
Long-term obligations ...... 551,366 504,065 29,411 11,030 2,019 2,194
Retained earnings
(accumulated deficit) ..... (52,332) (22,766) 4,845 1,841 (36) (1,048)
Stockholders' equity ....... 377,487 407,007 36,674 33,374 5,983 4,960
</TABLE>
- --------------------
(a) The Company had interest income of $3.3 million and $2.3 million for
the three months ended March 31, 1997 and 1996, respectively, and $17.3
million for the year ended December 31, 1996. The Company had no
interest income for the years ended December 31, 1995, 1994, 1993 and
1992. Excludes capitalized interest of $6.7 million and $2.7 million
for the three months ended March 31, 1997 and 1996, respectively, and
$29.0 million for the year ended December 31, 1996. During the
construction of the PCS System, the cost of the PCS licenses and the
costs related to construction expenditures are considered to be assets
qualifying for interest capitalization under FASB Statement No. 34
"Capitalization of Interest Cost." Accordingly, management expects that
a majority of the interest on the February 1996 Notes, the April 1996
Notes, the Vendor Financing Agreement and the Notes will be capitalized
during the construction of the PCS System. See "Pro Forma Financial
Information."
(b) During 1996, the Company changed its method of accounting for costs
incurred in connection with certain promotional programs under which
customers receive discounted cellular equipment or airtime usage
credits. Under its previous accounting method, all such costs were
deferred and amortized over the life of the related non-cancelable
cellular telephone service agreement. Under the new accounting method,
the costs are expensed as incurred.
(c) EBITDA represents earnings from continuing operations before interest
expense, income taxes, depreciation and amortization. EBITDA is
provided because it is a measure commonly used in the industry. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be considered an alternative to
net income as a measure of performance or to cash flow as a measure of
liquidity.
(d) Earnings were insufficient to cover fixed charges by $36.3 million and
$2.2 million for the three months ended March 31, 1997 and 1996,
respectively, and by $56.2 million for the year ended December 31,
1996. Earnings consist of income before income taxes, plus fixed
charges, except where capitalized. Fixed charges consist of interest
charges and amortization of debt issuance costs, in each case whether
expensed or capitalized, and the portion of rent expense under
operating leases representing interest.
(e) Cellular subscribers at end of period include 14,216, 20,288, 25,456,
21,320 and 26,486 subscribers in the State of Maine for the years ended
December 31, 1994, 1995 and 1996 and for the three months ended March
31, 1996 and 1997, respectively. See "The Maine Disposition."
(f) Net Population Equivalents means the estimated population of the
license market area multiplied by the percentage ownership of the
license. The estimated population is based on the 1996 Paul Kagan
Associates, Inc. Cellular/PCS POP Book. The Company owns 100% of each
of its PCS licenses and 100% of each of its cellular licenses. For the
years ended December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997, Net Cellular Population Equivalents include
441,900, 442,000, 442,200, 442,000 and 442,200 population equivalents,
respectively, from the Company's Maine market areas. See "The Maine
Disposition."
34
<PAGE> 39
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements have been prepared to give effect to the Transactions, the 1996
Offerings and the Powertel Combination. The accompanying unaudited pro forma
condensed consolidated balance sheet as of March 31, 1997 has been prepared as
if the Transactions were consummated as of that date. The accompanying unaudited
pro forma condensed consolidated statements of operations of the Company for the
year ended December 31, 1996 give effect to the Transactions, the 1996 Offerings
and the Powertel Combination as if they occurred at January 1, 1996. The
accompanying unaudited pro forma condensed consolidated statements of operations
for the three months ended March 31, 1997 give effect to the Transactions as if
they occurred at January 1, 1996. The pro forma adjustments are based upon
available information and certain assumptions that the Company believes are
reasonable under the circumstances.
The unaudited pro forma condensed consolidated financial statements and
notes thereto should be read in conjunction with "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "The Maine Disposition," "The Preferred Stock Sales," "Certain
Transactions," the historical financial statements of Powertel and notes thereto
and other financial and operating information included elsewhere in this
Prospectus. These unaudited pro forma condensed consolidated financial
statements and notes thereto are provided for informational purposes only and do
not purport to be indicative of the results that would have actually been
obtained had the Transactions, the 1996 Offerings and the Powertel Combination
been completed on the dates indicated or that may be expected to occur in the
future.
35
<PAGE> 40
POWERTEL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
POWERTEL, INC. MAINE ALL OTHER
HISTORICAL DISPOSITION(a) TRANSACTIONS PRO FORMA
-------------- -------------- ------------ ----------
(DOLLARS IN THOUSANDS)
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................. $ 207,511 $ 71,799 $ 201,132 (b) $ 500,217
(25,000)(c)
44,775 (d)
Restricted cash for payment of interest... -- -- 28,365 (b) 28,365
Cash held in escrow....................... -- 5,405 -- 5,405
Accounts receivable, net.................. 13,131 (1,999) -- 11,132
Inventories............................... 19,372 (415) -- 18,957
Prepaid and other......................... 2,271 (166) -- 2,105
--------- --------- --------- ----------
242,285 74,624 249,272 566,181
--------- --------- --------- ----------
PROPERTY AND EQUIPMENT, AT COST.............. 303,035 (16,624) -- 286,411
Less accumulated depreciation............. (18,322) 3,604 -- (14,718)
--------- --------- --------- ----------
284,713 (13,020) -- 271,693
--------- --------- --------- ----------
OTHER ASSETS:
Restricted cash for payment of interest... -- -- 61,253 (b) 61,253
Licenses, net of amortization............. 406,567 -- -- 406,567
Goodwill, net of amortization............. 22,518 (22,518) -- --
Deferred charges and other................ 17,011 (479) 9,250 (b) 25,782
--------- --------- --------- ----------
446,096 (22,997) 70,503 493,602
--------- --------- --------- ----------
Total assets........................... $ 973,094 $ 38,607 $ 319,775 $1,331,476
========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................... $ 28,158 $ (498) $ (25,000)(c) $ 2,660
Accrued expenses.......................... 11,361 (1,228) -- 10,133
Advance billings and customer deposits.... 2,008 (350) -- 1,658
Current portion of long-term obligations.. 112 -- -- 112
--------- --------- --------- ----------
41,639 (2,076) (25,000) 14,563
--------- --------- --------- ----------
LONG-TERM OBLIGATIONS:
February 1996 Notes....................... 223,080 -- -- 223,080
April 1996 Notes.......................... 223,738 -- -- 223,738
Notes..................................... -- -- 300,000 (b) 300,000
Vendor Financing Agreement................ 103,833 -- -- 103,833
Other..................................... 715 (390) -- 325
--------- --------- --------- ----------
551,366 (390) 300,000 850,976
--------- --------- --------- ----------
MINORITY INTEREST IN SUBSIDIARY.............. 2,602 (2,602) -- --
--------- --------- --------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock........................... 2 -- 2 (d) 4
Common stock.............................. 269 -- -- 269
Paid-in capital........................... 430,058 -- 44,773 (d) 474,831
Retained earnings (accumulated deficit)... (52,332) 43,675 -- (8,657)
Deferred compensation..................... (165) -- -- (165)
Treasury stock............................ (345) -- -- (345)
--------- --------- --------- ----------
377,487 43,675 44,775 465,937
--------- --------- --------- ----------
Total liabilities and stockholders'
equity................................. $ 973,094 $ 38,607 $ 319,775 $1,331,476
========= ========= ========= ==========
</TABLE>
The accompanying notes to unaudited pro forma consolidated financial
statements are an integral part of these statements.
36
<PAGE> 41
POWERTEL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------
POWERTEL,
INC. MAINE ALL OTHER
HISTORICAL DISPOSITION(e) TRANSACTIONS PRO FORMA
----------- -------------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUE AND SALES:
Service ............................ $ 14,084 $ (3,407) $ 10,677
Equipment .......................... 5,025 (88) 4,937
----------- ----------- -----------
Total revenue and sales ......... 19,109 (3,495) 15,614
----------- ----------- -----------
OPERATING EXPENSES:
Cost of services ................... 5,428 (549) 4,879
Cost of equipment sold ............. 11,987 (385) 11,602
Operations ......................... 3,809 (507) 3,302
Selling and marketing .............. 5,237 (675) 4,562
General and administrative ......... 7,680 (442) 7,238
Depreciation ....................... 8,340 (491) 7,849
Amortization ....................... 1,178 (164) 1,014 (f)
----------- ----------- -----------
Total operating expenses ........ 43,659 (3,213) 40,446
----------- ----------- -----------
OPERATING INCOME (LOSS) ............... (24,550) (282) (24,832)
----------- ----------- -----------
OTHER EXPENSES (INCOME):
Interest (income) expense, net ..... 4,543 (g) $ 6,384 (g) 10,927
Minority interest .................. (113) 113 --
Other .............................. 586 586
----------- ----------- ----------- -----------
5,016 113 6,384 11,513
----------- ----------- ----------- -----------
Net income (loss) ..................... $ (29,566) $ (395) $ (6,384) $ (36,345)
=========== =========== =========== ===========
EARNINGS PER SHARE:
Net loss per share ................. $ (1.10) $ (1.36)
=========== ===========
Average common and common equivalent
shares outstanding .............. 26,812,000 26,812,000
=========== ===========
</TABLE>
The accompanying notes to unaudited pro forma consolidated financial
statements are an integral part of these statements.
37
<PAGE> 42
POWERTEL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------------
POWERTEL, INC. POWERTEL PCS MAINE ALL OTHER
HISTORICAL PARTNERS, L.P.(h) DISPOSITION(e) TRANSACTIONS PRO FORMA
-------------- ----------------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUE AND SALES:
Service ................................... $ 31,875 $ (13,912) $ 17,963
Equipment ................................. 7,250 (2,172) 5,078
------------ ------------ ------------
Total revenue and sales ................. 39,125 (16,084) 23,041
------------ ------------ ------------
OPERATING EXPENSES:
Cost of services .......................... 5,811 (1,818) 3,993
Cost of equipment sold .................... 11,653 (1,787) 9,866
Operations ................................ 9,927 (2,039) 7,888
Selling and marketing ..................... 13,301 (2,473) 10,828
General and administrative ................ 16,963 $ 358 (1,621) 15,700
Depreciation .............................. 5,887 1 (1,709) 4,179
Amortization .............................. 4,214 -- (2,481) 1,733 (f)
------------ ------------ ------------ ------------
Total operating expenses ................ 67,756 359 (13,928) 54,187
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) .................... (28,631) (359) (2,156) (31,146)
------------ ------------ ------------ ------------
OTHER EXPENSES (INCOME):
Interest (income) expense,
net ..................................... (3,175)(g) (99) -- $13,827 (g) 10,553
Minority interest ......................... 474 -- 474 -- --
Other ..................................... 1,700 (34) -- -- 1,666
------------ ------------ ------------ ------------ ------------
(1,949) (133) 474 13,827 12,219
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle .................. (26,682) (226) (2,630) (13,827) (43,365)
Income tax benefit ......................... (1,654) -- -- -- (1,654)
------------ ------------ ------------ ------------ ------------
Income (loss) before cumulative
effect of change in accounting
principle ................................ (25,028) (226) (2,630) (13,827) (41,711)
Cumulative effect of change in
accounting principle, net of tax ......... (2,583) -- 1,818 -- (765)
------------ ------------ ------------ ------------ ------------
Net income (loss) .......................... $ (27,611) $ (226) $ (812) $ (13,827) $ (42,476)
============ ============ ============ ============ ============
EARNINGS PER SHARE:
Loss before cumulative effect
of change in accounting
principle ............................... $ (1.00) $ (1.66)
Cumulative effect of change in
accounting principle, net of tax ......... (.10) (.03)
------------ ------------
Net loss per share ........................ $ (1.10) $ (1.69)
============ ============
Average common and common
equivalent shares outstanding ............ 25,087,000 25,087,000
============ ============
</TABLE>
The accompanying notes to unaudited pro forma consolidated financial
statements are an integral part of these statements.
38
<PAGE> 43
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Reflects the $77.2 million proceeds from the Maine Disposition (which
includes $5.4 million that is being held in escrow for indemnification
or purchase price adjustment obligations) and the elimination of the
assets and liabilities related to the Company's Maine operations. The
selling price exceeded the net asset value of the Company's Maine
operations and, therefore, represents a gain to the Company of $43.7
million. The Company anticipates that net operating loss carryforwards,
as well as currently generated taxable losses will more than offset the
tax liability associated with this gain. Accordingly, no tax effect
related to the gain is reflected in the accompanying pro forma
financial statements. The Company's gain related to the Maine
Disposition, which is nonrecurring in nature, is not reflected on the
pro forma statement of operations as this statement is intended to
reflect the Company's ordinary operations.
(b) Reflects the issuance of $300.0 million principal amount of the Notes.
The net proceeds were approximately $290.8 million which is net of
issuance costs of $9.2 million. Such issuance costs will be amortized
using the effective interest method over the ten year life of the Notes
or $.9 million per annum. Approximately $89.6 million of the net
proceeds from the Offering was used to purchase Pledged Securities to
be held in a pledged account to secure the Notes until payment of the
first six scheduled interest payments on the Notes. See "Description of
the Notes -- Security."
(c) Reflects the remaining $25.0 million payment made by the Company to
complete the purchase of the licenses for the Kentucky/Tennessee BTAs.
The aggregate cost of the licenses was $31.2 million, of which at March
31, 1997 the Company had paid $6.2 million to the government as a
deposit. At March 31, 1997, "Licenses, net of amortization" included
the $31.2 million cost for the licenses for the Kentucky/Tennessee
BTAs.
(d) Reflects the issuance of 50,000 shares each of Series C Convertible
Preferred Stock and Series D Convertible Preferred Stock. The net
proceeds were $44.8 million, which is net of issuance costs of $.2
million.
(e) Reflects the elimination of the statement of operations items relating
to the Maine properties to be sold in the Maine Disposition.
(f) No pro forma adjustment has been made to amortize the licenses for the
Kentucky/Tennessee BTAs, as these properties have not yet been
constructed or placed in service. When placed in service, these
licenses will be amortized over 40 years resulting in amortization
expense of $.8 million per year.
(g) For the three months ended March 31, 1997 and the year ended December
31, 1996, interest income on a pro forma basis would have been $4.5
million and $22.2 million, respectively, which reflects an estimated
$1.3 million and $5.0 million, respectively, of interest income that
would have been earned on the Pledged Securities. See "Description of
the Notes-- Security." For the three months ended March 31, 1997 and
the year ended December 31, 1996, interest expense excludes capitalized
interest of $6.7 million and $29.0 million, respectively. Pro forma
interest excludes capitalized interest of $7.7 million and $55.8
million for the three months ended March 31, 1997 and the year ended
December 31, 1996, respectively. During the construction of the PCS
System, the cost of the PCS licenses and the cost related to
construction expenditures are considered to be assets qualifying for
interest capitalization under FASB Statement No. 34 "Capitalization of
Interest Cost." Accordingly, management expects that a majority of the
interest on the February 1996 Notes, the April Notes, the Vendor
Financing Agreement and the Notes will be capitalized during the
construction of the PCS System. Pro forma interest expense will not be
indicative of interest expense which will be recognized as additional
portions of the PCS System are placed in service.
(h) Reflects expenses related to the Powertel PCS Partners, L.P. prior to
the Powertel Combination.
39
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Powertel provides PCS services in the southeastern United States under
the name "Powertel" and provides cellular telephone service in contiguous
portions of western Georgia and eastern Alabama under the name "InterCel." On
May 1, 1997, the Company sold substantially all the assets related to its
cellular operations in the State of Maine for approximately $77.2 million. See
"The Maine Disposition."
Powertel's PCS licenses encompass a territory of approximately 246,000
contiguous square miles with a population of approximately 24.3 million people
in the MTAs of Atlanta, Georgia; Jacksonville, Florida; Memphis,
Tennessee/Jackson, Mississippi; and Birmingham, Alabama; and 13 BTAs in Kentucky
and Tennessee. Powertel first introduced its PCS services in October 1996 in
Jacksonville, Florida and Montgomery, Alabama and, to date, has launched its PCS
services in an additional 15 markets in Alabama, Florida, Georgia, Mississippi
and Tennessee. In all of these markets, the Company was the first to offer PCS
services commercially. Powertel intends to continue to rapidly build out its PCS
network and to launch its PCS services. As of March 31, 1997, the Company had
approximately 35,000 PCS subscribers.
In the D/E/F Auctions, the Company acquired both the 10 MHz "D" block
and the 10 MHz "E" block licenses in each of the BTAs of Evansville, Indiana;
Lexington, Louisville, Bowling Green-Glasgow, Corbin, Madisonville, Owensboro,
Paducah-Murray-Mayfield and Somerset, Kentucky; Nashville and Cookeville,
Tennessee; and Hopkinsville, Kentucky-Clarksville, Tennessee; and the 10 MHz "E"
block license in the Knoxville, Tennessee BTA. The aggregate purchase price for
the licenses, which encompass an area of approximately 66,000 square miles with
a population of approximately 6.8 million people, was $31.2 million. With the
addition of the Kentucky/Tennessee BTAs, Powertel has one of the largest
contiguous PCS footprints in the southeastern United States. The Company expects
its expanded PCS footprint to provide a competitive advantage in attracting new
customers in its markets.
Average revenues per subscriber in the wireless industry have declined
during recent years and are expected to decline in the future. The Company
believes that this downward trend is the result of the addition of lower usage
customers who utilize cellular service for security, personal convenience or as
backup for their traditional landline telephones. In addition, the Company
expects that revenue per minute will continue to decline as competition within
the wireless telecommunications industry intensifies. The Company believes the
effect of this trend on the Company's earnings will be mitigated by
corresponding increases in the number of subscribers and the number of minutes
of usage per subscriber.
The Company's overall historical financial performance has been
impacted positively by its efforts to attract and retain subscribers and
encourage more use of its services. Unlike many other companies in the cellular
industry that continue to experience operating losses due to the substantial
capital costs associated with constructing a system and acquiring licenses, the
Company has been successful in achieving positive operating income from its
cellular operations.
As a result of: (i) the significant costs required to build out and
maintain the PCS System, hire and manage the required personnel to operate the
PCS business and market its services; (ii) the significant subsidization of PCS
handsets to customers; and (iii) the depreciation of PCS equipment and
amortization of the PCS licenses, the Company incurred an operating loss of
$24.6 million and $28.6 million for the three months ended March 31, 1997 and
the year ended December 31, 1996, respectively. The Company expects to continue
subsidizing the cost of PCS handsets to customers for the foreseeable future and
expects that negative PCS equipment margin will continue to contribute
significantly to future operating results. The Company expects to incur
significant operating losses during the remainder of 1997 and thereafter as it
continues to build out its PCS System and build its PCS customer base.
Minimizing customer attrition, or "churn," becomes a greater challenge
as the subscriber base grows and the marketplace becomes more competitive. The
Company achieved an average monthly churn rate of 1.5%
40
<PAGE> 45
and 2.3%, respectively, for its cellular and PCS lines of business for the three
months ended March 31, 1997. The Company achieved a combined average monthly
churn rate of 1.6% for both its cellular and PCS lines of business in 1996. The
1996 cellular churn rate of 1.6% is a slight increase over the 1995 rate which
was 1.5%. The Cellular Markets' churn rate decreased to 1.9% from 2.1% in 1995.
The Company believes that it may experience an increase in its PCS churn rate
during the current year related to the disconnection of non-paying customers.
However, the Company intends to minimize the impact of such increase by
implementing a proactive customer retention program and focusing its efforts on
achieving consistently high levels of customer satisfaction.
The Company offers its PCS customers a choice of multiple pricing
plans, with varying amounts of unbilled or "free" minutes included in the
monthly access charge. From November 29, 1996 to January 18, 1997, the Company
offered a special promotional pricing plan, the Prestige Partners Promotion, in
all of its operational markets. This special, limited-time promotional pricing
plan offered unlimited local airtime through December 31, 1997 (with the
exception of certain subscribers in the Memphis area who were unable to obtain
the PCS handset model of their choice due to a handset shortage in that market
and for whom the promotional pricing extends through April 30, 1998) for a $50
per month access charge (excluding toll and roaming charges, taxes and fees for
optional services). As of March 31, 1997, a substantial majority of the
Company's PCS subscribers were participants in this promotion.
The majority of the interest costs incurred during 1996 related to the
Unit Offering and the Debt Offering and amounts borrowed under the Vendor
Financing Agreement has been capitalized as a cost of construction of the PCS
System. As the Company has now begun providing PCS services in several markets,
the interest costs related to the construction of the PCS systems in such
markets will amortize over the life of the related assets from the time such
systems were placed in service. Additionally, the Company's depreciation and
amortization expenses have significantly increased as a result of the fixed
assets and PCS licenses related to PCS systems placed in service during the
fourth quarter of 1996 and the first quarter of 1997 and will continue to
increase as a result of systems to be placed in service during the remainder of
1997 and thereafter.
The Company, like other participants in the cellular industry, has
recently experienced a dramatic increase in costs associated with both cloning
and subscription fraud. The Company's total costs associated with fraud
increased from $.1 million in 1995 to $.3 million in 1996 and was $.1 million
for the three months ended March 31, 1997.
During 1996, the Company changed its method of accounting for costs
incurred in connection with certain promotional programs under which the
Company's cellular customers receive discounted cellular equipment or airtime
usage credits. Under its previous accounting method, all such costs were
deferred and amortized over the life of the related non-cancelable cellular
telephone service agreements. Under the new accounting method, the costs are
expensed as incurred. This change in accounting principle resulted in a total
nonrecurring charge for the cumulative effect of this accounting change, net of
taxes, of approximately $2.6 million. Additionally, such costs are not deferred
in conjunction with the acquisition of PCS customers.
41
<PAGE> 46
RESULTS OF OPERATIONS
The following table reflects the composition of the Company's cellular
and PCS service revenue and equipment sales, and related gross margins, as well
as overall operating and other costs and margins, as a percentage of total
revenue. The Company's historical results of operations, particularly in view of
the Maine Disposition and the start-up costs associated with the Company's PCS
business, will not be comparable with future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------------------------- --------------------------------------------------
% OF % OF % OF % OF % OF
CELLULAR PCS COMBINED COMBINED CELLULAR COMBINED COMBINED
REVENUE/ REVENUE/ PCS AND REVENUE/ REVENUE/ PCS AND REVENUE/
CELLULAR SALES PCS(a) SALES CELLULAR SALES CELLULAR SALES PCS(a) CELLULAR SALES
-------- ------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SERVICE REVENUE
AND COST ANALYSIS:
Service revenue
Local customers --
Access revenue ......... $ 4,000 51.7% $ 4,540 71.5% $ 8,540 60.6% $ 3,428 49.0% $ -- $ 3,428 49.0%
Airtime revenue ........ 1,545 20.0 282 4.5 1,827 13.0 1,317 18.8 -- 1,317 18.8
Toll revenue ........... 218 2.8 673 10.6 891 6.3 166 2.4 -- 166 2.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
5,763 74.5 5,495 86.6 11,258 79.9 4,911 70.2 -- 4,911 70.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
Roamers --
Access and airtime
revenue ............... 1,242 16.1 -- -- 1,242 8.8 1,503 21.5 -- 1,503 21.5
Toll revenue ........... 399 5.1 -- -- 399 2.9 413 5.9 -- 413 5.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
1,641 21.2 -- -- 1,641 11.7 1,916 27.4 -- 1,916 27.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
Other service revenue .. 334 4.3 851 13.4 1,185 8.4 170 2.4 -- 170 2.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
Total service revenue .. 7,738 100.0 6,346 100.0 14,084 100.0 6,997 100.0 -- 6,997 100.0
Cost of services ......... 1,069 13.8 4,359 68.7 5,428 38.5 684 9.8 -- 684 9.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
Gross margin ........... $ 6,669 86.2% $ 1,987 31.3% $ 8,656 61.5% $ 6,313 90.2% $ -- $ 6,313 90.2%
======== ===== ======== ===== ======== ===== ======== ===== ======== ======== =====
EQUIPMENT SALES
AND COST ANALYSIS:
Equipment sales .......... $ 240 100.0% $ 4,785 100.0% $ 5,025 100.0% $ 853 100.0% $ -- $ 853 100.0%
Cost of equipment sales .. 840 350.0 11,147 233.0 11,987 238.5 694 81.4 -- 694 81.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
Gross margin ........... $ (600) --% $ (6,362) --% $ (6,962) --% $ 159 18.6% $ -- $ 159 18.6%
======== ===== ======== ===== ======== ===== ======== ===== ======== ======== ======
OPERATING MARGIN ANALYSIS:
Total revenues ........... $ 7,978 100.0% $ 11,131 100.0% $ 19,109 100.0% $ 7,850 100.0% $ -- $ 7,850 100.0%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
Operating expense --
Cost of services and
equipment sales ........ 1,909 23.9 15,506 139.3 17,415 91.1 1,378 17.6 -- 1,378 17.6
Operations .............. 1,010 12.7 2,799 25.1 3,809 19.9 1,070 13.6 134 1,204 15.3
Selling and marketing ... 1,239 15.5 3,998 35.9 5,237 27.4 1,096 14.0 178 1,274 16.2
General and
administrative ......... 913 11.4 6,767 60.8 7,680 40.2 793 10.1 1,017 1,810 23.1
Depreciation ............ 951 11.9 7,389 66.4 8,340 43.7 709 9.0 22 731 9.3
Amortization ............ 178 2.3 1,000 9.0 1,178 6.2 881 11.2 -- 881 11.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
Total operating
expenses .............. 6,200 77.7 37,459 336.5 43,659 228.5 5,927 75.5 1,351 7,278 92.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -------- -----
Operating income ......... $ 1,778 22.3% $(26,328) --% (24,550) -- $ 1,923 24.5% $ (1,351) 572 7.3
======== ===== ======== ===== ======== ===== ========
Interest expense
(income), net ........... 4,543 23.8 (739) --
Miscellaneous (income)
expense ................. 473 2.4 303 3.9
-------- ----- -------- -----
Income (loss) before
income taxes ............ (29,566) -- 1,008 12.8
Income tax provision ..... -- -- (472) --
-------- ----- -------- -----
Income (loss) before
cumulative effect ....... (29,566) -- 536 6.8
Cumulative effect of
change in accounting
principle, net of tax ... -- -- (2,583) --
-------- ----- -------- -----
Net income (loss) ........ $(29,566) --% $ (2,047) --%
======== ===== ======== =====
</TABLE>
- --------------------
(a) The Company did not commence PCS operations until the fourth quarter
1996.
42
<PAGE> 47
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
The following discussion reflects the Company's results of operations
for its PCS and cellular lines of business. All general corporate costs have
been allocated to those lines of business based on management's estimates of
actual expenses incurred related to such lines of business. On May 1, 1997, the
Company sold substantially all of its assets related to the Company's cellular
operations in the State of Maine (the "Maine Cellular Market"). See "The Maine
Disposition."
In October 1996, the Company began providing PCS services in
Jacksonville, Florida and Montgomery, Alabama. Throughout the remainder of 1996
and the first quarter of 1997, the Company launched PCS services in 14
additional markets within the Current PCS Markets and, as of March 31, 1997, had
approximately 35,000 subscribers.
Service revenue from local customers increased $6.3 million or 129.2%
for the three months ended March 31, 1997, as compared to the same period of
1996. Cellular service revenue from local customers increased $.9 million or
17.3%, primarily as a result of a 23.1% increase in the number of customers (to
49,731 at March 31, 1997 from 40,403 at March 31, 1996). This increase in
cellular subscribers is attributable to the success of the Company's marketing
efforts as well as the overall increase in nationwide cellular penetration
rates. PCS service revenue from local customers was $5.5 million for the three
months ended March 31, 1997. During the three months ended March 31, 1997, the
Company added 19,994 subscribers (an increase to 34,886 at March 31, 1997). The
addition of new PCS customers was primarily due to the recent service launch in
16 PCS markets coupled with the success of the Prestige Partners Promotion,
which was offered in all operational markets through January 18, 1997. The
Company's subscriber growth rate during the Prestige Partners Promotion may not
be indicative of subscriber growth rates in future periods.
The average monthly service revenue per local cellular subscriber
(excluding roaming revenue and equipment sales) decreased to $39.40 for the
three months ended March 31, 1997, from $41.42 for the same period of the prior
year. This decrease was due primarily to the addition of customers who tend to
use cellular service less frequently and a decrease in cellular pricing. The
average monthly service revenue per local PCS subscriber was $63.52 for the
three months ended March 31, 1997, which is substantially higher than cellular
due mainly to the $50 monthly access fee associated with the Prestige Partners
Promotion.
Roamer revenue (including roamer long distance), which was generated
solely from the Company's cellular business, decreased $.3 million, or 14.4%,
for the three months ended March 31, 1997, as compared to the same period of the
prior year. This decrease is attributable primarily to the amended agreement
with BellSouth Mobility, effective January 16, 1997, under which the parties
agreed to per-minute reductions to the rates charged to BellSouth Mobility
customers roaming in the Cellular Markets. The Company believes that this
amended agreement may result in decreased roaming revenues in future periods.
Cost of services includes direct cell site costs (e.g. property taxes,
site lease costs and electric utilities) and the cost of: (i) interconnection
with LEC facilities; (ii) cellular roaming validation (provided by a third-party
clearinghouse); (iii) long distance toll services; (iv) cellular cloning and
fraud; and (v) supplementary services (such as voice mail). For the three months
ended March 31, 1997, cost of services increased $4.7 million, or 693.6%, as
compared to the same period of 1996 and was 38.5% of total service revenue,
compared to 9.8% for the same period in 1996. This increase is primarily
attributable to costs associated with operating and maintaining the expanding
PCS network, including costs of interconnection and transport and cell site
leases, taxes and utilities. The Company expects cost of services to decline as
a percentage of total service revenue as the Company continues to build its
customer base.
To date, wireless telecommunications operators have been required to
pay fees to the LECs for the interconnection to their networks. However,
pursuant to the 1996 Telecommunications Act, such interconnection arrangements
must now be reciprocal and cost-based, with each party compensating the other at
the same rate for the right to interconnect with each other's network. The
Company has recently entered into interconnection agreements for its cellular
and PCS operations with BellSouth Telecommunications Corporation, the local
exchange subsidiary of BellSouth Corporation ("BellSouth"), the LEC with which
the Company primarily
43
<PAGE> 48
interconnects in its service territory. Effective as of April 1, 1997, the
mutual and reciprocal interconnection rates under these agreements range from
$.005644 to $.01586 per minute. These rates represent a significant decrease
from the previous rates paid by the Company to BellSouth of approximately $.022
per minute.
The Company generated a negative cellular equipment margin of 250.0% on
$.2 million of sales for the three months ended March 31, 1997, as compared to a
positive margin of 18.6% on $.9 million of sales for the same period of 1996.
This decrease is due to a change in the Company's method of accounting for
certain promotional costs (primarily equipment credits) in 1996. Under the new
method of accounting, all cellular equipment subsidies are expensed as incurred.
Such subsidies were deferred and amortized over the life of the related cellular
contract in prior periods. For its PCS operations, the Company generated a
negative equipment margin of 133.0% on $4.8 million of sales for the three
months ended March 31, 1997 as a result of the Company's decision to subsidize
the cost of PCS handsets. The Company expects to continue subsidizing the cost
of PCS and cellular handsets to consumers for the foreseeable future.
Operations costs, which include the costs of maintaining the cellular
and PCS systems, customer service, inventory management and in-house cellular
installations, totaled $3.8 million for the three months ended March 31, 1997,
which represented an increase of $2.6 million, or 216.4%, from the same period
of 1996. Cellular operations costs totaled $1.0 million for the three months
ended March 31, 1997, which represented a 5.6% decrease from the same period of
1996. Cellular operations costs as a percentage of total cellular revenue
improved to 12.7% for the three months ended March 31, 1997 as compared to 13.6%
for the same period of 1996. PCS operations costs totaled $2.8 million for the
three months ended March 31, 1997 and were comprised primarily of salaries and
benefits, bad debt provisions and credit and collection costs.
Selling and marketing costs were $5.2 million for the three months
ended March 31, 1997, an increase of $4.0 million, or 311.1%, as compared to the
same period of the prior year. Substantially all of this increase is
attributable to the PCS advertising campaign associated with the Prestige
Partners Promotion, as well as the costs of all direct and indirect sales
channels, including commissions incurred as the result of the increase in PCS
subscribers.
General and administrative costs ("G&A") were $7.7 million for the
three months ended March 31, 1997, an increase of $5.9 million, or 324.3%, from
the same period of 1996. PCS G&A costs totaled $6.8 million for the three months
ended March 31, 1997 and were comprised primarily of costs (excluding
depreciation) associated with the corporate and regional facilities.
Depreciation and amortization for the three months ended March 31, 1997
totaled $9.5 million, as compared to $1.6 million for the same period of 1996,
and consist principally of the depreciation of the cellular and PCS networks and
the amortization of PCS licenses. Substantially all of the increase of $7.9
million in depreciation and amortization for the three months ended March 31,
1997 is due to the PCS licenses and the PCS System, portions of which were
placed in service in the fourth quarter of 1996 and the first quarter of 1997.
The Company anticipates these costs will continue to increase in future periods
as additional portions of the PCS System are completed and placed in service.
Net consolidated interest expense totaled $4.5 million for the three
months ended March 31, 1997, as compared to net interest income of $.7 million
for the same period of 1996. Interest income earned during such periods was $3.3
million and $2.3 million, respectively. Additionally, approximately $6.7 million
and $2.7 million of interest expense was capitalized during the three months
ended March 31, 1997 and 1996, respectively, as the Company continued to
construct the PCS System.
The effective income tax rates for the three months ended March 31,
1997 and 1996 were 0% and 46.8%, respectively. The decrease between periods is
primarily attributable to the deferred tax asset valuation allowance required as
of March 31, 1997 ($23.0 million). The Company generated a $29.6 million loss
from continuing operations during the first quarter of 1997 and expects to
continue to incur significant operating losses throughout the remainder of 1997
and beyond. The tax benefit of these operating losses will not be recognized
until it is more likely than not that such benefit is realizable.
44
<PAGE> 49
The following table reflects the composition of the Company's cellular
and PCS service revenue and equipment sales, and related gross margins, as well
as overall operating and other costs and margins, as a percentage of total
revenue. The Company's historical results of operations, particularly in view of
the Maine Disposition and the start-up costs associated with the Company's PCS
business, will not be comparable with future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------- ------------------- --------------------
% OF % OF
CELLULAR COMBINED COMBINED % OF % OF
REVENUE/ PCS AND REVENUE/ REVENUE/ REVENUE/
CELLULAR SALES PCS(a) CELLULAR SALES CELLULAR SALES CELLULAR SALES
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SERVICE REVENUE AND
COST ANALYSIS:
Service revenue
Local customers --
Access revenue ............ $ 14,653 47.5% $ 402 $ 15,055 47.2% $ 12,244 48.2% $ 8,512 45.0%
Airtime revenue ........... 6,109 19.8 88 6,197 19.4 4,938 19.5 3,981 21.1
Toll revenue .............. 803 2.6 51 854 2.7 627 2.5 360 1.9
-------- ----- -------- -------- ----- -------- ----- -------- -----
21,565 69.9 541 22,106 69.3 17,809 70.2 12,853 68.0
-------- ----- -------- -------- ----- -------- ----- -------- -----
Roamers --
Access and airtime
revenue ................... 6,680 21.7 -- 6,680 21.0 5,541 21.8 4,404 23.3
Toll revenue ............... 1,821 5.9 -- 1,821 5.7 1,399 5.5 1,123 5.9
-------- ----- -------- -------- ----- -------- ----- -------- -----
8,501 27.6 -- 8,501 26.7 6,940 27.3 5,527 29.2
-------- ----- -------- -------- ----- -------- ----- -------- -----
Other service revenue ....... 783 2.5 485 1,268 4.0 635 2.5 523 2.8
-------- ----- -------- -------- ----- -------- ----- -------- -----
Total service revenue ..... 30,849 100.0 1,026 31,875 100.0 25,384 100.0 18,903 100.0
Cost of services ............ 3,535 11.5 2,276 5,811 18.2 2,394 9.4 1,921 10.2
-------- ----- -------- -------- ----- -------- ----- -------- -----
Gross margin ............... $ 27,314 88.5% $ (1,250) $ 26,064 81.8% $ 22,990 90.6% $ 16,982 89.8%
======== ===== ======== ======== ===== ======== ===== ======== =====
EQUIPMENT SALES AND
COST ANALYSIS:
Equipment sales ............. $ 3,803 100.0% $ 3,447 $ 7,250 100.0% $ 3,928 100.0% $ 2,859 100.0%
Cost of equipment sales ..... 2,890 76.0 8,763 11,653 160.7 3,127 79.6 2,391 83.6
-------- ----- -------- -------- ----- -------- ----- -------- -----
Gross margin ............... $ 913 24.0% $ (5,316) $ (4,403) --% $ 801 20.4% $ 468 16.4%
======== ===== ======== ======== ===== ======== ===== ======== =====
OPERATING MARGIN ANALYSIS:
Total revenues .............. $ 34,652 100.0% $ 4,473 $ 39,125 100.0% $ 29,312 100.0% $21,762 100.0%
-------- ----- -------- -------- ----- -------- ----- -------- -----
Operating expense --
Cost of services and
equipment sales ........... 6,425 18.5 11,039 17,464 44.6 5,521 18.8 4,312 19.8
Operations ................. 4,189 12.1 5,738 9,927 25.4 3,596 12.3 2,722 12.5
Selling and marketing ...... 4,637 13.4 8,664 13,301 34.0 4,280 14.6 3,405 15.6
General and administrative 2,940 8.4 14,023 16,963 43.4 4,218 14.4 3,651 16.8
Depreciation ............... 2,722 7.9 3,165 5,887 15.0 2,741 9.4 2,130 9.8
Amortization ............... 3,380 9.8 834 4,214 10.8 2,360 8.0 1,543 7.1
-------- ----- -------- -------- ----- -------- ----- -------- -----
Total operating expenses .. 24,293 70.1 43,463 67,756 173.2 22,716 77.5 17,763 81.6
-------- ----- -------- -------- ----- -------- ----- -------- -----
Operating income (loss) ..... $ 10,359 29.9% $(38,990) (28,631) -- 6,596 22.5 3,999 18.4
======== ===== ========
Interest expense (income),
net ........................ (3,175) -- 1,657 5.7 635 2.9
Miscellaneous (income)
expense .................... 1,226 3.1 (295) -- (48) --
-------- ----- -------- ----- -------- -----
Income before income taxes .. (26,682) -- 5,234 17.8 3,412 15.7
Income tax (provision)
benefit .................... 1,654 4.2 (2,230) -- (1,535) --
-------- ----- -------- ----- -------- -----
Income (loss) before
cumulative effect .......... (25,028) -- 3,004 10.2 1,877 8.6
Cumulative effect of change
in accounting principle,
net of tax ................. (2,583) -- -- -- -- --
-------- ----- -------- ----- -------- -----
Net income (loss) ........... $(27,611) --% $ 3,004 10.2% $ 1,877 8.6%
======== ===== ======== ===== ======== =====
</TABLE>
- --------------------
(a) The Company did not commence PCS operations until the fourth quarter
1996.
45
<PAGE> 50
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following discussion reflects the Company's results of operations
for its PCS and cellular lines of business. All general corporate costs have
been allocated to those lines of business based on management's estimates of
actual expenses incurred related to such lines of business. The Company sold
substantially all of the assets related to the Maine Cellular Market in May
1997. See "The Maine Disposition."
In October 1996, the Company began providing PCS services in
Jacksonville, Florida and Montgomery, Alabama. Throughout the remainder of 1996,
the Company launched PCS services in 13 additional markets within the Current
PCS Markets and, as of December 31, 1996, had approximately 15,000 PCS
subscribers.
Service revenue from local customers increased $4.3 million, or 24.1%,
for 1996 as compared to 1995. Cellular service revenue from local customers
increased $3.8 million, or 21.1%, primarily as a result of a 23.4% increase in
the number of cellular subscribers (to 47,617 at December 31, 1996, from 38,582
at December 31, 1995). This increase in subscribers is attributable to the
success of the Company's marketing efforts as well as the overall increase in
nationwide cellular penetration rates. The Company generated $.5 million in
service revenue from its PCS subscribers.
The average monthly revenue per local cellular subscriber (excluding
roaming revenue and equipment sales) decreased to $41.70 in 1996 from $43.95 in
1995. This decrease reflects the addition of customers who tend to use cellular
service less frequently and a decrease in cellular pricing. From November 29,
1996 through January 18, 1997, the Company offered the Prestige Partners
Promotion in all operational markets. Substantially all of the Company's PCS
subscribers as of December 31, 1996 were participants in this promotion.
For the cellular business unit, local service revenue as a percentage
of total service revenue remained relatively constant in 1996 (69.9% in 1996 as
compared to 70.2% in 1995). Roamer revenue (including toll revenue) for 1996,
which was generated solely from the Company's cellular business, increased $1.6
million, or 22.5%, in 1996 as compared to 1995. See "Business -- Cellular
Operations -- Cellular Roaming." This increase relates primarily to continued
market penetration by the cellular industry as a whole. Additionally, during the
third quarter of 1995, the Company entered into an agreement with BellSouth
Mobility, which operates cellular systems in markets contiguous to the Cellular
Markets, for lower roaming rates. The Company believes that the increased
roaming traffic in its Cellular Markets was partially a result of this
agreement.
Cost of services includes direct cell site costs (e.g. property taxes,
site lease costs and electric utilities) and the cost of: (i) interconnection
with LEC facilities; (ii) cellular roaming validation (provided by a third-party
clearinghouse); (iii) long distance toll services; (iv) cellular cloning and
fraud; and (v) supplementary services (such as voice mail). For 1996, cost of
services increased $3.4 million, or 142.7%, as compared to 1995, including a
$1.1 million, or 47.7%, increase in cost of cellular services. This increase was
due to the costs associated with the increased roaming traffic discussed above,
including increased toll costs, and an increase in costs associated with
cellular cloning in the Cellular Markets. PCS cost of services totaled $2.3
million for the year and was comprised primarily of cost of interconnection with
LEC facilities required for the PCS System.
The Company generated a cellular equipment margin of 24.0% on $3.8
million of sales in 1996 as compared to a 20.4% margin on $3.9 million of sales
in 1995. This increase in margin is attributable to a decrease in the cost of
cellular handsets during 1996. During 1996, the Company changed its method of
accounting for certain promotional costs (primarily equipment credits). For its
PCS operations, the Company generated a negative equipment margin of 154.2% on
$3.4 million in sales in 1996, as a result of the Company's subsidization of the
cost of PCS handsets.
Operations costs, which include the costs of maintaining the cellular
and PCS systems, customer service, inventory management and in-house cellular
installations, totaled $9.9 million for 1996. Cellular operations costs totaled
$4.2 million in 1996, which represented a 16.5% increase from 1995. The increase
was primarily attributable to the increased variable costs associated with the
increase in cellular subscribers. Cellular operations costs as a percentage of
total revenue improved slightly to 12.1% in 1996 as compared to 12.3%
46
<PAGE> 51
in 1995. PCS operations costs totaled $5.7 million for the year and were
comprised primarily of credit and collection costs and salaries and benefits.
Selling and marketing costs were $13.3 million for 1996. Cellular
selling and marketing costs totaled $4.6 million for the year, an increase of
$.4 million, or 8.3%, as compared to the prior year. PCS selling and marketing
costs totaled $8.7 million and were comprised of costs related to the commercial
launch of the Company's PCS services and the PCS advertising campaign associated
with the Prestige Partners Promotion, as well as the costs of all direct and
indirect sales channels, including commissions incurred as a result of the
addition of PCS subscribers.
G&A costs were $17.0 million for 1996. Cellular G&A totaled $2.9
million for the year, a decrease of $1.3 million, or 30.3%, as compared to the
prior year. Likewise, cellular G&A as a percentage of total revenue decreased to
8.4% from 14.4% in 1995. This improvement reflects the continued realization of
economies of scale in the cellular operations from certain costs such as
salaries and wages and leased facilities costs that do not increase in direct
proportion to increases in cellular service revenue. Additionally, certain costs
(primarily salaries and benefit costs) that were included in the cellular
business unit in 1995 were allocated to the PCS business unit during 1996. G&A
for the PCS business unit totaled $14.0 million for 1996 and were comprised
primarily of costs (excluding depreciation) associated with the corporate and
regional facilities.
Depreciation and amortization for 1996 totaled $10.1 million and
consisted principally of the depreciation of the cellular system and the
amortization of goodwill acquired in the 1994 acquisition of Unicel. Because the
majority of the Current PCS System and the related PCS licenses were either not
placed in service until late in the fourth quarter of 1996 or were under
construction and thus not yet depreciable, PCS depreciation and amortization
totaled only $4.0 million for 1996.
Net consolidated interest income totaled $3.2 million for 1996 as
opposed to net interest expense of $1.7 million in 1995. Net interest income
increased primarily as a result of investment of the proceeds from the 1996
Offerings. Additionally, $29.0 million of the interest costs related to the
February 1996 Notes, the April 1996 Notes and borrowings under the Vendor
Financing Agreement were capitalized in 1996 during the construction of the
Current PCS System.
The consolidated effective income tax rates for 1996 and 1995 were 6.2%
(benefit) and 42.6% (provision), respectively. The decrease between the periods
is primarily attributable to the deferred tax asset valuation allowance required
as of December 31, 1996 ($11.2 million). The Company has recognized a $1.7
million income tax benefit equal to available carry backs of operating losses to
the 1994 and 1995 tax years (during which time income taxes totaling
approximately $1.7 million were paid). Management believes that it is more
likely than not that this tax benefit will be realized. The Company generated a
$25.0 million loss from continuing operations during 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Service revenue from local cellular customers increased $5.0 million,
or 38.6%, for 1995, as compared to 1994. A 34.8% increase in the number of
Company subscribers (to 38,582 at December 31, 1995 from 28,624 at December 31,
1994) is the primary factor driving this growth. The substantial increase in new
customers reflects the success of the Company's marketing efforts. Additionally,
a portion of this increase resulted from the inclusion of an additional month of
revenues from the Maine Cellular Market for 1995 (the Company's acquisition of
Unicel was consummated January 31, 1994).
The average monthly service revenue per customer (excluding roaming
revenue and equipment charges) decreased to $43.95 for 1995 from $46.85 for
1994. This decrease was due primarily to the addition of customers who tend to
use cellular service less frequently.
Toll revenue attributable to local customers for 1995 increased $.3
million, or 74.2%, compared to 1994. The increase in long distance revenues is
due to the increase in the local customer base and the inclusion of an
additional month of revenues from the Maine Cellular Market for 1995. The
majority of the increase
47
<PAGE> 52
was realized in the Maine Cellular Market, where customer toll is a larger
component of local customer revenues. A slight increase in toll revenue was
achieved in the Cellular Markets, despite the Company's network being designed
in such a way that customers in the Cellular Markets can call the Atlanta,
Georgia and Birmingham and Montgomery, Alabama Local Access and Transport Areas
("LATAs") at local airtime rates (toll free).
Roamer revenue (including toll revenue) for 1995 increased $1.4
million, or 25.6%, compared to 1994. This increase relates primarily to
increased market penetration levels by the cellular industry as a whole, an
additional month of revenue from the Maine Cellular Market in 1995 and the
addition of eight new cell sites during 1995. While the Company experienced an
increase in total roamer revenue, average revenue per roamer declined slightly,
due primarily to reciprocal roaming agreements with certain surrounding carriers
that offer discounted rates. During the third quarter of 1995, the Company
agreed with BellSouth Mobility to provide discounted rates to BellSouth Mobility
for its customers roaming in the Cellular Markets in exchange for discounted
rates for the Company's Georgia and Alabama customers roaming in certain parts
of BellSouth Mobility's service area.
For 1995, other service revenue, which primarily includes connection
and installation revenues, increased $.1 million, or 21.4%. This increase was
due primarily to the inclusion of an additional month of revenue from the Maine
Cellular Market and increased connection fee revenue associated with the
increased subscriber base.
Monthly access revenue represented 48.2% of service revenue during
1995, as compared to 45.0% of revenue for 1994. Conversely, roaming revenue
declined to 27.3% of service revenue for 1995, as compared to 29.2% of service
revenue for 1994. These changes were consistent with the increased local
customer base and the success of the Company's efforts to add customers to the
higher monthly access fee plans, which include various nonbillable airtime
allotments depending on the service plan selected by the customer. Local
customer airtime revenue as a percentage of total service revenue decreased
slightly due to the Company's success in attracting customers to premium service
plans, which provide certain free airtime minutes but include higher monthly
access charges.
Cost of services includes cost of: (i) interconnection with LEC
facilities; (ii) roaming validation (provided by a third party clearinghouse);
(iii) long distance toll services; (iv) installation when performed by outside
contractors; and (v) supplementary services (such as voice mail). For 1995, cost
of services declined to 9.4% of total service revenue as compared to 10.2% of
total service revenue for 1994, as a result of economies of scale realized
during 1995.
Equipment sales totaled $3.9 million for 1995, an increase of $1.1
million, or 37.4%, over 1994. The increase between periods is attributable to
the increased number of new customers added during 1995 over 1994.
Cost of equipment sold increased $.7 million for 1995, a 30.8% increase
over the prior year. The gross margin on equipment sales was 20.4% and 16.4% for
1995 and 1994, respectively. The increase in the margin between periods relates
to the writedown of certain telephone equipment to fair market value during
1994.
Operations costs, which include the costs of maintaining the cellular
system, customer service, inventory management and in-house installations,
totaled $3.6 million for 1995, which represented a $.9 million, or 32.1%,
increase from 1994. The main components of cost in this category are employee
related costs (salaries, payroll taxes and employee benefits), the provision for
bad debts and communication costs (i.e. telephone, paging, etc.). The increase
in 1995 over 1994 was primarily due to increases in salaries and employee
benefits resulting from the hiring of additional technicians and customer
service representatives to meet the increased demand caused by the growing
customer base. In addition, the growing customer base contributed to an increase
in the number of nonpaying customers, which caused an increase in the bad debt
provision. Also, 1995 contains an additional month of expenses compared to 1994
related to the Company's acquisition of Unicel. Operations costs as a percentage
of total revenue and sales decreased slightly from 12.5% for 1994 to 12.3% for
1995.
48
<PAGE> 53
Selling and marketing costs were $4.3 million in 1995 as compared to
$3.4 million in 1994. The increase was primarily attributable to increased
commissions expense due to the increase in new customers and additional
operating costs associated with the opening of three new retail locations.
G&A costs were $4.2 million for the year ended December 31, 1995, an
increase of $.6 million, or 15.6%, as compared to 1994. The increase was
attributable to several factors, including increases in billing costs due to the
increased subscriber base and increases in employee related costs due to the
increase in total employees. G&A as a percentage of revenue decreased from 16.8%
for 1994 to 14.4% for 1995. During 1995, the Company benefitted from economies
of scale with respect to certain G&A in its cellular operations, such as
salaries and wages and leased facilities costs, that do not increase in direct
proportion to increases in the cellular service revenue and from cost control
efforts by management.
Depreciation and amortization consisted principally of the depreciation
of the cellular system, the amortization of the promotional credits associated
with the Company's promotion programs and the amortization of goodwill acquired
in the Company's acquisition of Unicel. Depreciation and amortization expense
totaled $5.1 million for 1995, as compared to $3.7 million for 1994 (17.4% and
16.9% of revenue, respectively). The primary cause of this increase was the
increase in depreciation expense resulting from the addition of eight new cell
sites, three new retail locations and the conversion of the cellular system in
the Cellular Markets to dual-mode analog/digital transmission facilities during
1995.
Net interest expense totaled $1.7 million for 1995, an increase of $1.0
million over 1994. Net interest expense increased primarily as a result of
borrowings of approximately $20.8 million on its credit facility in 1995 to
finance the Company's investment in Powertel PCS Partners, L.P. and its purchase
of a switch for the Cellular Markets. Such borrowings were repaid in full with
proceeds from the 1996 Offerings.
The effective income tax rates for 1995 and 1994 were 42.6% and 45.0%,
respectively. The decrease between the periods relates to a reduction in
amortization of goodwill associated with the Company's acquisition of Unicel,
which is nondeductible for income tax purposes. In connection with the
acquisition of Unicel, the Company has available in excess of $6.5 million of
net operating loss carryforwards for federal tax purposes that can be utilized
(subject to limitations) in future periods to offset taxable income, if any. At
December 31, 1994, the Company eliminated the valuation allowance for deferred
income taxes related to these net operating losses and concurrently reduced the
goodwill associated with the Unicel acquisition. This reduction in goodwill
resulted in a decrease in amortization expense for 1995 thus reducing the
effective income tax rate for the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires significant amounts of capital for funding the
operations and expansion of its PCS business. The Company may also require
additional financing in the event it decides to make additional acquisitions.
Total capital expenditures, including capital expenditures associated
with the PCS System buildout and for information technology and the support of
the PCS business, are estimated to be approximately $280.0 million for 1997.
Costs associated with the PCS System buildout include tower sites, leasehold
improvements, base station and switch equipment, microwave relocation costs and
labor expenses related to construction of sites. The Company currently estimates
that capital expenditures will total approximately $200.0 million in 1997 to
complete the initial buildout of the Current PCS System (excluding Albany,
Georgia and Chattanooga, Tennessee) and the digital upgrade of the Company's
cellular system, and $150.0 million ($30.0 million in 1997 and $120.0 million in
1998) relating to the initial buildout of the Kentucky/Tennessee PCS System.
Upon completion of the initial buildouts, the Company expects to be able to
offer PCS services in markets containing approximately 55% of the population
within the PCS Markets. The initial coverage is expected to extend across most
metropolitan areas, certain secondary cities and major connecting highway
corridors within the PCS Markets. Thereafter, based on customer demand and
competitive factors, the Company intends to continue to build out its PCS System
to enhance and expand its coverage.
49
<PAGE> 54
On May 1, 1997, the Company sold substantially all of its Maine
cellular assets for an aggregate purchase price of $77.2 million (which includes
$5.4 million that is being held in escrow for indemnification and purchase price
adjustment obligations). See "The Maine Disposition."
During the first quarter of 1996, the Company issued 7,124,322 shares
of its Common Stock in the Stock Offering resulting in net proceeds of $110.0
million. The Company also sold 35,747 units, consisting in the aggregate of
$357.5 million principal amount at maturity of the February 1996 Notes and
1,143,904 Warrants, in the Unit Offering. A portion of the net proceeds was used
to repay all previously outstanding borrowings.
Pursuant to an Asset Purchase Agreement dated as of March 5, 1996,
between Powertel Atlanta Licenses, Inc. and GTE Mobilnet Incorporated ("GTE
Mobilnet"), the Company purchased GTE Mobilnet's PCS license for the Atlanta MTA
on June 28, 1996 for approximately $195.2 million (the "Atlanta MTA
Acquisition"). On June 28, 1996, pursuant to a stock purchase agreement dated as
of March 4, 1996 between the Company and Ericsson, Ericsson purchased 100,000
shares of nonvoting Series A Convertible Preferred Stock from the Company for an
aggregate purchase price of $75.7 million and pursuant to a Stock Purchase
Agreement dated as of March 4, 1996 between the Company and SCANA, SCANA
purchased 100,000 shares of nonvoting Series B Convertible Preferred Stock from
the Company for an aggregate purchase price of $75.7 million (collectively, the
"1996 Preferred Stock Sales").
During the second quarter of 1996, the Company received $193.2 million
of net proceeds from the sale of the April 1996 Notes in the Debt Offering. The
Company used a portion of net proceeds from the 1996 Offerings and the 1996
Preferred Stock Sales to consummate the Atlanta MTA Acquisition and to partially
finance the development, construction and operating costs and certain
acquisition expenses associated with the Current PCS System.
Pursuant to the Vendor Financing Agreement, Ericsson has agreed,
subject to the terms and conditions therein, to provide the Company with up to
$165.0 million of financing for purchases of PCS equipment and services under
the Equipment Purchase Agreement. The Company's obligations under the Vendor
Financing Agreement are secured by all tangible assets purchased with the
proceeds therefrom and by a pledge of the capital stock of the Company's
subsidiaries that hold the licenses for the Current PCS System. As of March 31,
1997, approximately $103.8 million was outstanding under the Vendor Financing
Agreement. The Vendor Financing Agreement requires the Company to meet certain
performance measures and to maintain certain financial ratios. Failure of the
Company and its subsidiaries to meet such performance measures and/or maintain
such ratios would constitute events of default under the Vendor Financing
Agreement, notwithstanding the ability of the Company to meet its debt service
obligations. An event of default under the agreement would allow the lender to
accelerate the maturity of such indebtedness. In such event, a significant
portion of the Company's other indebtedness may become due and payable. The
Company was in compliance with all such ratios as of March 31, 1997. See
"Description of Certain Indebtedness -- The Vendor Financing Agreement."
The Company believes that PCS equipment vendors will make additional
financing available under terms similar to the terms of the existing Vendor
Financing Agreement for PCS equipment purchases related to the initial buildout
of the Kentucky/Tennessee BTAs. The Company intends to obtain financing for its
equipment purchases for the Kentucky/Tennessee BTAs concurrent with signing an
equipment purchase agreement for the Kentucky/Tennessee BTAs. However, there can
be no assurance that additional vendor financing will be available to the
Company, or if available, that it can be obtained on terms acceptable to the
Company and within the limitations contained in the Indentures or the Vendor
Financing Agreement.
The Company believes that the net proceeds from the Offering, together
with the net proceeds from the Preferred Stock Sales, cash on hand (including
proceeds from the Maine Disposition) and borrowings under the Vendor Financing
Agreement and additional vendor financing, which the Company expects to be
available, will be sufficient to finance the development, construction and
operating costs associated with the initial buildout of the PCS Markets and the
completion of the digital upgrade of the Company's cellular system. Although the
Company is currently unable to predict with certainty the amount of expenditures
that may be made subsequent to the initial buildout of the PCS System, the
Company expects that it may require additional capital. Sources
50
<PAGE> 55
of additional capital may include vendor financing, cash flow from operations,
public and private equity and debt financings and asset dispositions by the
Company. The Company may also require additional financing in the event it
decides to make additional acquisitions. The extent of additional financing
required will partially depend on the success of the Company's business. The
Company currently has no other sources of income or cash flows other than its
cellular and newly launched PCS operations and the interest income earned from
investing the net proceeds from the Maine Disposition and the remaining net
proceeds from 1996 Offerings. There can be no assurance that additional
financing will be available to the Company, or if available, that it can be
obtained on terms acceptable to the Company and within the limitations contained
in the Indentures, the Vendor Financing Agreement or that may be contained in
any future financing arrangements. See "Description of Certain Indebtedness" and
"Description of the Notes." The restrictions on additional indebtedness under
the Indentures require the Company to satisfy specified leverage ratios in order
to incur indebtedness; however, they permit the Company and its subsidiaries to
incur an unlimited amount of additional indebtedness to finance the acquisition
of inventory or equipment. See "Risk Factors -- Priority of Secured Debt;
Structural Subordination" and "-- Significant Capital Requirements."
The Company expects to incur significant operating losses and to
generate significant negative cash flow from operating activities during the
next several years, while it develops and constructs its PCS System and builds a
PCS customer base. Cash interest will not be payable on the April 1996 Notes or
the February 1996 Notes prior to 2001. However, at March 31, 1997, on a pro
forma basis after giving effect to the Transactions, the Company would have had
$851.1 million of indebtedness outstanding, and the accretion of original issue
discount on the April 1996 Notes and the February 1996 Notes will cause an
increase in the Company's liabilities from March 31, 1997 of $266.2 million
($129.9 million by February 1, 2001 with respect to the February 1996 Notes and
$136.3 million by May 1, 2001 with respect to the April 1996 Notes). Management
believes that cash flow from operations may be insufficient to repay the April
1996 Notes, the February 1996 Notes and the Notes in full at maturity and that
they may need to be refinanced. There can be no assurance that any such
refinancing could be effected successfully or on terms acceptable to the
Company. See "Risk Factors -- Ability to Service Debt; Restrictive Covenants;
Refinancing Risks."
During the three months ended March 31, 1997, the Company used net cash
of $48.7 million in operating activities as compared to net cash provided from
operating activities of $3.1 million for the same period of 1996. Included in
net cash used in operating activities for the three months ended March 31, 1997
was $29.6 million of net loss, $6.3 million of bond accretion on the February
1996 Notes and the April 1996 Notes, $9.5 million of depreciation and
amortization and $35.2 million related to changes in assets and liabilities.
During 1996, the Company used net cash of $15.3 million in operating activities,
which was a decrease of $20.9 million from 1995. Included in net cash used in
operating activities for 1996 was $27.6 million of net loss, $12.1 million of
non-cash interest expense on the bonds, $10.1 million of depreciation and
amortization and ($11.7) million related to changes in assets and liabilities.
During 1995, the Company generated net cash of $5.6 million from operating
activities, which was an increase of $1.4 million over the prior year. Included
in net cash provided from operating activities of 1995 was $3.0 million of net
income, $5.1 million of depreciation and amortization and ($3.2) million related
to changes in assets and liabilities. During 1994, the Company expensed $.4
million related to the evaluation and formation of strategies to obtain PCS
licenses. These costs were reimbursed by Powertel PCS Partners, L.P. during
1995. Additionally, the Company incurred $3.7 million of such expenses during
1995 which were reimbursed by Powertel on a monthly basis.
Cash provided by investing activities was $36.2 million for the three
months ended March 31, 1997, as compared to cash used of $24.9 million for the
same period of 1996. For investing activities for the three months ended March
31, 1997, the Company incurred capital expenditures totaling $36.2 million
(primarily related to the buildout of the PCS System and support systems) and
other license costs (primarily microwave relocation expenditures) of $3.3
million. These uses of capital were more than offset by the liquidation of
short-term investments totaling $75.7 million. Cash used for investing
activities was $489.1 million for 1996 as compared to cash used of $22.8 million
for 1995. Investing activities for 1996 included capital expenditures totaling
$233.6 million (primarily related to the buildout of the PCS System and support
system, including information technology systems, for the PCS business), short
term investments of $75.7 million, the acquisition of the PCS license for the
Atlanta MTA for $195.2 million and other license costs (primarily microwave
relocation expenditures) of $15.2 million. In addition, the Company received
$15.4 million in cash in 1996
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<PAGE> 56
related to the acquisition of Powertel PCS Partners, L.P. Cash used for
investing activities was $22.8 for fiscal year 1995 as compared to $9.3 million
for 1994. Investing activities for 1995 included capital expenditures totaling
$7.7 million (the majority of which related to the purchase and installation of
a new digital switch for the Cellular Markets) and an investment in Powertel PCS
Partners, L.P. of $17.0 million (to fund Powertel's portion of the acquired PCS
licenses and working capital). During 1995, the Company received $1.8 million in
refunds of certain non-interest bearing subordinated capital certificates from
the Rural Telephone Finance Cooperative related to a borrowing agreement entered
into by Unicel prior to the Company's acquisition of Unicel.
Cash provided by financing activities, which consisted primarily of
additional borrowings of $34.3 million under the Vendor Financing Agreement,
amounted to $34.5 million for the three months ended March 31, 1997 compared to
$276.6 million for the same period of 1996, during which the Company completed
debt and equity offerings which provided $304.4 million in net proceeds. Cash
provided by financing activities amounted to $689.2 million for 1996 compared to
$17.3 million for 1995. Cash provided by financing activities during 1996
included $110.0 million from the Stock Offering, $151.5 million from the 1996
Preferred Stock Sales, $385.3 million of net proceeds from the Unit Offering and
the Debt Offering and $69.5 million from borrowings under the Vendor Financing
Agreement. Cash used by financing activities during 1996 included $28.1 million
for repayment of amounts outstanding under the credit facility through Valley
Finance, Inc., a direct wholly owned subsidiary of ITC Holding, with National
Bank for Cooperatives. During 1995, the Company repaid $1.5 million on a note
outstanding to ITC Holding and borrowed $20.8 million under the credit facility.
Cash provided by financing activities was $5.2 million for fiscal year 1994.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings Per
Share," which becomes effective for fiscal years ending after December 15, 1997.
FAS 128 changes certain reporting and disclosure requirements for earnings per
share and will require restatement of all prior period earnings per share
amounts.
In October 1995, the FASB issued Statements of Financial Accounting
Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation," which
became effective for fiscal years beginning after December 15, 1995. FAS 123
established new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation cost for
stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities electing to remain with the accounting in
APB Opinion No. 25 will be required to make pro forma disclosures of net income
and earnings per share as if the provisions of FAS 123 had been applied. The
Company adopted FAS 123 on January 1, 1996 and elected to continue to measure
compensation cost for stock-based compensation under APB Opinion No. 25.
Accordingly, the adoption of FAS 123 did not impact the 1996 statement of
operations. See Note 6 to the consolidated financial statements included
elsewhere in this Prospectus for a pro forma disclosure as if the provisions of
FAS 123 had been applied.
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 ("FAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which becomes effective for
fiscal years beginning after December 15, 1995. FAS 121 established standards
for determining when impairment losses on long-lived assets have occurred and
how impairment losses should be measured. The Company adopted FAS 121 in 1996.
The adoption of FAS 121 did not have a material impact on the Company's
financial statements.
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<PAGE> 57
BUSINESS
Powertel provides PCS services in the southeastern United States under
the name "Powertel" and provides cellular telephone service in contiguous
portions of western Georgia and eastern Alabama under the name "InterCel."
Powertel's PCS licenses encompass a territory of approximately 246,000
contiguous square miles with a population of approximately 24.3 million people
and include licenses acquired in 1995 and 1996 to serve the MTAs of Atlanta,
Georgia; Jacksonville, Florida; Memphis, Tennessee/Jackson, Mississippi; and
Birmingham, Alabama and licenses to serve the Kentucky/Tennessee BTAs which the
Company acquired in the D/E/F Auctions.
In the D/E/F Auctions, the Company acquired both the 10 MHz "D" block
and the 10 MHz "E" block licenses in each of the BTAs of Evansville, Indiana;
Lexington, Louisville, Bowling Green-Glasgow, Corbin, Madisonville, Owensboro,
Paducah-Murray-Mayfield and Somerset, Kentucky; Nashville and Cookeville,
Tennessee; and Hopkinsville, Kentucky-Clarksville, Tennessee; and the 10 MHz "E"
block license in the Knoxville, Tennessee BTA. The aggregate purchase price for
these licenses, which encompass an area of approximately 66,000 square miles
with a population of approximately 6.8 million people, was $31.2 million. With
the addition of the Kentucky/Tennessee BTAs, Powertel has one of the largest
contiguous PCS footprints in the southeastern United States. The Company expects
its expanded PCS footprint to provide a competitive advantage in attracting new
PCS customers in its markets.
Powertel first introduced its PCS services in October 1996 in
Jacksonville, Florida and Montgomery, Alabama and, to date, has launched its PCS
services in an additional 15 cities: Brunswick, Georgia; Memphis and Jackson,
Tennessee; Florence, Anniston, Gadsden, Birmingham, Huntsville, Tuscaloosa and
Dothan, Alabama; Jackson and Tupelo, Mississippi; and Gainesville, Panama City
and Tallahassee, Florida. In all of these markets, the Company was the first to
offer PCS services commercially. Powertel intends to continue to rapidly build
out its PCS network and to launch its PCS services. As of March 31, 1997, the
Company had approximately 35,000 PCS subscribers.
Powertel intends to become a leading provider of wireless
telecommunications services in the southeastern United States by: (i) expanding
its market presence and subscriber base by offering significant value to its
customers; (ii) aggressively and creatively marketing a broad range of wireless
telecommunications services; and (iii) increasing cash flow margins by achieving
economies of scale and operating efficiencies and effectively implementing
technological advances. The Company believes that the market for wireless
telecommunications services will expand significantly as equipment costs and
service rates continue to decline, equipment becomes more convenient and
functional and wireless services become more diverse. The Company believes that
by expanding its presence in the southeastern United States it will be well
positioned to capitalize on this market opportunity and on the region's positive
demographics. The Company intends to build upon the extensive experience of its
management team in the telecommunications industry, the Company's experience and
reputation in the southeastern cellular market and its relationships with other
telecommunications providers to create a broad regional wireless
telecommunications company. The Company intends to continue to be among the
first PCS operators in its service areas to market advanced digital PCS wireless
systems with increased capacity, improved quality and greater functionality than
traditional analog cellular systems.
THE WIRELESS TELECOMMUNICATIONS INDUSTRY
Overview. Wireless telecommunications networks use a variety of radio
frequencies to transmit voice and data in place of, or in addition to, standard
landline telephone networks. Wireless telecommunications technologies include
one-way radio applications, such as paging or beeper services, and two-way radio
applications, such as cellular telephone and specialized mobile radio ("SMR")
networks. Each application operates on a distinct radio frequency block.
Since its initial introduction in 1983, commercial cellular telephone
service has grown dramatically and now dominates the wireless telecommunications
market. Service revenues for the wireless telephone industry set an annual
record of over $23.6 billion during 1996 (an increase from approximately $482
million in 1985).
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The number of wireless telephone subscribers nationwide has grown from
approximately 680,000 in 1986 to an estimated 44 million at December 31, 1996.
In 1993, the FCC allocated a portion of the radio spectrum for the
provision of a new wireless communications service, commonly known as PCS. PCS
differs from traditional cellular telephone service principally in that PCS
systems operate at a higher frequency and employ advanced digital technology.
Relative to existing cellular service, these features are expected to enable PCS
system operators to offer customers lower cost service options, lighter handsets
with longer battery lives and new and enhanced service offerings. The number of
wireless telephone subscribers has grown at a compound annual rate of 40% over
the last three years. The PCIA estimates that the number of cellular and PCS
wireless service subscribers will reach 84.5 million by the year 2000 and that
PCS subscribers will account for approximately 23.1 million of such subscribers.
Most cellular services currently transmit voice and data signals over
analog-based systems, which use one continuous electronic signal that varies in
amplitude or frequency over a single radio channel. Digital systems, on the
other hand, convert voice or data signals into a stream of digits that is
compressed before transmission, enabling a single radio channel to carry
multiple simultaneous signal transmissions. This enhanced capacity, along with
enhancements in digital protocols, allows digital-based wireless technologies to
offer new and enhanced services, such as greater call privacy and single number
(or "find me") service, and more robust data transmission features, such as
"mobile office" applications (including facsimile, electronic mail and
connecting notebook computers with computer/data networks).
While digital technology serves generally to reduce transmission
interference relative to analog technology, limitations in the 8 Kb cellular
digital handsets initially deployed in cellular systems by most digital wireless
operators also caused a perceptible decline in transmission quality. This gap in
transmission quality proved to be a barrier to cellular operators seeking to
switch their customers from analog to digital service. PCS providers are
currently utilizing 13 Kb digital handsets. These handsets offer digital
transmission quality comparable to, if not better than, current analog cellular
handsets. Enhanced 13 Kb handsets for GSM systems have recently become
available, and PCS providers, including the Company, are currently upgrading
their systems to fully support the enhanced handsets to allow users of these
handsets to obtain improved voice quality.
The Company believes the growth of the consumer market for wireless
telecommunications will accelerate due to anticipated declines in costs of
service, increased function versatility, and increased awareness of the
productivity, convenience and safety benefits associated with such services. The
Company also believes the rapid growth of notebook computers and personal
digital assistants, combined with emerging software applications for wireless
delivery of electronic mail, fax and database searching, will further stimulate
demand for wireless service. Moreover, the Company expects to see an increased
demand for local residential or fixed wireless telecommunications services as a
replacement to wireline products. AT&T Wireless, which holds PCS licenses
encompassing approximately 93% of the U.S. population, has reportedly developed
wireless technology that would allow AT&T to compete with LECs. This proprietary
technology reportedly will route calls to and from subscribers' landline or
mobile telephones over AT&T's wireless network, thereby bypassing LECs. The
Company intends to continue to monitor the demand for wireline replacement
services and to supplement its current wireless service offerings in the future
as appropriate to address a portion of this market segment.
Operation of Wireless Systems. Two-way wireless service areas are
divided into multiple regions called "cells," each of which contains a base
station system consisting of a low-power transmitter, a receiver and signaling
equipment. The cells are typically configured on a grid in a honeycomb-like
pattern, although terrain factors (including natural and man-made obstructions)
and signal coverage patterns may result in irregularly shaped cells and overlaps
or gaps in coverage. Cellular system cells generally have a radius ranging from
two miles to 25 miles. PCS system cells generally have a radius ranging from
one-quarter mile to eight miles, depending on the PCS technology being used,
antenna type and configuration, local capacity requirements and terrain. The
base station system in each cell is connected by microwave, fiber optic cable or
telephone wires to a mobile switching center, which uses computers to control
the operation of the wireless telephone system for its entire service area. The
mobile switching center controls the transfer of calls from cell to cell as a
subscriber's handset travels, manages call delivery to handsets, allocates calls
among the cells within the system
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and connects calls to the local landline telephone system or to a long distance
telephone carrier. Wireless service providers have interconnection agreements
with various local exchange carriers and interexchange carriers, thereby
integrating the wireless telephone system with landline telecommunications
systems. Because two-way wireless systems are fully interconnected with landline
telephone networks and long distance networks, subscribers can receive and
originate both local and long distance calls from their wireless telephones.
The signal strength of a transmission between a handset and a base
station system declines as the handset moves away from the base station, so the
mobile switching center and the base stations systems monitor the signal
strength of calls in progress. When the signal strength of a call declines to a
predetermined level, the mobile switching center may "hand off" the call to
another base station that can establish a stronger signal with the handset. If a
handset leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is established to hand
off the call to an adjacent system.
Operators of wireless systems frequently agree to provide service to
subscribers from other compatible systems who are temporarily located in or
traveling through the service area. Such subscribers are called "roamers."
Agreements among system operators allocate revenues received from roamers. With
automatic roaming, wireless subscribers are preregistered in certain systems
outside their service area and receive service automatically while they are
roaming, without having to notify the switching office. Other roaming features
permit calls to a subscriber to "follow" the subscriber into different systems,
so that the subscriber will continue to receive calls in a different system just
as if the subscriber were within his or her service area.
While PCS and cellular networks utilize similar technologies and
hardware, they operate on different frequencies and utilize different signaling
protocols. As a result, it generally will not be possible for users of one type
of system to "roam" on a different type of system outside of their service area,
or to hand off calls from one type of system to another unless the handset is
capable of operating on multiple frequencies or technology platforms (i.e.,
dual-mode). This is also true for PCS subscribers seeking to roam in a PCS
service area served by operators using incompatible PCS signaling protocols. See
"-- Digital Technology." The Company expects that dual-mode handsets capable of
receiving and transmitting over both analog cellular and GSM-based PCS networks
will become available in late 1997, but that they will weigh and cost more than
single-mode handsets. Automatic delivery of calls over analog cellular systems
to a roaming digital PCS subscriber using a dual-mode phone on a GSM-based PCS
system is expected to be available in late 1997.
Wireless subscribers generally are charged separately for monthly
access, airtime, long distance calls and custom calling features (although many
custom calling features are included in monthly access charges in the Company's
pricing plans). Wireless system operators have been required to pay fees to LECs
for interconnection to their networks or toll charges based on standard or
negotiated rates. However, pursuant to the 1996 Telecommunications Act, such
interconnection arrangements must now be reciprocal and cost-based, with each
party compensating the other at the same rate for the right to interconnect with
such carrier's network. See "-- Regulation of Wireless Telecommunications
Systems." The Company recently entered into interconnection agreements for its
cellular and PCS operations with BellSouth, the LEC with which the Company
primarily interconnects in its service territory. Effective April 1, 1997, the
mutual and reciprocal interconnection rates under these agreements range from
$.005644 to $.01586 per minute. These rates represent a significant decrease
from the previous rates paid by the Company to BellSouth of approximately $.022
per minute. When wireless operators provide service to roamers from other
systems, they generally charge roamer airtime usage rates, which usually are
higher than standard airtime usage rates for their own subscribers, and
additionally may charge daily access fees. Special, discounted rate roaming
arrangements, often between neighboring operators who wish to stimulate usage in
their respective territories, provide for reduced roaming fees and no daily
access fees.
Digital Technology. Digital signal transmission is accomplished through
the use of frequency management technologies, or "protocols." These protocols
"manage" the radio channel either by dividing it into distinct time slots (a
method known as Time Division Multiple Access, or "TDMA") or by assigning
specific coding instructions to each packet of digitized data that comprises a
signal (a method known as CDMA). While the FCC has mandated that licensed
cellular systems in the United States must utilize compatible analog signaling
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protocols, at present there is no required universal digital signaling protocol.
Currently, three principal competing, incompatible signaling protocols have been
proposed by various vendors for use in PCS systems: GSM, CDMA and IS-136. The
GSM protocol is an updated, up-banded version of the TDMA-based protocol widely
used in European and other countries. IS-136 is an up-banded version of the
TDMA-based digital cellular protocol now used by cellular operators in the
United States. Because IS-136 is based on current TDMA-based cellular protocols,
the dual-mode (analog cellular/PCS) handset using IS-136 technology was the
first dual-mode handset to become commercially available. Because the three
protocols are incompatible, a subscriber of a system that relies on GSM
technology, for example, will be unable to use his handset when traveling in an
area served only by CDMA or IS-136-based wireless operators unless he carries a
dual-mode handset that permits him to use one of the wireless providers' systems
in that area. Because dual-mode handsets are not expected to be commercially
available for GSM/analog cellular until late 1997, the success of each protocol
will depend both on its ability to offer enhanced wireless service and on the
extent to which its users will be able to use their handsets when roaming
outside their service area. See "-- PCS Operations -- PCS System." However,
there can be no assurance that the FCC or industry organizations will not
mandate a universal digital switching protocol in the future. See "Risk Factors
- -- Risks Relating to Selection of PCS Digital Protocol."
PCS OPERATIONS
Overview. The Company provides PCS services in the southeastern United
States under the name "Powertel." The Company has licenses to provide PCS
services in contiguous portions of 12 southeastern states. The Company believes
that by expanding its presence in the southeastern United States through the
acquisition of the licenses for the Kentucky/Tennessee BTAs, it will be able to
build upon its experience and reputation in its southeastern cellular markets,
benefit from the region's positive demographics and capitalize on its
relationships with other telecommunications providers in the southeast.
PCS Markets. The Company holds licenses to provide PCS to the
Birmingham, Alabama MTA; the Jacksonville, Florida MTA; the Memphis,
Tennessee/Jackson, Mississippi MTA; the Atlanta MTA; and the Kentucky/Tennessee
BTAs. The PCS Markets encompass approximately 246,000 contiguous square miles in
Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana,
Mississippi, Missouri, South Carolina and Tennessee. Approximately 24.3 million
people and over 10,250 miles of highway are located in the Company's PCS
Markets. As of March 31, 1997, the Company had approximately 35,000 PCS
subscribers in 16 markets in Alabama, Florida, Georgia, Mississippi and
Tennessee.
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The following table sets forth certain information regarding the
Company's PCS Markets:
PCS MARKET AREA INFORMATION
<TABLE>
<CAPTION>
Estimated
Annual Annual Estimated
License Populatio Population Retail Sales Highway
Net Population Cost per Square Growth Growth Growth 1993-98 Miles
PCS Markets Equivalents(a) POP(b) Miles(c) 1980-90(d) 1993-98(c) (%)(c) (c)
- ----------- -------------- -------- -------- -------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Jacksonville, Florida MTA(e).. 2,531,000 $ 19.03 28,880 1.9% 1.5% 7.1% 1,080
Memphis, Tennessee/Jackson,
Mississippi MTA(e)........... 3,617,000 12.50 54,070 .1 .8 6.5 1,638
Birmingham, Alabama MTA(e).... 3,441,000 10.74 38,964 .4 .9 6.2 1,518
Atlanta MTA(e)................ 7,871,000 24.85 58,116 1.6 2.3 7.2 3,034
Kentucky/Tennessee BTAs(f).... 6,833,000 4.57 65,767 .4 1.1 6.9 3,009
---------- -------- ------- --- --- --- ------
Total/Weighted Average...... 24,293,000 $ 14.70 245,797 .9% 1.5% 6.9% 10,279
========== ======== ======= === === === ======
</TABLE>
- ---------------------
(a) Net Population Equivalents means the estimated population of the
licensed market area multiplied by percentage ownership of the license.
The estimated population is based on the 1996 Paul Kagan Associates,
Inc. Cellular/PCS POP Book. The Company owns 100% of each of the PCS
licenses.
(b) License Cost Per POP for the Jacksonville, Florida MTA, the Memphis,
Tennessee/Jackson, Mississippi MTA, and the Birmingham, Alabama MTA
represents the portion of the purchase price paid by the Company for
Powertel allocated to the PCS licenses for such MTAs. The allocation
between the three markets is based on the relative prices paid for the
licenses by Powertel. License Cost Per POP for the Atlanta MTA
represents the price per POP to be paid by the Company to GTE Mobilnet
in the Atlanta MTA Acquisition.
(c) Source: 1995 PCS Atlas and Databook, Paul Kagan Associates, Inc.
(d) Annual Population Growth is computed from information contained in the
1990 U.S. Census.
(e) Represents either the 30 MHz "A" block license or "B" block license in
each MTA.
(f) Represents both the 10 MHz "D" block and 10 MHz "E" block licenses in
12 of the Kentucky/Tennessee BTAs and the 10 MHz "E" block license
in the Knoxville, Tennessee BTA.
The success of the Company's PCS operations will depend, in part, on
the Company's ability to be among the first in its markets to provide its
customers with integrated service offerings at competitive rates. The Company
believes it can become a low-cost provider of PCS and expand its market presence
by generating operating economies of scale through contiguous market areas,
distinguishing its products from those of its cellular competitors, and focusing
on customer acquisition and retention, as it has done in its cellular business.
PCS Services. The Company operates a fully digital, GSM-based PCS
system. See "-- PCS System" below. GSM technology enables the Company to offer
new and enhanced services and features, including the following:
- Secure Communications. Sophisticated encryption algorithms
provide increased call security, encouraging users to make
private, professional and personal calls that they might
otherwise have made only on landline telephones.
- Sophisticated Call Management. The Company's PCS System offers
call screening, routing and forwarding, caller I.D., caller
I.D. blocking, message waiting, call hold, call transfer and
selective call screening, rejection and forwarding.
- Enhanced Battery Performance. PCS handsets consume, on the
average, less power than cellular handsets. In contrast to
cellular handsets which transmit at a constant rate of power,
PCS handsets are able to determine the distance between a
handset and a cell site and vary the wattage of the handset
accordingly. This extends the amount of time a battery can be
used without having to be recharged.
- Single Number Service. This service will provide subscribers
with a convenient way to transfer all incoming calls between
primary landline and wireless locations automatically. When a
subscriber's handset is activated, the network will route all
incoming calls to the subscriber's wireless number. When the
handset is deactivated, all calls will be directed to the
subscriber's primary landline location. "Find Me" service will
enable subscribers to direct their incoming
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calls to one of several alternative locations (landline
telephone, paging system handset, mailbox, etc.) on an ongoing
basis. The Company expects to have the capability to offer
single number service in late 1997.
- Enhanced Wireless Data Transmission. Digital networks are
capable of simultaneous voice and data communications. The
Company currently offers basic enhanced wireless data
transmission services, such as alphanumeric short messaging
service. The Company believes that, as data transmission
technologies develop, a number of additional potential uses
for such services will emerge, including enhanced "mobile
office" applications, access to stock quote services,
transmission of text such as maps and manuals, transmission of
photographs, connections of wireless point-of-sale terminals
to host computers, monitoring of alarm systems, automation of
meter reading and monitoring of status and inventory levels of
vending machines.
- SIM Card. Credit card-sized Subscriber Identity Module ("SIM")
cards, programmed with the user's billing information and a
specified service package, allows subscribers to open Powertel
accounts and obtain PCS connectivity automatically through an
over-the-air activation process simply by inserting their SIM
cards into compatible PCS handsets and pressing any key on the
handset. A customer may also request and receive any
alteration or upgrade remotely through the same over-the-air
process. Once roaming agreements between the Company and
international PCS providers are in place, subscribers will
also be able to roam internationally anywhere GSM is deployed
by using their SIM cards with handsets compatible with the
local system. As of May 15, 1997, the Company had entered into
roaming agreements with 13 international GSM-based wireless
providers, and the Company expects that subscribers will be
able to roam internationally by using SIM cards in certain
markets by late 1997.
The Company intends to extend its current offerings of wireless
telecommunications services, which generally consist of wireline enhancement
services that supplement the customer's landline telephone, to include wireline
replacement services that will serve as the customer's primary mode of
telecommunication. An example of a wireline replacement service is "enhanced
cordless" handsets, which operate as cordless landline telephones when used in
or near the customer's home and operate as wireless PCS handsets when used
elsewhere.
PCS Roaming. The Company's PCS subscribers may roam outside their
"home" markets anywhere within the Company's PCS coverage area without being
assessed daily access fees or increased airtime usage rates. In addition, the
Company has reciprocal roaming agreements in place with Aerial Communications,
Inc. ("Aerial Communications"), Airadigm Communications Inc. ("Airadigm"),
American Personal Communications, Inc., BellSouth Mobility DCS, the PCS
subsidiary of BellSouth Corporation ("BellSouth Mobility DCS"), Microcell
Connexions Inc., Omnipoint Communications, Inc., Pacific Bell Mobile Services
Corp. and Western Wireless Corporation and, after a period of technical testing,
expects to begin offering its customers roaming capabilities by the third
quarter of 1997 in the service areas where these providers are operational. The
Company intends to provide such roaming services outside of its service areas to
its customers at rates lower than those traditionally offered by cellular
providers.
Several other PCS licensees (including winning bidders in the D/E/F
Auctions) have announced that they intend to deploy GSM-based PCS systems.
Together, PCS licensees (including Powertel) that have constructed, or announced
their intention to construct, GSM-based PCS systems cover markets containing
approximately 260 million persons, or approximately 98% of the U.S. population.
However, one of the GSM licensees, Pocket, which recently filed for
reorganization under Chapter 11 of the United States Bankruptcy Code, has
licenses in markets containing approximately 35 million people. There can be no
assurance that all of these licensees will deploy GSM-based PCS systems. Three
of these licensees (BellSouth Mobility DCS, Aerial Communications and DigiPH
Communications, Inc.) own licenses in MTAs and BTAs that are contiguous to the
PCS Markets which, assuming such markets are built out and roaming agreements
are in place, will increase the size of the contiguous geographic area where a
customer of the Company can roam using his GSM handset. BellSouth Mobility DCS
is currently providing PCS service in multiple markets in North and South
Carolina, and the Company is currently conducting certain tests prior to
implementing roaming service to and from such markets.
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The Company's subscribers will not be able to roam in markets without at least
one PCS licensee using the GSM protocol unless the subscriber uses a dual-mode
telephone that would permit the subscriber to use the existing analog cellular
wireless system in such other market. Such dual-mode phones are not expected to
be available until late 1997 and are expected to be heavier and cost more than
single-mode phones. See "Risk Factors -- Risks Relating to Selection of PCS
Digital Protocol."
PCS Customer Service. The Company recognizes that superior customer
service is vital to minimizing customer churn and to contributing to the
long-term success of its business. Accordingly, the Company has taken steps to
ensure that its PCS customers are fully introduced to its service offerings,
that they completely understand how to use the Company's equipment and its
features, and that they receive prompt and reliable service from the Company's
customer service representatives. The Company currently provides PCS subscribers
with toll-free access to its customer service representatives 24 hours a day,
seven days a week. In addition, PCS subscribers can reach a customer service
representative from their handsets (with no airtime charge) by dialing *611.
PCS Sales, Marketing and Distribution. The Company markets its PCS
service offerings primarily through: (i) a direct sales force; (ii) 16
Company-operated retail stores; (iii) a network of independent agents, each of
which has a retail store presence; and (iv) mass merchandisers, such as Radio
Shack, Office Depot and Circuit City. In addition to traditional distribution
channels, the Company will consider marketing its PCS products and services
through nontraditional distribution channels, including the internet,
telemarketing and direct mail. The Company supports its marketing activities
with local and regional advertising.
The Company's direct and retail store PCS sales force currently
consists of approximately 160 employees. The Company's sales employees
understand the Company's PCS system, products and services, so that they, in
turn, can provide extensive information to prospective customers. Sales
commissions generally are linked both to subscriber revenue and subscriber
retention. The Company expects that it will increase its PCS sales force to
approximately 300 employees by the end of 1997.
The Company also negotiates volume discounts from vendors of PCS
telephone equipment and passes on a substantial portion of the discount on, and
further subsidizes the cost of, such telephone equipment to its subscribers and
sales agents. The Company offers service for a fixed monthly charge (accompanied
by varying allotments of unbilled or "free" minutes), plus additional variable
charges per minute of use. A high volume caller might find an option with a
higher monthly access charge and lower per-minute charges to be most
advantageous. A lower volume user might choose a different package, featuring a
lower access fee and higher per-minute charges. Voicemail, caller ID, caller ID
blocking, call waiting and numeric messaging are included in a customer's
monthly access fee. The Company currently charges a $.10 per minute toll charge
for all long distance calls terminating within the Current PCS Markets and a
$.15 per minute toll charge for all calls terminating outside of the Current PCS
Markets. Optional features available at an additional charge include special
toll calling plans, custom call service, call forwarding, enhanced voicemail,
alphanumeric short messaging, fax management, message management and handset
loss protection. The Company recently conducted a promotional offering whereby
customers could purchase unlimited local airtime through 1997 for $50 per month.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
The Company offers over-the-air activation whereby a customer can
initiate service by purchasing a handset from any of the Company's distribution
channels and pressing any key on the handset to reach Powertel customer service.
During this call, the customer service representative can obtain all necessary
customer information and conduct a credit scoring assessment. The customer's
telephone can be activated within minutes following this call. The Company does
not require its PCS customers to sign long-term service contracts. The Company
currently subsidizes a portion of all PCS handset purchases, but after such
subsidy, such handsets are generally more expensive to subscribers than cellular
handsets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
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In marketing its PCS services, the Company emphasizes the enhanced
features and favorable pricing of its PCS System. The Company also promotes the
improved call security of its PCS System, which the Company believes encourages
users to make confidential calls that they might not otherwise make on an analog
cellular telephone. The Company anticipates offering certain bundled services
with other service providers in the future, such as long-distance, cable
television, and internet access companies. The Company's ability to offer
bundled services has increased as a result of requirements imposed on incumbent
LECs by the 1996 Telecommunications Act. Incumbent LECs will be required to
provide other telecommunications carriers like the Company with access to
unbundled network elements at any technically feasible point, on reasonable
terms and conditions. In addition, the Company and other wireless operators will
be entitled to purchase LEC retail services at wholesale rates. Further, the
LECs' rates for interconnection must be just, reasonable and cost-based.
Initially, the Company is concentrating its PCS marketing efforts on
the following several key types of customers:
- large, communications-intensive corporate accounts, currently
using or considering cellular or private radio systems, that
would benefit from integrated mobile telephone, short
messaging and wireless data transmission capabilities;
- high-mobility customers using or considering cellular
telephones who would benefit from the enhanced features and
services available on the Company's PCS System and from the
Company's large and contiguous discounted rate footprint, its
customer service and its competitive pricing; and
- low-mobility customers attracted to PCS as an alternative to
their landline telephones or as a second telephone "line" in
their homes.
The Company's PCS services will also compete more directly with
traditional landline telephone service providers. As prices decline for PCS
service and as the Company is able to provide a broader array of bundled
services, the advantages of mobility together with customized combinations of
PCS services will make PCS services increasingly attractive for telephonic
communications and may result in penetration into the landline telephone market.
This potential for increased PCS penetration of the landline market was enhanced
by the 1996 Telecommunications Act, which requires LECs to interconnect with
other telecommunications providers such as the Company at just and reasonable
rates that are based on costs. The Company expects that the PCS services offered
by operators will initially serve to enhance traditional landline telephone
services and will eventually be capable of replacing some traditional landline
telephone services.
PCS System. The Company's PCS System utilizes the GSM digital protocol.
The Company chose GSM because it: (i) has been operating successfully in
European and other countries for approximately six years; (ii) offers enhanced
features such as call encryption and short messaging; and (iii) utilizes an open
system architecture between the mobile switching center and base station
systems, thereby allowing the Company to purchase equipment from a variety of
vendors, improving the Company's ability to reduce equipment costs.
The GSM protocol has been up-banded from the 1.8 GHz frequency now used
by cellular operators in Europe to the 1.9 GHz frequency allocated for PCS in
the United States and has been adapted to interface with the U.S. landline
telephone switching network. However, in order to provide voice transmission
quality comparable to that currently offered by landline systems, the 13 Kb
vocoders, which are part of the GSM handsets, are being upgraded to enhanced 13
Kb vocoders. The Company is in the process of upgrading its mobile switching
center software to fully support the enhanced 13 Kb vocoders which are
commercially available today in many GSM handsets.
Currently, the Company offers PCS service in markets containing
approximately 30% of the population in the Current PCS Markets. The system
design primarily utilizes high-powered sites to provide wide area coverage of
the most dense population centers, surrounding communities and connecting
traffic corridors.
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Smaller, low-power sites provide enhanced coverage and supplemental capacity in
heavy usage areas. Upon completion of the initial buildout in its Current PCS
Markets (excluding Albany, Georgia and Chattanooga, Tennessee), the Company
expects to offer service in markets containing approximately 60% of the
population within the Current PCS Markets. The initial coverage is expected to
extend across 23 metropolitan areas and secondary cities within the Current PCS
Markets (Atlanta, Augusta, Macon, Savannah, Columbus and Athens, Georgia;
Memphis and Jackson, Tennessee; Jackson and Tupelo, Mississippi; Florence,
Huntsville, Anniston, Gadsden, Birmingham, Tuscaloosa, Montgomery and Dothan,
Alabama; and Panama City, Tallahassee, Jacksonville, St. Augustine and
Gainesville, Florida), as well as the major highway corridors connecting those
areas. The Company expects to complete the initial buildout of the Current PCS
Markets (excluding Albany, Georgia and Chattanooga, Tennessee) by late 1997 and
the Albany, Georgia and Chattanooga, Tennessee metropolitan areas in 1998.
Thereafter, based on customer demand and competitive factors, Powertel intends
to continue to build out its Current PCS System to enhance and expand its
coverage.
The Company is currently acquiring sites and rapidly building its
system in the Atlanta, Georgia MTA. The Company is completing the system design
and coverage phase of its initial buildout of the Kentucky/Tennessee BTAs and
expects to begin selecting and acquiring sites for its transmitters in these
markets in the third quarter of 1997. Sites will be selected on the basis of
their coverage of targeted customers, cost to construct the site and on
frequency propagation characteristics. In many cases, the Company may be
required to obtain zoning approval. For new sites, the Company estimates that
the site acquisition process can take three to twelve months. Once sites are
acquired and the requisite governmental approvals are obtained, preparation of
each site, including grounding, ventilation and air conditioning, equipment
installation, testing and optimization generally will require an additional two
to four months. In addition to frequency planning, system design and site
acquisitions, the implementation of the Kentucky/Tennessee PCS System will
require construction and equipment procurement, installation and testing.
One of the Company's objectives is to reduce the risk of delays during
the buildout schedule while maintaining the integrity of the system design. In
particular, during the initial implementation, the Company attempts to locate
sites for its towers and base stations where zoning approvals and other
necessary permits are likely to be obtained easily. Siting on government
property has been facilitated somewhat by the 1996 Telecommunications Act, which
requires the President to prescribe procedures by which Federal departments and
agencies may make Federal property, rights-of-way and easements available on a
fair, reasonable and non-discriminatory basis for the placement of
spectrum-based services. In addition, the 1996 Telecommunications Act requires
the FCC to provide technical support to states to encourage them to make state
property, rights-of-way and easements available for such purposes. The 1996
Telecommunications Act further mandates that state and local governments may not
deny requests for facilities siting, construction or modification based on the
environmental effects of RF emissions, so long as the facilities comply with the
FCC's emissions standards. However, some zoning delays due to government
monitoring remain nonetheless. The use of existing towers and other facilities
occupied by other telecommunications service providers and utility companies is
expected to facilitate the buildout process for the Company. Powertel has
entered into agreements with other telecommunications and utility companies to
enable Powertel to install PCS base stations and other equipment on the
companies' existing towers in the Current PCS Markets. The Company also pursues
access to multiple sites concurrently to provide contingencies in case of permit
denials and to use, where possible, pre-fabricated buildings with equipment
pre-installed, or outdoor equipment cabinets (which eliminates the need for
equipment buildings in some instances). See "Risk Factors -- Necessity of Zoning
Approvals."
The Company's buildout schedule may be revised from time to time as a
result of changing circumstances. The Company's ability to proceed with the
buildout of its PCS System may be subject to successful negotiation of site
acquisitions or leases, the availability of equipment and financing, and the
receipt of necessary governmental approvals. In addition, the timing of the
scheduled buildout will be subject to normal construction and other possible
delays.
The infrastructure of a PCS system generally consists of digital
switches, base station transmitters and receivers, and related equipment.
Additional costs are attributable to site acquisition and preparation and
installation services. The Company has entered into an equipment purchase
agreement and a Vendor Financing Agreement with Ericsson. See "Risk Factors --
PCS System Implementation Risks; Operational Risks,"
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Certain
Indebtedness -- The Vendor Financing Agreement."
In general, the frequency spectrum licensed by the FCC for PCS use was
partially occupied by private and common carrier fixed microwave users. Many of
these microwave incumbents provide services that could or would interfere with
or receive interference from the operation of the PCS System and, as a result,
have to be relocated. In an effort to balance the competing interests of
existing microwave users and newly authorized PCS licensees, the FCC adopted a
transition plan to relocate such microwave operators to other spectrum blocks.
With regard to the Company's PCS licenses in the Current PCS Markets, this
transition plan allowed most microwave users to operate in the PCS spectrum for
a two-year voluntary negotiation period and an additional one-year mandatory
negotiation period. However, the FCC has recently shortened the voluntary
negotiation period with respect to D/E/F block licenses, including the licenses
for the Kentucky/Tennessee BTAs, to one year. For public safety entities
dedicating a majority of their system communications for police, fire or
emergency medical services operations, the voluntary negotiation period is three
years. Parties unable to reach agreement within these time periods may refer the
matter to the FCC for resolution, but the incumbent microwave user is permitted
to continue its operations until final FCC resolution of the matter. In most
cases where the Company has displaced a microwave incumbent in the Current PCS
Markets, the Company has been or will be responsible for paying the microwave
incumbent's relocation expenses and for any actions necessary to put the
microwave incumbent's new facility into operation. The Company has been
successful in relocating the necessary microwave links for the initial buildout
of its Current PCS Markets (excluding Albany, Georgia and Chattanooga,
Tennessee). As of March 31, 1997, the Company had signed microwave relocation
agreements for 106 microwave links at a cost of $29.2 million and estimates that
it may be required to relocate between 40 and 50 additional microwave links in
the PCS Markets. It may be necessary for the Company to relocate additional
microwave links as it enhances and expands its coverage following the initial
buildout of its PCS System.
The FCC has a cost-sharing plan to allocate the costs of microwave
relocations among PCS licensees where a PCS licensee's relocation efforts and
expense has benefitted another. Under the approved plan, a PCS licensee would
not be required to contribute to the relocation costs of a particular microwave
link unless that link, by application of the FCC's objective interference test,
was determined to cause interference to or receive interference from the PCS
licensee's system. However, a PCS licensee's cost-sharing obligation is
generally limited to $250,000 per microwave link unless a new or modified tower
is required, in which case the cost-sharing obligation is limited to $400,000.
In addition to the microwave relocation expenses incurred by the Company as a
result of direct negotiations with incumbent microwave licensees, the Company
expects to incur a limited number of cost-sharing obligations and to also be
entitled to recoup certain of its costs due to cost-sharing obligations imposed
upon other licensees under the plan. Two non-profit clearinghouses have been
established to administer the FCC's cost-sharing plan.
The Company has increased capacity in certain markets in its PCS System
due to the response to its recent Prestige Partners Promotion. See "Risk Factors
- -- PCS System Implementation Risks; Operational Risks." In general, system
capacity has been expanded by installing additional transmitters at existing
sites and by site "splitting," a process whereby a single large cell is divided
into two or more smaller cells by using, in some cases, lower-powered
transmitters and towers with lower elevations. Additionally, the Company has
recently upgraded its Ericsson switching equipment to Ericsson's Release 2
Software which enabled increased network capacity and expects to upgrade to
Ericsson's Release 3 Software in the near future. In the future, additional
capacity typically will be added in response to anticipated demand and may be at
substantially less than the proportionate cost of the initial system. The
Company believes the cost of this additional capacity will be competitive with
the cellular industry's cost of adding capacity for additional subscribers.
Management Services. The Company may enter into agreements to provide
management services to entities that obtain BTA licenses in areas that
geographically complement the Company's existing wireless service area.
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Cellular Operations
Cellular Markets. The Cellular Markets consist of contiguous portions
of four RSAs in western Georgia and eastern Alabama. The Cellular Markets have a
population of approximately 296,000 persons and encompass approximately 2,900
square miles. Since the Company commenced service in late 1990, the number of
Company subscribers in the Cellular Markets has grown to 22,161 at December 31,
1996 (a penetration of approximately 7.5% of the total population in the
Cellular Markets).
While competition is significant, the Company believes that the
Cellular Markets, a unique combination of parts of four RSAs in which no other
single wireless operator presently offers service, provide a competitive
advantage by enabling the Company to serve many significant areas desired by
subscribers and travelers, including approximately 100 miles of Interstate
Highway 85 and 40 miles of Interstate Highway 185, Auburn University, Callaway
Gardens and West Point Lake.
Set forth in the table below is certain operating information
concerning the Cellular Markets:
<TABLE>
<CAPTION>
POWERTEL'S CELLULAR MARKETS OPERATING INFORMATION
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED ---------------------------------------------------------
MARCH 31, 1997 1996 1995 1994 1993 1992
-------------- ------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net Population Equivalent(a)....... 295,600 295,600 290,900 286,300 281,800 277,400
Total Number of Subscribers(b)..... 23,245 22,161 18,294 14,408 10,590 7,447
Market Penetration(b).............. 7.9% 7.5% 6.3% 5.0% 3.8% 2.7%
Monthly Average Revenue Per
Subscriber....................... $41.49 $41.23 $43.20 $45.20 $47.77 $49.64
Monthly Average Churn Rate(c)...... 1.9% 1.9% 2.1% 1.8% 1.3% 1.1%
</TABLE>
- -------------------------
(a) Net Population Equivalents means the estimated population of the
license market area multiplied by percentage ownership of the license.
The Company owns 100% of each of its cellular licenses. The estimated
population is based on the 1996 Paul Kagan Associates, Inc.
Cellular/PCS POP Book.
(b) Data is as of the end of the period.
(c) Monthly Average Churn Rate means number of subscriber cancellations per
month, as a percentage of the average total subscribers in such month.
Monthly Average Churn Rate is stated for the last month of each period.
The cost of acquiring a new customer is substantial, and the Company is
continually monitoring customer churn and taking steps to minimize it. Customer
churn generally tends to increase as the customer base grows and more
competition enters the marketplace. The Company believes that a more focused and
proactive customer retention process has resulted in a decreased churn rate in
the Cellular Markets.
Cellular Services. The Company provides a variety of cellular services
and products designed to match a range of consumer, business and personal
security needs. In addition to mobile voice and data transmission, the Company
offers ancillary services such as call forwarding, call waiting, three party
conference calling, voice message storage and retrieval, and no-answer transfer.
The Company offers cellular service for a fixed monthly charge (accompanied by
varying allotments of unbilled or "free" minutes), plus additional variable
charges per minute of use. Various pricing programs (some of which are based on
multi-year service contracts) are available. Ancillary services are included in
some service package offerings, billed separately in others or priced on a
stand-alone basis.
The Company has completed the initial upgrade of its analog cellular
system to digital to allow its cellular customers to obtain enhanced services
similar to those provided by digital PCS operators, including improved call
security and data transmission features. Currently, however, the quality of
digital cellular voice transmissions experienced in the Company's Cellular
Markets is inferior to that provided by analog systems.
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The Company is currently marketing its digital service in a limited manner. Once
improved handset equipment is available, which is expected in late 1997, and
more complete digital coverage is available outside the Cellular Markets, the
Company expects to increase the marketing of its digital services. Because its
digital switches are capable of handling both analog and digital transmissions,
the Company will be able to continue to offer analog cellular service to those
customers who do not transfer to digital service and will be able to capture
roaming revenues from users of both analog and digital service.
Cellular Roaming. In order to make using its wireless service more
convenient and, in some instances, more affordable, the Company has negotiated
automatic and special rate roaming agreements with other cellular providers.
Currently, the Company's cellular subscribers enjoy automatic call delivery in
most of the United States through a feature known as "Follow Me Roaming Plus."
The Company has special discounted roaming arrangements with certain other
cellular carriers in areas near the Cellular Markets, which provide the
Company's subscribers with reduced rates when roaming in these surrounding
areas. In most cases, these rates approximate the local per-minute rates with no
daily charge. The Company believes that expanded, discounted rate calling areas
attract customers and promote roaming by wireless telecommunications users
traveling within the Company's Cellular Markets.
Cellular Customer Service. The Company believes superior customer
service is integral to its success in the Cellular Markets. The Company provides
toll-free access with no airtime charges to its cellular customer service
representatives on a 24-hour basis, seven days a week. In addition, account
representatives contact cellular subscribers at regular intervals in order to
assist management in evaluating and measuring, on an ongoing basis, the quality
and competitiveness of the Company's cellular services.
Cellular Sales, Marketing and Distribution. The Company markets its
cellular service offerings primarily through: (i) its direct sales force; (ii)
four Company-operated cellular retail stores and two kiosks; and (iii) a network
of dealers and other agents, such as electronics stores, car dealerships and
paging service companies. The Company's direct and retail cellular sales force
currently consists of approximately 21 cellular employees. The Company's sales
employees understand the Company's cellular system, products and services, so
that they, in turn, can provide information to customers. Sales commissions
generally are linked to both subscriber revenue and subscriber retention.
The Company supports its marketing activities with local and regional
advertising. The Company also negotiates volume discounts from vendors of
cellular telephone equipment and, as a means of stimulating demand for cellular
service, passes on a substantial portion of the discount on such telephone
equipment to its subscribers and sales agents. In addition, the Company offers
pricing programs (generally based on service contracts extending up to three
years) in which subscribers receive a credit on their bill toward, at the
customer's option, the cost of a cellular telephone and auxiliary equipment, or
a credit against the customer's cellular service charges. Subscribers who do not
fulfill their obligations under the service contracts are obligated to repay the
full original credit amount.
The Company seeks to increase customer value by continuously updating
and expanding its pricing package options. The Company offers numerous pricing
package options tailored to fit the needs of different subscribers such as the
Corporate Plans for corporate users, the Professional and Frequent Caller Plans
for active users, and the Economy Plan for infrequent users. The Company offers
"Family Plan" and "Extra Plan" service to its cellular users. Under these plans,
a family may receive monthly access to more than one cellular number without
receiving multiple bills. Additional cellular numbers may be added at a reduced
rate, and the family members may share their unbilled airtime allowances.
Cellular System. The main switching office for the Cellular Markets is
located in Huguley, Alabama. The Company's cellular system in the Cellular
Markets consists of 17 cell sites.
All 17 of the Company's existing cell sites are omnidirectional for
maximum coverage. Reflectors have been installed at five of the sites in order
to ensure that their signals do not extend beyond the geographic areas in which
the Company is authorized to provide cellular service. The Company uses a
Company-owned
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microwave transmission system, in conjunction with leased capacity on fiber
optic systems and traditional landline facilities, to connect the cells to the
main switching offices in the Cellular Markets. The Company plans to add
approximately seven new cell sites during the next two years in order to
accommodate anticipated subscriber and usage growth and to equalize transmission
quality throughout the Cellular Markets.
The Company recently converted its cellular system to a
state-of-the-art dual-mode analog/TDMA digital system. By deploying TDMA, the
Company has positioned itself to provide digital services to enable it to
compete with other digital wireless telecommunications providers as they enter
the market. The Company recognizes, however, that compatibility with other
cellular providers is a significant factor in subscriber growth and revenue from
roamers. Accordingly, the equipment that the Company has installed, while
TDMA-ready, is also CDMA-capable with the addition of CDMA equipment at the cell
sites and a limited software upgrade to the existing digital cellular switch. If
market conditions justify the investment of substantial additional capital for
the CDMA equipment at the cell sites and switch upgrade, the Company can be in
the position of providing cellular service to analog, TDMA and/or CDMA digital
subscribers.
In order to receive digital service, the Company's current cellular
subscribers have to exchange their analog handsets for new digital handsets. The
Company expects that its analog customers will switch to digital handsets over
time according to their personal service needs. In order to encourage usage of
its digital cellular system and to retain cellular subscribers, the Company is
considering programs, such as trade-in, rental and leasing packages, to
encourage existing customers to upgrade to digital services when the Company
begins promoting such services.
The infrastructure and subscriber equipment used in the Company's
cellular system generally is available from multiple sources, and the Company
believes that such equipment will continue to be readily available in the
foreseeable future.
Maine Disposition. In May 1997, the Company sold its cellular
operations in the State of Maine to Rural Cellular Corporation ("Rural
Cellular") for an aggregate price of $77.2 million (which includes $5.4 million
that is being held in escrow for indemnification or purchase price adjustment
obligations). The Company acquired its Maine cellular operations in 1994 for
$36.4 million. As of December 31, 1996, the Company had increased the Maine
subscriber base at a compound annual rate of approximately 39% from 1994. The
growth rate in the Maine Cellular Market exceeded that of the Company's Cellular
Markets due generally to a market penetration in the Maine Cellular Market that
was lower at the time of the Company's acquisition of Unity Cellular Systems,
Inc., its Maine cellular subsidiary ("Unicel"), than that in the Cellular
Markets and to the introduction of new service plans and promotional incentives
following the Company's acquisition of Unicel. As of December 31, 1996, the
Company had 25,456 subscribers in the Maine Cellular Market (a penetration of
approximately 5.0% of the total Maine market population).
COMPETITION; OTHER TELECOMMUNICATIONS TECHNOLOGIES
General. The wireless telecommunications industry is experiencing
significant technological change, as evidenced by the increasing pace of
improvements in the capacity and quality of digital technology, shorter cycles
for new products and enhancements, and changes in consumer preferences and
expectations. Accordingly, the Company expects competition in the wireless
telecommunications business to be dynamic and intense as a result of the
entrance of new competitors and the development of new technologies, products
and services.
Each of the markets in which the Company competes is or will be served
by multiple other two-way wireless service providers, including cellular, PCS
and ESMR operators and resellers. Many of these competitors have been operating
for a number of years, currently serve a substantial subscriber base and have
significantly greater financial and technical resources than those available to
the Company. Some competitors are expected to market other services, such as
cable television access, with their wireless telecommunication
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service offerings. Several of the Company's competitors are operating, or
planning to operate, through joint ventures and affiliation arrangements,
wireless telecommunications systems that encompass most of the United States.
The Company also will face competition from other current or developing
technologies, such as paging, ESMR and global satellite networks. As a result of
advances in digital technology, ESMR operators have begun to design and deploy
digital mobile networks that increase the frequency capacity of ESMR systems to
a level that may be competitive with that of cellular systems. A limited number
of ESMR operators have recently begun offering short messaging, data services
and interconnected voice telephony services on a widespread basis. Nextel
operates digital mobile networks in most major U.S. markets, including in the
Atlanta market. Another ESMR operator, Southern Communications, has begun to
offer ESMR service in Georgia, Alabama, northern Florida and southeastern
Mississippi.
Pursuant to recent changes in FCC regulations, existing PCS licensees
have the ability to partition their licenses (transfer a portion of their
licensed geographic territory) or disaggregate their licenses (transfer a
portion of their spectrum allocation) to other qualified entities, thus creating
the potential for additional competitors in the marketplace. The FCC has
recently concluded an auction for 30 MHz of spectrum located in the 2.3 GHz
band, known as WCS. These licenses were auctioned in 5 MHz and 10 MHz blocks in
each license area. The FCC has determined that WCS providers will be permitted
to offer a broad range of services, but has imposed certain restrictions which
the FCC has indicated will make the use of WCS spectrums for mobile applications
"prohibitively expensive" and "technologically infeasible." The FCC has recently
announced that it will auction two local multipoint distribution service
licenses (one 1,150 MHz block and one 150 MHz block) in each BTA. These licenses
will allow licensees to provide wireless cable, telephony, video communications,
data and other services. In addition, several entities have received and several
others are seeking FCC authorization to construct and operate global satellite
networks to provide domestic and international mobile communications services
from geostationary and low earth orbit ("LEO") satellites. While geostationary
orbiting satellites are subject to transmission delays inherent in high earth
orbit satellite communications, a mobile satellite system could reduce
transmission delays with LEO satellites and could augment or replace
communications with segments of land-based wireless systems. Based on current
technologies, however, satellite transmission services are not expected to be
competitively priced relative to wireless telecommunications services. Finally,
the Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") requires, among
other things, the allocation to commercial use of a portion of 200 MHz of the
spectrum currently reserved for government use. It is possible that some portion
of the spectrum that is reallocated will be used to create new land-mobile
services or to expand existing land-mobile services.
Continuing technological advances in telecommunications and FCC
policies that encourage the development of new spectrum-based technologies make
it impossible to predict the extent of future competition. The 1996
Telecommunications Act alters regulatory and industry barriers which for years
deterred easy competition within and between telecommunications markets. The
amended statute and related FCC rulemakings are expected to continue to open new
avenues for competitive offerings of wireless, wireline and hybrid services.
Among the statutory provisions are requirements that telecommunications
providers interconnect with each other and employ common technical standards and
features. Further, if customers complain about lack of access to telephone toll
service (long distance) providers of their choice, the FCC may require
unblocking access to such providers through a code or similar mechanism.
Additionally, LECs must offer: (i) access to unbundled network elements at any
technically feasible point, on reasonable terms and conditions; (ii) retail
services for resale at wholesale rates; and (iii) access to their poles, ducts,
conduits, and rights-of-way, on rates, terms, and conditions that are just and
reasonable. Incumbent LECs also must make available: (i) interconnection and
unbundled access at any technically feasible point; (ii) nondiscriminatory
access to poles and conduits; (iii) unbundled local loops, switching and
transport; (iv) (for competing providers of telephone exchange or toll services)
dialing parity and nondiscriminatory access to telephone numbers and directory
and operator services; and (v) number portability, to the extent feasible.
Further, the FCC now requires LECs to share certain infrastructure and
information with certain requesting carriers. See "-- Regulation of Wireless
Telecommunications Systems." While these changes are expected to help the
Company gain access to and interconnection with wireline facilities and wireless
networks, other service providers may take advantage of the interconnection duty
to require the Company to open its facilities for carriage of their customer
traffic. In
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addition, although wireless service providers such as the Company are not now
classified as LECs, the FCC may change that definition in the future. If such a
time arises, the Company would likely become subject to LEC duties including the
foregoing obligations.
The 1996 Telecommunications Act also permits regional Bell operating
companies ("RBOCs") and their affiliates to provide commercial mobile services
between a LATA and points outside that area. Such "interLATA" services may be
offered outside of a RBOC's local exchange service states immediately. RBOCs may
offer such services inside such states ("in-region") once certain conditions
have been satisfied.
The Company expects to compete with other communications technologies
that now exist, such as conventional mobile telephone service, ESMR systems and
paging services, and with cellular and PCS resellers. In the future, cellular
service and PCS will also compete more directly with traditional landline
telephone service providers and with cable operators who expand into the
offering of traditional communications services over their cable systems. In
addition, the Company may face competition from technologies that may be
introduced in the future.
The Company anticipates that market prices for two-way wireless
services generally will decline in the future based upon increased competition.
The Company competes to attract and retain customers principally on the basis of
pricing, services and enhancements, its customer service and the size and
location of its service areas. The Company's ability to compete successfully
will also depend, in part, on its 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, which could adversely
affect the Company's operating margins.
PCS Markets. The Company's PCS business will directly compete with many
other PCS providers, including PrimeCo, Sprint PCS and AT&T Wireless, in its PCS
Markets. The FCC has auctioned five other PCS licenses in each of the Company's
markets, and each licensee has the ability to sell or transfer a portion of its
licenses to others. See "-- Regulation of Wireless Telecommunications Systems --
Licensing of PCS." The Company believes that AT&T Wireless may commence service
in the Atlanta MTA prior to the Company. The Company also expects that existing
wireless service providers in the PCS Markets, some of which have been
operational for a number of years and have significantly greater financial and
technical resources than those available to the Company, will continue to
upgrade their systems to provide comparable services in competition with its PCS
System. These wireless competitors include AT&T Wireless, BellSouth Mobility,
GTE Mobile, Alltel and Palmer. The Company may face additional competition from
winning bidders in the D/E/F Auctions. These potential competitors include
Sprint PCS, Alltel and BellSouth Wireless, each of which obtained 10 MHz
licenses in many of the same BTA's in which the Company holds licenses. See
"Risk Factors -- Competition."
PCS licensees choosing IS-136 technology, including AT&T Wireless, are
expected to cover territories covering the entire U.S. population because IS-136
handsets are currently capable of operating at both cellular and PCS
frequencies. Several major PCS providers, including PrimeCo and Sprint PCS, have
announced commercial service of CDMA-based PCS systems in multiple markets.
Together, CDMA-based PCS providers will cover approximately 100% of the U.S.
population. The fact that these major PCS providers have chosen digital
protocols other than GSM as their PCS technology may adversely affect the
Company's ability to establish a PCS customer base and to successfully compete
in the PCS business with those PCS operators offering greater roaming
capabilities. See "Risk Factors -- Risks Relating to Selection of PCS Digital
Protocol" and "-- PCS Operations -- PCS System."
Handsets used for GSM-based PCS systems will not be automatically
compatible with cellular systems, and vice versa. The Company expects dual-mode
phones to be available in late 1997, which will permit subscribers to roam by
using the existing cellular wireless system in other markets. Until then, this
lack of interoperability may impede the Company's ability to attract current
cellular subscribers or potential new wireless communication subscribers that
desire the ability to access different service providers outside of the
Company's markets.
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The retail price of the Company's PCS handsets initially have not been
as low as the price of analog cellular handsets. Whereas cellular providers
often subsidize fully the sale of analog cellular handsets such that subscribers
are not required to pay for the handsets, the price of PCS handsets are
generally higher because the Company is offering its customers only partial
offsets of the cost of PCS handsets. While the Company believes that its PCS
handsets are competitively priced as compared to digital cellular handsets of
comparable size, weight and features, cellular operators may also subsidize the
sale of digital handset units at prices below those with which the Company will
be able to compete.
Cellular Markets. The Company currently competes with one other
cellular licensee in each of its Cellular Markets, and expects to compete with
several PCS licensees, resellers and one or more ESMR providers. Such
competition may be intense. The Company expects to compete with other wireless
providers in its markets by upgrading its cellular system to provide comparable
services and features, continuing to expand its automatic and discounted rate
roaming service areas, and competitively pricing its products and services. See
"Risk Factors -- Competition."
REGULATION OF WIRELESS TELECOMMUNICATIONS SYSTEMS
The FCC regulates the licensing, construction, operation and
acquisition of wireless telecommunications systems in the United States pursuant
to the Federal Communications Act of 1934, as amended (the "Communications
Act"), and the rules, regulations and policies promulgated by the FCC
thereunder. Additional regulatory authority over PCS providers is granted to the
FCC by the Budget Act.
Under the Communications Act, the FCC is authorized to establish
regulations governing the interconnection of PCS and cellular systems with
wireline and other wireless carriers, allocate channels and frequencies, grant
or deny license renewals and applications for transfer of control or assignment
of PCS and cellular licenses, and impose fines and forfeitures for any
violations of FCC regulations. The 1996 Telecommunications Act and ongoing FCC
rulemakings are expected to lead to new regulations concerning interconnection
of networks. See "-- Competition; Other Telecommunications Technologies." The
1996 Telecommunications Act also permits the FCC to lift regulations where they
are no longer necessary in the public interest.
Licensing of PCS. The FCC has divided the United States and its
possessions and territories into PCS markets made up of 493 BTAs and 51 MTAs.
Each MTA consists of at least two BTAs. Numerous licensees may compete in each
PCS service area. The FCC has allocated 120 MHz of radio spectrum in the 2 GHz
band for licensed broadband PCS services. The FCC divided the 120 MHz of
spectrum into six individual blocks, each of which is allocated to serve either
MTAs or BTAs. The spectrum allocation includes two 30 MHz blocks ("A" and "B"
blocks) licensed for each of the 51 MTAs, one 30 MHz block ("C" block) licensed
for each of the 493 BTAs, and three 10 MHz blocks ("D", "E" and "F" blocks)
licensed for each of the 493 BTAs. A PCS license has been or will be awarded for
each MTA and BTA in every block, for a total of more than 2,000 licenses. Under
the FCC's rules, a broadband PCS licensee may own combinations of licenses
(e.g., one MTA (30 MHz) and one BTA (10 MHz)) with total aggregate spectrum
coverage of up to 45 MHz in a single geographic area. The FCC recently relaxed
its limitation on cellular cross-ownership of PCS licenses in the same area,
permitting existing cellular licensees to acquire up to 20 MHz of broadband PCS
spectrum in overlapping markets. Thus, no entity may hold licenses for more than
45 MHz of CMRS spectrum in a single geographic area, unless, in the case of
overlapping cellular licenses, such overlapping licenses cover less than 10% of
the population of the PCS territory. See "-- Commercial Mobile Radio Spectrum
Limit."
The FCC recently revised its rules to allow broadband PCS licensees in
the "A," "B," "D" and "E" blocks the flexibility to divide and sell portions of
any size of their licenses at any time. Under the revised rules, any of such
licensees may divide their licenses through geographic partitioning (dividing
spectrum by geographic area) or through spectrum disaggregation (dividing
license by amount of spectrum) to any entity that meets the FCC's requirements
(e.g., foreign ownership limits). The rules apply special restrictions to
license holders in the "C" and "F" blocks, which are restricted to entrepreneurs
and small businesses, by limiting partitioning or disaggregation for five years.
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The FCC has recently completed the auctions for licensing of the PCS
allocated spectrum. For these auctions, the FCC had comprehensive rules that
outlined the bidding process, described the bidding application and payment
process, established penalties for certain bid withdrawals, default or
disqualification, established regulatory safeguards, and reserved two of the six
frequency blocks (the "C" and "F" blocks) for "entrepreneurs" and small
businesses. The "A" and "B" block licenses were granted on June 23, 1995. The
auction for the "C" block licenses was completed on May 6, 1996, and the winning
bidders' licenses have been granted (with some grants being on a conditional
basis subject to required changes in ownership structure, for example) on a
case-by-case basis over the past several months, with the exception of certain
winning bidders who subsequently defaulted on payment obligations. Certain of
these defaulted "C" block licenses have been subsequently re-auctioned to
qualified bidders and others are still subject to re-auction in the future at
the discretion of the FCC. The D/E/F Auctions were completed by the FCC on
January 14, 1997. The Company recently submitted its final payment for the
licenses for the Kentucky/Tennessee BTAs.
All PCS licenses will be granted for a 10-year period, at the end of
which they must be renewed. Licenses may be revoked at any time for cause. All
30 MHz broadband PCS licensees, including the Company, must construct facilities
that offer coverage to one-third of the population of their service area within
five years of their initial license grants and to two-thirds of the population
within 10 years. For the 10 MHz broadband PCS licenses (i.e., "D" and "E" block
licenses), licensees including the Company must service with a signal level
sufficient to provide adequate service to at least one-quarter of the population
in their licensed area within five years of being licensed, or make a showing of
substantial service in their licensed area within the same time frame. Licensees
that fail to meet the coverage requirements may be subject to forfeiture of the
license. The FCC will conduct random audits to ensure that licensees are in
compliance with the FCC's holding period and attribution rules. Rule violations
could result in license revocations, forfeitures or fines.
Licensing of Cellular Systems. The FCC grants licenses to operate
cellular systems in defined market areas. The United States and its possessions
and territories have been divided into 734 cellular markets, consisting of 306
MSAs and 428 RSAs. Each cellular service area is served by two licensees, a
block "A" licensee and a block "B" licensee.
Following notice of completion of construction, a cellular operator
obtains initial operating authority. Cellular authorizations are issued
generally for a 10-year term beginning on the date of the grant of an initial
construction permit and are renewable upon application to the FCC for periods of
up to 10 years. The FCC may revoke a license prior to the end of its term in
extraordinary circumstances (such as when serious violations of FCC rules have
occurred).
Under the Communications Act, the authorized service area of a cellular
provider in each of its markets is referred to as the Cellular Geographic
Service Area or "CGSA." A cellular licensee has the exclusive right to serve the
entire area that falls within the licensee's MSA or RSA for a period of five
years after grant of the licensee's construction permit. At the end of the
five-year period, however, the licensee's CGSA rights become limited to the area
actually served by the licensee as of that time, as determined pursuant to a
formula adopted by the FCC. After the five-year period, any entity may apply to
serve portions of the MSA or RSA outside the licensee's CGSA.
The five-year fill-in periods for Alabama RSA 5, Alabama RSA 8 and the
Company's portions of Georgia RSAs have expired. There were no unserved areas
remaining in Alabama RSA 5 and Alabama RSA 8 at the time their respective
fill-in periods expired. As of March 31, 1997, only a minute portion of Georgia
RSA 5 located in the extreme northwest corner of Heard County remains unserved.
The Company has determined that it would not be prudent for the Company to
invest in extending its cellular service into that area at this time.
Near the conclusion of the license term (the year 2000, in the case of
the Company's current licenses for the Cellular Markets), licensees must file
applications for renewal of licenses to obtain authority to operate for up to an
additional 10-year term. Applications for license renewal may be denied if the
FCC determines that the grant of an application would not serve the public
interest, convenience and necessity. In addition, at
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license renewal time, other parties may file competing applications for the
authorization. In the event that qualified competitors file, the FCC may be
required to hold a hearing to determine whether the incumbent or the competitor
will receive the license. The FCC will grant a preference, or "renewal
expectancy," to the existing cellular licensee upon a showing that it has (i)
provided "substantial" service during its past license term and (ii)
substantially complied with applicable FCC rules and policies and the
Communications Act.
Character and Citizenship Requirements. Applications for FCC authority
may be denied, and in extreme cases licenses may be revoked, if the FCC finds
that an entity lacks the requisite "character" qualification to be a licensee.
In making that determination, the FCC considers whether an applicant or licensee
has been the subject of adverse findings in a judicial or administrative
proceeding involving, among other things, the possession or sale of unlawful
drugs, fraud, antitrust violations or unfair competition.
Under the Communications Act, non-U.S. citizens or their
representatives, foreign governments or their representatives, or corporations
organized under the laws of a foreign country may not own, in the aggregate,
more than 20% of a common carrier licensee; or more than 25% of the parent of a
common carrier licensee if the FCC determines that the public interest would be
served by prohibiting such ownership.
Failure to comply with these requirements may result in the FCC issuing
an order to the entity requiring divestiture of alien ownership to bring the
entity into compliance with the Communications Act. In addition, fines, a denial
of renewal or revocation of the license are possible. The Company's Third
Restated Certificate of Incorporation permits the redemption of the Company's
Common Stock from stockholders where necessary to protect the Company's
regulatory licenses.
Transfers and Assignments of PCS Licenses. The Communications Act
requires the FCC's prior approval of the assignment or transfer of control of a
PCS license. In addition, the FCC has established transfer disclosure
requirements that require licensees who transfer control of or assign a PCS
license within the first three years to file associated contracts for sale,
option agreements, management agreements or other documents disclosing the total
consideration that the applicant would receive in return for the transfer or
assignment of its license. Non-controlling interests in an entity that holds a
PCS license or PCS system generally may be bought or sold without prior FCC
approval.
Transfers and Assignments of Cellular Licenses. The Communications Act
requires the FCC's prior approval of the assignment or transfer of control of a
construction permit or license for a cellular system. Subject to FCC approval, a
license or permit granted to a nonwireline entity may be transferred or assigned
to a wireline entity, and vice versa. Non-controlling interests in an entity
that holds a cellular license or cellular system generally may be bought or sold
without prior FCC approval. In the case of a sale proposed to occur before the
expiration of certain holding periods, the FCC may prohibit or impose
limitations on such a sale, or require the seller to make certain
representations as a condition precedent to such a sale. For RSAs, the minimum
holding period generally expires upon completion of initial construction. Any
acquisition by the Company of cellular interests may also require the prior
approval of state or local regulatory authorities having jurisdiction over the
cellular telephone industry.
Interconnection Requirements. The 1996 Telecommunications Act imposes
an affirmative duty upon all telecommunications carriers, including the Company,
to connect their networks to each other. It also imposes a duty to negotiate in
good faith and requires interconnection at any technically feasible point of the
network on just, reasonable and nondiscriminatory terms and in a manner equal in
quality to that provided by the incumbent telephone company to itself and any
affiliate. The incumbent must also offer access to a minimum number of unbundled
elements of its network necessary for the provision of local service, which a
competitor may select in any combination. The 1996 Telecommunications Act
requires the incumbent to resell its local service and to provide for access to
rights-of-way (including poles, ducts, conduits) to carriers seeking to offer a
competitive local service.
On August 8, 1996, the FCC issued a decision promulgating rules
relating to the interconnection requirements imposed by the 1996
Telecommunications Act (the "Interconnection Order"). The Interconnection
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Order: (i) requires that interconnection compensation between CMRS providers and
LECs be mutual and reciprocal; (ii) establishes that charges for transport and
termination services be cost-based based on the LEC's forward looking total
element long-run incremental costs (with a default range of $.002 to $.004 per
minute for switching and end office termination and a default price ceiling of
$.0015 per minute for tandem switching and termination for these states that
have not imposed their own pricing methodology); (iii) gives state regulatory
commissions jurisdiction over the implementation of the LEC-CMRS interconnection
agreements, with the FCC retaining certain separate and independent jurisdiction
under the 1996 Telecommunications Act; (iv) gives CMRS carriers the opportunity
to renegotiate existing non-reciprocal LEC interconnection agreements; (v)
declines to require "bill and keep" for CMRS carriers but permits the states to
impose such arrangements where traffic between carriers is roughly balanced or
where carriers voluntarily negotiate such an agreement; (vi) explicitly states
that most traffic between a CMRS provider and the LEC is not subject to
interstate access charges, except in limited circumstances; and (vii) refrains
from treating CMRS providers for most regulatory purposes as local exchange
carriers, which could have subjected CMRS providers to the stricter regulatory
requirements imposed on incumbent LECs on issues such as interconnection, access
to unbundled elements and resale. The default rates set forth in the
Interconnection Order represent a substantial reduction from rates in place
prior to the order, which rates generally ranged from $.03 to $.05 per minute.
In addition, such rates previously were not mutual and reciprocal, so a CMRS
provider could not charge a LEC for minutes of use originated by the LEC's
network and delivered to and terminated on the CMRS provider's network.
The FCC's Interconnection Order is currently the subject of both
petitions for reconsideration and judicial review. On October 15, 1996, the
United States Court of Appeals for the Eighth Circuit granted a stay of parts of
the Interconnection Order pending further proceedings in that court. This stay
was appealed to the U.S. Supreme Court, which Court declined to vacate the stay.
Subsequently, in response to an emergency motion filed by AirTouch
Communications, Inc., a CMRS provider, the Eighth Circuit removed the stay of
certain portions of the FCC's rules and re-instated the following requirements:
(i) that LECs negotiate with wireless carriers for reciprocal and mutual
compensation arrangements for transport and termination of local
telecommunications traffic terminating on either of the parties' networks; (ii)
that wireless carriers shall have the right to re-negotiate any existing
interconnection arrangements which provide for non-reciprocal compensation for
local telecommunications traffic with any local exchange carrier; and (iii) that
the definition of "local telecommunications traffic" to which the above
requirements apply consists of calls that originate and terminate within the
same MTA, a geographic area which is not directly related to, but is generally
much larger than, a local exchange carrier's defined local calling area. The
Eighth Circuit heard oral argument in this case on January 17, 1997. At this
time it is not possible to predict when or if the remaining portions of the
Interconnection Order that have been stayed by the court will go into effect.
Universal Service Reform. The FCC has recently adopted a plan for the
implementation of universal service reform. While the plan does not impose a
surcharge on wireless customers in order to meet universal service funding
goals, the FCC adopted a competitively neutral contribution mechanism based on
end-user telecommunications revenues. The FCC has not yet adopted a method for
determining what percentage of revenues each carrier should contribute, but the
FCC has stated that it agrees with a previous finding of the Federal-State Joint
Board, established pursuant to the 1996 Telecommunications Act, that the 1996
Telecommunications Act does not preclude states from requiring CMRS providers,
such as the Company, to contribute to state support mechanisms. See "Risk
Factors -- Government Regulation."
Other Federal Regulations. Wireless systems are subject to certain
Federal Aviation Administration regulations respecting the location, lighting
and construction of cellular transmitter towers and antennas and may be subject
to regulation under the National Environmental Policy Act and the environmental
regulations of the FCC. The Company uses common carrier point-to-point microwave
and traditional landline facilities to connect cell sites and to link them to
their respective main switching offices. These facilities are separately
licensed by the FCC and are subject to regulation as to technical parameters and
service.
Wireless providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent wireless users,
permittees and licensees in order to avoid electrical interference between
adjacent systems. In addition, the
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height and power of base station transmitting facilities and the type of
signals they emit must fall within specified parameters. Also, under the 1996
Telecommunications Act, wireless equipment must be accessible to and usable by
persons with disabilities. The FCC also regulates wireless service resale
practices and the terms under which certain ancillary services may be provided
through wireless facilities. For example, all CMRS system operators are
required to provide service to "resellers." These resellers buy blocks of
telephone numbers from licensees and resell service through their own
distribution network to the public. CMRS system operators cannot unreasonably
restrict the resale of their services.
Commercial Mobile Radio Spectrum Limit. The FCC has limited the amount
of PCS, cellular and SMR spectrum that an investor may aggregate in a given
geographic area to 45 MHz. The Company's ability to invest in wireless services
providers in certain geographic areas is likely to be limited by this
restriction. In addition, the FCC may amend its rules to include other types of
mobile services in this spectrum aggregate limit.
State and Local Regulation. In 1993, Congress amended the
Communications Act to preempt state or local regulation of the entry of, or the
rates charged by, any commercial or private mobile radio service provider.
Notwithstanding such preemption, a state may petition the FCC for authority to
begin regulating or to continue regulating commercial mobile radio service
rates. Petitioners must demonstrate that existing market conditions cannot
protect consumers from unreasonable and unjust rates or that the service is a
replacement for traditional wireline telephone service for a substantial
portion of the wireline service within the state. Eight states petitioned the
FCC for authority to regulate, or continue regulating, commercial mobile radio
service rates and entry. The FCC denied seven of these petitions and one was
withdrawn. As of the date hereof, the states in which the Company currently
provides or plans to provide service (Alabama, Arkansas, Florida, Georgia,
Illinois, Indiana, Kentucky, Louisiana, Mississippi, Missouri, South Carolina
and Tennessee) either have not sought to regulate such matters or, in the case
of Louisiana, have had their petition to regulate denied by the FCC.
States are not, however, prohibited from regulating other terms and
conditions of CMRS, such as service quality, billing procedures and consumer
protection standards. In addition, the siting and construction of cellular
transmitter towers, antennas and equipment shelters are often subject to state
or local zoning, land use and other regulations. Under the 1996
Telecommunications Act, states may not restrict cell siting or modification
based upon the environmental effects of radio frequency emissions if those
emissions meet the standards which the FCC imposed in 1996. However, state and
local governmental authorities continue to impose regulations that expressly
prohibit the construction of additional tower sites, including several
governmental authorities in the Company's PCS Markets. These governmental
moratoria are the subject of a Petition for Declaratory Ruling filed with the
FCC by the CTIA. The Petition argues that these restrictions effectively impede
market entry of new telecommunications services and providers and are in
violation of the Communications Act. CTIA is seeking federal preemption of
state and local siting and zoning moratoria regulation. See "Risk Factors
- --Necessity of Zoning Approvals."
Recent Events. The 1996 Telecommunications Act precludes the FCC from
requiring CMRS providers to hand off long distance traffic to the long distance
carrier chosen by the subscriber (i.e., the provision of "equal access"). The
1996 Telecommunications Act provides, however, that if the FCC receives
complaints that consumers are not receiving access to the long distance carrier
or carriers of their choice, then the FCC may require provision of access to
those carriers through an access code or similar mechanism.
The 1996 Telecommunications Act also eliminates, to a large extent,
restrictions on the RBOCs' provision of interLATA long distance services and,
if certain conditions are satisfied, permits the restrictions to be lifted in
their entirety. See "-- Competition; Other Telecommunications Technologies."
The Company cannot predict the outcome of FCC implementation of the 1996
Telecommunications Act or the effect of the 1996 Telecommunications Act or any
resulting regulations or policies on cellular or PCS operations, and there can
be no assurance that such regulations or policies will not adversely affect the
Company's business or financial condition.
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On July 26, 1996, the FCC released a report and order which mandates
the implementation of widespread emergency 911 services available by PCS and
other CMRS providers, including enhanced 911 ("E911") services that provide the
caller's telephone number, location, and other useful information. By April
1998, PCS providers must be able to transmit to a Public Safety Answering Point
("PSAP") 911 calls from a PCS handset (without call validation), including
those from callers with speech or hearing disabilities, with the automatic
number identification. Assuming that a cost recovery mechanism is in place, by
mid-1998 such providers must be able to relay to a PSAP both the caller's
automatic number identification and cell site identification, and by 2001 they
must be able to identify the location of a 911 caller within 125 meters in 67%
of all cases. These proceedings have also raised questions concerning the
potential liability of wireless operators providing E911 services. While most
landline telephone companies are protected by their tariffs or are covered
expressly by state or local statutes, CMRS providers generally do not file
tariffs and many states have no indemnity provisions or only limited indemnity
provisions relating to the provision of E911 services by a wireless operator.
The wireless industry as a whole has been active in addressing this issue
through the introduction and support of proposed legislation in many of the
states. In addition, many states are individually addressing the issue of cost
recovery mechanisms to support both the wireless and wireline implementation of
E911 services. The FCC rules state that wireless carriers are entitled to fully
recover their costs of E911 implementation.
In August 1996, the FCC revised its rules to permit CMRS operators,
including PCS licensees, to use their licensed spectrum to provide fixed as
well as mobile services. Such fixed services include, but are not limited to,
"wireless local loop" services. The FCC has not yet determined whether such
fixed services should be subject to universal service obligations or how they
should be regulated, although it has proposed a presumption that they be
regulated as CMRS services.
EMPLOYEES AND AGENTS
As of May 1, 1997, the Company had approximately 550 employees,
including approximately 540 full-time employees. The Company anticipates that
the continued development of its PCS System will require the hiring of a
substantial number of new employees. None of the Company's employees is
represented by a labor organization, and the Company's management considers its
employee relations to be good.
PROPERTIES
The Company maintains its corporate headquarters in West Point,
Georgia and sales and administrative offices for its Cellular Markets in
Lanett, Alabama. The Company recently constructed an approximately 28,000
square foot corporate headquarters and network operations center in West Point,
Georgia. The lease for the Lanett space was renewed in October 1996, and the
current lease term expires in October 2001. In its Cellular Markets, the
Company operates four retail stores (located in Lanett and Opelika, Alabama and
Newnan and LaGrange, Georgia), and two sales kiosks (located in shopping malls
in LaGrange, Georgia and Auburn, Alabama). All of the Company's cellular retail
sites are leased.
As part of its cellular system, the Company owns a switch facility in
Huguley, Alabama and maintains 17 tower sites. The Company has a long-term
lease on its tower sites located at Auburn, Lake Harding and Lafayette, Alabama
and Callaway Gardens and McCollum, Georgia. The remaining 11 sites have been
purchased. The Lafayette site is subject to a sublease for a microwave two-way
radio transmitter.
In connection with its PCS System, the Company leases space for MTA
headquarters and switch facilities which are located in the following cities:
Birmingham, Alabama for the Birmingham MTA; Memphis, Tennessee for the Memphis
MTA; Jacksonville, Florida for the Jacksonville MTA; and Atlanta, Georgia for
the Atlanta MTA. The Atlanta MTA leases two separate switching facilities, both
of which are located in the city of Atlanta but in separate locations. The
Memphis MTA leases additional space in Jackson, Mississippi to accommodate its
sales and operations personnel. The Birmingham, Memphis, Jacksonville and
Atlanta MTAs currently lease warehouse space for network equipment and cell
site equipment related to the buildout of the
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PCS System in each respective MTA. The Kentucky/Tennessee BTAs will lease
similar warehouse space as the Company builds out those areas of its PCS
System.
The Company believes that all of its properties are well maintained.
PRINCIPAL EXECUTIVE OFFICES
The Company's principal executive offices are located at 1233 O.G.
Skinner Drive, West Point, Georgia 31833, and its telephone number is (706)
645-2000.
LEGAL MATTERS
The Company, through its subsidiary Powertel/Birmingham, was served
with a complaint filed on April 4, 1997 by American Page One, Inc. d/b/a
American Mobile Wireless Communications in the Circuit Court of Macon County,
Alabama. Plaintiff claims that Powertel/Birmingham has breached its agency
contract and has committed other torts with respect to Plaintiff by failing to
accurately track Plaintiff's account with respect to inventory invoicing and
commissions, failing to pay timely commissions, failing to provide services to
Plaintiff's customers in a competent and accurate manner, billing Plaintiff's
customers inaccurately and in excessive amounts, and making false
representations with regard to its customer service and operational
capabilities. Plaintiff is seeking unspecified damages. While the Company
believes that the claims are without merit and intends to vigorously defend
itself, there can be no assurance that these claims or the loss of its agency
relationship with Plaintiff will not result in a loss of customers acquired
from such agency relationship or otherwise have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company recently received a Demand from the Antitrust Division
requiring the Company to produce certain documents and answer certain
interrogatories in connection with the Antitrust Division's investigation of
possible bid rigging and market allocation for licenses auctioned by the FCC
for broadband PCS frequency blocks. The Company intends to cooperate fully with
the Antitrust Division's requests. See "Risk Factors -- Litigation."
The Company is also a party to routine filings and customary
regulatory proceedings with the FCC relating to its operations.
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COMPANY ORGANIZATION
The organization of the Company is as follows:
[Chart which sets forth the organizational
structure of the Company.]
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THE MAINE DISPOSITION
Pursuant to an asset purchase agreement (the "Unicel Agreement") by
and among Rural Cellular, Unicel, Powertel Licenses, Inc. and the Company,
Rural Cellular purchased and assumed from Unicel and Powertel Licenses, and
Unicel and Powertel Licenses respectively sold and assigned to Rural Cellular:
(i) substantially all of the assets and rights of Unicel, including its
partnership interest in a partnership which is licensed to provide cellular
service in Maine RSA 2; and (ii) the FCC licenses held by Powertel Licenses to
provide cellular and microwave service in the Bangor, Maine MSA and Maine RSA 3
and to provide microwave service in Maine RSA 2. Unicel and Powertel Licenses
are wholly-owned subsidiaries of the Company. This transaction constituted the
sale of all of the Company's cellular telephone operations in the State of
Maine.
The purchase price for the assets sold pursuant to the Unicel
Agreement was approximately $77.2 million (the "Purchase Price") (which
includes $5.4 million that is being held in escrow for indemnification or
purchase price adjustment obligations). In addition to the Purchase Price,
Rural Cellular reimbursed Powertel in cash at the closing of the Maine
Disposition for approximately $250,000 in capital expenditures made prior to
the closing.
THE PREFERRED STOCK SALES
Pursuant to a Stock Purchase Agreement dated as of May 23, 1997
between the Company and Huff (the "Huff Stock Purchase Agreement"), which sets
forth the terms and conditions for the Huff Preferred Stock Sale, and the Stock
Purchase Agreement dated as of May 23, 1997 between the Company and SCANA (the
"SCANA Stock Purchase Agreement" and, together with the Huff Stock Purchase
Agreement, the "Stock Purchase Agreements"), which sets forth the terms and
conditions for the SCANA Preferred Stock Sale, Powertel sold 50,000 shares of
Series C Convertible Preferred Stock for $22.5 million in cash to Huff and
50,000 shares of Series D Convertible Preferred Stock for $22.5 million in cash
to SCANA. The net proceeds received by Powertel in this transaction were
approximately $44.8 million in cash.
Preferred Stock Terms. The holders of Series C Convertible Preferred
Stock and Series D Convertible Preferred Stock have no voting rights, except as
required by law and certain specified exceptions. Each share of Series C
Convertible Preferred Stock and Series D Convertible Preferred Stock has a
liquidation preference over the Common Stock and other junior stock of $450 per
share plus declared and unpaid dividends in connection with a liquidation,
dissolution or winding up of the Company. The Series C Convertible Preferred
Stock and Series D Convertible Preferred Stock rank, as to dividends, on a
parity with the Common Stock. The Series C Convertible Preferred Stock and
Series D Convertible Preferred Stock are redeemable, at the option of the
Company, on June 5, 2002 and on June 10, 2002, respectively, in whole or in
part, on a pro rata basis, at a redemption price of $450 per share plus
declared and unpaid dividends. The Series C Convertible Preferred Stock and
Series D Convertible Preferred Stock are convertible on December 5, 1998 and on
March 14, 2002, respectively, at the option of the holder, into Common Stock at
a conversion price of $12.75, subject to adjustment.
Registration Rights. The offer and sale of the Series C Convertible
Preferred Stock, the Series D Convertible Preferred Stock and the shares of
Common Stock into which such preferred stock is convertible have not been
registered under the Securities Act. Huff and SCANA have been granted certain
"demand" and "piggyback" registration rights with respect to the shares of
Common Stock issued and issuable upon conversion of the Series C Convertible
Preferred Stock and Series D Convertible Preferred Stock, respectively.
Representations, Warranties and Indemnification. Powertel has agreed
to indemnify Huff and SCANA, and Huff and SCANA have agreed to indemnify
Powertel, for certain losses arising out of breaches of their respective
representations and covenants contained in the Stock Purchase Agreements,
subject to certain exceptions and limitations.
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Resale Restrictions. Each of Huff and SCANA has agreed, among other
things, that except for limited exceptions it will not transfer, directly or
indirectly, any shares of Series C Convertible Preferred Stock or Series D
Convertible Preferred Stock, as the case may be, or any shares of Common Stock
into which such preferred stock is convertible until June 5, 1998 and June 10,
1998, respectively, without the prior written consent of the Company.
Board Observer. The Company has agreed to allow one representative of
Huff to attend meetings of the Company's Board of Directors as an observer.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are set forth
below. The Company's Board of Directors consists of ten directors divided into
three classes of directors, serving staggered three-year terms. Directors and
executive officers of the Company are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. Directors of the Company are elected at the annual
meeting of stockholders. Officers of the Company are appointed at the Board's
first meeting after each annual meeting of stockholders. The ages of the
persons set forth below are as of July 15, 1997.
<TABLE>
<CAPTION>
Term as
Director
Name Age Position(s) with Company Expires
- ---- --- ------------------------ -------
<S> <C> <C> <C>
Campbell B. Lanier, III........... 46 Chairman of the Board of Directors 1998
Allen E. Smith.................... 48 President, Chief Executive Officer and Director 1998
Fred G. Astor, Jr................. 45 Executive Vice President and Chief Financial Officer --
Edward C. Horner.................. 46 Executive Vice President and Chief Operating Officer --
George R. Johnson................. 55 Executive Vice President -- PCS --
Walter R. Pettiss................. 63 Executive Vice President -- PCS --
Nicholas J. Jebbia................ 49 Executive Vice President -- PCS --
Rodney D. Dir..................... 39 Executive Vice President -- PCS --
Michael P. Tatom.................. 44 Executive Vice President -- PCS --
Maurice P. O'Connor............... 46 Director 1999
Donald W. Burton.................. 53 Director 1999
Bert G. Clifford.................. 77 Director 1999
O. Gene Gabbard................... 57 Director 2000
Lawrence M. Gressette, Jr......... 65 Director 1998
William H. Scott, III............. 49 Director and Secretary 2000
William B. Timmerman.............. 50 Director 2000
Donald W. Weber................... 60 Director 2000
</TABLE>
CAMPBELL B. LANIER, III has served as Chairman of the Board of
Directors of the Company since its inception in April 1991 and was Chief
Executive Officer of the Company from its inception to September 1993. Mr.
Lanier serves as Chairman of the Board and Chief Executive Officer of ITC
Holding and has served as a director of ITC Holding since its inception in 1985
through a predecessor company. In addition, Mr. Lanier served as a director and
President of Interstate Cellular, Inc. since its inception in 1989 until its
dissolution in June 1995, and he also is an officer and director of several ITC
Holding subsidiaries. Since 1995, he has been a director of K&G Mens Centers,
Inc., an operator of retail mens clothing stores. Since 1994, he has been a
director of MindSpring Enterprises, Inc. ("MindSpring"), an Internet access
provider. Since 1990, he has been a director of National Vision Associates,
Ltd., a full service optical retailer, and Vice Chairman of the Board of AvData
Systems, Inc. ("AvData"), a company providing satellite data transmission
services. He served as Chairman of the Board of AvData from 1988 to 1990. From
1984 to 1989, Mr. Lanier served as Chairman of the Board of Async Corporation
("Async"), a company providing voice message services. Mr. Lanier also served
as Vice President -- Industry Relations of Telecom*USA, Inc. ("Telecom") from
1984 to 1988 and as Senior Vice President Industry Relations from January 1989
until Telecom's merger with MCI Communications Corporation ("MCI") in August
1990. From 1984 to 1985, he served as Chief Executive Officer of SouthernNet,
Inc. ("SouthernNet"), a long distance telecommunications company which was the
predecessor to Telecom, and from 1985 to 1986 he was Vice Chairman of the Board
of SouthernNet. Mr. Lanier has also been a special limited partner in the South
Atlantic Venture Funds II and III since 1988.
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ALLEN E. SMITH has been Chief Executive Officer of the Company since
September 1993, has been the President and a Director of the Company since
January 1991, and was Chief Operating Officer of the Company from January 1991
to September 1993, when he became Chief Executive Officer. Mr. Smith has been a
Vice President of ITC Holding since January 1991. From 1988 to 1990, Mr. Smith
held several executive positions with Telecom, including Senior Vice President
- -- Customer Services, Senior Vice President -- Administration and Senior Vice
President--Human Resources and Administration. During 1988, Mr. Smith was Vice
President -- Telemarketing and Training at SouthernNet. From 1987 to 1988, Mr.
Smith was the Vice President of Marketing of Southland Communications
Corporation ("Southland"), a telecommunications company. During 1986, Mr. Smith
was the Executive Vice President and General Manager of Southland Cellular,
Inc., a subsidiary of Southland, where he managed the Pensacola, Florida
metropolitan service area, as well as voice and digital paging services.
FRED G. ASTOR, JR. has been Chief Financial Officer of the Company
since May 1991, served as Treasurer of the Company from May 1991 until May
1995, and was Vice President of the Company from May 1991 until May 1995, when
he was named Executive Vice President. Mr. Astor worked for Contel Corporation
("Contel"), a telecommunications company which merged with GTE Corporation in
March 1991, from 1976 to 1989 in various financial capacities. From 1983 to
1987, he served as the Assistant Corporate Controller in charge of financial
reporting, and from 1987 until late 1989, he served as Vice President --Finance
for Contel Credit Corporation, a finance subsidiary which was acquired by
General Electric Capital Corporation ("GE Capital"). In January 1990, he joined
Telecom as its Vice President -- Finance/Southern Division, and he served in
that capacity until Telecom's merger with MCI was consummated. In November
1990, Mr. Astor accepted a position with ProAir Services, L.P. as Vice
President --Finance. He served as that company's Chief Financial Officer until
accepting his current position with the Company.
EDWARD C. HORNER joined the Company as Executive Vice President and
Chief Operating Officer in May 1996. Prior to joining Powertel, he served as
Assistant Vice President Marketing and Distribution for GTE Mobilnet
Incorporated ("GTE Mobilnet"). He became a director of GTE Telephone Operations
in 1991. He was previously with Contel in a number of positions, culminating as
Assistant Vice President Network Marketing at the time Contel merged with GTE
Corporation.
GEORGE R. JOHNSON joined the Company as a Vice President -- PCS in May
1995 and was named Executive Vice President and General Manager for the
Birmingham, Alabama MTA in August 1995. From 1990 to 1995, he served as a
Product Manager for BellSouth Telecommunications, Inc. From 1989 to 1990, he
was National Sales Manager for BellSouth Products, Inc., a consumer telephone
products company.
WALTER R. PETTISS joined the Company as a Vice President -- PCS in
April 1995 and was named Executive Vice President and General Manager for the
Jacksonville, Florida MTA in August 1995. From 1992 to 1994, Mr. Pettiss served
as Chief Operating Officer of WJB-TV, L.P., a provider of wireless cable
television service, and its successor corporation, Wireless Broadcasting System
of America, Inc. Since 1991, he has served as a director of Electronic Power
Technology, Inc. ("EPT"). In 1995, he became Chairman of the Board of Directors
of EPT. In December 1995, EPT filed for protection of its assets under Chapter
7 of the U.S. Bankruptcy Code. From 1990 to 1992, he served as Chief Operating
Officer of WJB-Video, L.P., a Blockbuster Video franchisee. From 1987 through
1989, he was a Senior Vice President of SouthernNet.
NICHOLAS J. JEBBIA joined the Company in January 1996 as Executive
Vice President and General Manager for the Memphis, Tennessee/Jackson,
Mississippi MTA. From 1990 to 1995, Mr. Jebbia served as Vice President and
General Manager of New Ventures for National Data Corporation. From 1983 to
1990, he was Vice President of Service with United Telecommunications. Prior to
1983, he served in various management positions with Ohio Bell Telephone.
RODNEY D. DIR joined the Company in August 1996 as Executive Vice
President and General Manager for the Atlanta MTA. From 1995 to 1996, Mr. Dir
served as Area General Manager for GTE Mobilnet in California. He joined GTE
Telephone Operations in 1984 serving in various finance, accounting and
regulatory positions. In 1989, he joined GTE Mobilnet's cellular division.
Before joining GTE Telephone Operations,
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Mr. Dir worked with Kiesling and Associates, a certified public accounting firm,
providing accounting and management services to telecommunications clients.
MICHAEL P. TATOM joined the Company in February 1995 as Director of
Sales. Since May 1995, he has served as Vice President and General Manager of
the Company's southern cellular division and, in March 1997, was named
Executive Vice President and General Manager for the Company's PCS properties
in Kentucky. From 1990 to 1995, Mr. Tatom served as Branch Manager and General
Manager of the Small Business Division of AT&T Corp.
MAURICE P. O'CONNOR was appointed a Director and Vice President of
the Company in 1994 concurrent with the Company's acquisition of Unicel. He
also serves as a director of Unitel, Inc., a LEC in the State of Maine. Mr.
O'Connor is currently the Vice President and General Manager of MRCC, Inc., a
position that he has held since the consummation of the Maine Disposition in
May 1997. Mr. O'Connor served as General Manager of Unicel from 1991 until the
Unicel acquisition and had been employed by Unicel in other management
capacities since 1989. From 1984 until joining Unicel in 1989, Mr. O'Connor was
President and General Manager of New England Landscape & Irrigation Company in
Palmer, Massachusetts. From 1977 to 1984, he was the President of Cypress
Landscaping & Construction in Houston, Texas. Mr. O'Connor is the son-in-law of
Bert and Coral Clifford.
DONALD W. BURTON was appointed a Director of the Company in 1995. He
has served as the Managing General Partner of the South Atlantic Venture Funds
since 1983. He has served as the General Partner of The Burton Partnership,
Limited Partnership since 1979. Mr. Burton serves as a Director of MTL Inc., a
bulk transportation service company, the Heritage Group of Mutual Funds and
several private companies.
BERT G. CLIFFORD was appointed Vice Chairman of the Board of Directors
of the Company on March 28, 1994 concurrent with the Company's acquisition of
Unicel. Mr. Clifford has been the Chairman of the Board and President of Unity
Telephone Company since 1963. In connection with the acquisition of Unicel, Mr.
Clifford retired from his positions as the Chairman of the Board of Directors,
President and Chief Executive Officer of Unicel, which positions he had held
since Unicel's inception in 1987. Mr. Clifford is the father-in-law of Maurice
P. O'Connor.
O. GENE GABBARD has been a Director of the Company since February
1992. He has worked independently as an entrepreneur and consultant since
February 1993. Mr. Gabbard currently serves as a director of ITC Holding,
MindSpring, Masada Security, Inc., a security monitoring services company, and
two telecommunications technology companies, Dynatech Corporation and Adtran,
Inc. From August 1990 through January 1993, he served as Executive Vice
President and Chief Financial Officer of MCI. He served in various senior
executive capacities, including Chairman of the Board, President and Chief
Executive Officer of Telecom from December 1988 until Telecom's merger with MCI
in August 1990. From July 1984 to December 1988, he was Chairman and/or
President of SouthernNet.
LAWRENCE M. GRESSETTE, Jr. was appointed a Director of the Company in
1995. Since 1990, he has served as Chairman, President and Chief Executive
Officer of SCANA, a diversified utility company, from which positions he has
recently announced his retirement. Mr. Gressette serves as a director and as
Chairman of the Executive Committee of the Board of Directors of SCANA. He also
is a director of Wachovia Corporation, a bank holding company, and The Liberty
Corporation, a holding company of Liberty Life Insurance Co. and Cosmos
Broadcasting Corp.
WILLIAM H. SCOTT, III served as Vice Chairman of the Board of
Directors of the Company from its inception in April 1991 until February 7,
1996 and was reappointed as a Director and Secretary on March 21, 1996. Mr.
Scott has served as President of ITC Holding since December 1991 and has been a
director of ITC Holding since May 1989. He served as a director and Executive
Vice President of Interstate Cellular from May 1989 until its dissolution in
June 1995, and he also is an officer and director of several other ITC Holding
subsidiaries. Mr. Scott has served on the AvData Board of Directors since 1988
and on the MindSpring Board
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of Directors since 1994. From 1985 to 1989, Mr. Scott was an officer and
director of Async. Between 1984 and 1988, Mr. Scott held several offices with
SouthernNet, including Chief Operating Officer, Chief Financial Officer and
Vice President -- Administration. He was a director of that company from 1984
to 1987.
WILLIAM B. TIMMERMAN was appointed a Director of the Company in 1995.
Mr. Timmerman serves as Chairman, Chief Executive Officer and President of
SCANA and as Chairman and Chief Executive Officer of each of SCANA's
subsidiaries. Since 1978, he has served in a variety of management positions at
SCANA, including President, Senior Vice President, Executive Vice President and
Chief Financial Officer.
DONALD W. WEBER has been a Director of the Company since December
1991. Mr. Weber also is a director of ITC Holding, InterServ Services
Corporation, InterCall, Inc. and DPS Depot Inc. and Chairman of the Board and
Chief Executive Officer of ViewStar Entertainment Services, Inc., a company
providing DBS satellite systems hardware and programming. He is also a director
of Healthdyne Information Enterprise and Pegasus Communications Corporation,
both of which are public companies. From 1981 until his retirement in October
1991, Mr. Weber held various executive positions, including President and Chief
Executive Officer, at Contel. Mr. Weber was a director of Contel from 1985
until 1991 and was a director of Contel Cellular, Inc., a cellular telephone
company, from 1981 until 1991.
CERTAIN TRANSACTIONS
The Company has adopted a policy requiring that any material
transactions between the Company and persons or entities affiliated with
officers, directors or principal stockholders of the Company be on terms no
less favorable to the Company than reasonably could have been obtained in arm's
length transactions with independent third parties. The following is a summary
of certain transactions and relationships among the Company and its associated
entities, and among the directors, executive officers and stockholders of the
Company and its associated entities.
ITC HOLDING
As of May 15, 1997, ITC Holding owned approximately 27.3% of the
outstanding Common Stock of the Company. ITC Holding, through certain of its
subsidiaries, from time to time provides the Company with various services,
consisting principally of administrative and staff services, technical services
and access services (switch technicians and maintenance) and facilities for the
Company's switching office. The amount paid by the Company to ITC Holding for
such services during the three months ended March 31, 1997 was $.1 million.
The Company will periodically have outstanding affiliated receivables and
payables related to timing of payments for such administrative services.
The Company utilizes fiber optic facilities of Interstate FiberNet,
Inc., an ITC Holding subsidiary ("IFN"), for backhaul and transport of its PCS
and cellular service operations. The Company paid $.5 million to IFN during
the three months ended March 31, 1997. In addition, the Company has entered
into a co-location agreement with IFN for the lease of certain space to allow
the Company to co-locate certain of its network equipment with facilities of
IFN. The Company has also entered into an agreement with InterQuest, Inc., a
subsidiary of IFN, for the provision of operator and directory assistance
services branded with the "Powertel" name. The Company paid $55,491 to
InterQuest during the three months ended March 31, 1997. The Company has
entered into an 18-month agreement, effective November 1, 1996, with DeltaCom,
Inc., another subsidiary of ITC Holding ("DeltaCom"), for the provision of
long-distance services, which the Company then re-sells to its customers. The
Company paid $.2 million to DeltaCom during the three months ended March 31,
1997.
Certain officers and directors of the Company hold or have held
positions in ITC Holding and various subsidiaries of ITC Holding. See
"Management--Directors and Executive Officers." In addition, certain Company
officers and directors have ownership interests in ITC Holding.
OTHER TRANSACTIONS
As of May 15, 1997, SCANA owned approximately 16.7% of the
outstanding Common Stock of the Company. In addition, Messrs. Gressette and
Timmerman are directors of the Company and are directors and executive officers
of SCANA. Pursuant to the SCANA Stock Purchase Agreement, SCANA purchased
50,000 shares of Series D Convertible Preferred Stock for $22.5 million. In
addition, the Company purchased certain generating equipment from SCANA for
approximately $.7 million during the three months ended March 31, 1997. See
"The Preferred Stock Sales."
As of May 15, 1997, Huff owned approximately 7.7% of the outstanding
Common Stock of the Company. Pursuant to the Huff Stock Purchase Agreement,
Huff purchased 50,000 shares of Series C Convertible Preferred Stock for
$22.5 million. See "The Preferred Stock Sales."
The Company purchases certain equipment and services related to the
buildout of its PCS System from Ericsson and certain of Ericsson's
subsidiaries. Ericsson owns all of the Series A Preferred Stock of the
Company. The Company's total purchases for equipment and services from
Ericsson were $39.7 million for the three months ended March 31, 1997. In
addition, Ericsson provides the Company with financing for such purchases under
the Vendor Financing Agreement. See "Description of Certain Indebtedness."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
APRIL 1996 NOTES
The Company issued $360.0 million aggregate principal amount at
maturity of the April 1996 Notes under an indenture (the "April 1996 Notes
Indenture") between the Company and Bankers Trust Company, trustee (the "April
1996 Notes Trustee") in the Debt Offering.
The April 1996 Notes are unsecured obligations of the Company ranking
pari passu in right of payment with the Company's other unsecured
unsubordinated indebtedness, including, among other things, the Notes, the
February 1996 Notes and the Vendor Financing Agreement, and senior in right of
payment to all subordinated indebtedness of the Company. The April 1996 Notes
are effectively subordinated to the Vendor Financing Agreement to the extent
the Vendor Financing Agreement is secured or the indebtedness thereunder is
incurred by subsidiaries of the Company.
The April 1996 Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after May 1, 2001, at 106% of their
principal amount at maturity, plus accrued interest, declining to 100% of their
principal amount at maturity, plus accrued interest, on and after May 1, 2003.
In addition, prior to May 1, 1999, up to 25% of the aggregate principal amount
at maturity of the April 1996 Notes are redeemable at 112% of their accreted
value from the proceeds of public equity offerings provided that at least
$270.0 million principal amount at maturity remains outstanding after any such
redemption.
The April 1996 Notes Indenture contains certain restrictive covenants,
including among others, limitations on the ability of the Company to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, make investments, engage in transactions with stockholders and
affiliates, create liens, sell assets and engage in mergers and consolidations,
and certain events of default, which are substantially similar to those
relating to the February 1996 Notes and the Notes. See "-- February 1996 Notes"
and "Description of the Notes."
FEBRUARY 1996 NOTES
The Company issued $357.5 aggregate principal amount at maturity of
the February 1996 Notes under an indenture (the "February 1996 Notes
Indenture") between the Company and Bankers Trust Company, trustee (the
"February 1996 Notes Trustee") in connection with its sale of 35,747 Units in
the Unit Offering. Each Unit consisted of ten February 1996 Notes and 32
Warrants.
The February 1996 Notes are unsecured obligations of the Company
ranking pari passu in right of payment with the Company's other unsecured
unsubordinated indebtedness, including, among other things, the Notes, the
April 1996 Notes and the Vendor Financing Agreement, and senior in right of
payment to all subordinated indebtedness of the Company. The February 1996
Notes are effectively subordinated to the Vendor Financing Agreement to the
extent the Vendor Financing Agreement is secured or the indebtedness thereunder
is incurred by subsidiaries of the Company.
The February 1996 Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after February 1, 2001, at 106% of their
principal amount at maturity, plus accrued interest, declining to 100% of their
principal amount at maturity, plus accrued interest, on and after February 1,
2003. In addition, prior to February 1, 1999, up to 25% of the aggregate
principal amount at maturity of the February 1996 Notes are redeemable at 112%
of their accreted value from the proceeds of public equity offerings provided
that at least $268.1 million principal amount at maturity remains outstanding
after any such redemption.
The February 1996 Notes Indenture contains certain restrictive
covenants, including among others, limitations on the ability of the Company to
incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, make investments, engage in transactions with stockholders and
affiliates, create liens,
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sell assets and engage in mergers and consolidations, and certain events of
default, which are substantially similar to those relating to the April 1996
Notes and the Notes. See "-- April 1996 Notes" and "Description of the Notes."
THE VENDOR FINANCING AGREEMENT
Powertel PCS, Inc., a wholly owned subsidiary of the Company
("Powertel PCS"), entered into an Equipment Purchase Agreement dated as of
March 4, 1996 with Ericsson for the purchase of PCS equipment and services and
a Vendor Financing Agreement with Ericsson to finance up to $125.0 million of
such purchase. On October 31, 1996, March 31, 1997 and June 26, 1997, Powertel
PCS and Ericsson entered into amendments to the Vendor Financing Agreement
which increased the amount of vendor financing to $165.0 million and amended
certain other provisions of the Vendor Financing Agreement. The following
summary of certain material provisions of the Vendor Financing Agreement and
the Equipment Purchase Agreement, as amended, does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Vendor
Financing Agreement and the Equipment Purchase Agreement.
Under the Equipment Purchase Agreement, Powertel PCS agreed to
purchase, and Ericsson agreed to sell, certain equipment, software and
installation services required for the initial buildout and operation of the
PCS System (in each case subject to the terms and conditions of the Equipment
Purchase Agreement). Powertel PCS has agreed to: (i) purchase its first $75.0
million worth of PCS equipment, software and/or services for the Atlanta MTA
from Ericsson; and (ii) for a term of three years, utilize Ericsson as its
exclusive provider of PCS 1900 equipment for the Current PCS System.
The term of exclusivity will run independently for each MTA and will
commence six months prior to the date the Company first uses the PCS 1900
equipment to provide In Revenue Service (as defined in the Equipment Purchase
Agreement) for such MTA. Powertel PCS's grant of exclusivity is conditioned
upon: (i) Ericsson's continuing to provide sufficient quantities of PCS 1900
equipment to meet the Company's needs in the Current PCS Markets; (ii)
Ericsson's ability to provide commercial service for the Atlanta MTA by June 1,
1997; and (iii) Ericsson's continuing to provide "state-of-the-art" equipment.
Under the Vendor Financing Agreement, Ericsson has agreed to provide
financing to Powertel PCS for the cost of equipment, software and installation
services acquired by Powertel PCS under the Equipment Purchase Agreement for
the Current PCS System (subject to the terms and conditions of the Vendor
Financing Agreement). All advances under the five-year line of credit
established by the Vendor Financing Agreement made during any calendar year
will accrue interest at a spread (not exceeding 5%) above LIBOR or, under
certain circumstances, at a spread (not exceeding 3%) over Citibank N.A.'s
prime rate, payable quarterly in arrears at the end of each calendar quarter,
during the remainder of such calendar year and for three succeeding years;
thereafter, the principal amount will amortize and be repaid (together with
interest accrued thereon), in equal quarterly installments. A significant
amount of such indebtedness may mature prior to the Notes. See "Risk Factors --
Ability to Service Debt; Restrictive Covenants; Refinancing Risks." In
addition, the Company will be required to repay indebtedness outstanding under
the Vendor Financing Agreement in connection with certain sales of assets other
than in the ordinary course of business, including proceeds from the sale of
PCS licenses.
The Vendor Financing Agreement contains a number of covenants
including, among others, covenants limiting the License Subsidiaries' (as
defined below) ability to incur debt and covenants requiring Powertel to
provide financial and other information. In addition, the Company is required
to maintain certain financial ratios, including requirements that: (i) the
Company earn minimum quarterly consolidated PCS revenues ranging from $8.4
million for the quarter ending June 30, 1997 to $195.0 million for the quarter
ending December 31, 2005; (ii) the Company maintain a minimum amount of
consolidated assets minus consolidated liabilities; (iii) the Company maintain
a minimum number of subscribers ranging from 38,000 for the quarter ending June
30, 1997 to 600,000 for the quarter ending December 31, 2000 and maintaining
this subscriber level through December 31, 2005; (iv) the Company maintain a
minimum ratio of annualized consolidated EBITDA to consolidated debt service
(defined as scheduled principal payments plus cash interest expense) of .90 to
1 for the quarters ending December 31, 2001 and March 31, 2002, 1 to 1 for the
quarters ending June 30, 2002 through December 31,
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2002, 1.1 to 1 for the quarter ending March 31, 2003, 1.15 to 1 for the quarter
ending June 30, 2003, 1.2 to 1 for the quarter ending September 30, 2003, and
1.25 to 1 for the quarters ending December 31, 2003 through December 31, 2004;
(v) the Company must maintain a maximum ratio of consolidated debt to
annualized consolidated EBITDA of 16 to 1 for the quarter ending December 31,
2000 decreasing to 4 to 1 for the quarters ending December 31, 2004 through
December 31, 2005; and (vi) the Company must not permit its cumulative capital
expenditures from the period beginning January 1, 1999 to exceed $796.0 million
at December 31, 1999, increasing to approximately $1.2 billion by December 31,
2005. The Vendor Financing Agreement also includes customary events of default,
including a default for a change in control of the Company.
Powertel PCS's obligations under the Vendor Financing Agreement are
secured by all tangible assets purchased with the proceeds therefrom and by a
pledge of the capital stock of Powertel Jacksonville Licenses, Inc., Powertel
Memphis Licenses, Inc., Powertel Birmingham Licenses, Inc. and Powertel Atlanta
Licenses, Inc. (the "License Subsidiaries"). Repayment of Powertel PCS's
obligations under the Vendor Financing Agreement is guaranteed by Powertel, the
License Subsidiaries, and Powertel/Jacksonville, Inc., Powertel/Memphis, Inc.,
Powertel/Birmingham, Inc. and Powertel/Atlanta, Inc.
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DESCRIPTION OF THE NOTES
The Old Notes were issued under an Indenture, dated as of June 10,
1997 (the "Indenture"), between the Company and Bankers Trust Company, as
trustee (the "Trustee"). The New Notes will be issued under the Indenture,
which will be qualified under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), upon the effectiveness of the Registration Statement of
which this Prospectus is a part. The form and terms of the New Notes are
identical in all material respects to the form and terms of the Old Notes
except that the New Notes will be registered under the Securities Act and,
therefore, will not bear legends restricting transfer thereof. Upon the
consummation of the Exchange Offer, holders of Notes will not be entitled to
registration rights under, or the contingent increase in interest rate provided
pursuant to, the Old Notes. The New Notes will evidence the same debt as the
Old Notes and will be treated as a single class under the Indenture with any
Old Notes that remain outstanding. The Old Notes and New Notes are herein
collectively referred to as the "Notes."
The terms of the Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act as in effect
on the date of the Indenture. The Notes are subject to all such terms and
reference is made to the Indenture and the Trust Indenture Act for a statement
thereof. A copy of the Indenture has been filed with the Commission as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary, which describes certain provisions of the Indenture and the
Notes, does not purport to be complete and is subject to, and is qualified in
its entirety by reference to all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act. For definitions of certain capitalized terms used in the
following summary, see "-- Certain Definitions."
GENERAL
The Notes will be unsecured (except to the extent described under
"-- Security" below) senior obligations of the Company, initially limited to
$300,000,000 aggregate principal amount, and will mature on June 1, 2007. Each
Note will bear interest at 11 1/8% per annum from June 10, 1997 or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semiannually (to Holders of record at the close of business on the May
15 or November 15 immediately preceding the Interest Payment Date) on June 1
and December 1 of each year, commencing December 1, 1997. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be
payable at the office or agency of the Company in the Borough of Manhattan, the
City of New York (which initially will be the corporate trust office of the
Trustee at 4 Albany Street, New York, New York 10006, Attention: Corporate
Trust and Agency Group); provided that, at the option of the Company, payment
of interest may be made by check mailed to the address of the Holder as such
address appears in the Security Register.
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples thereof. See "-- Book-Entry;
Delivery and Form." No service charge will be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
Subject to the covenants described below under "Covenants" and
applicable laws, the Company may issue additional Notes under the Indenture.
The Notes and any additional Notes subsequently issued would be treated as a
single class for all purposes under the Indenture.
SINKING FUND
The Notes will not be subject to any sinking fund or mandatory
redemption.
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OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in
part, at any time or from time to time, on or after June 1, 2002 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the redemption prices (expressed in percentages of principal
amount) set forth below, plus accrued and unpaid interest to the redemption
date (subject to the right of Holders of record on the relevant regular record
date that is prior to the redemption date to receive interest due on an
interest payment date), if redeemed during the 12-month period commencing June
1, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2002............................................ 105.56250%
2003............................................ 102.78125
2004 and thereafter............................. 100.00000
</TABLE>
In addition, at any time prior to June 1, 2000, the Company may redeem
up to 35% of the principal amount of the Notes with the proceeds of one or more
Public Equity Offerings, at any time as a whole or from time to time in part,
at a redemption price (expressed as a percentage of principal amount) of
111.125%; provided that after any such redemption at least $195.0 million
aggregate principal amount of Notes remains outstanding.
If less than all of the Notes are to be redeemed at any time, the
Trustee will select the Notes, or portions thereof, for redemption in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
national securities exchange, on a pro rata basis, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate; provided that no Note of $1,000 in principal amount or less shall
be redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
SECURITY
On the Closing Date, the Company purchased and pledged to the Trustee
as security for the benefit of the Holders of the Notes the Pledged Securities
in such amount as will be sufficient upon receipt of scheduled interest and
principal payments of such securities to provide for payment in full of the
first six scheduled interest payments due on the Notes. The Company used
approximately $89.6 million of the net proceeds of the Offering to acquire the
Pledged Securities.
The Pledged Securities were pledged by the Company to the Trustee for
the benefit of the Holders of the Notes pursuant to the Pledge Agreement and
are held by the Trustee in the Pledge Account. Pursuant to the Pledge
Agreement, immediately prior to an Interest Payment Date, the Company may
either deposit with the Trustee from funds otherwise available to the Company
cash sufficient to pay the interest scheduled to be paid on such date or the
Company may direct the Trustee to release from the Pledge Account proceeds
sufficient to pay interest then due on the Notes. In the event the Company
exercises the former option, the Company may direct the Trustee to release a
like amount of proceeds from the Pledge Account. A failure to pay interest on
the Notes in a timely manner through the first six scheduled interest payment
dates will constitute an immediate Event of Default under the Indenture, with
no grace or cure period. The Pledged Securities and Pledge Account also secure
the repayment of the principal amount and premium on the Notes.
Under the Pledge Agreement, once the Company makes the first six
scheduled interest payments on the Notes, all of the remaining Pledged
Securities, if any, will be released from the Pledge Account and thereafter the
Notes will be unsecured.
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RANKING
The Indebtedness evidenced by the Notes will rank pari passu in right
of payment with all existing and future unsubordinated indebtedness of the
Company and senior in right of payment to all existing and future subordinated
indebtedness of the Company. After giving pro forma effect to the Transactions
and the application of the net proceeds thereof, as of March 31, 1997, the
Company would have had $551.1 million of indebtedness outstanding other than
the Notes and at such date would have approximately $61.2 million of
availability under the Vendor Financing Agreement for purchases of PCS
equipment and services. The Company is permitted to incur additional
indebtedness to finance the acquisition of inventory or equipment and up to
$25.0 million of indebtedness under one or more commercial bank facilities. The
Company is permitted under the Indenture to secure such indebtedness. The Notes
will be effectively subordinated to such security interests to the extent of
such security interests. In addition, all existing and future liabilities
(including trade payables) of the Company's subsidiaries will be effectively
senior to the Notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for
which no definition is provided.
"Adjusted Consolidated Net Income" means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person (other than net income
attributable to a Restricted Subsidiary) in which any Person (other than the
Company or any of its Restricted Subsidiaries) has a joint interest and the net
income of any Unrestricted Subsidiary, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any of its
Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary
during such period; (ii) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below
(and in such case, except to the extent includable pursuant to clause (i)
above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with the
Company or any of its Restricted Subsidiaries or all or substantially all of
the property and assets of such Person are acquired by the Company or any of
its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary
to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock (other than accrued dividends which, pursuant to the terms of the
Preferred Stock, will not be payable prior to the first anniversary after the
Stated Maturity of the Notes) of the Company or any Restricted Subsidiary owned
by Persons other than the Company and any of its Restricted Subsidiaries; and
(vi) all extraordinary gains and extraordinary losses.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company or shall be merged into or
consolidated with the Company or any of its Restricted Subsidiaries; provided
that such
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Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of
the Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company
or any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary of the Company) of (i) all or substantially all of the
Capital Stock of any Restricted Subsidiary of the Company or (ii) all or
substantially all of the assets that constitute a division or line of business
of the Company or any of its Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including
by way of merger, consolidation or sale-leaseback transaction) in one
transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any
Restricted Subsidiary, (ii) all or substantially all of the property and assets
of an operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and assets of the Company or any of
its Restricted Subsidiaries outside the ordinary course of business of the
Company or such Restricted Subsidiary and, in each case, that is not governed
by the provisions of the Indenture applicable to mergers, consolidations and
sales of all or substantially all of the assets of the Company; provided that
"Asset Sale" shall not include (i) sales or other dispositions of inventory,
receivables and other current assets, (ii) simultaneous exchanges by the
Company or any Restricted Subsidiary of property or equipment for other
property or equipment; provided that the property or equipment received by the
Company or such Restricted Subsidiary has at least substantially equal market
value to the Company or such Restricted Subsidiary (as determined by the Board
of Directors whose good faith determination shall be conclusive and evidenced
by a board resolution), provided that, after giving pro forma effect to such
exchange, the Consolidated Leverage Ratio shall be no greater than the
Consolidated Leverage Ratio immediately prior to such exchange or (iii) sales
or other dispositions of assets with a fair market value (as certified in an
officers' certificate) not in excess of $500,000.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether now outstanding or
issued after the Closing Date, including, without limitation, all Common Stock
and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of
the rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other
than the Existing Stockholders, becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total
voting power of the total Voting Stock of the Company on a fully diluted basis;
or (ii) individuals who at the beginning of any period of two consecutive
calendar years constituted the board of directors (together with any new
directors whose election by the board of directors or whose nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds of the members of the Board of Directors then in office who either
were members of the board of directors at the beginning of such period or whose
election or
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nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of board of directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether now outstanding or issued after the Closing Date,
including without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, the sum of the amounts
for such period of (i) Adjusted Consolidated Net Income, (ii) Consolidated
Interest Expense, (iii) income taxes, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income (other than income taxes (x)
(either positive or negative) attributable to extraordinary and non-recurring
gains or losses or sales of assets and (y) actually payable with respect to
such period), (iv) depreciation expense, to the extent such amount was deducted
in calculating Adjusted Consolidated Net Income, (v) amortization expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, and (vi) all other non-cash items reducing Adjusted Consolidated Net
Income (other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), less all non-cash
items increasing Adjusted Consolidated Net Income, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in
conformity with GAAP; provided that, if any Restricted Subsidiary is not a
Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to
the extent not otherwise reduced in accordance with GAAP) by an amount equal to
(A) the amount of the Adjusted Consolidated Net Income attributable to such
Restricted Subsidiary multiplied by (B) the quotient of (1) the number of
shares of outstanding Common Stock of such Restricted Subsidiary not owned on
the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding Common
Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including amortization of
original issue discount on any Indebtedness and the interest portion of any
deferred payment obligation, calculated in accordance with the effective
interest method of accounting; all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in
connection with the Transactions, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with
GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis as of the end of the four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or have otherwise become publicly available immediately
prior to such Transaction Date (the "Reference Period") to (ii) the aggregate
amount of Consolidated EBITDA for such Reference Period. In making the
foregoing calculation, (A) Indebtedness and Consolidated EBITDA shall be
calculated after giving pro forma effect to (x) any Indebtedness (including, if
applicable, the Notes) Incurred during such Reference Period or subsequent to
the end of the Reference Period and on or prior to the Transaction Date, in
each case as if such Indebtedness had been Incurred, and the proceeds thereof
had been applied, on the first day of such Reference Period and (y) any
Indebtedness that was outstanding during such Reference Period or thereafter
but that is not outstanding or is to be repaid on the Transaction Date; (B) pro
forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any Asset
Disposition) that
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occur during such Reference Period or thereafter and on or prior to the
Transaction Date as if they had occurred and such proceeds had been applied on
the first day of such Reference Period; (C) pro forma effect shall be given to
asset dispositions and asset acquisitions (including giving pro forma effect to
the application of proceeds of any asset disposition) that have been made by
any Person that has become a Restricted Subsidiary or has been merged with or
into the Company or any Restricted Subsidiary during such Reference Period or
subsequent to such period and on or prior to the Transaction Date and that
would have constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when such Person was a Restricted Subsidiary as if such
asset dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; provided
that to the extent that clause (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters immediately
preceding the Transaction Date of the Person, or division or line of business
of the Person, that is acquired or disposed for which financial information is
available; and (D) the aggregate amount of Indebtedness outstanding as of the
end of the Reference Period will be deemed to include the total amount of funds
outstanding and/or available on the Transaction Date under any revolving credit
facilities of the Company or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted
Subsidiaries filed with the Commission or otherwise publicly available, less
any amounts attributable to Redeemable Stock or any equity security convertible
into or exchangeable for Indebtedness, the cost of treasury stock and the
principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item
to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Existing Stockholders" means ITC Holding or SCANA and their
respective Affiliates at the time of determination.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the date of the Indenture, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
based on GAAP contained in the Indenture shall be computed in conformity with
GAAP applied on a consistent basis, except that calculations made for purposes
of determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the Transactions and
(ii) except as otherwise provided, the amortization of any amounts required or
permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and, without limiting the generality of the foregoing, any obligation, direct
or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
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"Holder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an Incurrence of Indebtedness by reason of the
acquisition of more than 50% of the Capital Stock of any Person; provided that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all Capitalized Lease Obligations of
such Person, (vi) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the lesser of
(A) the fair market value of such asset at such date of determination and (B)
the amount of such Indebtedness, (vii) all Indebtedness of other Persons
Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such
Person and (viii) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date (or in the case of a revolving credit or other similar facility, the
total amount of funds outstanding and/or available on the date of
determination) of all unconditional obligations as described above and, with
respect to contingent obligations, the maximum liability upon the occurrence of
the contingency giving rise to the obligation, provided (A) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the face amount of such Indebtedness less the unamortized portion of the
original issue discount of such Indebtedness at the time of its issuance as
determined in conformity with GAAP, (B) that money borrowed and set aside at
the time of the Incurrence of any Indebtedness in order to prefund the payment
of interest on such Indebtedness shall be deemed not to be "Indebtedness" and
(C) that Indebtedness shall not include any liability for federal, state, local
or other taxes.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement, option or future contract or other
similar agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan
or other extension of credit (including, without limitation, by way of
Guarantee or similar arrangement; but excluding advances to customers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person
and shall include the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant described below, (i) "Investment"
shall include the fair market value of the assets (net of liabilities) of any
Restricted Subsidiary of the Company at the time that such Restricted
Subsidiary of the Company is designated an Unrestricted Subsidiary and shall
exclude the fair market value of the assets (net of liabilities) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary of the Company and (ii) any property
transferred to or from any Person shall be valued at its fair market value at
the time of such transfer, in each case as determined by the Board of Directors
in good faith.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof, any sale
with recourse against the seller or any Affiliate of the seller, or any
agreement to give any security interest).
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"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Company
and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a
reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of Capital
Stock, the proceeds of such issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent
such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary of the Company) and proceeds from the conversion of other
property received when converted to cash or cash equivalents, net of attorney's
fees, accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes paid or payable as a result
thereof.
"Offer to Purchase" means an offer by the Company to purchase Notes
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a Business Day
no earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to
accrue interest pursuant to its terms; (iv) that, unless the Company defaults
in the payment of the purchase price, any Note accepted for payment pursuant to
the Offer to Purchase shall cease to accrue interest on and after the Payment
Date; (v) that Holders electing to have a Note purchased pursuant to the Offer
to Purchase will be required to surrender the Note, together with the form
entitled "Option of the Holder to Elect Purchase" on the reverse side of the
Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day immediately preceding the
Payment Date; (vi) that Holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal
amount of $1,000 or integral multiples thereof. On the Payment Date, the
Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the
Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by
the Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price, and the Trustee
shall promptly authenticate and mail to such Holders a new Note equal in
principal amount to any unpurchased portion of the Note surrendered; provided
that each Note purchased and each new Note issued shall be in a principal
amount of $1,000 or integral multiples thereof. The Company will publicly
announce the results of an Offer to Purchase as soon as practicable after the
Payment Date. The Trustee shall act as the Paying Agent for an Offer to
Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and
any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable, in the event that the Company is required to
repurchase Notes pursuant to an Offer to Purchase.
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"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) a Temporary Cash
Investment; (iii) commission, payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with GAAP; and (iv) stock, obligations or securities
received in satisfaction of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (iii) Liens incurred or deposits
made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (iv)
Liens incurred or deposits made to secure the performance of tenders, bids,
leases, statutory or regulatory obligations, bankers' acceptances, surety and
appeal bonds, government contracts, performance and return-of-money bonds and
other obligations of a similar nature incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money); (v)
easements, rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof)
upon real or personal property acquired after the Closing Date; provided that
(a) such Lien is created solely for the purpose of securing Indebtedness
Incurred, in accordance with the "Limitation on Indebtedness" covenant
described below, (1) to finance the cost (including the cost of improvement or
construction) of the item of property or assets subject thereto and such Lien
is created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost and (c) any such Lien shall not extend to or cover
any property or assets other than such item of property or assets and any
improvements on such item; (vii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of the Company
and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering
property or assets under construction arising from progress or partial payments
by a customer of the Company or its Restricted Subsidiaries relating to such
property or assets; (ix) any interest or title of a lessor in the property
subject to any Capitalized Lease or operating lease; (x) Liens arising from
filing Uniform Commercial Code financing statements regarding leases; (xi)
Liens on property of, or on shares of stock or Indebtedness of, any corporation
existing at the time such corporation becomes, or becomes a part of, any
Restricted Subsidiary; provided that such Liens do not extend to or cover any
property or assets of the Company or any Restricted Subsidiary other than the
property or assets acquired; (xii) Liens in favor of the Company or any
Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary of the
Company that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are either within
the general parameters customary in the industry and incurred in the ordinary
course of business, in each case, securing Indebtedness under Interest Rate
Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed
solely to protect the Company or any of its Restricted Subsidiaries from
fluctuations in interest rates or the price of commodities; (xvii) Liens
arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of the Company and its Restricted Subsidiaries prior to the
Closing Date; and (xviii) Liens on or sales of receivables.
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"Pledge Account" means an account established with the Trustee
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by the Company with the net proceeds from the sale of the
Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated June 10, 1997, made by the Company in favor of the Trustee, governing the
disbursement of funds from the Pledge Account, as such agreement may be
amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. government securities purchased by
the Company and held in the Pledge Account in accordance with the Pledge
Agreement.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however
designated,whether voting or non-voting) of such Person's preferred or
preference equity, whether now outstanding or issued after the Closing Date,
including, without limitation, all series and classes of such preferred stock
or preference stock.
"Preferred Stock Sales" means the sale by the Company for $45.0
million, in the aggregate, of (a) 50,000 shares of its Series C Convertible
Preferred Stock, par value $.01 per share, to The Huff Alternative Income Fund,
L.P. pursuant to the Stock Purchase Agreement dated as of May 23, 1997 between
the Company and The Huff Alternative Income Fund, L.P. and (b) 50,000 shares of
its Series D Convertible Preferred Stock, par value $.01 per share, to SCANA
Communications, Inc., a wholly owned subsidiary of SCANA Corporation, pursuant
to the Stock Purchase Agreement dated as of May 23, 1997 between the Company
and SCANA Communications, Inc.
"Public Equity Offering" means an underwritten primary public offering
of Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; provided that any
Capital Stock that would not constitute Redeemable Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase
or redeem such Capital Stock upon the occurrence of an "asset sale" or "change
of control" occurring prior to the Stated Maturity of the Notes shall not
constitute Redeemable Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the
holders of such Capital Stock than the provisions contained in "Limitation on
Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants
described below and such Capital Stock specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior
to the Company's repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below.
"Repurchase Offer" means a "Repurchase Offer" as defined in the
Warrants.
"Restricted Subsidiary" means any Subsidiary of the Company other
than an Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary of the Company that, together with its Subsidiaries, (i)
for the most recent fiscal year of the Company, accounted for more than 10% of
the consolidated revenues of the Company and its Restricted Subsidiaries or
(ii) as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and
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(ii) with respect to any scheduled installment of principal of or interest on
any debt security, the date specified in such debt security as the fixed date
on which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the outstanding
Voting Stock is owned, directly or indirectly, by such Person and one or more
other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or
obligations fully and unconditionally guaranteed by the United States of
America or any agency thereof, (ii) time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50.0 million
(or the foreign currency equivalent thereof) and has outstanding debt which is
rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor, (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) above entered into with a bank meeting the qualifications
described in clause (ii) above, (iv) commercial paper, maturing not more than
90 days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard & Poor's Ratings
Service, and (v) securities with maturities of six months or less from the date
of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Service or Moody's Investors Service, Inc.
"Trade Payables" means any accounts payable or any other indebtedness
or monetary obligation to trade creditors created, assumed or Guaranteed by the
Company or any of its Restricted Subsidiaries arising in the ordinary course of
business in connection with the acquisition of goods or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any Restricted Subsidiary; provided that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if
such Subsidiary has assets greater than $1,000, that such designation would be
permitted under the "Limitation on Restricted Payments" covenant described
below. The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary of the Company; provided that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant described below and (y) no Default or Event of Default shall have
occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced to the Trustee by promptly filing with the Trustee a copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
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"Warrants" means the Warrants to purchase 1,143,904 shares of the
Company's Common Stock at an exercise price of $18.15 per share, subject to
adjustment, issued pursuant to the Warrant Agreement dated as of February 7,
1996 between the Company and Bankers Trust Company, as warrant agent.
"Wholly Owned" means, with respect to any Subsidiary of any Person,
the ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds thereof, the Consolidated Leverage Ratio would
be less than or equal to 5 to 1.
Notwithstanding the foregoing, the Company, and (except as specified
below) any Restricted Subsidiary, may Incur each and all of the following: (i)
Indebtedness under one or more revolving credit or working capital facilities
in an aggregate principal amount outstanding or available at any time not to
exceed $25 million, less any amount of Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed to the Company or any of its Wholly Owned Restricted
Subsidiaries; provided that any subsequent issuance or transfer of any Capital
Stock which results in any such Wholly Owned Restricted Subsidiary ceasing to
be a Wholly Owned Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or another Wholly Owned Restricted
Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness; (iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness, other
than Indebtedness Incurred under clause (i), (ii), (iv) or (vii) of this
paragraph, and any refinancings thereof in an amount not to exceed the amount
so refinanced or refunded (plus premiums, accrued interest, fees and expenses);
provided that Indebtedness the proceeds of which are used to refinance or
refund the Notes or Indebtedness that is pari passu with, or subordinated in
right of payment to, the Notes shall only be permitted under this clause (iii)
if (A) in case the Notes are refinanced in part or the Indebtedness to be
refinanced is pari passu with the Notes, such new Indebtedness, by its terms or
by the terms of any agreement or instrument pursuant to which such new
Indebtedness is outstanding, is expressly made pari passu with, or subordinate
in right of payment to, the remaining Notes, (B) in case the Indebtedness to be
refinanced is subordinated in right of payment to the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is issued or remains outstanding, is
expressly made subordinate in right of payment to the Notes at least to the
extent that the Indebtedness to be refinanced is subordinated to the Notes and
(C) such new Indebtedness, determined as of the date of Incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness
to be refinanced or refunded, and the Average Life of such new Indebtedness is
at least equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded; and provided further that in no event may Indebtedness
of the Company be refinanced by means of any Indebtedness of any Restricted
Subsidiary of the Company pursuant to this clause (iii); (iv) Indebtedness (A)
in respect of performance, surety or appeal bonds provided in the ordinary
course of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; or (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in each case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary of the Company (other than
Guarantees of
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Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness Incurred to finance the cost
(including the cost of design, development, construction, installation or
integration) of inventory or equipment acquired by the Company or a Wholly Owned
Restricted Subsidiary after the Closing Date; (vi) Indebtedness of the Company
not to exceed, at any one time outstanding, two times the Net Cash Proceeds
received by the Company after the Closing Date from the issuance and sale of its
Capital Stock (other than (x) Redeemable Stock, (y) Preferred Stock that
provides for the payment of dividends in cash and (z) Capital Stock issued in
connection with the Preferred Stock Sales) to a Person that is not a Subsidiary
of the Company, less the amount of any Investments made pursuant to clause (vii)
of the second paragraph of the "Limitation on Restricted Payments" covenant;
provided that such Indebtedness does not mature prior to the Stated Maturity of
the Notes and has an Average Life longer than the Notes; and (vii) Indebtedness
(in addition to Indebtedness permitted under clauses (i) through (vi) above) in
an aggregate principal amount outstanding at any time not to exceed $50 million,
less any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded due solely to the result of
fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness otherwise
included in the determination of such particular amount shall not be included
and (2) any Liens granted pursuant to the equal and ratable provisions referred
to in the "Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on its Capital Stock (other than dividends or distributions payable solely in
shares of its or such Restricted Subsidiary's Capital Stock (other than
Redeemable Stock) of the same class held by such holders or in options, warrants
or other rights to acquire such shares of Capital Stock) held by Persons other
than the Company or any of its Wholly Owned Restricted Subsidiaries, (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of (A) the Company or an Unrestricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Person or (B) a Restricted Subsidiary of the Company (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary) or
any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock
of the Company, (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes or (iv) make any Investment, other than a
Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) being collectively "Restricted Payments")
if, at the time of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing, (B) the
Company could not Incur at least $1.00 of Indebtedness under the first paragraph
of the "Limitation on Indebtedness" covenant or (C) the aggregate amount
expended for all Restricted Payments (the amount so expended, if other than in
cash, to be determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) after the
date of the Indenture shall exceed the sum of (1) 50% of the aggregate amount of
the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net
Income is a loss, minus 100%
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of the amount of such loss) (determined by excluding income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an Unrestricted
Subsidiary) accrued on a cumulative basis during the period (taken as one
accounting period) beginning on the first day of the fiscal quarter immediately
following the Closing Date and ending on the last day of the last fiscal quarter
preceding the Transaction Date plus (2) the aggregate Net Cash Proceeds received
by the Company after the Closing Date from the issuance and sale permitted by
the Indenture of its Capital Stock (other than Redeemable Stock) to a Person who
is not a Subsidiary of the Company, or from the issuance to a Person who is not
a Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Redeemable Stock or
any options, warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes) plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds is included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed the amount of Investments previously
made by the Company and any Restricted Subsidiary in such Person.
The foregoing provision shall not be violated by reason of: (i) the
payment of any dividend within 60 days after the date of declaration thereof if,
at said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment to
the Notes including premium, if any, and accrued and unpaid interest, with the
proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the
second paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii)
the repurchase, redemption or other acquisition of Capital Stock of the Company
in exchange for, or out of the proceeds of a substantially concurrent offering
of, shares of Capital Stock (other than Redeemable Stock) of the Company; (iv)
the acquisition of Indebtedness of the Company which is subordinated in right of
payment to the Notes in exchange for, or out of the proceeds of, a substantially
concurrent offering of, shares of the Capital Stock of the Company (other than
Redeemable Stock); (v) payments or distributions to dissenting stockholders
pursuant to applicable law in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture applicable
to mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company; (vi) Investments in an aggregate amount not
to exceed $25 million, in any Person the primary business of which is related,
ancillary or complementary to the businesses of the Company and its Restricted
Subsidiaries on the date of such Investments; (vii) Investments in an aggregate
amount not to exceed the Net Cash Proceeds received by the Company after the
Closing Date from the issuance and sale of its Capital Stock (other than (x)
Redeemable Stock, (y) Preferred Stock that provides for the payment of dividends
in cash and (z) Capital Stock issued in connection with the Preferred Stock
Sales) to a Person that is not a Subsidiary of the Company; provided that the
Investment is made within 12 months after such sale of Capital Stock; (viii) the
purchase, redemption, acquisition, cancellation or other retirement for value of
shares of Capital Stock of the Company to the extent necessary, in the judgment
of the Board of Directors of the Company, to prevent the loss or secure the
renewal or reinstatement of any license or franchise held by the Company or any
Restricted Subsidiary from any governmental agency; and (ix) the repurchase of
the Warrants pursuant to a Repurchase Offer; provided that, except in the case
of clauses (i) and (iv), no Default or Event of Default shall have occurred and
be continuing or occur as a consequence of the actions or payments set forth
therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof and an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof), and the Net Cash Proceeds from any issuance of
Capital Stock referred to in clauses (iii), (iv) and (vii), shall be included in
calculating whether the conditions of clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes, or Indebtedness that is pari passu with
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the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary and existing at the time of
such acquisition, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired; (iv) in the case of clause (iv)
of the first paragraph of this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; or (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent the Company or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell, any shares of Capital
Stock of a Restricted Subsidiary (including options, warrants or other rights to
purchase shares of such Capital Stock) except (i) to the Company or a Wholly
Owned Restricted Subsidiary, (ii) issuances or sales to foreign nationals of
shares of Capital Stock of foreign Restricted Subsidiaries, to the extent
required by applicable law, (iii) if, immediately after giving effect to such
issuance or sale, neither the Company nor any of its Subsidiaries owns any
shares of Capital Stock of such Restricted Subsidiary (including options,
warrants or other rights to purchase shares of such Capital Stock) or (iv) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary and any Investment
in such Person remaining after giving effect to such issuance or sale would have
been permitted to be made under the "Limitation on Restricted Payments" covenant
if made on the date of such issuance or sale.
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Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary that (x) Guarantees the
Indebtedness Incurred under clause (i) of the second paragraph of the
"Limitation on Indebtedness" covenant, (y) existed at the time such Person
became a Restricted Subsidiary and (z) was not Incurred in connection with, or
in contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Stockholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to: (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
between the Company and any of its Wholly Owned Restricted Subsidiaries or
between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable
and customary regular fees to directors of the Company who are not employees of
the Company; (iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company files
a consolidated tax return or with which the Company is part of a consolidated
group for tax purposes; or (v) any Restricted Payments not prohibited by the
"Limitation on Restricted Payments" covenant. Notwithstanding the foregoing, any
transaction covered by the first paragraph of this "Limitation on Transactions
with Stockholders and Affiliates" covenant and not covered by clauses (ii)
through (iv) of this paragraph, the aggregate amount of which exceeds $1.0
million in value, must be approved or determined to be fair in the manner
provided for in clause (i)(A) or (B) above.
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Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to: (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens securing obligations under
commercial bank facilities under clause (i) of the second paragraph of the
"Limitation on Indebtedness" covenant; provided that the aggregate amount of
Indebtedness secured by any such Liens shall not at any time exceed the amount
of Indebtedness permitted to be Incurred under clause (i) of the second
paragraph of the "Limitation on Indebtedness" covenant; (vi) Liens securing
Indebtedness Incurred under clause (v) of the second paragraph of the
"Limitation on Indebtedness" covenant granted after the Closing Date on the
Capital Stock of any Restricted Subsidiary; provided the sole assets of such
Restricted Subsidiary consist of (x) licenses to provide personal communications
services, in the event the inventory or equipment acquired with such
Indebtedness relates to the Company's personal communications services business
or (y) licenses to provide cellular services, in the event the inventory or
equipment acquired with such Indebtedness relates to the Company's cellular
service business; or (vii) Permitted Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback
transaction if: (i) the lease is for a period, including renewal rights, of not
in excess of three years; (ii) the lease secures or relates to industrial
revenue or pollution control bonds; (iii) the transaction is between the Company
and any Wholly Owned Restricted Subsidiary or between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within twelve
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments. In the event and to the extent
that the Net Cash Proceeds received by the Company or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed $5 million, then the Company shall
or shall cause the relevant Restricted Subsidiary to (i) within twelve months
after the date Net Cash Proceeds so received
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exceed $5 million (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or any Restricted
Subsidiary providing a Subsidiary Guarantee pursuant to the "Limitation on
Issuances of Guarantees by Restricted Subsidiaries" covenant described above or
Indebtedness of any other Restricted Subsidiary, in each case owing to a Person
other than the Company or any of its Restricted Subsidiaries or (B) invest an
equal amount, or the amount not so applied pursuant to clause (A), (or enter
into a definitive agreement committing to so invest within twelve months after
the date of such agreement), in capital assets of a nature or type or that are
used in a business (or in a company having capital assets of a nature or type,
or engaged in a business) similar or related to the nature or type of the
property and assets of, or the business of, the Company and its Restricted
Subsidiaries existing on the date of such investment (as determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) and (ii) apply (no later than the end of the
twelve-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such twelve-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes plus, in
each case, accrued interest to the Payment Date.
Commission Reports and Reports to Holders
The Company shall file with the Commission the annual, quarterly and
other reports and other information required by Section 13(a) or 15(d) of the
Exchange Act, regardless of whether such sections of the Exchange Act are
applicable to the Company, and shall mail or cause to be mailed copies of such
reports to Holders and the Trustee within 15 days after the date it would have
been required to file such reports with the Commission had it been subject to
such sections; provided, however, that the copies of such reports mailed to
Holders may omit exhibits, which the Company will supply to any Holder at such
Holder's request.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company shall commence, within 30 days of the occurrence of a
Change of Control, and consummate an Offer to Purchase for all Notes then
outstanding, at a purchase price equal to 101% of the principal amount thereof,
plus accrued interest to the Payment Date.
There can be no assurances that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company, including the February 1996
Notes and the April 1996 Notes, which might be outstanding at the time). The
above covenant requiring the Company to repurchase the Notes will, unless
consents are obtained, require the Company to repay all indebtedness then
outstanding which by its terms would prohibit such Note repurchase, either prior
to or concurrently with such Note repurchase.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) defaults in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) defaults in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a period
of 30 days; provided that a failure to make any of the first six scheduled
interest payments on the Notes on the applicable Interest Payment Date will
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constitute an Event of Default with no grace or cure period; (c) defaults in the
performance or breach of the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company or the failure to make or consummate an Offer to Purchase
in accordance with the provisions of the "Limitation on Asset Sales" covenant or
the "Repurchase of Notes upon a Change of Control" covenant; (d) defaults in the
performance of or breaches any covenant or agreement of the Company in the
Indenture or under the Notes (other than a default specified in clause (a), (b)
or (c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of the Notes; (e) there occurs with respect
to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $5 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $5 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 30 consecutive days;
(h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors; or (i) the Pledge Agreement shall cease to be in full force and
effect or enforceable in accordance with its terms, other than in accordance
with its terms.
If an Event of Default (other than an Event of Default specified in
clause (g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (ii) the
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rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see "--
Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture will require certain officers of the Company to certify,
on or before a date not more than 90 days after the end of each fiscal year,
that a review has been conducted of the activities of the Company and its
Restricted Subsidiaries and the Company's and its Restricted Subsidiaries'
performance under the Indenture and that the Company has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any default
or defaults in the performance of any covenants or agreements under the
Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company on
all of the Notes and under the Indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Company or any Person becoming the successor obligor of the
Notes shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction;
(iv) immediately after giving effect to such transaction on a pro forma basis
the Company, or any Person becoming the successor obligor of the Notes, as the
case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant; provided, however, that
this clause (iv) shall not apply to a consolidation or merger with or into a
Wholly Owned Restricted Subsidiary with a positive net worth; provided that, in
connection with any such merger or consolidation, no consideration (other than
Common Stock in the surviving Person or the Company (or a Person that owns
directly or indirectly all of the Capital Stock of the surviving Person or the
Company immediately following such transaction)) shall be issued or distributed
to the stockholders of the Company; and (v) the Company delivers to the Trustee
an Officers' Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (iii) and (iv)) and Opinion of Counsel, in each case
stating that such consolidation, merger or transfer and such supplemental
indenture complies with this provision and that all conditions precedent
provided for herein relating to such transaction have been complied with;
provided, however, that clauses (iii) and (iv) above do not apply if, in the
good faith determination of
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the Board of Directors of the Company, whose determination shall be evidenced by
a Board Resolution, the principal purpose of such transaction is to change the
state of incorporation of the Company; and provided further that any such
transaction shall not have as one of its purposes the evasion of the foregoing
limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company
will be deemed to have paid and will be discharged from any and all obligations
in respect of the Notes on the 123rd day after the deposit referred to below,
and the provisions of the Indenture will no longer be in effect with respect to
the Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the date of the Indenture such that a ruling is no longer required or (y) a
ruling directed to the Trustee received from the Internal Revenue Service to the
same effect as the aforementioned Opinion of Counsel and (ii) an Opinion of
Counsel to the effect that the creation of the defeasance trust does not violate
the Investment Company Act of 1940 and after the passage of 123 days following
the deposit, the trust fund will not be subject to the effect of Section 547 of
the United States Bankruptcy Code or Section 15 of the New York Debtor and
Creditor Law, (C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or lapse of
time or both would become an Event of Default, shall have occurred and be
continuing on the date of such deposit or during the period ending on the 123rd
day after the date of such deposit, and such deposit shall not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound, and (D) if at such time
the Notes are listed on a national securities exchange, the Company has
delivered to the Trustee an Opinion of Counsel to the effect that the Notes will
not be delisted as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (iii) and (iv) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (d) under "Events of Default" with respect to such covenants
and clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," and
clauses (e) and (f) under "Events of Default" shall be deemed not to be Events
of Default, upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
Defeasance and Certain Other Events of Default. In the event the
Company exercises its option to omit compliance with certain covenants and
provisions of the Indenture with respect to the Notes as described in the
immediately preceding paragraph and the Notes are declared due and payable
because of the occurrence of an
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<PAGE> 110
Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the Trustee will be sufficient to pay
amounts due on the Notes at the time of their Stated Maturity but may not be
sufficient to pay amounts due on the Notes at the time of the acceleration
resulting from such Event of Default. However, the Company will remain liable
for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding Notes; provided,
however, that no such modification or amendment may, without the consent of each
Holder affected thereby, (i) change the Stated Maturity of the principal of, or
any installment of interest on, any Note, (ii) reduce the principal of, or
premium, if any, or interest on, any Note, (iii) change the place or currency of
payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium, if
any, or interest on the Notes or (vii) reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is necessary
for waiver of compliance with certain provisions of the Indenture or for waiver
of certain defaults.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will initially be
represented by one or more permanent global Notes in definitive, fully
registered form without interest coupons (each a "Global Note") and will be
deposited with the Trustee as custodian for, and registered in the name of, a
nominee of DTC. Except in the limited circumstances described below under
"Certificated Notes," owners of beneficial interests in a Global Note will not
be entitled to receive physical delivery of Certificated Notes (as defined
below).
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture.
Payments of the principal of, and interest on, a Global Note will be
made to DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers registered in the names of nominees for such customers. Such payments
will be the responsibility of such participants.
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<PAGE> 111
Transfers between participants in DTC will be effected in the ordinary
way in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken
by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in a Global Note is credited and only in respect of
such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the Notes, DTC will exchange the applicable Global
Note for Certificated Notes, which it will distribute to its participants.
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a clearing corporation within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical movement
of certificates and certain other organizations. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC, it
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective obligation
under the rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary
for the Global Notes, and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes in exchange for the
Global Note. Holders of an interest in a Global Note may receive a Certificated
Note in accordance with DTC's rules and procedures in addition to those provided
for under the Indenture.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the
principal of, premium, if any, or interest on any of the Notes or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a
Default, the Trustee will not be liable, except for the performance of such
duties as are specifically set forth in such Indenture. If an Event of Default
has occurred and is continuing, the Trustee will use the same degree of care and
skill in its exercise as a prudent person would exercise under the circumstances
in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest
under the Trust Indenture Act, it must eliminate such conflict or resign.
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<PAGE> 112
Bankers Trust Company acts as escrow agent in connection with the
Unicel Agreement and may perform other banking services for the Company in the
normal course of business. In addition, Bankers Trust Company acts as trustee
with respect to the April 1996 Notes and the February 1996 Notes.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary sets forth the material federal income tax
consequences of the acquisition, ownership and disposition of the New Notes. It
is based on the relevant provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), accompanying Treasury Regulations, published positions of
the Internal Revenue Service (the "Service"), legislative history, and judicial
decisions as in effect on the date hereof. The existing authorities, however,
are subject to change, and any changes could be applied retroactively and could
cause the tax consequences to vary substantially from those described below.
Furthermore, this summary does not discuss all aspects of federal income
taxation that may be relevant to a particular Holder because of the Holder's
personal investment circumstances or because of the Holder's classification
(such as an insurance company, a dealer in securities, a tax-exempt
organization, a financial institution or a foreign taxpayer) and resulting
special treatment under the federal income tax laws. The summary also does not
discuss aspects of state, local or foreign tax laws and is limited to Holders
who have held, and on the effective date of the Exchange Offer will hold, their
Notes as "capital assets," which would generally be property held for investment
purposes, within the meaning of Section 1221 of the Code, and will not be part
of a straddle, hedge or a conversion transaction within the meaning of Section
1258 of the Code.
THE NEW NOTES
Exchange For Registered Securities. The exchange by a Holder of an Old
Note for a New Note will not constitute a taxable exchange. Each New Note will
be treated as having been originally issued at the time the Old Note exchanged
therefor was originally issued.
Stated Interest. Each Holder of Notes must include as ordinary interest
income the interest attributable to such Notes at the time it accrues or is
received, in accordance with the Holder's accounting method for United States
federal income tax purposes.
Original Issue Discount. The Notes were not issued with original issue
discount for federal income tax purposes.
Sale, Exchange or Retirement. Upon the sale, exchange or retirement of
a Note, a Holder will recognize taxable gain or loss equal to the difference
between the amount realized on the sale, exchange or retirement (excluding, in
the case of a cash basis taxpayer, any amount attributable to accrued interest,
which is taxable as such) and such Holder's adjusted tax basis in such Note. A
Holder's adjusted tax basis in a Note will generally equal the cost of such Note
to such Holder, increased by any accrued interest and market discount previously
included in taxable income by the Holder, and reduced by any amortized bond
premium and any non-interest payments received by the Holder, and, in the case
of an accrual basis taxpayer, by any interest payments received by the Holder,
all with respect to such Note.
Subject to the exception discussed below for market discount, gain or
loss recognized on the sale, exchange or retirement of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if at the time
of sale, exchange or retirement such Note as been held for more than one year.
Amortizable Bond Premium and Market Discount. If a Holder purchased a
Note for an amount that is greater than the amount payable at maturity, such
Holder will be considered to have purchased such Note with "bond premium." The
amount of bond premium is the excess of (i) the Holder's tax basis in such Note,
over (ii) the amount payable at maturity (or on an earlier call date if it
results in a smaller amortizable bond premium). Such Holder may elect (in
accordance with applicable Code provisions) to amortize such premium using a
constant yield method over the remaining term of such Note (or until an earlier
call date if it resulted
108
<PAGE> 113
in a smaller amortizable bond premium) and to offset interest otherwise required
to be included in income in respect of such Note during any taxable year by the
amortized amount of such excess for such taxable year. Such election, once made,
is irrevocable (unless permission is received from the Service) and applies to
all taxable bonds held during the taxable year for which the election is made or
subsequently acquired.
If a Holder purchased a Note for an amount that is less than the stated
redemption price at maturity, such Holder will generally be considered to have
purchased such Note with "market discount." For this purpose, the stated
redemption price at maturity of a Note will equal its principal amount. Market
discount with respect to a Note is the excess of the stated redemption price at
maturity over the amount paid by the Holder for such Note. However, the amount
of market discount will be considered zero if it would otherwise be less than
1/4 of 1 percent of the stated redemption price of such Note at maturity
multiplied by the number of complete years to maturity (after the Holder
acquired such Note). If a Note is subject to the market discount rules, a Holder
will generally be required to (i) treat any gain realized with respect to such
Note as ordinary income to the extent market discount accrued during the period
such Holder held the Note, (ii) possibly treat any payment on such Note (other
than stated interest) as ordinary income to the extent market discount accrued
during the period such Holder held such Note, and (iii) defer the deduction of
all or a portion of the interest expense on any indebtedness incurred or
maintained by such Holder to purchase or carry such Note. If such Note is
disposed of in a nontaxable transaction (other than a nonrecognition transaction
described in Section 1276(c) of the Code), accrued market discount will be
includable as ordinary income to the Holder as if such Holder had sold such Note
at its then fair market value. Market discount will be considered to accrue
ratably during the period from the date of acquisition to the maturity date of
such Note, unless the Holder irrevocably elects (on an instrument-by-instrument
basis) to accrue market discount on the basis of a constant interest rate. A
Holder may elect to include market discount in income currently as it accrues
(on either a ratable or constant yield basis), in which case the rules described
above regarding the treatment of gain realized and the deferral of interest
deductions will not apply. An election to include market discount currently,
once made, will apply to all market discount obligations acquired by the Holder
on or after the first day of the first taxable year to which the election
applies, and may not be revoked without the consent of the Service.
Because of the complexity of the rules relating to bond premium and
market discount, Holders should consult their tax advisors as to the application
of these rules to their particular circumstances and as to the merit of making
any elections in connection therewith.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The 31% "backup" withholding and information reporting requirements
apply to certain payments of principal, premium, if any, and interest on a debt
instrument and to proceeds of the sale or redemption of a debt instrument.
Certain Holders may be subject to backup withholding at a rate of 31% on any
payments made with respect to, and proceeds of disposition of, the Notes. Backup
withholding will apply only if the Holder fails to furnish its taxpayer
identification number (social security number or employer identification
number), to certify that such Holder is not subject to backup withholding, or
otherwise fails to comply with the applicable requirements of the backup
withholding rules. Any amount withheld under these backup withholding rules will
be creditable against the Holder's federal income tax liability. Certain Holders
(including, among others, corporations) are not subject to the backup
withholding and information reporting requirements.
PLAN OF DISTRIBUTION
Except as described below, (i) a broker-dealer may not participate in
the Exchange Offer in connection with a distribution of the New Notes, (ii) such
broker-dealer would be deemed an underwriter in connection with such
distribution and (iii) such broker-dealer would be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transactions. A broker-dealer may, however,
receive New Notes for its own account pursuant to the Exchange Offer in exchange
for Old Notes when such Old Notes were acquired as a result of market-making
activities or other trading activities. Each such broker-dealer must acknowledge
that it will deliver a prospectus meeting the requirements of the
109
<PAGE> 114
Securities Act in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer (other than an "affiliate" of the Company) in connection with
resales of such New Notes. The Company has agreed that for a period of 180 days
after the Exchange Date, it will make this Prospectus, as amended or
supplemented, available to any such broker-dealer for use in connection with any
such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer may be deemed to be an "underwriter" within the meaning of
the Securities Act, and any profit on any such resale of the New Notes and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For period of 180 days after the Exchange Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in a Letter of Transmittal. The Company has agreed to pay all expenses incident
to the Exchange Offer other than commissions or concessions of any brokers or
dealers and transfer taxes and will indemnify the holders of the Old Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
The New Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the New Notes on
any national securities exchange or to seek approval for quotation through any
automated quotation system. The Company has been advised by the Placement Agents
that following completion of the Exchange Offer, the Placement Agents intend to
make a market in the New Notes. However, the Placement Agents are not obligated
to do so, and any market-making activities with respect to the New Notes may be
discontinued at any time without notice. Accordingly, no assurance can be given
that an active public or other market will develop for the New Notes or as to
the liquidity of or the trading market for the New Notes. If a trading market
does not develop or is not maintained, Holders of the New Notes may experience
difficulty in reselling the New Notes or may be unable to sell them at all. If a
market for the New Notes develops, any such market may cease to continue at any
time. If a public trading market develops for the New Notes, future trading
prices of the New Notes will depend on many factors, including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities and other factors, including the financial
conditions of the Company.
LEGAL MATTERS
Certain legal matters in connection with the Notes offered hereby are
being passed upon for the Company by Nelson Mullins Riley & Scarborough, L.L.P.,
Atlanta, Georgia.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996
and 1995, and the consolidated statements of operations, cash flows and changes
in stockholders' equity for each of the three years in the period ended December
31, 1996 have been audited by Arthur Andersen LLP, independent certified public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance and upon the authority of such firm as experts in
accounting and auditing in giving said reports.
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<PAGE> 115
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, is required to file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC" or the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of the reports, proxy statements and other
information can be obtained from the Public Reference Section of the Commission,
Washington, D.C.20549, at prescribed rates. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's web site is http://www.sec.gov. The Common Stock
of the Company is traded on the Nasdaq Stock Market (Symbol: PTEL), and such
reports, proxy statements and other information concerning the Company also can
be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-4 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the New Notes offered pursuant to the Exchange Offer. For the
purposes hereof, the term "Registration Statement" means the original
Registration Statement and any and all amendments thereto. In accordance with
the rules and regulations of the Commission, this Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information concerning the Company and the
New Notes offered in the Exchange Offer, reference is made to the Registration
Statement and the exhibits and schedules filed therewith, which may be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Commission and its regional offices at the locations listed above. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.
The Indenture requires the Company to file with the Commission all
reports and other information required by Sections 13(a) or 15(d) of the
Exchange Act, regardless of whether such sections are applicable to the Company.
The Company will supply the Trustee under the Indenture and each holder of
Notes, without cost to such holder, copies of such reports and other
information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission pursuant to the Exchange Act are incorporated by reference in this
Prospectus:
(a) Annual Report on Form 10-K for the year ended December 31, 1996;
(b) Current Report on Form 8-K dated January 8, 1997;
(c) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997;
(d) Current Report on Form 8-K dated May 12, 1997; and
(e) Current Report on Form 8-K dated July 1, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the Exchange Offer shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of the
filing of such
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<PAGE> 116
reports and documents. The Company will provide a copy of any or all of such
documents (exclusive of exhibits unless such exhibits are specifically
incorporated by reference therein), without charge, to each person to whom this
Prospectus is delivered, upon written or oral request to: Powertel, Inc., 1233
O.G. Skinner Drive, West Point, Georgia 31833 (telephone (706) 645-9958)
Attention: Lorena G. Turner -- Assistant Secretary.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1996 and
1995...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 ......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Condensed Consolidated Balance Sheet for the Three Months
Ended March 31, 1997 (Unaudited).......................... F-23
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996 (Unaudited).... F-24
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 (Unaudited).... F-25
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-26
</TABLE>
F-1
<PAGE> 118
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
InterCel, Inc.:
We have audited the accompanying consolidated balance sheets of INTERCEL,
INC. and subsidiaries (a Delaware corporation) as of December 31, 1996 and 1995
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the years ended December 31, 1996, 1995 and 1994.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InterCel, Inc. and its
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for the years ended December 31, 1996, 1995 and
1994 in conformity with generally accepted accounting principles.
As more fully discussed in Note 2 of Notes to Consolidated Financial
Statements, effective January 1, 1996, the Company changed its method of
accounting for promotional costs.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 3, 1997 (except for Note 14, as to
which the date is March 13, 1997)
F-2
<PAGE> 119
INTERCEL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents.................................................. $185,525 $ 630
Short-term Investments..................................................... 75,659 0
Accounts Receivable, net of allowance for doubtful
accounts of $217 and $249 at
December 31, 1996 and 1995, respectively................................. 8,228 4,253
Inventories (Note 2)....................................................... 7,805 831
Prepaid Expenses and Other................................................. 12,642 564
Current Portion of Deferred Income Taxes (Note 7).......................... 0 270
-------- -------
289,859 6,548
-------- -------
PROPERTY AND EQUIPMENT, AT COST (Note 2):
Land....................................................................... 1,222 1,001
Building and Towers........................................................ 81,901 5,995
Equipment.................................................................. 74,419 15,579
Furniture and Fixtures..................................................... 4,572 618
Assets Under Construction.................................................. 99,137 81
-------- -------
261,251 23,274
Less Accumulated Depreciation.............................................. (9,982) (5,208)
-------- -------
251,269 18,066
-------- -------
OTHER ASSETS:
Licenses, net of accumulated amortization of $813 at
December 31, 1996......................................................... 365,964 0
Goodwill, net of accumulated amortization of $2,058 and
$1,445 at December 31, 1996 and 1995, respectively........................ 22,670 23,283
Investment in Powertel...................................................... 0 19,224
Deferred Offering Costs, net of accumulated amortization
of $1,251 and $0 at December 31, 1996 and 1995, respectively.............. 13,687 1,621
Deferred Income Taxes (Note 7).............................................. 2,190 1,405
Deferred Charges and Other, net of accumulated
amortization of $318 and $4,661 at
December 31, 1996 and 1995, respectively (Note 2)....... ................. 1,478 4,183
-------- -------
405,989 49,716
-------- -------
$947,117 $74,330
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable-Trade...................................................... $ 7,723 $ 883
Advance Billings and Customer Deposits...................................... 1,352 828
Accrued Construction Costs.................................................. 15,214 0
Accrued Taxes Other Than Income............................................. 3,609 322
Accrued Compensation........................................................ 2,003 896
Accrued Other............................................................... 3,491 2,613
Current Portion of Long-Term Obligations (Note 4)........................... 118 29
-------- -------
33,510 5,571
-------- -------
LONG-TERM OBLIGATIONS (Note 4):
12% Senior Discount Notes due February 2006................................. 216,465 0
12% Senior Discount Notes due May 2006...................................... 217,345 0
Vendor Financing Agreement.................................................. 69,514 0
Credit Facility............................................................. 0 24,602
Note Payable to ITC Holding Company......................................... 0 3,500
Note Payable to Powertel.................................................... 0 901
Other....................................................................... 741 408
-------- -------
504,065 29,411
-------- -------
COMMITMENTS AND CONTINGENCIES (Notes 9 & 14)
MINORITY INTEREST IN SUBSIDIARY (Note 2)...................................... 2,535 2,674
-------- -------
STOCKHOLDERS' EQUITY (Note 5):
Series A Convertible Preferred Stock, $.01 Par Value;
100,000 Shares Authorized, 100,000 and 0 Shares Issued and
Outstanding at December 31, 1996 and 1995, respectively................... 1 0
Series B Convertible Preferred Stock; $.01 Par Value;
100,000 Shares Authorized, 100,000 and 0 Shares Issued and
Outstanding at December 31, 1996 and 1995, respectively................... 1 0
Common Stock, $.01 Par Value; 55,000,000 Shares
Authorized, 26,863,643 and 10,011,603 Shares Issued and Outstanding at
December 31, 1996 and 1995, respectively................................. 269 100
Paid-In Capital............................................................. 430,053 32,440
(Accumulated Deficit) Retained Earnings..................................... (22,766) 4,845
Deferred Compensation....................................................... (206) (371)
Treasury Stock at cost -- 52,483 and 52,283 shares at
December 31, 1996 and 1995, respectively.................................. (345) (340)
-------- -------
407,007 36,674
-------- -------
$947,117 $74,330
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE> 120
INTERCEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
REVENUES AND SALES (Note 2):
Monthly Access Revenue.................................... $ 15,055 $12,244 $ 8,512
Airtime Revenue........................................... 6,197 4,938 3,981
Roaming Revenue........................................... 6,680 5,541 4,404
Toll Revenue.............................................. 2,675 2,026 1,483
Installation and Connection Revenue....................... 683 394 395
Other Revenue............................................. 585 241 128
-------- ------- -------
Total Service Revenues............................ 31,875 25,384 18,903
Equipment Sales........................................... 7,250 3,928 2,859
-------- ------- -------
Total Revenues and Sales.......................... 39,125 29,312 21,762
-------- ------- -------
OPERATING EXPENSES:
Cost of Services.......................................... 5,811 2,394 1,921
Cost of Equipment Sold.................................... 11,653 3,127 2,391
Operations................................................ 9,927 3,596 2,722
Selling, General and Administrative....................... 30,264 8,498 7,056
Depreciation and Amortization............................. 10,101 5,101 3,673
-------- ------- -------
Total Operating Expenses.......................... 67,756 22,716 17,763
-------- ------- -------
OPERATING (LOSS) INCOME..................................... (28,631) 6,596 3,999
-------- ------- -------
OTHER (INCOME) EXPENSE:
Interest (Income) Expense................................. (3,175) 1,657 635
Loss on Equity Investments................................ 34 133 0
Minority Interest in Cellular Partnership................. (474) (130) (124)
Miscellaneous Expense (Income)............................ 1,666 (298) 76
-------- ------- -------
Total Other (Income) Expense...................... (1,949) 1,362 587
-------- ------- -------
(LOSS) INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE............................ (26,682) 5,234 3,412
INCOME TAX (BENEFIT) PROVISION.............................. (1,654) 2,230 1,535
-------- ------- -------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...................................... (25,028) 3,004 1,877
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... (2,583) 0 0
-------- ------- -------
NET (LOSS) INCOME................................. $(27,611) $ 3,004 $ 1,877
======== ======= =======
PER SHARE DATA:
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...................................... ($ 1.00) $ 0.29 $ 0.19
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... ($ 0.10) $ 0.00 $ 0.00
-------- ------- -------
NET (LOSS) INCOME PER COMMON SHARE.......................... ($ 1.10) $ 0.29 $ 0.19
======== ======= =======
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING..... 25,087 10,281 9,765
======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE> 121
INTERCEL, INC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON CONVERTIBLE
STOCK PREFERRED TOTAL
$.01 PAR STOCK $.01 PAID-IN RETAINED DEFERRED TREASURY STOCKHOLDERS'
VALUE PAR VALUE CAPITAL EARNINGS COMPENSATION STOCK EQUITY
-------- ----------- -------- -------- ------------ -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993......... $ 62 $0 $ 5,957 $ (36) $ 0 $ 0 $ 5,983
Issuance of Common Stock Under
Stock Options.................... 0 0 51 0 0 0 51
Issuance of Common Stock Connected
with Unicel Acquisition.......... 19 0 12,295 0 0 0 12,314
Purchase of 52,283 Shares of Common
Stock............................ 0 0 0 0 0 (340) (340)
Issuance of Common Stock, Net of
Issuance Expenses................ 18 0 13,471 0 0 0 13,489
Net Income......................... 0 0 0 1,877 0 0 1,877
---- -- -------- -------- ----- ----- --------
BALANCE, DECEMBER 31, 1994......... 99 0 31,774 1,841 0 (340) 33,374
Issuance of Common Stock Under
Stock Options.................... 1 0 171 0 0 0 172
Issuance of Common Stock Under
Restricted Stock Agreement....... 0 0 495 0 (495) 0 0
Amortization of Deferred
Compensation..................... 0 0 0 0 124 0 124
Net Income......................... 0 0 0 3,004 0 0 3,004
---- -- -------- -------- ----- ----- --------
BALANCE, DECEMBER 31, 1995......... 100 0 32,440 4,845 (371) (340) 36,674
Issuance of Common Stock Under
Stock Options.................... 1 0 181 0 0 0 182
Issuance of Common Stock, in
Connection with Powertel Business
Combination (Note 3)............. 97 0 129,943 0 0 0 130,040
Issuance of Common Stock, Net of
Issuance Expenses (Note 5)....... 71 0 109,919 0 0 0 109,990
Issuance of Warrants (Note 4)...... 0 0 6,092 0 0 0 6,092
Issuance of Series A Convertible
Preferred Stock, Net of Issuance
Expenses (Note 5)................ 0 1 75,739 0 0 0 75,740
Issuance of Series B Convertible
Preferred Stock, Net of Issuance
Expenses (Note 5)................ 0 1 75,739 0 0 0 75,740
Purchase of Treasury Shares........ 0 0 0 0 0 (5) (5)
Amortization of Deferred
Compensation..................... 0 0 0 0 165 0 165
Net Loss........................... 0 0 0 (27,611) 0 0 (27,611)
---- -- -------- -------- ----- ----- --------
BALANCE, DECEMBER 31, 1996......... $269 $2 $430,053 $(22,766) $(206) $(345) $407,007
==== == ======== ======== ===== ===== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 122
INTERCEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS (USED IN) PROVIDED FROM OPERATING ACTIVITIES:
Net (Loss) Income........................................... $ (27,611) $ 3,004 $ 1,877
Adjustments to Reconcile Net (Loss) Income to Net Cash
(Used in) Provided From Operating Activities --
Minority Interest in Loss of Subsidiary................... (474) (130) (124)
Cumulative Effect of Change in Accounting Principle....... 2,583 0 0
Loss on Equity Investment................................. 34 133 0
Bond Accretion............................................ 12,089 0 0
Amortization of Offering Costs of Notes................... 1,251 0 0
Depreciation and Amortization............................. 10,101 5,101 3,673
Deferred Compensation -- Restricted Stock................. 165 124 0
Deferred Taxes, Net....................................... (1,654) 605 1,423
Changes in Assets and Liabilities:
Increase in Accounts Receivable......................... (3,975) (1,133) (425)
Increase in Inventories................................. (6,974) (187) (185)
Increase in Other Assets................................ (12,423) (3,655) (1,995)
Increase (Decrease) in Accounts Payable, Accrued
Expenses and Other Current Liabilities................ 11,633 1,778 (1)
--------- -------- --------
Net Cash (Used in) Provided From Operating Activities..... (15,255) 5,640 4,243
--------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital Expenditures........................................ (233,551) (7,661) (2,866)
Increase in Accrued Construction Costs...................... 15,214 0 0
Short-Term Investments...................................... (75,659) 0 0
Cash Acquired in Powertel Business Combination.............. 15,353 0 0
Acquisition of Atlanta License.............................. (195,242) 0 0
Other License Costs......................................... (15,199) 0 0
Cash Paid for Unicel Acquisition, Net of Cash Acquired...... 0 0 (4,062)
Investment in Powertel...................................... 0 (16,975) (2,382)
Investment in RTFC Subordinated Capital Certificates........ 0 1,841 0
--------- -------- --------
Net Cash Used In Investing Activities..................... (489,084) (22,795) (9,310)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Sale of Common Stock, Net of Offering
Expenses.................................................. 109,990 0 13,540
Proceeds From Sale of Preferred Stock, Net of Offering
Expenses.................................................. 151,480 0 0
Proceeds From Issuance of Bonds and Warrants -- February
Offering, Net............................................. 192,150 0 0
Proceeds From Issuance of Bonds -- April Offering, Net...... 193,152 0 0
Borrowings Under Vendor Financing Agreement................. 69,514 0 0
Repayments of Loan Agreements............................... (24,602) (2,183) (42,271)
(Repayments to) Advances From Affiliates.................... (3,500) (1,460) 5,051
Proceeds from Other Debt, Net............................... 162 21,723 28,432
Other, Net.................................................. 888 (802) 452
--------- -------- --------
Net Cash Provided From Financing Activities............... 689,234 17,278 5,204
--------- -------- --------
NET INCREASE IN CASH........................................ 184,895 123 137
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 630 507 370
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 185,525 $ 630 $ 507
========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid During the Year for Interest, Net of Amounts
Capitalized............................................... $ 2,005 $ 1,296 $ 574
Cash Paid During the Year for Income Taxes.................. 103 1,557 712
Noncash Investing and Financing Activities:
Fair Value of Assets Acquired in Powertel Business
Combination............................................. 130,041 0 0
Total Capitalized Interest................................ 29,039 0 0
Fair Value of Common Stock Issued in Unicel Acquisition... 0 0 12,314
Fair Value of Common Stock Purchased...................... (5) 0 (340)
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 123
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
1. ORGANIZATION AND NATURE OF BUSINESS
InterCel, Inc. (the "Company") was incorporated in Delaware in April 1991.
The Company operates a cellular telephone system in contiguous portions of four
rural service areas ("RSAs") in eastern Alabama and western Georgia, as well as
the Bangor, Maine metropolitan service area ("MSA") and Maine RSA 2 and RSA 3
(the "Company Service Area"). The Company Service Area has a population of
approximately 807,700 people (according to a 1996 industry publication) and
covers approximately 100 miles of Interstate Highway 85 and 40 miles of
Interstate Highway 185 in the Alabama/Georgia market as well as over 200 miles
of Interstate Highway 95 and major portions of U.S. Route 1 along the coastline
in the Maine market.
On January 31, 1994, the Company acquired (the "Unicel Acquisition") Unity
Cellular Systems, Inc. ("Unicel"). Unicel is the wireline provider of cellular
telephone service for the Bangor, Maine MSA and for Maine RSA 3 (which includes
Augusta, the state capital), and is the managing partner of (with a 51% interest
in) the Maine RSA 2 Cellular Partnership (the "Northern Maine Partnership" or
the "Partnership"), a partnership which is the wireline provider of cellular
service in Maine RSA 2. The Bangor MSA and Maine RSA 2 and RSA 3 constitute a
"cluster" of contiguous properties that have a population of approximately
512,300 people (according to industry publications). On December 23, 1996, the
Company entered into an asset purchase agreement to sell its interest in Unicel
and the Northern Maine Partnership. See Note 13.
In addition to the existing cellular properties, the Company had a 13.396%
ownership interest in Powertel PCS Partners, L.P. ("Powertel"), a partnership
formed to pursue licenses in the Federal Communication Commission's personal
communications services ("PCS") auction. On February 7, 1996, pursuant to a
Business Combination Agreement dated August 23, 1995, among the Company,
Powertel, and the owners of Powertel, such owners (other than the Company)
exchanged their ownership interests in Powertel for an aggregate of 9,686,410
shares of the Company's common stock in a private placement (Note 3).
On June 28, 1996, the Company acquired the PCS license for the Atlanta
major trading area ("MTA") from GTE Mobilnet, Inc. for approximately $195
million. The Company now holds PCS licenses to provide service in contiguous
parts of ten southeastern states in the four MTAs of Atlanta, Georgia;
Jacksonville, Florida; Memphis, Tennessee/Jackson, Mississippi; and Birmingham,
Alabama. Additionally, in January 1997, the Company was the winning bidder for
additional PCS licenses in 13 Basic Trading Areas ("BTAs") in Tennessee,
Kentucky and Indiana (Note 14). These MTAs and BTAs cover approximately 24.3
million persons (according to industry publications) and provide the Company
with one of the largest contiguous PCS footprints in the southeastern United
States. The Company is currently providing PCS in 16 markets within its service
territory and is in the process of developing and constructing the PCS systems
in numerous other markets.
2. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are prepared on the accrual basis of
accounting and include the accounts of the Company and all majority-owned
subsidiaries. All significant intercompany balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 124
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SOURCE OF SUPPLIES
The Company relies on local telephone companies and other companies to
provide certain communications services. Although management feels alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain multiple vendors for each
required product, its inventory and equipment, which are important components of
its operations, are each currently acquired from one to three sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it builds
out its network infrastructure and sells services and equipment, then delays and
increased costs in the expansion of the Company's network infrastructure or
losses of potential customers could result, which would affect operating results
adversely.
PRESENTATION
Certain prior year amounts have been reclassified to conform to the current
year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, demand deposits, and
short-term investments with original maturities of three months or less.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair value.
INVENTORIES
The Company maintains inventories for resale of wireless handsets and
accessory parts (i.e., antennae, batteries, cable, etc.). Inventory is valued at
the lower of average cost (which approximates first-in, first-out) or market.
INVESTMENTS
Investments having maturities of more than three months, but less than one
year are categorized as held-to-maturity. Accordingly, they are carried at cost,
without recognition of gains or losses deemed to be temporary, because the
Company has both the intent and ability to hold these investments to maturity.
At December 31, 1996, the fair value of these investments approximated cost.
PROPERTY AND DEPRECIATION
Property and equipment are recorded at cost, including certain engineering
costs. The Company records depreciation using the straight-line method over the
estimated useful lives of the assets, which are 10 to 20 years for towers,
buildings, and improvements; 3 to 10 years for equipment; and 5 to 10 years for
furniture and fixtures. The Company's policy is to remove the cost and
accumulated depreciation of retirements from the accounts and recognize the
related gain or loss upon the disposition of assets. Such gains and losses were
not material for any period presented.
F-8
<PAGE> 125
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ASSETS UNDER CONSTRUCTION
Expenditures to construct the Company's cellular network and PCS system are
recorded as assets under construction until the assets are placed in service.
When the assets are placed in service, they are transferred to the appropriate
property and equipment category and depreciated.
The Company capitalizes interest incurred on borrowings related to assets
under construction. Of the total 1996 capitalized interest of $29.0 million,
$5.3 million was attributed to property, plant and equipment in 1996, of which
$2.9 million is included in assets under construction at December 31, 1996.
There was no capitalized interest in 1995 and 1994.
LICENSES
Licenses, which consist of costs incurred to acquire PCS licenses,
including capitalized interest of $23.7 million, and certain microwave
relocation costs, are stated at cost less accumulated amortization and are being
amortized using the straight line method over 40 years.
GOODWILL
On January 31, 1994, the Company consummated the Unicel Acquisition. In
conjunction with this Acquisition, the Company recorded goodwill of $24.7
million due to the purchase price exceeding the value of the net assets
acquired.
Goodwill is stated at cost less accumulated amortization and is amortized
using the straight-line method over 40 years.
DEFERRED OFFERING COSTS
Through December 31, 1995, the Company had deferred $1.6 million of
expenses associated with the offering of its common stock and the concurrent
offering of units consisting of 12% Senior Discount Notes due February 2006 and
warrants (the "February Offerings") (Notes 4 and 5). During 1996, the Company
recorded an additional $20.8 million of expenses related to the February
Offerings, as well as the April offering of 12% Senior Discount Notes due May
2006 (the "April Offering") (Note 5). Upon completion of the February and April
Offerings, costs of $7.5 million related to the common stock offering were
netted against the proceeds from such offering. Net costs of $14.9 million
related to the February Offering and April Offering will be amortized over the
life of the related notes (10 years).
During 1996, the Company amortized $1.3 million related to these deferred
Offering costs.
DEFERRED CHARGES AND OTHER
The Company offers certain promotional programs under which a customer can
receive either a free cellular telephone, a substantial discount toward a
cellular telephone, or a credit toward future monthly service in return for
signing a noncancelable cellular telephone service agreement for a term of one
to three years. Should a customer cancel service prior to expiration of his
service agreement or be disconnected for nonpayment, the customer becomes liable
to the Company for the full original credit issued under this program. It is the
Company's policy to establish a full reserve for receivables that arise as a
result of such cancellations.
The Company had deferred costs associated with these programs and amortized
such costs over the specific terms of the contracts. Effective January 1, 1996,
the Company changed its method of accounting for these deferred promotional
costs to immediate expensing as incurred to better align itself with industry
practice and to correspond with its treatment of similar promotional costs for
PCS. The cumulative effect of
F-9
<PAGE> 126
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
this change in accounting principle was to increase the net loss for the year
ended December 31, 1996 by $2.6 million or $(0.10) per share.
Deferred charges also includes certain other investments and deferred
software costs. Amortization of deferred charges is included in depreciation and
amortization in the accompanying statements of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the value assigned to long-lived assets,
including property, goodwill, deferred charges, licenses and deferred offering
costs, to determine if any impairments are other than temporary. Management
believes the long-lived assets in the accompanying balance sheet are
appropriately valued.
MINORITY INTEREST
Minority Interest represents the 49% ownership interest in the Northern
Maine Partnership.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Effective in 1996, the Company adopted the disclosure
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") (Note 6) for all options granted
subsequent to January 1, 1995. SFAS 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. SFAS 123 requires that companies which do not
choose to account for stock-based compensation as prescribed by this statement
shall disclose the pro forma effects on earnings and earnings per share as if
SFAS 123 had been adopted. Additionally, certain other disclosures are required
with respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS 123.
REVENUE RECOGNITION
The Company earns revenues by providing cellular and PCS service to both
local subscribers and subscribers of other cellular carriers traveling
("roaming") through the company service area as well as from sales of cellular
and PCS equipment. Service revenue from local subscribers consists of the base
monthly service fee and airtime revenue. Generally, base monthly service fees
are billed one month in advance, but are recognized when earned. The Maine
Market has approximately 7% of its monthly access fees being billed in arrears,
after it is earned. Airtime revenues are recognized when service is provided.
Roamer revenues consist of the airtime fees charged to certain nonsubscribers
for use of the cellular network while traveling in the service area. Roamer
revenues are recognized when the service is rendered.
Long-distance revenues ("toll revenues") are charged to both local and
roamer users and are recognized when service is provided. Equipment sales are
recognized upon delivery of the equipment to the customer. Other revenues
consist of equipment installation charges and connection fees and are recognized
when earned.
NET INCOME (LOSS) PER SHARE
Net income per share for 1995 and 1994 was computed using the weighted
average number of shares outstanding, adjusted for common stock equivalents. Net
loss per share for 1996 does not include the impact of common stock equivalents
as their effect would be antidilutive.
F-10
<PAGE> 127
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. POWERTEL BUSINESS COMBINATION AND ATLANTA PCS LICENSE ACQUISITION
On February 7, 1996, pursuant to a Business Combination Agreement dated
August 23, 1995, among the Company, Powertel, and the owners of Powertel, such
owners (other than the Company) exchanged their ownership interests in Powertel
for an aggregate of 9,686,410 shares of the Company's common stock in a private
placement. The combination was recorded under the purchase method of accounting;
accordingly, the results of operations of Powertel for the period from February
7, 1996, are included in the accompanying consolidated financial statements. The
purchase price of $130.0 million has been allocated to assets acquired and
liabilities assumed based on fair market value at the date of acquisition, as
determined by an independent appraisal, and is summarized as follows (in
millions):
<TABLE>
<S> <C>
Licenses.................................................... $113.4
Cash........................................................ 15.4
Other, net.................................................. 1.2
------
Total..................................................... $130.0
======
</TABLE>
On June 28, 1996, pursuant to an asset purchase agreement, dated as of
March 5, 1996, between InterCel Atlanta Licenses, Inc., a wholly-owned
subsidiary of the Company, and GTE Mobilnet Inc., the Company purchased GTE
Mobilnet Inc.'s license to provide PCS in the Atlanta MTA for approximately
$195.2 million.
The following unaudited pro forma condensed consolidated statements of
operations (in millions, except per share data) assume the combination and
acquisition of the Atlanta MTA license occurred at the beginning of each period
presented. In the opinion of management, all adjustments necessary to present
fairly such unaudited pro forma condensed statement of operations have been
made.
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Revenues.................................................. $ 39.1 $29.3
Net (Loss) Income......................................... (27.8) 2.1
Net (Loss) Income per Share............................... $(1.04) $0.06
</TABLE>
4. LONG-TERM OBLIGATIONS
Long-Term Obligations consist of the following (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
12% Senior Discount Notes due February 2006................. $216.5 $ 0.0
12% Senior Discount Notes due May 2006...................... 217.3 0.0
Vendor Financing Agreement.................................. 69.5 0.0
Credit Facility............................................. 0.0 24.6
Note Payable to ITC Holding Company, Inc. ("ITC")........... 0.0 3.5
Other....................................................... 0.9 1.3
------ -----
504.2 29.4
Less current portion........................................ 0.1 0.0
------ -----
Long-term obligations....................................... $504.1 $29.4
====== =====
</TABLE>
On February 1, 1996, the Company issued 35,747 units consisting of $357
million principal amount at maturity of the Company's 12% Senior Discount Notes
due 2006 (the "February Notes") and 1,143,904 warrants to purchase an equal
number of shares of the Company's common stock at an exercise price of $18.15
per share (Note 5), subject to adjustment (the "Unit Offering") for
approximately $200 million gross proceeds. The net proceeds were used to repay
all outstanding borrowings under the Credit Facility and the
F-11
<PAGE> 128
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
note payable to ITC, as well as to partially finance the buildout and operating
costs of the PCS system for the Birmingham, Jacksonville and Memphis MTAs. The
February Notes may be redeemed at any time on or after February 1, 2001, at the
option of the Company, at 106% of their principal amount at maturity, plus
accrued interest, declining to 100% of their principal amount at maturity, plus
accrued interest, on and after February 1, 2003. In addition, at any time prior
to February 1, 1999, up to 25% of the aggregate principal amount at maturity of
the February Notes may be redeemed from the proceeds of one or more public
equity offerings at 112% of their accreted value on the redemption date,
provided that after any such redemption at least $268.1 million aggregate
principal amount at maturity of the February Notes remain outstanding.
The February Notes will fully accrete to face value on February 1, 2001, at
which time they will bear interest, payable in cash, at a rate of 12% per annum
on each February 1 and August 1, commencing August 1, 2001.
On April 16, 1996, the Company issued $360 million aggregate principal
amount at maturity of the Company's 12% Senior Discount Notes due 2006 (the
"April Notes") for approximately $200 million gross proceeds in a public
offering. The net proceeds were used to partially finance the development,
construction and operating costs associated with the Company's PCS system. The
April Notes may be redeemed at any time on or after May 1, 2001, at the option
of the Company, at 106% of their principal amount at maturity, plus accrued
interest, declining to 100% of their principal amount at maturity, plus accrued
interest, on and after May 1, 2003. In addition, at any time prior to May 1,
1999, up to 25% of the aggregate principal amount at maturity of the April Notes
may be redeemed from the proceeds of one or more public equity offerings at 112%
of their accreted value on the redemption date, provided that after any such
redemption at least $270 million aggregate principal amount at maturity of the
April Notes remain outstanding.
The April Notes will fully accrete to face value on May 1, 2001, at which
time they will bear interest, payable in cash, at a rate of 12% per annum on
each May 1 and November 1, commencing November 1, 2001.
Unamortized original issue discount on the February Notes and April Notes
are being amortized using effective interest rates of 12.35% and 12%,
respectively. During 1996, total accretion of the original issue discount was
$39.6 million, of which $27.5 million was capitalized and $12.1 million is
included in interest (income) expense in the accompanying consolidated
statements of operations.
The February Notes and the April Notes contain certain restrictive
covenants including, but not limited to, restrictions related to additional
indebtedness, restricted payments, transactions with related parties and asset
sales. Upon a change in control (as defined in the February Notes and the April
Notes), the Company will be required to make an offer to purchase the February
Notes and the April Notes at a purchase price equal to 101% of their accreted
value, plus accrued interest, to the date of purchase.
On March 4, 1996, the Company entered into a $125 million credit agreement
(the "Vendor Financing Agreement") with Ericcson, Inc. regarding the purchase of
and vendor financing for PCS equipment and services. Under the terms of the
agreement, advances are made as requested by the Company to finance purchases
from Ericcson pursuant to the terms of the related equipment purchase agreement
(Note 9). The aggregate amount of the advances made in each calendar year will
be repaid in twenty equal quarterly installments, commencing on the last day of
the first calendar quarter to occur three years after the end of the calendar
year in which the advances were made and continuing for a period of five years
thereafter, with the last installment in an amount necessary to repay in full
the remaining unpaid principal amount of all the cumulative advances. On October
31, 1996, the Company requested and Ericcson agreed to increase the total
borrowing capacity under the agreement to $165 million. The Company had
borrowings outstanding under this line of credit of $69.5 million at December
31, 1996.
The interest rate under the Vendor Financing Agreement is based on the
applicable Eurodollar Rate plus 3% (8.563% at December 31, 1996) but can be
converted to a fluctuating interest rate per annum based on the higher of
Citibank N.A.'s base rate or .5% above the Federal Funds Rate, plus 1%, at the
discretion of the
F-12
<PAGE> 129
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lender. Interest on the unpaid principal amount of each advance is payable in
arrears on the last day of each calendar quarter.
The Vendor Financing Agreement is secured by all the equipment purchased
with the proceeds therefrom, subject to the terms of the equipment purchase
agreement, as well as a pledge of the stock of the Company's subsidiaries that
hold the PCS licenses, except for the licenses for the BTAs. The Vendor
Financing Agreement contains certain restrictive covenants including, but not
limited to, restrictions on indebtedness, asset sales, and dividends, as well as
maintenance of certain financial ratios and minimums. The Company was in
compliance with all such covenants as of December 31, 1996.
In connection with the Unicel Acquisition in January 1994, the Company
entered into a new $30 million revolving credit facility (the "Credit Facility")
with the National Bank for Cooperatives to replace the Company's and Unicel's
previous debt facilities. All amounts borrowed under this facility were the
obligation of the Company. Under the terms of the Credit Facility, the maximum
amount available was reduced by $2 million on the first anniversary of the
closing date of the Facility. On the second anniversary of the closing date of
the Credit Facility (the "Termination Date"), the Credit Facility was to convert
to an eight-year secured term loan ($26.5 million maximum) that would mature on
the eighth anniversary of the Termination Date. However, all borrowings under
the Credit Facility were repaid in connection with the Powertel business
combination (Note 3) with proceeds from the 1996 stock offering and Unit
Offering.
On March 10, 1994, the Company entered into a revolving lending arrangement
with its former parent, ITC, under which ITC could lend to the Company from time
to time amounts representing ITC's excess available cash, pursuant to which $9.4
million of outstanding borrowings under the Company's credit facility were
repaid by ITC and loaned back to the Company. The loan from ITC, which was
unsecured and prepayable (without penalty) at any time, bore interest at the
same rates that the Company would have been paying had the amounts remained
outstanding under the Credit Facility. All borrowings under this lending
arrangement were repaid in connection with the Powertel business combination
(Note 3) with proceeds from the 1996 stock offering and the Unit Offering.
The carrying value of the April Notes, the February Notes, including the
related warrants, and Vendor Financing Agreement approximated market value at
December 31, 1996.
Scheduled maturities of long-term obligations are as follows (in millions):
<TABLE>
<S> <C>
1997........................................................ $ 0.1
1998........................................................ 0.1
1999........................................................ 0.1
2000........................................................ 13.0
2001........................................................ 13.9
Thereafter.................................................. 477.0
------
Total $504.2
======
</TABLE>
The indentures relating to the February Notes and the April Notes (the
"Indentures") and Vendor Financing Agreement contain certain restrictive
covenants, and any additional financing agreements may contain additional
restrictive covenants. The restrictions contained in the Indentures and the
Vendor Financing Agreement will affect, and in some cases will significantly
limit or prohibit, among other things, the ability of the Company to incur
indebtedness, make prepayments of certain indebtedness, pay dividends, make
investments, engage in transactions with stockholders and affiliates, issue
capital stock, create liens, sell assets and engage in mergers and
consolidations. If the Company fails to comply with the restrictive covenants in
the Indentures, the Company's obligation to repay the February Notes and the
April Notes may be accelerated. However, the limitations set forth in the
Indentures are subject to a number of important qualifications and exceptions.
In particular, while the Indentures restrict the Company's ability to incur
additional indebtedness
F-13
<PAGE> 130
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by requiring compliance with specified leverage ratios, they permit the Company
and its subsidiaries to incur an unlimited amount of additional indebtedness to
finance the acquisition of inventory or equipment and up to $25 million of
additional indebtedness under one or more revolving credit or working capital
facilities and in each case to secure such indebtedness. In addition to the
restrictive covenants described above, the Vendor Financing Agreement requires
the Company to maintain certain financial ratios. The failure of the Company and
its subsidiaries to maintain such ratios would constitute events of default
under the Vendor Financing Agreement, notwithstanding the ability of the Company
to meet its debt service obligations. An event of default under the Vendor
Financing Agreement would allow the lender thereunder to accelerate the maturity
of such indebtedness. In such event, a significant portion of the Company's
other indebtedness (including the February Notes and the April Notes) may become
immediately due and payable.
5. STOCKHOLDERS' EQUITY
In February 1996, the Company issued 7,124,322 shares of common stock in a
public offering at $16.50 per share. The net proceeds of the offering after
underwriting discount and offering expenses were approximately $110 million. The
Company used the proceeds of the offering to partially finance the buildout and
operating costs of the PCS system and to retire certain indebtedness.
In February 1996, in connection with the Unit Offering (Note 4), the
Company issued 1,143,904 warrants to purchase an equal number of shares of the
Company's common stock at an exercise price of $18.15 per share. The warrants
may be exercised at any time on or after August 1, 1996 and prior to February 1,
2006, after which any unexercised warrants will expire. At December 31, 1996, no
warrants had been exercised.
In February, 1996, the Company issued 9,686,410 shares of common stock at
$13.42 per share in connection with the Powertel business combination (Note 3).
On June 28, 1996, pursuant to a Stock Purchase Agreement dated as of March
4, 1996, between the Company and Ericsson, Inc., the Company issued to Ericsson
100,000 shares of nonvoting Series A Convertible Preferred Stock for an
aggregate purchase price of $75 million and pursuant to a Stock Purchase
Agreement dated as of March 4, 1996, between the Company and SCANA
Communications, Inc. ("SCANA"), the Company issued to SCANA 100,000 shares of
nonvoting Series B Convertible Preferred Stock for an aggregate purchase price
of $75 million. Both series are convertible, at the option of the holder, at a
rate of 45.45 shares of the Company's Common Stock per share of Preferred Stock.
The Series A Convertible Preferred Stock is convertible any time subsequent to
June 28, 1998 and the Series B Convertible Preferred Stock is convertible any
time subsequent to June 28, 2000. Both series are redeemable, at the option of
the Company, in whole or in part, on a pro rata basis, at a redemption price of
$750 per share plus declared and unpaid dividends, anytime subsequent to June
28, 2001. Both series have a liquidation preference of $750 per share plus
unpaid dividends in the event of a liquidation, dissolution or winding up of the
Company.
The Company's certificate of incorporation empowers the Board of Directors
of the Company to redeem any of the Company's outstanding capital stock at the
lesser of fair market value or such holder's purchase price (if the stock was
purchased within a year of such redemption) to the extent necessary to prevent
the loss or secure the reinstatement of any license or franchise from any
governmental agency.
The Company's certificate of incorporation authorizes the Board of
Directors to issue, from time to time and without further stockholder action,
one or more series of preferred stock and to fix the relative rights and
preferences of the shares, inducing voting powers, dividend rights, liquidation
preferences, redemption rights, and conversion privileges.
F-14
<PAGE> 131
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLANS
Employee Stock Option Plan
Under the InterCel, Inc. 1991 Stock Option Plan (the "Stock Plan"),
2,000,000 shares of common stock are reserved for issuance upon exercise of
options. Substantially all of the employees of the Company are eligible to
receive options under the Plan. Management recommends to the Stock Option
Committee the number of options to grant based on management's analysis of the
employee's performance and level of responsibility. As of December 31, 1996,
approximately 1.7 million options had been granted under this plan.
The Stock Option Committee determines the periods within which options may
be exercised, but no option may be exercised more than ten years after the date
of grant. Options granted generally become exercisable 50% two years after the
date of grant, 25% three years after the date of grant, and 25% four years after
the date of grant. Options generally remain exercisable for a period of ten
years following the date of grant. The Board of Directors also may include in
each option granted under the Stock Plan certain additional limitations on the
recipient's right to exercise the option. Options under the Stock Plan may be
either "incentive stock options," as defined under Section 422 of the Internal
Revenue Code, or nonqualified options.
Nonemployee Stock Option Plan
Under the Company's Nonemployee Stock Option Plan (the "Nonemployee Plan"),
400,000 shares of Common Stock are authorized for issuance upon exercise of
options. All nonemployee directors of the Company, and all employees of
affiliates of the Company, are eligible to receive options under the Nonemployee
Plan. Options are granted to each nonemployee director upon his or her election
as a director, and are exercisable at the fair market value of the Common Stock
(as determined by the Board of Directors) on the date of grant.
On March 23, 1994, the Nonemployee Plan was amended to provide that the
options to purchase 10,000 shares of Common Stock (at an exercise price equal to
the fair market value of the Common Stock on the date of grant) would be granted
pursuant thereto to nonemployee directors upon their initial election or
appointment to the Board of Directors. The Nonemployee Plan, as so amended, does
not provide for discretionary option grants. Options generally become
exercisable as to 50% two years after the date of grant, as to an additional 25%
three years after the date of grant, and as to the remaining 25% four years
after the date of grant. As of December 31, 1996, 248,200 options had been
granted under this plan.
Options generally are exercisable at a price established by the Stock
Option Committee equal to at least 100% of the fair market value of the Common
Stock on the options' grant date, except that the exercise price with respect to
options granted to an individual who owns more than 10% of the combined voting
power of all classes of stock of the Company must be at least 110% of the fair
market value of the common stock on the date of grant. The full exercise price
for shares being purchased must be paid at the time of exercise in cash or, if
permitted by the particular option agreement, in whole or in part by delivery of
shares of Common Stock having a fair market value (on the delivery date) of not
less than the exercise price.
Statement of Financial Accounting Standards No. 123
The Company accounts for its stock-based compensation related to the Stock
Plan and the Non-Employee Plan under APB 25; accordingly, no compensation
expense has been recognized, as all options have been granted with an exercise
price equal to the fair value of the Company's stock on the date of grant. For
F-15
<PAGE> 132
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 123 pro forma purposes, the fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes option pricing model
with the following assumptions:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Risk-free interest rate............................ 6.29% 5.53%
Expected dividend yield............................ 0 0
Expected lives..................................... 8.2 Yrs. 7.3 Yrs.
Expected volatility................................ 51% 52%
</TABLE>
Using these assumptions, the fair value of the stock options granted in
1996 and 1995 is $5.5 million and $4.7 million, respectively, which would be
amortized as compensation expense over the vesting period of the options. Had
compensation cost been determined consistent with the provisions of SFAS 123,
the Company's net loss and pro forma net loss per share, before the cumulative
effect of change in accounting principle for 1996 and net income and pro forma
net income per share for 1995 would have been as follows (in millions except per
share amounts):
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Net (loss) income:
As Reported......................................... $(25.0) $ 3.0
Pro Forma........................................... $(27.0) $ 2.4
Net (loss) income per share:
As Reported......................................... $(1.00) $0.29
Pro Forma........................................... $(1.08) $0.23
</TABLE>
Because SFAS 123 has not been applied to options granted prior to January
1, 1995, the resulting pro forma compensation cost may not be representative of
that expected in future years.
A summary of the combined status of the Company's Stock and Non-Employee
Plans at December 31, 1994, 1995, and 1996 and changes during the years ended
December 31, 1995 and 1996 is presented in the following table:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding at December 31, 1994....................... 639,365 $ 6.50
Granted.............................................. 440,200 14.04
Forfeited............................................ (45,124) 12.90
Exercised............................................ (39,671) 4.67
---------
Outstanding at December 31, 1995....................... 994,770 9.89
Granted.............................................. 788,398 18.63
Forfeited............................................ (49,707) 16.91
Exercised............................................ (41,308) 6.29
---------
Outstanding at December 31, 1996....................... 1,692,153 13.78
=========
</TABLE>
The following table summarizes, as of December 31, 1996, for the number of
options outstanding, the exercise price range, weighted average exercise price,
and remaining contractual lives by year of grant:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE WEIGHTED REMAINING
YEAR OF GRANT OF SHARES RANGE AVERAGE PRICE CONTRACTUAL LIFE
- ------------- --------- --------------- ------------- ----------------
<S> <C> <C> <C> <C>
1996.............................. 762,837 $12.38 - $24.75 $18.63 9.4 Years
1995.............................. 389,730 $11.50 - $17.63 $14.18 8.5 Years
Pre-1995.......................... 539,586 $ 3.33 - $11.75 $ 6.50 6.4 Years
</TABLE>
F-16
<PAGE> 133
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total stock options exercisable at December 31, 1996 were 401,264 at a
weighted average exercise price of $5.23.
Restricted Stock Plan
Under the Company's 1995 Employee Restricted Stock Plan adopted by the
Board of Directors on April 24, 1995 and approved by stockholders on December
20, 1995 (the "Restricted Stock Plan"), 200,000 shares of authorized but
unissued Common Stock, are reserved for issuance, 35,000 shares of which were
issued on April 24, 1995 (with a $.01 exercise price) and are outstanding as of
December 31, 1996. These restricted stock awards vest in three equal
installments on the first, second and third anniversaries of the date of grant.
The compensation associated with the restricted grants (i.e., the difference
between the market price of the Company's Common Stock on the date of grant and
the exercise price) is being amortized ratably over the three year vesting
period. Such compensation expense totaled $164,792 and $123,594 for the years
ended December 31, 1996 and 1995, respectively. Any unamortized deferred
compensation is reflected as a reduction to stockholders' equity in the
accompanying consolidated balance sheets. The Restricted Stock Plan is
administered by the Compensation Committee of the Board of Directors
7. INCOME TAXES
Prior to 1994, the Company was included in the consolidated income tax
return of ITC. However, for 1994 and subsequent years, the Company has filed a
separate Federal income tax return, and utilization of all credits and net
operating loss and other tax carryforwards is evaluated on a stand-alone basis.
The income tax (benefit) provision reflected in the accompanying financial
statements consisted of the following (in millions):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------ ----- ------
<S> <C> <C> <C>
Current:
Federal................................................... $ 0.0 $1.4 $(0.1)
State..................................................... 0.0 0.2 0.2
----- ---- -----
0.0 1.6 0.1
----- ---- -----
Deferred:
Federal................................................... (1.4) 0.5 1.3
State..................................................... (0.3) 0.1 0.1
----- ---- -----
(1.7) 0.6 1.4
----- ---- -----
Total income tax (benefit) provision.............. $(1.7) $2.2 $ 1.5
===== ==== =====
</TABLE>
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory federal tax (benefit) provision................... (34)% 34% 34%
Increase (decrease) in tax (benefit) provision resulting
from --
Goodwill amortization..................................... 1 4 6
Excess Original Issue Discount............................ 1 0 0
State taxes, net of Federal benefit....................... (10) 5 6
Other, net................................................ 0 0 (1)
Valuation Allowance....................................... 36 0 0
--- -- --
Actual income tax (benefit) provision....................... (6)% 43% 45%
=== == ==
</TABLE>
F-17
<PAGE> 134
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The sources of differences between financial accounting and tax basis of
assets and liabilities which gave rise to the net deferred tax asset are as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred assets
Net operating loss carryforwards.......................... $ 7.1 $ 3.1
Start Up Costs Capitalized................................ 4.7 0.0
Bond Accretion Capitalized................................ 4.9 0.0
Other..................................................... 0.4 0.6
------ -----
17.1 3.7
------ -----
Deferred liabilities
Depreciation.............................................. (3.6) (1.6)
Other..................................................... (0.1) (0.4)
------ -----
(3.7) (2.0)
------ -----
Net Deferred Tax Asset Before Valuation Allowance........... 13.4 1.7
Valuation Allowance......................................... (11.2) 0.0
------ -----
Net Deferred Tax Asset...................................... 2.2 1.7
Less: Current Portion....................................... 0.0 0.3
------ -----
Deferred Tax Asset -- Non-Current Portion................... $ 2.2 $ 1.4
====== =====
</TABLE>
The Tax Reform Act of 1986 provided for certain limitations on the
utilization of net operating loss carryforwards if certain events occur, such as
a 50% change in ownership. Also, the net operating loss carryforwards used to
affect any taxes calculated as alternative minimum tax could be significantly
less than the regular tax net operating loss carryforwards. The net operating
loss carryforwards ("NOLs") generated during 1996 will be used first to reduce
income taxes paid in 1994 and 1995 ($1.7 million) and then to offset taxable
income generated in future years, subject to the applicable limitations and
their expiration in 2011. Since it is currently not more likely than not that
the net deferred tax assets resulting from the NOLs will be realized, a
valuation allowance of $11.2 million has been provided in the accompanying
consolidated financial statements.
8. EMPLOYEE BENEFIT PLANS
Prior to 1995, as a subsidiary of ITC, the Company included its employees
as participants in ITC's pension plan (the "ITC Plan"). The plan provided
retirement, disability, and survivor benefits to eligible employees. The plan
covered all eligible employees of ITC and its majority-owned subsidiaries,
including the Company. The Company's policy was to fund pension cost in
accordance with applicable regulations. Total pension cost related to the ITC
Plan charged to expense in 1996, 1995 and 1994 was $0.0, $0.3 million and $0.2
million, respectively. As of December 31, 1995, the Company's interest in the
ITC Plan's net assets available for benefits and projected benefit obligation
were $0.2 and $0.1, respectively, as computed under Statement of Financial
Accounting Standards No. 87.
Prior to the Unicel Acquisition, employees of Unicel were included in the
Unitel (the former parent company of Unicel) pension plan. This plan covered all
eligible employees of Unitel and Unicel. This plan was curtailed with respect to
the Unicel employees participating in the plan and all benefit accruals were
frozen as of April 29, 1994. In connection with the Unicel Acquisition, the
assets and liabilities of the plan were separated by company and the assets and
liabilities of Unicel were the only assets which remained in the plan. As of
December 31, 1995, this plan's net assets available for benefits was $0.1
million and the projected benefit obligations was $0.1 million, as computed
under Statement of Financial Accounting Standards No. 87.
F-18
<PAGE> 135
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective February 1, 1995, the Company elected to freeze its participation
in the ITC Plan and offer a defined contribution 401(k) plan in its place. The
401(k) plan covers all full-time employees. The Company makes an annual
discretionary contribution to the plan ($0.4 and $0.2 million in 1996 and 1995,
respectively) based on each employee's earnings and matches employee
contributions at a rate of 50% of each 1% of employee contributions (up to 2% of
employee contributions) subject to applicable regulations.
On June 1, 1996, the Company spun off all assets attributable to its
employees from the ITC Plan into the Unity Cellular Systems, Inc. Pension Plan
which was simultaneously renamed the InterCel, Inc. Pension Plan (the "Plan").
Effective November 1, 1996, the Company notified participants in the Plan of the
intent to terminate the Plan. Such termination is expected to be completed
during the first quarter of 1997 and is not expected to have a material impact
on the consolidated financial statements. As of December 31, 1996, the Plan's
net assets available for benefits and projected benefit obligation were $0.3
million and $0.3 million, respectively.
9. COMMITMENTS AND CONTINGENCIES
Leases
Lease expenses relate to the lease of office and warehouse space, land for
cell sites, cell sites, dedicated lines and trunk access facilities, computer
equipment, and billboards and include leases with affiliates (Note 10). Rents
charged to expense were approximately $3.2 million, $0.5 million and $0.4
million for the years ended December 31, 1996, 1995 and 1994.
At December 31, 1996, future minimum lease payments under noncancelable
operating leases with initial remaining terms of more than one year are as
follows (in millions):
<TABLE>
<S> <C>
1997........................................................ $ 6.2
1998........................................................ 5.9
1999........................................................ 5.8
2000........................................................ 5.6
2001........................................................ 3.7
Subsequent years............................................ 4.0
-----
$31.2
=====
</TABLE>
Equipment Purchase Commitments
On March 4, 1996, the Company entered into a five-year equipment purchase
agreement with Ericsson, Inc. and the Vendor Financing Agreement (Note 4) for
the purchase of certain equipment and services required for the initial buildout
and operation of the Company's PCS system. Under the terms of the agreement, the
Company is required to purchase its first $75 million worth of PCS equipment and
services for the Atlanta MTA from Ericsson and utilize Ericsson as the exclusive
provider of certain PCS equipment for a period of three years for all its MTAs.
The term of exclusivity runs independently for each MTA and commences six months
prior to the date the Company first uses the equipment for commercial purposes.
The Company's grant of exclusivity is conditioned upon Ericsson's ability to
provide sufficient quantities of PCS equipment to meet the Company's needs in
the PCS markets, provide commercial service for each PCS market by pre-defined
dates, and continue to provide "state of the art" equipment. The Company had
total purchases under the agreement of $69.5 million for the year ended December
31, 1996.
On July 19, 1996, the Company entered into an equipment purchase agreement
with Nokia Mobile Phones Americas, Inc. for the purchase of PCS handsets. Under
the terms of the agreement, which extends to December 31, 1998, unless
terminated in accordance with the provisions therein, the Company is committed
F-19
<PAGE> 136
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to purchase a minimum of 50,000 handsets. The Company had purchased a total of
16,312 handsets under this agreement as of December 31, 1996.
On August 22, 1996, the Company entered into an equipment purchase
agreement with Siemens Rolm Communications, Inc. for the purchase of PCS
handsets. Under the terms of the agreement, which extends to May 31, 1999,
unless terminated in accordance with the provisions therein, the Company is
committed to purchase a minimum of 50,000 handsets. No handsets had been
purchased under this agreement as of December 31, 1996.
On November 1, 1996, the Company entered into an equipment purchase
agreement with Mitsubishi Communications, Inc. for the purchase of PCS handsets.
Under the terms of the agreement, which extends to April 30, 1999, unless
terminated in accordance with the provisions therein, the Company is committed
to purchase a minimum of 50,000 handsets. No handsets had been purchased under
this agreement as of December 31, 1996.
Litigation
The Company is subject to litigation related to matters arising in the
normal course of business. As of December 31, 1996, management is not aware of
any asserted or pending material litigation or claims against the Company.
10. TRANSACTIONS WITH AFFILIATES
The Company leases certain dedicated and trunk telephone access lines, as
well as certain local and long-distance services, through its former parent,
ITC, and certain of ITC's other subsidiaries and related parties. ITC Holding
and its subsidiaries also provide various staff and administrative support
services for the Company. The total expense recorded by the Company for these
services was approximately $2.5 million, $0.6 million and $0.6 million for 1996,
1995 and 1994, respectively.
The Company purchases certain equipment and services related to the
buildout of its PCS system from preferred stockholders and certain of their
subsidiaries. The Company's total purchases for equipment and services were
$74.5 million in 1996.
The Company sells cellular telephones and provides cellular services to
certain of its affiliates and their employees. Revenues recorded by the Company
for these sales and services were approximately $0.3 million, $0.2 million and
$0.3 million in 1996, 1995 and 1994, respectively.
At December 31, 1996, and 1995, the Company owed approximately $0.2 million
and $0.1 million, respectively, to ITC and its subsidiaries for amounts due
under the agreements discussed above.
11. BUSINESS SEGMENT DATA
The Company's operations for 1996 are classified into two business
segments: cellular and PCS. Prior to 1996, the Company's operations consisted
entirely of cellular operations. Certain corporate administrative expenses have
been allocated to the segments based upon the nature of the expense. Summarized
financial information by business segment for 1996 is as follows (in millions):
<TABLE>
<CAPTION>
CELLULAR PCS TOTAL
-------- ------ ------
<S> <C> <C> <C>
Revenues.................................................... $34.7 $ 4.4 $ 39.1
Operating income (loss)..................................... 10.4 (39.0) (28.6)
Net income (loss), after effects of change in accounting
principle................................................. 8.2 (35.8) (27.6)
Identifiable assets......................................... 53.7 893.4 947.1
</TABLE>
F-20
<PAGE> 137
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------- ------ -------
(IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996 Quarters
Revenues and Sales................................... $ 7.8 $ 8.5 $ 9.1 $ 13.7
Operating Income (Loss).............................. 0.6 (1.2) (4.3) (23.7)
Net Income (Loss) Before Cumulative Effect of Change
in Accounting Principle........................... 0.5 (1.4) 0.1 (24.2)
Cumulative Effect of Change in Accounting
Principle......................................... (2.6) 0.0 0.0 0.0
Net (Loss) Income.................................... (2.1) (1.4) 0.1 (24.2)
Net (Loss) Income Per Share.......................... $(0.11) $(0.05) $ 0.0 $(0.90)
1995 Quarters
Revenues and Sales................................... $ 6.3 $ 7.1 $ 8.0 $ 8.0
Operating Income..................................... 1.1 1.7 2.0 1.7
Net Income........................................... 0.7 0.9 0.8 0.6
Net Income Per Share................................. $ 0.07 $ 0.08 $0.08 $ 0.06
1994 Quarters
Revenues and Sales................................... $ 4.0 $ 5.3 $ 6.1 $ 6.4
Operating Income..................................... 0.7 0.8 1.5 1.0
Net Income........................................... 0.3 0.3 0.8 0.5
Net Income Per Share................................. $ 0.04 $ 0.03 $0.07 $ 0.05
</TABLE>
13. ASSET SALE
Pursuant to an Asset Purchase Agreement, dated as of December 23, 1996,
between Unicel (the "Seller"), Intercel Licenses, Inc. (the "Licensee"), a
wholly owned subsidiary of the Company, and Rural Cellular Corporation (the
"Purchaser"), the Purchaser agreed to acquire substantially all the assets and
FCC licenses of the Seller, constituting the Seller's cellular telephone
operations in Maine, for approximately $77.4 million (the "Sale"). Closing of
the Sale is conditioned upon financing being obtained by the Purchaser, receipt
by Seller of consents from various parties to contracts with Seller and receipt
of all required regulatory approvals. The Sale is also subject to right of first
refusal by Cellco Partnership ("Cellco"), which owns the remaining 49% interest
in the Northern Maine Partnership. If Cellco exercises its right of first
refusal, the purchase price paid by the Purchaser could be reduced by
approximately $12.8 million (the portion of the purchase price allocated to the
Company's interest in the Partnership). The price that would then be paid by
Cellco upon exercise of its right of first refusal has not yet been determined.
If Cellco and the Seller are unable to agree upon a purchase price, the purchase
price may, as contemplated in the agreement governing the Partnership, be
determined by appraisal.
14. SUBSEQUENT EVENTS
On January 15, 1997, the FCC announced its acceptance of the Company's bid
for PCS licenses in the D and E block auctions for 13 BTAs covering
approximately 6.8 million persons located in Kentucky, Tennessee and Indiana
(according to industry publications). The winning bid amounts for these licenses
totaled approximately $31 million. In connection with this bid acceptance, the
Company was charged a bid withdrawal penalty of $1.2 million, which is included
in other expense in the accompanying consolidated statements of operations.
The Company intends to seek additional debt and equity financing in 1997 to
finance the purchase of the D and E block licenses and the initial buildout of
these properties. There can be no assurance that these financings will be
completed.
F-21
<PAGE> 138
INTERCEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While there are numerous cellular telephone systems operating in the United
States and other countries, the wireless telecommunications industry has only
limited operating history. Achieving profitable PCS operations will require
successfully competing with other PCS providers in all of its markets, as well
as with both existing and other future wireless providers. In addition,
successful PCS operations will require the development of products which are at
least as commercially effective as its wireless competitors. Any failure to
anticipate and respond to changes to technology and customer wants could have an
adverse effect on the PCS business.
Management anticipates incurring significantly greater expenses in future
periods as a result of the PCS line of business. As a result of such increased
expenses, management expects to incur significant operating losses in the
future. These losses and negative cash flow are expected to increase during the
initial years of the PCS System buildout and operation. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flow from operating activities in the future. If the Company cannot achieve
profitability or positive cash flow from operating activities, it may not be
able to meet its debt service or working capital requirements.
The successful implementation of the Company's PCS strategy is necessary
for the Company to be able to meet its debt service requirements. The buildout
of the PCS System may require substantial additional capital. In addition, the
Company's ability to satisfy its obligations once the PCS System is operational
will be dependent upon the Company's future performance, which is subject to a
number of factors, many of which are beyond the Company's control. There can be
no assurance that the Company can complete the PCS System or that, once
completed, the Company will generate sufficient cash flow from operating
activities to meet its debt service and working capital requirements. In such an
event, the Company would need to refinance its indebtedness at maturity. The
Company's ability to refinance indebtedness will depend on, among other things,
its financial condition at the time, the restrictions in the instruments
governing its indebtedness and other factors, including market conditions,
beyond the control of the Company. In addition, in the event the implementation
of the PCS System is delayed or the Company does not generate sufficient cash
flow to meet its debt service requirements, the Company may need to seek
additional financing. There can be no assurance that any such financing or
refinancing could be obtained on terms that are acceptable to the Company. In
the absence of such financing or refinancing, the Company could be forced to
dispose of assets in order to make up for any shortfall in the payments due on
its indebtedness under circumstances that might not be favorable to realizing
the highest price for such assets. A substantial portion of the Company's assets
consist of intangible assets, principally licenses granted by the FCC, the value
of which will depend upon a variety of factors (including the success of the
Company's PCS and cellular businesses and the wireless telecommunications
industry in general). In addition, transfers of interests in such licenses are
subject to FCC approval. As a result, there can be no assurance that the
Company's assets could be sold quickly enough, or for sufficient amounts, to
enable the Company to meet its obligations.
F-22
<PAGE> 139
INTERCEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $207,511
Short-Term Investments.................................... 0
Accounts Receivable, net of allowance for doubtful
accounts................................................ 13,131
Inventories............................................... 19,372
Prepaid Expenses and Other................................ 2,271
--------
242,285
--------
PROPERTY AND EQUIPMENT, AT COST:............................ 303,035
Less: Accumulated Depreciation............................ (18,322)
--------
284,713
--------
OTHER ASSETS:
Licenses, net............................................. 406,567
Goodwill, net............................................. 22,518
Deferred Offering Costs, net.............................. 13,377
Deferred Income Taxes..................................... 2,776
Deferred Charges and Other, net........................... 858
--------
446,096
--------
$973,094
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable -- Trade................................. $ 28,158
Advance Billings and Customer Deposits.................... 2,008
Accrued Construction Costs................................ 2,211
Accrued Taxes Other than Income........................... 4,443
Accrued Other............................................. 4,707
Current Portion of Long-Term Obligations.................. 112
--------
41,639
--------
LONG-TERM OBLIGATIONS:
12% Senior Discount Notes due February 2006............... 223,080
12% Senior Discount Notes due May 2006.................... 223,738
Vendor Financing Agreement................................ 103,833
Other..................................................... 715
--------
551,366
--------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARY............................. 2,602
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock...................... 1
Series B Convertible Preferred Stock...................... 1
Common Stock.............................................. 269
Paid-in Capital........................................... 430,058
Accumulated Deficit....................................... (52,332)
Deferred Compensation..................................... (165)
Treasury Stock at cost.................................... (345)
--------
377,487
--------
$973,094
========
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
F-23
<PAGE> 140
INTERCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
-------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
REVENUES AND SALES:
Monthly Access Revenue.................................... $ 8,540 $ 3,428
Airtime Revenue........................................... 1,827 1,317
Roaming Revenue........................................... 1,242 1,503
Toll Revenue.............................................. 1,290 578
Installation and Connection Revenue....................... 667 81
Other Revenue............................................. 518 89
-------- -------
Total Service Revenues................................. 14,084 6,996
Equipment Sales........................................... 5,025 854
-------- -------
Total Revenues and Sales............................... 19,109 7,850
-------- -------
OPERATING EXPENSES:
Cost of Services.......................................... 5,428 684
Cost of Equipment Sold.................................... 11,987 694
Operations................................................ 3,809 1,204
Selling and Marketing..................................... 5,237 1,274
General and Administrative................................ 7,680 1,810
Depreciation.............................................. 8,340 731
Amortization.............................................. 1,178 881
-------- -------
Total Operating Expenses............................... 43,659 7,278
-------- -------
OPERATING (LOSS) INCOME..................................... (24,550) 572
-------- -------
OTHER EXPENSE (INCOME):
Net Interest Expense (Income)............................. 4,543 (739)
Miscellaneous Expense..................................... 473 303
-------- -------
Total Other Expense (Income)........................... 5,016 (436)
-------- -------
(LOSS) INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE............................ (29,566) 1,008
INCOME TAX (PROVISION) BENEFIT............................ 0 (472)
-------- -------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...................................... (29,566) 536
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... 0 (2,583)
-------- -------
NET LOSS............................................... $(29,566) $(2,047)
======== =======
PER SHARE DATA:
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE...................................... $ (1.10) $ 0.03
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE......... 0 (0.13)
-------- -------
NET LOSS PER COMMON SHARE................................... $ (1.10) $ (0.10)
======== =======
AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING..... 26,812 19,899
======== =======
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these statements.
F-24
<PAGE> 141
INTERCEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS (USED IN) PROVIDED FROM OPERATING ACTIVITIES:
Net Loss.................................................... $(29,566) $ (2,047)
Adjustments to Reconcile Net Loss to Net Cash (Used In)
Provided From Operating Activities --
Minority Interest in Loss of Subsidiary................... (113) (79)
Cumulative Effect of Change in Accounting Principle....... 0 2,583
Loss on Equity Investment................................. 0 34
Depreciation and Amortization............................. 9,518 1,612
Bond Accretion............................................ 6,320 1,328
Amortization of Deferred Offering Costs................... 375 0
Deferred Compensation -- Restricted Stock................. 41 41
Deferred Taxes, Net....................................... 0 20
Changes in Assets and Liabilities:
Increase in Accounts Receivable......................... (4,903) (174)
(Increase) Decrease in Inventories...................... (11,567) 81
Decrease in Prepaid Expenses and Other.................. 10,371 125
Increase in Deferred Charges and Other.................. (31) (697)
Increase in Accounts Payable............................ 20,435 1,058
Decrease in Accrued Expenses............................ (50,207) (796)
Increase in Advance Billings and Customer Deposits...... 656 38
-------- --------
Net Cash (Used In) Provided From Operating Activities..... (48,671) 3,127
-------- --------
CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
Capital Expenditures........................................ (36,209) (10,874)
Cash Acquired in Powertel Business Combination.............. 0 15,379
Short-Term Investments...................................... 75,659 (29,388)
Microwave Relocation Cost................................... (3,265) 0
-------- --------
Net Cash Provided From (Used In) Investing Activities..... 36,185 (24,883)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Sale of Stock, Net............................ 5 111,446
Proceeds from Issuance of Senior Notes, Net................. 0 192,998
Borrowings Under Vendor Financing Agreement................. 34,319 0
Repayments of Long-term Obligations......................... (6) (28,102)
Other....................................................... 154 224
-------- --------
Net Cash Provided From Financing Activities............... 34,472 276,566
-------- --------
NET INCREASE IN CASH........................................ 21,986 254,810
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 185,525 630
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $207,511 $255,440
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-25
<PAGE> 142
INTERCEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of Regulation
S-X. The accompanying unaudited condensed consolidated financial statements
reflect, in the opinion of management, all adjustments necessary to achieve a
fair statement of financial position and results for the interim periods
presented. All such adjustments are of a normal recurring nature. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
2. Certain prior year amounts have been reclassified to conform with the
current period presentation.
3. On May 1, 1997 (the "Closing Date"), pursuant to an Asset Purchase
Agreement dated as of December 23, 1996, Unity Cellular Systems, Inc. ("Unicel")
and Intercel Licenses, Inc. (the "Licensee"), each a wholly owned subsidiary of
the Company, sold and assigned (the "Maine Disposition") to MRCC, Inc., a wholly
owned subsidiary of Rural Cellular Corporation ("Rural Cellular"): (i)
substantially all of the assets and rights of Unicel, including Unicel's 51%
general partnership interest in the Northern Maine Cellular Partnership; and
(ii) the FCC licenses held by Licensee to provide cellular and microwave service
in the Bangor, Maine RSA and Maine RSA3 and to provide microwave service in
Maine RSA2. On the Closing Date, MRCC, Inc. paid the Seller $71.8 million in
cash and paid $5.4 million into escrow.
4. On May 5, 1997, the FCC officially granted the Company PCS licenses for
which the Company was the winning bidder in the D/E/F block auctions for 13
Basic Trading Areas covering approximately 6.8 million persons (according to
industry publications) located in Kentucky, Tennessee, Illinois and Indiana for
a purchase price of $31.2 million, of which $6.2 million had previously been
paid by the Company. On May 12, 1997, the Company paid the remaining $25
million.
5. During the first quarter 1996, the Company changed its method of
accounting for costs incurred in connection with certain promotional programs
under which the Company's cellular customers received discounted cellular
equipment or airtime usage credits. Under its previous accounting method, all
such costs were deferred and amortized over the life of the related
non-cancelable cellular telephone service agreements. Under the new accounting
method, the costs are expensed as incurred. This change in accounting principle
resulted in a total nonrecurring charge for the cumulative effect of this
accounting change, net of taxes, of approximately $2.6 million. Additionally,
such costs are not deferred in conjunction with the acquisition of PCS
customers.
F-26
<PAGE> 143
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law (the "Delaware Law") permits a
corporation to exonerate its directors from personal liability to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty, other than: (i) for any breach of the duty of loyalty to the corporation
or its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for willful
or negligent violations of provisions regarding the unlawful payment of
dividends or unlawful stock repurchases or redemptions; or (iv) for any
transaction from which the person derived an improper personal benefit. This
provision pertains only to breaches of duty by directors in their capacity as
directors (and not in any other corporate capacity, such as officers) and limits
liability only for breaches of fiduciary duties under the Delaware Law (and not
for violation of other laws, such as the federal securities laws). The Company's
Third Restated Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), exonerates the Company's directors from monetary liability to
the extent permitted by this statutory provision.
The Certificate of Incorporation also provides that, except as
expressly prohibited by law, the Company shall indemnify any person who was or
is a party, or threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative,
or investigative) by reason of the fact that such person is or was a director or
officer of the Company (or is or was serving at the request of the Company as a
director or officer of another enterprise), against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests o the Company
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful. Such indemnification shall not be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Company, unless (and only to the extent that)
the Delaware Court of Chancery or the court in which such action or suit was
brought determines that, in view of all circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses that the Court
of Chancery or such other court shall deem proper. In addition, the Certificate
of Incorporation provides for mandatory advancement of expenses incurred by an
officer or director upon request, to the extent permitted by law. The Delaware
Law permits a corporation to advance expenses incurred by an officer or director
in defending any action, suit or proceeding upon receipt of an undertaking by or
on behalf of the director or officer to repay in the event that the director or
officer is ultimately determined not to be entitled to indemnification.
The Company maintains a liability insurance policy on behalf of all of
its directors and officers. Under this policy, directors and officers are
insured (and the Company is insured to the extent that it has properly
indemnified its directors and officers) against liability for claims incurred by
reason of their breach of duty, neglect, error, misstatement, misleading
statement, omission or act, in their capacities as directors and officers and
solely by reason of their status as directors and officers. However, directors
and officers are not insured against certain types of claims, including claims
that arise out of a gain of personal profit, a criminal or fraudulent act, the
filing of a registration statement, an offering by means of a prospectus, or an
underwriting agreement for the offer or sale of a security.
The Company has entered into indemnity agreements with certain of its
directors and executive officers. Indemnification of a director or officer under
an indemnity agreement would add several protections to those provided by
Delaware Law, the Certificate of Incorporation, and the Company's liability
insurance including the following: (i) the Company generally would be obligated
to advance litigation expenses to the indemnitee, subject to a later
determination that the indemnitee would not be permitted to receive such
indemnification under applicable law; (ii) to the extent permitted by law, the
indemnitee generally would be entitled to indemnification unless the Company
affirmatively determined that the indemnitee had not met the applicable standard
of conduct;
II-1
<PAGE> 144
(iii) upon a change in control (as defined in the indemnity agreements) the
Company could only seek legal advice with respect to indemnification of the
indemnitee from a special independent counsel selected by the indemnitee, and
only the special independent counsel would have the right to make a final
determination that the indemnitee has not met the requisite standard of conduct;
(iv) the period of time in which the Company could sue the indemnitee for an
action would be limited to two years from the date that the cause of action
accrued. The Company anticipates that the protections afforded by the indemnity
agreements will contribute to the Company's ability to attract and retain highly
qualified directors and executive officers.
The Delaware Law and Article 6 of the Certificate of Incorporation
specifically provide for the indemnification of directors and officers, and the
Delaware Law permits the adoption of indemnity agreements generally. The
enforceability of certain provisions of the indemnity agreements has not been
tested in court, however, and remains subject to considerations of state law and
public policy. The indemnity agreements were not implemented in response to any
pending or threatened litigation involving directors or officers.
Subject to the possibility of unenforceability referred to above, the
indemnity agreements constitute binding agreements of the Company, and the
Company would be unable to modify its indemnification policy unilaterally in a
way that is adverse to any party to an indemnity agreement. The Securities and
Exchange Commission ("Commission") takes the position that indemnification of
directors and executive officers against violations of the Securities Act is
against public policy and unenforceable. Accordingly, whenever an issuer
registers securities with the Commission it must execute an undertaking (a) to
submit to a court any such indemnification claim arising with respect to the
registered securities for a determination whether the clause is enforceable and
(b) to be bound by the court's decision. Accordingly, any claim made by a
director or executive officer of the Company for indemnification under an
indemnity agreement with respect to a claim subject to the Company's undertaking
to the Commission would have to be submitted to a court before final payment
thereunder would be made to the director or executive officer.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit Page
Number EXHIBIT DESCRIPTION Number
- ------ ------------------- ------
<S> <C> <C> <C>
* 4(a) Indenture dated as of February 7, 1996 between InterCel, Inc. and Bankers Trust
Company, as Trustee, relating to the 12% Senior Discount Notes Due 2006 of
InterCel, Inc. (Filed as Exhibit 4(a) to Registration Statement on Form S-1, File
No. 33-92618 (the "February 1996 Form S-1"), and incorporated herein by reference.).......
4(b) Warrant Agreement dated as of February 7, 1996 between InterCel, Inc. and Bankers
Trust Company, as Warrant Agent. (Filed as Exhibit 4(b) to February 1996 Form S-1
and incorporated herein by reference.)....................................................
* 4(c) Form of Indenture (including form of Note) between InterCel, Inc. and Bankers Trust
Company, as Trustee, relating to the 12% Senior Discount Notes Due 2006 of
InterCel, Inc. (Filed as Exhibit 4(c) to Registration Statement on Form S-1, File No.
333-2748 (the "April 1996 Form S-1"), and incorporated herein by reference.)..............
* 4(d) Certificate of Designations, Powers, Preferences and Relative, Participating or Other
Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series A
Convertible Preferred Stock of InterCel, Inc. (Filed as Exhibit 10(tt) to the Form 10-
Q for the quarter ended September 30, 1996 (the "1996 Third Quarter 10-Q") and
incorporated herein by reference.)........................................................
</TABLE>
II-2
<PAGE> 145
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description Number
- ------ ------------------- ------
<S> <C> <C> <C>
* 4(e) Certificate of Designations, Powers, Preferences and Relative, Participating or Other Rights,
and the Qualifications, Limitations or Restrictions Thereof, of Series B Convertible Preferred
Stock of InterCel, Inc. (Filed as Exhibit 10(uu) to 1996 Third Quarter 10-Q and
incorporated herein by reference.).......................................................................
* 4(f) Certificate of Designations, Powers, Preferences and Relative, Participating or Other
Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series C
Convertible Preferred Stock of InterCel, Inc. (Filed as Exhibit 4(f) to the Annual
Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K")
and incorporated herein by reference.)...................................................................
* 4(g) Certificate of Designations, Powers, Preferences and Relative, Participating or Other Rights, and
the Qualifications, Limitations or Restrictions Thereof, of Series D Convertible Preferred Stock of
InterCel, Inc. (Filed as Exhibit 4(g) to 1996 Form 10-K and incorporated herein by reference.)..........
* 4(h) Indenture (including form of Note) dated June 10, 1997 between InterCel, Inc. and Bankers Trust
Company, as Trustee, relating to the 11 1/8% Senior Notes due 2007 of InterCel, Inc.....................
* 4(i) Registration Rights Agreement dated June 10, 1997 between InterCel, Inc. and Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Oppenheimer & Co., Inc..............
* 4(j) Collateral Pledge and Security Agreement dated June 10, 1997 between InterCel, Inc.
and Bankers Trust Company, as Trustee**..................................................................
* 4(k) Certificate of Amendment to the Certificate of Designations, Powers, Preferences and Relative,
Participating or Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series B
Convertible Preferred Stock of InterCel, Inc.............................................................
* 4(l) Amended Certificate of Designations, Powers, Preferences and Relative, Participating or Other Rights, and
the Qualifications, Limitations or Restrictions Thereof, of Series C Convertible Preferred Stock of
InterCel, Inc............................................................................................
* 4(m) Amended Designations, Powers, Preferences and Relative, Participating or Other
Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series D
Convertible Preferred Stock of InterCel, Inc.............................................................
5(a) Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
* 10(a) Stock Purchase Agreement dated May 23, 1997 between InterCel, Inc. and The Huff
Alternative Income Fund, L.P.**..........................................................................
* 10(b) Escrow Agreement dated June 5, 1997 between InterCel, Inc. and The Huff
Alternative Income Fund, L.P.**..........................................................................
* 10(c) Stock Purchase Agreement dated May 23, 1997 between InterCel, Inc. and SCANA
Communications, Inc.**...................................................................................
* 10(d) Escrow Agreement dated June 5, 1997 between InterCel, Inc. and SCANA
Communications, Inc.**...................................................................................
* 10(e) Amendment No. 2 dated March 31, 1997 to the Credit Agreement dated March 4,
1996 among Powertel, Inc., Ericsson Project Finance A.B., as Lender, and Ericsson
Inc., as Agent for the Lenders...........................................................................
* 10(f) Amendment No. 3 dated June 26, 1997 to the Credit Agreement dated March 4, 1996
among Powertel PCS, Inc., the Lenders set forth on the signature pages thereto and
Ericsson Inc., as Agent for the Lenders..................................................................
* 12 Statement regarding Computation of Ratio of Earnings to Fixed Charges.
23(a) Consent of Arthur Andersen LLP...........................................................................
23(b) Consent of Nelson Mullins Riley & Scarborough, L.L.P. (included as part of its
opinion filed as Exhibit 5(a))...........................................................................
* 24 Power of Attorney (included on signature pages).
* 25 Statement of Eligibility of Trustee on Form T-1..........................................................
* 99(a) Form of Letter of Transmittal for 11 1/8% Senior Notes Due 2007..........................................
</TABLE>
II-3
<PAGE> 146
<TABLE>
<CAPTION>
Exhibit
Number EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
* 99(b) Form of Notice of Guaranteed Delivery for 11 1/8% Senior Notes Due 2007.
* 99(c) Guidelines for Certification of Taxpayer Identification Number on Substitute Form.
* 99(d) Powertel, Inc.'s Letter to Brokers.
* 99(e) Letter of Registered Holder to Beneficial Owner and Instruction of Beneficial Owner.
</TABLE>
- -------------------------------
* Previously filed.
** The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon
request, as provided in Item 601(b)(2) of Regulation S-K.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filling of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the Registration
Statement 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 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 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 147
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of West
Point, State of Georgia, on this 30th day of July, 1997.
POWERTEL, INC.
By:/s/ Allen E. Smith
-----------------------------------------
Allen E. Smith
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities set forth below on this 30th day of July, 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE
<S> <C>
/s/ Allen E. Smith President, Chief Executive Officer and
- ------------------------------ Director (Principal executive officer)
Allen E. Smith
/s/ Fred G. Astor, Jr. Executive Vice President and Chief
- ------------------------------ Financial Officer (Principal financial officer
Fred G. Astor, Jr. and principal accounting officer)
* Director and Chairman of the Board
- ------------------------------
Campbell B. Lanier, III
* Director
- ------------------------------
Donald W. Burton
* Director
- ------------------------------
Bert G. Clifford
* Director
- ------------------------------
O. Gene Gabbard
* Director
- ------------------------------
Lawrence M. Gressette, Jr.
</TABLE>
<PAGE> 148
<TABLE>
<S> <C>
* Director
- ------------------------------
Maurice P. O'Connor
* Director and Secretary
- ------------------------------
William H. Scott, III
* Director
- ------------------------------
William B. Timmerman
* Director
- ------------------------------
Donald W. Weber
</TABLE>
*By: /s/ Allen E. Smith
-------------------------
Allen E. Smith
Attorney-in-Fact
<PAGE> 149
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description Number
- ----- ------------------- ------
<S> <C> <C>
* 4(a) Indenture dated as of February 7, 1996 between InterCel, Inc. and Bankers Trust
Company, as Trustee, relating to the 12% Senior Discount Notes Due 2006 of
InterCel, Inc. (Filed as Exhibit 4(a) to Registration Statement on Form S-1, File
No. 33-92618 (the "February 1996 Form S-1"), and incorporated herein by
reference).............................................................................
* 4(b) Warrant Agreement dated as of February 7, 1996 between InterCel, Inc. and
Bankers Trust Company, as Warrant Agent. (Filed as Exhibit 4(b) to February
1996 Form S-1 and incorporated herein by reference)....................................
* 4(c) Form of Indenture (including form of Note) between InterCel, Inc. and Bankers
Trust Company, as Trustee, relating to the 12% Senior Discount Notes Due 2006
of InterCel, Inc. (Filed as Exhibit 4(c) to Registration Statement on Form S-1,
File No. 333-2748 (the "April 1996 Form S-1"), and incorporated herein by
reference).............................................................................
* 4(d) Certificate of Designations, Powers, Preferences and Relative, Participating or
Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series
A Convertible Preferred Stock of InterCel, Inc. (Filed as Exhibit 10(tt) to the
Form 10-Q for the quarter ended September 30, 1996 (the "1996 Third Quarter 10-Q")
and incorporated herein by reference)..................................................
* 4(e) Certificate of Designations, Powers, Preferences and Relative, Participating or
Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series
B Convertible Preferred Stock of InterCel, Inc. (Filed as Exhibit 10(uu) to 1996
Third Quarter 10-Q and incorporated herein by reference)...............................
* 4(f) Certificate of Designations, Powers, Preferences and Relative, Participating or
Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series
C Convertible Preferred Stock of InterCel, Inc. (Filed as Exhibit 4(f) to the
Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996
Form 10-K") and incorporated herein by reference)......................................
* 4(g) Certificate of Designations, Powers, Preferences and Relative, Participating or
Other Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series
D Convertible Preferred Stock of InterCel, Inc. (Filed as Exhibit 4(g) to 1996
Form 10-K and incorporated herein by reference)........................................
* 4(h) Indenture (including form of Note) dated June 10, 1997 between InterCel, Inc.
and Bankers Trust Company, as Trustee, relating to the 11 1/8% Senior Notes due
2007 of InterCel, Inc..................................................................
* 4(i) Registration Rights Agreement dated June 10, 1997 between InterCel, Inc. and
Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Oppenheimer & Co., Inc................................................
* 4(j) Collateral Pledge and Security Agreement dated June 10, 1997 between InterCel,
Inc. and Bankers Trust Company, as Trustee**...........................................
* 4(k) Certificate of Amendment to the Certificate of Designations, Powers, Preferences and
Relative, Participating or Other Rights, and the Qualifications, Limitations or
Restrictions Thereof, of Series B Convertible Preferred Stock of InterCel, Inc.........
* 4(l) Amended Certificate of Designations, Powers, Preferences and Relative,
Participating or Other Rights, and the Qualifications, Limitations or Restrictions
Thereof, of Series C Convertible Preferred Stock of InterCel, Inc......................
* 4(m) Amended Designations, Powers, Preferences and Relative, Participating or Other
Rights, and the Qualifications, Limitations or Restrictions Thereof, of Series D
Convertible Preferred Stock of InterCel, Inc...........................................
5(a) Opinion of Nelson Mullins Riley & Scarborough, L.L.P...................................
* 10(a) Stock Purchase Agreement dated May 23, 1997 between InterCel, Inc. and The Huff
Alternative Income Fund, L.P.**.......................................................
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description Number
- ----- ------------------- ------
<S> <C> <C>
* 10(b) Escrow Agreement dated June 5, 1997 between InterCel, Inc. and The Huff
Alternative Income Fund, L.P.**........................................................
* 10(c) Stock Purchase Agreement dated May 23, 1997 between InterCel, Inc. and
SCANA Communications, Inc.**...........................................................
* 10(d) Escrow Agreement dated June 5, 1997 between InterCel, Inc. and SCANA
Communications, Inc.**.................................................................
* 10(e) Amendment No. 2 dated March 31, 1997 to the Credit Agreement dated March 4,
1996 among Powertel, Inc., Ericsson Project Finance A.B., as Lender, and
Ericsson Inc., as Agent for the Lenders................................................
* 10(f) Amendment No. 3 dated June 26, 1997 to the Credit Agreement dated March 4,
1996 among Powertel PCS, Inc., the Lenders set forth on the signature pages
thereto and Ericsson Inc., as Agent for the Lenders....................................
* 12 Statement regarding Computation of Ratio of Earnings to Fixed Charges.
23(a) Consent of Arthur Andersen LLP.........................................................
23(b) Consent of Nelson Mullins Riley & Scarborough, L.L.P. (included as part of its
opinion filed as Exhibit 5(a)).........................................................
* 24 Power of Attorney (included on signature pages)........................................
* 25 Statement of Eligibility of Trustee on Form T-1........................................
* 99(a) Form of Letter of Transmittal for 11 1/8% Senior Notes Due 2007........................
* 99(b) Form of Notice of Guaranteed Delivery for 11 1/8% Senior Notes Due 2007................
* 99(c) Guidelines for Certification of Taxpayer Identification Number on Substitute Form......
* 99(d) Powertel, Inc.'s Letter to Brokers.....................................................
* 99(e) Letter of Registered Holder to Beneficial Owner and Instruction of
Beneficial Owner.......................................................................
</TABLE>
- ---------------------------
* Previously filed.
** The Registrant agrees to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon request,
as provided in Item 601(b)(2) of Regulation S-K.
<PAGE> 1
EXHIBIT 5
[NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. LETTERHEAD]
July 31, 1997
Powertel, Inc.
1233 O.G. Skinner Drive
West Point, Georgia 31833
Ladies and Gentlemen:
We have acted as counsel to Powertel, Inc., a Delaware corporation
(the "Company"), in connection with the filing of a Registration Statement on
Form S-4 (Reg. No. 333-31399) (the "Registration Statement") under the
Securities Act of 1933, as amended, relating to the proposed exchange (the
"Exchange Offer") of up to $300 million principal amount of 11 1/8% Senior Notes
due 2007 (the "New Notes") for a like principal amount of the Company's issued
and outstanding 11 1/8% Senior Notes due 2007 (the "Old Notes"). The Old Notes
were, and the New Notes will be, issued pursuant to the Indenture (the
"Indenture") dated as of June 10, 1997 among the Company, as issuer, and
Bankers Trust Company, as trustee (the "Trustee"), which has been filed as
Exhibit 4(h) to the Registration Statement.
We have examined the Indenture, the form of certificate which will
evidence the New Notes, the Collateral Security and Pledge Agreement dated as
of June 10, 1997 among the Company, as pledgor, the placement agents named
therein and the Trustee (the "Pledge Agreement"), which has been filed as
Exhibit 4(j) to the Registration Statement, and certain corporate records of
the Company, and we have made such other investigations as we have deemed
appropriate in order to express the opinion set forth herein. We have assumed
that the execution and delivery of, and the performance of all obligations
under, the Indenture have been duly authorized by all requisite action by the
Trustee, and that the Indenture has been duly executed and delivered by, and is
a valid and binding agreement of, the Trustee, enforceable against the Trustee
in accordance with its terms.
This opinion is limited by and is in accordance with the January 1,
1992 edition of the Interpretive Standards applicable to Legal Opinions to
Third Parties in Corporate Transactions adopted by the Legal Opinion Committee
of the Corporate and Banking Law Section of the State Bar of Georgia.
<PAGE> 2
Powertel, Inc.
July 31, 1997
Page 2
Based upon the foregoing, and the other limitations and qualifications
set forth herein, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing
under the laws of the State of Delaware; and
2. The Indenture and the New Notes have been duly authorized by the
Company, and the New Notes, when executed, authenticated and delivered to the
holders of the Old Notes pursuant to the Exchange Offer in accordance with the
terms of the Indenture, will be valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as (i)
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting creditors' rights
generally and (ii) rights of acceleration, if applicable, and the availability
of equitable remedies may be limited by equitable principles of general
applicability.
While the Indenture provides that it will be governed by the
substantive laws of the State of New York, we have assumed, for purposes of our
opinion, that the Indenture will be governed by the laws of the State of
Georgia.
This opinion is given as of the date hereof, and we assume no
obligation to advise you after the date hereof of facts or circumstances that
come to our attention or changes in law that occur which could affect the
opinions contained herein. This letter is being rendered solely for the benefit
of the Company in connection with the matters addressed herein. This opinion
may not be furnished to or relied upon by any person or entity for any purpose
without our prior written consent.
We hereby consent to the inclusion of this opinion as an exhibit to
the Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Nelson Mullins Riley & Scarborough, L.L.P.
NELSON MULLINS RILEY &
SCARBOROUGH, L.L.P.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made a part of this
registration statement and to the incorporation by reference in this
registration statement of our reports dated February 3, 1997 (except for Note
14, as to which the date was March 13, 1997) included in the Powertel, Inc.
(formerly known as InterCel, Inc.) and subsidiaries' Annual Report on
Form 10-K for the year ended December 31, 1996.
/s/ Arthur Andersen LLP
Atlanta, Georgia
July 29, 1997
