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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2000
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from __________ to __________
COMMISSION FILE NUMBER: 1-15325
TRITON PCS HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 23-2974475
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1100 Cassatt Road
Berwyn, Pennsylvania 19312
(Address and zip code of principal executive offices)
(610) 651-5900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, $.01 par value per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 5, 2001, 57,545,039 shares of registrant's Class A common stock and
8,210,827 shares of the registrant's Class B non-voting common stock were
outstanding, and the aggregate market value of shares of Class A common stock
and Class B non-voting common stock held by non-affiliates was approximately
$1.86 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2001 annual meeting of
stockholders are incorporated by reference into Part III.
TRITON PCS HOLDINGS, INC.
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1 Business...................................................................................... 4
Item 2 Properties.................................................................................... 18
Item 3 Legal Proceedings............................................................................. 18
Item 4 Submission of Matters to a Vote of Security Holders........................................... 18
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters......................... 19
Item 6 Selected Financial Data....................................................................... 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 20
Item 7A Quantitative and Qualitative Disclosures about Market Risk.................................... 27
Item 8 Financial Statements & Supplementary Data..................................................... F-1
Report of PricewaterhouseCoopers LLP.......................................................... F-2
Consolidated Balance Sheets................................................................... F-3
Consolidated Statements of Operations......................................................... F-4
Consolidated Statements of Redeemable Preferred Equity and Shareholders' Equity (Deficit)..... F-5
Consolidated Statements of Cash Flows......................................................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures....................................................................... 29
PART III
Item 10 Directors and Executive Officers of the Registrant............................................ 29
Item 11 Executive Compensation........................................................................ 29
Item 12 Security Ownership of Certain Beneficial Owners and Management................................ 29
Item 13 Certain Relationships and Related Transactions................................................ 29
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 29
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as anticipate, believe, could, estimate, expect, intend, may, should,
will and would or similar words. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial position or
state other forward-looking information. We believe that it is important to
communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the "Risk Factors" section of our prospectus supplement dated
February 22, 2001, as well as any cautionary language in this report, provide
examples of risk, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. You should be aware that the occurrence of the events described in
the "Risk Factors" section of our prospectus supplement and in this report could
have a material adverse effect on our business, results of operations and
financial position.
3
PART I
ITEM 1. BUSINESS
Introduction
Our principal offices are located at 1100 Cassatt Road, Berwyn,
Pennsylvania 19312, and our telephone number at that address is (610) 651-5900.
Our World Wide Web site address is http://www.tritonpcs.com. The information in
------------------------
our website is not part of this report.
In this report, Triton, we, us and our refer to Triton PCS Holdings, Inc.
and its wholly-owned subsidiaries, unless the context requires otherwise. AT&T
Wireless PCS refers to AT&T Wireless PCS, LLC, AT&T Wireless refers to AT&T
Wireless Services, Inc. and AT&T refers to AT&T Corp.
Overview
We are a rapidly growing provider of wireless personal communications
services in the southeastern United States. Our personal communications services
licenses cover approximately 13 million potential customers in a contiguous
geographic area encompassing portions of Virginia, North Carolina, South
Carolina, Tennessee, Georgia and Kentucky. In February 1998, we entered into a
joint venture with AT&T Wireless. As part of the agreement, AT&T Wireless
contributed personal communications services licenses for 20 MHz of authorized
frequencies covering 11 million potential customers within defined areas of our
region in exchange for an equity position in Triton. Since that time, we have
expanded our coverage area to include an additional 2 million potential
customers through acquisitions and license exchanges with AT&T Wireless. As part
of the transactions with AT&T Wireless, we were granted the right to be the
exclusive provider of wireless mobility services using equal emphasis co-
branding with AT&T within our region. We believe our markets are strategically
attractive because of their proximity to AT&T Wireless's wireless systems in the
Washington, D.C., Charlotte, North Carolina and Atlanta, Georgia markets, which
collectively cover a population of more than 27 million individuals. Our market
location is attractive as we are the preferred provider of wireless mobility
services to AT&T Wireless's digital wireless customers who roam into our
markets. Our strategy is to provide extensive coverage to customers within our
region, to offer our customers coast-to-coast coverage and to benefit from
roaming revenues generated by AT&T Wireless's and other carriers' wireless
customers who roam into our covered area. Our management team is led by Michael
Kalogris and Steven Skinner, the former Chief Executive Officer and Chief
Operating Officer of Horizon Cellular Group, respectively.
Our network build-out is scheduled for three phases. As of December 31,
2000, we had completed Phase I and Phase II of this build-out and successfully
launched personal communications services in all of our 37 markets. As of
December 31, 2000, our network in these 37 markets included 1,691 cell sites and
seven switches. Since we began offering services in these 37 markets, our
subscriber base and the number of minutes generated by non-Triton subscribers
roaming onto our network have grown dramatically.
From our initial launch of personal communications services in January 1999
to December 31, 2000, our subscriber base has grown from 33,844 subscribers to
446,401 subscribers, with 84,811 additional subscribers alone coming in the
fourth quarter of 2000. Roaming minutes generated by non-Triton subscribers
since January 1999 have increased from approximately 0.7 million minutes per
month to approximately 38.0 million minutes per month, with roaming minutes
rising from 56.5 million in the fourth quarter of 1999 to 110 million minutes in
the fourth quarter of 2000. In addition, our subscriber churn rate decreased to
1.78% in the fourth quarter of 2000 from 1.94% in the third quarter of 2000.
We have begun the third phase of our network build-out, which focuses on
covering major highways linking the cities in our licensed area, as well as
neighboring cities where AT&T Wireless and other carriers use compatible
wireless technology. We expect Phase III to be completed by year-end 2001 and to
add approximately 409 cell sites to our network. Upon completion of Phase III,
our network will include approximately 2,100 cell sites and seven switches and
span approximately 18,000 highway miles.
Our markets have attractive demographic characteristics for wireless
communications services, including population densities that are 80% greater
than the national average.
Our goal is to provide our customers with simple, easy-to-use wireless
services with coast-to-coast service, superior call quality, personalized
customer care and competitive pricing. We utilize a mix of sales and
distribution channels, including, as of December 31, 2000, a network of 94
company-owned retail stores, over 415 agents with 689 indirect outlets,
including nationally recognized retailers such as Circuit City, Office Depot,
Staples and Best Buy, and 88 direct sales representatives covering corporate
accounts.
4
We believe that as a member of the AT&T Wireless Network, we will attract
customers by capitalizing on AT&T's national brand and its extensive digital
wireless network. We have also entered into an agreement with TeleCorp PCS,
another member of the AT&T Wireless Network, to operate under a common regional
brand name, SunCom, throughout an area covering approximately 49 million
potential customers primarily in the south-central and southeastern United
States. We believe this arrangement will allow us to establish a strong regional
brand name within our markets.
Strategic Alliance with AT&T Wireless
One of our most important competitive advantages is our strategic alliance
with AT&T Wireless, one of the largest providers of wireless communications
services in the United States. As part of its strategy to rapidly expand its
digital wireless coverage in the United States, AT&T Wireless has focused on
constructing its own network and making strategic acquisitions in selected
cities, as well as entering into agreements with three independent wireless
operators, including Triton, to construct and operate personal communications
services networks in other markets.
Our strategic alliance with AT&T Wireless provides us with many business,
operational and marketing advantages, including the following:
. Recognized Brand Name. We market our wireless services to our potential
customers giving equal emphasis to the SunCom and AT&T brand names and
logos.
. Exclusivity. We are AT&T Wireless's exclusive provider of facilities-
based wireless mobility communications services using equal emphasis co-
branding with AT&T in our covered markets, and, from time to time, we
may participate with AT&T Wireless in other programs.
. Preferred Roaming Partner. We are the preferred carrier for AT&T
Wireless's digital wireless customers who roam into our coverage area.
. Coverage Across the Nation. With the use of advanced multi-mode handsets
which transition between personal communications services and cellular
frequencies, our customers have access to coast-to-coast coverage
through our agreements with AT&T Wireless, other members of the AT&T
Wireless Network and with other third-party roaming partners.
. Volume Discounts. We receive preferred terms on certain products and
services, including handsets, infrastructure equipment and
administrative support from companies who provide these products and
services to AT&T.
. Marketing. We benefit from AT&T's nationwide marketing and advertising
campaigns, including the success of AT&T's national rate plans, in the
marketing of our own plans.
Competitive Strengths
In addition to the advantages provided by our strategic alliance with AT&T
Wireless, we have the following competitive strengths:
. Attractive Licensed Area. Our markets have favorable demographic
characteristics for wireless communications services, such as population
densities that are 80% greater than the national average.
. Proven Technology. We are building our personal communications services
network using time division multiple access digital technology. This
technology is also used by AT&T Wireless, and, therefore, our network is
compatible with AT&T Wireless's network and other time division multiple
access digital technology networks. This technology allows wireless
communications service providers to offer enhanced features, higher
network quality, improved in-building penetration and greater network
capacity relative to analog cellular service. In addition, handsets
operating on a digital system are capable of sleep-mode while turned on
but not in use, thus increasing standby availability for incoming calls
as users will be able to leave these phones on for significantly longer
periods than they can with wireless phones using an earlier technology.
. Experienced Management. We have a management team with a high level of
experience in the wireless communications industry. Our senior
management team has an average of 12 years of experience with wireless
leaders such as AT&T, Verizon, Horizon Cellular and ALLTEL
Communications Inc. Our senior management team also owns in excess of 9%
of our outstanding Class A common stock.
. Contiguous Service Area. We believe our contiguous service area allows
us to cost effectively offer large regional calling areas to our
customers. Further, we believe that we generate operational cost
savings, including sales and marketing efficiencies, by operating in a
contiguous service area.
5
. Strong Capital Base. We believe that we have sufficient capital and
availability under our credit facility to fund the build-out of our
current network plan through 2001. On January 19, 2001, we completed the
private sale of $350.0 million principal amount of senior subordinated
notes due in 2011. The net proceeds of the notes were approximately
$337.5 million. On February 28, 2001, we issued and sold 3,500,000
shares of Class A common stock in a public offering at $32 per share and
raised approximately $106.1 million, net of $5.9 million of costs.
Business Strategy
Our objective is to become the leading provider of wireless communications
services in the markets we serve. We intend to achieve this objective by
pursuing the following business strategies:
. Operate a Superior, High Quality Network. We are committed to making the
capital investment required to develop and operate a superior, high
quality network. Our network, when complete, will include approximately
2,100 cell sites and seven switches and span approximately 18,000
highway miles. We believe this network will enable us to provide
extensive coverage within our region and consistent quality performance,
resulting in a high level of customer satisfaction.
. Provide Superior Coast-to-Coast and In-Market Coverage. Our market
research indicates that scope and quality of coverage are extremely
important to customers in their choice of a wireless service provider.
We have designed extensive local calling areas, and we offer coast-to-
coast coverage through our arrangements with AT&T Wireless, its
affiliates and other third-party roaming partners. Our network covers
those areas where people are most likely to take advantage of wireless
coverage, such as suburbs, metropolitan areas and vacation locations.
. Provide Enhanced Value at Low Cost. We offer our customers advanced
services and features at competitive prices. Our affordable, simple
pricing plans are designed to promote the use of wireless services by
enhancing the value of our services to our customers. We include usage-
enhancing features such as call waiting, voice mail, three-way
conference calling and short message service in our basic packages. We
also allow customers to purchase large packages of minutes per month for
a low fixed price.
. Deliver Quality Customer Service. We believe that superior customer
service is a critical element in attracting and retaining customers. Our
systems have been designed with open interfaces to other systems. This
design allows us to select and deploy the best software package for each
application in our administrative systems. Our point-of-sale activation
process is designed to ensure quick and easy service initiation,
including customer qualification. We also emphasize proactive and
responsive customer care, including rapid call-answer times, welcome
packages and anniversary calls. We currently operate state-of-the-art
customer care facilities in Richmond, Virginia and Charleston, South
Carolina that house our customer service and collections personnel.
License Acquisition Transactions
Our original personal communications services licenses were acquired as
part of our joint venture agreement with AT&T Wireless.
On June 30, 1998, we acquired an existing cellular system serving Myrtle
Beach and the surrounding area from Vanguard Cellular Systems for a purchase
price of approximately $164.5 million. We integrated the Myrtle Beach system,
which used time division multiple access digital technology, into our personal
communications services network as part of our Phase I network deployment.
Substantially all of our revenues prior to 1999 were generated by services
provided in Myrtle Beach. We have used our position in Myrtle Beach to secure
roaming arrangements with other carriers that enable us to offer regional
calling plans on a cost-effective basis.
On December 31, 1998, we acquired from AT&T Wireless a personal
communications services license covering the Norfolk, Virginia basic trading
area, as well as a recently deployed network plant and infrastructure, for an
aggregate purchase price of $111.0 million. The integration and launch of our
Norfolk personal communications services were completed as part of our Phase I
network build-out.
On June 8, 1999, we completed an exchange of personal communications
services licenses with AT&T Wireless. As part of this transaction, we
transferred Hagerstown and Cumberland, Maryland personal communications services
licenses that cover approximately 512,000 potential customers, with an estimated
value of $5.1 million, for Savannah and Athens, Georgia personal communications
services licenses that cover approximately 517,000 potential customers, with an
estimated value of $15.5 million. We also issued to AT&T Wireless PCS 53,882
shares of our Series A preferred stock and 42,739 shares of our Series D
preferred stock, with estimated values of $5.8 million and $4.6 million,
respectively, in connection with the exchange. The build-out of our Savannah and
Athens licenses was completed as part of Phase II of our network build-out.
6
Summary Market Data
The following table presents statistical information concerning the markets
covered by our licenses.
Local
2000 Estimated % Interstate
Potential Growth Population Traffic
Licensed Areas(1) Customers(2) 1998-2003 Density(3) Density(4)
- ----------------- ------------- --------- ---------- ----------
Charlotte Major Trading Area
Anderson, SC................................................... 346.6 1.28% 117 29,540
Asheville, NC.................................................. 588.7 1.18% 94 28,774
Charleston, SC................................................. 686.8 0.59% 125 37,054
Columbia, SC................................................... 657.0 1.36% 161 31,789
Fayetteville/Lumberton, NC..................................... 636.8 0.76% 130 27,834
Florence, SC................................................... 260.2 0.71% 113 24,689
Goldsboro/Kinston, NC.......................................... 232.0 0.72% 112 9,065
Greenville/Washington, NC...................................... 245.1 0.60% 60 N/A
Greenville/Spartanburg, SC..................................... 897.7 1.33% 220 28,535
Greenwood, SC.................................................. 74.4 0.81% 91 N/A
Hickory/Lenoir, NC............................................. 331.1 1.09% 199 31,385
Jacksonville, NC............................................... 148.4 0.49% 193 N/A
Myrtle Beach, SC............................................... 186.4 3.00% 154 N/A
New Bern, NC................................................... 174.7 1.14% 84 N/A
Orangeburg, SC................................................. 119.6 0.35% 63 27,787
Roanoke Rapids, NC............................................. 76.8 (0.34)% 61 28,372
Rocky Mount/Wilson, NC......................................... 217.2 0.82% 150 26,511
Sumter, SC..................................................... 156.7 0.57% 92 19,421
Wilmington, NC................................................. 327.6 2.32% 109 14,161
Knoxville Major Trading Area
Kingsport, TN.................................................. 693.4 0.31% 117 23,617
Middlesboro/Harlan, KY......................................... 118.4 (0.41)% 75 N/A
Atlanta Major Trading Area
Athens, GA..................................................... 194.6 1.65% 137 36,559
Augusta, GA.................................................... 579.4 0.68% 89 24,497
Savannah, GA................................................... 737.1 1.18% 79 24,400
Washington Major Trading Area
Charlottesville, VA............................................ 223.8 1.19% 75 15,925
Fredericksburg, VA............................................. 144.0 2.25% 102 67,606
Harrisonburg, VA............................................... 145.0 0.61% 58 29,728
Winchester, VA................................................. 162.4 1.17% 119 25,156
Richmond Major Trading Area
Danville, VA................................................... 167.2 (0.42)% 75 N/A
Lynchburg, VA.................................................. 161.5 0.43% 117 31,863
Martinsville, VA............................................... 89.6 (0.42)% 103 N/A
Norfolk-Virginia Beach, VA..................................... 1,751.0 0.44% 293 61,023
Richmond/Petersburg, VA........................................ 1,232.5 0.66% 133 35,969
Roanoke, VA.................................................... 647.6 0.19% 91 27,541
Staunton/Waynesboro, VA........................................ 108.9 0.62% 76 26,974
Triton total/average...................................... 13,520.2(5) 0.83% (6) 144.1(7) 30,183(8)
U.S. average.............................................. N/A 0.89% 80(9) 31,521
__________
All figures are based on 2000 estimates published by Paul Kagan Associates, Inc.
in 2000.
(1) Licensed major trading areas are segmented into basic trading areas.
(2) In thousands.
(3) Number of potential customers per square mile.
(4) Daily vehicle miles traveled (interstate only) divided by interstate
highway miles in the relevant area.
7
(5) Total potential customers in the licensed area.
(6) Weighted by potential customers. Projected average annual population growth
in our licensed area.
(7) Weighted by potential customers. Average number of potential customers per
square mile in our licensed area.
(8) Weighted by interstate miles. Average daily vehicle miles traveled
(interstate only) divided by interstate highway miles in our licensed area.
(9) Average number of potential customers per square mile for the U.S.
Sales and Distribution
Our sales strategy is to utilize multiple distribution channels to minimize
customer acquisition costs and maximize penetration within our licensed service
area. Our distribution channels include a network of company-owned retail
stores, independent retailers and a direct sales force for corporate accounts,
as well as direct marketing channels such as telesales, neighborhood sales and
online sales. We also work with AT&T Wireless's national corporate account sales
force to cooperatively exchange leads and develop new business.
. Company-Owned Retail Stores. We make extensive use of company-owned
retail stores for the distribution and sale of our handsets and
services. We believe that company-owned retail stores offer a
considerable competitive advantage by providing a strong local presence,
which is required to achieve high penetration in suburban and rural
areas and the lowest customer acquisition cost. We have opened 94
company-owned SunCom stores as of December 31, 2000.
. Retail Outlets. We have negotiated distribution agreements with national
and regional mass merchandisers and consumer electronics retailers,
including Circuit City, Office Depot, Staples, Best Buy, Metro Call and
Zap's. As of December 31, 2000, we had over 415 agents with 689 retail
outlet locations where customers can purchase our services.
. Direct Sales. We focus our direct sales force on high-revenue, high-
profit corporate users. As of December 31, 2000, our direct corporate
sales force consisted of 88 dedicated professionals targeting wireless
decision-makers within large corporations. We also benefit from AT&T
Wireless's national corporate accounts sales force, which supports the
marketing of our services to AT&T Wireless's large national accounts
located in certain of our service areas.
. Direct Marketing. We use direct marketing efforts such as direct mail
and telemarketing to generate customer leads. Telesales allow us to
maintain low selling costs and to sell additional features or customized
services.
. Website. Our web page provides current information about our markets,
our product offerings and us. We have established an online store on our
website, www.suncom.com. The web page conveys our marketing message, and
we expect it will generate customers through online purchasing. We
deliver all information that a customer requires to make a purchasing
decision at our website. Customers are able to choose rate plans,
features, handsets and accessories. The online store provides a secure
environment for transactions, and customers purchasing through the
online store encounter a transaction experience similar to that of
customers purchasing service through other channels.
Marketing Strategy
Our marketing strategy has been developed on the basis of extensive market
research in each of our markets. This research indicates that the limited
coverage of existing wireless systems, relatively high cost and inconsistent
performance reduce the attractiveness of wireless service to existing users and
potential new users. We believe that our affiliation with the AT&T brand name
and the distinctive advantages of our time division multiple access digital
technology, combined with simplified, attractive pricing plans, will allow us to
capture significant market share from existing analog cellular providers in our
markets and to attract new wireless users. We are focusing our marketing efforts
on three primary market segments:
. current wireless users;
. individuals with the intent to purchase a wireless product within six
months; and
. corporate accounts.
For each segment, we are creating a specific marketing program including a
service package, pricing plan and promotional strategy. We believe that targeted
service offerings will increase customer loyalty and satisfaction, thereby
reducing customer turnover.
8
The following are key components of our marketing strategy:
. Regional Co-Branding. We have entered into an agreement with TeleCorp
PCS, another company affiliated with AT&T Wireless, to adopt a common
regional brand, SunCom. We market our wireless services as SunCom,
Member of the AT&T Wireless Network and use the globally recognized AT&T
brand name and logo in equal emphasis with the SunCom brand name and
logo. We believe that use of the AT&T brand reinforces an association
with reliability and quality. We and TeleCorp PCS are establishing the
SunCom brand as a strong local presence with a service area covering
approximately 49 million potential customers. We enjoy preferred pricing
on equipment, handset packaging and distribution by virtue of our
affiliation with AT&T Wireless and the other SunCom company.
. Pricing. Our pricing plans are competitive and straightforward, offering
large packages of minutes, large regional calling areas and usage
enhancing features. One way we differentiate ourselves from existing
wireless competitors is through our pricing policies. We offer pricing
plans designed to encourage customers to enter into long-term service
contract plans.
We offer our customers regional, network only and national rate plans. Our
rate plans allow customers to make and receive calls anywhere within the
southeast region and the District of Columbia without paying additional roaming
or long distance charges. By contrast, competing flat rate plans generally
restrict flat rate usage to such competitors' owned networks. By virtue of our
roaming arrangements with AT&T Wireless, its affiliates and other third-party
roaming partners, we offer competitive regional, network only and national rate
plans. Our sizable licensed area allows us to offer large regional calling areas
at rates as low as $.08 per minute throughout the Southeast.
Customer Care. We are committed to building strong customer relationships
by providing our customers with service that exceeds expectations. We currently
operate state-of-the-art customer care facilities in Richmond, Virginia and
Charleston, South Carolina that house our customer service and collections
personnel. We supplement these facilities with customer care services provided
by Convergys Corporation in Clarksville, Tennessee. Through the support of
approximately 250 customer care representatives and a sophisticated customer
care platform provided by Integrated Customer Systems, we have been able to
implement one ring customer care service using live operators and state-of-the-
art call routing, so that about 90% of incoming calls to our customer care
centers are answered on the first ring.
Future Product Offerings. We may bundle our wireless communications
services with other products such as the wireless office service that we
currently provide to selected business accounts. Our recent addition of wireless
access protocol service allows our customers to access the wireless web from
their wireless phones and terminal devices. Enhancements to these platforms as
well as short message service and unified messaging will allow us to provide our
customers with an expanding suite of products and services.
Advertising. We believe our most successful marketing strategy is to
establish a strong local presence in each of our markets. We are directing our
media and promotional efforts at the community level with advertisements in
local publications and sponsorship of local and regional events. We combine our
local efforts with mass marketing strategies and tactics to build the SunCom and
AT&T brands locally. Our media effort includes television, radio, newspaper,
magazine, outdoor and Internet advertisements to promote our brand name. In
addition, we use newspaper and radio advertising and our web page to promote
specific product offerings and direct marketing programs for targeted audiences.
Services and Features
We provide affordable, reliable, high-quality mobile telecommunications
service. Our advanced digital personal communications services network allows us
to offer customers the most advanced wireless features that are designed to
provide greater call management and increase usage for both incoming and
outgoing calls.
. Feature-Rich Handsets. As part of our service offering, we sell our
customers the most advanced, easy-to-use, interactive, menu-driven
handsets that can be activated over the air. These handsets have many
advanced features, including word prompts and easy-to-use menus, one-
touch dialing, multiple ring settings, call logs and hands-free
adaptability. These handsets also allow us to offer the most advanced
digital services, such as voice mail, call waiting, call forwarding,
three-way conference calling, e-mail messaging and paging.
. Multi-Mode Handsets. We exclusively offer multi-mode handsets, which are
compatible with personal communication services, digital cellular and
analog cellular frequencies and service modes. These multi-mode handsets
allow us to offer customers coast-to-coast nationwide roaming across a
variety of wireless networks. These handsets incorporate a roaming
database, which can be updated over the air that controls roaming
preferences from both a quality and cost perspective.
9
. New Product Offerings. We have undertaken several new product
initiatives which include:
- Wireless Office Systems. Wireless Office Systems provide business
customers a private wireless network inside an enterprise that
enables users to make and receive calls both within and outside the
offices using a simple wireless phone and phone number. We installed
our first commercial application in North Carolina during 2000.
- SunCom iNotes. We have introduced SunCom iNotes, a two-way text
messaging service that allows its wireless customers to originate
and receive text messages over their mobile phones, in Richmond,
Virginia, and Charleston, South Carolina.
Network Build-Out
The principal objective for the build-out of our network is to maximize
population coverage levels within targeted demographic segments and geographic
areas , rather than building out wide-area network as depicted in the cellular
design model. As of December 31, 2000, we have successfully launched service in
37 cities, 1691 cell sites and seven switches. The Phase III network design,
scheduled to be completed by year-end 2001, will complete our initial network
build-out. At completion of Phase III, 2,100 cell sites will be on the air,
covering approximately 18,000 highway miles and over 80% of our potential
customers.
The build-out of our network involves the following:
. Property Acquisition, Construction and Installation. Two experienced
vendors, Crown Castle International Corp. and American Tower, identify
and obtain the property rights we require to build out our network,
which includes securing all zoning, permitting and government approvals
and licenses. As of December 31, 2000, we had signed leases or options
for 1,832 sites, 46 of which were awaiting required zoning approvals.
Crown Castle and American Tower also act as our construction management
contractors and employ local construction firms to build the cell sites.
. Interconnection. Our digital wireless network connects to local exchange
carriers. We have negotiated and received state approval of
interconnection agreements with telephone companies operating or
providing service in the areas where we are currently operating our
digital personal communications services network. We use AT&T as our
inter-exchange or long-distance carrier.
Network Operations
To effectively maintain, operate and expand our network, agreements must be
established with service providers such as local exchange carriers, long
distance companies, network monitoring services and roaming agreements with
other wireless carriers.
Switched Interconnection/Backhaul. Our network is connected to the public
switched telephone network to facilitate the origination and termination of
traffic on our network.
Long Distance. We have executed a wholesale long distance agreement with
AT&T that provides preferred rates for long distance services.
Roaming. Through our arrangements with AT&T Wireless and via the use of
multi-mode handsets, our customers have roaming capabilities on AT&T Wireless's
network. Further, we have established roaming agreements with third-party
carriers at preferred pricing, including in-region roaming agreements covering
all of our launched service areas.
Network Monitoring Systems. Our network monitoring service provides around-
the-clock surveillance of our entire network. The network operations center is
equipped with sophisticated systems that constantly monitor the status of all
switches and cell sites, identify failures and dispatch technicians to resolve
issues. Operations support systems are utilized to constantly monitor system
quality and identify devices that fail to meet performance criteria. These same
platforms generate statistics on system performance such as dropped calls,
blocked calls and handoff failures. Our operations support center located in
Richmond, Virginia performs maintenance on common network elements such as voice
mail, home location registers and short message centers.
Information Technology. We maintain all information technology or IT,
network elements that control administrative systems such as customer care,
provisioning, billing and financial systems. Our sophisticated network
management system allows us to identify and correct IT network faults.
Time Division Multiple Access Digital Technology
We are building our network using time division multiple access digital
technology on the IS-136 platform. This technology allows for the use of
advanced multi-mode handsets, which allow roaming across personal communications
services and cellular frequencies, including both analog and digital cellular.
This technology allows for enhanced services and features, such as short-
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messaging, extended battery life, added call security and improved voice
quality, and its hierarchical cell structure enables us to enhance network
coverage with lower incremental investment through the deployment of micro, as
opposed to full-size, cell sites. This enables us to offer customized billing
options and to track billing information per individual cell site, which is
practical for advanced wireless applications such as wireless local loop and
wireless office applications. Management believes that time division multiple
access digital technology provides significant operating and customer benefits
relative to analog systems. In addition, management believes that time division
multiple access digital technology provides customer benefits, including
available features and roaming capabilities, and call quality that is similar to
or superior to that of other wireless technologies. Time division multiple
access technology allows three times the capacity of analog systems. Some
manufacturers, however, believe that code division multiple access technology
will eventually provide system capacity that is greater than that of time
division multiple access technology and global systems for mobile
communications.
Time division multiple access digital technology is currently used by two
of the largest wireless communications companies in the United States, AT&T
Wireless and Cingular Wireless. Time division multiple access equipment is
available from leading telecommunications vendors such as Lucent, Ericsson and
Northern Telecom, Inc.
Regulation
The FCC regulates aspects of the licensing, construction, operation,
acquisition and sale of personal communications services and cellular systems in
the United States pursuant to the Communications Act, as amended from time to
time, and the associated rules, regulations and policies it promulgates.
Licensing of Cellular and Personal Communications Services Systems. A
broadband personal communications services system operates under a protected
geographic service area license granted by the FCC for a particular market on
one of six frequency blocks allocated for broadband personal communications
services. Broadband personal communications services systems generally are used
for two-way voice applications. Narrowband personal communications services, in
contrast, are used for non-voice applications such as paging and data service
and are separately licensed. The FCC has segmented the United States into
personal communications services markets, resulting in 51 large regions called
major trading areas, which are comprised of 493 smaller regions called basic
trading areas. The FCC awarded two broadband personal communications services
licenses for each major trading area and four licenses for each basic trading
area. Thus, generally, six broadband personal communications services licensees
will be authorized to compete in each area. The two major trading area licenses
authorize the use of 30 MHz of spectrum. One of the basic trading area licenses
is for 30 MHz of spectrum, and the other three are for 10 MHz each. The FCC
permits licensees to split their licenses and assign a portion, on either a
geographic or frequency basis or both, to a third party. In this fashion, AT&T
Wireless assigned us 20 MHz of its 30 MHz licenses covering our licensed areas.
Two cellular licenses are also available in each market. Cellular markets are
defined as either metropolitan or rural service areas and do not correspond to
the broadband personal communications services markets.
Generally, the FCC awarded initial personal communications services
licenses by auction. Initial personal communications services auctions began
with the 30 MHz major trading area licenses and concluded in 1998 with the last
of the basic trading area licenses. However, in March 1998, the FCC adopted an
order that allowed financially troubled entities that won personal
communications services 30 MHz C-Block licenses at auction to obtain some
financial relief from their payment obligations by returning some or all of
their C-Block licenses to the FCC for reauctioning. The FCC completed the
reauction of the returned licenses in April 1999, and some licenses were not
sold. In January 2000, the FCC announced that certain personal communications
services licenses previously held by licensees that had declared bankruptcy had
cancelled and were available for reauction. The FCC commenced the reauction on
December 12, 2000. The auction concluded on January 26, 2001. Lafayette
Communications was the high bidder on 14 licenses. On February 27, 2001,
Lafayette Communications' long-form applications for these licenses were
accepted for filing by the FCC. These applications, however, could be subject to
petitions to deny from other parties. On March 9, 2001, NextWave Personal
Communications, Inc. and the NextWave Committee of Unsecured Creditors, or
collectively, NextWave, individually filed petitions to defer, or in the
alternative, to condition the grant of the C-Block licenses pending a ruling on
the appeal. NextWave filed at the United States Court of Appeals for the
District of Columbia Circuit requesting the Court to overturn the FCC's decision
to cancel the NextWave licenses. Lafayette Communications is expected to file
its opposition to the NextWave petition on March 16, 2001. These auctions place
additional spectrum in the hands of our potential competitors.
Under the FCC's current rules specifying spectrum aggregation limits
affecting broadband personal communications services, Specialized Mobile Radio
Services and cellular licensees, no entity may hold attributable interests,
generally 20% or more of the equity of, or an officer or director position with,
the licensee, in licenses for more than 45 MHz of personal communications
services, cellular and certain specialized mobile radio services where there is
significant overlap, except in rural areas. In rural areas, up to 55 MHz of
spectrum may be held. Passive investors may hold up to a 40% interest.
Significant overlap will occur when at least 10% of the population of the
personal communications services licensed service area is within the cellular
and/or specialized mobile radio service area(s). In a September 15, 1999 FCC
order revising the spectrum cap rules, the FCC noted that new broadband wireless
services, such as Third Generation wireless, may be included in the cap when
spectrum is allocated for those services. The FCC has initiated a proceeding to
review the possible modification or elimination of the spectrum cap.
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Recently, however, the FCC adopted licensing rules governing the 700 MHz
spectrum originally scheduled for auction in March 2001. Thirty (30) MHz of
spectrum will be auctioned; none of which is subject to the spectrum cap. The
FCC recently postponed the 700 MHz auction until September 12, 2001. Because of
the flexible use policy adopted by the FCC for this spectrum, wireless providers
may provide Third Generation services over the 700 MHz band. The personal
communications services reauctioned spectrum is subject to the spectrum cap. In
November 2000, the FCC adopted a Policy Statement and Notice of Proposed
Rulemaking regarding secondary markets in radio spectrum. In the Notice of
Proposed Rulemaking, the FCC tentatively concludes that spectrum licensees
should be permitted to enter leasing agreements with third parties to promote
greater use of unused spectrum.
Late last year, President Clinton ordered the FCC and other Federal
agencies to work together to create a spectrum allocation plan for Third
Generation advanced wireless services. In January 2001, the FCC issued a Notice
of Proposed Rulemaking requesting comment on the use of certain spectrum bands
for Third Generation services. The FCC also seeks comment on whether Third
Generation services could be provided over the frequency bands currently
allocated to cellular, personal communications services and Specialized Mobile
Radio services. It is unclear at this point what impact, if any, this proceeding
will have on our current operations.
All personal communications services licenses have a 10-year term, at the
end of which they must be renewed. The FCC will award a renewal expectancy to a
personal communications services licensee that has:
. provided substantial service during its past license term; and
. has substantially complied with applicable FCC rules and policies and
the Communications Act.
Cellular radio licenses also generally expire after a 10-year term in the
particular market and are renewable for periods of 10 years upon application to
the FCC. Licenses may be revoked for cause and license renewal applications
denied if the FCC determines that a renewal would not serve the public interest.
FCC rules provide that competing renewal applications for cellular licenses will
be considered in comparative hearings, and establish the qualifications for
competing applications and the standards to be applied in hearings. Under
current policies, the FCC will grant incumbent cellular licensees the same
renewal expectancy granted to personal communications services licensees.
All personal communications services licensees must satisfy certain
coverage requirements. In our case, we must construct facilities that offer
radio signal coverage to one-third of the population of our service area within
five years of the original license grants to AT&T Wireless and to two-thirds of
the population within ten years. Licensees that fail to meet the coverage
requirements may be subject to forfeiture of their license. We anticipate the
last phase of our network build-out to be completed by year-end 2001. Our
cellular license, which covers the Myrtle Beach area, is not subject to coverage
requirements.
For a period of up to five years, subject to extension, after the grant of
a personal communications services license, a 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 our personal communications services systems efficiently and with
adequate population coverage, we have relocated two of these incumbent licensees
and will need to relocate two more licensees. In an effort to balance the
competing interests of existing microwave users and newly authorized personal
communications services licensees, the FCC has adopted:
. a transition plan to relocate such microwave operators to other
spectrum blocks; and
. a cost sharing plan so that if the relocation of an incumbent benefits
more than one personal communications services licensee, those
licensees will share the cost of the relocation.
Initially, this transition plan allowed most microwave users to operate in
the personal communications services spectrum for a two-year voluntary
negotiation period and an additional one-year mandatory negotiation period. For
public safety entities that dedicate a majority of their system communications
to police, fire or emergency medical services operations, the voluntary
negotiation period is three years, with an additional two-year mandatory
negotiation period. In 1998, the FCC shortened the voluntary negotiation period
by one year, without lengthening the mandatory negotiation period for non-public
safety personal communications services licensees in the C, D, E and F Blocks.
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. The transition
and cost sharing plans expire on April 4, 2005, at which time remaining
microwave incumbents in the personal communications services spectrum will be
responsible for the costs of relocating to alternate spectrum locations. Our
cellular license is not encumbered by existing microwave licenses.
Transfers and Assignments of Cellular and Personal Communications Services
Licenses. The Communications Act and FCC rules require the FCC's prior approval
of the assignment or transfer of control of a license for a personal
communications services or cellular system. In addition, the FCC has established
transfer disclosure requirements that require any licensee that assigns or
transfers control of a personal communications services license within the first
three years of the license term to file associated sale contracts, option
agreements, management agreements or other documents disclosing the total
consideration that the licensee would receive in return for the transfer or
assignment of its license. Non-controlling interests in an entity that holds a
FCC license generally may be
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bought or sold without FCC approval, subject to the FCC's spectrum aggregation
limits. However, we may require approval of the Federal Trade Commission and the
Department of Justice, as well as state or local regulatory authorities having
competent jurisdiction, if we sell or acquire personal communications services
or cellular interests over a certain size.
Foreign Ownership. Under existing law, no more than 20% of an FCC
licensee'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. If an FCC licensee is controlled by
another entity, as is the case with our ownership structure, up to 25% of that
entity's capital stock may be owned or voted by non-US citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation. Foreign ownership above the 25% level may be allowed should the FCC
find such higher levels not inconsistent with the public interest. The FCC has
ruled that higher levels of foreign ownership, even up to 100%, are
presumptively consistent with the public interest with respect to investors from
certain nations. If our foreign ownership were to exceed the permitted level,
the FCC could revoke our FCC licenses, although we could seek a declaratory
ruling from the FCC allowing the foreign ownership or take other actions to
reduce our foreign ownership percentage to avoid the loss of our licenses. We
have no knowledge of any present foreign ownership in violation of these
restrictions.
Regulation of Personal Communications Services Operations. Personal
communications services and cellular systems are subject to certain FAA
regulations governing the location, lighting and construction of transmitter
towers and antennas and may be subject to regulation under Federal environmental
laws and the FCC's environmental regulations. State or local zoning and land use
regulations also apply to our activities. We expect to use common carrier point
to point microwave facilities to connect the transmitter, receiver, and
signaling equipment for each personal communications services or cellular cell,
the cell sites, and to link them to the main switching office. The FCC licenses
these facilities separately and they are subject to regulation as to technical
parameters and service.
The Communications Act preempts state and local regulation of the entry of,
or the rates charged by, any provider of private mobile radio service or of
commercial mobile radio service, which includes personal communications services
and cellular service. The Communications Act permits states to regulate the
"other terms and conditions of CMRS." The FCC has not clearly defined what is
meant by the "other terms and conditions" of CMRS, however, and has upheld the
legality of state universal service requirements on CMRS carriers. The United
States Courts of Appeals for the 5th and District of Columbia Circuits have
affirmed the FCC's determination. The FCC also has held that private lawsuits
based on state law claims concerning how wireless rates are promoted or
disclosed may not be preempted by the Communications Act.
The FCC does not regulate commercial mobile radio service or private mobile
radio service rates. The FCC does exercise jurisdiction over all
telecommunications service providers whose facilities are used to provide,
originate and terminate interstate or international communications.
Recent Industry Developments. The following requirements impose
restrictions on our business and could increase our costs:
Enhanced 911 Services. The FCC has announced rules for making emergency 911
services available by cellular, personal communications services and other
commercial mobile radio service providers, including enhanced 911 services that
provide the caller's telephone number, location and other useful information.
Commercial mobile radio service providers currently are required to be able to
process and transmit 911 calls without call validation, including those from
callers with speech or hearing disabilities and relay a caller's automatic
number identification and cell site. FCC regulations will require wireless
carriers to identify the location of emergency 911 callers by use of either
network-based or handset-based technologies.
On September 8, 2000, the FCC adopted an order modifying its rules for
carriers electing to use hand-set based technologies. Carriers that use
handset-based technologies must:
. begin selling compliant handsets by October 1, 2001;
. ensure that 25% of all newly activated handsets are compliant by
December 31, 2001 and that 100% of all newly activated digital
handsets are compliant by December 21, 2002;
. comply with additional requirements relating to passing location
information upon the request of 911 operators; and
. achieve full penetration (defined as 95% penetration) of compliant
handsets by no later than December 31, 2005.
Carriers that use network-based technologies must provide location information
for 50% of callers within six months and 100% of callers within 18 months of a
request from a 911 operator. The FCC will require network-based solutions to be
accurate for 67% of calls to within 100 meters and for 95% of calls to within
300 meters and handset-based solutions to be accurate for 67% of calls to within
50 meters and for 95% of calls to within 150 meters.
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On October 12, 1999, Congress adopted legislation that would establish
national rules governing emergency services, which was signed into law on
October 26, 1999. The legislation:
. makes 911 the national emergency number for wireline and wireless
phones;
. extends limited liability protection to wireless users, wireless
providers and public safety officials;
. allows carriers to use a customer's network information for emergency
purposes; and
. allows carriers to disclose the customer's network information,
including location information, to family members and guardians in
emergency situations.
In August 2000, the FCC issued an order and notice of proposed rulemaking
designating 911 as the emergency telephone number within the United States and
requesting comment on certain issues regarding 911 implementation, including the
appropriate transition periods for areas in which 911 is currently not in use as
an emergency number. The notice of proposed rulemaking is pending.
On November 18, 1999, the FCC eliminated carrier cost recovery as a
precondition to enhanced 911 deployment. The FCC's cost-recovery rules require
wireless carriers to implement enhanced 911 services without any specific
mechanism to recoup their costs. Recently, the FCC denied two requests for
reconsideration of this decision.
Pending the development of adequate technology, the FCC has granted waivers
of the requirement to provide 911 service to users with speech or hearing
disabilities to various providers, and we have obtained a waiver. On June 9,
1999, the FCC also adopted rules designed to ensure that analog cellular calls
to 911 are completed. These rules, which do not apply to digital cellular
service or to personal communications services, give each cellular handset
manufacturer a choice of three ways to meet this requirement. These rules were
in effect on February 13, 2000, but several handset manufacturers have obtained
waivers of the deadline. State actions incompatible with the FCC rules are
subject to preemption.
On December 14, 2000, the FCC released a decision establishing June 20,
2002, as the deadline by which digital wireless service providers must be
capable of transmitting 911 calls made by users with speech or hearing
disabilities using text telephone devices. Recently, a petition for
reconsideration was filed challenging the decision.
Radiofrequency Emissions. On January 10, 2001, the United States Supreme
Court denied a petition for review of the FCC guidelines for health and safety
standards of radiofrequency radiation. The guidelines, which were adopted by the
FCC in 1996, limit the permissible human exposure to radiofrequency radiation
from transmitters and other facilities.
Media reports have suggested that, and studies are currently being
undertaken to determine whether, certain radiofrequency emissions from wireless
handsets may be linked to various health concerns, including cancer, and may
interfere with various electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may have the effect of
discouraging the use of wireless handsets, which would decrease demand for our
services. However, the most recent reports from the National Cancer Institute
and the American Health Foundation, both released in December 2000, and from the
Danish Cancer Society, released in February 2001, found no evidence that cell
phones cause cancer, although one of the reports indicated that further study
might be appropriate as to one rare form of cancer. Other studies of these
issues are in progress.
Interconnection Provisions. In 1996, Congress passed legislation designed
to open local telecommunications markets to competition. The Telecommunications
Act of 1996 mandated significant changes in existing regulation of the
telecommunications industry. The Telecommunications Act establishes a general
duty of all telecommunications carriers, including personal communications
services licensees, to interconnect with other carriers directly or indirectly.
The Telecommunications Act also contains detailed requirements with respect to
the interconnection obligations of local exchange carriers.
On August 8, 1996, the FCC released its order implementing the
interconnection provisions of the Telecommunications Act. Although many of the
provisions of this order were struck down by the United States Court of Appeals
for the Eighth Circuit, the United States Supreme Court reversed the Eighth
Circuit and upheld the FCC in all respects material to our operations. While
appeals have been pending, the rationale of the FCC's order has been adopted by
many states' public utility commissions, with the result that the charges that
cellular and personal communications services operators pay to interconnect
their traffic to the public switched telephone network have declined
significantly from pre-1996 levels.
On July 18, 2000, the United States Court of Appeals for the Eighth Circuit
vacated the FCC's method for setting the prices of incumbent local exchange
carriers' unbundled network elements, which is known as "total element long run
incremental cost" or TELRIC. TELRIC is a forward-looking cost model that
attempts to value the incumbent carriers' existing network elements and
facilities based on what the cost would be to provide these elements or
facilities over the most efficient technology and network configuration. While
the court struck down TELRIC, it did not foreclose the FCC from employing a
different forward-looking cost model for interconnection and unbundled elements.
The FCC requested the Eighth Circuit to stay the decision pending review by the
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Supreme Court. A stay was granted in September 2000. On January 23, 2001, the
Supreme Court granted certiorari and agreed to hear the appeal from the Eighth
Circuit. The Supreme Court will hear the case during its session that begins in
October 2001. If the FCC's rules are not reinstated it is possible that our
costs for incumbent local exchange carrier services, including interconnection
with the public switched telecommunications network, could increase. In
addition, Congress may consider legislation and the FCC has initiated a
proceeding that could greatly modify the current regime of payments for
interconnection. If legislation were enacted in the form under consideration in
the previous session of Congress, it could further reduce our costs for
interconnection.
On March 5, 2001, the United States Supreme Court agreed to hear a dispute
over whether Federal courts can review state public utility commission decisions
that arise when they arbitrate interconnection disputes between local exchange
carriers and competitive carriers. The Communications Act permits carriers to
appeal public utility commission decisions to United States District Courts.
Several state commissions have challenged whether this provision violates the
Eleventh Amendment, which gives states immunity from suits in Federal court.
Should the Supreme Court determine that states are immune from such suits in
Federal court, carriers would be limited in their challenges to state
arbitration decisions at the Federal court level.
Universal Service Funds. In its implementation of the Telecommunications
Act, the FCC established federal universal service requirements that affect
commercial mobile radio service operators. Under the FCC's rules, commercial
mobile radio service providers are potentially eligible to receive universal
service subsidies for the first time; however, they are also required to
contribute to both federal and state universal service funds. The rules adopted
by the FCC in its Universal Service orders require telecommunications carriers
generally (subject to limited exemptions) to contribute to funding existing
universal service programs for high cost carriers and low income customers and
to new universal service programs to support services to schools, libraries and
rural health care providers. The FCC has implemented a program to fund local
exchange carrier operations in high cost service non-rural areas that, in the
short run, preserves many of the existing subsidies. On December 22, 2000, the
Federal-State Joint Board on Universal Service forwarded to the FCC
recommendations of the Rural Task Force on Universal Service, referred to as the
"RTF", for implementing a rural universal service plan. Among the
recommendations of the RTF is the use of embedded-cost mechanisms, not
forward-looking tools, to set rural high-cost support. The RTF proposal also
calls for geographic disaggregation of costs and retaining but adjusting the cap
on high-cost support. The RTF proposal also supports increasing support for the
provision of advanced services. An expansion of the services covered by the
Universal Service Fund could substantially increase the contributions Triton and
other carriers make to the fund. This subsidy mechanism, if adopted, could
provide an additional source of revenue to those local exchange carriers or
other carriers willing and able to provide service to those markets that are
less financially desirable. Regardless of our ability to receive universal
service funding for the supported services we provide, we are required to fund
these federal programs based on our end user telecommunications revenue and also
may be required to contribute to state universal service programs.
Number Portability. The FCC has adopted rules on telephone number
portability that will enable customers to migrate their landline and cellular
telephone numbers to cellular or personal communications services providers and
from a cellular or personal communications services provider to another service
provider. The deadline for compliance with this requirement is November 24,
2002, subject to any later determination that an earlier implementation of
number portability is necessary to conserve telephone numbers.
Electronic Surveillance. The FCC has also adopted rules requiring providers
of wireless services that are interconnected to the public switched telephone
network to provide functions to facilitate electronic surveillance by law
enforcement officials. The Communications Assistance for Law Enforcement Act
requires telecommunications carriers to modify their equipment, facilities, and
services to ensure that they are able to comply with authorized electronic
surveillance. These modifications were required to be completed by June 30,
2000, unless carriers were granted temporary waivers, which Triton and many
other wireless providers requested. The FCC has extended the compliance deadline
for wireless providers, including Triton, whose waiver requests met certain
specified requirements until March 31, 2001, subject to any subsequent
determinations the FCC may make. Carriers must implement additional capabilities
by September 30, 2001. In light of a court decision overturning certain
substantive requirements, a petition seeking to suspend the compliance dates has
been filed at the FCC. The September 30, 2001 compliance date for the
Communications Assistance for Law Enforcement Act capabilities remains in
question.
Number Pooling. In addition, there are significant ongoing controversies
concerning numbering resources. In March and December 2000, the FCC released
orders establishing rules intended to promote the efficient use of numbering
resources while ensuring that all carriers have access to the numbering
resources they need to compete effectively and a further notice of proposed
rulemaking seeking additional comments and supporting data on certain issues.
The orders adopt a mandatory requirement for carriers to share blocks of
telephone numbers (known as "number pooling"), which today are assigned in
groups of 10,000. The orders defer this requirement for wireless providers until
the time when those providers will be required to implement number portability,
which is November 24, 2002. The orders also adopt a requirement for carriers to
meet usage thresholds before requesting new telephone numbers and gives states
new authority to reclaim unused blocks of telephone numbers. In particular, the
FCC adopted a utilization threshold--the percentage of already-assigned
telephone numbers a carrier must use before asking for more numbering resources
- -- of 60%, effective three months after the December 2000 order is published in
the Federal Register, which eventually increases to 75% in increments of 5% over
the next three years. The orders also extend the period that telephone numbers
could be reserved by carriers from 45 to 180 days and establish a five-year
contract term for the number pooling administrator.
In the December, 2000 order, the FCC also seeks comment on several issues,
including modification of the current prohibition on service-specific and
technology-specific overlays, and whether states should be permitted to
implement such overlays subject to certain conditions. The further notice also
seeks comment on the extent of the FCC's authority over rate center
consolidation, which typically has been reserved to the states.
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In addition, the FCC has shown a willingness to delegate to the states a
larger role in telephone number conservation measures. Examples of state
conservation methods include number pooling and number rationing. Number pooling
is especially problematic for wireless providers because it is dependent on
number portability technology.
Since mid-1999, the FCC has granted interim number conservation authority
to several state commissions, including Ohio, Wisconsin, Texas, New Hampshire,
Connecticut, California, Florida, Maine, Massachusetts, New York, Arizona,
Colorado, Iowa, Missouri, Nebraska, North Carolina, Oregon, Pennsylvania,
Tennessee, Utah, Virginia, and Washington. Any state actions under these waivers
must be consistent with the FCC's numbering optimization orders.
Rate Integration. The FCC has determined that the interstate, interexchange
offerings, commonly referred to as long distance, of commercial mobile radio
service providers are subject to the interstate, interexchange rate averaging
and integration provisions of the Communications Act. Rate averaging requires
carriers to average our interstate long distance commercial mobile radio service
rates between high cost and urban areas. The U.S. Court of Appeals for the
District of Columbia Circuit, however, rejected the FCC's application of its
rate integration requirements to wireless carriers. The court remanded the issue
back to the FCC for further consideration of whether CMRS carriers should be
required to average their long distance rates across all U.S. territories. This
proceeding remains pending.
Privacy. The FCC has adopted rules limiting the use of customer proprietary
network information by telecommunications carriers, including Triton, in
marketing a broad range of telecommunications and other services to their
customers and the customers of affiliated companies. The rules give wireless
carriers discretion to use customer proprietary network information, without
customer approval, to market all information services used in the provision of
wireless services. The FCC also allowed all telephone companies to use customer
proprietary network information to solicit lost customers. While all carriers
must establish a customer's approval prior to using customer proprietary network
information for purposes not explicitly permitted by the rules, the specific
details of gathering and storing this approval are now left to the carriers. The
FCC's order was issued following a decision by the U.S. Court of Appeals for the
10th Circuit, which overturned the FCC's rules, but not the underlying statute,
on First Amendment grounds. Because the 10th Circuit did not invalidate the
customer proprietary network information provision in the Communications Act,
carriers are still obligated under the Communications Act not to misuse customer
proprietary network information.
Billing. The FCC has adopted rules governing customer billing by commercial
mobile radio services providers. The FCC adopted detailed billing rules for
landline telecommunications service providers and extended some of those rules
to commercial mobile radio services providers. Commercial mobile radio service
providers must comply with two fundamental rules: (i) clearly identify the name
of the service provider for each charge; and (ii) display a toll-free inquiry
number for customers on all "paper copy" bills.
Access for Individuals with Disabilities. The FCC has adopted an order that
determines the obligations of telecommunications carriers to make their services
accessible to individuals with disabilities. The order requires
telecommunications services providers, including Triton, to offer equipment and
services that are accessible to and useable by persons with disabilities, if
that equipment can be made available without much difficulty or expense. The
rules require us to develop a process to evaluate the accessibility, usability
and compatibility of covered services and equipment. While we expect our vendors
to develop equipment compatible with the rules, we cannot assure you that we
will not be required to make material changes to our network, product line, or
services.
Calling Party Pays. In June 1999, the FCC initiated an administrative
rulemaking proceeding to help facilitate the offering of calling party pays as
an optional wireless service. Under the calling party pays service, the party
placing the call to a wireless customer pays the wireless airtime charges. Most
wireless customers in the U.S. now pay both to place calls and to receive them.
Adoption of a workable system that permits calling party pays to be offered on a
nationwide basis by all commercial mobile radio service providers could make
commercial mobile radio service providers more competitive with traditional
landline telecommunications providers for the provision of regular telephone
service.
State Regulation and Local Approvals
The states in which we operate do not regulate wireless service at this
time. In the 1993 Budget Act, Congress gave the FCC the authority to preempt
states from regulating rates or entry into commercial mobile radio service,
including cellular and personal communications services. The FCC, to date, has
denied all state petitions to regulate the rates charged by commercial mobile
radio service providers. States may, however, regulate the other terms and
conditions of commercial mobile radio service. State and local governments are
permitted to manage public rights of way and can require fair and reasonable
compensation from telecommunications providers, including personal
communications services providers, so long as the compensation required is
publicly disclosed by the government. The sitting of cells/base stations also
remains subject to state and local jurisdiction, although proceedings are
pending at the FCC relating to the scope of that authority. States also may
impose competitively neutral requirements that are necessary for universal
service or to defray the costs of state emergency 911 services programs, to
protect the public safety and welfare, to ensure continued service quality and
to safeguard the rights of consumers. While a state may not impose requirements
that effectively
16
function as barriers to entry or create a competitive disadvantage, the scope of
state authority to maintain existing or to adopt new such requirements is
unclear.
There are several state and local legislative initiatives that are underway
to ban the use of wireless phones in motor vehicles. Tennessee, Nebraska,
Maryland, Arizona, New York, Oregon and Virginia are considering state-wide
initiatives. San Francisco, Chicago and several counties in New York are
considering similar actions. Officials in a handful of communities, including
Marlboro Township, New Jersey, Lebanon, Pennsylvania, and Brooklyn, Ohio, have
enacted ordinances banning or restricting the use of cell phones by drivers.
Recently, Suffolk County, New York became the first county in the United States
to enact a ban on the use of wireless phones while driving. Westchester County,
New York enacted a similar law in February 2001. Should this become a nationwide
initiative, commercial mobile radio service providers could experience a decline
in the number of minutes of use by subscribers.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the wireless
telecommunications industry. Other existing federal regulations, copyright
licensing and, in many jurisdictions, state and local franchise requirements are
the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals that could change, in varying degrees,
the manner in which wireless providers operate. Neither the outcome of these
proceedings nor their impact upon our operations or the wireless industry can be
predicted at this time.
Competition
We compete directly with two cellular providers and other personal
communications services providers in each of our markets except Myrtle Beach,
where we are one of two cellular providers, and against enhanced specialized
mobile radio providers in some of our markets. These cellular providers have an
infrastructure in place and have been operational for a number of years, and
some of these competitors have greater financial, technical resources and
spectrum than we do. These cellular operators may upgrade their networks to
provide services comparable to those we offer. The technologies primarily
employed by our digital competitors are code division multiple access and global
system for mobile communications, two competing digital wireless standards.
We also compete with personal communications services license holders in
each of our markets. We also expect to face competition from other existing
communications technologies such as specialized mobile radio and enhanced
specialized mobile radio, which is currently employed by Nextel Communications,
Inc. in our licensed area. Although the FCC originally created specialized
mobile radio as a non-interconnected service principally for fleet dispatch, in
the last decade it has liberalized the rules to permit enhanced specialized
mobile radio, which, in addition to dispatch service, can offer services that
are functionally equivalent to cellular and personal communications services and
may be less expensive to build and operate than personal communications services
systems.
We expect competition to intensify as a result of the consolidation of the
industry, the entrance of new competitors, the development of new technologies,
products and services and the auction of additional spectrum. The wireless
communications industry has been experiencing significant consolidation, and we
expect that this trend will continue. For example, Cingular Wireless,
Voicestream and Verizon Wireless have all been recently formed as national
carriers from the combination of several smaller carriers, which has doubled the
number of large national wireless competitors. This consolidation trend may
create additional large, well-capitalized competitors with substantial
financial, technical, marketing and other resources.
The FCC requires all cellular and personal communications services
licensees to provide service to resellers. A reseller provides wireless service
to customers but does not hold a FCC license or own facilities. Instead, the
reseller buys blocks of wireless telephone numbers and capacity from a licensed
carrier and resells service through its own distribution network to the public.
Thus, a reseller is both a customer of a wireless licensee's services and a
competitor of that licensee. Several small resellers currently compete with us
in our licensed area. With respect to cellular and personal communications
services license, the resale obligations terminate five years after the last
group of initial licenses of currently allotted personal communications services
spectrum were awarded. Accordingly, our resale obligations end on November 24,
2002, although licensees will continue to be subject to the provisions of the
Communications Act requiring non-discrimination among customers. We have also
agreed to permit AT&T Wireless to resell our services.
In September 2001, the FCC has scheduled the 700 MHz auction, which is
exempt from spectrum cap limitations. Some applicants have received and 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 satellites.
Our ability to compete successfully will depend, in part, on our ability to
anticipate and respond to various competitive factors affecting the industry,
including new services that may be introduced, changes in consumer preferences,
demographic trends, economic conditions and competitors' discount pricing
strategies, all of which could adversely affect our operating margins. We plan
to use our digital feature offerings, coast-to-coast digital wireless network
through our AT&T Wireless affiliation, contiguous presence providing an expanded
home-rate billing area and local presence in secondary markets to combat
potential competition. We
17
expect that our extensive digital network, once deployed, will provide cost-
effective means to react effectively to any price competition.
Intellectual Property
The AT&T globe design logo is a service mark owned by AT&T and registered
with the United States Patent and Trademark Office. Under the terms of our
license agreement with AT&T, we use the AT&T globe design logo and certain other
service marks of AT&T royalty-free in connection with marketing, offering and
providing wireless mobility telecommunications services using time division
multiple access digital technology and frequencies licensed by the FCC to end-
users and resellers within our licensed area. The license agreement also grants
us the right to use the licensed marks on certain permitted mobile phones.
AT&T has agreed not to grant to any other person a right or license to
provide or resell, or act as agent for any person offering, those licensed
services under the licensed marks in our licensed area except:
. to any person who resells, or acts as our agent for, licensed services
provided by us, or
. any person who provides or resells wireless communications services to
or from specific locations such as buildings or office complexes, even
if the applicable subscriber equipment being used is capable of
routine movement within a limited area and even if such subscriber
equipment may be capable of obtaining other telecommunications
services beyond that limited area and handing-off between the service
to the specific location and those other telecommunications services.
In all other instances, AT&T reserves for itself and its affiliates the
right to use the licensed marks in providing its services whether within or
outside of our licensed area.
The license agreement contains numerous restrictions with respect to the
use and modification of any of the licensed marks.
We have entered into an agreement with TeleCorp PCS to adopt and use a
common regional brand name, SunCom. Under this agreement, we have formed
Affiliate License Company with TeleCorp PCS for the purpose of sharing ownership
of and maintaining the SunCom brand name. Each company shares in the ownership
of the SunCom brand name and the responsibility of securing protection for the
SunCom brand name in the United States Patent and Trademark Office, enforcing
our rights in the SunCom brand name against third parties and defending against
potential claims against the SunCom brand name. The agreements provide
parameters for each company's use of the SunCom brand name, including certain
quality control measures and provisions in the event that either of these
company's licensing arrangements with AT&T is terminated.
An application for registration of the SunCom brand name was filed in the
United States Patent and Trademark Office on September 4, 1998, and the
application is pending. Affiliate License Company owns the application for the
SunCom brand name. The application has undergone a preliminary examination at
the United States Patent and Trademark Office, and no pre-existing registrations
or applications were raised as a bar or potential bar to the registration of the
SunCom brand name.
Employees
As of December 31, 2000, we had 1,370 employees. We believe our relations
with our employees are good.
ITEM 2. PROPERTIES
Triton maintains its executive offices in Berwyn, Pennsylvania. We also
maintain two regional offices in Richmond, Virginia and Charleston, South
Carolina. We lease these facilities.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any lawsuit or proceeding which, in management's
opinion, is likely to have a material adverse effect on our business or
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Triton's Class A common stock is traded on the Nasdaq National Market under
the symbol "TPCS". The following table indicates the high and low closing sales
prices for the Class A common stock as reported by the Nasdaq National Market
since the Class A common stock began trading publicly on October 28, 1999 for
each of the periods indicated:
Low High
--- ----
Year Ended December 31, 1999
Fourth Quarter (from October 28, 1999) $18.000 $47.1875
Year Ended December 31, 2000
First Quarter $39.375 $68.875
Second Quarter 37.875 60.000
Third Quarter 25.000 59.250
Fourth Quarter 25.9375 52.375
Triton has not paid any cash dividends on its Class A common stock since
its inception and does not anticipate paying any cash dividends in the
foreseeable future. Our ability to pay dividends is restricted by the terms of
our preferred stock, our indentures and our credit facility. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources-Credit Facility" and "-Senior Subordinated
Notes."
As of March 5, 2001, Triton had approximately 6,094 stockholders of its
Class A common stock and one stockholder of its Class B non-voting common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial data derived from audited
financial statements of Triton for the period from March 6, 1997 to December 31,
1997 and for the years ended December 31, 1998, 1999 and 2000. In addition,
subscriber data for the same periods is presented. The following financial
information is qualified by reference to and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes appearing elsewhere
in this report.
March 6, 1997 Year Ended December 31,
through ------------------------------------
December 31, 1997 1998 1999 2000
----------------- ---------- --------- --------
(in thousands, except share data)
Statement of Operations Data:
Revenues:
Service........................................................... $ - $ 11,172 $ 63,545 $ 224,312
Roaming........................................................... - 4,651 44,281 98,492
Equipment......................................................... - 755 25,405 34,477
---------- ---------- ---------- ----------
Total revenues................................................. - 16,578 133,231 357,281
========== ========== ========== ==========
Expenses:
Costs of services and equipment (excluding noncash compensation of $0, $0,
$142 and $1,026 for the periods ended December 31, 1997, 1998,
1999 and 2000, respectively) ....................................... - 10,466 107,521 194,686
Selling and marketing (excluding noncash compensation of $0, $0, $213
and $1,274 for the periods ended December 31, 1997, 1998, 1999 and
2000, respectively)................................................. - 3,260 59,580 100,403
General and administrative (excluding noncash compensation of $0,
$1,120, $2,954 and $5,967 for the periods ended December 31, 1997,
1998, 1999 and 2000, respectively).................................. 2,736 15,589 42,354 84,682
Non-cash compensation............................................... - 1,120 3,309 8,267
Depreciation and amortization....................................... 5 6,663 45,546 94,131
---------- ---------- ---------- ----------
Total operating expenses.......................................... 2,741 37,098 258,310 482,169
---------- ---------- ---------- ----------
Loss from operations................................................. (2,741) (20,520) (125,079) (124,888)
19
Interest and other expense........................................... 1,228 30,391 41,061 56,229
Interest and other income............................................ 8 10,635 4,852 4,957
Gain on sale of property, equipment and marketable securities, net... - - 11,928 -
---------- ---------- ----------- ----------
Loss before taxes.................................................... (3,961) (40,276) (149,360) (176,160)
Income tax (benefit) expense......................................... - (7,536) - 746
---------- ---------- ----------- ----------
Net loss............................................................. $ (3,961) $ (32,740) $ (149,360) $ (176,906)
Accretion of preferred stock......................................... - 6,853 8,725 9,865
---------- ---------- ----------- ----------
Net loss available to common stockholders............................ $ (3,961) (39,593) $ (158,085) $ (186,771)
========== ========== =========== ===========
Net loss per common share (basic and diluted)........................ $ (1.25) $ (8.18) $ (9.79) $ (3.01)
========== ========== =========== ===========
Weighted average common shares outstanding (basic and diluted)....... 3,159,418 4,841,520 16,142,482 62,058,844
========== ========== =========== ===========
As of December 31,
-------------------------------------------------------------
1997 1998 1999 2000
-------------------------------------------------------------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents.......................................... $ 11,362 $ 146,172 $ 186,251 $ 1,617
Working capital (deficiency)....................................... (5,681) 146,192 134,669 (54,305)
Property, plant and equipment, net................................. 473 198,953 421,864 662,990
Intangible assets, net............................................. 1,249 308,267 315,538 300,161
Total assets....................................................... 13,253 686,859 979,797 1,065,890
Long-term debt and capital lease obligations....................... - 465,689 504,636 728,485
Redeemable preferred stock......................................... - 80,090 94,203 104,068
Shareholders' (deficit) equity..................................... (3,959) 95,889 233,910 55,437
March 6, 1997
through Year Ended December 31,
----------------------------------------
December 31, 1997 1998 1999 2000
----------------- --------- --------- ----------
(in thousands, except subscriber data)
Other Data:
Subscribers (end of period)....................................... - 33,844 195,204 446,401
EBITDA(1)......................................................... $ (2,736) $ (12,737) $ (76,224) $ (22,490)
Cash flows from:
Operating activities............................................ $ (1,077) $ (4,130) $ (72,549) $ (61,242)
Investing activities............................................ (478) (372,372) (170,511) (303,334)
Financing activities............................................ 12,917 511,312 283,139 179,942
(1) "EBITDA" is defined as operating loss plus depreciation and amortization
expense and non-cash compensation. EBITDA is a key financial measure but should
not be construed as an alternative to operating income, cash flows from
operating activities or net income (or loss), as determined in accordance with
generally accepted accounting principles. EBITDA is not a measure determined in
accordance with generally accepted accounting principles. We believe that EBITDA
is a standard measure commonly reported and widely used by analysts and
investors in the wireless communications industry. However, our method of
computation may or may not be comparable to other similarly titled measures of
other companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following discussion and analysis is based upon our financial
statements as of the dates and for the periods presented in this section. You
should read this discussion and analysis in conjunction with our financial
statements and the related notes contained elsewhere in this report.
20
We were incorporated in October 1997. In February 1998, we entered into a
joint venture with AT&T Wireless. As part of the agreement, AT&T Wireless
contributed to us personal communications services licenses covering 20 MHz of
authorized frequencies in a contiguous geographic area encompassing portions of
Virginia, North Carolina, South Carolina, Tennessee, Georgia and Kentucky in
exchange for an equity position in Triton. As part of the transaction, we were
granted the right to be the exclusive provider of wireless mobility services
using equal emphasis co-branding with AT&T within our region.
On June 30, 1998, we acquired an existing cellular system serving Myrtle
Beach and the surrounding area from Vanguard Cellular Systems of South Carolina,
Inc. In connection with this acquisition, we began commercial operations and
earning recurring revenue in July 1998. We integrated the Myrtle Beach system
into our personal communications services network as part of our Phase I network
deployment. Substantially all of our revenues prior to 1999 were generated by
cellular services provided in Myrtle Beach. Our results of operations do not
include the Myrtle Beach system prior to our acquisition of that system.
We began generating revenues from the sale of personal communications
services in the first quarter of 1999 as part of Phase I of our personal
communications services network build-out. Our network build-out is scheduled
for three phases. We completed the first phase of our build-out in the first
half of 1999 with the launch of 15 markets and completed the second phase during
the first quarter of 2000 launching 21 additional markets. We are in the third
phase of our network build-out, which focuses on covering major highways linking
the cities in our licensed area, as well as neighboring cities where AT&T
Wireless and other carriers use compatible wireless technology. This phase,
which is expected to be completed by year-end 2001, has included the launch of
one additional market in our licensed area.
Revenue
We derive our revenue from the following sources:
. Service. We sell wireless personal communications services. The various
types of service revenue associated with wireless communications
services for our subscribers include monthly recurring charges and
monthly non-recurring airtime charges for local, long distance and
roaming airtime used in excess of pre-subscribed usage. Our customers'
roaming charges are rate plan dependent and based on the number of
pooled minutes included in their plans. Service revenue also includes
monthly non-recurring airtime usage charges associated with our prepaid
subscribers and non-recurring activation and de-activation service
charges.
. Equipment. We sell wireless personal communications handsets and
accessories that are used by our customers in connection with our
wireless services.
. Roaming. We charge per minute fees to other wireless telecommunications
companies for their customers' use of our network facilities to place
and receive wireless services.
We believe our roaming revenues will be subject to seasonality. We expect
to derive increased revenues from roaming during vacation periods, reflecting
the large number of tourists visiting resorts in our coverage area. We believe
that our equipment revenues will also be seasonal, as we expect sales of
telephones to peak in the fourth quarter, primarily as a result of increased
sales during the holiday season. Although we expect our overall revenues to
increase due to increasing roaming minutes, our per-minute roaming revenue will
decrease over time according to the terms of our agreements with AT&T Wireless.
Costs and Expenses
Our costs of services and equipment include:
. Equipment. We purchase personal communications services handsets and
accessories from third party vendors to resell to our customers for use
in connection with our services. Because we subsidize the sale of
handsets to encourage the use of our services, the cost of handsets is
higher than the resale price to the customer. We do not manufacture any
of this equipment.
. Roaming Fees. We incur fees to other wireless communications companies
based on airtime usage by our customers on other wireless communications
networks.
. Transport and Variable Interconnect. We incur charges associated with
interconnection with other wireline and wireless carriers' networks.
These fees include monthly connection costs and other fees based on
minutes of use by our customers.
. Variable Long Distance. We pay usage charges to other communications
companies for long distance service provided to our customers. These
variable charges are based on our subscribers' usage, applied at
pre-negotiated rates with the other carriers.
. Cell Site Costs. We incur expenses for the rent of towers, network
facilities, engineering operations, field technicians, and related
utility and maintenance charges.
21
Recent industry data indicate that transport, interconnect, roaming and
long distance charges that we currently incur will continue to decline, due
principally to competitive pressures and new technologies. Cell site costs are
expected to increase due to escalation factors included in the lease agreements.
Other expenses include:
. Selling and Marketing. Our selling and marketing expense includes the
cost of brand management, external communications, retail distribution,
sales training, direct, indirect, third party and telemarketing support.
. General and Administrative. Our general and administrative expense
includes customer care, billing, information technology, finance,
accounting, legal services, network implementation, product development,
and engineering management. Functions such as customer care, billing,
finance, accounting and legal services are likely to remain centralized
in order to achieve economies of scale.
. Depreciation and Amortization. Depreciation of property and equipment is
computed using the straight-line method, generally over three to twelve
years, based upon estimated useful lives. Leasehold improvements are
amortized over the lesser of the useful lives of the assets or the term
of the lease. Network development costs incurred to ready our network
for use are capitalized. Amortization of network development costs
begins when the network equipment is ready for its intended use and is
amortized over the estimated useful life of the asset. Our personal
communications services licenses and our cellular license are being
amortized over a period of 40 years.
. Non-cash Compensation. As of December 31, 2000, we recorded $42.2
million of deferred compensation associated with the issuances of our
common and preferred stock to employees. The compensation is being
recognized over five years as the stock vests.
. Interest Income (Expense) and other. Interest income is earned primarily
on our cash and cash equivalents. Interest expense through December 31,
2000 consists of interest on our credit facility and 2008 notes, net of
capitalized interest. Other expenses include amortization of certain
financing charges.
Our ability to improve our margins will depend on our ability to manage our
variable costs, including selling, general and administrative expense, costs per
gross added subscriber and costs of building out our network. We expect our
operating costs to grow as our operations expand and our customer base and call
volumes increase. Over time, these expenses should represent a reduced
percentage of revenues as our customer base grows. Management will focus on
application of systems and procedures to reduce billing expense and improve
subscriber communication. These systems and procedures will include debit
billing, credit card billing, over-the-air payment and Internet billing systems.
Investment in Lafayette Communications
We own a 39% equity investment in Lafayette Communications LLC, which
through separate transactions has agreed to acquire licenses in 30 BTAs
throughout the Company's service area. Because we do not control Lafayette
Communications, we account for our investment on the equity method and record
our proportionate share of its losses or income in our income statement. We
anticipate that we will lend Lafayette Communications approximately $230.0
million to finance the purchases of the licenses. We will record as income any
interest due from Lafayette Communications under its loan.
Results of Operations
Year ended December 31, 2000 compared to the year ended December 31, 1999
Net subscriber additions were 251,197 and 161,360 for the years ended
December 31, 2000 and 1999, respectively. Subscribers were 446,401 and 195,204
as of December 31, 2000 and 1999, respectively. The increase in subscribers was
primarily due to offering twelve months of service in the 27 markets launched as
of December 31, 1999 as part of our Phase I and Phase II build-out, launching 10
additional markets between December 31, 1999 and December 31, 2000 as part of
the Phase II and Phase III network build-out, and continued strong demand for
our digital service offerings and pricing plans.
The wireless industry typically generates a higher number of subscriber
additions and handset sales in the fourth quarter of each year compared to the
other quarters. This is due to the use of retail distribution, which is
dependent on the holiday shopping season, the timing of new products and service
introductions, and aggressive marketing and sales promotions.
22
Subscriber churn was 1.80% and 1.86% for the years ended December 31, 2000
and 1999, respectively. We believe that our churn rate remains consistently low
due to our high quality system performance, our commitment to quality customer
service and our focused collection efforts.
Average revenue per user was $60.99 and $57.81 for the years ended
December 31, 2000 and 1999, respectively. We continue to focus on attracting new
customers with rate plans that provide more value to the customer at a higher
average customer bill.
Total revenue was $357.3 million and $133.2 million for the years ended
December 31, 2000 and 1999, respectively. Service revenue was $224.3 million and
$63.5 million for the years ended December 31, 2000 and 1999, respectively. The
increase in service revenue of $160.8 million was due primarily to growth of
subscribers. Equipment revenue was $34.5 million and $25.4 million for the years
ended December 31, 2000 and 1999, respectively. The equipment revenues increase
of $9.1 million was due primarily to the increase in gross additions. Roaming
revenue was $98.5 million and $44.3 million for the years ended December 31,
2000 and 1999, respectively. The increase in roaming revenues of $54.2 million
was due to increased roaming minutes of use resulting from our continued network
build-out, partially offset by a contractual decrease in our service charge per
minute.
Cost of service was $125.3 million and $63.2 million for the years ended
December 31, 2000 and 1999, respectively. The increase in costs of service of
$62.1 million was due primarily to increased costs of expanding and maintaining
our wireless network to support an increase in the number of subscriber and
roamer minutes of use. Cost of equipment was $69.4 million and $44.3 million for
the years ended December 31, 2000 and 1999, respectively. The increase of $25.1
million was due primarily to an increase in subscriber additions.
Selling and marketing costs were $100.4 million and $59.6 million for the
years ended December 31, 2000 and 1999, respectively. The increase of $40.8
million was primarily due to the expansion of our sales distribution channels
and advertising and promotion costs associated with the additional markets
launched.
General and administrative expenses were $84.7 million and $42.4 million
for the years ended December 31, 2000 and 1999, respectively. The increase of
$42.3 million was primarily due to the development and growth of infrastructure
and staffing related to information technology, customer care, collections,
retention and other administrative functions established in conjunction with
launching additional markets and the corresponding growth in subscriber base.
EBITDA represents operating loss plus depreciation and amortization expense
and non-cash compensation. We believe EBITDA provides meaningful additional
information on our operating results and on our ability to service our long-term
debt and other fixed obligations as well as our ability to fund our continued
growth. EBITDA is considered by many financial analysts to be a meaningful
indicator of an entity's ability to meet its future financial obligations.
Growth in EBITDA is considered to be an indicator of future profitability,
especially in a capital-intensive industry such as wireless telecommunications.
EBITDA should not be construed as an alternative to operating income (loss) as
determined in accordance with United States GAAP, as an alternate to cash flows
from operating activities as determined in accordance with United States GAAP,
or as a measure of liquidity. EBITDA was a loss of $22.5 million and a loss of
$76.2 million for the years ended December 31, 2000 and 1999, respectively. The
decrease in the loss of $53.7 million resulted primarily from the items
discussed above.
Non-cash compensation expense was $8.3 million and $3.3 million for the
years ended December 31, 2000 and 1999, respectively. The increase of $5.0
million is attributable to the vesting of an increased number of restricted
shares.
Depreciation and amortization expenses were $94.1 million and $45.5
million for the years ended December 31, 2000 and 1999, respectively. The
increase of $48.6 million relates primarily to depreciation of our fixed assets
as well as the amortization on our personal communications services licenses and
AT&T agreements upon the commercial launch of our Phase II markets. Depreciation
will continue to increase as additional portions of our network are placed into
service.
Interest and other expense was $56.2 million, net of capitalized interest
of $9.5 million, for the year ended December 31, 2000. Interest and other
expense was $41.1 million, net of capitalized interest of $12.3 million, for the
year ended December 31, 1999. The increase of $15.1 million relates primarily to
additional draws on our credit facility totaling $182.8 million and less
capitalized interest as a result of assets placed into service. For the year
ended December 31, 2000, we had a weighted average interest rate of 10.98% on
our average borrowings under our bank credit facility and our average obligation
for the senior subordinated debt.
Interest income was $5.0 million and $4.9 million for the years ended
December 31, 2000 and 1999, respectively. The increase of $0.1 million was due
primarily to interest on slightly higher average cash bal