<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 027455
AirGate PCS, Inc.
Harris Tower
233 Peachtree St.
Suite 1700
ATLANTA, GA 30303
(404) 525-7272
DELAWARE 58-2422929
- -------------------------------- -------------------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
11,969,734 shares of Common Stock, $0.01 par value per share, were outstanding
as of November 15, 1999.
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes ______ No __X__
AIRGATE PCS, INC.
FOURTH QUARTER REPORT
Table of Contents
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1999 (unaudited) and December
31, 1998
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Consolidated Statements of Operations (unaudited) for the three and nine
months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1999 and 1998
Notes to the Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II Other Information
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
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PART I. FINANCIAL INFORMATION
Item I FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(dollars in $000's)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 258,900 $ 2,296
Due from AirGate Wireless, LLC 751 378
Prepaid expenses 1,596 100
--------- ---------
Total current assets 261,247 2,774
Property and equipment, net 44,206 12,545
Financing costs 11,622 --
Other assets 245 131
--------- ---------
$ 317,320 $ 15,450
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable 22,394 $ 1,449
Accrued interest 1,413 686
Notes payable -- 6,000
Notes payable to shareholders -- 4,965
Current maturities of long-term debt $ 7,700 3,381
--------- ---------
Total current liabilities 31,507 16,481
Long-term debt, excluding current maturities 157,967 4,319
--------- ---------
Total liabilities 189,474 20,800
--------- ---------
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;
11,957,201 shares issued and
outstanding 120 34
Unearned stock option compensation (2,900) --
Additional paid-in capital 157,880 6,270
Accumulated deficit (27,254) (11,654)
--------- ---------
Total stockholders' equity(deficit) 127,846 (5,350)
--------- ---------
Total liabilities and stockholders' equity(deficit) $ 317,320 $ 15,450
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
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AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in $000's, except per share amounts)
<TABLE>
<CAPTION>
Period from
Three Months Nine Months Inception,
Ended Ended June 15, 1995 to
September 30, September 30, September 30,
1999 1998 1999 1998 1999
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
General and administrative expenses $ (3,820) $ (452) $ (5,619) $ (1,552) $ (12,027)
Depreciation and amortization (213) (282) (622) (1,028) (2,861)
---------- ---------- ---------- ---------- ---------
Operating loss (4,033) (734) (6,241) (2,580) (14,888)
Interest expense (3,801) (506) (9,358) (1,015) (12,366)
---------- ---------- ---------- ---------- ---------
Net loss $ (7,834) $ (1,240) $ (15,599) $ (3,595) $ (27,254)
========== ========== ========== ========== =========
Basic and diluted net loss per
share of common stock $ (2.25) $ (0.37) $ (4.57) $ (1.06)
Weighted-average common
shares outstanding 3,477,978 3,382,518 3,414,338 3,382,518
========== ========== ========== ==========
Weighted-average fully diluted
common shares outstanding 5,394,420 3,382,518 4,234,898 3,382,518
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in $000's)
<TABLE>
Period from
Nine Months Inception,
ended June 15, 1995
September 30, to September 30,
1999 1998 1999
----------- ---------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (15,599) $ (3,595) $ (27,254)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization: 622 1,028 2,861
Loss on sale of fixed assets (19) -- (19)
Amortization of note discounts 8,691 -- 8,691
Stock option compensation 325 -- 325
(Increase) decrease in:
Due from AirGate Wireless, LLC (373) -- (751)
Prepaid expenses (1,496) (212) (1,596)
Other assets (114) -- 2,102
Increase (decrease) in:
Accounts payable 4,673 1,002 (6,110)
Accrued interest 726 788 3,170
--------- -------- ---------
Net cash (used in)
operating activities (2,564) (989) 6,361
--------- -------- ---------
Cash flows from investing activities:
Capital expenditures (15,651) (2,432) (20,889)
Purchase of FCC licenses -- -- (2,936)
--------- -------- ---------
Net cash used in investing activities (15,651) (2,432) (23,825)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from notes payable 18,500 -- 26,300
Payment on notes payable (10,000) -- (10,000)
Proceeds from high yield debt 156,057 -- 156,057
Financing cost on Lucent and high yield offering (11,622) -- (11,622)
Proceeds from equity offering 130,985 -- 130,985
Offering costs (10,481) -- (10,481)
Payment of note payable to bank (1,000) -- (1,000)
Proceeds from notes payable to stockholders 2,530 5,200 30,190
Payments on notes payable to stockholders (150) -- (20,850)
Cash distributions -- -- (493)
--------- -------- ---------
Net cash provided by financing activities 274,819 5,200 289,086
--------- -------- ---------
Net increase in cash and
cash equivalents 256,604 1,779 258,900
Cash and cash equivalents at beginning of period 2,296 147 --
--------- -------- ---------
Cash and cash equivalents at end of period $ 258,900 $ 1,926 $ 258,900
========= ======== =========
Supplemental disclosure of cash flow information--
cash paid for interest $ 503 $ 930 $ 2,209
========= ======== =========
Supplemental disclosure of non cash investing and
financing activities:
Assets acquired through debt financing:
FCC licenses $ -- $ -- $ 11,745
Site acquisition and engineering costs -- 7,700 7,700
Notes payable and accrued interest converted to equity 7,835 -- 13,040
Fair value of warrants 13,319 -- 13,319
Compensatory stock options 3,225 -- 3,225
Beneficial conversion of convertible notes 6,979 -- 6,979
Network assets acquired through payables 16,272 -- 16,272
Distribution of FCC licenses:
Accrued interest -- (894) (894)
Long-term debt -- (11,745) (11,745)
FCC licenses -- 12,846 12,846
Line of credit -- (1,800) (1,800)
</TABLE>
See accompanying notes to consolidated financial statements.
5
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AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements are unaudited and
have been prepared by management. In the opinion of management, these
consolidated financial statements contain all of the adjustments,
consisting of normal recurring adjustments, necessary to present
fairly, in summarized form, the financial position and the results of
operations of AirGate PCS, Inc. ("AirGate" or the "Company"). The
results of operations for the three and nine months ended September 30,
1999 are not indicative of the results that may be expected for a full
fiscal year. The financial information presented herein should be read
in conjunction with the consolidated financial statements for the year
ended December 31, 1998 which include information and disclosures not
included herein. All significant intercompany accounts or balances have
been eliminated in consolidation.
(2) Development Stage Enterprise
AirGate, LLC, the first predecessor 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
September 30, 1999, the Company has not generated any revenues and has
incurred expenses of $(27.3) million, resulting in an accumulated
deficit during the development stage of $(27.3) million as of September
30, 1999.
(3) Stockholders' Equity and Debt Transactions
(a) On September 30, 1999, the Company sold 7,705,000 shares of its
common stock in its initial public offering pursuant to a
registration statement filed on Form S-1 (Registration File
Numbers 333-79189-02 and 333-79189-01) declared effective by the
Securities and Exchange Commission on September 27, 1999. Proceeds
from the initial public offering were $131.0 million. The Company
incurred expenses, underwriting discounts and commissions related
to the initial public offering of $10.5 million to independent
third parties which have been reflected as a reduction of the
offering proceeds. The managing underwriters for the Company's
initial public offering were Donaldson, Lufkin & Jenrette
Securities Corporation, Credit Suisse First Boston Corporation and
the Robinson-Humphrey Company, L.L.C.
(b) On September 30, 1999, the Company issued 300,000 units, each unit
consisting of $1,000 principal amount at maturity of 13.5% senior
subordinated discount notes due 2009 and one warrant to purchase
2.148 shares of common stock at a price of $0.01 per share pursuant
to a registration statement filed on Form S-1 (Registration File
Numbers 333-79189-02 and 333-79189-01) declared effective by the
Securities and Exchange Commission on September 27, 1999. The
aggregate principal amount outstanding as of September 30, 1999 of
the discount notes was $156.1 million which will accrete to the
full aggregate principal amount of $300.0 million by October 1,
2004. The managing underwriters for the Company's units offering
were Donaldson, Lufkin & Jenrette Securities Corporation and Credit
Suisse First Boston Corporation.
The Company incurred expenses, underwriting discounts and
commissions of $6.6 million to independent third parties related to
the units offering which have been recorded as an issuance cost and
are being amortized over the life of the notes.
The Company has allocated $10.9 million as of September 30, 1999 to
the fair value of the warrants and has recorded an associated
discount on the senior subordinated discount notes and will
recognize the discount through interest expense over the life of
the notes.
(c) In August 1999, the Company entered into a $153.5 million Credit
Agreement with Lucent Technologies Inc. ("Lucent") (the "Credit
Facility"). The Credit Facility provides for (i) a $13.5 million
senior secured term loan (the "Tranche I Term Loan") which matures
on June 6, 2007, and (ii) a $140.0 million senior secured term loan
(the "Tranche II Term Loan") which matures on September 30, 2008.
Mandatory quarterly payments of principal are required beginning
December 31, 2002 for the Tranche I Term Loan and March 31, 2004
for the Tranche II Term Loan initially in the amount of 3.75% of
the loan balance then outstanding and increasing thereafter. In
connection with this
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financing, the Company issued to Lucent warrants to purchase common
stock that were exercisable upon issuance. The base price of the
warrants equals 120% of the price of one share of common stock at the
closing of the initial public offering, or $20.40, and the warrants are
exercisable for an aggregate of 128,860 shares of common stock. The
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 has terminated the remaining
unused portion of the commitments under the Lucent financing. The
Company had allocated $0.7 million to the fair value of the warrants
and recorded a discount of the note payable, which will be recognized
as interest expense over the period from issuance to the maturity date.
The Company incurred origination fees and expenses of $5.0 million
which have been recorded as a financing cost and are being amortized
over the life of the Lucent financing.
(d) On September 30, 1999, the Company converted $7.6 million of
convertible notes payable and accrued interest payable into 869,683
shares of common stock at a 48% discount of the initial public offering
price. The amount related to the fair value of the beneficial
conversion feature of $7.0 million has been allocated to additional
paid in capital and recognized as interest expense from the date of
issuance to the expected date of conversion (August 15, 1999).
In May 1999, the Company issued warrants to purchase shares of common
stock for an aggregate amount up to $2.7 million at an exercise price
25% less than the price of a share of common stock sold in the initial
public offering or $12.75. The warrants for 214,413 shares of common
stock were exercisable upon issuance and may be exercised for two years
from the date of issuance. The Company had allocated $1.7 million to
the fair value of the warrants and recognized the associated discount
on the convertible notes payable as interest expense over the period
from issuance to the expected date of conversion (August 15, 1999).
(e) On July 28,1999, the Board of Directors approved an incentive stock
option plan, whereby 2.0 million shares of common stock were reserved
for issuance to current and future employees. A total of 1,075,000 of
these options was granted on July 28, 1999 at market value, $14 per
share. These options vest at various terms up to a 5 year period
beginning at the grant date. Unearned compensation of $3.2 million was
recorded for the difference between the initial public offering price
and the exercise price at the date of grant and is being recognized
over the period in which the related employee services are rendered.
(f) 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 which was effective July 28, 1999, 0.900-for-one which was
effective September 15, 1999, and 0.965-for-one which was effective
September 27, 1999. All share and stockholders' equity amounts have
been restated for these stock splits.
(4) New Accounting Pronouncements
On July 8, 1999, the Financial Accounting Standards Board (FASB) issued
SFAS No. 137, Deferral of the Effective Date of FAS 133 which defers the
effective date of SFAS 133, Accounting for Derivative Instruments and
Hedging Activities to all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company is currently evaluating the financial
impact of adoption of SFAS No. 133. The adoption is not expected to have a
material effect on the Company's consolidated results of operations,
financial position, or cash flows.
(5) Subsequent Events
(a) On October 21, 1999, the Company changed its fiscal year from the year
ending December 31 to the year ending September 30 effective September
30, 1999. The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on November 4, 1999 that indicated
the change in the Company's fiscal year.
(b) On October 21, 1999, the Company's Board of Directors authorized the
issuance of 12,533 additional shares of common stock to the affiliates
of Weiss, Peck & Greer Venture Partners and the affiliates of
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JAFCO America Ventures, Inc. pursuant to a previously authorized
promissory note issued by the Company. The shares were authorized for
issuance in consideration for interest that accrued from the period
June 30, 1999 to September 28, 1999 on promissory notes issued to the
affiliates of Weiss, Peck & Greer Venture Partners and the affiliates
of JAFCO America Ventures Inc. The promissory notes were convertible
into shares of common stock at a price 48% less than the price of a
share of common stock sold in the Company's initial public offering of
common stock.
(c) On October 21, 1999, the Company's Board of Directors granted options
to purchase 95,000 shares of common stock to a director and certain
employees pursuant to the 1999 Stock Option Plan. Of these options,
45,000 options have an exercise price equal to the fair market value on
the date of the grant, 40,000 options have an exercise price of $14.00,
and 10,000 options granted to a director have an exercise price of
$2.00.
(6) AGW Leasing Company, Inc. -- Wholly-Owned Subsidiary
AGW Leasing Company, Inc. ("AGW") is a wholly-owned subsidiary of AirGate.
AGW has fully and unconditionally guaranteed the Company's senior
subordinated discount notes. AGW is the Company's only subsidiary and was
formed to hold the real estate interests for the Company's PCS network. AGW
also was a registrant under the Company's registration statement
(Registration File Number 333-78189-01) declared effective by the
Securities and Exchange Commission on September 27, 1999. The Company has
not presented separate financial statements and other disclosures for AGW
because management has determined that such information is not material to
investors.
The unaudited condensed consolidating financial statements for the Company
and AGW for the nine-month period ended September 30, 1999 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
AirGage PCS, Inc. AGW Leasing
and Predecessors Company, Inc. Eliminations Consolidated
----------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Cash $ 258,900 - - 258,900
Property and equipment, net 44,206 - - 44,206
Other assets 15,593 - (1,379) 14,214
------------- ------------ ------------ --------------
Total assets $ 318,699 - (1,379) 317,320
============= ============ ============ ==============
Accounts payable $ 22,394 - - 22,394
Other liabilities 9,113 1,379 (1,379) 9,113
Long term debt 157,967 - - 157,967
------------- ------------ ------------ --------------
Total liabilities 189,474 1,379 (1,379) 189,474
------------- ------------ ------------ --------------
Common stock 120 - - 120
Unearned stock option compensation (2,900) - - (2,900)
Additional paid-in capital 157,880 - - 157,880
Accumulated deficit (25,875) (1,379) - (27,254)
------------- ------------ ------------ --------------
Total liabilities and stockholders'
deficit $ 318,699 - (1,379) 317,320
============= ============ ============ ==============
Total expenses (14,220) (1,379) - (15,599)
Net loss $ (14,220) (1,379) - (15,599)
============= ============ ============ ==============
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained herein regarding expected financial results and other
planned events are forward-looking statements that involve risk and
uncertainties. Actual future events or results may differ materially from these
statements. Readers are referred to the documents filed by AirGate with the
Securities and Exchange Commission, specifically the most recent filings which
identify important risk factors that could cause actual results to differ from
those contained in the forward-looking statements, including potential
fluctuations in quarterly results, dependence on new product development, rapid
technological and market change, risks related to future growth and rapid
expansion, volatility of stock prices, and risks related to the year 2000.
These and other applicable risks are summarized under the caption "risk factors"
in the Company's Registration Statement on Form S-1 (Registration File No. 333-
79189-02), as declared effective by the Securities and Exchange Commission on
September 27, 1999.
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.
Through the nine months ended September 30, 1999, we have incurred $31.9
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 anticipate substantially
completing the build-out of our PCS network by the end of 2000 covering
approximately 74% of the resident population in our territory of 6.8 million. We
expect to continue to fill in coverage in 2001.
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Results of Operations
Historical Income Statements
For the three months ended September 30, 1999 compared to the three months
ended September 30, 1998:
Revenues
As a development stage enterprise, AirGate to date has not begun commercial
operations. Accordingly, no revenues or costs of service have been recorded for
either period.
General and Administrative Expenses
For the three months ended September 30, 1999, we were focused on raising
capital to continue our PCS network build-out. We incurred expenses of $3.8
million during the three month period ended September 30, 1999 compared to $0.5
million for the three months ended September 30, 1998, an increase of $3.3
million. The increase is primarily comprised of all cell site lease payments
related to our PCS network build-out, additional salaries, employee bonus
accruals, relocation liabilities and non-cash compensation of vested stock
options.
Depreciation and Amortization
For the three months ended September 30, 1999, depreciation and amortization
expense decreased $0.1 million to $0.2 million compared to $0.3 million for the
same period in 1998. Through August 1998 we were amortizing the purchase price
for FCC licenses held by our predecessor. We incurred capital expenditures of
$27.4 million in the three months ended September 30, 1999 related to the
continued build-out of our PCS network which included approximately $0.8 million
of capitalized interest. Depreciation will continue to increase as our network
equipment is placed into service.
Interest Expense, net
For the three months ended September 30, 1999, interest expense was $3.8
million, an increase of $3.3 million over the same period in 1998. The increase
is attributable to a $3.7 million charge recognized as interest expense in the
three months ended September 30, 1999 to record the fair value of warrants and
the beneficial conversion feature related to the convertible promissory notes
issued to the affiliates of Weiss, Peck & Greer Venture Partners and the
affiliates of JAFCO America Ventures Inc. Interest expense increased as a
result of increased debt incurred to fund operations. The Company had
borrowings of $165.7 million as of September 30, 1999 compared to $18.7 million
at December 31, 1998. Of the September 30, 1999 borrowings, $156.1 million was
issued as of September 30, 1999. Future interest expense will include the
accretion on the 13.5% senior subordinated discount notes.
Net Loss
For the three months ended September 30, 1999, the net loss was $7.8 million an
increase of $6.6 million compared to the net loss of $1.2 million for the same
period in 1998 for the aforementioned reasons. Net losses will continue to
increase as we further build-out our PCS network.
For the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998
Revenues
As a development stage enterprise, AirGate had no commercial operations for
either period, resulting in no revenues or costs of service being recorded.
General and Administrative Expenses
From January 1, 1999 through September 30, 1999, we were focused on raising
capital to continue our PCS network build-out. We incurred expenses of $5.6
million during the nine month period ended September 30, 1999 compared
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to $1.6 million for the nine months ended September 30, 1998, an increase of
$4.0 million. The increase is primarily comprised of all cell site lease
payments related to our PCS network build-out, additional salaries, employee
bonus accruals, relocation liabilities and non-cash compensation of vested stock
options.
Depreciation & Amortization
For the nine months ended September 30, 1999, depreciation and amortization
expense was $0.6 million compared to $1.0 million for the nine months ended
September 30, 1998. Through August 1998 we were amortizing the purchase price
for FCC licenses held by our predecessor. We incurred capital expenditures of
$31.9 million in the nine months ended September 30, 1999 related to the
continued build-out of our PCS network which included approximately $1.1 million
of capitalized interest compared to capital expenditures of $2.4 million in the
nine months ended September 30, 1998 of which no interest was capitalized as the
network build-out commenced August 1998. Depreciation will continue to increase
as our network equipment is placed into service.
Interest Expense, net
For the nine months ended September 30, 1999, interest expense was $9.4
million, net of capitalized interest of $1.1 million, an increase of $8.4
million over the $1.0 million in interest expense for the nine months ended
September 30, 1998. Interest expense for the 1999 period included a $8.7
million charge to record the fair value of warrants and the beneficial
conversion feature related to the convertible promissory notes issued to the
affiliates of Weiss, Peck & Greer Venture Partners and the affiliates of JAFCO
America Ventures Inc. Capitalized interest of $1.1 million for the nine months
ended September 30, 1999 was higher due to increased capital expenditures
compared to no capitalized interest for the nine months ended September 30,
1998. Future interest expense will include the accretion on the 13.5% senior
subordinated discount notes.
Net Loss
For the nine months ended September 30, 1999, the net loss was $15.6 million as
compared to $3.6 million for the same period in 1998. The net loss increased
$12.0 million, resulting primarily from the items discussed above. Net losses
will continue to increase as we further build-out our PCS network.
Liquidity and Capital Resources
As of September 30, 1999, the Company had $258.9 million in cash and cash
equivalents, as compared to $2.3 million in cash and cash equivalents at
December 31, 1998. Net working capital was $229.7 million at September 30, 1999
versus negative working capital of $13.7 million at December 31, 1998.
Net Cash Used In Operating Activities
The $2.6 million in cash used in operating activities was the result of the
Company's net loss for the nine months ended September 30, 1999 partially offset
by an increase in accounts payable and amortization of note discounts.
Net Cash Used in Investing Activities
The $15.6 million in cash used by investing activities represents capital
expenditures related to the network build-out with an additional $16.3 million
acquired through accounts payable for a total of $31.9 million of capital
expenditures in the nine months ended September 30, 1999.
Net Cash Provided by Financing Activities
The $274.8 million in cash provided by financing activities consisted primarily
of $131.0 million gross proceeds with respect to the completion of our initial
public offering, $156.1 gross proceeds relating to the notes offering as
described below, increased borrowings pursuant to the Lucent financing partially
offset by equity and debt issuance costs.
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Liquidity
AirGate closed its offering of equity and debt funding on September 30, 1999.
The total equity amount raised was $131.0 million, or $120.5 million in net
proceeds. Concurrently, the Company closed its offering of $300 million
principal amount at maturity senior subordinated discount notes (the "notes")
due 2009 raising gross proceeds of $156.1 million. The notes will require cash
payments of interest beginning on April 1, 2005.
In addition, on August 16, 1999, the Company entered into a $153.5 million
Credit Agreement with Lucent (the "Credit Facility"). The Credit Facility
provides for (i) a $13.5 million senior secured term loan (the "Tranche I Term
Loan") which matures on June 6, 2007, and (ii) a $140.0 million senior secured
term loan (the "Tranche II Term Loan") which matures on September 30, 2008.
Mandatory quarterly payments of principal are required beginning December 31,
2002 for the Tranche I Term Loan and March 31, 2004 for the Tranche II Term Loan
initially in the amount of 3.75% of the loan balance then outstanding and
increasing thereafter. Management expects that the proceeds of the Company's
concurrent initial public offering of common stock and the offering of senior
subordinated discount notes together with the Lucent financing will fund the
Company's capital expenditures including the completion of our network build-out
and working capital requirements through 2002.
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 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.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the operations of the Company are exposed 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 Company's primary market risk
exposure relates to: (i) the interest rate risk on the Company's long-term and
short term borrowings; (ii) the Company's ability to refinance its senior
subordinated discount notes at maturity at market rates; and (iii) the impact of
interest rate movements on the Company's ability to meet interest expense
requirements and financial covenants under the Company's debt instruments.
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.
11
<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) The information required to be provided by Item 701(f) of Regulation
S-K is provided in the Notes to Consolidated Financial Statements set
forth in Part I, Item 1 of this Report.
Item 4. SUBMISSION OF MATTERS FOR TO A VOTE OF SECURITY HOLDERS
(a) By unanimous consent on July 28, 1999 the security holders of the
Company consented to the matters set forth in subsection (c) of this
Item 4.
(c) By unanimous consent the security holders of the Company approved:
(1) an Amendment to the Certificate of Incorporation of the Company;
and (2) the 1999 Company Stock Option Plan.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
3* (i) Amended and Restated Certificate of Incorporation of AirGate PCS, Inc.
(ii) Amended and Restated Bylaws of AirGate PCS, Inc.
4.1* Specimen of Common Stock Certificate of AirGate PCS, Inc.
4.2* Form of warrant issued in units offering
4.3* Form of Weiss, Peck & Greer warrants
4.4* Form of Lucent warrants
4.5* Form of Indenture for senior subordinated discount notes (including form of
pledge agreement)
4.6* Form of unit (included in exhibit 10.15)
10.1* Sprint PCS Management Agreement between SprintCom, Inc. and AirGate
Wireless, L.L.C.
10.2* Sprint PCS Services Agreement between Sprint Spectrum L.P. and AirGate
Wireless, L.L.C.
10.3* Sprint Spectrum Trademark and Service Mark License Agreement
10.4* Sprint Trademark and Service Mark License Agreement
10.5* Master Site Agreement dated August 6, 1998 between AirGate and BellSouth
Carolinas PCS, L.P., BellSouth Carolinas PCS, L.P., BellSouth Personal
Communications, Inc. and BellSouth Mobility DCS.
10.6* Compass Telecom, L.L.C. Construction Management Agreement
10.7* Commercial Real Estate Lease dated August 7, 1999 between AirGate and
Perry Company of Columbia, Inc. to lease a warehouse facility
10.8* Form of Indemnification Agreement
10.9* Employment Agreement dated April 9, 1999 between AirGate and Thomas M.
Dougherty
10.10* Form of Executive Employment Agreement
10.11* Form of 1999 Stock Option Plan
10.12* Credit Agreement with Lucent (including form of pledge agreement and form
of intercreditor agreement)
10.13* Consent and Agreement
10.14* Assignment of Sprint PCS Management Agreement, Sprint Spectrum Services
Agreement and Trademark and Service Mark Agreements from AirGate
Wireless, L.L.C. to AirGate Wireless, Inc. dated November 20, 1998
10.15* Form of Warrant for units offering (including form of warrant in units
offering and from of unit)
27 Financial Data Schedule
(b) Reports on Form 8-K
On November 4, 1999, the Company filed a Current Report on Form 8-K
with the Securities and Exchange Commission that indicated the Company
had changed its end of the fiscal year from December 31 to September
30 effective September 30, 1999.
</TABLE>
* Incorporated herein by reference from exhibits contained in the registration
statement on Form S-1 (Registration File Nos. 333-79189-02 and 333-79189-01)
declared effective by the Securities and Exchange Commission on September 27,
1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AirGate PCS, Inc.
By: /s/ Alan B. Catherall
------------------------------
Name: Alan B. Catherall
Title: Chief Financial Officer
Date: November 15, 1999 /s/ Alan B. Catherall
-----------------------------
Alan B. Catherall
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
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