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Pursuant to Rule 424(b)(1)
Registration No. 333-79189-02
No. 333-79189-01
Prospectus
September 27, 1999
6,700,000 Shares of Common Stock
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The Offering:
. We are offering 6,700,000 shares of our common stock.
. We have granted the underwriters an option to purchase a maximum of
1,005,000 additional shares of common stock to cover over-allotments.
. This is our initial public offering.
. Closing: On or about September 30, 1999.
Symbol & Market:
. PCSA/Nasdaq National Market
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<S> <C> <C>
Per Share Total
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Public offering price: $17.00 $113,900,000
Underwriting fees: $ 1.19 $ 7,973,000
Proceeds to AirGate: $15.81 $105,927,000
</TABLE>
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This investment involves risk. See "Risk Factors" beginning on page 7.
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Neither the SEC nor any state securities commission has determined whether
this prospectus is truthful or complete. Nor have they made, nor will they
make, any determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
Credit Suisse First Boston
The Robinson-Humphrey Company
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[One page of four photographs depicting customers using wireless telephones]
[Graphic displaying a map of the United States highlighting Sprint PCS'
licensed areas with blow-up picture of AirGate PCS' territory]
[Series of pictures of a wireless telephone, Sprint PCS network operations
center, Sprint PCS store and a national retail store which has an agreement
with Sprint and Sprint PCS to sell their products and services]
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TABLE OF CONTENTS
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Page
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Prospectus Summary.................... 1
Risk Factors.......................... 7
Forward-Looking Statements............ 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 22
Industry Background................... 29
Business....................... 31
The Sprint PCS Agreements...... 46
Description of Certain
Indebtedness.................. 60
Management..................... 64
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Page
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Principal Stockholders................................................ 71
Certain Transactions.................................................. 73
Regulation of the Wireless Telecommunications Industry................ 74
Description of Capital Stock.......................................... 78
Description of Units.................................................. 81
Shares Eligible for Future Sale....................................... 85
U.S. Federal Tax Consequences of
Our Common Stock to Non-U.S. Holders................................. 87
Underwriting.......................................................... 90
Legal Matters......................................................... 94
Experts............................................................... 94
Available Information................................................. 94
Index to Consolidated Financial Statements............................ F-1
</TABLE>
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This prospectus includes product names, trade names and trademarks of other
companies.
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PROSPECTUS SUMMARY
Statements in this prospectus regarding Sprint or Sprint PCS are derived from
information contained in our agreements with Sprint PCS, periodic reports and
other documents filed with the Securities and Exchange Commission, or press
releases issued by Sprint Corporation and Sprint PCS. References to AirGate as
a provider of wireless personal communication services or similar phrases
generally refer to our designing, constructing and managing a personal
communication services network in our territory under our long-term agreements
with Sprint and Sprint PCS.
The Company
We have entered into a management agreement with Sprint PCS whereby we have
the exclusive right to provide 100% digital, 100% PCS products and services
under the Sprint and Sprint PCS brand names in our territory in the
southeastern United States. Based on the population of our territory, we are
the second largest Sprint PCS affiliate in the United States. Under our long-
term agreements with Sprint PCS, we will exclusively market personal
communications services, generally known as PCS, under the Sprint and Sprint
PCS brand names. As a Sprint PCS affiliate, we will offer the same products and
services that have made Sprint PCS the fastest growing wireless company in the
United States based on total new subscribers in 1998. We have completed our
radio frequency design, network design and substantial site acquisition and
cell site engineering, and commenced construction of our personal
communications services network in November 1998. Our network will be built to
meet or exceed the high standards for technical and service quality established
by Sprint PCS. We will use Sprint PCS' established back office services to
handle customer activation, billing and customer care. The customer, who
effectively will see our products and services as those of Sprint PCS, will be
able to make and receive calls, on handsets with both digital and analog
capability, over Sprint PCS' network and other wireless networks with which
Sprint PCS has roaming agreements.
As of June 30, 1999, Sprint PCS, together with its affiliates, operated PCS
systems in 286 metropolitan markets within the United States, including all of
the 50 largest metropolitan areas. Today, Sprint PCS is still constructing its
nationwide network and does not offer PCS services, either on its own network
or through its roaming agreements, in every city in the United States.
We will benefit from Sprint PCS' national advertising campaigns and will have
access to major national retailers for distribution under existing Sprint PCS
contracts. We plan to launch commercial PCS service in the first quarter of
2000 with initial coverage to over 1.5 million residents and expect to offer
service to more than 5.0 million residents, or 74% of the population in our
territory, by the end of the fourth quarter of 2000. Today, we are a
development stage company and have not generated any revenues.
Our territory has a resident population of more than 6.8 million and covers
21 contiguous markets in one of the fastest growing regions in the United
States. The territory covers almost the entire state of South Carolina,
including Charleston, Columbia and Greenville-Spartanburg, parts of North
Carolina, including Asheville, Wilmington and Hickory, and the eastern Georgia
cities of Augusta and Savannah. Our territory is contiguous to important Sprint
PCS markets which are already operational, including Atlanta, Georgia;
Charlotte and Raleigh, North Carolina; Norfolk, Virginia; and Knoxville,
Tennessee. In addition to serving the resident populations of these markets,
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our territory welcomes over 27 million visitors each year to popular vacation
and tourist destinations, which include Myrtle Beach, Charleston and Hilton
Head Island, South Carolina; the Outer Banks of North Carolina; and Savannah,
Georgia. As a result, we will generate roaming revenue from visitors to our
territory who will use our PCS network for seamless national Sprint PCS
services.
Under existing Sprint PCS agreements with national third-party retailers,
including distribution agreements with Circuit City, Office Depot and Best Buy
and an exclusive PCS distribution agreement with RadioShack, we will have
access to more than 250 retail outlets to sell and distribute Sprint PCS
products and services throughout our territory. We also intend to offer Sprint
PCS products and services through 12 of our own Sprint PCS stores and through
local retailers with strong community connections. We will combine the strength
of these retail outlets with Sprint PCS' national sales force, which focuses on
Fortune 500 companies, national inbound telemarketing sales force and
electronic commerce sales platforms. In addition, we expect that approximately
30% of the population in our territory will receive their local telephone
service from Sprint by the end of 2000. This provides us with an additional
established distribution channel for selling Sprint PCS products and services.
We believe this combination of major national and local distribution channels
provides us with a competitive advantage over other wireless providers in our
territory.
Sprint PCS has invested $44.6 million to purchase the PCS licenses in our
territory and incurred additional expenses to remove microwave signals from the
licensed spectrum, a process generally referred to as microwave clearing. Under
our long term agreements with Sprint PCS, we will manage the network on Sprint
PCS' licensed spectrum as well as use the Sprint and Sprint PCS brands royalty-
free during our affiliation with Sprint PCS. We also have access to Sprint PCS'
national marketing support and distribution programs and are entitled to buy
network and subscriber equipment and handsets at the same discounted rates
offered by vendors to Sprint PCS based on its large volume purchases. In
exchange for these benefits, Sprint PCS will retain 8% of collected service
revenues and we are entitled to receive 92%. Collected service revenues do not
include revenues from roaming and subscriber equipment sales of which we are
entitled to 100%. Under the agreements with Sprint PCS, we also have the option
to purchase back office services from Sprint PCS at rates reflecting Sprint
PCS' economies of scale.
We have an experienced senior management team, including a former regional
president of Sprint PCS. These executives have an average of more than 15 years
of experience in building wireless telecommunications systems in the Southeast.
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The Offering
Common Stock Offered........ 6,700,000 shares
Common Stock to be
Outstanding After the
Offering.................... 10,952,201 shares
Nasdaq National Market
Symbol...................... "PCSA"
Risk Factors................ See "Risk Factors" beginning on page 7 for a
discussion of the material factors that you
should consider before purchasing shares of
common stock.
This summary of the offering includes 869,683 shares of common stock issuable
upon the consummation of this offering due to the conversion of outstanding
promissory notes and related accrued interest. See "Certain Transactions."
Unless otherwise indicated, the share information in this prospectus
excludes:
. up to 1,005,000 shares that may be issued to the underwriters to cover
over-allotments. See "Underwriting."
. 2,000,000 shares of common stock reserved for issuance under our 1999
Stock Option Plan including employee grants of 1,075,000 shares effected
on July 28, 1999. See "Management--1999 Stock Option Plan."
. 214,413 shares of common stock issuable upon the exercise of outstanding
warrants at an exercise price of 75% of the initial offering price of
our common stock. See "Certain Transactions."
. 128,860 shares of common stock issuable upon the exercise of outstanding
warrants at an exercise price of 120% of the initial offering price of
our common stock. See "Description of Capital Stock--Warrants."
. 644,400 shares of common stock issuable upon the exercise of warrants to
be issued in the concurrent units offering. See "Description of Units."
All references to shares of common stock in this prospectus reflect a 39,134-
for-one split of our common stock which was effective as of July 9, 1999 and
subsequent reverse stock splits of 0.996-for-one of our common stock which was
effective July 28, 1999, 0.900-for-one of our common stock which was effective
September 15, 1999 and 0.965-for-one of our common stock which was effective
September 27, 1999.
The closing of our offering of common stock and our completion of a
concurrent offering of units under the separate units prospectus, are
conditioned on each other.
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The Concurrent Units Offering
The Units
Issuer...................... AirGate PCS, Inc.
Securities Offered.......... 300,000 units, each consisting of $1,000
principal amount at maturity of 13 1/2% senior
subordinated discount notes due 2009 and one
warrant to purchase 2.148 shares of our common
stock at $0.01 per share representing in the
aggregate approximately 5% of the issued and
outstanding shares of common stock on a fully
diluted basis on the date hereof assuming
exercise of all of the outstanding warrants. The
senior subordinated discount notes and the
warrants will not be separately transferable
until the separation date, which shall be the
earliest to occur of:
. 180 days after the closing of the units
offering;
. the occurrence of a change of control or an
event of default on the senior subordinated
discount notes; and
. such date as Donaldson, Lufkin & Jenrette
Securities Corporation in its sole discretion
shall determine.
Issue Price................. $520.19 per unit.
The Senior Subordinated Discount Notes
Senior Subordinated
Discount Notes.............. $300.0 million aggregate principal amount at
maturity of 13 1/2% senior subordinated discount
notes due 2009. We will issue the senior
subordinated discount notes, together with the
warrants to be issued, at a price to investors
that will yield gross proceeds to us at issuance
of approximately $156.1 million.
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Maturity Date............... October 1, 2009.
Change of Control........... If we experience a change of control, holders of
our senior subordinated discount notes will have
the right to require us to repurchase our senior
subordinated discount notes at a price equal to
101% of their accreted value or the principal
amount, as applicable, together with accrued and
unpaid interest, if any, to the date of
repurchase.
Restrictive Covenants....... The indenture governing the senior subordinated
discount notes will contain covenants that, among
other things, will limit our ability and the
ability of our subsidiary and our future
subsidiaries to:
.incur additional indebtedness or issue
preferred stock;
. pay dividends, redeem capital stock or make
other restricted payments or investments;
.create liens on assets;
.merge, consolidate or dispose of assets;
.enter into certain transactions with
affiliates; and
.enter into sale and leaseback transactions.
The Warrants
Number of Warrants
Offered..................... 300,000 warrants which will entitle the holders
of the warrants to purchase an aggregate of
644,400 shares of our common stock representing
approximately 5% of the issued and outstanding
shares of common stock on a fully diluted basis,
assuming exercise of all outstanding warrants.
Exercise.................... Each warrant will entitle the holder to purchase
on or after the separation date, but prior to the
expiration date, 2.148 shares of our common stock
at an exercise price of $0.01 per share, subject
to adjustment from time to time upon the
occurrence of some changes with respect to us,
including:
. some distributions of our shares;
. issuances of options or convertible
securities by us;
. dividends and distributions by us; and
. changes in the terms of our options and
convertible securities.
A warrant does not entitle its holder to receive
any dividends paid on our shares of common stock.
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Expiration.................. October 1, 2009.
Transfer Restrictions....... Until such time, if any, as a registration
statement with respect to resale of the warrant
shares is declared effective, the warrant shares
will be subject to some restrictions on transfer.
We do not intend to list the warrants on any
exchange.
Registration of Warrant
Shares...................... We are required, pursuant to the terms of a
warrant agreement, to (1) file a shelf
registration statement with the Securities and
Exchange Commission within 60 days of the date of
this prospectus to register the common stock
underlying the warrants, (2) use our reasonable
best efforts to have the shelf registration
statement declared effective by the Securities
and Exchange Commission within 120 days of the
date of this prospectus and (3) keep the shelf
registration statement continuously effective
until the later of the date on which (a) all of
the warrants have been exercised or (b) the
warrants expire.
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RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information contained in this prospectus before purchasing the common
stock we are offering.
Risks Particular to AirGate
The termination of our affiliation with Sprint PCS or Sprint PCS' failure to
perform its obligations under our agreements would severely restrict our
ability to conduct our business
Our ability to offer Sprint PCS products and services and our PCS network's
operation are dependent on our agreements with Sprint PCS being renewed and not
terminated. Each of these agreements can be terminated for breach of any
material terms. We are dependent on Sprint PCS' ability to perform its
obligations under the Sprint PCS agreements. The non-renewal or termination of
any Sprint PCS agreement or the failure of Sprint PCS to perform its
obligations under the Sprint PCS agreements would severely restrict our ability
to conduct our business.
If Sprint PCS does not complete the construction of its nationwide PCS
network, we may not be able to attract and retain customers
Sprint PCS' network may not provide nationwide coverage to the same extent as
its competitors which could adversely affect our ability to attract and retain
customers. Sprint PCS is creating a nationwide PCS network through its own
construction efforts and those of its affiliates. Today, Sprint PCS is still
constructing its nationwide network and does not offer PCS services, either on
its own network or through its roaming agreements, in every city in the United
States. Sprint PCS has entered into, and anticipates entering into, affiliation
agreements similar to ours with companies in other territories pursuant to its
nationwide PCS build-out strategy. Our results of operations are dependent on
Sprint PCS' national network and, to a lesser extent, on the networks of its
other affiliates. Sprint PCS and its affiliate program are subject, to varying
degrees, to the economic, administrative, logistical, regulatory and other
risks described in this prospectus. Sprint PCS' and its other affiliates' PCS
operations may not be successful.
We do not have an operating history and if we do not successfully manage our
anticipated rapid growth, we may not be able to complete our PCS network by our
target date, if at all
Our performance as a PCS provider will depend on our ability to manage
successfully the network build-out process, implement operational and
administrative systems, expand our base of 12 employees as of June 30, 1999 and
train and manage our employees, including engineering, marketing and sales
personnel. We have completed our radio frequency design, network design and
substantial site acquisition and cell site engineering, and commenced
construction of our PCS network in November 1998. Based on our build-out plan,
we do not expect to launch commercial PCS operations until the first quarter of
2000. We will require expenditures of significant funds for the development,
construction, testing and deployment of our PCS network before commencement of
commercial PCS operations. These activities are expected to place significant
demands on our managerial, operational and financial resources.
The inability to use Sprint PCS' back office services and third party vendors'
back office systems could disrupt our business
Our operations could be disrupted if Sprint PCS is unable to maintain and
expand its back office services such as customer activation, billing and
customer care, or to efficiently outsource those services and systems through
third party vendors. The rapid expansion of Sprint PCS' business is expected to
continue to pose a significant challenge to its internal support systems.
Additionally,
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Sprint PCS has relied on third-party vendors for a significant number of
important functions and components of its internal support systems and may
continue to rely on these vendors in the future. We depend on Sprint PCS'
willingness to continue to offer such services to us and to provide these
services at competitive costs. Our services agreement with Sprint PCS provides
that, upon nine months' prior written notice, Sprint PCS may elect to terminate
any such service beginning January 1, 2002. If Sprint PCS terminates a service
for which we have not developed a cost-effective alternative, our operating
costs may increase beyond our expectations and restrict our ability to operate
successfully.
If we fail to complete the build-out of our PCS network, Sprint PCS may
terminate our management agreement, and we would no longer be able to offer
Sprint PCS services
A failure to meet our build-out requirements for any one of the individual
markets in our territory, or to meet Sprint PCS' technical requirements, would
constitute a breach of our management agreement with Sprint PCS that could lead
to its termination. If the management agreement is terminated, we will no
longer be able to offer Sprint PCS products and services. Our agreements with
Sprint PCS require us to build our PCS network in accordance with Sprint PCS'
technical and coverage requirements. These agreements also require that we
provide network coverage to a specified percentage, ranging from 39% to 86%, of
the population within each of the 21 markets which make up our territory by
specified dates.
We have substantial debt which we may not be able to service and which may
result in our lenders controlling our assets in an event of default
Our substantial debt will have a number of important consequences for our
operations and our investors, including the following:
. we will have to dedicate a substantial portion of any cash flow from
operations to the payment of interest on, and principal of, our debt,
which will reduce funds available for other purposes;
. we may not have sufficient funds to pay interest on, and principal of,
our debt;
. we may not be able to obtain additional financing for currently
unanticipated capital requirements, capital expenditures, working capital
requirements and other corporate purposes;
. some of our debt, including borrowings under our financing from Lucent,
will be at variable rates of interest, which could result in higher
interest expense in the event of increases in market interest rates; and
. due to the liens on substantially all of our assets and the pledges of
stock of our subsidiary and future subsidiaries that secure our senior
debt and our senior subordinated discount notes, lenders or holders of
our senior subordinated discount notes may control our assets or our
subsidiaries' assets upon a default.
As of June 30, 1999, after giving effect to the common stock offering, the
units offering, consisting of senior subordinated discount notes and warrants,
and the conversion of $7.6 million of convertible notes plus accrued interest
of $127,000, our outstanding long-term debt would have totaled $154.5 million.
In addition, on August 20, 1999 we borrowed an additional $3.5 million from
Lucent. Under our current business plan, we expect to incur substantial
additional debt before achieving break-even operating cash flow, including
$140.0 million of additional borrowings under our financing from Lucent.
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If we do not meet all of the conditions required under our Lucent financing
documents, we may not be able to draw down all of the funds we anticipate
receiving from Lucent and may not be able to complete the build-out of our
network
We have received $13.5 million to date from Lucent. The remaining $140.0
million which we expect to receive in the future is subject to our meeting all
of the conditions specified in the financing documents and, in addition, is
subject at each funding date to the following conditions:
. that the representations and warranties in the loan documents are true
and correct; and
. the absence of a default under our loan documents.
If we do not meet these conditions at each funding date, the lenders may not
lend any or all of the remaining amounts, and if other sources of funds are not
available, we may not be in a position to complete the build-out of our PCS
network. If we do not have sufficient funds to complete our network build-out,
we may be in breach of our management agreement with Sprint PCS and in default
under our financing from Lucent and under the senior subordinated discount
notes.
If we lose the right to install our equipment on wireless towers owned by
other carriers or fail to obtain zoning approval for our cell sites, we may
have to rebuild our network
We expect more than 85% of our cell sites to be collocated on facilities
shared with one or more wireless providers. We will collocate over 150 of these
sites on facilities owned by one wireless carrier. If our master collocation
agreement with that carrier were to terminate, we would have to find new sites,
and if the equipment had already been installed we might have to rebuild that
portion of our network. Some of the cell sites are likely to require us to
obtain zoning variances or other local governmental or third party approvals or
permits. We may also have to make changes to our radio frequency design as a
result of difficulties in the site acquisition process.
We may have difficulty in obtaining infrastructure equipment required in order
to meet our network construction deadlines required under our management
agreement
If we are not able to acquire the equipment required to build our PCS network
in a timely manner, we may be unable to provide wireless communications
services comparable to those of our competitors or to meet the requirements of
our agreements with Sprint PCS. The demand for the equipment that we require to
construct our PCS network is considerable, and manufacturers of this equipment
could have substantial order backlogs. Accordingly, the lead time for the
delivery of this equipment may be long. Some of our competitors purchase large
quantities of communications equipment and may have established relationships
with the manufacturers of this equipment. Consequently, they may receive
priority in the delivery of this equipment.
Sprint PCS' vendor discounts may be discontinued, which could increase our
equipment costs
We intend to purchase our infrastructure equipment under Sprint PCS' vendor
agreements that include volume discounts. If Sprint PCS were unable to continue
to obtain vendor discounts for its affiliates, the loss of vendor discounts
could increase our equipment costs.
The failure of our consultants and contractors to perform their obligations
may delay construction of our network which may lead to a breach of our
management agreement
The failure by any of our vendors, consultants or contractors to fulfill
their contractual obligations to us could materially delay construction of our
PCS network. We have retained Lucent and other consultants and contractors to
assist in the design and engineering of our systems, construct cell sites,
switch facilities and towers, lease cell sites and deploy our PCS network
systems and we will be significantly dependent upon them in order to fulfill
our build-out obligations.
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Conflicts with Sprint PCS may not be resolved in our favor which could
restrict our ability to manage our business and provide Sprint PCS products and
services
Conflicts between us and Sprint PCS may arise and as Sprint PCS owes us no
duties except as set forth in the management agreement, these conflicts may not
be resolved in our favor. The conflicts and their resolution may harm our
business. For example, Sprint PCS prices its national plans based on its own
objectives and could set price levels that may not be economically sufficient
for our business. In addition, upon expiration, Sprint PCS could decide to not
renew the management agreement which would not be in our best interest or the
interest of our stockholders. There may be other conflicts such as the setting
of the price we pay for back office services and the focus of Sprint PCS'
management and resources.
If we fail to pay our debt, our lenders may sell our loans to Sprint PCS
giving Sprint PCS certain rights of a creditor to foreclose on our assets
Sprint PCS has contractual rights, triggered by an acceleration of the
maturity of our financing by our lender, pursuant to which Sprint PCS may
purchase our obligations under the Lucent financing and obtain the rights of a
senior lender. To the extent Sprint PCS purchases these obligations, Sprint
PCS' interests as a creditor could conflict with ours. Sprint PCS' rights as a
senior lender would enable it to exercise rights with respect to our assets and
continuing relationship with Sprint PCS in a manner not otherwise permitted
under our agreements with Sprint PCS.
Certain provisions of our agreements with Sprint PCS may diminish the
valuation of our company
Provisions of our agreements with Sprint PCS could effect the valuation of
our company, thereby, among other things reducing the market prices of our
securities and decreasing our ability to raise additional capital necessary to
complete our network build-out. Under our agreements with Sprint PCS, subject
to the requirements of applicable law, there are circumstances under which
Sprint PCS may purchase our operating assets or capital stock for 72% or 80% of
the "entire business value" of our company, as defined in our management
agreement with Sprint PCS. In addition, Sprint PCS must approve any change of
control of our ownership and consent to any assignment of our agreements with
Sprint PCS. Sprint PCS also has been granted a right of first refusal if we
decide to sell our operating assets. We are also subject to a number of
restrictions on the transfer of our business including the prohibition on
selling our company or our operating assets to a number of identified and as
yet to be identified competitors of Sprint PCS or Sprint. These and other
restrictions in our agreements with Sprint PCS may limit the saleability and/or
reduce the value a buyer may be willing to pay for our business and may operate
to reduce the "entire business value" of our company.
We may not be able to compete with larger, more established businesses
offering similar products and services
Our ability to compete will depend, in part, on our ability to anticipate and
respond to various competitive factors affecting the telecommunications
industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors. We will compete in our territory with two cellular
providers, both of which have an infrastructure in place and have been
operational for a number of years. They have significantly greater financial
and technical resources than we do, could offer attractive pricing options and
may have a wider variety of handset options. We expect that existing cellular
providers will upgrade their systems and provide expanded, digital services to
compete with the Sprint PCS
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products and services that we intend to offer. These wireless providers require
their customers to enter into long-term contracts, which may make it more
difficult for us to attract customers away from them. Sprint PCS generally does
not require its customers to enter into long-term contracts, which may make it
easier for other wireless providers to attract Sprint PCS customers away from
Sprint PCS. We will also compete with several PCS providers and other existing
communications companies in our territory. A number of our cellular and PCS
competitors will have access to more licensed spectrum than the 10 MHz licensed
to Sprint PCS in our territory. In addition, any competitive difficulties that
Sprint PCS may experience could also harm our competitive position and success.
Our services may not be broadly used and accepted by consumers
PCS systems have a limited operating history in the United States. The extent
of potential demand for PCS in our markets cannot be estimated with any degree
of certainty. If we are unable to establish and successfully market PCS
services we may not be able to attract customers in sufficient numbers to
operate our business successfully.
The technology we use has limitations and could become obsolete
We intend to employ digital wireless communications technology selected by
Sprint PCS for its network. Code division multiple access, known as CDMA,
technology is a relatively new technology. CDMA may not provide the advantages
expected by Sprint PCS. If another technology becomes the preferred industry
standard, we may be at a competitive disadvantage and competitive pressures may
require Sprint PCS to change its digital technology which, in turn, may require
us to make changes at substantially increased costs. We may not be able to
respond to such pressures and implement new technology on a timely basis, or at
an acceptable cost.
If Sprint PCS customers are not able to roam instantaneously or efficiently
onto other wireless networks, prospective customers could be deterred from
subscribing for our Sprint PCS services
The Sprint PCS network operates at a different frequency and uses or may use
a different technology than many analog cellular and other digital systems. To
access another provider's analog cellular or digital system outside of the
Sprint PCS network, a Sprint PCS customer is required to utilize a dual-
band/dual-mode handset compatible with that provider's system. Generally,
because dual-band/dual-mode handsets incorporate two radios rather than one,
they are more expensive and are larger and heavier than single-band/single-mode
handsets. The Sprint PCS network does not allow for call hand-off between the
Sprint PCS network and another wireless network, thus requiring a customer to
end a call in progress and initiate a new call when leaving the Sprint PCS
network and entering another wireless network. In addition, the quality of the
service provided by a network provider during a roaming call may not
approximate the quality of the service provided by Sprint PCS. The price of a
roaming call may not be competitive with prices of other wireless companies for
roaming calls, and Sprint PCS customers may not be able to use Sprint PCS
advanced features, such as voicemail notification, while roaming.
Non-renewal or revocation by the Federal Communications Commission of the
Sprint PCS licenses would significantly harm our business
PCS licenses are subject to renewal and revocation. Sprint PCS' licenses in
our territory will expire in 2007 but may be renewed for additional ten year
terms. There may be opposition to renewal of Sprint PCS' licenses upon their
expiration and the Sprint PCS licenses may not be renewed. The Federal
Communications Commission, generally referred to as the FCC, has adopted
11
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specific standards to apply to PCS license renewals. Failure by Sprint PCS to
comply with these standards in our territory could cause revocation or
forfeiture of the Sprint PCS licenses for our territory or the imposition of
fines on Sprint PCS by the FCC.
The loss of our officers and skilled employees that we depend upon to operate
our business could reduce our ability to offer Sprint PCS products and services
The loss of one or more key officers could impair our ability to offer Sprint
PCS products and services. Our business is managed by a small number of
executive officers. We believe that our future success will also depend in
large part on our continued ability to attract and retain highly qualified
technical and management personnel. We believe that there is and will continue
to be intense competition for qualified personnel in the PCS equipment and
services industry as the PCS market continues to develop. We may not be
successful in retaining our key personnel or in attracting and retaining other
highly qualified technical and management personnel. We intend to, but do not
currently, maintain "key man" life insurance for some of our executive officers
or other employees.
We may not achieve or sustain operating profitability or positive cash flow
from operating activities
We expect to incur significant operating losses and to generate significant
negative cash flow from operating activities until 2002 while we develop and
construct our PCS network and build our customer base. If and when we start to
provide services to customers, our operating profitability will depend upon
many factors, including, among others, our ability to market our services,
achieve our projected market penetration and manage customer turnover rates. If
we do not achieve and maintain operating profitability and positive cash flow
from operating activities on a timely basis, we may not be able to meet our
debt service requirements.
We may need more capital than we currently project to build out our PCS
network
The build-out of our PCS network will require substantial capital. Additional
funds would be required in the event of significant departures from the current
business plan, unforeseen delays, cost overruns, unanticipated expenses,
regulatory changes, engineering design changes and other technological risks.
Due to our highly leveraged capital structure, additional financing may not be
available or, if available, may not be obtained on a timely basis and on terms
acceptable to us or within limitations permitted under our existing debt
covenants. Failure to obtain additional financing, should the need for it
develop, could result in the delay or abandonment of our development and
expansion plans.
Unauthorized use of our PCS network could disrupt our business
We will likely incur costs associated with the unauthorized use of our PCS
network, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraud impacts interconnection
costs, capacity costs, administrative costs, fraud prevention costs and
payments to other carriers for unbillable fraudulent roaming.
Our agreements with Sprint PCS, our certificate of incorporation and our
bylaws include provisions that may discourage, delay and/or restrict any sale
of our operating assets or common stock to the possible detriment of our
stockholders
Our agreements with Sprint PCS restrict our ability to sell our operating
assets and common stock. Generally, Sprint PCS must approve a change of control
of our ownership and consent to any assignment of our agreements with Sprint
PCS. The agreements also give Sprint PCS a right of first
12
<PAGE>
refusal if we decide to sell our operating assets to a third party. These
restrictions, among other things, could discourage, delay or make more
difficult any sale of our operating assets or common stock. This could have a
material adverse effect on the value of the senior subordinated discount notes
or our common stock and could reduce the price of our company in the event of a
sale. Provisions of our certificate of incorporation and bylaws could also
operate to discourage, delay or make more difficult a change in control of our
company. Our certificate of incorporation, which contains a provision
acknowledging the terms under the management agreement and a consent and
agreement pursuant to which Sprint PCS may buy our operating assets, has been
duly authorized and approved by our board of directors and our stockholder.
This provision is intended to permit the sale of our operating assets pursuant
to the terms of the management agreement or a consent and agreement with our
lenders without further stockholder approval. See "Description of Capital
Stock."
We face risks relating to the year 2000 issue
If our systems, the systems of our vendors, consultants and contractors, or
the systems of Sprint and Sprint PCS and their vendors, consultants and
contractors, are not year 2000 compliant or are unable to recover from system
interruptions which may result from the year 2000 date change, our business
could be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Impact of Year 2000
Issue on the Operations and Financial Condition of AirGate."
Industry Risks
We may experience a high rate of customer turnover which would increase our
costs of operations and reduce our revenue
Our strategy to reduce customer turnover may not be successful. The PCS
industry has experienced a higher rate of customer turnover as compared to
cellular industry averages. The rate of customer turnover may be the result of
several factors, including network coverage; reliability issues such as blocked
calls, dropped calls and handset problems; non-use of phones; change of
employment; non-use of customer contracts, affordability; customer care
concerns and other competitive factors. Price competition and other competitive
factors could also cause increased customer turnover.
Wireless providers offering services based on alternative technologies may
reduce demand for PCS
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades
in existing analog wireless systems, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements and changes in end-user
requirements and preferences. There is also uncertainty as to the extent of
customer demand as well as the extent to which airtime and monthly recurring
charges may continue to decline. As a result, our future prospects and those of
the industry, and the success of PCS and other competitive services, remain
uncertain.
Regulation by government agencies may increase our costs of providing service
or require us to change our services
The licensing, construction, use, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC, the Federal Aviation
13
<PAGE>
Administration, generally referred to as the FAA, and, depending on the
jurisdiction, state and local regulatory agencies and legislative bodies.
Adverse decisions regarding these regulatory requirements could negatively
impact Sprint PCS' operations and our cost of doing business. The Sprint PCS
agreements reflect an affiliation that the parties believe meets the FCC
requirements for licensee control of licensed spectrum. If the FCC were to
determine that our agreements with Sprint PCS need to be modified to increase
the level of licensee control, we have agreed with Sprint PCS to use our best
efforts to modify the agreements as necessary to cause the agreements to comply
with applicable law and to preserve to the extent possible the economic
arrangements set forth in the agreements. If the agreements cannot be modified,
the agreements may be terminated pursuant to their terms.
Use of hand-held phones may pose health risks
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health problems, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may discourage use
of wireless handsets or expose us to potential litigation.
Risks Relating to the Offering
Our current management and directors may be able to control the outcome of
significant matters presented to stockholders as a result of their ownership
position following the completion of this offering
Upon completion of this offering, our current management and directors will
beneficially own approximately 39% of our outstanding common stock on a diluted
basis, or approximately 36% if the underwriters' over-allotment option is
exercised in full. Consequently, such persons, as a group, may be able to
control the outcome of matters submitted for stockholder action including the
election of members to our board of directors and the approval of significant
change in control transactions. This may have the effect of delaying or
preventing a change in control. See "Management" and "Principal Stockholders."
An active market for the common stock may not develop which may inhibit the
ability of our stockholders to sell common stock following this offering
An active or liquid trading market in our common stock may not develop upon
completion of this offering, or if it does develop, it may not continue. The
initial public offering price of our common stock has been determined through
our negotiations with the underwriters and may be higher than the market price
of common stock after this offering. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
The price of our common stock may be volatile
The market price of our common stock could be subject to significant
fluctuations in response to variations in quarterly operating results,
announcements of technological innovations or new products and services by us
or our competitors, our failure to achieve operating results consistent with
securities analysts' projections, the operating and stock price performance of
other companies that investors may deem comparable to us and other events or
factors. Factors such as announcements of the introduction of new or enhanced
services or related products by us or our competition,
14
<PAGE>
announcements of joint development efforts or corporate partnerships in the
wireless telecommunications market, market conditions in the technology,
telecommunications and other emerging growth sectors, and rumors relating to us
or our competitors may also have a significant impact on the market price of
our common stock.
The stock market has experienced extreme price volatility. Under these market
conditions, stock prices of many emerging growth and development stage
companies have often fluctuated in a manner unrelated or disproportionate to
the operating performance of such companies. Since we are a development stage
company, our common stock may be subject to greater price volatility than the
stock market as a whole.
Purchasers in this offering will experience dilution
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock will be
immediately after the offering. Any common stock you purchase in the offering
will have a post-offering net tangible book value per share of $6.34 less than
the price you paid for the share. See "Dilution".
Possible future sales of our common stock by management and other affiliates
and exercise of the warrants could cause the market price of our common stock
to decrease
A substantial number of shares of our common stock could be sold into the
public market after this offering. The occurrence of such sales, or the
perception that such sales could occur, could materially and adversely affect
our stock price and could impair our ability to obtain capital through an
offering of equity securities. The shares of common stock being sold in this
offering will be freely transferable under the securities laws immediately
after issuance, except for any shares sold to our "affiliates." All of our
stockholders, Lucent, members of our senior management and our directors have
either entered into or have agreed to enter into written "lock-up" agreements
that, for a period of 180 days from the date of this prospectus, they will not,
among other things, sell their shares without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation. Upon the expiration of the
180 day lock-up period, an additional 2,753,686 shares of our common stock will
be eligible for sale in the public market subject, in most cases, to volume and
other restrictions under federal securities laws. Upon completion of our common
stock offering, Weiss Peck & Greer and Lucent will hold warrants exercisable
for an aggregate of 343,273 shares of our common stock. We have agreed to enter
into registration rights agreements under which, subject to the applicable
lock-up agreements, Weiss Peck & Greer and Lucent may require us to register
these shares. In connection with our concurrent units offering we will issue
warrants exercisable for shares of our capital stock. Upon the occurance of the
separation date, the 644,400 shares underlying the warrants to be issued in the
units offering will be freely tradeable. In the event the number of shares
underlying the warrants varies based on the closing of the concurrent units
offering, additional shares would become freely tradeable on the separation
date. Shares covered by an effective registration statement would be freely
transferable. See "Description of Capital Stock" and "Shares Eligible for
Future Sale."
You may not receive a return on investment through dividend payments or the
sale of your shares
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Instead, we intend to retain future earnings to fund our
growth. Therefore, you will not receive a return on your investment in our
common stock through the payment of dividends and may not realize a return on
your investment even if you sell your shares.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations,
which are "forward-looking statements." Any statement in this prospectus that
is not a statement of historical fact may be deemed to be a forward-looking
statement. These statements include:
. forecasts of growth in the number of consumers using PCS services;
. statements regarding our plans for and costs of the build-out of our PCS
network;
. statements regarding our anticipated revenues, expense levels, liquidity
and capital resources and projection of when we will launch commercial
PCS service and achieve break-even operating cash flow;
. statements regarding our preparedness for the year 2000 date change; and
. other statements, including statements containing words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend"
and other similar words that signify forward-looking statements.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements.
Specific factors that might cause such a difference include, but are not
limited to:
. our dependence on our affiliation with Sprint PCS;
. the need to successfully complete the build-out of our PCS network;
. our lack of operating history and anticipation of future losses;
. our dependence on Sprint PCS' back office services;
. potential fluctuations in our operating results;
. our potential need for additional capital;
. our potential inability to expand our services and related products in
the event of substantial increases in demand for these services and
related products;
. our competition; and
. our ability to attract and retain skilled personnel.
See additional discussion under "Risk Factors" beginning on page 7.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the common stock we are
offering, after deducting underwriting discounts and commissions and estimated
offering expenses will be approximately $104.9 million, or approximately $120.8
million if the underwriters' over-allotment option is exercised in full. The
net proceeds to be received from the sale of the units, consisting of senior
subordinated discount notes and warrants, we are offering, after deducting
underwriting discounts and commissions and estimated offering expenses, will be
approximately $149.6 million. We intend to use the net proceeds from the common
stock offering and the units offering, together with the financing from Lucent,
to fund:
. capital expenditures, including the build-out of our PCS network, of
approximately $196.7 million;
. operating losses and working capital requirements of approximately $89.9
million; and
. debt service payments, including the repayment of existing debt
consisting of a $7.7 million unsecured promissory note bearing interest
at an annual rate of 14.0% which matures in December 2000 and a $1.0
million note payable to a bank bearing interest at an annual rate of
prime plus 0.5% which currently matures in November 1999.
Pending such uses, we expect to invest the net proceeds from the sale of the
common stock and units in short-term investment grade securities which will
earn interest.
The foregoing discussion represents our best estimate of the allocation of
the net proceeds of the offerings based upon our current plans. Actual
expenditures may vary substantially from these estimates and we may find it
necessary or advisable to reallocate the net proceeds within the above-
described categories or to use portions thereof for other purposes.
DIVIDEND POLICY
We intend to retain our future earnings, if any, to fund the development and
growth of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. Our future decisions concerning the
payment of dividends on the common stock will depend upon our results of
operations, financial condition and capital expenditure plans, as well as such
other factors as the board of directors, in its sole discretion, may consider
relevant. In addition, our existing indebtedness restricts, and we anticipate
our future indebtedness may restrict, our ability to pay dividends.
17
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and our actual
capitalization:
. as of June 30, 1999; and
. as adjusted to reflect the conversion of $7.6 million in convertible
notes plus accrued interest of $127,000 into 869,683 shares of common
stock; the sale in the common stock offering of 6,700,000 shares of
common stock at an initial offering price of $17.00 per share less
underwriting discounts and commissions and estimated offering expenses of
$9.0 million; the sale of approximately $156.1 million gross proceeds at
issuance of units, consisting of 13 1/2% senior subordinated discount
notes due 2009 and warrants to purchase 644,400 shares of common stock at
an exercise price of $0.01 per share, less aggregate underwriting
discounts and commissions and estimated offering expenses of
$6.5 million; and the cost of the Lucent financing, including the payment
of origination fees and other fees and expenses of $5.0 million.
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------
Actual As Adjusted
(In thousands)
(Unaudited)
<S> <C> <C>
Cash and cash equivalents................................ $ 2,910 $243,685
======== ========
Short-term debt:
Notes payable(1)........................................ $ 4,146 $ 150
Long-term debt:(2)
Lucent financing(3)..................................... 10,000 9,342
13 1/2% senior subordinated discount notes due 2009(4).. -- 145,109
Other long-term debt(5)................................. 7,700 --
-------- --------
Total long-term debt.................................... 17,700 154,451
-------- --------
Stockholders' equity (deficit):
Preferred stock, par value $.01 per share; 5,000,000
shares authorized; no shares issued and outstanding.... -- --
Common stock, par value $.01 per share, 25,000,000
shares authorized; 3,382,518 shares outstanding,
actual; 10,952,201 shares outstanding, as
adjusted(6)(7)......................................... 34 110
Additional paid-in capital(1)(3)(4)..................... 15,872 139,762
Accumulated deficit(1).................................. (19,419) (23,071)
-------- --------
Total stockholders' equity (deficit)................... (3,513) 116,801
-------- --------
Total capitalization................................. $ 14,187 $271,252
======== ========
</TABLE>
- --------------------
(1) Actual includes a $1.0 million credit facility with a bank and $7.7 million
face value of notes payable to affiliates less a $4.6 million unrecognized
discount. As adjusted reflects the conversion of $7.6 million face value of
outstanding promissory notes with an allocation of the $4.6 million
unamortized discount to accumulated deficit and additional paid-in capital,
and repayment of the $1.0 million credit facility.
(2) Includes current maturities.
(3) As adjusted reflects $10.0 million of borrowings outstanding from Lucent at
June 30, 1999 less a $658,000 unamortized discount associated with the
value of warrants issued in connection with the Lucent financing. The
unamortized discount has been allocated to additional paid-in capital.
(4) As adjusted reflects $156.1 million of gross proceeds at issuance of senior
subordinated discount notes less a $10.9 million unrecognized discount
associated with the value of warrants issued in connection with our units
offering. The unrecognized discount has been allocated to additional paid-
in capital.
(5) Actual consists of a promissory note issued to a third party in connection
with our acquisition of certain site acquisition and engineering costs. As
adjusted reflects repayment of this note.
(6) Shares of common stock outstanding reflect a 39,134-for-one stock split
effective July 9, 1999 and subsequent reverse stock splits of 0.996-for-one
of our common stock which was effective July 28, 1999, 0.900-for-one of our
common stock which was effective September 15, 1999, and 0.965-for-one of
our common stock which was effective September 27, 1999.
(7) Excludes 2,000,000 shares of our common stock reserved for issuance under
our 1999 Stock Option Plan, warrants currently outstanding for 343,273
shares of common stock and warrants to be issued for 644,400 shares of
common stock in the concurrent units offering. On July 28, 1999, we granted
to current employees options to purchase 1,075,000 shares of our common
stock pursuant to the 1999 Stock Option Plan.
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<PAGE>
DILUTION
Our net tangible book value at June 30, 1999, was $(3.5) million or $(1.04)
per share of common stock. Net tangible book value per share represents the
amount of total tangible assets less total liabilities, divided by the number
of shares outstanding. After giving effect to:
. the sale in this offering of 6,700,000 shares of common stock at an
initial public offering price of $17.00 per share and the receipt of
proceeds therefrom;
. the effect of the conversion of $7.6 million in convertible notes plus
accrued interest of $127,000 into 869,683 shares of common stock upon the
closing of this offering; and,
. the deduction of underwriting discounts and commissions and estimated
offering expenses of $9.0 million
our as-adjusted net tangible book value as of June 30, 1999 would have been
approximately $116.8 million, or $10.66 per share. This represents an immediate
dilution of $6.34 per share to new purchasers of common stock in the offering
and an immediate increase in net tangible book value to existing stockholders
of $11.70 per share. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $17.00
Net tangible book value per share as of June 30, 1999........ $(1.04)
Increase in net tangible book value per share attributable to
the offering and the conversion of notes payable to common
stock....................................................... 11.70
------
As adjusted net tangible book value per share after the
offering and conversion of notes payable.................... 10.66
------
Dilution per share to new purchasers of common stock......... $ 6.34
======
</TABLE>
The following table summarizes, on an as-adjusted basis as of June 30, 1999,
the number of shares of common stock purchased, the total consideration paid
and the average price per share paid by our existing stockholders and by new
purchasers of common stock in the offering, with an offering price of $17.00
per share, before the deduction of underwriting discounts and commissions and
estimated offering expenses of $9.0 million payable by us:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average
Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 4,252,201 39% $ 12,399,429 10% $ 2.92
New purchasers of common
stock.................... 6,700,000 61 113,900,000 90 17.00
---------- --- ------------ --- ------
Total................... 10,952,201 100% $126,299,429 100% $11.53
========== === ============ === ======
</TABLE>
The foregoing tables assume no exercise of the underwriters' over-allotment
option and no exercise of outstanding stock options and warrants. See
"Management--1999 Stock Option Plan" and "Management--Employment Agreements."
19
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the captions "Statement of
Operations Data," "Other Data," and "Balance Sheet Data" for, and as of the end
of, the period from inception, June 15, 1995, to December 31, 1995 is derived
from the unaudited consolidated financial statements of AirGate PCS, Inc. and
subsidiaries and predecessors. The selected financial data presented below
under the captions "Statement of Operations Data," "Other Data," and "Balance
Sheet Data" for, and as of the end of, each of the years in the three-year
period ended December 31, 1998, are derived from the consolidated financial
statements of AirGate PCS, Inc. and subsidiaries and predecessors, which
consolidated financial statements have been audited by KPMG LLP, independent
certified public accountants.
The selected financial data should be read in conjunction with the
consolidated financial statements for the three-year period ended December 31,
1998, the related notes and the independent auditors' report, which contains an
explanatory paragraph that states that our recurring losses from operations and
working capital and accumulated deficit raise substantial doubt about our
ability to continue as a going concern, appearing elsewhere in this prospectus.
The consolidated financial statements and the selected financial data do not
include any adjustments that might result from the outcome of that uncertainty.
The selected unaudited financial data presented below as of June 30, 1999 and
for the six month periods ended June 30, 1998 and 1999, are derived from our
unaudited consolidated financial statements included elsewhere in this
prospectus. The unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, that management considers
necessary to a fair presentation of financial position and results of
operations. Operating results for the six month period ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999.
<TABLE>
<CAPTION>
Period From
Inception,
June 15, For the Six Month
1995, to Periods Ended
December 31, For the Years Ended December 31, June 30,
------------ ---------------------------------- ------------------
1995 1996 1997 1998 1998 1999
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating expenses:
General and
administrative........ $ 1,458 $ 1,252 $ 1,101 $ 2,596 $ 1,100 $ 1,799
Depreciation and
amortization.......... 18 19 998 1,204 746 409
------- ---------- ---------- ---------- -------- --------
Operating loss......... (1,476) (1,271) (2,099) (3,800) (1,846) (2,208)
Interest expense....... (217) (582) (817) (1,392) (510) (5,557)
------- ---------- ---------- ---------- -------- --------
Net loss............... $(1,693) $ (1,853) $ (2,916) $ (5,192) $ (2,355) $ (7,765)
======= ========== ========== ========== ======== ========
Other Data:
Operating loss before
fixed charges......... $(1,476) $ (1,271) $ (2,099) $ (3,800) $ (1,846) $ (2,208)
======= ========== ========== ========== ======== ========
Basic and diluted net
loss per share
of common stock (1)... $ (0.50) $ (0.55) $ (0.86) $ (1.54) $ (0.70) $ (2.30)
======= ========== ========== ========== ======== ========
</TABLE>
- ---------------------
(Footnotes on the following page)
20
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of June 30, 1999
---------------------------------- -----------------------
1995 1996 1997 1998 Actual As Adjusted(2)
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents........... $ 256 $ 6 $ 147 $ 2,296 $ 2,910 $243,685
Total assets........... 21,643 2,196 13,871 15,450 21,190 278,521
Long-term debt(3)...... -- -- 11,745 7,700 17,700 154,451
Stockholders' equity
(deficit)............. (1,272) (3,025) (1,750) (5,350) (3,513) 116,801
</TABLE>
- ---------------------
(1) Basic and diluted net loss per share of common stock is computed by
dividing net loss by the weighted average number of common shares
outstanding.
(2) As adjusted Balance Sheet Data reflects the conversion of notes payable
plus accrued interest to 869,683 shares of common stock, the sale in the
common stock offering of 6,700,000 shares of common stock at an initial
offering price of $17.00 per share, less underwriting discounts and
commissions and estimated offering expenses of $9.0 million and the
concurrent sale of approximately $156.1 million of gross proceeds at
issuance of 13 1/2% senior subordinated discount notes due 2009 and
warrants in the units offering, less aggregate underwriting discounts and
commissions and estimated offering expenses of $6.5 million, the repayment
of $8.7 million in short-term and long-term debt and the cost of the Lucent
financing, including the payment of origination fees and other estimated
fees and expenses of $5.0 million.
(3) Includes current maturities.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes included elsewhere in
this prospectus. The discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from the results anticipated in these forward-looking statements as a result of
factors including, but not limited to, those under "Risk Factors" and elsewhere
in this prospectus.
Overview
On July 22, 1998, we entered into a management agreement with Sprint PCS
whereby we became the Sprint PCS affiliate with the exclusive right to provide
100% digital, 100% PCS services under the Sprint and Sprint PCS brand names in
our territory in the southeastern United States. We are a development stage
company and have not generated any revenues to date. We have completed our
radio frequency design, network design and substantial site acquisition and
cell site engineering, and commenced construction of our PCS network in
November 1998.
Sprint PCS has invested $44.6 million to purchase the PCS licenses in our
territory and incurred additional expenses for microwave clearing. Under our
long term agreements with Sprint PCS, we will manage the network on Sprint PCS'
licensed spectrum as well as the Sprint and Sprint PCS brand names royalty-free
during our affiliation with Sprint PCS. We also have access to Sprint PCS'
national marketing support and distribution programs and are entitled to buy
network and subscriber equipment and handsets at the same discounted rates
offered by vendors to Sprint PCS based on its large volume purchases. In
exchange for these benefits, we are entitled to receive 92%, and Sprint PCS is
entitled to retain 8%, of collected service revenues from customers in our
territory. We are entitled to 100% of revenues collected from the sale of
handsets and accessories, on revenues received when Sprint PCS customers from a
different territory make a wireless call on our PCS network, and on roaming
revenues from non-Sprint PCS customers.
In addition, for specified fees, we may purchase certain back office
services, including customer activation, billing and customer care, directly
from Sprint PCS. We will purchase these services from Sprint PCS at a cost
which reflects Sprint PCS' economies of scale. We expect that the outsourcing
of these services will enable us to reduce capital expenditures for
administrative purposes and to operate with fewer employees than other wireless
providers.
Through June 30, 1999, we have acquired $7.7 million of capitalized network
assets from Sprint PCS and incurred $9.0 million of capital expenditures
related to the build-out of our PCS network. As a result of the progress made
on our PCS network build-out, we expect to be able to launch commercial PCS
operations in the first quarter of 2000. We expect to extend our coverage
during the balance of 2000 and to substantially complete the build-out of our
PCS network by the end of 2000 covering approximately 74% of the population in
our territory. We expect to continue to fill in coverage in 2001.
From our inception in June 1995 through August 1998, our operating activities
were focused on developing a PCS business in the southeastern United States,
including the purchase of four PCS licenses from the FCC. During this period we
did not generate any revenues and, as a result, have incurred operating losses
since inception. The operating results during this period are not indicative of
the anticipated results of operations which we expect to achieve, following
commencement of commercial operations, as a Sprint PCS affiliate.
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<PAGE>
Results of Operations
Prospective Income Statements
Revenues. Under our management agreement with Sprint PCS, we are entitled to
receive 92% of collected service revenues from customers in our territory. For
financial reporting purposes, we will record 100% of collected service revenues
along with an expense equal to 8% of collected service revenues which Sprint
PCS is entitled to retain under our management agreement. In addition to
collected service revenues, we will generate revenues from the sale of handsets
and accessories and from roaming services provided to customers traveling onto
our PCS network. Sprint PCS is not entitled to retain any of these revenues. We
will make an appropriate accrual of bad debt expense on a monthly basis.
Through our marketing efforts, we will seek to distinguish our service
offerings on the basis of the quality of digital PCS services and extensive
wireless coverage our subscribers will receive through the Sprint PCS network.
We believe that the Sprint and Sprint PCS brand names and quality of digital
PCS service, coupled with Sprint PCS' established customer care and simplified
billing, will build customer loyalty and limit customer turnover, thereby
increasing revenues and margins.
Wireless providers that have offered poor or spotty coverage, inferior voice
quality, unresponsive customer care or confusing billing formats suffer higher
than average customer turnover rates. Accordingly, we will only launch service
in a particular market after comprehensive and reliable coverage and service
can be maintained in that market. In addition, we will use the Sprint PCS
billing platform and rate plans which are designed to offer simple and
understandable options. Specifically, the Sprint PCS Free and Clear rate plans
offer bundled minute options that include local, long distance and roaming on
the entire Sprint PCS network.
Operating Expenses. We expect our operating expenses will principally include
sales and marketing, network operations and general and administrative
expenses.
Sales and marketing expenses relate to our indirect distribution channels,
sales representatives, sales support personnel, our retail stores, advertising
programs and equipment costs and subsidies paid to third party retailers to
sell our handsets. We expect that our cost for each additional customer will be
higher in the initial years of operation and decline as our sales and marketing
expenses are distributed over a greater customer base and costs and subsidies
of handsets decline. We will benefit from the use of the Sprint and Sprint PCS
brand names, Sprint PCS national advertising and other marketing programs. We
will not pay Sprint PCS a marketing service fee. Our costs of handsets and
accessories will reflect Sprint PCS' volume discounts.
Network operations expenses include cell site collocation lease costs,
utilities, switch maintenance, switch site leases, engineering personnel,
backhaul and interconnect charges. We will also be charged roaming fees by
Sprint PCS and other wireless carriers when our customers make a wireless call
on networks outside our territory. More than 85% of our cell sites will be
collocated, which will result in higher cell site lease expenses. These higher
lease expenses will be offset in part by certain operating expense savings
resulting from collocation. Collocation will also substantially reduce our
capital expenditures and time to market. Collocation is the ability to locate
existing antennas and other transmission equipment on existing towers or other
existing structures. Collocation has the following three primary benefits:
. allows us to avoid the costs of building the tower and buying or leasing
the land;
23
<PAGE>
. allows us to more quickly install antennas than if we had to build the
towers ourselves; and
. allows us to avoid any zoning challenges that could prohibit use of the
location for a cell site since we will use existing towers.
On collocation sites we also are able to avoid paying the costs of maintenance
that are borne by the owner of the tower. This results in higher cell lease
expenses, but lower operating costs.
We will purchase a full suite of back office services from Sprint PCS.
. These services will be provided by Sprint PCS in the same manner and with
the same standard of care that Sprint PCS uses in conducting its own
business.
. Initially, the charges for these services, which are based on Sprint PCS'
cost and reflect their economies of scale, will be lower than if we
provided these services ourselves.
. In addition, we expect that, by using these established services, our
capital expenditures and demands on our management's time in connection
with back office services will be lower than if we developed and provided
the services ourselves. We will have access to these services until at
least December 31, 2001. Because of the economic benefits to us, we will
initially purchase:
.customer billing and collections;
.customer care;
.subscriber activation, including credit verification;
.handset logistics;
.network operations control center monitoring;
.national platform interconnectivity;
.voice mail;
.directory assistance and operator services;
.long distance;
.roaming fees and roaming clearinghouse fees; and
.inter-service area fees.
As indicated above, Sprint PCS will retain 8% of collected service revenues.
We will record this affiliation fee as an operating expense.
We will also incur certain general and administrative expenses relating to
corporate overhead, including salaries and other benefits.
Historical Income Statements
From June 15, 1995 (inception) to December 31, 1997:
From inception, June 15, 1995, through December 31, 1997, our operating
activities were focused on developing a PCS business which included the
purchase of four FCC PCS licenses. During this period, we incurred total
cumulative expenses of $6.5 million. These expenses related to salaries and
benefits, professional fees, interest expense, depreciation and amortization of
the FCC
24
<PAGE>
PCS licenses. All costs of start-up and organizational activities have been
expensed or incurred in accordance with AICPA Statement of Position 98-5.
For the year ended December 31, 1998:
In July 1998, we signed a series of agreements with Sprint PCS to operate as
the exclusive affiliate of Sprint PCS in certain markets in the southeastern
United States. As a part of these agreements, we were given the right to market
Sprint PCS' products and services in exchange for building, constructing and
managing a PCS network that will support the wireless service offerings of
Sprint PCS in our territory. In October 1998, AirGate PCS, Inc. was formed and
all operations related to the affiliation with Sprint PCS were transferred to
it and its subsidiaries. The FCC PCS licenses will not be used in our
continuing operations as a Sprint PCS affiliate and, therefore, have been
excluded from the financial statements of AirGate PCS, Inc. During 1998, we
focused on consummating our affiliation with Sprint PCS. Expenses incurred for
these purposes totaled $5.2 million for salaries and benefits, professional
fees, interest expense and depreciation and amortization. Capital outlays in
1998 amounted to $12.9 million. Included in this amount were $7.7 million of
capitalized network assets which we purchased from Sprint PCS which include
radio frequency and engineering design data, site acquisition materials and
construction equipment. We also incurred $5.2 million of capital expenditures
related to the build-out of our PCS network.
For the six month period ended June 30, 1999:
From December 31, 1998 through June 30, 1999, we were focused on raising
capital to continue our PCS network build-out. We incurred expenses of $7.8
million during the six month period ended June 30, 1999. These expenses
consisted of salaries and benefits, professional fees, interest expense and
depreciation and amortization expense primarily related to our network build
out. We incurred capital expenditures of $4.4 million related to the continued
build-out of our PCS network which includes approximately $810,000 of
capitalized interest.
Interest expense for the period was $6.5 million, which included a $5.0
million charge to record the fair value of warrants and the beneficial
conversion feature related to the convertible notes issued to affiliates.
Liquidity and Capital Resources
Since inception, our activities have consisted principally of raising
capital, participating in PCS license auctions, consummating and supporting our
agreements with Sprint PCS, completing the initial design of our PCS network
and adding to our management team. We have relied on the proceeds from equity
and debt financing, rather than revenues, as our primary sources of capital.
Specifically, operations during this development phase have been funded through
equity infusions by Weiss Peck & Greer PCS Partners and Maxicom PCS L.L.C. as
well as convertible notes issued to the various venture capital funds of Weiss,
Peck & Greer Venture Partners and JAFCO America Ventures, Inc. These notes will
convert into common stock concurrently with this offering. In addition, we
issued a secured promissory note to Lucent for $10.0 million in June 1999 which
was repaid in connection with the Lucent financing in August 1999.
Completion of our PCS network will require substantial capital. Our build-out
plan includes the installation of three switches and over 500 cell sites by the
end of the fourth quarter of 2000. In addition, we will construct 12 company-
owned Sprint PCS stores and develop other administrative systems. Currently, we
estimate that the capital requirements to achieve our goals, including
25
<PAGE>
repayment of debt, operating losses and working capital for the period from
July 1, 1999 through the end of 2002, will total approximately $344.8 million.
The actual funds required to build out our PCS network and fund operating
losses and working capital needs may vary materially from these estimates, and
additional funds could be required in the event of unforeseen delays, cost
overruns, unanticipated expenses, engineering design changes and other
technology risks.
Currently, we have no sources of revenue to meet our anticipated capital
requirements. We expect the primary sources of funding to be the proceeds
provided by our concurrent offerings of common stock and units together with
the financing from Lucent. As part of our concurrent offerings, we are offering
for sale units, which consist of senior subordinated discount notes and
warrants. The senior subordinated discount notes will be issued in an aggregate
principal amount and with an interest rate sufficient to generate, together
with the warrants, gross proceeds of approximately $156.1 million. The
aggregate accreted value of the senior subordinated discount notes will
increase from approximately $156.1 million at issuance at a rate of 13 1/2
compounded semi-annually to a final accreted value equal to their aggregate
principal amount of $300.0 million at the end of year five. After year five, we
are required to pay cash interest on the senior subordinated discount notes.
The senior subordinated discount notes will be secured by a senior subordinated
pledge of the capital stock of our future, direct subsidiaries, will be
guaranteed by our existing and our future subsidiaries and will be subordinated
in right of payment to our existing and future senior indebtedness.
We have entered into a credit agreement with Lucent Technologies Inc.
pursuant to which we can borrow up to $153.5 million. We used $10.0 million of
our financing with Lucent to repay outstanding indebtedness to Lucent. We will
use the balance of the financing to purchase equipment and for general
corporate purposes. Borrowings under the Lucent financing are secured by a
first priority lien over all of our assets and the assets of our subsidiary and
future subsidiaries, and a pledge of the capital stock of our subsidiary and
future subsidiaries. As of August 31, 1999, we had $13.5 million of borrowings
outstanding under our credit agreement with Lucent.
We believe that the net proceeds from our concurrent offerings of common
stock and units, together with the Lucent financing, will provide us with
sufficient funds to complete our PCS network build-out and fund operating
losses and working capital requirements through 2002, at which point we expect
to have achieved break-even operating cash flow. If we expand more rapidly than
currently anticipated, or if our working capital needs exceed our current
expectations, we will need to raise additional equity or debt capital. We
cannot be sure that we will be able to obtain the additional financing to
satisfy our cash requirements or to implement our growth strategy on acceptable
terms or at all. If we cannot obtain such financing on terms acceptable to us,
we may be forced to curtail our planned business expansion and may be unable to
fund our ongoing operations.
Impact of Year 2000 Issue on the Operations and Financial Condition of AirGate
The year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four to
define the applicable year. Consequently, such software has the potential to
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
We believe that our computer systems and software are year 2000 compliant. To
the extent that we implement our own computer systems and software in the
future, we will assess year 2000
26
<PAGE>
compliance prior to their implementation. We have not incurred any costs
relating to year 2000 compliance. In the process of designing and constructing
our PCS network, we have entered into material agreements with several third-
party vendors. We rely on them for all of our important operating, computer and
non-information technology systems. We are therefore highly dependent on Sprint
PCS and other vendors for remediation of their network elements, computer
systems, software applications and other business systems. We will purchase
critical back office services from Sprint PCS, and our network infrastructure
equipment will be contractually provided by a third party vendor with whom we
have a material relationship. If either Sprint PCS or this third party vendor
fail to become year 2000 compliant, our ability to commence operations may be
materially delayed. We have contacted our third party vendors and believe that
they will be year 2000 compliant. However, we have no contractual or other
right to compel compliance by them.
We do not expect to commence operations until the first quarter of 2000.
Because of our reliance on third-party vendors, we believe that the impact on
us of issues relating to year 2000 compliance, if any, would be a delay in our
launching commercial PCS operations and not a disruption in service. We,
therefore, have not developed a contingency plan and do not expect to do so.
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risks that are inherent in our financial
instruments. These instruments arise from transactions entered into in the
normal course of business. We are subject to interest rate risk on our
financing from Lucent and any future financing requirements. Our fixed rate
debt will consist primarily of the accreted balance of the senior subordinated
discount notes. Our variable rate debt will consist of borrowings made under
the Lucent financing.
The following table presents the estimated future outstanding long-term debt
at the end of each year and future required annual principal payments for each
year then ended associated with senior subordinated discount notes and the
Lucent financing based on our projected level of long-term indebtedness:
<TABLE>
<CAPTION>
Years Ending December 31,
------------------------------------------------
1999 2000 2001 2002 2003 Thereafter
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Senior subordinated
discount notes......... $155,909 $183,905 $209,570 $238,817 $272,145 --
Fixed interest rate..... 13.50% 13.50% 13.50% 13.50% 13.50% 13.50%
Principal payments...... -- -- -- -- -- $300,000
Lucent financing........ $ 13,500 $ 55,500 $121,679 $152,994 $150,969 --
Variable interest rate
(1).................... 9.25% 9.25% 9.25% 9.25% 9.25% 9.25%
Principal payments...... -- -- -- $ 506 $ 2,025 $150,969
</TABLE>
- ---------------------
(1) Interest rate on the Lucent financing equals the London Interbank Offered
Rate ("LIBOR") +3.75%. LIBOR is assumed to equal 5.5% for all periods
presented.
27
<PAGE>
Our primary market risk exposure relates to:
.the interest rate risk on long-term and short-term borrowings,
.our ability to refinance our senior subordinated discount notes at
maturity at market rates; and
. the impact of interest rate movements on our ability to meet interest
expense requirements and meet financial covenants.
We expect to manage the interest rate risk on our outstanding long-term and
short-term debt through the use of fixed and variable rate debt and interest
rate swaps. While we cannot predict our ability to refinance existing debt or
the impact interest rate movements will have on our existing debt, we continue
to evaluate our financial position on an ongoing basis.
Inflation
Management believes that inflation has not had, and will not have, a material
adverse effect on our results of operations.
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<PAGE>
INDUSTRY BACKGROUND
Wireless communications systems use a variety of radio frequencies to
transmit voice and data. Broadly defined, the commercial wireless communication
industry includes one-way radio applications, such as paging or beeper
services, and two-way radio applications, such as cellular, PCS and enhanced
specialized mobile radio, known as ESMR, networks. Historically, each
application has been licensed and operates in a distinct radio frequency block.
In the commercial wireless communication industry there are two principal
services licensed by the FCC for transmitting two-way, real time voice and data
signals: "cellular" and "PCS." Cellular, which uses the 800 MHz frequency
block, is the predominant form of commercial wireless voice communications
service used by subscribers today. Cellular systems are analog-based, but over
the last several years cellular operators have started to deploy digital
service in the 800 MHz frequency block. Digital services have been deployed, as
a complement to the analog based services, in most of the major metropolitan
markets. Analog-based systems send signals in which the transmitted signal
resembles the input signal, the caller's voice, while in digital systems the
input is coded into a binary form before the signal is transmitted. In
addition, ESMR networks may provide up to 15 MHz of spectrum for interconnected
two-way real time voice and data services.
In 1993, the FCC allocated the 1900 MHz frequency block of the radio spectrum
for PCS. PCS differs from traditional analog cellular telephone service
principally in that PCS systems operate at a higher frequency and employ
advanced digital technology. Digital systems convert voice or data signals into
a stream of digits that permit a single radio channel to carry multiple
simultaneous transmissions. Digital systems also achieve greater frequency
reuse than analog systems resulting in greater capacity than analog systems.
This enhanced capacity, along with enhancements in digital protocols, allows
digital-based wireless technologies, whether using PCS or cellular frequencies,
to offer new and enhanced services, such as greater call privacy and more
robust data transmission features, such as "mobile office" applications
including facsimile, electronic mail and connecting notebook computers with
computer/data networks.
Since the introduction of commercial cellular service in 1983, the wireless
communications industry has experienced dramatic growth. The number of wireless
subscribers for cellular, PCS and ESMR has increased from an estimated 340,213
at the end of 1985 to over 69 million as of December 31, 1998, according to the
Cellular Telecommunications Industry Association ("CTIA"), an international
association for the wireless industry. The following chart illustrates the
annual growth in U.S. wireless communication customers for cellular, PCS and
ESMR through December 31, 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Wireless Industry
Statistics(1)
Total service revenues
(in billions).......... $ 7.8 $ 10.9 $ 14.2 $ 19.1 $ 23.6 $ 27.5 $ 33.1
Wireless subscribers at
end of period
(in millions).......... 11.0 16.0 24.1 33.8 44.0 55.3 69.2
Subscriber growth....... 46.0% 45.1% 50.8% 40.0% 30.4% 25.6% 25.1%
Average monthly revenues
per subscriber......... $68.68 $61.49 $56.21 $51.00 $47.70 $42.78 $39.43
</TABLE>
- ---------------------
Source: Cellular Telecommunications Industry Association.
(1) Reflects domestic commercially operational cellular, ESMR and PCS
providers.
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<PAGE>
Paul Kagan Associates, Inc., an independent media and telecommunications
association, estimates that the number of wireless users will increase to
approximately 137 million and 169 million by 2002 and 2005, respectively. This
growth is driven largely by a substantial projected increase in PCS users, who
are forecast to account for approximately 34% and 42% of total users in 2002
and 2005, respectively, representing a significant increase over the
approximately 10% of total wireless customers using PCS as of the end of 1998.
Paul Kagan Associates, Inc. projects that total wireless industry penetration,
defined as the number of wireless subscribers nationwide divided by total
United States population, will grow from an estimated 25.3% in 1998 to 57.0% in
2005.
We believe that a significant portion of the predicted growth in the consumer
market for wireless telecommunications will result from anticipated declines in
costs of service, increased functional versatility, and increased awareness of
the productivity, convenience and privacy benefits associated with the services
offered by PCS providers. PCS providers are one of the first direct wireless
competitors of cellular providers to offer all-digital mobile networks. We also
believe that the rapid growth in the use of notebook computers and personal
digital assistants, combined with emerging software applications for delivery
of electronic mail, fax and database searching, will contribute to the growing
demand for wireless service.
Wireless communications systems, whether PCS or cellular, are divided into
multiple geographic coverage areas, known as "cells." In both PCS and cellular
systems, each cell contains a transmitter, a receiver and signaling equipment,
known as the "cell site." The cell site is connected by microwave or landline
telephone circuits to a switch that uses computers to control the operation of
the cellular or PCS communications system for the entire service area. The
system controls the transfer of calls from cell to cell as a subscriber's
handset travels, coordinates calls to and from handsets, allocates calls among
the cells within the system and connects calls to the local landline telephone
system or to a long distance carrier. Wireless communications providers
establish interconnection agreements with local exchange carriers and
interexchange carriers, thereby integrating their system with the existing
landline communications system. Because the signal strength of a transmission
between a handset and a cell site declines as the handset moves away from the
cell site, the switching office and the cell site monitor the signal strength
of calls in progress. When the signal strength of a call declines to a
predetermined level, the switching office may "hand off" the call to another
cell site where the signal strength is stronger.
Wireless digital signal transmission is accomplished through the use of
various forms of "air interface protocols." The FCC has not mandated a
universal air interface protocol for PCS systems. PCS systems operate under one
of three principal air interface protocols, CDMA, TDMA or GSM. TDMA and GSM are
both time division multiple access systems but are incompatible with each
other. CDMA is a code division multiple access system and is incompatible with
both GSM and TDMA. Accordingly, a subscriber of a system that utilizes CDMA
technology is unable to use a CDMA handset when traveling in an area not served
by CDMA-based PCS operators, unless the customer carries a dual-band/dual-mode
handset that permits the customer to use the analog cellular system in that
area. The same issue would apply to users of TDMA or GSM systems. All of the
PCS operators now have dual- or tri-mode handsets available to their customers.
Until digital networks become fully built-out, these handsets will be necessary
for a certain segment of the subscriber base.
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<PAGE>
BUSINESS
We have entered into a management agreement with Sprint PCS whereby we have
the exclusive right to provide 100% digital, 100% PCS products and services
under the Sprint and Sprint PCS brand names in our territory in the
southeastern United States. Based upon the population of our territory, we are
the second largest Sprint PCS affiliate in the United States. Our territory,
which covers almost the entire state of South Carolina, parts of North
Carolina, and the eastern Georgia cities of Augusta and Savannah, has a
resident population of more than 6.8 million and covers 21 contiguous markets
in one of the fastest growing regions in the United States based on population.
Sprint PCS
Sprint is a diversified telecommunications service provider whose principal
activities include long distance service, local service, wireless telephony
products and services, product distribution and directory publishing
activities, and other telecommunications activities, investments and alliances.
Sprint PCS, a wholly-owned subsidiary of Sprint, operates the only 100%
digital, 100% PCS wireless network in the United States with licenses to
provide service nationwide using a single frequency and a single technology.
The Sprint PCS network uses CDMA technology nationwide.
Sprint launched its first commercial PCS service in the United States in
November 1995. Since then, Sprint PCS has experienced rapid customer growth,
providing service to approximately 4.0 million customers as of June 30, 1999.
In the fourth quarter of 1998, Sprint PCS added approximately 830,000 net new
subscribers, the largest single quarter of customer growth ever reported by a
wireless provider in the United States. In the first quarter of 1999, Sprint
PCS added approximately 763,000 net new wireless subscribers, the second
largest quarter ever recorded by a wireless carrier in the United States. As of
June 30, 1999, Sprint PCS, together with its affiliates, operated PCS systems
in 286 metropolitan markets within the United States, including all of the 50
largest metropolitan areas. The following table, showing the quarterly end-of-
period subscriber data for Sprint PCS, illustrates Sprint PCS' subscriber
growth from the beginning of 1997 to the end of the second quarter of 1999.
<TABLE>
<CAPTION>
1997 1998 1999
----------------------- ----------------------- -----------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total subscribers.. 192 347 570 887 1,114 1,370 1,750 2,586 3,350 3,967
</TABLE>
Sprint PCS currently provides nationwide PCS service through a combination of:
.operating its own digital network in major metropolitan areas;
.strategic affiliations with other companies, primarily in and around
smaller metropolitan areas;
. roaming on analog cellular networks of other providers using dual-band,
dual-mode handsets; and
.roaming on digital PCS networks of other CDMA-based providers.
We are the second largest affiliate of Sprint PCS and will provide Sprint PCS
services in key cities contiguous to current and future Sprint PCS markets. Our
territory connects to Sprint PCS markets including Atlanta, Georgia; Charlotte
and Raleigh, North Carolina; Norfolk, Virginia; and Knoxville, Tennessee. The
build-out of our territory will significantly extend Sprint PCS' coverage in
the Southeast and we believe is important to its nationwide strategy.
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<PAGE>
Competitive Strengths
Benefits of the Sprint PCS Affiliation
Our strategic affiliation with Sprint PCS provides us with many business,
operational and marketing advantages including the following:
Exclusive provider of Sprint PCS products and services. We are the exclusive
provider of Sprint PCS' 100% digital, 100% PCS products and services in our
territory. We will provide these products and services exclusively under the
Sprint and Sprint PCS brand names.
Strong brand recognition and national advertising support. We will benefit
from the strength and the reputation of the Sprint and Sprint PCS brands.
Sprint PCS' national advertising campaigns and developed marketing programs
will be provided to us at no additional cost under our agreements with Sprint
PCS. We will offer the same strategic pricing plans, promotional campaigns and
handset and accessory promotions that we believe have made Sprint PCS the
fastest growing wireless service provider in the United States.
Established and available distribution channels. We will have use of all the
national distribution channels used by Sprint PCS. These channels include:
. RadioShack stores on an exclusive basis for PCS;
. other major national third-party retailers such as Best Buy, Circuit City
and Office Depot;
. Sprint PCS' national inbound telemarketing sales force;
. Sprint PCS' national accounts sales team; and
. Sprint PCS' electronic commerce sales platform.
Nationwide coverage. We plan to operate our PCS network seamlessly with the
Sprint PCS national network. This will provide customers in our territory with
immediate nationwide roaming using Sprint PCS' network and other wireless
networks with which Sprint PCS has roaming agreements. As of June 30, 1999,
Sprint PCS, together with its affiliates, operated PCS systems in 286
metropolitan markets within the United States. Sprint PCS is still constructing
its PCS network. Accordingly, the areas currently served by Sprint PCS,
together with the areas covered by Sprint PCS' roaming agreements, do not cover
every area in the United States. We will receive roaming revenue from the use
of our PCS network by Sprint PCS customers traveling in or visiting our
territory.
Ability to purchase back office services from Sprint PCS. Our affiliation
with Sprint PCS provides us with the option to use Sprint PCS' established back
office services, including customer activation, billing and customer care.
Using this option, we can accelerate the launch of our commercial PCS
operations and reduce our capital expenditures and operating costs rather than
establishing and operating our own systems. Sprint PCS has indicated it intends
to provide these services to us at costs reflecting Sprint PCS' economies of
scale. We may elect to develop our own internal capabilities to handle these
functions or outsource them to a third party in the event that doing so proves
to be more cost effective.
Sprint PCS network design. Sprint PCS developed the initial build-out plan
for our PCS network. We have based our network build-out on this design and
have further enhanced it to better provide coverage for our territory.
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<PAGE>
Economies of scale of a nationwide network. We will purchase our network and
subscriber equipment under Sprint PCS' vendor contracts that provide for volume
discounts. These discounts will reduce the overall capital required to build
our PCS network and will lower the cost of subscriber equipment.
Sprint PCS licenses and long-term commitment. Sprint PCS has funded the
purchase of the licenses covering our territory at a cost of $44.6 million and
incurred additional expenses for microwave clearing. As a Sprint PCS affiliate,
we did not have to fund the acquisition of the licenses thereby reducing our
start-up costs. Sprint PCS has entered into a consent and agreement with Lucent
that limits Sprint PCS' rights or remedies under its agreements with us,
including Sprint PCS' right to terminate the agreements and withhold payments,
until our financing from Lucent is satisfied in full pursuant to the terms of
the consent and agreement. See "The Sprint PCS Agreements--Consent and
Agreement for the Benefit of the Lucent Financing."
Other Competitive Strengths
In addition to the advantages provided by our strategic affiliation with
Sprint PCS, we have the following competitive strengths:
Attractive market footprint. Our territory has favorable demographic
characteristics for wireless communications services which we believe are
important to Sprint PCS' national footprint. The 21 contiguous markets in our
territory:
. include approximately 6.8 million residents;
. include key southeastern cities and vacation destinations such as Myrtle
Beach and Hilton Head Island, South Carolina; Savannah, Georgia; and the
Outer Banks of North Carolina;
. have strong population growth and attractive traffic patterns;
. connect important Sprint PCS markets which are already operational,
including Atlanta, Georgia; Charlotte and Raleigh, North Carolina;
Norfolk, Virginia; and Knoxville, Tennessee; and
. are serviced by Sprint local telephone companies that we expect will
provide local telephone service to approximately 30% of the population in
our territory by the end of the year 2000, contributing to the market
awareness of Sprint's telecommunications services and providing us with
an additional distribution channel.
Experienced management team. We have attracted an experienced senior
management team with an average of more than 15 years of experience in building
and operating telecommunications networks in the southeastern United States.
. Thomas M. Dougherty, our president and chief executive officer, has more
than 16 years of telecommunications experience, and is a former senior
executive of Sprint PCS. As the president of a major Sprint PCS region,
Mr. Dougherty was responsible for Sprint PCS market launches in eighteen
major metropolitan areas with a resident population of approximately 75
million, including Chicago, Illinois; Houston, Texas; Atlanta, Georgia;
and Charlotte, North Carolina.
. Thomas D. Body III, our vice president of strategic planning, has over 20
years of telecommunications experience in the Southeast. Mr. Body co-
founded and operated several successful paging and cellular companies and
also served as chief executive officer of MFS-Atlanta, a major fiber-
optic systems provider.
33
<PAGE>
. W. Chris Blane, our vice president of new business development, has over
20 years of experience in telecommunications in the Southeast. Mr. Blane
co-founded and operated several successful paging and cellular companies
including serving as a chief operating officer of American Mobilphone
Paging and CellularOne of Birmingham and Montgomery, Alabama.
. Robert E. Gourlay, our vice president of marketing, has 22 years of
wireless telecommunications experience including 18 years with Motorola,
Inc. Mr. Gourlay served as the southeastern manager of sales and
operations for Motorola, Inc.'s Cellular Infrastructure Division for four
years.
. David C. Roberts, our vice president of engineering and network
operations, has 15 years of wireless telecommunications experience,
having served in various engineering and management positions with
Motorola, Inc. in the Southeast.
. Shelley L. Spencer, our vice president of law and secretary, has 12 years
of legal experience, six of which were spent in the private practice of
law specializing in telecommunications. Ms. Spencer joined AirGate in
1995.
. Alan B. Catherall, our chief financial officer, has served in senior
financial capacities in the telecommunications industry for approximately
17 years.
Fully financed plan. The net proceeds from our concurrent offerings of common
stock and units, which consist of senior subordinated discount notes and
warrants, together with the Lucent financing, are expected to total
approximately $393.1 million. We believe this capital will provide us with
sufficient funds to complete our PCS network build-out and to fund anticipated
operating losses and working capital requirements through 2002, at which point
we expect to have achieved break-even operating cash flow.
Business Strategy
Upon the completion of our 100% digital, 100% PCS network, we intend to
become a leading provider of wireless PCS services in the Southeast. We believe
that the following elements of our business strategy will enable us to rapidly
launch our network, distinguish our wireless service offerings from those of
our competitors and compete successfully in the wireless communications
marketplace.
Leverage our affiliation with Sprint PCS. The benefits of our affiliation
with Sprint PCS include:
. Sprint PCS brand awareness and national marketing programs;
. access to established Sprint PCS distribution channels and outlets;
. Sprint PCS nationwide coverage;
. use of Sprint PCS' back office services including customer activation,
billing and customer care;
. roaming revenue from Sprint PCS customers traveling onto our PCS network;
. availability of discount prices for network and subscriber equipment
under Sprint PCS' vendor contracts; and
. use of Sprint PCS' national network control center which is responsible
for continually monitoring the performance of our PCS network and
providing rapid response for systems maintenance needs.
34
<PAGE>
Execute optimal build-out plan. We are constructing a state-of-the-art, high
quality, all digital PCS network. Our radio frequency design has a high density
of cell sites. We believe that this cell density, together with the use of
digital technology, will allow our system to handle more customers with fewer
dropped calls and better clarity than our competitors. By leasing cell sites on
facilities shared with one or more other wireless providers, we will be able to
build our PCS network quickly. More than 85% of our leases for cell sites will
be collocation leases. Our strategy is to provide service to major urban and
suburban areas and the interstates and primary roads connecting these areas. We
plan to initiate service only in areas where we are capable of providing
population coverage comparable to or more extensive than that of our wireless
competitors.
Implement efficient operating structure. We intend to maximize operating
efficiency by minimizing staffing and reducing costs through the purchase and
use of Sprint PCS' existing back office services. For example, we will purchase
billing and customer care from Sprint PCS on a per subscriber basis thereby
avoiding the costly and time-consuming tasks of building our own systems. In
addition, we will limit marketing costs by using Sprint PCS' national marketing
concepts and programs. As the customer base in our territory grows, we may
elect to develop internal systems for certain back office functions such as
customer activation, billing and customer care, or outsource such functions
directly to third party vendors if it is more cost-effective.
Explore strategic opportunities to expand our territory in the future. Upon
the successful build-out of our current territory and subject to the
availability of financing, we may strategically expand our territory with a
focus on the southeastern United States.
Markets
Our territory covers almost the entire state of South Carolina including
Charleston, Columbia and Greenville-Spartanburg; portions of North Carolina
including Asheville, Wilmington and Hickory; and the eastern Georgia cities of
Augusta and Savannah. Sprint PCS has launched service in the major southeastern
cities of Atlanta, Georgia; Knoxville, Tennessee; Norfolk, Virginia; and
Charlotte and Raleigh, North Carolina. We will be the exclusive provider of
Sprint PCS products and services in the markets connecting these major cities.
The build-out of the network in our territory will bridge existing Sprint PCS
markets. We believe connecting existing Sprint PCS markets is important to
Sprint PCS' strategy to provide seamless, nationwide PCS service.
Our contiguous markets with a population of 6.8 million have attractive
demographic characteristics.
. According to the Charleston metropolitan area Chamber of Commerce, South
Carolina beaches are a major national tourism destination. Myrtle Beach,
Charleston, Savannah and Hilton Head Island have over 27 million visitors
annually. In addition, the Outer Banks of North Carolina is a popular
vacation spot for Virginia and Washington, D.C. residents.
. Our territory includes over 2,750 highway miles. Over 36 million vehicle
miles are traveled daily on the 1,320 interstate miles of highway.
. It is estimated that our markets will have a population growth rate 16%
higher than that of the United States as a whole over the 5 years ending
December 31, 2000.
. There are at least 27 colleges and universities located in our territory,
including the University of South Carolina and Clemson University.
35
<PAGE>
The following table lists the location and population of each of the markets
that comprise our territory under our agreements with Sprint PCS:
<TABLE>
<CAPTION>
Territory (BTAs)* State Population (1)
<S> <C> <C>
Greenville-Spartanburg South Carolina 853,000
Savannah Georgia 715,000
Charleston South Carolina 638,000
Columbia South Carolina 628,000
Augusta Georgia 568,000
Asheville-Hendersonville North Carolina 568,000
Anderson South Carolina 329,000
Hickory-Lenoir-Morganton North Carolina 320,000
Wilmington North Carolina 304,000
Florence South Carolina 257,000
Greenville-Washington North Carolina 241,000
Goldsboro-Kinston North Carolina 233,000
Rocky Mount-Wilson North Carolina 213,000
New Bern North Carolina 167,000
Myrtle Beach South Carolina 157,000
Sumter South Carolina 154,000
Jacksonville North Carolina 150,000
Orangeburg South Carolina 119,000
The Outer Banks(2) North Carolina 80,000
Roanoke Rapids North Carolina 80,000
Greenwood South Carolina 73,000
---------
Total 6,847,000
=========
</TABLE>
- ---------------------
* Basic Trading Areas
(1) Based on estimates compiled by Paul Kagan Associates, Inc. in 1997, except
with respect to the Outer Banks.
(2) The Outer Banks territory covered by our agreements with Sprint PCS does
not comprise a complete BTA. The population information related to the
Outer Banks territory is based on estimates by AirGate.
Network Build-Out Plan
We expect to commence commercial operations in the first quarter of 2000,
covering approximately 1.5 million people, or 22% of the population in our
territory. By the end of the fourth quarter of 2000, we expect to be capable of
providing service to more than 5.0 million residents, or 74% of the population
in our territory. Our strategy is to provide service to major urban and
suburban areas and to cover interstates and primary roads connecting these
areas. We plan to initiate service only in areas where we are capable of
providing population coverage comparable to or more extensive than that of our
wireless competitors.
In order to complete our network build-out, we will need to acquire leasehold
interests in or purchase and construct approximately 566 cell sites. The table
below indicates the expected launch dates and network coverage that we expect
will be operational and the population covered by those cell sites through the
fourth quarter of 2000.
36
<PAGE>
<TABLE>
<CAPTION>
Expected Covered Residents
Commercial Launch Cumulative as a Percentage of
Date by Quarter Markets Included Covered Residents Total Residents
<C> <S> <C> <C>
First quarter 2000 Anderson and Greenville- 1,535,986 22%
Spartanburg, South
Carolina; Asheville and
Hickory, North Carolina
Second and third quarters 2000 Augusta and Savannah, 4,363,458 63%
Georgia; Charleston,
Columbia, Myrtle Beach,
and Orangeburg, South
Carolina; Goldsboro,
Roanoke Rapids, Rocky
Mount and Wilmington,
North Carolina
Fourth quarter 2000 Florence, Greenwood and 5,003,320 74%
Sumter, South Carolina;
Greenville--Washington,
Jacksonville, New Bern,
and the Outer Banks,
North Carolina
</TABLE>
This build-out plan exceeds the network build-out requirements under our
management agreement with Sprint PCS. We believe that the above schedule is
achievable based on our management's prior experience in network build-outs,
the proven digital PCS technology we will use to build our PCS network and the
established standards of Sprint PCS. As of June 30, 1999, we had signed or
negotiated master or generic lease agreements covering over 400 sites in our
territory. We expect more than 85% of our cell sites to be collocated on
facilities shared with one or more wireless providers. For sites where
collocation leases are utilized, zoning, permitting and surveying approvals and
licenses have already been secured thereby minimizing our start-up costs and
accelerating access to the markets.
Sprint PCS developed the initial build-out plan for our PCS network. We have
based our network build-out on this design and have further enhanced it to
better provide coverage for our territory. We have completed the radio
frequency design for the entire build-out of our digital PCS network. This
process includes cell site design, frequency planning and network optimization
for our market. Radio frequency engineering also allocates voice channels and
assigns frequencies to cell sites taking into consideration both PCS and
microwave interference issues. Under the management agreement, Sprint PCS is
responsible for the microwave clearing efforts and costs in our territory. All
relevant microwave paths have been cleared by Sprint PCS to allow us to provide
service in our territory.
Lucent and Compass Telecom Services LLC will oversee the deployment of our
digital PCS network. Lucent will provide the installation and optimization
services for their equipment and Compass will provide project and construction
services and employ local construction firms to build the cell sites. We may
also hire firms to identify and obtain the required property for our PCS
network. These firms will secure all zoning, permitting and surveying approvals
and licenses.
37
<PAGE>
Sources and Uses
The following table highlights our projected sources and uses of capital from
July 1, 1999 through December 31, 2002.
<TABLE>
<CAPTION>
Amount
(In millions)
<S> <C>
Sources:
Gross proceeds from the common stock offering................... $113.9
Gross proceeds from the units offering(1)....................... 156.1
Lucent financing(2)............................................. 143.5
------
Total sources................................................. $413.5
======
Uses:
Capital expenditures............................................ $196.7
Working capital and operating losses............................ 89.9
Debt service(3)................................................. 37.8
Fees and expenses(4)............................................ 20.4
------
Total uses.................................................... 344.8
Cash on hand at December 31, 2002............................. 68.7
------
Total uses and cash on hand at December 31, 2002.............. $413.5
======
</TABLE>
- ---------------------
(1) The senior subordinated discount notes will be issued in an aggregate
principal amount and bear a rate of interest, which, together with the
warrants, will be sufficient to generate gross proceeds at issuance of
approximately $156.1 million.
(2) Our financing from Lucent provides for up to $153.5 million of borrowings,
$10.0 million of which was provided to us prior to July 1, 1999. We
borrowed an additional $3.5 million on August 20, 1999 and expect
additional drawings totaling $140.0 million between October 1, 2000 and
December 31, 2002 to fund approximately $110.0 million of equipment
purchases to complete our network build-out and $33.5 million for general
corporate purposes.
(3) Debt service payments are composed of:
<TABLE>
<CAPTION>
Amount
(In millions)
<S> <C>
Cash interest payments...................................... $ 29.1
Repayment of third-party unsecured promissory note.......... 7.7
Repayment of bank credit facility........................... 1.0
------
Total..................................................... $ 37.8
======
</TABLE>
(4) Fees and expenses include estimated offering expenses and underwriting
discounts and commissions for both the common stock offering and units
offering and origination and other fees related to the Lucent financing.
38
<PAGE>
Products and Services
We will offer established Sprint PCS products and services throughout our
territory. Our products and services are designed to mirror the service
offerings of Sprint PCS and to integrate seamlessly with the Sprint PCS
nationwide network. The wireless services that Sprint PCS currently offers in
over 286 metropolitan markets, including more than 4,000 cities and
communities, provide customers with affordable, reliable 100% digital, 100% PCS
services. The Sprint PCS service package we will offer includes the following:
100% digital wireless mobility. Our primary service is wireless mobility
coverage. Our PCS network will be part of the largest 100% digital, 100% PCS
network in the nation. We will offer customers in our territory enhanced voice
clarity, advanced features, and simple, affordable Sprint PCS Free and Clear
pricing plans. These plans include free long distance and wireless airtime
minutes for use throughout the Sprint PCS network at no additional charge. Our
basic wireless service includes voice mail, caller ID, enhanced call waiting,
three-way calling, call forwarding, distinctive ringing and call blocking.
Nationwide service. Sprint PCS customers in our territory will be able to use
Sprint PCS services throughout our contiguous markets and seamlessly throughout
the Sprint PCS network. Dual-band/dual-mode handsets allow roaming on wireless
networks where Sprint PCS is not available and with which Sprint PCS has
roaming agreements.
Advanced handsets. CDMA handsets weighing approximately eight ounces will
offer two days of standby time and approximately four hours of talk time. We
will also offer dual-band/dual-mode handsets that allow customers to make and
receive calls on both PCS and cellular frequency bands and both digital or
analog technology. These handsets allow roaming on cellular networks where
Sprint PCS digital service is not available. All handsets will be equipped with
preprogrammed features such as speed dial and last number redial, and will be
sold under the Sprint and Sprint PCS brand names.
Extended battery life. CDMA handsets offer significantly extended battery
life relative to earlier technologies, providing two days of standby battery
life. Handsets operating on a digital system are capable of saving battery life
while turned on but not in use, improving efficiency and extending the
handset's use.
Improved voice quality. We believe the Sprint PCS CDMA technology offers
significantly improved voice quality, compared to existing analog and TDMA
networks, more powerful error correction, less susceptibility to call fading
and enhanced interference rejection, all of which result in fewer dropped
calls. See "--CDMA Technology" for a discussion of the reasons CDMA technology
offers improved voice quality.
Privacy and security. Sprint PCS provides secure voice transmissions encoded
into a digital format to prevent eavesdropping and unauthorized cloning of
subscriber identification numbers.
Easy activation. Customers can purchase a shrink-wrapped Sprint PCS handset
off the shelf at a retail location and activate their service by calling
customer service, which can program the handset over the air. We believe over-
the-air activation will reduce the training requirements for salespersons at
the retail locations.
39
<PAGE>
Customer care. Sprint PCS will provide customer care services to customers in
our territory under our services agreement. Sprint PCS offers customer care 24
hours a day, seven days a week. Customers can call the Sprint PCS toll-free
customer care number from anywhere on the national Sprint PCS network. All
Sprint PCS phones are preprogrammed with a speed dial feature that allows
customers to easily reach customer care at any time.
In addition to these services, we may also offer wireless local loop services
in our territory. Wireless local loop is a wireless substitute for the
landline-based telephones in homes and businesses. We also believe that new
features and services will be developed on the Sprint PCS nationwide network to
take advantage of CDMA technology. As a leading wireless provider, Sprint PCS
conducts ongoing research and development to produce innovative services that
give Sprint PCS a competitive advantage. We intend to offer a portfolio of
products and services developed by Sprint PCS to accommodate the growth in, and
the unique requirements of, high speed data traffic and demand for video
services. We plan to provide, when available, a number of applications for
wireless data services including facsimile, Internet access, wireless local
area networks and point-of-sale terminal connections.
Marketing Strategy
Our marketing and sales strategy will use Sprint PCS' proven strategies and
developed national distribution channels that have helped generate the highest
incremental wireless penetration of any cellular or PCS provider in the United
States. In the fourth quarter of 1998, Sprint added approximately 830,000 net
new subscribers, the largest single quarter of customer growth ever reported by
a wireless provider in the United States. In the first quarter of 1999, Sprint
PCS added approximately 763,000 net new wireless subscribers, the second
largest quarter ever recorded by a wireless carrier in the United States. We
plan to enhance Sprint PCS' proven strategies with strategies tailored to our
specific territory.
Use Sprint PCS' brand equity and marketing. We will feature exclusively and
prominently the nationally recognized Sprint and Sprint PCS brand names in our
marketing effort. From the customers' point of view, they will use our PCS
network and the Sprint PCS national network seamlessly as a unified national
network. We will build on Sprint PCS' national distribution channels and
advertising programs.
Pricing. Our use of the Sprint PCS pricing strategy will offer customers in
our territory simple, easy-to-understand service plans. Sprint PCS' consumer
pricing plans are typically structured with competitive monthly recurring
charges, large local calling areas, service features such as voicemail,
enhanced caller ID, call waiting and three-way calling, and competitive per-
minute rates. Lower per-minute rates relative to analog cellular providers are
possible in part because the CDMA system that both we and Sprint PCS employ has
greater capacity than current analog cellular systems, enabling us to market
high usage customer plans at lower prices. All of Sprint PCS' current national
plans:
.include minutes in any Sprint PCS market with no roaming charges;
.are feature-rich and generally require no annual contracts or hidden
charges;
.offer a wide selection of phones to meet the needs of consumers and
businesses;
.provide a limited-time money back guarantee on Sprint PCS phones; and
.provide the first incoming minute free.
40
<PAGE>
In addition, Sprint PCS' national Free and Clear plans, which offer simple,
affordable plans for every consumer and business customer, include free long
distance calling from anywhere on its nationwide network.
Local focus. Our local focus will enable us to supplement Sprint PCS'
marketing strategies with our own strategies tailored to each of our specific
markets. This will include attracting local businesses to enhance our
distribution and drawing on our management team's experience in the
southeastern United States. We will use local radio, television and newspaper
advertising to sell our products and services in each of our markets. We intend
to establish a large local sales force to execute our marketing strategy
through 12 company-owned Sprint PCS stores and to employ a direct sales force
targeted to business sales. In addition, Sprint PCS' existing agreements with
national retailers provide us with access to over 250 retail locations in our
territory. We expect that Sprint-owned local exchange carriers will provide
local telephone service to approximately 30% of the population in our territory
by the end of the year 2000 which will provide us with an additional
distribution channel through which we can market to an established base of
Sprint customers. Many of these local exchange carriers have store fronts for
Sprint customers to pay their bills, which we can use to sell Sprint PCS
products and services.
Advertising and promotions. Sprint PCS uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote
its products. We benefit from this national advertising in our territory at no
additional cost to us. Sprint PCS also runs numerous promotional campaigns
which provide customers with benefits such as additional features at the same
rate or free minutes of use for limited time periods. We are able to purchase
promotional materials related to these programs from Sprint PCS at their cost.
Sponsorships. Sprint PCS is a sponsor of numerous selective, broad-based
national, regional and local events. These sponsorships provide Sprint PCS with
brand name and product recognition in high profile events, provide a forum for
sales and promotional events and enhance our promotional efforts in our
territory.
Bundling of services. We intend to take advantage of the complete array of
communications services offered by bundling Sprint PCS services with other
Sprint products, such as long distance and Internet access.
Sales and Distribution
Our sales and distribution plan mirrors Sprint PCS' proven multiple channel
sales and distribution plan. Key elements of our sales and distribution plan
consist of the following:
Sprint store within a RadioShack store. Sprint has an exclusive arrangement
with RadioShack to install a "store within a store," making Sprint PCS the
exclusive brand of PCS sold through RadioShack stores. RadioShack has 175
stores in our territory.
Other national third party retail stores. In addition to RadioShack, we will
benefit from the distribution agreements established by Sprint PCS with other
national retailers which currently include Best Buy, Circuit City, Office
Depot, The Good Guys, Dillards, The Sharper Image, Montgomery Ward, OfficeMax,
Ritz Camera and certain May Company department stores. These retailers provide
an additional 75 retail stores in our territory.
41
<PAGE>
Sprint PCS stores. We intend to own and operate 12 Sprint PCS stores. These
stores will be located in major metropolitan markets within our territory,
providing us with the strong local presence and a high degree of visibility.
We will train our sales representatives to be informed and persuasive
advocates for Sprint PCS' services. Following the Sprint PCS model, these
stores will be designed to facilitate retail sales, bill collection and
customer service.
National accounts and direct selling. We will participate in Sprint PCS'
national accounts program. Sprint PCS has a national accounts team which
focuses on the corporate headquarters of Fortune 500 companies. Once a
representative reaches an agreement with the corporate headquarters, we
service the offices of that corporation located in our territory. Our direct
sales force will target the employees of these corporations in our territory
and cultivate other local business clients.
Inbound telemarketing. Sprint PCS will provide inbound telemarketing sales
when customers call from our territory. As the exclusive provider of Sprint
PCS products and services in our market, we will use the national Sprint 1-
800-480-4PCS number campaigns that generate call-in leads. These leads are
then handled by Sprint PCS' inbound telemarketing group.
Electronic commerce. Sprint PCS launched an Internet site in December 1998
which contains information on Sprint PCS products and services. A visitor to
Sprint PCS' Internet site can order and pay for a handset and select a rate
plan. Customers visiting the site can review the status of their account,
including the number of minutes used in the current billing cycle. Customers
in our territory who purchase products and services over the Sprint PCS
Internet site will be customers of our PCS network.
CDMA Technology
Sprint PCS' nationwide network and its affiliates' networks all use digital
CDMA technology. CDMA technology is fundamental to accomplishing our business
objective of providing high volume, high quality airtime at a low cost. We
believe that CDMA provides important system performance benefits.
Voice quality. CDMA systems offer more powerful error correction, less
susceptibility to fading and reduced interference than analog systems. Using
enhanced voice coding techniques, CDMA systems achieve voice quality that is
comparable to that of the typical wireline telephone. This CDMA vocoder
technology also employs adaptive equalization which filters out annoying
background noise more effectively than existing wireline, analog cellular or
other digital PCS phones.
Greater capacity. CDMA technology allows a greater number of calls within
one allocated frequency and reuses the entire frequency spectrum in each cell.
CDMA systems are expected to provide capacity gains of up to seven times over
the current analog system and up to three times greater than TDMA and GSM
systems. We believe that, by the end of 1999, a new voice coding technology
will be available for CDMA networks which is expected to increase the capacity
of the system by approximately 40%. This new voice coding standard, referred
to as Enhanced Variable Rate Coding, or EVRC, will allow the network to
support additional capacity while maintaining the high level of voice quality
associated with digital networks. We will utilize the EVRC technology
throughout our PCS network to gain the capacity increases. Additional capacity
improvements are expected for CDMA networks over the next two years as new
third generation standards are approved and implemented that will allow for
high-speed data and an even greater increase in the voice traffic capacity.
42
<PAGE>
CDMA technology is designed to provide flexible or "soft" capacity that
permits a system operator to temporarily increase the number of telephone calls
that can be handled within a cell. When capacity limitations in analog, TDMA
and GSM systems are reached, additional callers in a given cell must be given a
busy signal. Using CDMA technology, the system operator can allow a small
degradation in voice quality to provide temporary increases in capacity. This
reduces blocked calls and increase the probability of a successful cell-to-cell
hand-off.
Soft hand-off. CDMA systems transfer calls throughout the network using a
technique referred to as a soft hand-off, which connects a mobile customer's
call with a new cell site while maintaining a connection with the cell site
currently in use. CDMA networks monitor the quality of the transmission
received by both cell sites simultaneously to select a better transmission path
and to ensure that the network does not disconnect the call in one cell until
it is clearly established in a new one. As a result, fewer calls are dropped
compared to analog, TDMA and GSM networks which use a "hard hand-off" and
disconnect the call from the current cell site as it connects with a new one.
Integrated services. CDMA systems permit us to offer advanced features,
including voice mail, caller ID, enhanced call waiting, three-way calling, call
forwarding and paging and text-messaging. These advanced features may also be
offered by companies utilizing competing technologies.
Privacy and security. One of the benefits of CDMA technology is that it
combines a constantly changing coding scheme with a low power signal to enhance
security and privacy. Vendors are currently developing additional encryption
capabilities which will further enhance overall network security.
Simplified frequency planning. Frequency planning is the process used to
analyze and test alternative patterns of frequency use within a wireless
network to minimize interference and maximize capacity. Currently, cellular
service providers spend considerable money and time on frequency planning.
Because TDMA and GSM based systems have frequency reuse constraints similar to
present analog systems, frequency reuse planning for TDMA and GSM based systems
is expected to be comparable to planning for the current analog systems. With
CDMA technology, however, the same subset of allocated frequencies can be
reused in every cell, substantially reducing the need for costly frequency
reuse patterning and constant frequency plan management.
Longer battery life. Due to their greater efficiency in power consumption,
CDMA handsets will provide two days of standby time and approximately four
hours of talk time availability. This generally exceeds the battery life of
handsets using alternative digital or analog technologies.
Benefits of other technologies. While CDMA has the inherent benefits
discussed above, TDMA networks are generally less expensive when overlaying
existing analog systems since the TDMA spectrum usage is more compatible with
analog spectrum planning. In addition, the GSM technology standard, unlike
CDMA, supports a more robust interoperability standard which allows multi-
vendor equipment to be used in the same network. This, along with the fact that
the GSM technology is currently more widely deployed throughout the world than
CDMA, provides economies of scale for handset and equipment purchases. A
standards process is also underway which will allow wireless handsets to
support analog, TDMA and GSM technologies in a single unit. Currently, there
are no plans to have CDMA handsets that support either the TDMA or GSM
technologies.
43
<PAGE>
Competition
We will compete in our territory with the incumbent cellular providers and
new PCS providers. The cellular providers in our territory serve different
geographic segments of our territory in our territory, with no cellular carrier
providing complete coverage throughout our territory. Of the PCS providers,
only two will provide service comparable to ours in our territory. These are
BellSouth Mobility DCS and Triton PCS. Bell South Mobility DCS has deployed a
PCS network that uses GSM technology. This competitor is dependent on its
roaming agreements with other wireless carriers to provide service beyond its
licensed areas. Triton PCS is deploying a PCS network that uses TDMA
technology. Triton PCS has reported that it will market its PCS under the
SunCom name and as a member of the AT&T wireless network. In addition, we
compete with wireless providers using ESMR technology such as Nextel and
Southern LINC, a subsidiary of The Southern Company. Our ability to compete
effectively with these other providers will depend on a number of factors,
including the continued success of CDMA technology in providing better call
quality and clarity as compared to analog and digital cellular systems, our
competitive pricing with various options suiting individual customer's calling
needs, and the continued expansion and improvement of the Sprint PCS nationwide
network, customer care system, and handset options.
Most of our competitors are current cellular providers and joint ventures of
current and potential wireless communications service providers, many of which
have financial resources and customer bases greater than ours. Many of our
competitors have access to more licensed spectrum than the 10 MHz licensed to
Sprint PCS in our territory. Cellular service providers have licenses covering
25 MHz of spectrum, and two competing PCS providers have licenses to use 30 MHz
in our territory. Some of our competitors also have established
infrastructures, marketing programs, and brand names. In addition, certain
competitors may be able to offer coverage in areas not served by our PCS
network, or, because of their calling volumes or their affiliations with, or
ownership of, wireless providers, may be able to offer roaming rates that are
lower than those we offer. PCS operators will likely compete with us in
providing some or all of the services available through the Sprint PCS network
and may provide services that we do not. Additionally, we expect that existing
cellular providers, some of whom have been operational for a number of years
and have significantly greater financial and technical resources and customer
bases than us, will continue to upgrade their systems to provide digital
wireless communication services competitive with Sprint PCS.
We also face competition from "resellers" which provide wireless service to
customers but do not hold FCC licenses or own facilities. Instead, the reseller
buys blocks of wireless telephone numbers and capacity from a licensed carrier
and resells service through its own distribution network to the public. Thus, a
reseller is both a customer of a wireless licensee's services and also a
competitor of that and other licensees. The FCC requires all cellular and PCS
licensees to permit resale of carrier service to a reseller.
In addition, we will compete with paging, dispatch and conventional mobile
telephone companies in our markets. Potential users of PCS systems may find
their communications needs satisfied by other current and developing
technologies. One or two-way paging or beeper services that feature voice
messaging and data display as well as tone-only service may be adequate for
potential customers who do not need to speak to the caller.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While some of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
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Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
PCS. Based upon increased competition, we anticipate that market prices for
two-way wireless services generally will decline in the future. We will compete
to attract and retain customers principally on the basis of services and
features, the size and location of our service areas, network coverage and
reliability, customer care and pricing. Our ability to compete successfully
will also depend, in part, on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by competitors.
Intellectual Property
The Sprint diamond design logo is a service mark registered with the United
States Patent and Trademark Office. The service mark is owned by Sprint. We
expect, pursuant to the trademark and service mark license agreements, to use,
royalty-free, the Sprint and Sprint PCS brand names and the Sprint diamond
design logo and certain other service marks of Sprint in connection with
marketing, offering and providing licensed services to end-users and resellers,
solely within our territory.
Except in certain instances, Sprint PCS has agreed not to grant to any other
person a right or license to provide or resell, or act as agent for any person
offering, licensed services under the licensed marks. In all other instances,
Sprint PCS reserves for itself and its affiliates the right to use the licensed
marks in providing its services, subject to its exclusivity obligations
described above, whether within or without our territory.
The trademark license agreements contain numerous restrictions with respect
to the use and modification of any of the licensed marks. See "The Sprint PCS
Agreements--The Trademark and Service Mark License Agreements."
Employees
As of June 30, 1999, we employed 12 full-time employees. None of our
employees are represented by a labor union. We believe that our relations with
our employees are good.
Properties
Our principal executive offices are located at Harris Tower, 233 Peachtree
Street, N.E., Suite 1700, Atlanta, Georgia 30303. We believe our property is in
good operating condition and is currently suitable and adequate for our
business operations.
Legal Proceedings
We are not aware of any pending legal proceedings against us which,
individually or in the aggregate, if adversely determined, would have a
material adverse effect on our financial condition or results of operations.
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THE SPRINT PCS AGREEMENTS
The following is a summary of the material terms and provisions of the Sprint
PCS agreements and the consent and agreement modifying the Sprint PCS
management agreement. We have filed the Sprint PCS agreements and will file a
consent and agreement as exhibits to the registration statement of which this
prospectus is a part and urge you to review them carefully.
Overview of Sprint PCS Relationship and Agreements
Under long-term agreements with Sprint PCS, we will exclusively market PCS
services under the Sprint and Sprint PCS brand names in our territory. The
agreements with Sprint PCS require us to interface with the Sprint PCS wireless
network by building our PCS network to operate on the 10 MHz of PCS frequencies
licensed to Sprint PCS in the 1900 MHz range. The Sprint PCS agreements also
give us access to Sprint PCS' equipment discounts, roaming revenue from Sprint
PCS customers traveling into our territory, and various other back office
services. Our relationship and agreements with Sprint PCS provide strategic
advantages, including avoiding the need to fund up-front spectrum acquisition
costs and the costs of establishing billing and other customer services
infrastructure. The management agreement has an initial term of 20 years with
three 10-year renewals which will lengthen the contract to a total term of 50
years. The agreements will automatically renew for the first 10-year renewal
period unless we are in material default on our obligations under the
agreements. The agreements will automatically renew for two additional 10-year
terms unless we or Sprint PCS provide the other with two years' prior written
notice to terminate the agreements.
We have four major agreements with Sprint and Sprint PCS (collectively the
"Sprint PCS Agreements"):
. the management agreement;
. the services agreement;
. the trademark and service mark license agreement with Sprint; and
. the trademark and service mark license agreement with Sprint PCS.
In addition, Sprint PCS has entered into a consent and agreement that
modifies our management agreement for the benefit of Lucent and the holders of
any refinancing of the Lucent financing.
The Management Agreement
Under our management agreement with Sprint PCS, we have agreed to:
. construct and manage a network in our territory in compliance with Sprint
PCS' PCS licenses and the terms of the management agreement;
. distribute during the term of the management agreement, Sprint PCS
products and services;
. use Sprint PCS' and our own distribution channels in our territory;
. conduct advertising and promotion activities in our territory; and
. manage that portion of Sprint PCS' customer base assigned to our
territory.
Sprint PCS will supervise our PCS network operations and has the right to
unconditional access to our PCS network.
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Exclusivity. We are designated as the only person or entity that can manage
or operate a PCS network for Sprint PCS in our territory. Sprint PCS is
prohibited from owning, operating, building or managing another wireless
mobility communications network in our territory while our management agreement
is in place and no event has occurred that would permit the agreement to
terminate. Sprint PCS is permitted under our agreement to make national sales
to companies in our territory and, as required by the FCC, to permit resale of
the Sprint PCS products and services in our territory. If Sprint PCS decides to
expand the geographic size of our build-out, Sprint PCS must provide us with
written notice of the proposed expansion. We have 90 days to determine whether
we will build out the proposed area. If we do not exercise this right, Sprint
PCS can build out the territory or permit another third party to do so.
Network build-out. The management agreement specifies the terms of the Sprint
PCS affiliation, including the required network build-out plan. We have agreed
to cover a specified percentage of the population at coverage levels ranging
from 39% to 86% within each of the 21 markets which make up our territory by
specified dates beginning by March 31, 2000 and ending on December 31, 2000.
The aggregate coverage will result in network coverage of approximately 65% of
the population in our territory of 6.8 million by December 31, 2000. We have
agreed to operate our PCS network, if technically feasible and commercially
reasonable, to provide for a seamless handoff of a call initiated in our
territory to a neighboring Sprint PCS network.
Products and services. The management agreement identifies the products and
services that we can offer in our territory. These services include, but are
not limited to, Sprint PCS consumer and business products and services
available as of the date of the agreement, or as modified by Sprint PCS. We are
allowed to sell wireless products and services that are not Sprint PCS products
and services if those additional products and services do not cause
distribution channel conflicts or, in Sprint PCS' sole determination, consumer
confusion with Sprint PCS' products and services. We may cross-sell services
such as Internet access, handsets, and prepaid phone cards with Sprint, Sprint
PCS and other Sprint PCS affiliates. If we decide to use third parties to
provide these services, we must give Sprint PCS an opportunity to provide the
services on the same terms and conditions. We cannot offer wireless local loop
services specifically designed for the competitive local exchange market in
areas where Sprint owns the local exchange carrier unless we name the Sprint-
owned local exchange carrier as the exclusive distributor or Sprint PCS
approves the terms and conditions.
We will participate in the Sprint PCS sales programs for national sales to
customers, and will pay the expenses and receive the compensation from national
accounts located in our territory. We must use Sprint's long distance service
which we can buy at the best prices offered to comparably situated Sprint
customers.
Service pricing, roaming and fees. We must offer Sprint PCS subscriber
pricing plans designated for regional or national offerings, including Sprint
PCS' Free and Clear plans. We are permitted to establish our own local price
plans for Sprint PCS' products and services only offered in our territory,
subject to Sprint PCS' approval. Sprint PCS will retain 8% of collected
revenues received by Sprint PCS for Sprint PCS products and services from
customers in our territory. This amount excludes roaming revenues, sales of
handsets and accessories, proceeds from sales not in the ordinary course of
business and amounts collected with respect to taxes. Except in the case of
taxes, we will retain 100% of these revenues. Although many Sprint PCS
subscribers will purchase a bundled pricing plan that allows roaming anywhere
on the Sprint PCS and affiliates' network without incremental roaming charges,
we will earn roaming revenues from every minute that a "foreign" subscriber's
call is carried on our PCS network. We will earn revenues from Sprint PCS based
on an
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established per minute rate for Sprint PCS' or its affiliates' subscribers
roaming in our territory. Similarly, we will pay for every minute our own
subscribers use the Sprint PCS nationwide network outside our territory. The
analog roaming rate onto a non-Sprint PCS provider's network is set under
Sprint PCS' third party roaming agreements.
Advertising and promotions. Sprint PCS is responsible for all national
advertising and promotion of the Sprint PCS products and services. We are
responsible for advertising and promotion in our territory. Sprint PCS' service
area includes the urban markets around our territory. Sprint PCS will pay for
advertising in these markets. Given the proximity of those markets to ours, we
expect considerable spill-over from Sprint PCS' advertising in surrounding
urban markets.
Program requirements. We will comply with Sprint PCS' program requirements
for technical standards, customer service standards, national and regional
distribution and national accounts programs. Sprint PCS can adjust the program
requirements from time to time. We have the right to appeal to Sprint PCS'
management adjustments which could cause an unreasonable increase in cost to us
if the adjustment: (1) causes us to incur a cost exceeding 5% of the sum of our
equity plus our outstanding long term debt, or (2) causes our operating
expenses to increase by more than 10% on a net present value basis. If Sprint
PCS denies our appeal, then we have 10 days after the denial to submit the
matter to arbitration. If we do not submit the matter to arbitration within the
10-day period or comply with the program adjustment, Sprint PCS has the
termination rights described below.
Non-competition. We may not offer Sprint PCS products and services outside
our territory without the prior written approval of Sprint PCS. Within our
territory we may offer, market or promote telecommunications products and
services only under the Sprint PCS brands, our own brand, brands of related
parties of ours or other products and services approved under the management
agreement, except that no brand of a significant competitor of Sprint PCS or
its related parties may be used for those products and services. To the extent
we have or obtain licenses to provide PCS services outside our territory, we
may not use the spectrum to offer Sprint PCS products and services without
prior written consent from Sprint PCS.
Inability to use non-Sprint PCS brand. We may not market, promote, advertise,
distribute, lease or sell any of the Sprint PCS products and services on a non-
branded, "private label" basis or under any brand, trademark or trade name
other than the Sprint PCS brand, except for sales to resellers or as otherwise
permitted under the trademark and service mark license agreements.
Rights of first refusal. Sprint PCS has certain rights of first refusal to
buy our assets upon a proposed sale of all or substantially all of our assets.
Termination of management agreement. The management agreement can be
terminated as a result of:
. termination of Sprint PCS' PCS licenses;
. an uncured breach under the management agreement;
. bankruptcy of a party to the management agreement;
. the management agreement not complying with any applicable law in any
material respect;
. the termination of either of the trademark and service mark license
agreements;
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. our failure to obtain the financing necessary for the build-out of our
PCS network and for our working capital needs; provided, however, that
Sprint PCS has agreed that the Lucent financing, the issuance of the
senior subordinated discount notes and the offering of common stock will
meet the financing requirements of the management agreement; or
. the unauthorized transfer or assignment of ownership interest by certain
individuals identified in the management agreement for a period of five
years from the date of the management agreement, if we do not initiate
immediate legal action to prevent the transfer.
The termination or non-renewal of the management agreement triggers certain
of our rights and those of Sprint PCS. The right of either party to require the
other to purchase or sell the operating assets, as discussed below, may not be
exercised, except in limited circumstances in the case of Sprint PCS, until
July 22, 2000.
If we have the right to terminate the management agreement because of an
event of termination caused by Sprint PCS, generally we may:
. require Sprint PCS to purchase all of our operating assets used in
connection with our PCS network for an amount equal to at least 80% of
our Entire Business Value as defined below;
. if Sprint PCS is the licensee for 20 MHz or more of the spectrum on the
date we terminate the management agreement, require Sprint PCS to assign
to us, subject to governmental approval, up to 10MHz of licensed spectrum
for an amount equal to the greater of (1) the original cost to Sprint PCS
of the license plus any microwave relocation costs paid by Sprint PCS or
(2) 9% of our Entire Business Value; or
. sue Sprint PCS for damages or submit the matter to arbitration and
thereby not terminate the management agreement.
If Sprint PCS has the right to terminate the management agreement because of
an event of termination caused by us, generally Sprint PCS may:
. require us to sell our operating assets to Sprint PCS for an amount equal
to 72% of our Entire Business Value;
. require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of (1) the original cost to
Sprint PCS of the license plus any microwave relocation costs paid by
Sprint or (2) 10% of our Entire Business Value;
. take any action as Sprint PCS deems necessary to cure our breach of the
management agreement, including assuming responsibility for, and
operating, our PCS network; or
. sue us for damages or submit the matter to arbitration and thereby not
terminate the management agreement.
Non-renewal. If Sprint PCS gives us timely notice that it does not intend to
renew the management agreement, we may:
. require Sprint PCS to purchase all of our operating assets used in
connection with our PCS network for an amount equal to 80% of our Entire
Business Value; or
. if Sprint PCS is the licensee for 20MHz or more of the spectrum on the
date we terminate the management agreement, require Sprint PCS to assign
to us, subject to governmental approval, up to 10MHz of licensed spectrum
for an amount equal to the greater of (1) the original cost
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to Sprint PCS of the license plus any microwave relocation costs paid by
Sprint PCS or (2) 10% of our Entire Business Value.
If we give Sprint PCS timely notice of non-renewal, or we both give notice of
non-renewal, or the management agreement can be terminated for failure to
comply with legal requirements or regulatory considerations, Sprint PCS may:
. purchase all of our operating assets for an amount equal to 80% of our
Entire Business Value; or
. require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of (1) the original cost to
Sprint PCS of the license plus any microwave relocation costs paid by
Sprint PCS or (2) 10% of our Entire Business Value.
Determination of Entire Business Value. If the Entire Business Value is to be
determined, we and Sprint PCS will each select one independent appraiser and
the two appraisers will select a third appraiser. The three appraisers will
determine the Entire Business Value on a going concern basis using the
following guidelines:
. the Entire Business Value is based on the price a willing buyer would
pay a willing seller for the entire on-going business;
. then-current customary means of valuing a wireless telecommunications
business will be used;
. the business is conducted under the Sprint and Sprint PCS brands and the
Sprint PCS agreements;
. that we own the spectrum and frequencies presently owned by Sprint PCS
and subject to the Sprint PCS Agreements; and
. the valuation will not include any value for businesses not directly
related to the Sprint PCS products and services, and such businesses
will not be included in the sale.
The rights and remedies of Sprint PCS outlined in the management agreement
resulting from an event of termination of the management agreement have been
materially amended by the consent and agreement as discussed below. However, at
such time that there is no outstanding debt covered under the consent and
agreement, such amendments to the rights and remedies of Sprint PCS reflected
in the consent and agreement will not be in effect.
Insurance. We are required to obtain and maintain with financially reputable
insurers who are licensed to do business in all jurisdictions where any work is
performed under the management agreement and who are reasonably acceptable to
Sprint PCS, workers' compensation insurance, commercial general liability
insurance, business automobile insurance, umbrella excess liability insurance
and "all risk" property insurance.
Indemnification. We have agreed to indemnify Sprint PCS and its directors,
employees and agents and related parties of Sprint PCS and their directors,
employees and agents against any and all claims against any of the foregoing
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in the management agreement or any other
agreement between us and Sprint PCS, our ownership of the operating assets or
the actions or the failure to act of anyone employed or hired by us in the
performance of any work under this agreement, except we will not indemnify
Sprint PCS for any claims arising solely from the negligence or willful
misconduct of Sprint PCS. Sprint PCS has agreed to indemnify us and our
directors, employees and agents against all claims against any of the foregoing
arising from Sprint PCS' violation of any law
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and from Sprint PCS' breach of any representation, warranty or covenant
contained in this agreement or any other agreement between Sprint PCS and us,
except Sprint PCS will not indemnify us for any claims arising solely from our
negligence or willful misconduct.
The Services Agreement
The services agreement outlines various back office services provided by
Sprint PCS and available to us at established rates. Sprint PCS can change any
or all of the service rates one time in each 12 month period. Some of the
available services include: billing, customer care, activation, credit checks,
handset logistics, home locator record, voice mail, prepaid services, directory
assistance, operator services, roaming fees, roaming clearinghouse fees,
interconnect fees and inter-service area fees. Sprint PCS offers three packages
of available services. Each package identifies which services must be purchased
from Sprint PCS and which may be purchased from a vendor or provided in-house.
Essentially, services such as billing, activation and customer care must all be
purchased from Sprint PCS or none may be purchased from Sprint PCS. We have
chosen to initially buy these services from Sprint PCS but may develop an
independent capability with respect to these services over time. Sprint PCS may
contract with third parties to provide expertise and services identical or
similar to those to be made available or provided to us. We have agreed not to
use the services received under the services agreement in connection with any
other business or outside our territory. We may discontinue use of any service
upon three months' prior written notice. Sprint PCS has agreed that the
services presently offered will be available until at least December 31, 2001.
Sprint PCS may discontinue a service after December 31, 2001 provided that
Sprint PCS provides us with nine months' prior notice.
We have agreed with Sprint PCS to indemnify each other as well as officers,
directors, employees and certain other related parties and their officers,
directors and employees for violations of law or the services agreement except
for any liabilities resulting from the indemnitee's negligence or willful
misconduct. The services agreement also provides that no party to the agreement
will be liable to the other party for special, indirect, incidental, exemplary,
consequential or punitive damages, or loss of profits arising from the
relationship of the parties or the conduct of business under, or breach of, the
services agreement except as may otherwise be required by the indemnification
provisions. The services agreement automatically terminates upon termination of
the management agreement and neither party may terminate the services agreement
for any reason other than the termination of the management agreement.
The Trademark and Service Mark License Agreements
We have non-transferable, royalty-free licenses to use the Sprint and Sprint
PCS brand names and "diamond" symbol, and several other U.S. trademarks and
service marks such as "The Clear Alternative to Cellular" and "Clear Across the
Nation" on Sprint PCS products and services. We believe that the Sprint and
Sprint PCS brand names and symbols enjoy a very high degree of awareness,
providing us an immediate benefit in the market place. Our use of the licensed
marks is subject to our adherence to quality standards determined by Sprint and
Sprint PCS and use of the licensed marks in a manner which would not reflect
adversely on the image of quality symbolized by the licensed marks. We have
agreed to promptly notify Sprint and Sprint PCS of any infringement of any of
the licensed marks within our territory of which we become aware and to provide
assistance to Sprint and Sprint PCS in connection with Sprint's and Sprint PCS'
enforcement of their respective rights. We have agreed with Sprint and Sprint
PCS to indemnify each other for losses incurred in connection with a material
breach of the trademark license agreements. In addition, we have agreed
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to indemnify Sprint and Sprint PCS from any loss suffered by reason of our use
of the licensed marks or marketing, promotion, advertisement, distribution,
lease or sale of any Sprint or Sprint PCS products and services other than
losses arising solely out of our use of the licensed marks in compliance with
certain guidelines.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if we file for bankruptcy, materially breach the agreement or our
management agreement is terminated. We can terminate the trademark and service
mark license agreements upon Sprint's or Sprint PCS' abandonment of the
licensed marks or if Sprint or Sprint PCS files for bankruptcy, or the
management agreement is terminated.
Consent and Agreement for the Benefit of the Lucent Financing
Sprint PCS has entered into a consent and agreement with Lucent, which we
have acknowledged, that modifies Sprint PCS' rights and remedies under our
management agreement for the benefit of Lucent and any refinancing of the
Lucent financing (the "Lucent Consent").
The Lucent Consent generally provides, among other things, the following:
. Sprint PCS' consent to the pledge of our subsidiary stock and grant of a
security interest in all our assets including the Sprint PCS Agreements;
. that the Sprint PCS Agreements may not be terminated by Sprint PCS until
the financing from Lucent is satisfied in full pursuant to the terms of
the Lucent Consent, unless our stock or assets are sold to a purchaser
who does not continue to operate the business as a Sprint PCS network,
which sale requires the approval of the Administrative Agent;
. a prohibition on competing Sprint PCS networks in our territory;
. for Sprint PCS to maintain 10 MHz of PCS spectrum in all our markets;
. for redirection of payments from Sprint PCS to the Administrative Agent
under specified circumstances;
. for Sprint PCS and the Administrative Agent to provide to each other
notices of default;
. the ability to appoint an interim replacement, including Sprint PCS, to
operate our PCS network under the Sprint PCS Agreements after an
acceleration of our financing from Lucent or an event of termination
under the Sprint PCS Agreements;
. the ability of the Administrative Agent or Sprint PCS to assign the
Sprint PCS Agreements and sell our assets to a qualified purchaser other
than a major competitor of Sprint PCS or Sprint;
. the ability to purchase spectrum from Sprint PCS and sell our assets to
any qualified purchaser; and
. the ability of Sprint PCS to purchase our assets or our debt.
Consent to security interest and pledge of stock. Sprint PCS has consented to
the grant of the following:
. a first priority security interest in all our assets including the
Sprint PCS Agreements;
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. a lien upon all of our assets and property including our rights under
the Sprint PCS Agreements; and
. a first priority security interest in the capital stock and equity
interests of our subsidiary and future subsidiaries.
Sprint PCS has agreed to acknowledge the grant of these security interests
and to waive its right to challenge or contest the validity of the interests.
Agreement not to terminate Sprint PCS Agreements until the obligations under
the Lucent financing are repaid. Sprint PCS has agreed not to exercise its
rights or remedies under the Sprint PCS Agreements, except its right to cure
some defaults, including its right to terminate the Sprint PCS Agreements and
withhold payments, other than rights of setoff, until the Lucent financing is
satisfied in full pursuant to the terms of the Lucent Consent. Sprint PCS has
agreed that until the Lucent financing is satisfied in full pursuant to the
terms of the Lucent Consent, the failure of a party related to us to pay any
amount under any agreement with Sprint PCS, other than the Sprint PCS
Agreements, or its related parties will not constitute a breach of the Sprint
PCS Agreements.
No competition until obligations under the Lucent financing are
repaid. Sprint PCS has agreed that it will not permit any person other than
AirGate or a successor manager to be a manager or operator for Sprint PCS in
our territory until the Lucent financing is satisfied in full pursuant to the
terms of the Lucent Consent. Consistent with our management agreement, while
the Lucent financing is outstanding, Sprint PCS can sell PCS services through
its national accounts, permit resellers and build new geographical areas within
our territory for which we have chosen not to exercise our rights of first
refusal. Similarly, Sprint PCS has agreed that it will not own, operate, build
or manage another wireless mobility communications network in our territory
unless it is permitted under the management agreement or the management
agreement is terminated in accordance with the Lucent Consent, and, in each
case, our senior debt is satisfied in full pursuant to the terms of the Lucent
Consent.
Maintain 10 MHz of spectrum. Sprint PCS has agreed to own at least 10 MHz of
PCS spectrum in our territory until the first of the following events occurs:
. the obligations under the Lucent financing are satisfied in full
pursuant to the terms of the Lucent Consent;
. the sale of spectrum is completed under the Lucent Consent, as discussed
below;
. the sale of operating assets is completed under the Lucent Consent, as
discussed below; or
. the termination of our management agreement.
Restrictions on assignment and change of control do not apply to lenders and
the Administrative Agent. Sprint PCS has agreed not to apply the restrictions
on assignment of the Sprint PCS Agreements and changes in control of our
ownership to the lenders of the Lucent financing or the Administrative Agent.
The assignment and change of control provisions in the Sprint PCS Agreements
will apply if the assignment or change of control is to someone other than the
Administrative Agent or a lender of the Lucent financing, or is not permitted
under the Lucent Consent.
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Redirection of payments from Sprint PCS to the Administrative Agent. Sprint
PCS has agreed to make all payments due from Sprint PCS to us under the Sprint
PCS Agreements directly to the Administrative Agent if the Administrative Agent
provides Sprint PCS with notice that an event of default has occurred and is
continuing under the Lucent financing. Payments to the Administrative Agent
would cease upon the cure of the event of default.
Notice of defaults. Sprint PCS has agreed to provide to the Administrative
Agent a copy of any written notice it sends us regarding an event of
termination or an event that if not cured, or if notice is provided, would be
an event of termination under the Sprint PCS Agreements. Sprint PCS also has
acknowledged that notice of an event of termination under the Sprint PCS
Agreements constitutes an event of default under the Lucent financing. The
Administrative Agent is, or will be, required to provide Sprint PCS a copy of
any written notice sent to us regarding an event of default or default under
the Lucent financing instruments.
Right to cure. Sprint PCS and the Administrative Agent have the right, but
not the obligation, to cure a default under the Sprint PCS Agreements. During
the first six months as interim manager Sprint PCS' right to reimbursement of
any expenses incurred in connection with the cure are subordinated to the
satisfaction in full, pursuant to the terms of the Lucent Consent of the
obligations under the Lucent financing.
Modification of termination rights. The Lucent Consent modifies the rights
and remedies under the management agreement provided in an event of termination
and grants the provider of the Lucent financing certain rights in the event of
a default under the instruments governing the senior debt. The rights and
remedies of Lucent vary based on whether we have:
. defaulted under our debt obligations but no event of termination has
occurred under the management agreement; or
. breached the management agreement.
The Lucent Consent generally permits the appointment of a person to run our
business under the Sprint PCS Agreements on an interim basis and establishes a
process for sale of the business. The person designated to operate our business
on an interim basis is permitted to collect a reasonable management fee. If
Sprint PCS or a related party is the interim operator, the amount of the fee
shall not exceed the amount of direct expenses of its employees to operate the
business plus out-of-pocket expenses. Sprint PCS shall collect its fee by
setoff against the amounts owed to us under the Sprint PCS Agreements with
them. In the event of an acceleration of obligations under the Lucent financing
and for up to two years thereafter, Sprint PCS shall retain only one-half of
the 8% of collected revenues that it would otherwise be entitled to retain.
Sprint PCS may retain the full 8% after the second anniversary of the date of
acceleration if Sprint PCS has not been appointed to run our business on an
interim basis or earlier if our business is sold to a third party. We or the
Administrative Agent, as the case may be, shall be entitled to receive the
remaining one-half of the collected revenues that Sprint PCS would otherwise
have retained. The amount advanced to us or the Administrative Agent shall be
evidenced by an interest-bearing promissory note. The promissory note shall
mature on the earlier of (1) the date a successor manager is qualified and
assumes our rights and obligations under the Sprint PCS Agreements or (2) the
date on which our operating assets or equity are purchased by a third party.
Default under the Lucent financing without a management agreement breach. If
we default on our obligations under the Lucent financing and there is no
default under our management agreement
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with Sprint PCS, Sprint PCS has agreed to permit the Administrative Agent to
elect to take any of the following actions:
. allow us to continue to operate the business under the Sprint PCS
Agreements;
. appoint Sprint PCS to operate the business on an interim basis; or
. appoint a person other than Sprint PCS to operate the business on an
interim basis.
Appointment of Sprint PCS or third party designee by Administrative Agent to
operate business. If the Administrative Agent appoints Sprint PCS to operate
the business, Sprint PCS must accept the appointment within 14 days or
designate to operate the business another person who also is an affiliate of
Sprint PCS or is acceptable to the Administrative Agent. Sprint PCS or its
designated person must agree to operate the business for up to six months. At
the end of the six months, the period may be extended by the Administrative
Agent for an additional six months or an additional 12 months if the aggregate
population served by all of Sprint PCS' affiliates is less than 40 million. If
the term is extended beyond the initial six month period, the Administrative
Agent will be required to reimburse Sprint PCS or its designated person for
amounts previously expended and to be incurred as interim manager to cure a
default up to an aggregate amount that is equal to 5% of the sum of our
stockholders' equity value plus the outstanding amount of our long term debt.
Sprint PCS or its designated person is not required to incur expenses beyond
this 5% limit. At the end of the initial six-month interim term, the
Administrative Agent has the right to appoint a successor to AirGate subject to
the requirements set forth below.
Appointment of third party by Administrative Agent to operate business. If
the Administrative Agent appoints a person other than Sprint PCS to operate the
business on an interim basis the third party must:
. agree to serve for six months unless terminated by Sprint PCS or the
Administrative Agent for cause;
. meet the requirements for a successor to an affiliate and not be
challenged by Sprint PCS for failing to meet these requirements within
20 days after the Administrative Agent provides Sprint PCS with
information on the third party; and
. agree to comply with the terms of the Sprint PCS Agreements.
The third party is required to operate the Sprint PCS network in our
territory but is not required to assume our existing liabilities. If the third
party materially breaches the Sprint PCS Agreements, this breach will be
treated as an event of default under the management agreement with Sprint PCS.
Management agreement breach. If we breach the Sprint PCS Agreements and this
breach causes a default under the Lucent financing, Sprint PCS has the right to
designate who will operate our business on an interim basis. Sprint PCS has the
right to:
. allow us to continue to operate the PCS business under the Sprint PCS
Agreements if approved by the Administrative Agent;
. operate our PCS business on an interim basis; or
. appoint a person other than Sprint PCS that is acceptable to the
Administrative Agent, which acceptance can not be unreasonably withheld
and must be given for another Sprint PCS affiliate, to operate our PCS
business on an interim basis.
When a debt default is caused by a breach of our management agreement with
Sprint PCS, the Administrative Agent only has a right to designate who will
operate our business on an interim basis
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if Sprint PCS elects not to operate the business or designate a third party to
operate the business on an interim basis.
Election of Sprint PCS to serve as interim manager or designate a third party
to operate business. If Sprint PCS elects to operate the business on an interim
basis or designate a third party to operate the business on an interim basis,
Sprint PCS or the third party may operate the business for up to six months at
the discretion of Sprint PCS. At the end of the six months, the period may be
extended for an additional six months or an additional 12 months if the
aggregate population served by us and all other affiliates of Sprint PCS is
less than 40 million. If the term is extended beyond the initial six month
period, the Administrative Agent will be required to reimburse Sprint PCS or
its third party designee for amounts previously expended and to be incurred as
interim manager to cure a default up to an aggregate amount that is equal to 5%
of the sum of our shareholder's equity value plus the outstanding amount of our
long term debt. Sprint PCS or its third party designee is not required to incur
expenses beyond this 5% limit. At the end of the initial six-month interim
term, Sprint PCS, subject to the approval of the Administrative Agent has the
right to appoint a successor interim manager to operate our business.
Appointment of third party by Administrative Agent to operate business. If
Sprint PCS gives the Administrative Agent notice of a breach of the management
agreement, the debt repayment is accelerated, and Sprint PCS does not agree to
operate the business or is unable to find a designee, the Administrative Agent
may designate a third party to operate the business. The Administrative Agent
has this same right if Sprint PCS or the third party designated by Sprint PCS
resigns and is not replaced within 30 days. The third party selected by the
Administrative Agent must:
. agree to serve for six months unless terminated by Sprint PCS for cause
by the Administrative Agent;
. meet the requirements for a successor to an affiliate and not be
challenged by Sprint PCS for failing to meet the requirements within 20
days after the Administrative Agent provides Sprint PCS with information
on the third party; and
. agree to comply with the terms of the Sprint PCS Agreements.
The third party may continue to operate the business after the six month
period at the Administrative Agent's discretion, so long as the third party
continues to satisfy the requirements to be a successor to an affiliate. The
third party is required to operate the Sprint PCS network in our territory, but
is not required to assume our existing liabilities.
Purchase and sale of operating assets. The Lucent Consent establishes a
process for the sale of our operating assets in the event of a default and
acceleration under the Lucent financing. Our stockholder has approved the sale
of our operating assets pursuant to the terms of the Lucent Consent.
Sprint PCS' right to purchase on acceleration of amounts outstanding under
the Lucent financing. Subject to the requirements of applicable law, so long as
our equipment financing with Lucent or any refinancing thereof remains
outstanding, Sprint PCS has the right to purchase our operating assets upon
notice of an acceleration of the Lucent financing under the following terms:
. in addition to the purchase price requirements of the management
agreement, the purchase price must include the payment or assumption in
full, pursuant to the terms of the Lucent Consent, of the Lucent
financing;
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. Sprint PCS must notify the Administrative Agent of its intention to
exercise the purchase right within 60 days of receipt of the notice of
acceleration;
. the Administrative Agent is prohibited for a period of at least 120 days
after the acceleration or until Sprint PCS rescinds its intention to
purchase from enforcing its security interest if Sprint PCS has given
notice of its intention to exercise the purchase right;
. if we receive a written offer that is acceptable to us to purchase our
operating assets within a specified period after the acceleration,
Sprint PCS has the right to purchase our operating assets on terms and
conditions at least as favorable to us as the offer we receive. Sprint
PCS must agree to purchase the operating assets within 14 business days
of its receipt of the offer, on acceptable conditions, and in an amount
of time acceptable to us; and
. upon completion of the sale to Sprint PCS, the Administrative Agent must
release the security interests upon satisfaction in full pursuant to the
terms of the Lucent Consent of the obligations under the Lucent
financing.
If the Administrative Agent acquires our operating assets, Sprint PCS has the
right for 60 days to notify the Administrative Agent that it wants to purchase
the operating assets for an amount not less than the sum of the aggregate
amount paid by the lenders under the Lucent financing for the operating assets
plus an aggregate amount sufficient to satisfy in full the obligations under
the Lucent financing pursuant to the terms of the Lucent Consent. If Sprint PCS
purchases the operating assets under these provisions, the Administrative Agent
must release the security interests.
If the Administrative Agent receives an offer to purchase the operating
assets, Sprint PCS has the right to purchase the operating assets on terms and
conditions at least as favorable as the terms and conditions in the proposed
offer within 14 days of Sprint PCS' receipt of notice of the offer, and so long
as the conditions of Sprint PCS' offer and the amount of time to complete the
purchase is acceptable to the Administrative Agent.
Sale of operating assets to third parties. If Sprint PCS does not purchase
the operating assets, following an acceleration of the obligations under the
Lucent financing, the Administrative Agent may sell the operating assets.
Subject to the requirements of applicable law, the Administrative Agent has two
options:
. to sell the assets to an entity that meets the requirements to be our
successor under the Sprint PCS Agreements; or
. to sell the assets to any third party, subject to specified conditions.
Sale of assets to qualified successor. Subject to the requirements of
applicable law, the Administrative Agent may sell the operating assets and
assign the agreements to entities that meet the following requirements to
succeed us:
. the person has not materially breached a material agreement with Sprint
PCS or its related parties that has resulted in the exercise of a
termination right or in the initiation of judicial or arbitration
proceedings during the past three years;
. the person is not named by Sprint PCS as a prohibited successor;
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. the person has reasonably demonstrated its credit worthiness and can
demonstrate the ability to service the indebtedness and meet the
requirements in the build-out plan; and
. the person agrees to be bound by the Sprint PCS Agreements.
The Administrative Agent is required to provide Sprint PCS with information
necessary to determine if a buyer meets the requirements to succeed us. Sprint
PCS has 20 days after its receipt of this information to object to the
qualifications of the buyer to succeed us. If Sprint PCS does not object to the
buyer's qualifications, subject to the requirements of applicable law, the
buyer can purchase the assets and assume our rights and responsibilities under
the Sprint PCS Agreements. The Lucent Consent will remain in full force and
effect for the benefit of the buyer and its lenders. The buyer also has a
period to cure any defaults under our Sprint PCS Agreements.
Sale of assets to non-successor. Subject to the requirements of applicable
law, the Administrative Agent may sell our assets to a party that does not meet
the requirements to succeed AirGate. If such a sale is made:
.Sprint PCS may terminate the Sprint PCS Agreements;
. the buyer may purchase from Sprint PCS 5, 7.5 or 10 MHz of the PCS
spectrum licensed to Sprint PCS in our territory under specified terms;
. if the buyer controls, is controlled by or is under common control with
an entity that owns a license to provide wireless service to at least 50%
of the population in a basic trading area where the buyer proposes to
purchase the spectrum from Sprint PCS, the buyer may only buy 5 MHz of
spectrum;
. the price to purchase the spectrum is equal to the sum of the original
cost of the license to Sprint PCS pro rated on a population and a
spectrum basis, plus the cost paid by Sprint PCS for microwave clearing
in the spectrum ultimately acquired by the buyer of our assets and the
amount of carrying costs attributable to the license and microwave
clearing costs from the date of the Lucent Consent until the closing of
the sale, based on a rate of 12% per annum;
. the buyer will receive from Sprint PCS the customers with the MIN
assigned to the market area covered by the purchased spectrum except for
customers of national accounts and resellers;
. with limited exceptions, Sprint PCS will not solicit for six months the
customers transferred to the buyer with the MIN assigned to the market
area;
. the buyer and Sprint PCS will enter into a mutual roaming agreement with
prices equal to the lesser of the most favored pricing provided by buyer
to third parties roaming in the geographic area and the national average
paid by Sprint PCS to third parties; and
. Sprint PCS will have the right to resell buyer's wireless services at
most favored nations pricing.
Right to purchase debt obligations. Following an acceleration under the
Lucent financing and until the 60-day anniversary of the filing of a petition
of bankruptcy, Sprint PCS has the right to purchase our obligations under the
Lucent financing at a purchase price equal to the amount of the obligations
other than interest accrued and fees and expenses that are deemed to be
unreasonable.
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Modification and amendment of Lucent Consent. If Sprint PCS modifies or
amends the form of consent and agreement it enters into with a lender to
another Sprint PCS affiliate that serves an area with population exceeding 5.0
million, then Sprint PCS agrees to give the Administrative Agent written notice
of the amendments and to amend the Lucent Consent in the same manner at the
Administrative Agent's request; provided, however, that Sprint PCS is not
required to amend the Lucent Consent to:
. incorporate selected changes designated by the Administrative Agent
unless Sprint PCS consents to making only the selected changes; or
. incorporate changes made for the benefit of a lender because of
circumstances related to a particular Sprint PCS affiliate other than
AirGate.
The following circumstances would not be considered related to a particular
Sprint PCS affiliate and, subject to the preceding sentence, could result in
amendment of the Lucent Consent:
. any form of recourse to Sprint PCS or similar form of credit
enhancement;
. any change in Sprint PCS's right to purchase our operating assets or
capital stock under the management agreement or Sprint PCS's right to
purchase the obligations under the Lucent financing;
. any change to our right or the right of the Administrative Agent or our
lenders under the Lucent financing to sell the collateral or purchase
spectrum from Sprint PCS;
. any change in the ownership status, terms of usage or the amount of
spectrum that may be purchased by us from Sprint PCS;
. any material change in the flow of certain revenues between Sprint PCS
and us;
. any changes to the obligations required to be assumed by, or
qualifications for, or appointment of, anyone other than AirGate who can
be appointed to operate our business on an interim basis under the
management agreement or purchase the business and continue to operate
under the management agreement;
. any changes to the consent and agreements terms on confidentiality, non-
compete or eligible buyers of the business;
. any clarifications of FCC compliance issues;
. any issuance of legal opinions; and
. any changes to the requirements of this section.
Termination of Lucent Consent. The Lucent Consent will terminate upon the
first to occur of:
. repayment in full of all our obligations under the Lucent financing and
termination of the Lucent financing; and
. termination of the Sprint PCS Agreements.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The Lucent Financing
We have entered into a credit agreement with Lucent Technologies Inc.
pursuant to which Lucent has agreed to provide a credit facility in the amount
of up to $153.5 million. The Lucent financing will be used to purchase
equipment from Lucent and for general corporate purposes. Our debt under this
facility is senior debt that ranks senior in right of payment to the senior
subordinated discount notes and is secured by a first priority security
interest in substantially all of our assets. The Lucent financing is guaranteed
by our subsidiary and will be guaranteed by our future subsidiaries.
The Lucent financing provides for (1) $13.5 million in senior secured debt
("Tranche 1"), which was drawn on August 20, 1999 and which matures June 6,
2007 and (2) $140.0 million in senior secured debt ("Tranche 2"), which is
available to be drawn from time to time for three years commencing on October
1, 2000 and which matures September 30, 2008.
The principal amount of each tranche amortizes in 19 quarterly installments
according to a graduated schedule. Amortization of Tranche 1 will begin in
December 2002, with final maturity occurring June 6, 2007. Amortization of
Tranche 2 will begin in March 2004, and final maturity will occur September 30,
2008.
The availability of funding under Tranche 2 is subject to the following
conditions, all of which will have been satisfied on or before the closing of
the offering:
. the payment of all fees then due related to the Lucent financing;
. the approval by the administrative agent under the Lucent credit
agreement of any adverse changes to our most recent business and
financing plan provided to Lucent at the closing of the Lucent financing
which would have a material adverse effect;
. if all other conditions have not been satisfied or waived by November 16,
1999, receipt by Lucent from the appropriate Sprint PCS entities of
certification that the PCS licenses and interconnection agreements
required for us to operate our network have been obtained, remain in
effect and are not subject to impairment, and that the Sprint PCS
entities are in compliance with those licenses and interconnection
agreements;
. the successful completion of the concurrent common stock and units
offerings with proceeds of not less than $215.0 million in the aggregate
of which not less than $85.0 million is equity;
. the execution of the indenture for the senior subordinated discount
notes;
. the execution of an intercreditor agreement;
. the absence of any suit or proceeding that might result in a material
adverse change in our business or that would affect the enforceability of
the loan documents;
. the payment of all insurance premiums due and compliance with the other
insurance requirements under the Lucent financing;
. the representations and warranties in the loan documents continuing to be
true and correct and the absence of a default under the loan documents;
and
. our compliance with and the continued effectiveness of our agreements
with Sprint PCS and our supply agreement with Lucent.
Each draw under Tranche 2 is subject to the conditions that the
representations and warranties continue to be true and correct, and that there
is no event of default under the loan documents.
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The Lucent financing is secured by the following:
. a perfected first priority lien on substantially all of our assets and
the assets of our present and future subsidiaries;
. collateral assignment of the Sprint PCS Agreements; and
. a pledge of all of the capital stock of our subsidiary and future
subsidiaries.
At the time we request a borrowing under the Lucent financing, we may select
one of two types of interest rates:
. We may choose a Eurodollar borrowing, on which interest accrues at a
rate determined by reference to an adjusted LIBOR plus 3.75%, only so
long as no Event of Default exists. Adjusted LIBOR is a LIBOR rate
adjusted by a multiple determined by a reserve requirement published by
the Board of Governors of the Federal Reserve System.
. Alternatively, we may choose an alternative base rate borrowing on which
interest accrues at a rate determined by reference to the greater of:
. the Federal Funds effective rate, as defined in the credit agreement,
plus 0.50%; or
. the prime rate of either the Chase Manhattan Bank, or, if the
administrative agent is a commercial bank, the administrative agent,
plus 2.75%.
Interest on any overdue amounts will accrue at a rate per annum equal to, in
the case of overdue principal, 2.50% plus the rate otherwise applicable, or, in
the case of all other amounts overdue, 2.50% plus the rate then applicable to
alternative base rate borrowings.
The terms of the Lucent financing require us to pay quarterly commitment
fees, which accrue as follows:
. at the rate of 1.50% per annum on the average daily undrawn amount of the
Tranche 1 commitments during the period from and including June 6, 1999
to, but excluding, June 30, 2000;
. at the rate of 3.75% per annum, or 1.50% per annum after 30% of the
Tranche 2 commitments has been borrowed, on the average daily undrawn
amount of the Tranche 2 commitments from the closing date of the Lucent
financing to, but excluding, January 1, 2001; and
. at the rate of 4.50% per annum, or 1.50% per annum after 30% of the
Tranche 2 commitments have been borrowed, on the average daily undrawn
amount of the Tranche 2 commitment from January 1, 2001 to September 30,
2003.
The commitment fees with respect to the Tranche 1 loans and the Tranche 2 loans
are payable quarterly in arrears, and a separate agent's fee is payable to the
administrative agent and the collateral agent.
The Tranche 1 and Tranche 2 loans will be prepaid, and the outstanding
commitments will be reduced, in an aggregate amount equal to:
. 60% of the excess cash flow, or 50% of excess cash flow if we meet
specified financial tests of each fiscal year commencing with the fiscal
year ending December 31, 2002;
. 100% of the net proceeds of asset sales outside of the ordinary course of
business, subject to exceptions, or insurance proceeds, to the extent not
reinvested in property or assets within a required period of time; and
. upon prepayment of any indebtedness incurred under a vendor financing
arrangement or other bank or credit facility, other than those facilities
outstanding at the date of the closing of the Lucent financing facility,
and several other exceptions, the product of the aggregate principal
amount of loans outstanding under the Lucent financing facility and a
fraction, the numerator of which is the amount of indebtedness prepaid
and the denominator of which is the aggregate
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principal amount of such indebtedness outstanding excluding the Lucent
financing and the senior subordinated discount notes then outstanding.
The Lucent financing contains various covenants that restrict the ability of
us and our subsidiaries to, among other things:
. incur additional indebtedness except for the senior subordinated discount
notes and certain other limited indebtedness;
. grant liens;
. make guarantees;
. enter into hedging agreements;
. engage in mergers, acquisitions, investments, consolidations,
liquidations, dissolutions and asset sales;
. pay dividends and redeem equity; and
. prepay certain indebtedness, including the senior subordinated discount
notes.
The Lucent financing contains financing and operating covenants including,
among other things:
. ratio of total debt to total capitalization;
. ratio of total debt to annualized earnings before interest, taxes,
depreciation and amortization, referred to as EBITDA;
. ratio of senior secured debt to total capitalization;
. ratio of senior secured debt to annualized EBITDA;
. ratio of EBITDA to fixed charges;
. minimum population coverage by our PCS network in order to incur
additional indebtedness;
. minimum subscribers in order to incur additional indebtedness;
. minimum revenue; and
. maximum capital expenditures.
We would default on the Lucent financing if among other things:
. we fail to make the payments due under the Lucent financing;
. we fail to comply with a covenant under any document under the Lucent
financing;
. we default on the Sprint PCS Agreements or certain of our rights under
the Sprint PCS Agreements are terminated or materially impaired;
. our supply agreement with Lucent or our loan documents shall cease to be,
or are asserted by us not to be, in full force and effect;
. any representation or warranty under the Lucent financing is determined
to be materially incorrect in any material respect when made;
. an involuntary proceeding is commenced or an involuntary petition is
filed under bankruptcy or similar laws;
. we voluntarily commence a proceeding or file a petition under bankruptcy
or similar laws;
. we become unable, admit in writing our inability or fail generally to pay
a certain amount of our debts as they become due;
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. one or more judgments for the payment of money in an aggregate amount of
a certain amount is rendered against us or any subsidiary and shall
remain undischarged for a certain period of time;
. we become liable under ERISA in an aggregate amount exceeding $5.0
million in any year or $10.0 million for all periods;
. any lien on a material portion of collateral created under the loan
documents ceases to be a valid and perfected lien on that collateral;
. there is any termination or other condition that causes the loan
documents to not be in full force and effect;
. we fail to perform any term under the guaranty of our Lucent financing
and such failure adversely affects the lenders;
. we default on certain other indebtedness;
. we change control of our ownership; or
. prior to the completion of this offering any entity other than Lucent
that manufactures equipment or provides services subject to our supply
agreement with Lucent owns more than 3% of our capital stock.
We have paid Lucent the expenses related to the Lucent financing and will pay
the origination fees upon closing. In addition, in connection with the Lucent
financing we issued warrants to Lucent to purchase shares of common stock
representing 1% of the outstanding common stock on a fully diluted basis on the
closing date of our initial public offering at an exercise price of 120% of the
initial public offering price of our common stock. See "Description of Capital
Stock--Warrants."
Senior Subordinated Discount Notes
Upon the closing of the units offering, we will have approximately $156.1
million of gross proceeds at issuance of senior subordinated discount notes
outstanding. See "Description of Units--Senior Subordinated Discount Notes."
Other Long-Term Debt
In July 1998, AirGate Wireless, LLC issued an unsecured promissory note to a
third party to purchase certain site acquisition and engineering costs. At June
30, 1999, the principal amount of this unsecured promissory note was $7.7
million. The note bears interest at 14% and originally provided for quarterly
payments of principal and interest beginning on March 1, 1999 and ending on
December 1, 2000. In May 1999, the note was amended to provide for quarterly
payments of principal and interest beginning on August 31, 1999 or the first
day following the close of the first fiscal quarter of the closing of our
concurrent offerings of common stock and units, consisting of senior
subordinated discount notes and warrants, in an amount equal to or greater than
$130.0 million with the final payment due on August 31, 2001. In August 1999,
the note was amended to provide for quarterly payments beginning on October 15,
1999 with the final payment due on October 15, 2001. It is our intention to
repay this promissory note with the proceeds from our concurrent offerings of
common stock and units.
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MANAGEMENT
Directors and Executive Officers
The following table presents information with respect to our directors and
executive officers.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Thomas M. Dougherty............. 55 Director, President and Chief Executive
Officer
W. Chris Blane.................. 46 Director and Vice President of New Business
Development
Thomas D. Body III.............. 61 Director and Vice President of Strategic
Planning
Robert E. Gourlay............... 45 Vice President of Marketing
David C. Roberts................ 36 Vice President of Engineering and Network
Operations
Shelley L. Spencer.............. 36 Vice President of Law and Secretary
Alan B. Catherall............... 45 Chief Financial Officer
Gill Cogan...................... 46 Director
Barry Schiffman................. 53 Chairman of the Board and Director
</TABLE>
Thomas M. Dougherty joined AirGate in April 1999. Mr. Dougherty, our
president and chief executive officer, has more than 16 years of experience in
the telecommunications industry, and is a former senior executive of Sprint
PCS. As the president of a major region for Sprint PCS, Mr. Dougherty was
responsible for Sprint PCS market launches in eighteen major metropolitan areas
covering approximately 75 million people, including Chicago, Illinois; Houston,
Texas; Atlanta, Georgia; and Charlotte, North Carolina. Mr. Dougherty served as
Executive Vice President and Chief Operating Officer of Chase
Telecommunications, a personal communications services carrier, from 1996 to
1997. Mr. Dougherty served as President and Chief Operating Officer of Cook
Inlet BellSouth PCS, L.P., a start-up wireless communications company, from
1995 to 1996. Prior to October 1995, Mr. Dougherty was Vice President and Chief
Operating Officer of BellSouth Mobility DCS Corporation. Before entering the
telecommunications industry, Mr. Dougherty held various senior marketing and
operational positions with Coca-Cola. Mr. Dougherty holds a B.S. and MBA from
Georgia State University.
W. Chris Blane has more than twenty years of wireless telecommunications
experience in the Southeast. In 1978, he founded and developed American
Mobilphone Paging, Inc. In 1981, Mr. Blane was named president of Maxicom,
Inc., a cellular licensee in Atlanta, Memphis, Tampa, Birmingham and Mobile.
From 1984 to 1988, he served as president of Cellular One in Birmingham
directing operation of the company's cellular network in the Birmingham and
Montgomery MSAs. In 1989, Mr. Blane was appointed President of Metrex
Corporation which constructed the first fiber optic competitive access network
in Atlanta and ultimately merged with MFS Communications Co., now WorldCom. In
1995, Mr. Blane joined AirGate's affiliate, AirLink II, as it prepared for the
C block PCS auction. Mr. Blane holds a B.S. degree in Architecture from Georgia
Institute of Technology.
Thomas D. Body III has over twenty years of wireless telecommunications
experience in the Southeast. From 1979 to 1981, he served as chief executive
officer of American Mobilphone Paging, Inc. and from 1981 to 1988, as an
officer and director for Maxicom, Inc., the non-wireline cellular licensee for
the Atlanta, Birmingham, Memphis, Tampa and Mobile markets. As a founder and
partner of CellularOne in Birmingham and Montgomery, Alabama, Mr. Body was
instrumental in the design, construction, development and success of the
company's cellular networks. In 1989, he was appointed chairman of Metrex
Corporation where he oversaw development of the first fiber optic competitive
access network in the Atlanta market, which subsequently merged with MFS
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Communications Co., now WorldCom. Mr. Body then served as chairman and CEO of
MFS-Atlanta as the company built the first large area sonet network in the
country. After leaving MFS-Atlanta, he then served as a consultant to MFS until
1994. Mr. Body joined AirGate's affiliate, AirLink II, as it prepared for the C
block PCS auction. Mr. Body holds a B.B.A. degree in Real Estate/Risk
Management from the University of Georgia.
Robert E. Gourlay has twenty-two years of wireless communications experience
in the Southeast dating to his service with Motorola in 1976. From 1976 to
1989, Mr. Gourlay served as area sales manager of Motorola's Communications
division for the State of Georgia. From 1989 to 1993, Mr. Gourlay served as the
southeastern manager of sales and operations for Motorola Inc.'s Cellular
Infrastructure Division bearing responsibility for product sales, engineering,
deployment and implementation of cellular infrastructure equipment throughout
the Southeast. Mr. Gourlay was also directly involved in Motorola Inc.'s
evaluation and deployment of wireless technologies including CDMA, TDMA, NAMPS,
IS-41 and analog. In 1993 Mr. Gourlay co-founded Encompass, Inc. where he
served as senior vice president and co-authored the company's business plan to
enter the PCS industry via the auction process. Mr. Gourlay was instrumental in
raising the initial venture capital to fund AirGate. In 1995, Mr. Gourlay
joined AirGate's affiliate, AirLink II. Mr. Gourlay holds a B.S. Degree in
Management Science from the University of South Carolina and an MBA from
Georgia State University.
David C. Roberts is a fifteen-year veteran of the wireless telecommunications
industry having served in various engineering and management positions for
Motorola, Inc. From 1990 to 1993, Mr. Roberts served as engineering manager for
Motorola Cellular Infrastructure. In that capacity, he worked out of Motorola
Inc.'s Atlanta regional office where he had overall responsibility for wireless
engineering in the Southeast. In 1993 Mr. Roberts co-founded Encompass, Inc.
where he served in an engineering management capacity and was instrumental in
developing the company's business plan and strategy for entering the PCS
industry. In 1995, Mr. Roberts joined AirGate's affiliate, AirLink II, in
preparation for the C block PCS auction. Mr. Roberts holds a B.S. degree in
Electrical Engineering Technology from the Southern College of Technology.
Shelley L. Spencer has twelve years of legal experience, six of which were
spent in private practice with the telecommunications practice of Swidler &
Berlin, Chtd. From 1989 to 1995, while at Swidler & Berlin, Ms. Spencer
specialized in representing wireless telecommunications companies before the
FCC, Congress and in corporate structuring and commercial transactions. In
1995, Ms. Spencer joined AirGate's affiliate, AirLink II, as it prepared for
the C block PCS auction. Ms. Spencer holds a B.A. from Baldwin-Wallace College
and a J.D. from Georgetown University Law Center.
Alan B. Catherall became AirGate's Chief Financial Officer in March 1998
under a contract between AirGate and Tatum CFO Partners. As a partner in Tatum
CFO Partners since 1996, Mr. Catherall has served as chief financial officer or
provided consulting services for a variety of clients. Before joining Tatum CFO
Partners, Mr. Catherall was chief financial officer of Syncordia Services, a
joint venture of MCI and British Telecom, from 1994 to 1996. Syncordia, founded
in 1991, provided telecommunications outsourcing services to enterprises in
support of their global communications. From 1989 to 1994, Mr. Catherall served
as vice president of finance and administration for MCI's Business Markets
Unit. In this position, Mr. Catherall had overall responsibility for all
financial, real estate, procurement and administration activities. From 1988 to
1989, Mr. Catherall was vice president of finance for Lex Computer Systems, a
company providing computer solutions to medium sized companies. Mr. Catherall
has a B.S. in Economics from the
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University of Manchester and an MBA from Loyola College in Baltimore. He is a
member of AICPA and the Institute of Chartered Accountants in the U.K.
Gill Cogan is managing partner of Weiss, Peck & Greer Venture Partners and
has served in such capacity since 1992. He is a director of Electronics for
Imaging, Inc., and several privately held companies. Mr. Cogan holds a BS
degree in theoretical physics and an MBA from UCLA.
Barry Schiffman is president, chief investment officer and member of the
board of JAFCO America Ventures, Inc. and has held such position since 1996.
Mr. Schiffman has more than 14 years of industry experience in investing in
high-growth information technology companies. From 1994 and until he joined
JAFCO, he was a general partner at Weiss, Peck & Greer Venture Partners. Mr.
Schiffman holds a bachelor's degree in industrial and systems engineering from
Georgia Institute of Technology and an MBA from Stanford University, Graduate
School of Business.
Board of Directors
The seven directors comprising the board of directors are divided into three
classes. Barry Schiffman and Gill Cogan constitute Class I and will stand for
election at the annual meeting of stockholders to be held in 2000. The two
directors who will fill the current vacancies on the board will constitute
Class II and will stand for election at the annual meeting of stockholders to
be held in 2001. Thomas M. Dougherty, Thomas D. Body III and W. Chris Blane
constitute Class III and will stand for election at the annual meeting of
stockholders to be held in 2002. After the initial term following the offering,
directors in each class will serve for a term of three years, or until his or
her successor has been elected and qualified and will be compensated at the
discretion of the board of directors. Executive officers are ordinarily elected
annually and serve at the discretion of the board of directors.
Currently there are two vacancies on the board. Immediately after the closing
of this offering, we expect to fill one of the vacancies in Class II. In
addition, we anticipate that the remaining vacancy will be filled shortly
thereafter. We expect the outside directors to be experienced leaders in the
telecommunications and business communities with direct experience managing and
advising public companies.
The audit committee consists of Gill Cogan, Barry Schiffman and Thomas M.
Dougherty. The compensation committee consists of Gill Cogan, Barry Schiffman
and Thomas D. Body III.
The audit committee is responsible for recommending to the board of directors
the engagement of our independent auditors and reviewing with the independent
auditors the scope and results of the audits, our internal accounting controls,
audit practices and the professional services furnished by the independent
auditors.
The compensation committee is responsible for reviewing and approving all
compensation arrangements for our officers, and is also responsible for
administering the stock option plan.
Compensation Committee Interlocks and Insider Participation
The compensation committee during the year ended December 31, 1998, consisted
of the board of directors. None of the executive officers served as a director
or member of the compensation committee or other board committee performing
equivalent functions of another corporation, one of whose executive officers
served on our board of directors.
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Limitation on Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Our certificate of incorporation
provides that we shall indemnify our directors and executive officers and may
indemnify our other officers and employees and agents and other agents to the
fullest extent permitted by law. Our certificate of incorporation also permits
us to secure insurance on behalf of any officer, director, employee or other
agent for any liability arising out of his or her actions in such capacity,
regardless or whether the certificate of incorporation would permit
indemnification.
We have entered into agreements to indemnify our directors and officers in
addition to indemnification provided for in our certificate of incorporation.
These agreements, among other things, indemnify our directors and officers for
certain expenses, including attorneys' fees, judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by us or in our right, arising out of such person's services as a
director or officer of ours, any subsidiary of ours, or any other company or
enterprise to which the person provides services at our request. In addition,
we intend to obtain directors' and officers' insurance providing
indemnification for certain of our directors, officers and employees for
certain liabilities. We believe that these provisions, agreements and insurance
are necessary to attract and retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of ours where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
Executive Compensation
The following table presents summary information with respect to the
compensation paid to our Chief Executive Officer and each of our other
executive officers whose salary and bonus exceeded $100,000 during the year
ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------
Name and Principal Position Year Salary
<S> <C> <C>
Thomas D. Body III....................................... 1998 $ 120,000
Chief Executive Officer(1)
W. Chris Blane........................................... 1998 120,000
Vice President of New Business Development
Robert E. Gourlay........................................ 1998 120,000
Vice President of Marketing
Shelley L. Spencer....................................... 1998 120,000
Vice President of Law and Secretary
Jack R. Kimzey........................................... 1998 68,000
Chief Executive Officer(2)
Edward C. Horner......................................... 1998 159,000
Chief Operating Officer(3)
</TABLE>
- ---------------------
(1) Mr. Body served as acting Chief Executive Officer from January 1998 to
October 1998.
(2) Mr. Kimzey served as Chief Executive Officer from October 1998 to February
1999. Mr. Kimzey resigned in February 1999.
(3) Mr. Horner served as Chief Operating Officer from January 1998 to December
15, 1998. Mr. Horner resigned in December 1998.
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Compensation of Directors
Currently, we do not compensate our directors. We do reimburse directors for
their expenses of attendance at board meetings.
Employment Agreements
We entered into an employment agreement with Thomas M. Dougherty, the Chief
Executive Officer. Mr. Dougherty's employment agreement is for a five-year term
and provides for an annual base salary of $180,000, with a minimum guaranteed
annual increase of $20,000 over the next four years, until April 15, 2004. In
addition to his base salary, Mr. Dougherty is eligible to receive an annual
bonus up to 50% of his base salary. Under the employment agreement, Mr.
Dougherty is entitled to an award of stock options equal to 2% of the number of
fully diluted shares of common stock outstanding following our concurrent
offerings, subject to possible upward adjustment by the board of directors if
the number of shares of the common stock authorized for issuance to employees
is more than 10% of fully diluted shares of common stock. Under the agreement,
Mr. Dougherty would vest in 25% of the awarded stock options on April 15, 1999,
with the remaining 75% of the options vesting in 15 equal quarterly
installments beginning June 30, 2000. If Mr. Dougherty voluntarily terminates
his employment prior to April 15, 2000, he will not be entitled to any of the
shares underlying the stock options. The exercise price of the stock options
granted to Mr. Dougherty is $14.00 per share. In addition, Mr. Dougherty is
eligible to participate in all employee benefit plans and policies.
The employment agreement provides that Mr. Dougherty's employment may be
terminated with or without cause, as defined in the agreement, at any time. If
Mr. Dougherty is terminated without cause, he is entitled to receive (1) six
months base salary, plus one month's salary for each year employed, (2) all
stock options vested on the date of termination and (3) six months of health
and dental benefits. Mr. Dougherty is not entitled to any compensation or
benefits upon voluntary termination or termination for cause. Under the
employment agreement, Mr. Dougherty agreed to a restriction on his present and
future employment. Mr. Dougherty agreed not to compete in the business of
wireless telecommunications either directly or indirectly in our territory
during his employment and for a period of 18 months after his employment is
terminated.
Pursuant to a requirement set forth in our management agreement with Sprint
PCS, we intend to enter into employment agreements with W. Chris Blane, Thomas
D. Body III, Robert E. Gourlay, David C. Roberts and Shelley L. Spencer prior
to or concurrently with the completion of the offering. Each of these employees
may be terminated with or without cause at any time. The agreements are
expected to provide that each employee, upon termination will not compete in
the business of wireless telecommunications in our territory or have another
primary business for a period of five years from the date of the execution of
our management agreement with Sprint PCS on July 22, 1998. These employment
restrictions on having another primary business will not apply when at least
one-third of the corporate officers of Sprint and/or Sprint PCS terminate their
employment for any reason within one year following a change of control, as
defined in the management agreement. In the event that an employee is
terminated without cause, we will continue to pay the employee salary for the
remaining term of the agreement or until the non-compete provision expires or
is waived by Sprint PCS. In addition to these agreements, we will also enter
into an employment agreement with Alan B. Catherall. Under his agreement, Mr.
Catherall will agree not to compete in the business of wireless
telecommunications either directly or indirectly in our territory during his
employment and for a period of 18 months after his employment is terminated.
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1999 Stock Option Plan
The 1999 Stock Option Plan has been adopted by our board of directors and
stockholders. The option plan permits the granting of both incentive stock
options and nonqualified stock options to employees. The aggregate number of
shares of common stock that may be issued pursuant to options granted under the
option plan shall be 2,000,000, including the options granted to Mr. Dougherty
pursuant to his employment agreement, subject to adjustment in the event of
certain changes in the outstanding shares of common stock. On July 28, 1999, we
granted options to purchase 1,075,000 shares of common stock with an exercise
price of $14.00 per share to directors, officers and employees. The following
table presents information with respect to the options granted to directors and
executive officers.
<TABLE>
<CAPTION>
Number of Securities
Underlying % of Total Exercise Expiration Value at
Name Options Options Granted Price Date Date of Grant(1)
<S> <C> <C> <C> <C> <C>
Thomas M. Dougherty..... 300,000 27.9% $14.00 04/2009 $900,000
W. Chris Blane.......... 75,000 7.0 14.00 07/2009 225,000
Thomas D. Body III...... 75,000 7.0 14.00 07/2009 225,000
Robert E. Gourlay....... 75,000 7.0 14.00 07/2009 225,000
David C. Roberts........ 75,000 7.0 14.00 07/2009 225,000
Shelley L. Spencer...... 115,000 10.7 14.00 07/2009 345,000
Alan B. Catherall....... 90,000 8.4 14.00 07/2009 270,000
</TABLE>
- ---------------------
(1) Value at date of grant is based on the product of the public offering price
of $17.00 per share minus the exercise price, multiplied by the number of
securities underlying the options granted.
The option plan will be administered by our board of directors or by a
compensation committee appointed by our board of directors, which will be
authorized, subject to the provisions of the option plan, to grant awards and
establish rules and regulations as it deems necessary for the proper
administration of the option plan and to make whatever determinations and
interpretations it deems necessary or advisable.
An incentive option may not have an exercise price less than the fair market
value of the common stock on the date of grant or an exercise period that
exceeds ten years from the date of grant and is subject to certain other
limitations which allow the option holder to qualify for favorable tax
treatment. Nonqualified options may have an exercise price of less than, equal
to or greater than the fair market value of the underlying common stock on the
date of grant but, like incentive options, are limited to an exercise period of
no longer than ten years.
Options granted under the option plan will become exercisable according to a
schedule. Employees who have worked for us for 12 months prior to the date
their options were granted will be able to exercise 25% of their options
beginning on July 22, 2000. This percentage will increase in 6.25 percent
increments up to 100% at 60 months of employment. Employees who have not worked
for us for 12 months prior to the date their options were granted, other than
Mr. Dougherty, will be able to exercise 25% of their options 12 months after
the date of grant. This percentage will increase in five percent increments up
to 100% at 57 months of employment.
The exercise price of an option may be paid in cash or by check.
An option will not be not transferable except by will or by the laws of
descent or distribution or unless determined otherwise by our board of
directors.
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Unless previously exercised, a vested option granted under the option plan
will terminate automatically:
. 12 months after the employee's termination of employment or by reason of
disability;
. six months after the employee's death; and
. three months after an employee's voluntary termination of employment.
A vested option will also terminate automatically upon termination of
employment for cause.
In the event of a change in control of AirGate where the acquiror does not
assume the options or provide for substitute options, the board of directors
may provide the employee with the right to exercise options, including those
not exercisable at the time of the change in control. Only one-half of the
options not yet vested may, however, be exercised in the event of a change in
control. In the case of the liquidation or dissolution of AirGate, the board of
directors may similarly provide the employee with the right to exercise all
options.
Noncompetition Agreement
In connection with the granting of options under the option plan, each
employee granted options must enter into a noncompetition agreement. These
agreements provide that for so long as the employee works for us, and for a
period of two years after the employee's termination for any reason, the
employee may not disclose in any way any confidential information. The
agreements also provide that for so long as the employee works for us and for a
period of 18 months after the employee's termination for any reason, the
employee is prohibited from:
. engaging in the same business or in a similar capacity in our territory;
. soliciting business in competition with us; and
. hiring any of our employees or directly or indirectly causing any of our
employees to leave their employment to work for another employer.
For so long as the shares underlying the options are not registered with the
Securities and Exchange Commission, in the event of a breach of the
noncompetition agreement by an employee, we have the option to repurchase any
and all shares held by the employee at the employee's exercise price. We may,
at any time, pursue any other remedies provided by law or in equity.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The Amended and Restated Limited Liability Company Agreement of AirGate, LLC,
the parent company of AirGate, provides that the shares of common stock of
AirGate shall be distributed to the members of AirGate, LLC in proportion to
each member's membership interest immediately prior to completion of AirGate's
initial public offering.
The following table presents certain information regarding the beneficial
ownership of common stock, as of September 27, 1999, and assumes that the
number of shares of AirGate common stock held by AirGate, LLC has been
distributed to the members of AirGate, LLC in accordance with its limited
liability company agreement, with respect to:
. each person who, to our knowledge, is the beneficial owner of 5% or more
of the outstanding common stock;
. each of the directors;
. each of the executive officers; and
. all executive officers and directors as a group.
<TABLE>
<CAPTION>
Number of Percentage of Percentage of
Shares Beneficially Ownership Ownership
Name and Address(1) Owned(2) Prior to Offering After Offering(3)(10)
<S> <C> <C> <C>
Maxicom PCS L.L.C.(4)... 1,479,175 43.7% 13.5%
Weiss, Peck & Greer
Venture Partners
affiliated funds....... 1,884,003 38.6 16.9(5)
555 California Street,
Suite 3130
San Francisco,
California 94104
JAFCO America Ventures,
Inc. affiliated funds.. -- -- 4.6
505 Hamilton Ave, Suite
310
Palo Alto, California
94301
Robert E. Gourlay &
Associates, LP......... 191,451 5.7 1.7
8734 Oakthorpe Drive
Charlotte, North
Carolina 28277
Thomas M. Dougherty..... -- -- --
W. Chris Blane(4)....... 1,479,175 43.7 13.5
Robert E. Gourlay(6).... 191,451 5.7 1.7
Barry Schiffman(7)...... -- -- 4.6
Gill Cogan(8)........... 1,884,003 38.6 16.9(9)
Shelley L. Spencer...... 86,931 2.6 *
Thomas D. Body III(4)... 1,479,175 43.7 13.5
David C. Roberts........ 121,771 3.6 1.1
Alan B. Catherall....... -- -- --
All executive officers
and directors as a
group (9 persons)...... 3,184,642 94.2 38.6
</TABLE>
- ---------------------
(Footnotes on following page)
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<PAGE>
* Less than one percent.
(1) Except as otherwise indicated below, the address for Maxicom PCS L.L.C. and
each executive officer and director is Harris Tower 233 Peachtree Street,
N.E., Suite 1700, Atlanta, Georgia 30303.
(2) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act. A person is deemed to be the beneficial owner of
any shares of common stock if such person has or shares voting power or
investment power with respect to such common stock, or has the right to
acquire beneficial ownership at any time within 60 days of the date of the
table. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct
the disposition of shares.
(3) Includes 869,683 shares reflecting conversion of the promissory notes
issued to the Weiss, Peck & Greer Venture Partners affiliated funds and the
JAFCO America Ventures, Inc. affiliated funds.
(4) Maxicom PCS L.L.C. is controlled by Messrs. W. Chris Blane and Thomas D.
Body III. Therefore, Messrs. Blane and Body may be deemed to beneficially
own the shares held by Maxicom PCS L.L.C.
(5) Includes 214,413 shares of common stock underlying the warrants issued to
the Weiss, Peck & Greer Venture Partners affiliated funds.
(6) Includes 191,451 shares that Mr. Gourlay is deemed to beneficially own as a
general partner of Robert E. Gourlay & Associates, LP.
(7) Includes shares Mr. Schiffman is deemed to beneficially own as president,
chief investment officer and member of the board of JAFCO America Ventures,
Inc. Mr. Schiffman's address is 505 Hamilton Avenue, Suite 310, Palo Alto,
California 94301.
(8) Includes 1,884,003 shares of common stock that Mr. Cogan is deemed to
beneficially own as managing partner of Weiss, Peck & Greer Venture
Partners. Mr. Cogan disclaims beneficial ownership of such shares except to
the extent of his pecuniary interest in Weiss, Peck & Greer Venture
Partners affiliated funds. Mr. Cogan's address is 555 California Street,
Suite 3130, San Francisco, California 94104.
(9) Includes 214,413 shares underlying the warrants issued to the Weiss, Peck &
Greer Venture Partners affiliated funds which Mr. Cogan is deemed to own as
managing partner of Weiss, Peck & Greer Venture Partners. Mr. Cogan
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest in Weiss, Peck & Greer Venture Partners affiliated
funds.
(10) Subject to a downward adjustment as a result of shares of our common stock
underlying warrants being issued in the units offering and subsequent
exercise of those warrants.
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CERTAIN TRANSACTIONS
From our inception through May 1999, we received financing from affiliates of
Weiss, Peck & Greer Venture Partners and affiliates of JAFCO America Ventures,
Inc. Mr. Cogan, one of our directors, is managing partner of Weiss, Peck &
Greer Venture Partners. Another director, Mr. Schiffman, is President, chief
investment officer and a member of the board of JAFCO America Ventures, Inc. In
August 1998, we issued $1.8 million of subordinated promissory notes to the
Weiss, Peck & Greer Venture Partners affiliated funds. In September 1998, we
issued $3.0 million of subordinated promissory notes to the JAFCO America
Ventures, Inc. affiliated funds. All of these notes provided for the conversion
of the notes into preferred or common stock upon the satisfaction of certain
conditions or repayment of the notes one year after their issuance. Repayment
of the notes was subordinated to senior secured debt we received in November
1998 from Lucent. We also issued warrants to purchase the preferred stock to
the Weiss, Peck & Greer Venture Partners affiliated funds and to the JAFCO
America Ventures, Inc. related funds in consideration for their financing. The
warrants were to be exercised on the earlier of five years from the date of
issuance or an initial public offering. In March, April and May 1999, we
received an additional $1.25 million of financing from the Weiss, Peck & Greer
Venture Partners affiliated funds and $1.25 million of additional financing
from the JAFCO America Ventures, Inc. affiliated funds pursuant to subordinated
notes. In May 1999, we consolidated the promissory notes issued to the Weiss,
Peck & Greer Venture Partners affiliated funds in 1998 and 1999 for a total of
$3.167 million into two subordinated promissory notes that will be converted
into shares of our common stock concurrently with completion of our concurrent
offerings at a price 48% less than the price of a share of the common stock
sold in the common stock offering. The warrants held by the Weiss, Peck & Greer
Venture Partners affiliated funds were terminated. In May 1999, we issued
warrants to the Weiss, Peck & Greer Venture Partners affiliated funds to
purchase shares of common stock for an aggregate price of up to $2.73 million
exercisable at a 25% discount to the price of a share of common stock sold in
the common stock offering. The warrants may be exercised after an initial
public offering for two years from the date of grant. In May 1999, we
consolidated the promissory notes issued to the JAFCO America Ventures, Inc.
affiliated funds for a total of $4.394 million into subordinated promissory
notes that will be converted into shares of our common stock concurrent with
the completion of our concurrent offerings at a price 48% less than the price
of a share of common stock sold in the common stock offering. The warrants held
by the JAFCO America Ventures, Inc. affiliated funds were terminated. In
connection with the issuance of these convertible notes, the warrants and
Weiss, Peck & Greer Venture Partners affiliated funds' existing ownership
interest, we intend to enter into registration rights agreements with the
Weiss, Peck and Greer Venture Partners affiliated funds and the JAFCO America
Ventures, Inc. affiliated funds.
The affiliated funds of Weiss, Peck & Greer Venture Partners also have
guaranteed repayment of loans made to AirGate Wireless, LLC in principal
amounts of $1.0 million and $1.8 million by NationsBank and Silicon Valley
Bank, respectively. The combined principal amount of these two loans is $2.8
million. The loan from NationsBank for $1.0 million has been assigned to us.
The $1.8 million loan from Silicon Valley will remain at AirGate Wireless, LLC.
During the year ended December 31, 1998, we made $60,000 in lease payments to
an affiliate of two of our directors, W. Chris Blane and Thomas D. Body III.
The lease related to the office space of our previous corporate headquarters
and was terminated as of June 30, 1999. We believe that the terms of that lease
arrangement were comparable to terms that we could have obtained with an
unrelated party.
In addition, as of June 30, 1999, Robert E. Gourlay, an executive officer,
held a note payable issued by us in the amount of $68,919. The note bears
interest at the annual rate of 8% and is payable at the option of Mr. Gourlay
upon consummation of an equity offering or October 15, 1999.
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REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
The FCC regulates the licensing, construction, operation, acquisition and
interconnection arrangements of wireless telecommunications systems in the
United States.
The FCC has promulgated, and is in the process of promulgating, a series of
rules, regulations and policies to, among other things:
. grant or deny licenses for PCS frequencies;
. grant or deny PCS license renewals;
. rule on assignments and/or transfers of control of PCS licenses;
. govern the interconnection of PCS networks with other wireless and
wireline carriers;
. establish access and universal service funding provisions;
. impose fines and forfeitures for violations of any of the FCC's rules;
and
. regulate the technical standards of PCS networks.
The FCC currently prohibits a single entity from having a combined
attributable interest, of 20% or greater interest in any license, in broadband
PCS, cellular and SMR licenses totaling more than 45 MHz in any geographic
area.
Transfers and Assignments of PCS Licenses
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a PCS license. Non-
controlling interests in an entity that holds a PCS license or operates PCS
networks generally may be bought or sold without prior FCC approval. In
addition, a recent FCC order requires only post-consummation notification of
certain pro forma assignments or transfers of control.
Conditions of PCS Licenses
All PCS licenses are granted for 10-year terms conditioned upon timely
compliance with the FCC's build-out requirements. Pursuant to the FCC's build-
out requirements, all 30 MHz broadband PCS licensees must construct facilities
that offer coverage to one-third of the population within 5 years and to two-
thirds of the population within 10 years, and all 10 MHz broadband PCS
licensees must construct facilities that offer coverage to at least one-quarter
of the population within 5 years or make a showing of "substantial service"
within that 5 year period. Rule violations could result in license revocations.
The FCC also requires licensees to maintain a certain degree of control over
their licenses. The Sprint PCS agreements reflect an alliance that the parties
believe meets the FCC requirements for licensee control of licensed spectrum.
If the FCC were to determine that our agreements with Sprint PCS need to be
modified to increase the level of licensee control, the Sprint PCS agreements
may be modified to cure any purported deficiency regarding licensee control of
the licensed spectrum.
PCS License Renewal
PCS licensees can renew their licenses for additional 10 year terms. PCS
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford PCS renewal applicants involved in comparative renewal hearings with a
"renewal expectancy." The
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renewal expectancy is the most important comparative factor in a comparative
renewal hearing and is applicable if the PCS renewal applicant has: (1)
provided "substantial service" during its license term; and (2) substantially
complied with all applicable laws and FCC rules and policies. The FCC's rules
define "substantial service" in this context as service that is sound,
favorable and substantially above the level of mediocre service that might
minimally warrant renewal.
Interconnection
The FCC has the authority to order interconnection between CMRS providers and
any other common carrier. The FCC has ordered local exchange carriers to
provide reciprocal compensation to CMRS providers for the termination of
traffic. Using these new rules, we will negotiate interconnection agreements
for the Sprint PCS network in our market area with all of the major regional
Bell operating companies, GTE and several smaller independent local exchange
carriers. Interconnection agreements are negotiated on a state-wide basis. If
an agreement cannot be reached, parties to interconnection negotiations can
submit outstanding disputes to state authorities for arbitration. Negotiated
interconnection agreements are subject to state approval.
Other FCC Requirements
In June 1996, the FCC adopted rules that prohibit broadband PCS providers
from unreasonably restricting or disallowing resale of their services or
unreasonably discriminating against resellers. Resale obligations will
automatically expire on November 24, 2002. The FCC is also considering whether
wireless providers should be required to offer unbundled communications
capacity to resellers who intend to operate their own switching facilities.
The FCC also adopted rules in June 1996 that require local exchange and most
CMRS carriers, to program their networks to allow customers to change service
providers without changing telephone numbers, which is referred to as service
provider number portability. The FCC requires most CMRS carriers to implement
wireless service provider number portability where requested in the top 100
metropolitan areas by November 24, 2002. Most CMRS carriers are required to
implement nationwide roaming by November 24, 2002 as well. The FCC currently
requires most CMRS providers to be able to deliver calls from their networks to
ported numbers anywhere in the country, and to contribute to the Local Number
Portability Fund.
The FCC has adopted rules permitting broadband PCS and other CMRS providers
to provide wireless local loop and other fixed services that would directly
compete with the wireline services of LECs. In June 1996, the FCC adopted rules
requiring broadband PCS and other CMRS providers to implement enhanced
emergency 911 capabilities within 18 months after the effective date of the
FCC's rules. In December 1997, the FCC revised these rules to extend the
compliance deadline for phase 1 until October 1, 1998 and for phase II until
October 1, 2001 for digital CMRS carriers to ensure access for customers using
devices for the hearing-impaired. The FCC recently extended the phase 1
compliance deadline to January 1, 1999. Further waivers of the enhanced
emergency 911 capability requirements may be obtained by individual carriers by
filing a waiver request.
On June 10, 1999, the FCC initiated a regulatory proceeding seeking comment
from the public on a number of issues related to competitive access to
multiple-tenant buildings, including the following:
. the FCC's tentative conclusion that the Communications Act of 1934, as
amended, requires utilities to permit telecommunications carriers access
to rooftop and other rights-of-way in
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multiple tenant buildings under just, reasonable and nondiscriminatory
rates, terms and conditions; and
. whether building owners that make access available to a
telecommunications carrier should be required to make access available to
all other telecommunications carriers on a nondiscriminatory basis, and
whether the FCC has the authority to impose such a requirement.
This proceeding could affect the availability and pricing of sites for our
antennae and those of our competitors.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act, enacted in 1994 to
preserve electronic surveillance capabilities authorized by Federal and state
law, requires telecommunications carriers to meet certain "assistance
capability requirements" by October 25, 1998. However, the FCC recently granted
a blanket extension of that deadline until June 30, 2000, because CALEA
compliant equipment is not yet available. CALEA provides that a
telecommunications carrier meeting industry CALEA standards shall have safe
harbor for purposes of compliance with CALEA. Toward the end of 1997
telecommunications industry standard-setting organizations agreed to a joint
standard to implement CALEA's capability requirements, known as J-STD-025.
Although we will be able to offer traditional electronic surveillance
capabilities to law enforcement, it, as well as the other participants in the
wireless industry, may not meet the requirements of J-STD-025 by June 30, 2000,
given hardware changes that are yet to be developed and implemented by switch
manufacturers.
In addition, the FCC is considering petitions from numerous parties to
establish and implement technical compliance standards pursuant to CALEA
requirements.
Other Federal Regulations
Wireless systems must comply with certain FCC and FAA regulations regarding
the siting, lighting and construction of transmitter towers and antennas. In
addition, certain FCC environmental regulations may cause certain cell site
locations to become subject to regulation under the National Environmental
Policy Act. The FCC is required to implement the Act by requiring carriers to
meet certain land use and radio frequency standards.
Review of Universal Service Requirements
The FCC and the states are required to establish a "universal service"
program to ensure that affordable, quality telecommunications services are
available to all Americans. Sprint PCS is required to contribute to the federal
universal service program as well as existing state programs. The FCC has
determined that the Sprint PCS' "contribution" to the federal universal service
program is a variable percentage of "end-user telecommunications revenues."
Although many states are likely to adopt a similar assessment methodology, the
states are free to calculate telecommunications service provider contributions
in any manner they choose as long as the process is not inconsistent with the
FCC's rules. At the present time it is not possible to predict the extent of
the Sprint PCS total federal and state universal service assessments or its
ability to recover from the universal service fund.
Partitioning; Disaggregation
The FCC has modified its rules to allow broadband PCS licensees to partition
their market areas and/or to disaggregate their assigned spectrum and to
transfer partial market areas or spectrum assignments to eligible third
parties.
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Wireless Facilities Siting
States and localities are not permitted to regulate the placement of wireless
facilities so as to "prohibit" the provision of wireless services or to
"discriminate" among providers of such services. In addition, so long as a
wireless system complies with the FCC's rules, states and localities are
prohibited from using radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. The FCC is
considering numerous requests for preemption of local actions affecting
wireless facilities siting.
Equal Access
Wireless providers are not required to provide equal access to common
carriers for toll services. However, the FCC is authorized to require unblocked
access to toll carriers subject to certain conditions.
State Regulation of Wireless Service
Section 332 of the Communications Act preempts states from regulating the
rates and entry of commercial mobile radio service providers. However, states
may petition the FCC to regulate such providers and the FCC may grant such
petition if the state demonstrates that (1) market conditions fail to protect
subscribers from unjust and unreasonable rates or rates that are unjustly or
unreasonably discriminatory, or (2) when commercial mobile radio service is a
replacement for landline telephone service within the state. To date, the FCC
has granted no such petition. To the extent we provide fixed wireless service,
we may be subject to additional state regulation.
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DESCRIPTION OF CAPITAL STOCK
General
The following summarizes all of the material terms and provisions of our
capital stock. We have 30,000,000 shares of authorized capital stock, including
25,000,000 shares of common stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share. As of September 27, 1999,
there were 3,382,518 shares of common stock and no shares of preferred stock
issued and outstanding.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have any
cumulative rights. Subject to the rights of the holders of any series of
preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available therefor. Holders of shares of common stock have no preemptive,
conversion, redemption, subscription or similar rights. If we liquidate,
dissolve or wind up, the holders of shares of common stock are entitled to
share ratably in the assets which are legally available for distribution, if
any, remaining after the payment or provision for the payment of all debts and
other liabilities and the payment and setting aside for payment of any
preferential amount due to the holders of shares of any series of preferred
stock.
Preferred Stock
Under our certificate of incorporation, the board of directors is authorized,
subject to certain limitations prescribed by law, without further stockholder
approval, from time to time to issue up to an aggregate of 5,000,000 shares of
preferred stock. The preferred stock may be issued in one or more series. Each
series may have different rights, preferences and designations and
qualifications, limitations and restrictions that may be established by our
board of directors without approval from the stockholders. These rights,
designations and preferences include:
. number of shares to be issued;
. dividend rights;
. dividend rates;
. right to convert the preferred shares into a different type of security;
. voting rights attributable to the preferred shares;
. right to set aside a certain amount of assets for payment relating to the
preferred shares; and
. prices to be paid upon redemption of the preferred shares or a bankruptcy
type event.
If our board of directors decides to issue any preferred stock, it could have
the effect of delaying or preventing another party from taking control of
AirGate. This is because the terms of the preferred stock would be designed to
make it prohibitively expensive for any unwanted third party to make a bid for
our shares. We have no present plans to issue any shares of preferred stock.
Warrants
Weiss Peck & Greer affiliated entities and Lucent hold warrants to purchase
shares of our common stock. The warrants held by Weiss Peck & Greer were issued
in consideration for financing provided to us by Weiss Peck & Greer. The terms
of these warrants are described in greater detail under "Certain Transactions"
and "Shares Eligible For Future Sale."
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The warrants issued to Lucent in consideration for the Lucent financing may
be exercised to purchase common stock in an amount equal to one percent of the
outstanding common stock, on a fully diluted basis, on the closing date of our
initial public offering. The exercise price of the warrants is 120% of the
initial public offering price of our common stock. The warrants expire on the
earlier of August 15, 2004 or August 15, 2001, if, as of such date, we have
paid in full all outstanding amounts under the Lucent financing and have
terminated the remaining unused portion of the commitments under the Lucent
financing.
As part of our units offering, we will be offering warrants to purchase an
aggregate of 644,400 shares of our common stock, or approximately 5% of the
issued and outstanding shares of our common stock on a fully diluted basis
assuming exercise of all outstanding warrants. The terms and conditions of the
warrants issued in the units offering are described in this prospectus under
"Description of Units--Warrants" and in the warrant agreement filed as an
exhibit to the registration statement of which this prospectus is a part.
Delaware Law and Certain Charter and By-Law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law (the "DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a certain period of time.
That period is three years after the date of the transaction in which the
person became an interested stockholder, unless the interested stockholder
attained that status with the approval of the board of directors or unless the
business combination is approved in a prescribed manner. A "business
combination" includes certain mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
his or her affiliates and associates, owns, or owned within three years prior,
15% or more of the corporation's voting stock.
Our certificate of incorporation and by-laws provide for the division of the
board of directors into three classes, as nearly equal in size as possible,
with each class beginning its three year term in a different year. See
"Management--Board of Directors." A director may be removed only for cause by
the affirmative vote of the holders of at least 80% of the voting power of all
of the then-outstanding shares of capital stock entitled to vote generally for
the election of directors voting together as a single class.
Our by-laws will also require a stockholder who intends to nominate a
candidate for election to the board of directors, or to raise new business at a
stockholder meeting to give at least 90 days advance notice to the Secretary.
The notice provision will require a stockholder who desires to raise new
business to provide us certain information concerning the nature of the new
business, the stockholder and the stockholder's interest in the business
matter. Similarly, a stockholder wishing to nominate any person for election as
a director will need to provide us with certain information concerning the
nominee and the proposing stockholder.
Our certificate of incorporation empowers our board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include:
. comparison of the proposed consideration to be received by stockholders
in relation to the then current market price of AirGate's capital stock,
the estimated current value of AirGate in
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a freely negotiated transaction and the estimated future value of AirGate
as an independent entity; and
. the impact of a transaction on our employees, suppliers and clients and
its effect on the communities in which we operate.
The provisions described above could make it more difficult for a third party
to acquire control of AirGate and, furthermore, could discourage a third party
from making any attempt to acquire control of AirGate.
Our certificate of incorporation provides that any action required or
permitted to be taken by the stockholders of AirGate may be taken only at a
duly called annual or special meeting of the stockholders, and that special
meetings may be called only by resolution adopted by a majority of the board of
directors, or as otherwise provided in the bylaws. These provisions could have
the effect of delaying until the next annual stockholders meeting stockholder
actions that are favored by the holders of a majority of the outstanding voting
securities. These provisions may also discourage another person or entity from
making an offer to stockholders for the common stock. This is because the
person or entity making the offer, even if it acquired a majority of the
outstanding voting securities of AirGate, would be unable to call a special
meeting of the stockholders and would further be unable to obtain unanimous
written consent of the stockholders. As a result, any meeting as to matters
they endorse, including the election of new directors or the approval of a
merger, would have to wait for the next duly called stockholders meeting.
The DGCL provides that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or by-laws, unless the corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage.
Our certificate of incorporation requires the affirmative vote of the holders
of at least 80% of the outstanding voting stock to amend or repeal any of the
provisions of the certificate of incorporation described above. The 80% vote is
also required to amend or repeal any of our by-law provisions described above.
The by-laws may also be amended or repealed by the board of directors. The 80%
stockholder vote would be in addition to any separate vote that each class of
preferred stock is entitled to that might in the future be required in
accordance with the terms of any preferred stock that might be outstanding at
the time any amendments are submitted to stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
Listing
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PCSA."
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DESCRIPTION OF UNITS
Each unit being offered by us will consist of $1,000 principal amount at
maturity of 13 1/2% senior subordinated discount notes due 2009 and one warrant
to purchase 2.148 shares of our common stock, par value $0.01 per share, at an
exercise price of $0.01 per share. The senior subordinated discount notes and
the warrants will not be separately transferable until the separation date,
which shall be the earliest to occur of:
. 180 days after the closing of the units offering;
. the occurrence of a change of control or an event of default on the senior
subordinated discount notes; and
. such date as Donaldson, Lufkin & Jenrette Securities Corporation in its
sole discretion shall determine.
Upon exercise, the holders of the warrants would be entitled, in the
aggregate, to purchase common stock representing approximately 5% of the issued
and outstanding shares of our common stock on a fully diluted basis, assuming
exercise of all outstanding warrants.
Senior Subordinated Discount Notes
Concurrently with this offering of our common stock, we are offering $300.0
million aggregate principal amount at maturity of 13 1/2% senior subordinated
discount notes maturing in 2009 and warrants in our units offering.
Accompanying each senior subordinated discount note is a warrant exercisable
for 2.148 shares of common stock at an exercise price of $0.01. The combination
of the senior subordinated discount note and warrant is a unit. See
"Description of Units--Warrants." No cash interest payments will be made on the
senior subordinated discount notes prior to April 1, 2005. The aggregate
accreted value of the senior subordinated discount notes will increase from
approximately $156.1 million at issuance at a rate of 13 1/2% per annum to a
final accreted value equal to their aggregate principal amount of $300.0
million on October 1, 2004. Accretion will be computed on a basis of a 360-day
year of twelve 30 day months, compounded semi-annually. Commencing April 1,
2005, cash interest will be payable to holders of the senior subordinated
discount notes at a rate of 13 1/2% per annum, semi-annually in arrears on each
April 1 and October 1. The cash interest, computed on a basis of a 360-day year
of twelve 30-day months, will accrue from the most recent interest payment date
or, if no interest has been paid or duly provided for, from October 1, 2004.
The senior subordinated discount notes are not subject to any sinking fund.
The senior subordinated discount notes will be guaranteed by our existing
subsidiary, AGW Leasing Company, Inc., and may be guaranteed by additional
subsidiaries of ours in the future. In addition, pursuant to a pledge
agreement, the senior subordinated discount notes will be secured by a
subordinated pledge of all of the capital stock of our future, directly owned
subsidiaries.
Holders of the senior subordinated discount notes will have the right to
require us to repurchase all or part of the senior subordinated discount notes
at a premium upon the occurrence of events constituting a change in control of
AirGate. Any such repurchases would be for cash at an aggregate price of 101%
of the accreted value of the senior subordinated discount notes to be
repurchased, if the repurchase were prior to October 1, 2004 or, if the
repurchase were on or after October 1, 2004, at an aggregate price of 101% of
the aggregate principal amount thereof plus accrued and unpaid
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interest thereon. Under the indenture governing the senior subordinated
discount notes, a change of control includes:
. sale or other disposition of substantially all of our and our
subsidiaries' assets;
. our adoption of a plan of liquidation or dissolution;
. consummation of a transaction in which a person becomes the beneficial
owner of more than 50% of our voting stock;
. continuing directors ceasing to comprise a majority of our board of
directors; and
. a merger or consolidation of AirGate in which our voting stock is
converted into or exchanged for cash, securities or other property,
unless our voting stock is converted into or exchanged for a majority of
the outstanding shares of one of the other parties to the merger or
consolidation.
We will have the right to redeem all or part of the senior subordinated
discount notes on or after October 1, 2004 at redemption prices beginning at
106.750% in 2004 and decreasing gradually to 100.000% in 2007 and thereafter,
in each case together with accrued and unpaid interest, if any. During the
first 36 months after the units offering, we may use the net proceeds from an
equity offering to redeem up to 35% of the accreted value of the senior
subordinated discount notes originally issued at a redemption price of 113.500%
of the accreted value, provided that at least 65% of the accreted value of the
senior subordinated discount notes originally issued remains outstanding
immediately after the redemption.
The indenture governing the senior subordinated discount notes will contain
covenants that, among other things, will limit our ability and the ability of
our subsidiary and future subsidiaries to:
. pay dividends, redeem capital stock or make other restricted payments or
investments;
. incur additional indebtedness or issue preferred stock;
. create liens on assets;
. merge, consolidate or dispose of assets;
. dispose of less than all of the equity in a wholly owned subsidiary;
. engage in any business other than PCS telecommunications and related or
ancillary businesses;
. enter into transactions with affiliates; and
. enter into sale and leaseback transactions.
Events of default under the senior subordinated discount notes include:
. default for 30 days in the payment when due of interest on the senior
subordinated discount notes;
. default in payment when due of the principal of or premium, if any, on
the senior subordinated discount notes;
. our failure, or the failure of any of our subsidiaries, to comply with
provisions of the senior subordinated discount notes indenture relating
to change of control and with limitations on asset sales;
. our failure, or the failure of any of our subsidiaries, to comply with
any other provisions of the indenture or the pledge agreement relating to
the senior subordinated discount notes;
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. our default, or default by any of our subsidiaries, with respect to other
debt of $5.0 million or more, which default either is caused by failure
to pay the principal or premium thereof or results in acceleration of the
other debt;
. our failure, or failure of any of our subsidiaries, to pay within 60 days
a final judgment exceeding $5.0 million;
. breach by us of any material representation or warranty or agreement in
the pledge agreement, repudiation by us of our obligations under the
pledge agreement, the unenforceability of the pledge agreement against us
for any reason, the failure of any lien purported to be created on the
collateral under the pledge agreement to be a valid and perfected lien
with the priority required under the pledge agreement, or assertion by us
that such lien is not valid or perfected or lacks such priority;
. a judicial determination rendering any of the guarantees unenforceable or
a guarantor's denial or disaffirmance of its obligations under the
guarantee;
. bankruptcy or insolvency of AirGate or any of our subsidiaries; and
. the occurrence of any event that causes, subject to any applicable grace
period, an event of termination under the Sprint PCS Agreements.
In the case of an event of default arising from certain events of bankruptcy
or insolvency, all outstanding senior subordinated discount notes would become
due and payable immediately. If any other event of default occurs and is
continuing, the trustee for the senior subordinated discount note holders or
the holders of at least 25% in accreted value or principal amount, as the case
may be, of the then outstanding senior subordinated discount notes may declare
the notes to be due and payable immediately.
Warrants
The warrants issued in the units offering will be issued pursuant to a
warrant agreement between AirGate and Bankers Trust Company, as the warrant
agent. We will file a copy of the warrant agreement as an exhibit to our
registration statement, which includes this prospectus.
At the completion of the units offering, the holders of the warrants will be
entitled, in the aggregate, to purchase 644,400 shares of our common stock,
representing approximately 5% of the issued and outstanding shares of our
common stock on a fully diluted basis, assuming exercise of all outstanding
warrants. Each warrant, when exercised, will entitle the holder to receive
fully paid and non-assessable shares of our common stock, at an exercise price
of $0.01 per share, subject to adjustment from time to time upon the occurrence
of the following:
(1) the payment by us of dividends and other distributions on our common
stock other than in our common stock;
(2) subdivision, combinations and reclassifications of our common stock;
(3) the issuance to all holders of common stock of such rights, options or
warrants entitling them to subscribe for our common stock or securities
convertible into, or exchangeable or exercisable for, our common stock
at a price which is less than the fair market value per share or our
common stock;
(4) certain distributions to all holders of our common stock or any of our
assets or debt securities or any rights or warrants to purchase any
such securities, excluding those rights and warrants referred to in
clause (3) above;
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(5) the issuance of shares of our common stock for consideration per share
less than the then fair market value per share of our common stock at
the time of issuance of such convertible or exchangeable security,
excluding securities issued in transactions referred to in clauses (1)
through (4) above, or (6) below;
(6) the issuance of securities convertible into or exchangeable for our
common stock for a conversion or exchange price plus consideration
received upon issuance less than the then fair market value per share
of our common stock at the time of issuance of such convertible or
exchangeable security, excluding securities issued in transactions
referred to in (1) through (4) above; and
(7) certain other events that could have the effect of depriving holders of
the warrants of the benefit of all or a portion of the purchase rights
evidenced by the warrants. No adjustment need be made for any of the
foregoing transactions if warrant holders are to participate in the
transaction on a basis and with notice that the board of directors is
determined to be fair and appropriate in light of the basis and notice
and on which other holders of the common stock participate in the
transaction.
The warrants will not be separately transferable until the separation date
which shall be the earliest to occur of:
. 180 days after the closing of the units offerings;
. the occurrence of a change of control or an event of default under the
senior subordinated discount notes; and
. such date as Donaldson, Lufkin & Jenrette Securities Corporation in its
sole discretion shall determine.
The shares of common stock underlying the warrants will not be initially
registered under the Securities Act. Until such time, if any, as a registration
statement with respect to resale of the warrant shares is declared effective,
the warrant shares will be subject to certain restrictions on transfer.
Pursuant to the terms of a warrant agreement, we will register the warrants
offered in the units offering through the filing of a shelf registration
statement with the SEC within 60 days of the date of the units prospectus. We
will use our best efforts to have the shelf registration statement declared
effective by the SEC within 120 days of the date of the units prospectus and
keep the shelf registration statement continuously effective, until the later
of the date on which (a) all of the warrants have been exercised or (b) the
warrants expire. Holders of warrants will be able to exercise their warrants
only if a registration statement relating to the common stock underlying the
warrants is then in effect, or the exercise of such warrants is exempt from the
registration requirements of the Securities Act, and such securities are
qualified for sale or exempt from qualification under securities laws of the
states in which the various holders of warrants or other persons to whom it is
proposed that underlying shares of common stock are to be issued on exercise of
the warrants reside.
The holders of the warrants will have no right to vote on matters submitted
to our stockholders and will have no right to receive dividends. The holders of
the warrants will not be entitled to share in our assets in the event of
liquidation, dissolution or the winding up of AirGate. In the event a
bankruptcy or reorganization is commenced by or against us, a bankruptcy court
may hold that unexercised warrants are executory contracts which may be subject
to rejection by us with approval of the bankruptcy court, and the holders of
the warrants may, even if sufficient funds are available, receive nothing or a
lesser amount as a result of any such bankruptcy case then they would be
entitled to if they had exercised their warrants prior to the commencement of
any such case.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect market prices of the common stock prevailing from time to
time. Furthermore, because only a limited number of shares will be available
for sale shortly after the consummation of our concurrent offerings due to
certain contractual and legal restrictions on resale, as described below, sales
of substantial amounts of common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price of the
common stock and our ability to raise equity capital in the future.
Upon completion of our concurrent offerings, we will have outstanding an
aggregate of 10,952,201 shares of common stock, assuming no exercise of the
underwriters' over-allotment option and based upon the number of shares
outstanding as of September 27, 1999. Of these shares, all of the shares sold
in the common stock offering will be freely tradeable without restriction or
further registration under the Securities Act, except that any shares purchased
by our affiliates may generally only be sold in compliance with the limitations
of Rule 144 described below.
Sales of Restricted Shares; Options
All of the shares of common stock sold in the common stock offering will be
freely tradeable under the Securities Act, unless purchased by our
"affiliates," as the Securities Act defines that term. In general, under Rule
144 as currently in effect, a person or persons whose shares are aggregated,
including an affiliate, who has beneficially owned restricted stock for at
least one year is entitled to sell, within any three-month period, a number of
such shares that does not exceed the greater of:
.one percent of the then outstanding shares of common stock, or
. the average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of such sale is filed.
In addition, under Rule 144(k), a person who is not an affiliate and has not
been an affiliate for at least three months prior to the sale and who has
beneficially owned shares of restricted stock for at least two years may resell
such shares without compliance with the foregoing requirements. In meeting the
one and two year holding periods described above, a holder of restricted stock
can include the holding periods of a prior owner who was not an affiliate.
Additional shares of common stock are available for future grants under our
stock option plan. See "Management--1999 Stock Option Plan." We intend to file
one or more registration statements on Form S-8 under the Securities Act to
register all shares of common stock subject to outstanding stock options and
common stock issuable pursuant to our stock option plans that do not qualify
for an exemption under Rule 701 from the registration requirements of the
Securities Act. We expect to file these registration statements as soon as
practicable following the closing of our concurrent offerings, and such
registration statements are expected to become effective upon filing. Shares
covered by these registration statements will thereupon be eligible for sale in
the public markets subject to the lock-up agreements, to the extent applicable.
Sales of Warrant Shares
All of the shares of common stock underlying the warrants issued in the units
offering will be freely tradeable under the Securities Act, unless purchased by
our affiliates as the Securities Act defines that term, no later than 180 days
after the closing of the units offering.
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Lock-up Agreements
We and all of our current stockholders, Lucent, members of our senior
management and our directors have agreed, pursuant to lock-up agreements that,
during the period beginning from the date of this prospectus and continuing and
including the date 180 days after the date of this prospectus, they will not,
directly or indirectly offer, pledge, sell, contract to sell, grant any option,
right or warrant to purchase, or otherwise dispose of any shares of common
stock, including but not limited to any common stock or securities convertible
into or exercisable or exchangeable for common stock which may be deemed to be
beneficially owned in accordance with the rules and regulations of the
Securities and Exchange Commission or enter into any swap or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
common stock, or make any demand for, or exercise and right with respect to,
the registration of common stock or any securities convertible into or
exercisable or exchangeable for common stock, without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation.
Following the 180 day lock-up period, 2,753,686 shares of common stock will
become eligible for sale, subject to compliance with Rule 144 of the Securities
Act as described above.
Registration Rights
At the completion of our common stock offering, Lucent and entities
affiliated with Weiss, Peck & Greer will hold warrants exercisable for an
aggregate of 343,273 shares of our common stock. Lucent and Weiss, Peck & Greer
entities will be entitled to several types of registration rights with respect
to the shares issuable upon exercise of the warrants as provided under the
terms of separate registration rights agreements. These agreements provide for
demand registration rights and, subject to a number of limitations, for
inclusion of the shares on future registration statements that we file.
Registration of shares of common stock pursuant to the registration rights
agreements will result in those shares becoming freely tradeable without
restriction under the Securities Act. We will bear registration expenses
incurred in connection with the above registrations except that, in some
circumstances, the parties seeking to register shares will bear the
registration expenses if the registration statement does not become effective
as a result of the withdrawal of the request for registration by the
stockholder that initiated the request.
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U.S. FEDERAL TAX CONSEQUENCES OF OUR COMMON STOCK TO
NON-U.S. HOLDERS
This is a general discussion of certain United States federal tax
consequences of the acquisition, ownership, and disposition of our common stock
by a holder that, for U.S. federal income tax purposes, is not a U.S. person as
we define that term below. A holder of our common stock who is not a U.S.
person is a non-U.S. holder. We assume in this discussion that you will hold
our common stock issued pursuant to the offering as a capital asset (generally,
property held for investment). We do not discuss all aspects of U.S. federal
taxation that may be important to you in light of your individual investment
circumstances, such as special tax rules that would apply to you, for example,
if you are a dealer in securities, financial institution, bank, insurance
company, tax-exempt organization, partnership or owner of more than 5% of our
common stock. Our discussion is based on current provisions of the Internal
Revenue Code of 1986, as amended, Treasury regulations, judicial opinions,
published positions of the U.S. Internal Revenue Service and other applicable
authorities, all as in effect on the date of this prospectus and all of which
are subject to differing interpretations or change, possibly with retroactive
effect. We have not sought, and will not seek, any ruling from the IRS with
respect to the tax consequences discussed in this prospectus, and there can be
no assurance that the IRS will not take a position contrary to the tax
consequences discussed below or that any position taken by the IRS would not be
sustained. We urge you to consult your tax advisor about the U.S. federal tax
consequences of acquiring, holding, and disposing of our common stock, as well
as any tax consequences that may arise under the laws of any foreign, state,
local, or other taxing jurisdiction.
For purposes of this discussion, a U.S. person means any one of the
following:
. a citizen or resident of the U.S.;
. a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of
the U.S.;
. an estate, the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
. a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust.
Dividends
Dividends paid to a non-U.S. holder will generally be subject to withholding
of U.S. federal income tax at the rate of 30%. If, however, the dividend is
effectively connected with the conduct of a trade or business in the U.S. by
the non-U.S. holder, the dividend will be subject to U.S. federal income tax
imposed on net income on the same basis that applies to U.S. persons generally,
and, for corporate holders under certain circumstances, the branch profits tax.
Non-U.S. holders should consult any applicable income tax treaties that may
provide for a reduction of, or exemption from withholding taxes. For purposes
of determining whether tax is to be withheld at a reduced rate as specified by
a treaty, we generally will presume that dividends we pay on or before
December 31, 2000, to an address in a foreign country are paid to a resident of
that country.
Under recently finalized U.S. Treasury Department regulations, which in
general apply to dividends that we pay after December 31, 2000, to obtain a
reduced rate of withholding under a
87
<PAGE>
treaty, a non-U.S. holder generally will be required to provide certification
as to that non-U.S. holder's entitlement to treaty benefits. These regulations
also provide special rules to determine whether, for purposes of applying a
treaty, dividends that we pay to a non-U.S. holder that is an entity should be
treated as paid to holders of interests in that entity.
Gain on Disposition
A non-U.S. holder will generally not be subject to United States federal
income tax, including by way of withholding, on gain recognized on a sale or
other disposition of our common stock unless any one of the following is true:
. the gain is effectively connected with the conduct of a trade or
business in the U.S. by the non-U.S. holder;
. the non-U.S. holder is a nonresident alien individual present in the
U.S. for 183 or more days in the taxable year of the disposition and
certain other requirements are met;
. the non-U.S. holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates; and
. we are or have been during certain periods a "United States real
property holding corporation" for U.S. federal income tax purposes.
If we are or have been a United States real property holding corporation, a
non-U.S. holder will generally not be subject to U.S. federal income tax on
gain recognized on a sale or other disposition of our common stock provided
that:
. the non-U.S. holder does not hold, and has not held during certain
periods, directly or indirectly, more than 5% of our outstanding common
stock; and
. our common stock is and continues to be traded on an established
securities market for U.S. federal income tax purposes.
We believe that our common stock will be traded on an established securities
market for this purpose in any quarter during which it is listed on the Nasdaq
National Market.
If we are or have been during certain periods a U.S. real property holding
corporation and the above exception does not apply, a non-U.S. holder will be
subject to U.S. federal income tax with respect to gain realized on any sale or
other disposition of our common stock as well as to a withholding tax,
generally at a rate of 10% of the proceeds. Any amount withheld pursuant to a
withholding tax will be creditable against a non-U.S. holder's U.S. federal
income tax liability.
Gain that is effectively connected with the conduct of a trade or business in
the U.S. by the non-U.S. holder will be subject to the U.S. federal income tax
imposed on net income on the same basis that applies to U.S. persons generally,
and, for corporate holders under certain circumstances, the branch profits tax,
but will generally not be subject to withholding. Non-U.S. holders should
consult any applicable income tax treaties that may provide for different
rules.
United States Federal Estate Taxes
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S., as specially defined for U.S. federal
estate tax purposes, on the date of that
88
<PAGE>
person's death will be included in his or her estate for U.S. federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
Generally, we must report annually to the IRS and to each non-U.S. holder the
amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the non-U.S. holder resides.
Under current U.S. Treasury Department regulations, U.S. information
reporting requirements and backup withholding tax will generally not apply to
dividends that we pay on our common stock to a non-U.S. holder at an address
outside the U.S. Payments of the proceeds of a sale or other taxable
disposition of our common stock by a U.S. office of a broker are subject to
both backup withholding at a rate of 31% and information reporting, unless the
holder certifies as to its non-U.S. holder status under penalties of perjury or
otherwise establishes an exemption. Information reporting requirements, but not
backup withholding tax, will also apply to payments of the proceeds of a sale
or other taxable disposition of our common stock by foreign offices of U.S.
brokers or foreign brokers with certain types of relationships to the U.S.,
unless the broker has documentary evidence in its records that the holder is a
non-U.S. holder and certain other conditions are met or the holder otherwise
established an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
non-U.S. holder's U.S. federal income tax liability if certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding the
withholding and information reporting rules discussed above. In general, those
regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
89
<PAGE>
UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement covering the common stock to be offered in this offering. Donaldson,
Lufkin & Jenrette Securities Corporation, Credit Suisse First Boston
Corporation and The Robinson-Humphrey Company, LLC are acting as
representatives of the underwriters. Each underwriter has agreed to purchase
the number of shares of common stock set forth opposite its name in the
following table.
<TABLE>
<CAPTION>
Underwriters: Number of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........ 2,586,250
Credit Suisse First Boston Corporation..................... 1,293,125
The Robinson-Humphrey Company, LLC......................... 1,293,125
ABN AMRO Rothschild........................................ 65,000
Banc of America Securities LLC............................. 65,000
Bear, Stearns & Co. Inc.................................... 65,000
CIBC World Markets Corp.................................... 65,000
Credit Lyonnais Securities (USA) Inc....................... 65,000
Deutsche Bank Securities................................... 65,000
A.G. Edwards & Sons, Inc................................... 65,000
ING Barings................................................ 65,000
Lehman Brothers Inc........................................ 65,000
Merrill Lynch & Co......................................... 65,000
J.P. Morgan Securities Inc................................. 65,000
PaineWebber Incorporated................................... 65,000
Salomon Smith Barney....................................... 65,000
SG Cowen................................................... 65,000
SoundView Technology Group, Inc............................ 65,000
Warburg Dillon Read LLC.................................... 65,000
William Blair & Company.................................... 32,500
First Union Capital Markets Corp........................... 32,500
Gabelli & Company, Inc..................................... 32,500
Gerard Klauer Mattison & Co., LLC.......................... 32,500
Hoak Breedlove Wesneski & Co............................... 32,500
Wachovia Securities, Inc................................... 32,500
Lebenthal & Co., Inc....................................... 32,500
McDonald Investments Inc................................... 32,500
Morgan Keegan & Company, Incorporated...................... 32,500
Parker/Hunter Incorporated................................. 32,500
Pennsylvania Merchant Group................................ 32,500
Raymond James & Associates, Inc............................ 32,500
Sanders Morris Mundy....................................... 32,500
Sands Brothers & Co., Ltd.................................. 32,500
Wedbush Morgan Securities.................................. 32,500
---------
Total.................................................... 6,700,000
=========
</TABLE>
The underwriting agreement provides that if the underwriters take any of the
shares set forth in the table above, then they must take all of these shares.
No underwriter is obligated to take any shares allocated to a defaulting
underwriter except under limited circumstances.
The underwriters are offering the shares of common stock, subject to the
prior sale of such shares, and when, as and if such shares are delivered to and
accepted by them. The underwriters will
90
<PAGE>
initially offer to sell shares to the public at the initial public offering
price set forth on the cover page of this prospectus. The underwriters may also
sell shares to securities dealers at a discount of up to $0.71 per share from
the initial public offering price. Any such securities dealers may resell
shares to certain other brokers or dealers at a further discount of up to $0.10
per share. After the initial public offering, the underwriters may change the
public offering price and other selling terms. The underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have the option to buy up to an additional
1,005,000 shares of common stock from AirGate to cover such sales. They may
exercise this option during the 30-day period from the date of this prospectus.
If any shares are purchased with this option, the underwriters will purchase
shares in approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions that AirGate will pay to the underwriters. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by AirGate
-------------------------
No exercise Full exercise
<S> <C> <C>
Per share......................................... $ 1.19 $ 1.19
---------- ----------
Total........................................... $7,973,000 $9,168,950
========== ==========
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be $1.0 million.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
At our request, the underwriters have reserved shares of common stock for
sale at the initial public offering price to directors, officers, employees and
retirees of AirGate who have expressed an interest in participating in the
offering. We expect these persons to purchase no more than 5% of the common
stock offered in the offering. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. The underwriters will offer unpurchased reserved shares to the
general public on the same basis as the other offered shares.
We and all of our current stockholders, Lucent, members of senior management
and directors have agreed that, for a period of 180 days from the date of this
prospectus, we will not, without the prior written consent of Donaldson, Lufkin
& Jenrette Securities Corporation, do either of the following:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
In addition, during such period, except for the registration of shares
underlying options in our stock option plan and the shelf registration
statement for shares underlying warrants issued in the units offering, we have
also agreed not to file any registration statement with respect to, and each of
our executive officers and directors and several of our stockholders have
agreed not to make any
91
<PAGE>
demand for, or exercise any right with respect to, the registration of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise. Further, the shares of common
stock underlying the warrants issued in the units offering will become freely
tradeable no later than 180 days after the closing of the units offering.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PCSA." In order to meet the requirements for listing
the common stock on the Nasdaq National Market, the underwriters have
undertaken to sell lots of 100 to a minimum of 400 beneficial owners.
Other than in the United States, no action has been taken by AirGate or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. This prospectus is not an offer to sell or a solicitation of an
offer to buy any shares of common stock included in this offering in any
jurisdiction where that would not be permitted or legal.
We expect that delivery of the shares will be made to investors on or about
September 30, 1999.
The underwriters may purchase and sell shares of common stock in the open
market in connection with this offering. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or slowing a decline in the market price of the common
stock while the offering is in progress. The underwriters may also impose a
penalty bid, which means that an underwriter must repay to the other
underwriters a portion of the underwriting discount received by it. An
underwriter may be subject to a penalty bid if the representatives of the
underwriters, while engaging in stabilizing or short covering transactions,
repurchase shares sold by or for the account of that underwriter. These
activities may stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that otherwise might exist in the open market. If the underwriters
commence these activities, they may discontinue them at any time. The
underwriters may carry out these transactions on the Nasdaq National Market, in
the over-the-counter market or otherwise.
Donaldson, Lufkin & Jenrette Securities Corporation and Credit Suisse First
Boston Corporation are also acting as underwriters under our concurrent
offering of units, for which they will receive underwriting discounts and
commissions customary for performing such services. In addition, Donaldson,
Lufkin & Jenrette Securities Corporation served as our financial advisor in the
negotiation of our financing with Lucent, for which Donaldson, Lufkin &
Jenrette Securities Corporation is entitled to receive fees customary for
performing such services.
92
<PAGE>
Pricing of this Offering
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock was
determined by negotiation among us and the representatives of the underwriters.
Among the factors considered in determining the public offering price were:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalization and stages of development of other companies
which the representatives of the underwriters believe to be comparable to
us; and
. estimates of our business potential.
93
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of common
stock offered hereby will be passed upon for AirGate by Patton Boggs LLP,
Washington D.C. and for the underwriters by Skadden, Arps, Slate, Meagher &
Flom (Illinois), Chicago, Illinois.
EXPERTS
The consolidated financial statements of AirGate PCS, Inc. and subsidiaries
and predecessors as of December 31, 1998 and 1997, and for each of the years in
the three-year period ended December 31, 1998 and for the period from
inception, June 15, 1995, to December 31, 1998, have been included herein and
in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG LLP contains an explanatory paragraph that states that AirGate has
incurred recurring losses from operations and has a working capital and an
accumulated deficit that raise substantial doubt about its ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to our concurrent offerings of common stock
and units, consisting of senior subordinated discount notes and warrants. This
prospectus does not contain all of the information set forth in the
registration statement. For further information about us and our securities,
see the registration statement and its exhibits. This prospectus contains a
description of the material terms and features of all material contracts,
reports or exhibits to the registration statement required to be disclosed.
However, as the descriptions are summaries of the contracts, reports or
exhibits, we urge you to refer to the copy of each material contract, report
and exhibit attached to the registration statement. Copies of the registration
statement, including exhibits, may be examined without charge in the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W. Room 1024, Washington, DC 20549, and the Securities and Exchange
Commission's Regional Offices located at 500 West Madison Street, Suite 1400,
Chicago, IL 60601, and 7 World Trade Center, 13th Floor, New York, NY 10048 or
on the Internet at http://www.sec.gov. You can get information about the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0300. Copies of all or a portion of the registration
statement can be obtained from the Public Reference Section of the Securities
and Exchange Commission upon payment of prescribed fees.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will be
required to file periodic reports, proxy statements and other information with
the Securities and Exchange Commission.
94
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(A Development Stage Enterprise)
<TABLE>
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996 and for the period from inception, June 15, 1995, to
December 31, 1998....................................................... F-4
Consolidated Statements of Stockholder's Deficit for the years ended
December 31, 1998, 1997 and 1996 and for the period from inception, June
15, 1995, to December 31, 1998.......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996 and for the period from inception, June 15, 1995, to
December 31, 1998....................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Consolidated Balance Sheet as of June 30, 1999................. F-20
Unaudited Consolidated Statements of Operations for the six-month periods
ended June 30, 1999 and 1998............................................ F-21
Unaudited Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 1999 and 1998............................................ F-22
Notes to Unaudited Consolidated Financial Statements..................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AirGate PCS, Inc.:
We have audited the accompanying consolidated balance sheets of AirGate PCS,
Inc. and subsidiaries and predecessors (a development stage enterprise) as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholder's deficit, and cash flows for each of the years in the
three-year period ended December 31, 1998 and for the period from inception,
June 15, 1995, to December 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AirGate
PCS, Inc. and subsidiaries and predecessors (a development stage enterprise) as
of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1998 and for the period from inception, June 15, 1995, to December 31, 1998 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that AirGate PCS, Inc. and subsidiaries and predecessors (a
development stage enterprise) will continue as a going concern. As discussed in
note 2 to the consolidated financial statements, AirGate PCS, Inc. and
subsidiaries and predecessors have incurred recurring losses from operations
and have a working capital and an accumulated deficit that raise substantial
doubt about their ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
April 28, 1999, except for notes 13(g) 13(h), 13(i) and 13(j) which are as of
July 9, July 28, September 15, and September 27, 1999, respectively
Atlanta, Georgia
F-2
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 2,295,614 $ 146,939
Due from AirGate Wireless, LLC (note 6)........... 378,260 --
Prepaid expenses.................................. 100,333 4,713
------------ -----------
Total current assets............................ 2,774,207 151,652
FCC licenses, net (note 5).......................... -- 13,702,577
Property and equipment, net (note 4)................ 12,545,365 16,967
Other assets........................................ 130,915 --
------------ -----------
$ 15,450,487 $13,871,196
============ ===========
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable.................................. $ 1,449,255 $ 37,883
Accrued interest.................................. 686,707 573,746
Notes payable (note 7(a))......................... 6,000,000 2,800,000
Notes payable to affiliates (note 7(b))........... 4,965,000 465,000
Current maturities of long-term debt (note 7(c)).. 3,380,523 --
------------ -----------
Total current liabilities....................... 16,481,485 3,876,629
Long-term debt, excluding current maturities (note
7(c)).............................................. 4,319,477 11,745,066
------------ -----------
Total liabilities............................... 20,800,962 15,621,695
------------ -----------
Stockholder's deficit (notes 8, 9 and 13):
Preferred stock, par value $.01 per share;
5,000,000 shares authorized; no shares issued and
outstanding...................................... -- --
Common stock, par value $.01 per share; 25,000,000
shares authorized; 3,382,518 shares issued and
outstanding at December 31, 1998 ................ 33,825 --
Additional paid-in capital........................ 6,270,120 4,711,429
Deficit accumulated during the development stage.. (11,654,420) (6,461,928)
------------ -----------
Total stockholder's deficit..................... (5,350,475) (1,750,499)
------------ -----------
Commitments and contingencies (notes 7, 8, 11 and
13)
Total liabilities and stockholder's deficit..... $ 15,450,487 $13,871,196
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception,
Years Ended December 31, June 15, 1995,
------------------------------------- to December 31,
1998 1997 1996 1998
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Operating expenses:
General and
administrative
expenses.............. $(2,596,534) $(1,101,054) $(1,252,027) $ (6,407,615)
Depreciation and
amortization.......... (1,203,945) (997,761) (18,965) (2,238,671)
----------- ----------- ----------- ------------
Operating loss...... (3,800,479) (2,098,815) (1,270,992) (8,646,286)
Interest expense........ (1,392,013) (817,164) (582,349) (3,008,134)
----------- ----------- ----------- ------------
Net loss............ $(5,192,492) $(2,915,979) $(1,853,341) $(11,654,420)
=========== =========== =========== ============
Basic and diluted net
loss per share of
common stock........... $ (1.54) $ (0.86) $ (0.55)
=========== =========== ===========
Weighted average common
shares outstanding..... $ 3,382,518 $ 3,382,518 $ 3,382,518
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997, and 1996 and the period
from inception,
June 15, 1995, to December 31, 1998
-----------------------------------------------------------------
Deficit
accumulated
Common stock Additional during the Total
----------------------- paid-in development stockholder's
Shares Amount capital stage deficit
---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at June 15, 1995
(inception)............ -- $ -- $ -- $ -- $ --
Loan conversions (note
9(b)).................. -- -- 420,119 -- 420,119
Net loss................ -- -- -- (1,692,608) (1,692,608)
---------- ---------- ---------- ------------ -----------
Balance at December 31,
1995................... -- -- 420,119 (1,692,608) (1,272,489)
Loan conversions (note
9(b)).................. -- -- 100,710 -- 100,710
Net loss................ -- -- -- (1,853,341) (1,853,341)
---------- ---------- ---------- ------------ -----------
Balance at December 31,
1996................... -- -- 520,829 (3,545,949) (3,025,120)
Loan conversions (note
9(b)).................. -- -- 4,683,544 -- 4,683,544
Cash distribution (note
9(c)).................. -- -- (492,944) -- (492,944)
Net loss................ -- -- -- (2,915,979) (2,915,979)
---------- ---------- ---------- ------------ -----------
Balance at December 31,
1997................... -- -- 4,711,429 (6,461,928) (1,750,499)
Formation of AirGate
PCS, Inc. (note 1(a)).. 3,382,518 33,825 (33,825) -- --
Distribution of AirGate
Wireless, LLC (note
9(a)).................. -- -- 1,592,516 -- 1,592,516
Net loss................ -- -- -- (5,192,492) (5,192,492)
---------- ---------- ---------- ------------ -----------
Balance at December 31,
1998................... 3,382,518 $ 33,825 $6,270,120 $(11,654,420) $(5,350,475)
========== ========== ========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Years ended December 31, Inception,
--------------------------------------- June 15, 1995,
1998 1997 1996 to December 31, 1998
------------ ----------- ------------ --------------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $ (5,192,492) $(2,915,979) $ (1,853,341) $(11,654,420)
Adjustments to reconcile
net loss to net cash
(used in) provided by
operating activities:
Depreciation and
amortization......... 1,203,945 997,761 18,965 2,238,671
(Increase) decrease
in:
Due from AirGate
Wireless, LLC...... (378,260) -- -- (378,260)
FCC deposit......... -- -- 20,000,000 --
Prepaid expenses.... (95,620) (4,713) -- (100,333)
Other assets........ (130,915) 2,086,869 1,039,752 2,216,461
Increase (decrease)
in:
Accounts payable.... 1,411,372 18,495 (95,596) 1,436,445
Accrued interest.... 1,006,577 587,449 640,636 2,443,779
------------ ----------- ------------ ------------
Net cash (used in)
provided by
operating
activities....... (2,175,393) 769,882 19,750,416 (3,797,657)
------------ ----------- ------------ ------------
Cash flows from
investing activities:
Capital expenditures.. (5,175,932) -- -- (5,237,399)
Purchase of FCC
licenses............. -- (2,936,267) -- (2,936,267)
------------ ----------- ------------ ------------
Net cash used in
investing
activities....... (5,175,932) (2,936,267) -- (8,173,666)
------------ ----------- ------------ ------------
Cash flows from
financing activities:
Proceeds from notes
payable.............. 5,000,000 2,800,000 -- 7,800,000
Proceeds from notes
payable to
affiliates........... 5,200,000 -- -- 25,620,119
Payments on notes
payable to
affiliates........... (700,000) -- (20,000,000) (20,700,000)
Cash distribution..... -- (492,944) -- (492,944)
------------ ----------- ------------ ------------
Net cash provided
by (used in)
financing
activities....... 9,500,000 2,307,056 (20,000,000) 12,227,175
------------ ----------- ------------ ------------
Net increase
(decrease) in
cash and cash
equivalents...... 2,148,675 140,671 (249,584) 255,852
Cash and cash
equivalents at
beginning of period.... 146,939 6,268 255,852 --
------------ ----------- ------------ ------------
Cash and cash
equivalents at end of
period................. $ 2,295,614 $ 146,939 $ 6,268 $ 255,852
============ =========== ============ ============
Supplemental disclosure
of cash flow
information--cash paid
for interest........... $ 1,279,052 $ 930,125 $ -- $ --
============ =========== ============ ============
Supplemental disclosure
of noncash investing
and financing
activities:
Assets acquired through
assumption of debt:
FCC licenses.......... $ -- $11,745,066 $ -- $ --
Site acquisition and
engineering costs.... 7,700,000 -- -- --
Notes payable and
accrued interest
converted to equity.. -- (4,683,544) (100,710) (420,119)
============ =========== ============ ============
Distribution of AirGate
Wireless, LLC:
Accrued interest...... $ (893,616) $ -- $ -- $ --
Long-term debt........ (11,745,066) -- -- --
FCC licenses, net..... 12,846,166 -- -- --
Line of credit........ (1,800,000) -- -- --
============ =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
(1) Business, Basis of Presentation and Summary of Significant Accounting
Policies
(a) Business and Basis of Presentation
AirGate PCS, Inc. and subsidiaries and predecessors (collectively, the
"Company") were formed for the purpose of becoming a leading provider of
wireless Personal Communication Services (PCS). AirGate PCS, Inc. was formed in
August 1998 to become a provider of PCS services exclusively licensed to use
the Sprint PCS brand name in 21 markets located in the southeastern United
States. The consolidated financial statements included herein include the
accounts of AirGate PCS, Inc., formed August 1998, and its wholly owned
subsidiaries (AirGate Wireless, Inc., formed October 1998, and AGW Leasing
Company, Inc., formed December 1998) from their formation in August 1998 and
their predecessor entities (AirGate, LLC, formed July 1995, AirGate Wireless,
LLC, formed June 1996, and AirLink II, LLC, formed July 1995), for all periods
presented, except that AirGate Wireless, LLC has been excluded effective August
4, 1998 as described below. AirGate, LLC is the parent, and owns 100% of the
outstanding common stock of AirGate PCS, Inc. The financial position and
results of operations of these predecessor entities have been included because
of common ownership and management. All significant intercompany accounts and
transactions have been eliminated in consolidation.
From inception through August 1998, the predecessor entities' operating
activities focused on developing a PCS business in the southeastern United
States. These activities included the purchase of four Federal Communications
Commission ("FCC") PCS licenses. In July 1998, the Company decided to pursue a
different PCS business opportunity and signed a series of agreements with
SprintCom, Inc. (the "Sprint Agreements") to build, construct and manage a PCS
network that will support the offering of Sprint PCS services. To date, the
Company has not paid any consideration for the use of the Sprint PCS licenses.
As a result of this change in business strategy, AirGate Wireless, LLC, which
consists solely of the FCC licenses and related liabilities, was not
transferred to its successor entity, AirGate PCS, Inc. by AirGate, LLC because
its asset and liabilities will not be included in the continuing operations of
the Company.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, increasing competition and the cost associated with the
build-out of a PCS network. The Company's continuing operations are dependent
upon Sprint's ability to perform is obligations under the Sprint Agreements and
the ability of the Company to raise sufficient capital to fund operating
losses, to meet debt service requirements, and to complete the build-out of the
PCS network. Additionally, the Company's ability to attract and maintain a
sufficient customer base is critical to achieving breakeven cash flow. Changes
in technology, increased competition, or the inability to obtain required
financing, among other factors, could have an adverse effect on the Company's
financial position and results of operations.
(b) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents includes amounts on deposit with
commercial banks including a money market account.
F-7
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(c) FCC Licenses
FCC licenses are stated at cost less accumulated amortization. Amortization
is provided using the straight-line method over the estimated useful lives of
ten years.
(d) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Capitalized interest on construction
activity during 1998 was not material. Asset lives are as follows:
<TABLE>
<CAPTION>
Asset Useful life
----- -----------
<S> <C>
Site acquisition and engineering costs........................ 10 years
Computer equipment............................................ 3 years
Furniture, fixtures, and office equipment..................... 5 years
</TABLE>
(e) Income Taxes
Prior to the formation of AirGate PCS, Inc. in August 1998, the predecessors
of AirGate PCS, Inc. were operated as limited liability companies. As a result,
income taxes were passed through to and were the responsibility of the
stockholders of the predecessors.
The Company uses the asset and liability method of accounting for income
taxes. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and net operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date.
The Company has not provided any pro forma income tax information for periods
prior to August 1998 because such information would not be significant to the
accompanying consolidated financial statements.
(f) Net Loss Per Share
The Company has presented net loss per common share pursuant to SFAS No. 128,
"Earnings per Share." Basic net loss per share of common stock is computed by
dividing net loss by the weighted average number of common shares outstanding.
Diluted net loss per share has not been presented separately, as the potential
common shares are anti-dilutive for each of the periods presented.
(g) Revenue Recognition
The Company will recognize revenue as services are performed. An affiliation
fee of 8% will be withheld by Sprint on collected service revenues and recorded
as an operating expense. Revenues generated from the sale of handsets and
accessories and from roaming services provided to customers traveling onto our
PCS network are not subject to the 8% affiliation fee.
F-8
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(h) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(i) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities at the dates of the consolidated balance sheets and
expenses during the reporting periods to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(j) Start-Up Activities
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities." This statement became effective January 1, 1999
and requires that costs of start-up activities and organization costs be
expensed as incurred. The Company has expensed all costs of start-up activities
and organization costs. The adoption of this statement will not have an effect
on the Company's financial position or results of operations.
(2) Liquidity
Since inception, the Company has been engaged in preparing business plans,
raising capital and planning and designing the build-out of its PCS network. As
a result, the Company has not generated any revenues and losses from inception
through December 31, 1998 have amounted to $11,654,420.
Despite these negative cash flows, the Company has been able to secure
financing from a variety of sources to support its development to date. These
sources have included both equity and debt financing.
Significant amounts of additional financing will be required to build-out the
PCS network and commence commercial operations. Based on the Company's current
business plan, it is estimated that more than $347 million will be required to
fund capital expenditures, principal payments on short and long-term debt, and
losses from operations until the Company reaches breakeven cash flow.
While there is no assurance that funding will be available to execute these
plans, the Company is actively seeking financing and is exploring a number of
alternatives in this regard.
F-9
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(3) Development Stage Enterprise
AirGate, LLC, the first predecessor entity of the Company, was established on
June 15, 1995 (inception). The Company has devoted most of its efforts to date
to activities such as preparing business plans, raising capital, and planning
the build-out of its PCS network. From inception through December 31, 1998, the
Company has not generated any revenues and has incurred expenses of
$11,654,420, resulting in an accumulated deficit during the development stage
of $11,654,420 as of December 31, 1998.
(4) Property and Equipment
Property and equipment consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Site acquisition and engineering costs............ $12,838,340 $ --
Computer equipment................................ 74,487 48,404
Furniture, fixtures, and office equipment......... 24,572 13,063
----------- -----------
Total property and equipment.................... 12,937,399 61,467
Less accumulated depreciation and amortization.... 392,034 44,500
----------- -----------
Property and equipment, net..................... $12,545,365 $ 16,967
=========== ===========
</TABLE>
Site acquisition and engineering costs consists of construction costs, switch
site improvements, RF engineering services, and site acquisitions and
engineering costs incurred related to the network design and build-out.
(5) FCC Licenses, Net
In April 1997, the Company participated in the FCC's auction of certain PCS
licenses. In connection with this auction, AirGate Wireless, LLC, a predecessor
to AirGate PCS, Inc., acquired four F Block PCS licenses for $14,681,333
consisting of $2,936,267 in cash and installment plan notes payable to the FCC
of $11,745,066. These FCC licenses are being amortized using the straight-line
method over an estimated useful life of 10 years. In July 1998, the Company
decided to pursue a different PCS business opportunity. As a result, upon
formation of AirGate PCS, Inc. in August 1998, AirGate Wireless, LLC, which
consists solely of the FCC licenses and related liabilities has been removed
from the consolidated financial statements because its assets and liabilities
were not transferred to AirGate PCS, Inc. and will not be included in the
continuing operations of the Company. FCC licenses consist of the following at
December 31, 1997:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
FCC licenses.................................................. $14,681,333
Less accumulated amortization................................. 978,756
-----------
FCC licenses, net........................................... $13,702,577
===========
</TABLE>
F-10
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(6) Due From AirGate Wireless, LLC
AirGate Wireless, LLC, a predecessor entity, which consists solely of the FCC
Licenses and related liabilities, was not transferred to AirGate PCS, Inc., its
successor entity, because its assets and liabilities will not be included in
the continuing operations of the Company. The Company made interest payments
totaling $378,260 during 1998 related to these liabilities on behalf of AirGate
Wireless, LLC. The Company has established an amount due from AirGate Wireless,
LLC which is expected to be paid with proceeds from the sale of the FCC
licenses by AirGate Wireless, LLC.
(7) Notes Payable and Long-Term Debt
(a) Notes Payable consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Note payable to bank under revolving line of
credit facility; interest at prime plus 1% due
monthly (10.25% at December 31, 1997); matures on
May 1, 1999; guaranteed by affiliates (note
9(a))............................................ $ -- $ 1,800,000
Note payable to bank; interest at prime plus .5%
due monthly (8.25% and 9.75% at December 31, 1998
and 1997, respectively); principal due in a
single payment on May 9, 1999; guaranteed by
affiliates (see note 13(f))...................... 1,000,000 1,000,000
Secured promissory note, dated November 25, 1998,
interest at 9.5%; interest and principal due at
the earlier of: (1) the first drawdown on the
vendor equipment financing or (2) June 30, 1999.. 5,000,000 --
----------- -----------
$ 6,000,000 $ 2,800,000
=========== ===========
</TABLE>
In November 1998, an equipment vendor loaned $5 million to the Company under
a secured promissory note. The proceeds of the loan are intended to finance the
purchase of products and services from the vendor and to satisfy short-term
working capital needs of the Company, approved by the vendor consisting of
engineering, network construction, switch site improvements, network equipment
and collocation expenses. The $5 million secured promissory note payable to the
vendor is secured by all assets of the Company.
Additionally, the Company entered into a secured equipment loan note for $10
million with the equipment vendor which may be used solely to finance the
purchase of its products and services. At December 31, 1998, no amounts were
outstanding related to the equipment loan note.
F-11
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(b) Notes Payable to Affiliates consist of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Notes payable to affiliates dated June 11, 1996;
interest at 8%; payable based upon the occurrence
of an equity financing or June 11, 1999 (see note
13(h)) .......................................... $ 150,000 $ 150,000
Notes payable to affiliates dated June 11, 1996;
interest at 8%; due and payable at maturity;
matures in conjunction with a merger or sale of
the Company or June 11, 1999..................... -- 135,000
Note payable to an affiliate dated September 27,
1996; interest at 8%; due and payable at
maturity; payable or convertible on August 8,
1998............................................. -- 180,000
Convertible promissory notes payable to affiliates
dated August 8, 1998; interest at 8%; principal
and interest due on September 18, 1999 (see notes
9(d) and 13(d)).................................. 4,815,000 --
----------- -----------
$ 4,965,000 $ 465,000
=========== ===========
</TABLE>
The convertible promissory notes payable to affiliates have a face value of
$4,815,000 at December 31, 1998 and mature at September 18, 1999, unless
converted earlier. The notes are convertible into preferred or common stock at
any time at the option of the holder and automatically convert upon the closing
of the first equity financing in which AirGate PCS, Inc. sells shares of its
equity securities for an aggregate consideration of at least $70,000,000 and at
a premoney valuation of AirGate PCS, Inc. of at least $50,000,000 (see note
13(d)).
In March and April 1999, the Company received an additional $1.5 million of
short-term financing in the form of convertible notes from affiliates. All
notes bear interest at 8%, are payable upon demand and automatically convert
into shares of common stock at a 48% discount upon the Initial Public Offering
of AirGate PCS, Inc.
(c) Long-Term Debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
FCC installment plan notes dated April 28, 1997;
interest payments at 6.25% due in eight equal
quarterly payments beginning July 31, 1998 and
ending April 30, 2000; principal and interest
payments of $469,207 are due quarterly beginning
July 28, 1999 until January 28, 2007............ $ -- $11,745,066
Unsecured promissory note dated July 22, 1998;
interest at 14%; principal and interest payments
of $1,120,170 due quarterly commencing March 1,
1999 and ending December 1, 2000 (see note
13(e)).......................................... 7,700,000 --
----------- -----------
Total long-term debt........................... 7,700,000 11,745,066
Less current maturities.......................... 3,380,523 --
----------- -----------
Long-term debt, excluding current maturities... $ 4,319,477 $11,745,066
=========== ===========
</TABLE>
F-12
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
As of December 31, 1998, management believes the Company is in compliance
with all outstanding debt covenants. Failure of the Company to obtain
additional financing during 1999 on a timely basis could result in the
inability of the Company to meet its future debt service requirements.
Aggregate minimum annual principal payments due on long-term debt for the
next two years at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending
December 31,
------------
<S> <C>
1999........................................................... $3,380,523
2000........................................................... 4,319,477
----------
Total long-term debt......................................... $7,700,000
==========
</TABLE>
(8) Commitments
(a) Lease Commitments
The Company is obligated under noncancelable operating lease agreements for
office space and cell sites. Future minimum annual lease payments under these
noncancelable operating lease agreements for the next five years and in the
aggregate are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1999.......................................................... $ 594,736
2000.......................................................... 641,622
2001.......................................................... 612,217
2002.......................................................... 465,345
2003.......................................................... 365,422
Thereafter.................................................... 548,346
----------
Total future minimum annual lease payments.................. $3,227,688
==========
</TABLE>
The Company made lease payments to a related party for office space. A
written lease agreement does not exist; however, the payments are $6,000 per
month and $60,000 was paid to this related party for the year ended December
31, 1998. The Company believes that the terms of this related party lease
arrangement are comparable to terms that the Company could have obtained with
an unrelated third party.
Rental expense for all operating leases was $292,842, $44,134, and $24,291
for the years ended December 31, 1998, 1997, and 1996, respectively.
The Company has entered into a Master Site Lease Agreement with BellSouth
Personal Communications, Inc. whereby the Company has the right to lease tower
space for the Company's communications and network equipment. The Company paid
$100,000 in August 1998 to BellSouth for reimbursement of preparation and
processing of the tower sites. In addition, the Company has paid $80,000
through December 31, 1998 in prepaid rent in order to exercise its right of
first refusal to lease four tower sites. Future minimum annual lease payments
under this arrangement, excluding one-time site cost reimbursements not to
exceed $10,000 per site, as of December 31, 1998 are as follows:
F-13
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
<TABLE>
<S> <C>
1999............................................................. $ 80,000
2000............................................................. 80,000
2001............................................................. 80,000
2002............................................................. 80,000
2003............................................................. 80,000
Thereafter....................................................... 480,000
--------
Total future minimum annual lease payments..................... $880,000
========
</TABLE>
(b) Employment Commitment
On April 9, 1999, the Company entered into an employment agreement with
Thomas Dougherty, the Company's new president and chief executive officer. This
agreement included a stock option grant, which allows Mr. Dougherty the option
to purchase a total number of shares equal to approximately 2.0% of the fully
diluted common shares of AirGate PCS, Inc. Additionally, if the Company
successfully completes an Initial Public Offering or private placement offering
in which at least $50,000,000 in new equity funds are raised before April 15,
2000, the Company agrees to award an additional option to Mr. Dougherty so
that, after such financing he will continue to hold stock options equal to 2%
of the number of shares outstanding. See note 13(h).
(9) Stockholder's Deficit
(a) Distribution of AirGate Wireless, LLC
In July 1998, the Company decided to pursue a different PCS business
opportunity. As a result, upon formation of AirGate PCS, Inc. on August 4,
1998, AirGate Wireless, LLC, which consists solely of the FCC licenses and
related liabilities, has been removed from the consolidated financial
statements because its assets and liabilities were not transferred to AirGate
PCS, Inc. and will not be included in the continuing operations of the Company.
These assets and liabilities included the FCC licenses, net, FCC installment
plan notes payable, a revolving line of credit with a commercial bank, and
related accrued interest with carrying values of $12,846,166, $11,745,066,
$1,800,000, and $893,616 at August 4, 1998, respectively.
(b) Loan Conversions
During the years ended December 31, 1997, 1996 and the period from inception,
June 15, 1995, to December 31, 1995, $4,683,544, $110,710 and $420,119,
respectively, of notes payable to affiliates including accrued interest were
converted to additional paid-in capital in accordance with the respective terms
of the note agreements.
(c) Cash Distribution
During the years ended December 31, 1997 and 1996 and the period from
inception, June 15, 1995, to December 31, 1995, the affiliates agreed to
convert outstanding notes to additional paid-in capital as described under loan
conversions above. During the year ended December 31, 1997, in connection with
the purchase of FCC licenses, the Company received a refund of $492,944 from
the FCC which the Company paid to the affiliates in the form of a cash
distribution.
F-14
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(d) Stock Purchase Warrants
In August 1998, the Company issued stock purchase warrants to affiliates in
consideration for: (1) loans made by the affiliates to the Company which have
been converted to additional paid-in capital, (2) guarantees of certain bank
loans provided by the affiliates, and (3) in connection with the $4,815,000 in
convertible debt financing provided by the affiliates. The warrants enabled the
holders to purchase either preferred stock or common stock. The number of
shares available for purchase under the terms of the warrants are based upon a
predetermined formula which is contingent on the amount of financing provided
or guaranteed and the price per share received by the Company in the next
financing round. The exercise price under the terms of the warrants would equal
the price per share received by the Company in the next financing round and the
warrants were exercisable for five years. All of these warrants were cancelled
in connection with the debt consolidation described in note 13(d).
The Company has not reflected the fair value of the warrants as a charge to
interest expense because such amount was not significant.
(e) Preferred Stock
The Company's articles of incorporation authorize the Company's Board of
Directors to issue up to 5 million shares of preferred stock without
shareholder approval. The Company has no present plans to issue any preferred
stock.
(10) Income Taxes
Prior to the formation of AirGate PCS, Inc. in August 1998, the predecessors
of the Company were operated as limited liability companies. As a result,
income taxes were passed through to and were the responsibility of the
stockholders of the predecessors.
The Company has not provided any pro forma income tax information for periods
prior to August 1998 because such information would not be significant to the
accompanying consolidated financial statements.
The provision for income taxes includes income taxes currently payable and
those deferred because of temporary differences between the financial statement
and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future and any increase or decrease in the valuation
allowance for deferred income tax assets.
Income tax expense (benefit) for the year ended December 31, 1998 differed
from the amount computed by applying the statutory U.S. Federal income tax rate
of 34% to loss before income taxes as a result of the following:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Computed "expected" tax expense............................. $(1,765,447)
Expense related to LLC predecessors......................... 568,939
State and local income taxes, net of Federal income tax
effect..................................................... (187,416)
Increase in valuation allowance............................. 1,893,093
Benefit derived from contribution of tax assets............. (414,993)
Other, net.................................................. (94,176)
-----------
Total income tax expense (benefit)........................ $ --
===========
</TABLE>
F-15
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
The income tax effects of temporary differences that give rise to the
Company's deferred income tax assets as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Deferred income tax assets:
Net operating loss carryforwards.......................... $ 302,085
Capitalized start-up costs................................ 1,381,634
Accrued expenses.......................................... 28,702
Property and equipment due to differences in depreciation
and amortization......................................... 180,672
-----------
Gross deferred income tax asset......................... 1,893,093
Less valuation allowance.................................. (1,893,093)
-----------
Net deferred income tax asset........................... $ --
===========
</TABLE>
In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the projected future taxable income and tax
planning strategies in making this assessment.
The increase in deferred income tax assets and the increase in the valuation
allowance for the net deferred income tax assets for the year ended December
31, 1998 was $1,893,093. Deferred income tax assets and liabilities are
recognized for differences between the financial statement carrying amounts and
the tax basis of assets and liabilities which result in future deductible or
taxable amounts and for net operating loss and tax credit carryforwards. A
valuation allowance has been provided because the realization of deferred
income tax assets is uncertain.
As of December 31, 1998, the Company has net operating loss carryforwards of
approximately $750,000, which will expire in the year 2018.
(11) Year 2000
The year 2000 issue arises as the result of computer programs having been
written, and systems having been designed, using two digits rather than four to
define the applicable year. Consequently, such software has the potential to
recognize a date using the "00" as the year 1900, rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company believes that its own computer systems and software are year 2000
compliant. To the extent that the Company implements its own computer systems
and software in the future, the Company will assess year 2000 compliance prior
to their implementation. The Company has not incurred any costs relating to the
year 2000 compliance. In the process of designing and constructing its PCS
network, the Company has entered into material agreements with several third-
party vendors. The Company relies on these vendors for all important operating,
computer and non-information technology systems. Therefore, the Company is
highly dependent on Sprint PCS and other vendors for remediation of their
network elements, computer systems, software applications and other
F-16
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
business systems. The Company will purchase critical back office services from
Sprint PCS such as billing, customer care, home location registration,
intelligent network capabilities and directory and operator assistance. The
Company's network infrastructure equipment will be contractually provided by a
third-party vendor with whom the Company has a material relationship. If either
Sprint PCS or this third-party vendor fail to become year 2000 compliant, the
Company's ability to commence operations may be materially delayed. The Company
has contacted its third-party vendors and believe that they will be year 2000
compliant. However, the Company has no contractual or other right to compel
compliance by them.
The Company does not expect to commence operations until the first quarter of
2000. Because of its reliance on third-party vendors, the Company believes that
the impact of issues relating to year 2000 compliance, if any, would result in
a delay in launching commercial PCS operations and not a disruption in service.
Therefore, the Company has not developed a contingency plan and does not expect
to do so.
(12) Condensed Consolidating Financial Statements
The condensed consolidating financial statements for AirGate PCS, Inc. and
predecessors and its wholly owned guarantor subsidiary, AGW Leasing Company,
Inc. as of December 31, 1998 and for the year then ended are as follows:
<TABLE>
<CAPTION>
AirGate PCS, Inc. AGW Leasing
and Predecessors Company, Inc. Eliminations Consolidated
----------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash.................... $ 2,295,613 1 -- 2,295,614
Property and equipment,
net.................... 12,545,365 -- -- 12,545,365
Other assets............ 609,509 -- (1) 609,508
----------- ------- ------ -----------
Total assets.......... $15,450,487 1 (1) 15,450,487
=========== ======= ====== ===========
Notes payable........... $14,345,523 -- -- 14,345,523
Other liabilities....... 2,135,962 -- -- 2,135,962
Long term debt.......... 4,319,477 -- -- 4,319,477
----------- ------- ------ -----------
Total liabilities..... 20,800,962 -- -- 20,800,962
----------- ------- ------ -----------
Common stock............ 33,825 -- -- 33,825
Additional paid-in
capital................ 6,270,120 1 (1) 6,270,120
Accumulated deficit..... (11,654,420) -- -- (11,654,420)
----------- ------- ------ -----------
Total liabilities and
stockholders'
deficit.............. $15,450,487 1 (1) 15,450,487
=========== ======= ====== ===========
Total expenses.......... (5,192,492) -- -- (5,192,492)
Net loss.............. $(5,192,492) -- -- (5,192,492)
=========== ======= ====== ===========
</TABLE>
(13) Subsequent Events (Unaudited)
(a) On May 14, 1999, the Board of Directors amended the Articles of
Incorporation to increase the number of authorized shares of common stock from
20,000 to 20,000,000 shares and the number of authorized shares of preferred
stock from 5,000 to 5,000,000 shares.
(b) In May 1999, the Company received an additional $1.0 million of short-
term financing in the form of convertible notes from affiliates. All notes bear
interest at 8%, are payable upon demand, and automatically convert into shares
of common stock at a 48% discount upon the initial public offering of AirGate
PCS, Inc.
F-17
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(c) The Company filed a registration statement for an equity and debt
financing in May 1999. The Company selected Donaldson, Lufkin & Jenrette
Securities Corporation to lead an initial public offering to raise $113.9
million in equity financing and approximately $156.1 million in gross proceeds
from the issuance of senior subordinated discount notes due 2009. The Company
plans to utilize the proceeds from the aforementioned offerings to build-out
its PCS network, to fund the Company's anticipated operating losses while
completing the network build-out and to pay-off $8.7 million in debt.
(d) In May 1999, the Company consolidated the convertible notes payable to
affiliates issued to the Weiss, Peck & Greer Venture Partners affiliated funds
in 1998 and 1999 for a total of $3.167 million into two subordinated promissory
notes that will be converted into shares of common stock concurrently with
completion of the initial public offering at a 48% discount upon the initial
public offering. The stock purchase warrants issued by the Company in August
1998 (see note 9(d)) and held by the Weiss, Peck & Greer Venture Partners
affiliated funds were terminated. In May 1999, the Company issued new warrants
to the Weiss, Peck & Greer Venture Partners affiliated funds to purchase shares
of common stock for an aggregate price of up to $2.73 million at a price 25%
less than the price of a share of common stock sold in the initial public
offering. These warrants for 214,413 shares may be exercised for two years from
the date of issuance. The Company expects to allocate $1.7 million to the fair
value of the warrants and record a discount on the convertible notes payable
which will be recognized as interest expense over the period from the date of
issuance to the expected date of conversion (August 1999) using a $7.80 per
share conversion price, assuming an Initial Public Offering price of $15 per
share.
In May 1999, the Company consolidated the convertible notes payable to
affiliates issued to the JAFCO America Ventures, Inc. affiliated funds in 1998
and 1999 for a total of $4.394 million into two subordinated promissory notes
that will be converted into shares of common stock concurrently with the
completion of the initial public offering at a 48% discount upon the initial
public offering. The stock purchase warrants issued by the Company in August
1998 (see note 9(d)) and held by the JAFCO America Ventures, Inc. affiliated
funds were terminated.
The notes described in the previous two paragraphs, which were issued with an
"in the money" conversion feature, will be accounted for in accordance with
EITF Issue 98-5. The amount related to the fair value of the beneficial
conversion feature of $7.0 million will be allocated to additional paid-in
capital with a like amount recognized as interest expense over the period from
the date of issuance to the expected date of conversion (August 1999).
If the initial public offering is not completed, the Company is required to
repay these new convertible notes one year after their issuance, subject to the
prior repayment of the senior debt.
(e) The Company obtained a loan modification agreement to defer the initial
principal and interest payment due on the Company's $7.7 million long-term debt
arrangement from March 1, 1999, to October 15, 1999.
(f) The Company obtained a loan modification agreement for its $1 million
note payable to bank to extend the maturity date from May 9, 1999 to November
9, 1999.
F-18
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
(g) On July 9, 1999 the Board of Directors effected a 39,134-for-one stock
split on the Company's common stock and amended the Certificate of
Incorporation of AirGate PCS, Inc. to increase the number of authorized shares
of common stock from 20,000,000 to 25,000,000 shares. Common stock and
additional paid-in capital have been restated retroactively for all periods
presented to reflect this split.
(h) On July 28, 1999 the Board of Directors effected a reverse stock split of
0.996-for-one on the Company's common stock. Common stock and additional paid-
in capital have been restated retroactively for all periods presented to
reflect this split. Additionally, the Board of Directors approved an incentive
stock option plan, whereby 2 million shares were reserved for issuance to
current and future employees. A total of 1,075,000 of these options were
granted at an exercise price of $14 per share. These options vest at various
terms over a five year period beginning at the grant date. Unearned
compensation will be recorded for the difference between the initial public
offering price and the exercise price at the date of grant and will be
recognized as compensation expense as these options vest.
Included in these option grants were a total of 300,000 options granted to
Thomas Dougherty. The options vest quarterly over a five year period beginning
April 15, 2000.
Additionally, the Company obtained a note modification deferring the maturity
date of the $150,000 in notes payable to affiliates from June 11, 1999 to
October 15, 1999.
(i) In August 1999, the Company entered into a credit agreement with Lucent
Technologies, Inc. pursuant to which Lucent has agreed to provide a credit
facility of up to $153.5 million. In connection with this financing, the
Company issued stock purchase warrants to Lucent. The warrants may be exercised
to purchase common stock in an amount equal to one percent of the outstanding
common stock, on a fully diluted basis, on the closing date of the earlier of
the initial public offering or a private offering of common stock or common
stock equivalents with gross proceeds in excess of $130.0 million. If an
offering does not occur on or prior to December 31, 1999, the amount of common
stock underlying the warrants shall be equal to one percent of the outstanding
common stock, on a fully diluted basis. The base price of the warrants equals
either 120% of the initial public offering price or 120% of the then current
market value of one share of common stock. These warrants expire on the earlier
of August 15, 2004 or August 15, 2001, if, as of such date, the Company has
paid in full all outstanding amounts under the Lucent financing and have
terminated the remaining unused portion of the commitments under the current
financing. The Company expects to allocate $567,000 to the fair value of the
warrants and record a discount on the note payable, which will be recognized as
interest expense over the period from date of issuance to the maturity date.
On September 15, 1999 the Board of Directors effected a reverse stock split
of 0.900-for-one on the Company's common stock. Common stock and additional
paid-in capital have been restated retroactively for all periods presented to
reflect this split.
(j) On September 27, 1999 the Board of Directors effected a reverse stock
split of 0.965-for-one on the Company's common stock. Common stock and
additonal paid-in capital have been restated retroactively for all periods
presented to reflect this split.
F-19
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
As of
June 30,
1999
------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents...................................... $ 2,909,561
Due from AirGate Wireless, LLC................................. 750,998
------------
Total current assets......................................... 3,660,559
Property and equipment, net...................................... 16,531,890
Site lease deposits.............................................. 530,000
Offering costs................................................... 336,880
Other assets..................................................... 130,915
------------
$ 21,190,244
============
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable............................................... $ 1,392,178
Accrued interest............................................... 1,465,060
Notes payable.................................................. 1,000,000
Notes payable to affiliates, net .............................. 3,146,312
Current maturities of long-term debt........................... 5,465,997
------------
Total current liabilities.................................... 12,469,547
Long-term debt, excluding current maturities..................... 12,234,003
------------
Total liabilities............................................ 24,703,550
------------
Stockholder's deficit:
Preferred stock, par value $.01 per share; 5,000,000 shares
authorized; no shares issued and outstanding.................. --
Common stock, par value $.01 per share; 25,000,000 shares
authorized; 3,382,518 shares issued and outstanding at June
30, 1999...................................................... 33,825
Additional paid-in capital..................................... 15,872,241
Deficit accumulated during the development stage............... (19,419,372)
------------
Total stockholder's deficit.................................. (3,513,306)
------------
Total liabilities and stockholder's deficit................ $ 21,190,244
============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-20
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Six-Month
Periods Ended June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating expenses:
General and administrative expenses............... $(1,798,567) $(1,099,724)
Depreciation and amortization..................... (409,274) (745,845)
----------- -----------
Operating loss.................................. (2,207,841) (1,845,569)
Interest expense.................................... (5,557,112) (509,775)
----------- -----------
Net loss........................................ $(7,764,953) $(2,355,344)
=========== ===========
Basic and diluted net loss per share of common
stock.............................................. $ (2.30) $ (0.70)
=========== ===========
Weighted average common shares outstanding.......... $ 3,382,518 $ 3,382,518
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-21
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six-Month
Periods Ended June 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(7,764,953) $(2,355,344)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 409,274 745,845
Accretion of discount on convertible notes to
interest expense................................. 5,037,434 --
(Increase) decrease in:
Due from AirGate Wireless, LLC.................. (372,738) --
Prepaid expenses................................ 100,333 (2,668)
Site lease deposits............................. (530,000) --
Increase (decrease) in:
Accounts payable................................ (57,077) (2,566)
Accrued interest................................ 994,353 397,047
----------- -----------
Net cash used in operating activities......... (2,183,374) (1,217,686)
----------- -----------
Cash flows from investing activities--capital
expenditures....................................... (4,395,799) (31,459)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable to affiliates....... 2,530,000 1,065,000
Proceeds from notes payable..................... 5,000,000 --
Offering costs.................................. (336,880) --
----------- -----------
Net cash provided by financing activities..... 7,193,120 1,065,000
----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 613,947 (184,145)
Cash and cash equivalents at beginning of period.... 2,295,614 146,939
----------- -----------
Cash and cash equivalents at end of period.......... $ 2,909,561 $ (37,206)
=========== ===========
Supplemental disclosure of cash flow information--
cash paid for interest............................. $ 503,063 $ 221,139
=========== ===========
Supplemental disclosure of noncash financing
activities:
Consolidation of accrued interest into notes
payable:
Accrued interest.................................. $ (216,000) $ --
Notes payable to affiliates....................... 216,000 --
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-22
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements represent the
accounts of AirGate PCS, Inc. and subsidiaries and predecessors (collectively,
the "Company"). These unaudited consolidated financial statements have been
prepared in accordance with instructions for preparing interim financial
information and, therefore, do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations,
and cash flows in conformity with generally accepted accounting principles. All
adjustments, consisting of normal recurring accruals, which, in the opinion of
management, are necessary to a fair presentation of financial position and
results of operations have been included. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and related notes appearing
elsewhere herein.
(2) Development Stage Enterprise
AirGate, LLC, the first predecessor entity of the Company, was established on
June 15, 1995 (inception). The Company has devoted most of its efforts to date
to activities such as preparing business plans, raising capital, and planning
the build-out of its PCS network. From inception through June 30, 1999, the
Company has not generated any revenues and has incurred expenses of
$(19,419,372), resulting in an accumulated deficit during the development stage
of $(19,419,372) as of June 30, 1999.
(3) Net Loss Per Share
The Company has presented net loss per common share pursuant to SFAS No. 128,
"Earnings per Share." Basic net loss per share of common stock is computed by
dividing net loss by the weighted average number of common shares outstanding.
Diluted net loss per share has not been presented separately, as the potential
common shares are anti-dilutive for each of the periods presented.
F-23
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1999 and 1998
(Unaudited)
(4) Condensed Consolidating Financial Statements
The condensed consolidating financial statements for AirGate PCS, Inc. and
predecessors and its wholly owned guarantor subsidiary, AGW Leasing Company,
Inc. as of June 30, 1999 and for the six-month period then ended are as
follows:
<TABLE>
<CAPTION>
AirGate PCS, Inc. AGW Leasing
and Predecessors Company, Inc. Eliminations Consolidated
----------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash.................... $ 2,909,560 1 -- 2,909,561
Property and equipment,
net.................... 16,631,890 -- -- 16,531,890
Other assets............ 2,279,075 -- (530,282) 1,748,793
----------- -------- -------- -----------
Total Assets............ $21,720,525 1 (530,282) 21,190,244
=========== ======== ======== ===========
Notes payable........... $ 9,612,309 -- -- 9,612,309
Other liabilities....... 2,857,238 530,281 (530,281) 2,857,238
Long term debt.......... 12,234,003 -- -- 12,234,003
----------- -------- -------- -----------
Total liabilities....... 24,703,550 530,281 (530,281) 24,703,550
=========== ======== ======== ===========
Common stock............ 33,825 -- -- 33,825
Additional paid-in
capital................ 15,872,241 1 (1) 15,872,241
Accumulated deficit..... (18,889,091) (530,281) -- (19,419,372)
----------- -------- -------- -----------
Total liabilities and
stockholders' deficit.. $21,720,525 1 (530,282) 21,190,244
=========== ======== ======== ===========
Total expenses.......... (7,234,672) (530,281) -- (7,764,953)
Net loss................ $(7,234,672) (530,281) -- (7,764,953)
=========== ======== ======== ===========
</TABLE>
(5) Stockholder's Deficit and Debt Transactions
(a) On May 14, 1999, the Board of Directors amended the Articles of
Incorporation to increase the number of authorized shares of common stock from
20,000 to 20,000,000 shares and the number of authorized shares of preferred
stock from 5,000 to 5,000,000 shares.
F-24
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1999 and 1998
(Unaudited)
(b) In May 1999, the Company received an additional $1.0 million of short-
term financing in the form of convertible notes from affiliates. All notes bear
interest at 8%, are payable upon demand, and automatically convert into shares
of common stock at a 48% discount upon the initial public offering of AirGate
PCS, Inc.
(c) The Company filed a registration statement for an equity and debit
financing in May 1999. The Company selected Donaldson, Lufkin & Jenrette
Securities Corporation to lead an initial public offering to raise $113.9
million in equity financing and approximately $156.1 million in gross proceeds
from the issuance of senior subordinated discount notes due 2009. The Company
plans to utilize the proceeds from the aforementioned offerings to build-out
its PCS network, to fund the Company's anticipated operating losses while
completing the network build-out, and to pay-off $8.7 million of debt.
(d) In May 1999, the Company consolidated the convertible notes payable to
affiliates issued to the Weiss, Peck & Greer Venture Partners affiliated funds
in 1998 and 1999 for a total of $3.167 million into two subordinated promissory
notes that will be converted into shares of common stock concurrently with
completion of the initial public offering at a 48% discount upon the initial
public offering. The stock purchase warrants issued by the Company in August
1998 and held by the Weiss, Peck & Greer Venture Partners affiliated funds were
terminated. In May 1999, the Company issued new warrants to the Weiss, Peck &
Greer Venture Partners affiliated funds to purchase shares of common stock for
an aggregate price of up to $2.75 million at a price 25% less than the price of
a share of common stock sold in the initial public offering. These warrants for
214,413 shares may be exercised for two years from the date of issuance. The
Company has allocated $1.7 million to the fair value of the warrants and
recorded the associated discount on the convertible notes payable as interest
expense over the period from issuance to the expected date of conversion
(August 1999) using a $7.80 per share conversion price, assuming an initial
public offering price of $15 per share.
In May 1999, the Company consolidated the convertible notes payable to
affiliates issued to the JAFCO America Ventures, Inc. affiliated funds for a
total of $4.394 million into two subordinated promissory notes that will be
converted into shares of common stock concurrently with the completion of the
initial public offering at a 48% discount upon the initial public offering. The
stock purchase warrants issued by the Company in August 1998 and held by the
JAFCO America Ventures, Inc. affiliated funds were terminated.
The notes described in the previous two paragraphs, which were issued with an
"in the money" conversion feature, have been accounted for in accordance with
EITF Issue 98-5. The amount related to the fair value of the beneficial
conversion feature of $7.0 million has been allocated to additional paid-in
capital with a like amount recognized as interest expense over the period from
issuance to the date of conversion (August 1999).
If the initial public offering is not completed, the Company is required to
repay all of these new convertible notes one year after their issuance, subject
to the prior repayment of the senior debt.
(e) The Company obtained a loan modification agreement for its $1 million
note payable to bank to extend the maturity date from May 9, 1999 to November
9, 1999.
F-25
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1999 and 1998
(Unaudited)
(f) The Company obtained a loan modification agreement to defer the initial
principal and interest payments due on the Company's $7.7 million long-term
debt arrangement from March 1, 1999, to October 15, 1999.
(6) Subsequent Events
(a) On July 9, 1999 the Board of Directors effected a 39,134-for-one stock
split on the Company's common stock and amended the Certificate of
Incorporation of AirGate PCS, Inc. to increase the number of authorized shares
of common stock from 20,000,000 to 25,000,000 shares. Common stock and
additional paid-in capital have been restated retroactively for all periods
presented to reflect this split.
(b) On July 28, 1999 the Board of Directors effected a reverse stock split of
0.996-for-one on the Company's common stock. Common stock and additional paid-
in capital have been restated retroactively for all periods presented to
reflect this split. Additionally, the Board of Directors approved an incentive
stock option plan, whereby 2 million shares were reserved for issuance to
current and future employees. A total of 1,075,000 of these options were
granted at an exercise price of $14 per share. These options vest at various
terms over a five year period beginning at the grant date. Unearned
compensation will be recorded for the difference between the initial public
offering price and the exercise price at the date of grant and will be
recognized as compensation expense as these options vest.
Additionally, the Company obtained a note modification deferring the maturity
date of the $150,000 in notes payable to affiliates from June 11, 1999 to
October 15, 1999.
(c) In August 1999, the Company entered into a credit agreement with Lucent
Technologies, Inc. pursuant to which Lucent has agreed to provide a credit
facility of up to $153.5 million. In connection with this financing, the
Company issued stock purchase warrants to Lucent. The warrants may be exercised
to purchase common stock in an amount equal to one percent of the outstanding
common stock, on a fully diluted basis, on the closing date of the earlier of
the initial public offering or a private offering of common stock or common
stock equivalents with gross proceeds in excess of $130.0 million. If an
offering does not occur on or prior to December 31, 1999, the amount of common
stock underlying the warrants shall be equal to one percent of the outstanding
common stock, on a fully diluted basis. The base price of the warrants equals
either 120% of the initial public offering price or 120% of the then current
market value of one share of common stock. These warrants expire on the earlier
of August 15, 2004 or August 15, 2001, if, as of such date, the Company has
paid in full all outstanding amounts under the Lucent financing and have
terminated the remaining unused portion of the commitments under the current
financing. The Company expects to allocate $567,000 to the fair value of the
warrants and record a discount on the note payable, which will be recognized as
interest expense over the period from date of issuance to the maturity date.
F-26
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1999 and 1998
(Unaudited)
On September 15, 1999 the Board of Directors effected a reverse stock split
of 0.900-for-one on the Company's common stock. Common stock and additional
paid-in capital have been restated retroactively for all periods presented to
reflect this split.
(d) On September 27, 1999 the Board of Directors effected a reverse stock
split of 0.965-for-one on the Company's common stock. Common stock and
additional paid-in capital have been restated retroactively for all periods
presented to reflect this split.
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
September 27, 1999
6,700,000 Shares of Common Stock
-----------------
PROSPECTUS
-----------------
Donaldson, Lufkin & Jenrette
Credit Suisse First Boston
The Robinson-Humphrey Company
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any of the sales made hereunder after the date of this prospectus shall create
an implication that the information contained herein or our affairs have not
changed since the date hereof.
Until October 22, 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering or when selling
previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
