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As filed with the Securities and Exchange Commission on December 28, 1999
Registration No. 333-91749
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
Amendment No. 1
To
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________
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AirGate PCS, Inc. Delaware 4812 58-2422929
(Exact name of registrant as (State or other jurisdiction (Primary Standard Industry (I.R.S. Employer
specified in its charter) of incorporation or Classification Code Number) Identification No.)
organization)
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______________
Harris Tower Thomas M. Dougherty
Suite 1700 AirGate PCS, Inc.
233 Peachtree Street, N.E. Harris Tower
Atlanta, Georgia 30303 Suite 1700
(404) 525-7272 233 Peachtree Street NE
(Address, including zip code, and Atlanta, Georgia 30303
telephone number, including area code, (404) 525-7272
of registrant's principal executive offices) (Name, address, including
zip code, and telephone number,
including area code, of agent
for service)
______________
Copies to:
Mary M. Sjoquist, Esq.
Joseph G. Passaic, Jr., Esq.
Patton Boggs LLP
2550 M Street, NW
Washington, DC 20037
(202) 457-6000
______________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
______________
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _________
If the Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Prospectus
, 1999
[logo]
644,400 Shares of Common Stock Issuable Upon Exercise of Warrants
We are offering 644,400 shares of common stock issuable by us from time to time
upon exercise of warrants sold by us in our units offering, which was completed
on September 30, 1999. The warrants became separately transferable from the
units on October 21, 1999. Each warrant entitles the holder to purchase, prior
to the expiration date, 2.148 shares of our common stock at an exercise price of
$.01 per share.
The exact number of shares of common stock offered under this prospectus may be
subject to adjustment to prevent dilution of the warrant value. This prospectus
includes such additional shares of common stock, which as of this date is
indeterminable, that we may have to issue and sell to avoid dilution of the
warrants.
The warrants will expire on October 1, 2009. All expenses of this offering,
other than commissions and discounts of broker-dealers and market makers, will
be paid by us.
Our common stock is traded on the Nasdaq National Market under the symbol
"PCSA." On December 17, 1999, the closing price of our common stock was $44.75
per share.
This investment involves risk. See "Risk Factors" beginning on page 4.
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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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TABLE OF CONTENTS
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Prospectus Summary...................................................... 1
Risk Factors............................................................ 4
Forward-Looking Statements.............................................. 14
Use of Proceeds......................................................... 16
Price Range of Common Stock and Dividend Policy......................... 16
Selected Financial Data................................................. 17
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 19
Industry Background..................................................... 27
Business................................................................ 29
The Sprint PCS Agreements............................................... 45
Description of Certain Indebtedness..................................... 60
Management.............................................................. 66
Principal Stockholders.................................................. 75
Certain Transactions.................................................... 77
Regulation of the Wireless Telecommunications Industry.................. 78
Description of Capital Stock............................................ 82
Plan of Distribution.................................................... 88
Legal Matters........................................................... 88
Experts................................................................. 88
Available Information................................................... 88
Index to Consolidated Financial Statements.............................. F-1
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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 one of the
largest Sprint PCS affiliates 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 September 30, 1999, Sprint PCS, together with its affiliates,
operated PCS systems in 4,000 cities and communities 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 currently provide roaming coverage along the Interstate 85
corridor in South Carolina, between Atlanta, Georgia and Charlotte, North
Carolina. 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 significant 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, 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,
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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............. 644,400 shares of common stock issuable upon
exercise of warrants issued in our units
offering.
Common Stock Outstanding......... 11,969,734 shares.
Nasdaq National Market Symbol.... "PCSA"
Risk Factors..................... See "Risk Factors" beginning on page 4 for
a discussion of the material factors that you
should consider before purchasing shares of
common stock.
Number of Warrants Previously
Issued........................... 300,000 warrants were issued in our units
offering.
Exercise......................... Each warrant entitles the holder to purchase,
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.
Separation....................... The warrants were separated from the units on
October 21, 1999.
Expiration....................... October 1, 2009.
Transfer Restrictions............ Upon effectiveness of the registration
statement, of which this prospectus is a
part, and through such time as it continues
to be effective, holders, who are not our
affiliates, will not be subject to resale
restrictions on the shares of common stock
received upon the exercise of their warrants.
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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 you exercise your warrants
to purchase shares of our common stock.
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 23 employees as of September 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, other than roaming
coverage, which commenced in November 1999, 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.
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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, 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
Technologies Inc., will be at variable rates of interest, which could
result in higher interest expense in the event of increases in market
interest rates; and
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. 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 September 30, 1999, our outstanding long-term debt totaled $165.7
million. 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.
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 borrowed $13.5 million to date from Lucent. The remaining $140.0
million which we expect to borrow 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 our 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 tower company. If our master collocation
agreement with that tower company 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
6
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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.
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 the Lucent Financing, 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
7
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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 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.
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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
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 currently have "key man" life
insurance for our chief executive officer.
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
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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 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 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 stockholders.
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."
10
<PAGE>
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 Administration, generally referred to
as the FAA, and, depending on the jurisdiction, state and local regulatory
agencies and legislative bodies. Adverse decisions regarding these regulatory
requirements could negatively impact our operations and 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 beneficial
ownership of our common stock
11
<PAGE>
Our current management and directors beneficially own approximately 29% of
our outstanding common stock on a diluted basis as of December 17, 1999.
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."
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, 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, Sprint 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.
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 during this offering by our management and our affiliates and upon
exercise of the warrants and subsequent sale of the shares of common stock
underlying the warrants. The occurrence of such sales, or the perception that
such sales could occur, could materially and adversely affect the market price
of our common stock. All of our stockholders prior to our initial public
offering of common stock, Lucent, members of our senior management and our
directors have entered into written "lock-up" agreements pursuant to which each
has agreed that, until March 25, 2000 not to, among other things, sell their
shares. As a result, upon the expiration of the lock-up agreements 180 days
after the date of this prospectusand any other restrictions that are applicable,
an additional 3,596,996 shares of our common stock will be eligible for sale
subject, in most cases, to volume and other restrictions under federal
securities laws. In addition, up to 644,400 shares of common stock may be issued
upon exercise of the warrants pursuant to this prospectus for an exercise price
of $0.01 per share. Upon exercise of the warrants, the shares of common stock
issued will be freely tradeable, subject to restrictions on sales of securities
under the federal securities laws for persons who are our affiliates.
On the separation date 644,400 shares underlying the warrants issued in the
units offering became freely tradeable.
You may not receive a return on investment through dividend payments
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
12
<PAGE>
through cash dividends on the shares of common stock purchased pursuant to the
exercise of your warrants.
We have the right to suspend the use of this prospectus which will restrict
the ability of holders to exercise their warrants
The warrant holders will not be able to exercise their warrants to purchase
our common stock during a period in which we elected to suspend the
effectiveness of the shelf registration statement of which this prospectus is a
part, any amendment made to the shelf registration statement. Under the warrant
agreement pursuant to which the warrants were issued, we have the right to
suspend the effectiveness of the shelf registration statement and, therefore,
the use of this prospectus, for a limited period of time.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations,
which are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended. 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;
. our substantial amount of debt and our ability to service such debt and
comply with all the covenants in the loan documents;
. 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 technology becoming obsolete;
. our competition; and
14
<PAGE>
. our ability to attract and retain skilled personnel.
See additional discussion under "Risk Factors" beginning on page 4.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the exercise of the warrants, assuming
all warrants are exercised, after deducting estimated offering expenses, will be
approximately $6,444. We intend to use the net proceeds from the exercise of the
warrants for general corporate purposes including working capital.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the Nasdaq National Market under the symbol
PCSA. The following table sets forth, for the periods indicated, the range of
high and low bid prices for our common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
Price Range of
Common Stock
-------------------
High Low
<S> <C> <C>
Year Ended September 30, 1999:
Fourth Quarter (From September 28, 1999) $28.00 $23.00
Year Ended September 30, 2000 $54.25 $23.00
First Quarter (through December 17, 1999)
</TABLE>
On December 17, 1999, the reported last sales price of the common stock was
$44.75 per share.
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.
16
<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 subsidiary 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 and for the nine month periods ended
September 30, 1998 and 1999, are derived from the consolidated financial
statements of AirGate PCS, Inc. and subsidiary 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 included herein.
<TABLE>
<CAPTION>
Period from
Inception,
For the Nine Month June 15,
Periods Ended 1995, to
September 30, For the Years Ended December 31, December 31,
------------------ -------------------------------- ------------
1999 1998 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
(In thousands except per share data)
Statement of Operations Data:
Operating expenses:
General and administrative............ $(5,619) $(1,552) $(2,597) $(1,101) $(1,252) $(1,458)
Depreciation and amortization......... ( 622) (1,028) (1,204) (998) (19) (18)
-------- ------- ------- ------- ------- -------
Operating loss........................ (6,241) (2,580) (3,801) (2,099) (1,271) (1,476)
Interest expense...................... (9,358) (1,015) (1,392) (817) (582) (217)
-------- ------- ------- ------- ------- -------
Net loss.............................. $(15,599) $(3,595) $(5,193) $(2,916) $(1,853) $(1,693)
======== ======= ======= ======= ======= =======
Other Data:
Operating loss before fixed charges... $ (6,241) $(2,580) $(3,801) $(2,099) $(1,271) $(1,476)
======== ======= ======= ======= ======= =======
Basic and diluted net loss per share
of common stock (1)................. $ (4.57) $ (1.06) $ (1.54) $ (0.86) $ (0.55) $ (0.50)
======== ======= ======= ======= ======= =======
</TABLE>
____________________
(Footnotes on the following page)
17
<PAGE>
<TABLE>
<CAPTION>
As of September 30, As of December 31,
-------------------- -------------------------------------------
1999 1998 1998 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:...................
Cash and cash equivalents............ $258,900 $ 1,926 $ 2,296 $ 147 $ 6 $ 256
Total assets......................... 317,320 12,120 15,450 13,871 2,196 21,643
Long-term debt(2).................... 165,667 7,700 7,700 11,745 -- --
Stockholders' equity (deficit)....... 127,846 (3,753) (5,350) (1,750) (3,025) (1,272)
</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) Includes current maturities.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the 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 significant revenues. 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 use of 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 September 30, 1999, we have incurred $45.0 million of capital
expenditures related to the build-out of our PCS network. We currently provide
roaming coverage along the Interstate 85 corridor in South Carolina, between
Atlanta, Georgia and Charlotte, North Carolina. 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.
19
<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:
20
<PAGE>
. allows us to avoid the costs of building the tower and buying or leasing
the land;
. 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.
21
<PAGE>
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
For the nine month period ended September 30, 1999:
On October 21, 1999, the Company changed its fiscal year from a calendar
year ending on December 31 to a fiscal year ending on September 30 effective
September 30, 1999. From January 1, 1999 through September 30, 1999, we were
focused on raising capital to continue our PCS network build-out.
Revenues
As a development stage enterprise, we had no commercial operations for any
period, resulting in no revenues or costs of service being recorded. In November
1999, we began offering roaming coverage along the Interstate 85 corridor in
South Carolina, between Atlanta, Georgia and Charlotte, North Carolina. We
expect to generate revenue from Sprint PCS customers and customers of other
wireless carriers with whom Sprint PCS has roaming agreements as they use our
PCS network along the Interstate 85 corridor.
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 to $1.6
million for the nine month period 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 and Amortization
For the nine months ended September 30, 1999, depreciation and amortization
expense was $622,000 compared to $1.0 million for the nine months ended
September 30, 1998. Through August 1998 we were amortizing the purchase price of
FCC licenses held by our predecessor. We made 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 in August 1998. Depreciation and amortization of
our network build-out will begin as the network becomes operational and will
continue to increase as our network is placed into service.
22
<PAGE>
Interest Expense, net
For the nine months ended September 30, 1999, interest expense was $9.4
million, net of capitzalized interest of $1.1 million, an increase $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 increase as a result of the issuance in September 1999 of the units
offering and as outstanding balances under the Lucent Financing increase.
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 build-out our PCS network.
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
consolidated financial statements of AirGate PCS, Inc. and subsidiaries and
predecessors. 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 network assets which we purchased from Sprint
PCS which include radio frequency and engineering design data, site acquisition
materials and construction equipment. We also made $5.2 million of capital
expenditures related to the build-out of our PCS network.
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 and depreciation and amortization of the FCC
PCS licenses. All costs of start-up and organizational activities have been
expensed in accordance with AICPA Statement of Position 98-5.
Liquidity and Capital Resources
As of September 30, 1999, we had $258.9 million in cash and cash
equivalents, as compared to $2.3 million in cash and cash equivalents at
December 31, 1998. Our net working capital was $229.7 million at September 30,
1999 versus negative working capital of $13.7 million at December 31, 1998.
23
<PAGE>
Net Cash Used in Operating Activities
The $2.5 million in cash used in operating activities was the result of our
net loss for the nine months ended September 30, 1999 which was partially offset
by increases in current liabilities and no-cash interest expense.
Net Cash Used in Investing Activities
The $15.7 million in cash used by investing activities represents capital
expenditures related to our network build-out. We made an additional $16.2
million in capital expenditures through accounts payable, for a total of $31.9
million of capital expenditures for 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 in gross proceeds from our initial public offering
of common stock, $156.1 in gross proceeds from our units offering, as described
below, and increased borrowings pursuant to the Lucent financing partially
offset by equity and debt issuance costs.
Liquidity
We closed our offerings 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, we closed our units offering consisting of $300 million
principal amount at maturity 13.5% senior subordinated discount notes due 2009
and warrants to purchase 644,000 shares of common stock at $.01 per share. The
gross proceeds from the units offering was $156.1 million or $149.4 million in
net proceeds. The senior subordinated discount notes will require cash payments
of interest beginning on April 1, 2005.
In addition, on August 16, 1999, we entered into a $153.5 million credit
agreement with Lucent. The credit agreement provides for a $13.5 million senior
secured term loan which matures on June 6, 2007, which is the first installment
of the loan, or Tranche 1. The second installment, or Tranche 2, under the
credit agreement is for a $140.0 million senior secured term loan that matures
on September 30, 2008. Mandatory quarterly payments of principal are required
beginning December 31, 2002 for Tranche 1 and March 21, 2004 for Tranche 2
initially in the amount of 3.75% of the loan balance then outstanding and
increasing thereafter. We expect that the proceeds of our concurrent initial
public offering of common stock and the units offering together with the Lucent
financing will fund our 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.
24
<PAGE>
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 commercial 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
In the normal course of business, our operations are exposed to interest
rate risk on our financing from Lucent and any future financing requirements.
Our fixed rate debt consists primarily of the accreted balance of the senior
subordinated discount notes. Our variable rate debt consists of borrowings made
under the Lucent financing. Our primary market risk exposure relates to: (i) the
interest rate risk on our long-term borrowings; (ii) our ability to refinance
our senior subordinated discount notes at maturity at market rates; and (iii)
the impact of interest rate movements on our ability to meet interest expense
requirements and financial covenants under our debt instruments.
We expect to manage the interest rate risk on our outstanding long-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 monitor
our interest rate risk on an ongoing basis.
25
<PAGE>
The following table presents the estimated future balances of outstanding
long-term debt at the end of each year and future required annual principal
payments for each year then ended associated with the senior subordinated
discount notes and the Lucent financing based on our projected level of long-
term indebtedness:
<TABLE>
<CAPTION>
Years Ending September 30,
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2000 2001 2002 2003 2004 Thereafter
(Dollars in thousands)
Senior subordinated discount notes............. $178,193 $206,819 $235,446 $268,796 $300,000 --
Fixed interest rate............................ 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Principal payments............................. -- -- -- -- -- $300,000
Lucent financing............................... $ 13,500 $ 72,560 $152,994 $150,969 $127,775 --
Variable interest rate (1)..................... 9.25% 9.25% 9.25% 9.25% 9.25% 9.25%
Principal payments............................. -- -- -- $ 2,025 $ 2,025 $127,775
</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.
Inflation
We believe that inflation has not had, and will not have, a material
adverse effect on our results of operations.
26
<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.
27
<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.
28
<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 one of the
largest Sprint PCS affiliates 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 4.7 million customers as of September 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
September 30, 1999, Sprint PCS, together with its affiliates, operated PCS
systems in 4,000 cities and communities 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 third quarter of 1999.
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------------- ------------------------------ --------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Total subscribers........ 192 347 570 887 1,114 1,370 1,750 2,586 3,350 3,967 4,690
</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.
29
<PAGE>
We are one of the largest affiliates 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.
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 September 30, 1999,
Sprint PCS, together with its affiliates, operated PCS systems in 4,000 cities
and communities in 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
30
<PAGE>
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.
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.
31
<PAGE>
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.
. W. Chris Blane, our vice president of 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.
. Mark A. Roth, our vice president of the interior region, has more than 10
years of wireless communications experience. Mr. Roth has served as a
divisional head for Arch Communications, responsible for managing over
$80 million in revenue. More recently, Mr. Roth was Senior Vice President
of Sales and Distribution for Conxus Communications.
Fully financed plan. The net proceeds received from our concurrent
offerings of common stock and units, which consisted of senior subordinated
discount notes and warrants, together with the amount of borrowings available
under the Lucent financing, total approximately $408.9 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.
32
<PAGE>
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.
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.
33
<PAGE>
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.
34
<PAGE>
The following table lists the location and population of each of the
markets that comprise our territory under our agreements with Sprint PCS:
Territory (BTAs)* State Population (1)
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
=========
- ---------------
* 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
In November 1999, we began offering roaming coverage along the Interstate
85 corridor in South Carolina, between Atlanta, Georgia and Charlotte, North
Carolina. 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.
35
<PAGE>
<TABLE>
<CAPTION>
Expected
Commercial Launch Cumulative Percentage of
Date by Quarter Covered Residents Covered Residents as a Total Market Included
<S> <C> <C> <C>
First quarter 2000 Anderson and Greenville-Spartanburg, 1,535,986 22%
South Carolina; Asheville and Hickory,
North Carolina
Second and third quarters 2000 Augusta and Savannah, Georgia; 4,363,458 63%
Charleston, Columbia, Myrtle Beach, and
Orangeburg, South Carolina; Goldsboro,
Roanoke Rapids, Rocky Mount and
Wilmington, North Carolina
Fourth quarter 2000 Florence, Greenwood and Sumter, South 5,003,320 74%
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 September 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.
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<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 offers in over 4,000
cities and communities in the United States as of September 30, 1999, 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.
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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. 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.
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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.
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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.
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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.
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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 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. BellSouth 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 markets its PCS
services 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
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cable systems. While some of these technologies and services are currently
operational, others are being developed or may be developed in the future.
Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
PCS. Based upon increased competition, we anticipate that market prices for
two-way wireless 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 December 2, 1999, we employed 81 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 consist of a 10,052 square foot leased
office space located at Harris Tower, 233 Peachtree Street, N.E., Suite 1700,
Atlanta, Georgia 30303. We also lease a 40,000 square foot office located at
Pelham 85 Business Center, Greenville, South Carolina, and lease a 24,000
square foot office located at 411 Huger Street, Columbia, South Carolina. We
believe our properties are in good operating condition and are currently
suitable and adequate for our business operations.
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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. The Sprint PCS agreements and a consent and agreement are
exhibits to the registration statement of which this prospectus is a part. We
urge you to carefully review the Sprint PCS agreements and the consent and
agreement.
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;
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. 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.
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.
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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 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.
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Termination of management agreement. The management agreement can be
terminated as a result of:
. termination of Sprint PCS' PCS licenses;
. an uncured breach under the management agreement;
. bankruptcy of a party to the management agreement;
. the management agreement not complying with any applicable law in any
material respect;
. the termination of either of the trademark and service mark license
agreements; or
. 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;
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. 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 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.
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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 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
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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 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;
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. 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;
. 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
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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.
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.
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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 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
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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 cannot 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 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 stockholder's equity value plus the outstanding amount of
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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 stockholders have 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;
. 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
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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;
. 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
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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 5MHz 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.
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:
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. 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.
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.
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%.
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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 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;
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. 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;
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. 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;
. 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; or
. we change control of our ownership.
We have paid Lucent the expenses related to the Lucent financing and an
origination fee. In addition, in connection with the Lucent financing we issued
warrants to Lucent to purchase shares of common stock representing 128,860
shares of common stock on the closing date of our initial public offering at an
exercise price of $20.40 per share. See "Description of Capital Stock--
Warrants."
Senior Subordinated Discount Notes
In our units offering, we offered $300.0 million aggregate principal amount
at maturity of 13 1/2% senior subordinated discount notes maturing in 2009 and
warrants. Accompanying each senior subordinated discount note was a warrant
exercisable for 2.148 shares of common stock at an exercise price of $0.01. The
senior subordinated discount notes and the warrants became separately
transferable at the request of the underwriter on October 21, 1999. 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 is 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, 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 are guaranteed by our existing
subsidiary, AGW Leasing Company, Inc., and may be guaranteed by additional
subsidiaries of ours in the future. In addition,
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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 interest thereon.
We 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
contains 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;
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. 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;
. 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.
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
September 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. As of November 15, 1999,
all outstanding principal and interest due under the note has been paid.
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MANAGEMENT
Directors and Executive Officers
The following table presents information with respect to our directors and
executive officers.
Name Age Position
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 Development
Barry Schiffman............. 53 Chairman of the Board and Director
Gill Cogan.................. 46 Director
Robert Ferchat.............. 65 Director
Robert E. Gourlay........... 45 Vice President of Marketing
David C. Roberts............ 37 Vice President of Engineering and
Network Operations
Shelley L. Spencer.......... 36 Vice President of Law and Secretary
Alan B. Catherall........... 46 Chief Financial Officer
Mark A. Roth................ 43 Vice President Interior Region
Thomas M. Dougherty has been our president and chief executive officer since
April 1999. Prior to joining us, Mr. Dougherty was a senior executive of Sprint
PCS. Before that, Mr. Dougherty served as executive vice president and chief
operating officer of Chase Telecommunications, a personal communications
services company, 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, a PCS company.
W. Chris Blane has been our vice president of business development since 1998.
In 1995, Mr. Blane joined AirLink II LLC as a vice president for business
development as it prepared for the C block PCS auction. Prior thereto, Mr. Blane
was the president of Metrex Corporation, which constructed the first fiber optic
competitive access network in Atlanta and which ultimately merged with MFS
Communications Co., now MCI WorldCom, Inc.
Thomas D. Body III has been our vice president of strategic planning since
November 1998. Prior to that, Mr. Body served as our chief executive officer
from January 1998 to October 1998. In 1995, Mr. Body joined AirLink II LLC as a
vice president for business development as it prepared for the C block PCS
auction. Prior thereto, Mr. Body was the chairman and chief executive officer
of Metrex Corporation, which constructed the first fiber optic competitive
access network in Atlanta and which ultimately merged with MFS Communications
Co., now MCI WorldCom, Inc.
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Gill Cogan has been a director of AirGate since 1998. He is co-managing partner
of Weiss, Peck & Greer Venture Partners, a venture capital firm, and has served
in such capacity since 1992. He is a director of Electronics for Imaging, Inc.,
and several privately held companies.
Barry Schiffman has been a director of AirGate since 1998. He is president,
executive managing director and, chief investment officer and member of the
board of JAFCO America Ventures, Inc., a venture capital firm, and has held such
position since 1996. From 1994 and until he joined JAFCO, he was a general
partner at Weiss, Peck & Greer Venture Partners.
Robert A. Ferchat has been a director of AirGate since October 1999. Mr. Ferchat
previously served as the chairman of the board of directors, president and chief
executive officer of BCE Mobile Communications a wireless telecommunications
company from November 1994 to January 1999. Mr. Ferchat is a director of GST
Telecommunications and Brookfield Properties Corp. as well as several companies
traded on the Toronto Exchange.
Robert E. Gourlay has been our vice president of marketing since 1998. In 1995,
Mr. Gourlay joined AirLink II LLC as vice president-marketing as it prepared for
the C block PCS auction.
David C. Roberts has been our vice president of engineering and network
operations since 1998. In 1995, Mr. Roberts joined AirLink II LLC as vice
president-engineering as it prepared for the C block PCS auction.
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Shelley L. Spencer has been our vice president of law and secretary since 1998.
In 1995, Ms. Spencer joined AirLink II LLC as general counsel as it prepared for
the C block PCS auction.
Alan B. Catherall has been our chief financial officer since March 1998. Prior
to joining us, Mr. Catherall was a partner in Tatum CFO Partners, a financial
consulting firm, since 1996. Before that, Mr. Catherall was chief financial
officer of Syncordia Services, a joint venture of MCI and British Telecom, from
1994 to 1996.
Mark A. Roth has been our vice president of sales, interior region since July
1999. Prior to joining us, Mr. Roth was senior vice present of sales and
distribution for Conxus Communications. Before that, Mr. Roth held various
positions with Arch Communications, most recently as a divisional head, from
1992 to July 1998.
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. Robert
Ferchat and a director to be appointed by the board of directors 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, 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 is one vacancy on the board. We anticipate that the
remaining vacancy will be filled in the near future by the board of directors.
The audit committee consists of Gill Cogan, Barry Schiffman and Robert A.
Ferchat. The compensation committee consists of Gill Cogan, Barry Schiffman and
Robert A. Ferchat.
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
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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 September 30, 1999,
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.
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 $100,000 during the year ended
September 30, 1999.
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Summary Compensation Table(1)
<TABLE>
<CAPTION> Long Term
Annual Compensation Compensation Awards Payouts
------------------------------------ --------------------------- ---------
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
sation Awards Options/SARs Payouts Compensation
Name and Principal Position Year Salary($)(1) Bonus ($) ($)(4) ($)(5) (#)(6) ($) ($)
- --------------------------- ----- ----------- ---------- -------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas D. Dougherty (2) 1999 $ 82,500 $71,875(7) ------ ------ 300,000 ------ -------
President and Chief 1998 ------- ------ ------ ------ ------- ------ -------
Executive Officer
Thomas D. Body III (3) 1999 120,000 25,550 ------ ------ 75,000 ------ -------
Vice President of 1998 120,000 ------ ------ ------ ------- ------ -------
Strategic Development
W. Chris Blane 1999 120,000 25,500 ------ ------ 75,000 ------ -------
Vice President of Business 1998 120,000 ------ ------ ------ ------- ------ -------
Development
Alan B. Catherall 1999 120,000 75,000 ------ ------ 90,000 ------
Chief Financial 1998 ------- ------ ------ ------ ------- ------
Officer
Robert E. Gourlay 1999 120,000 25,900 ------ ------ 75,000 ------ -------
Vice President of 1998 120,000 ------ ------ ------ ------- ------ -------
Marketing
Shelley L. Spencer 1999 120,000 68,425 ------ ------ 115,000 ------ -------
Vice President of Law and 1998 120,000 ------ ------ ------ ------- ------ -------
Secretary
Jack R. Kimzey (6) 1999 33,750 33,750 ------ ------ ------- ------ $16,000
Chief Executive Officer 1998 67,500 ------ ------ ------ ------- ------ -------
</TABLE>
(1) Due to the change in our fiscal year from a fiscal year end of December 31
to September 30 the compensation reported for each person listed in the
table during both 1998 and 1999 includes an overlap of compensation for the
period between September 30, 1998 through December 31, 1998.
(2) Mr. Dougherty became our Chief Executive Officer on April 15, 1999.
(3) Mr. Body served as Chief Executive Officer from January 1998 to October
1998.
(4) There were no (a) perquisites over the lesser of $50,000 or 10% of the
individual's total salary and bonus for the last year, (b) payments of
above-market preferential earnings on deferred compensation, (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation, (d) tax payment reimbursements, or (e) preferential
discounts on stock.
(5) For 1999, the Company had no employee restricted stock plans in existence.
(6) Mr. Kimzey served as Chief Executive Officer from October 1998 to February
1999. Mr. Kimzey resigned in February 1999. From February 15, 1999 to
April 15, 1999 Mr. Kimzey was employed as a consultant and received
$16,000.
(7) Mr. Dougherty's bonus for the fiscal year ended September 30, 1999
consisted of a cash bonus of $71,875 and options to acquire 10,000 shares
of common stock. The exercise price of the options was equal to the fair
market value of the common stock on October 21, 1999 and are immediately
exercisable.
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Compensation of Directors
Currently, we do not compensate our directors with directors fees, however,
we have granted director Robert A. Ferchat 10,000 options to purchase common
stock. See "Management--1999 Stock Option Plan" In addition, we do reimburse
directors for their expenses of attendance at board meetings.
Employment Agreements
We have entered into an employment agreement with Thomas M. Dougherty, our
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. Mr. Dougherty was awarded options
exercisable for 300,000 shares of common stock. Under the agreement, Mr.
Dougherty vested 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. The options that vested on April 15, 1999 are not
exercisable until April 15, 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 entered into employment agreements with W. Chris Blane, Thomas D. Body
III, Robert E. Gourlay, David C. Roberts, and Shelley L. Spencer as of the
completion of the common stock offering. Each of these employees may be
terminated with or without cause at any time. The agreements provide that each
employee, upon termination, will not compete in the business of wireless
telecommunications in our territory or 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's 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 have also
entered into an employment agreement with Mark A. Roth. Under his agreement, Mr.
Roth 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. We expect to enter into an
employment agreement with Alan B. Catherall with similar terms.
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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. On July 28, 1999, we made an initial
granted of options to purchase 1,075,000 shares of common stock with an exercise
price of $14.00 per share to our existing officers and employees. As of
December 2, 1999, we have granted options to purchase 1,170,000 shares of common
stock. The following table presents information with respect to the options
granted to executive officers whose salary and bonus exceeded $100,000 during
the year ended September 30, 1999.
<TABLE>
<CAPTION>
Potential realized
Value at Assumed
Annual Rates of Stock Price
Appreciation for Option
Term (2)
Number of Securities % of Total ------------------------------
Underlying Options Exercise Expiration
Name Options (1) Granted Price Date 5% 10%
- ---------------------------- ----------------------- ------------ ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas M. Dougherty......... 300,000 25.6% $14.00 04/2009 $2,641,357 $6,693,718
W. Chris Blane.............. 75,000 6.4 14.00 07/2009 660,339 1,673,430
Thomas D. Body III.......... 75,000 6.4 14.00 07/2009 660,339 1,673,430
Alan B. Catherall........... 90,000 7.7 14.00 07/2009 792,407 2,008,115
Robert E. Gourlay........... 75,000 6.4 14.00 07/2009 660,339 1,673,430
Shelley L. Spencer.......... 115,000 9.8 14.00 07/2009 1,012,520 2,565,925
</TABLE>
___________________
(1) Mr. Dougherty's options will vest 25% on April 15, 1999, with the remaining
75% of the options vesting in 15 equal quarterly installments beginning
June 30, 2000. The remaining named executive officers 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.
(2) The amounts represent certain assumed rates of appreciation. Actual gains,
if any, on stock option exercises and common stock holdings are dependent
on the future performance of the common stock and overall stock market
conditions. There can be no assurance that the amounts reflected in this
table will be realized.
The option plan is will be administered by our board of directors which may
subject to the provisions of the option plan, 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.
Year-End Option Values. The following table sets forth information concerning
the value as of September 30, 1999 of options held by the executive officers
named in the Summary Compensation Table set forth above.
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<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End (1) at Fiscal Year-End (1)(2)
---------------------- -------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- -------------------------- -------------------------
<S> <C> <C>
Thomas M. Dougherty --/300,000 $--/$3,262,500
W. Chris Blane --/75,000 $--/$815,625
Thomas D. Body III --/75,000 $--/$815,625
Alan B. Catherall --/90,000 $--/$978,750
Robert E. Gourlay --/75,000 $--/$815,625
Shelley L. Spencer --/115,000 $--/$1,250,625
</TABLE>
________
(1) No options were exercised by any of the named executive officers as of
September 30, 1999.
(2) The value of the unexercised in the money options were calculated by
multiplying the number of shares of common stock underlying the options by the
difference between $24.875, which was the closing market price of our common
stock on September 30, 1999, and the option exercise price of $14.00.
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. Mr. Ferchat's options will vest 50% on the
completion of his first year as a director; the remaining 50% will vest on the
completion of his second year as a director.
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.
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 our company 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 our
company AirGate, the board of directors may similarly provide the employee with
the right to exercise all options.
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Noncompetition Agreement
In connection with the granting of options under the option plan, most
employees 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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PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the beneficial
ownership of common stock, as of December 17, 1999, 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 named executive officers; and
. all executive officers and directors as a group.
<TABLE>
<CAPTION>
Number of Percentage
Shares Beneficially of Outstanding
Name and Address of Beneficial Owner(1) Owned(2) Common Stock
<S> <C> <C>
Essex Investment Management
Company, LLC(3)........................ 1,453,405 12.1%
125 High Street
Boston, Massachusetts 02110
Weiss, Peck & Greer Venture
Partners affiliated funds(4)........... 1,675,842 14.0%
555 California Street, Suite 3130
San Francisco, California 94104
Thomas M. Dougherty(5)................. 10,000 *
W. Chris Blane(6)...................... 325,537 2.7
Alan B. Catherall...................... 1,000 *
Robert E. Gourlay(7)................... 191,451 1.6
Barry Schiffman(8)..................... 511,686 4.3
Gill Cogan(9).......................... 1,675,842 14.0
Shelley L. Spencer(10)................. 87,131 *
Thomas D. Body III..................... 320,537 2.7
David C. Roberts....................... 140,339 1.2
Robert A. Ferchat...................... -- --
</TABLE>
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All executive officers and directors as
a group
(11 persons)........................... 3,263,723 27.3%
- -------------------------
(Footnotes on following page)
* Less than one percent.
(1) Except as indicated below, the address for 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) Based upon information contained in an amended Schedule 13G filed with the
Securities and Exchange Commission on December 15, 1999.
(4) Includes 214,413 shares of common stock underlying the warrants issued to
the Weiss, Peck & Greer Venture Partners affiliated funds.
(5) Includes options to acquire 10,000 shares of common stock which are
exercisable at a per share exercise price of $43.58.
(6) Includes 305,000 shares directly held by Mr. Blane, 16,537 held by Mr.
Blane's spouse and 4,000 held by his children.
(7) Includes 191,451 shares that Mr. Gourlay is deemed to beneficially own as a
general partner of Robert E. Gourlay & Associates, LP.
(8) Includes 511,686 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.
(9) Consists of 1,675,842 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.
(10)Includes 86,931 shares directly held by Ms. Spencer and 200 shares held by
her spouse, which Ms. Spencer disclaims beneficial ownership.
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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,
executive managing director, 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 were converted into shares of our common
stock concurrently with the 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 are exerciseable after the common stock 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 were converted into
shares of our common stock concurrently 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 entered into registration
rights agreements with the Weiss, Peck and Greer Venture Partners affiliated
funds and the JAFCO America Ventures, Inc. affiliated funds.
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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 metropolitan areas
and 55 MHz in rural areas.
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.
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PCS License Renewal
PCS licensees can renew their licenses for additional 10 year terms. PCS
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford PCS renewal applicants involved in comparative renewal hearings with a
"renewal expectancy." The renewal expectancy is the most important comparative
factor in a comparative renewal hearing and is applicable if the PCS renewal
applicant has: (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. The FCC has adopted rules requiring
broadband PCS and other CMRS providers to implement enhanced emergency 911
capabilities. The compliance deadline for phase 1 was January 1, 1999, and for
phase II will be October 1, 2001 for digital CMRS carriers to ensure access for
customers using devices for the hearing-impaired. The FCC recently adopted
rules allowing carriers to implement handset based enhanced 911 service. If
such technology is used at least 50 percent of all new handsets
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must be capable of automatic location identification by October 1, 2001. Under
certain circumstances, 100% of the new handsets will need automatic location
identification by October 1, 2001. Further waivers of the enhanced emergency 911
capability requirements may be obtained by individual carriers by filing a
waiver request.
On June 10, 1999, the FCC initiated a regulatory proceeding seeking comment
from the public on a number of issues related to competitive access to multiple-
tenant buildings, including the following:
. the FCC's tentative conclusion that the Communications Act of 1934, as
amended, requires utilities to permit telecommunications carriers access
to rooftop and other rights-of-way in multiple tenant buildings under
just, reasonable and nondiscriminatory rates, terms and conditions; and
. whether building owners that make access available to a
telecommunications carrier should be required to make access available
to all other telecommunications carriers on a nondiscriminatory basis,
and whether the FCC has the authority to impose such a requirement.
This proceeding could affect the availability and pricing of sites for our
antennae and those of our competitors.
Communications Assistance for Law Enforcement Act
The Communications Assistance for Law Enforcement Act, 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 uncontested requirements of J-STD-025 by
June 30, 2000, given hardware changes that are yet to be developed and
implemented by switch manufacturers. Compliance with contested portions of the
J-STD-025 standard and "punch-list" capability adopted by the FCC will be
required by September 30, 2001.
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.
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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.
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 December 17, 1999,
there were 11,969,734 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.
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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 Warrants
Weiss Peck & Greer affiliated entities 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 warrants
may be exercised to purchase 214,413 shares of common stock at a per share
exercise price of $12.75. We agreed to register the shares of common stock
underlying the warrants under the terms of a registration rights agreement
entered into with Weiss, Peck & Greer. The warrants held by Weiss, Peck & Greer
are subject to a lock-up agreement and may not be sold, transferred or exercised
until after March 25, 2000.
Lucent Warrants
We also issued warrants to Lucent in consideration for the financing we
received from Lucent. The warrants are exercisable for 128,860 shares of our
common stock at an exercise price of $20.40 per share 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. We entered into a registration rights agreement with Lucent that
provides for the registration of the shares of common stock purchased by Lucent
upon exercise of their warrants, however, Lucent may not sell their warrants or
any shares of common stock received upon exercise of their warrants until after
the lock-up agreement with us expires on March 25, 2000.
Warrants Issued in Units Offering
We have issued warrants to purchase an aggregate of 644,400 shares of our
common stock pursuant to a warrant agreement by and among us, AGW Leasing
Company, Inc., and Bankers Trust Company, as warrant agent. The following
description is a summary of the material provisions of the warrant agreement.
We urge you to read the warrant agreement because it defines your rights as a
holder of these warrants. The warrant agreement is an exhibit to the
registration statement of which this prospectus is a part.
General. Each warrant, when exercised, entitles the holder to receive
2.148 fully paid and non-assessable shares of our common stock, at an exercise
price of $0.01 per share, subject to adjustment. The number of shares of common
stock underlying the warrants is subject to adjustment in the cases referred to
below. The warrants became separated from the units and are freely transferable
as of the separation date or October 21, 1999. Unless exercised, the warrants
will automatically expire at 5:00 p.m. New York City time on the expiration
date, October 1, 2009.
The warrants may be exercised by surrendering the warrant certificates
evidencing the warrants to be exercised with the accompanying form of election
to purchase that is properly completed and executed, together with payment of
the exercise price. Payment of the exercise price may be made at the
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holder's election (1) by tendering senior subordinated discount notes having an
aggregate accreted value or aggregate principal amount, as the case may be, plus
accrued and unpaid interest, if any, thereon, to the date of exercise equal to
the exercise price and (2) in cash in United States dollars by wire transfer or
by certified or official bank check to the order of AirGate. Upon surrender of
the warrant certificate and payment of the exercise price, we will deliver or
cause to be delivered, to or upon the written order of such holder, stock
certificates representing the number of whole shares of common stock underlying
the warrants to which the holder is entitled. If less than all of the warrants
evidenced by a warrant certificate are to be exercised, a new warrant
certificate will be issued for the remaining number of warrants. Holders of
warrants will be able to exercise their warrants only if a registration
statement relating to the shares of 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 of 1933, 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 the shares of common stock be issued on exercise of the warrants reside.
No fractional shares of common stock will be issued upon exercise of the
warrants. We will pay to the holder of the warrant at the time of exercise an
amount in cash equal to the current market value of any such fractional shares
less a corresponding fraction of the exercise price.
The holders of the warrants have no right to vote on matters submitted to
our stockholders and have no right to receive dividends. The holders of the
warrants are not entitled to share in our assets of in the event of our
liquidation, dissolution or the winding up of corporate business. 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.
In the event of a taxable distribution to holders of our common stock that
results in an adjustment to the number of shares of common stock or other
consideration for which a warrant may be exercised, the holders of the warrants
may, in certain circumstances, be deemed to have received a distribution subject
to United States federal income tax as a dividend.
Adjustments. The number of shares of common stock purchasable upon
exercise of warrants arewill be subject to adjustment in several circumstances.
No adjustment need be made 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. In addition, no
adjustment need be made for the adoption of a plan being referred to as a
shareholder's rights plan or the issuance of rights and such a plan.
In the case of certain consolidations or mergers of AirGate, or the sale of
all or substantially all of the assets of AirGate to another corporation, (1)
each warrant will thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the warrants been exercised immediately prior thereto and (2) the
Person formed by or surviving any such consolidation or merger, (if other than
AirGate) or to which such sale shall have been made will assume the obligations
of AirGate under the Warrant Agreement.
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Registration of the Warrant Shares. We also are required, under the
terms of the warrant agreement, to (1) file a shelf registration statement by
November 29, 1999 to register the common stock underlying the warrants, (2) use
our reasonable best efforts to cause the shelf registration statement to be
declared effective by the Securities and Exchange Commission on or before
January 29, 2000 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 have expired.
We may suspend the effectiveness of any shelf registration statement or
amendment thereto, suspend the use of any prospectus and shall not be required
to amend or supplement the shelf registration statement, any related prospectus
or any document incorporated therein by reference other than an effective
registration statement being used for an underwritten offering in the event
that, and for periods (each a "Suspension Period") not to exceed 60
consecutive days and no more than two times in any calendar year if (1) an event
or circumstance occurs and is continuing as a result of which the shelf
registration statement, any related prospectus or any document incorporated
therein by reference as then amended or supplemented or proposed to be filed
would, in our good faith judgment, contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and (2) (A) we determine in our good faith judgment that the
disclosure of such event at such time would have a material adverse effect on
our business, operations, or prospects or (B) the disclosure otherwise relates
to a material business transaction or development which has not yet been
publicly disclosed.
Liquidated Damages. The warrant agreement provides that if we fail to
(1) file a shelf registration statement with respect to the common stock
underlying the warrants by November 29, 1999, (2) use our reasonable best
efforts to have the Securities and Exchange Commission declare the shelf
registration statement effective on or before January 29, 2000, or (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 have
expired, then in each case above (each such event referred to in clauses (1)
through (3) above a "Registration Default"), we will be required to pay
liquidated damages to each holder of a warrant which shall accrue from the first
such Registration Default. We met the first filing requirement under the warrant
agreement when we filed our registration statement with the Securities and
Exchange Commission on November 29, 1999.
The liquidated damages paid to each holder of a warrant will be in an
amount equal to $0.03 per week per warrant held by such holder for each week or
portion thereof that the Registration Default continues for the first 90-day
period immediately following the occurrence of such Registration Default. This
amount will increase by an additional $0.02 per week per warrant with respect to
each subsequent 90-day period, up to a maximum amount equal to $0.07 per week
per warrant. The provision for liquidated damages will continue until such
Registration Default has been cured. We will not be required to pay liquidated
damages for more than one Registration Default at any given time.
Liquidated damages accrued as of April 1 or October 1 of each year will be
payable on such date. All accrued liquidated damages shall be paid by us to
holders entitled to liquidated damages in accordance with the warrant agreement.
Delaware Law and Certain Charter and By-Law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. 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
85
<PAGE>
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 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
86
<PAGE>
election of new directors or the approval of a merger, would have to wait
for the next duly called stockholders meeting.
Delaware law 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 and is traded on the
Nasdaq National Market under the symbol "PCSA."
Registration Rights
As of September 30, 1999, 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 arewill 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.
87
<PAGE>
PLAN OF DISTRIBUTION
All or a portion of the common stock offered by this prospectus may be
delivered upon exercise of the warrants by the warrant holder. Subject to a
suspension period, the warrant holder may exercise their warrant(s) at anytime
at a per share exercise price of $.01 per underlying share of common stock. The
costs of registering, issuing and maintaining an effective registration
statement for the shares of common stock underlying the warrants have been and
will be borne by us. For additional information regarding the distribution of
the shares of common stock underlying the warrants see "Description of Capital
Stock -- Warrants".
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of
common stock upon exercise of the warrants will be passed upon for AirGate by
Patton Boggs LLP, Washington D.C.
EXPERTS
The consolidated financial statements of AirGate PCS, Inc. and
subsidiary and predecessors as of September 30, 1999 and December 31, 1998, and
for the nine month periods ended September 30, 1999 and 1998, the years ended
December 31, 1998 and 1997 and for the period from inception, June 15, 1995, to
September 30, 1999, 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.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy any document we file at
the following locations:
. At the Public Reference Room of the Commission, Room 1024-Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549 or by calling at 1-
800-SEC-0300;
. At the public reference facilities at the Commission's regional offices
at Seven World Trade Center, 13/th/ Floor, New York, New York 10048 or
Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661;
. By writing to the Commission, Public Reference Section, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549;
. At the offices of the National Association of Securities Dealers, Inc.,
Reports Section, 1735 K Street, N.W., Washington, DC 20006; or
. From the Commission's web site at www.sec.gov.
88
<PAGE>
Some of these locations may charge a prescribed or modest fee for copies.
We have filed with the Commission a Registration Statement on Form S-1
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
shares of common stock offered hereby. As permitted by the Commission, this
prospectus, which consitutes a part of the Registration Statement, does not
contain all the information included in the Registration Statement. Such
additional information may be obtained from the number locations described
above. Statements contained in this prospectus as to the contents of any
contract or other document are not necessarily complete. You should refer to
the contract or other documents for all the details.
89
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report ............................................................... F-2
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 ................. F-3
Consolidated Statements of Operations for the nine month periods ended
September 30, 1999 and 1998, the years ended December 31, 1998 and 1997
and for the period from inception, June 15, 1995, to September 30, 1999 ............... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the nine month periods
ended September 30, 1999 and 1998, the years ended December 31, 1998
and 1997 and for the period from inception, June 15, 1995, to
September 30, 1999 ................................................................... F-5
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1999 and 1998, the years ended December 31, 1998 and 1997
and for the period from inception, June 15, 1995, to September 30, 1999 .............. F-6
Notes to the Consolidated Financial Statements ............................................ F-8
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AirGate PCS, Inc.:
We have audited the accompanying consolidated balance sheets of AirGate
PCS, Inc. and subsidiary and predecessors (a development stage enterprise) as of
September 30, 1999 and December 31, 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
nine month periods ended September 30, 1999 and 1998, the years ended December
31, 1998 and 1997 and for the period from inception, June 15, 1995, to September
30, 1999. 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 subsidiary and predecessors (a development stage enterprise) as of
September 30, 1999 and December 31, 1998 and the results of their operations and
their cash flows for the nine month periods ended September 30, 1999 and 1998,
the years ended December 31, 1998 and 1997 and for the period from inception,
June 15, 1995, to September 30, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Atlanta, Georgia
November 19, 1999
F-2
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 258,900 $ 2,296
Due from AirGate Wireless, LLC (note 5) 751 378
Prepaid expenses 1,596 100
-------------- --------------
Total current assets 261,247 2,774
Property and equipment, net (note 4) 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 $ 2,216 $ 1,449
Accrued expenses 20,178 --
Accrued interest 1,413 686
Notes payable (note 6(a)) -- 6,000
Notes payable to stockholders (note 6(b)) -- 4,965
Current maturities of long-term debt (note 6(c)) 7,700 3,381
-------------- --------------
Total current liabilities 31,507 16,481
Long-term debt, excluding current maturities (note 6(c)) 157,967 4,319
-------------- --------------
Total liabilities 189,474 20,800
-------------- --------------
Stockholders' equity (deficit) (note 8):
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 and 3,382,518 shares issued
and outstanding at September 30, 1999
and December 31, 1998, respectively 120 34
Additional paid-in-capital 157,880 6,271
Deficit accumulated during the development stage (27,254) (11,655)
Unearned stock option compensation (2,900) --
-------------- --------------
Total stockholders' equity (deficit) 127,846 (5,350)
Commitments and contingencies
(notes 2, 6, 10, 12 and 13) -- --
-------------- --------------
$ 317,320 $ 15,450
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Nine Month Periods Years Period from
Ended Ended Inception,
September 30, December 31, June 15, 1995,
to September 30,
1999 1998 1998 1997 1999
----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
General and
administrative expenses $ (5,619) $ (1,552) $ (2,597) $ (1,101) $(12,027)
Depreciation and
amortization (622) (1,028) (1,204) (998) ( 2,861)
---------- ---------- ---------- ---------- --------
Operating loss (6,241) (2,580) (3,801) (2,099) (14,888)
Interest expense, net (9,358) (1,015) (1,392) $ (817) $(12,366)
---------- ---------- ---------- ---------- --------
Net loss $ (15,599) $ (3,595) $ (5,193) $ (2,916) $(27,254)
========== ========== ========== ========== ========
Basic and diluted net loss
per share of common stock $ (4.57) $ (1.06) $ (1.54) $ (0.86)
========== ========== ========== ==========
Weighted-average
outstanding common shares 3,414,276 3,382,518 3,382,518 3,382,518
---------- ---------- ---------- ----------
Weighted-average
potentially dilutive
equivalents:
Common stock options 42,157 -- -- --
Stock purchase warrants 29,187 -- -- --
Convertible promissory
notes 433,249 -- -- --
---------- ---------- ---------- ----------
Weighted-average
outstanding common shares
including potentially
dilutive equivalents 3,918,869 3,382,518 3,382,518 3,382,518
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(dollars in thousands, except share amounts)
Nine month periods ended September 30, 1999 and 1998, the years ended December
31, 1998 and 1997 and for the period from inception, June 15, 1995, to
September 30, 1999
<TABLE>
<CAPTION>
Deficit
accumulated
Common Stock Additional during the Unearned stock Total
--------------------- paid-in development option stockholders'
Shares Amount capital stage compensation equity (deficit)
---------- --------- ------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 15, 1995 (inception) -- $ -- $ -- $ -- $ -- $ --
Loan conversions -- -- 420 -- -- 420
Net loss -- -- -- (1,693) -- (1,693)
---------- --------- ------------ --------------- --------------- ----------------
Balance at December 31, 1995 -- -- 420 (1,693) -- (1,273)
Loan conversions -- -- 101 -- -- 101
Net loss -- -- -- (1,853) -- (1,853)
----------- --------- ------------ --------------- --------------- ---------------
Balance at December 31, 1996 -- -- 521 (3,546) -- (3,025)
Loan conversions -- -- 4,684 -- -- 4,684
Cash distributions -- -- (493) -- -- (493)
Net loss -- -- -- (2,916) -- (2,916)
---------- -------- ------------ --------------- --------------- -----------------
Balance at December 31, 1997 -- -- 4,712 (6,462) -- (1,750)
Formation of AirGate PCS, Inc.
(note 1(a)) 3,382,518 34 (34) -- -- --
Distribution of AirGate Wireless, LLC -- -- 1,593 -- -- 1,593
(note 8(e))
Net loss -- -- -- (3,595) -- (3,595)
---------- -------- ------------ -------------- --------------- -----------------
Balance at September 30, 1998 3,382,518 34 6,271 (10,057) -- (3,752)
Net loss -- -- -- (1,598) -- (1,598)
---------- -------- ------------ -------------- --------------- -----------------
Balance at December 31, 1998 3,382,518 34 6,271 (11,655) -- (5,350)
Issuance of stock purchase warrants in -- -- 2,369 -- -- 2,369
connection with issuance of
convertible notes payable to
stockholders and Lucent Financing
(notes 8(b)(i) and 8(b)(ii))
Beneficial conversion feature of -- -- 6,979 -- -- 6,979
convertible notes payable to
stockholders (note 8(a)(ii))
Unearned compensation related to grant -- -- 3,225 -- (3,225) --
of compensatory stock options
(note 8(c))
Stock option compensation (note 8(c)) -- -- -- 325 325
Issuance of common stock, net of 7,705,000 77 120,391 -- -- 120,468
offering costs (note 8(a)(iii))
Issuance of warrants in connection -- -- 10,948 -- -- 10,948
with units offering (note 8(b)(iii))
Conversion of notes payable to 869,683 9 7,697 -- -- 7,706
stockholders to common stock
(note 8(a)(ii))
Net loss -- -- -- (15,599) -- (15,599)
--------- -------- ------------ -------------- --------------- -----------------
Balance at September 30, 1999 11,957,201 $ 120 $ 157,880 $ (27,254) $ (2,900) $ 127,846
========== ======== ============ ============== =============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Period from
Nine Month Periods Years Inception,
Ended Ended June 15, 1995,
September 30, December 31, to September 30,
1999 1998 1998 1997 1999
------------ ------------ ------------- ----------- --------------
Cash flows from operating activities:
<S> <C> <C> <C> <C> <C>
Net loss $ (15,599) $ (3,595) $ (5,193) $ (2,916) $ (27,254)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation and amortization 622 1,028 1,204 998 2,861
Loss on sale of fixed assets 19 -- -- -- 19
Interest expense associated with
accretion of discount and
beneficial conversion feature 8,707 -- -- -- 8,707
Stock option compensation 325 -- -- -- 325
(Increase) decrease in:
Due from AirGate Wireless, LLC (373) -- (378) -- (751)
Prepaid expenses (1,496) (212) (95) (5) (1,596)
Other assets (114) -- (131) 2,087 2,102
Increase (decrease) in:
Accounts payable 767 1,002 1,411 18 2,203
Accrued expenses 3,942 -- -- -- 3,942
Accrued interest 727 788 1,007 588 3,171
-------- -------- --------- -------- ---------
Net cash (used in) provided
by operating activities (2,473) (989) (2,175) 770 (6,271)
-------- -------- --------- -------- ----------
Cash flows from investing activities:
Capital expenditures (15,706) (2,432) (5,176) -- (20,943)
Purchase of FCC licenses -- -- -- (2,936) (2,936)
-------- -------- --------- -------- ----------
Net cash used in investing
activities (15,706) (2,432) (5,176) (2,936) (23,879)
-------- -------- --------- -------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes
payable and related warrants to Lucent 18,500 -- 5,000 2,800 26,300
Payment on notes payable to Lucent (10,000) -- -- -- (10,000)
Proceeds from issuance of warrants
and senior subordinated discount
notes in units offering 156,057 -- -- -- 156,057
Financing cost on Lucent Financing
and units offering (11,622) -- -- -- (11,622)
Proceeds from issuance of common
stock 130,985 -- -- -- 130,985
Offering costs (10,517) -- -- -- (10,517)
Payment of note payable to bank (1,000) -- -- -- (1,000)
Proceeds from issuance of convertible
notes payable to stockholders and
related warrants 2,530 5,200 5,200 -- 30,190
Payments on notes payable to
stockholders (150) -- (700) -- (20,850)
Cash distributions -- -- -- (493) (493)
-------- -------- --------- ------- ----------
Net cash provided by
financing activities 274,783 5,200 9,500 2,307 289,050
-------- -------- --------- ------- ----------
Net increase in cash and
cash equivalents 256,604 1,779 2,149 141 258,900
Cash and cash equivalents at beginning
of period 2,296 147 147 6 --
-------- -------- --------- ------- ----------
Cash and cash equivalents at end of
period $258,900 $ 1,926 $ 2,296 $ 147 $ 258,900
======== ========= ========== ======== ===========
Supplemental disclosure of cash flow
information - cash paid for interest $ 503 $ 930 $ 1,279 $ 930 $ 2,209
======== ========= ========== ======== ===========
</TABLE>
(continued)
F-6
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Period from
Nine Month Periods Years Inception,
Ended Ended June 15, 1995,
September 30, December 31, to September 30,
1999 1998 1998 1997 1999
----------- ---------- --------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of non-cash
investing and financing activities:
Assets acquired through debt
financing:
FCC licenses $ -- $ -- $ -- $11,745 $11,745
Site acquisition and engineering
costs -- 7,700 7,700 -- 7,700
Convertible notes payable to stockholders
and accrued interest converted
to equity 7,706 -- -- 4,864 12,911
Grant of compensatory stock options 3,225 -- -- -- 3,225
Beneficial conversion feature of
convertible notes payable to
stockholders 6,979 -- -- -- 6,979
Network assets acquired and not yet
paid for 16,236 -- -- -- 16,236
Distribution of FCC licenses:
Accrued interest -- (894) (894) -- (894)
Long-term debt -- (11,745) (11,745) -- (11,745)
FCC licenses -- 12,846 12,846 -- 12,846
Line of credit -- (1,800) (1,800) -- (1,800)
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
(1) Business, Basis of Presentation and Summary of Significant Accounting
Policies
(a) Business and Basis of Presentation
AirGate PCS, Inc. and subsidiary 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. and its wholly-owned subsidiary, AGW Leasing Company, Inc.,
and their predecessor entities (AirGate, LLC, AirGate Wireless, LLC, and AirLink
II, LLC) for all periods presented. All significant intercompany accounts and
transactions have been eliminated in consolidation.
From inception (June 15, 1995) 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 Sprint and Sprint PCS (the "Sprint Agreements") to build,
construct and manage a PCS network that will support the offering of Sprint PCS
services. 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
AirGate PCS, Inc.
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 its 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 or achieve breakeven cash flow, among other factors, could have an
adverse effect on the Company's financial position and results of operations.
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits, money market
accounts, and investments in commercial paper rated A-1/P-1 or better with
original maturities of three months or less.
(c) 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. Asset lives used by the Company are as
follows:
<TABLE>
<CAPTION>
USEFUL LIFE
------------------
<S> <C>
Network assets................................................ 10 years
Computer equipment............................................ 3 years
Furniture, fixtures, and office equipment..................... 5 years
</TABLE>
Construction in progress includes expenditures for the purchase of capital
equipment, design services, construction services, and testing of the Company's
network. The Company capitalizes interest on its construction in progress
activities. Interest capitalized for the nine month period ending September 30,
1999 totaled $1.1 million. Capitalized interest on construction activities in
prior periods was not material. When the network assets are placed
F-8
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
in service, the Company transfers the assets from construction in progress to
network assets and depreciates those assets over their estimated useful life.
(d) Financing Costs
Costs incurred in connection with the Lucent Financing and the Company's
issuance of senior subordinated discount notes were deferred and will be
amortized into interest expense over the term of the respective financing using
the effective interest method.
(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 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 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 amount 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 rate 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.
(f) Net Loss Per Share
The Company computes net loss per common share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" and SEC
Staff Accounting Bulletin No. 98. Basic and diluted net loss per share of
common stock is computed by dividing net loss for each period by the weighted-
average outstanding common shares. No conversion of common stock equivalents
has been assumed in the calculations since the effect would be antidilutive. As
a result, the number of weighted-average outstanding common shares as well as
the amount of net loss per share are the same for basic and diluted net loss per
share calculations for all periods presented.
(g) Revenue Recognition
The Company will recognize revenue as services are rendered. 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.
(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 Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future 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.
F-9
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
(i) Advertising Costs
The company expenses advertising costs when the advertisement occurs. Total
advertising expense was approximately $90,000 for the nine month period ended
September 30, 1999, with no advertising expense in prior periods.
(j) Derivative Instruments and Hedging Activities
On July 8, 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, "Deferral of the Effective Date of SFAS 133." SFAS No. 137 defers the
effective date of SFAS No. 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 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.
(k) 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.
(l) Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities." This statement became effective January 1, 1999 and requires that
costs of start-up activities and organization costs be expensed as incurred.
The Company has expensed all costs of start-up activities and organization
costs.
(m) Change of Fiscal Year
On October 21, 1999, the Company changed its fiscal year from a calendar year
ending on December 31 to a fiscal year ending on September 30 effective
September 30, 1999.
(n) Comprehensive Income
No statements of comprehensive income have been included in the accompanying
consolidated financial statements since the Company does not have any "Other
Comprehensive Income" to report.
(2) Sprint Agreements
In July 1998, the Company signed four major agreements with Sprint and Sprint
PCS. They are the management agreement, the services agreement, the trademark
and service license agreement with Sprint and the trademark and service license
agreement with Sprint PCS. These agreements allow the Company to exclusively
offer Sprint PCS services in the Company's territory.
The management agreement has an initial term of 20 years with three 10-year
renewals, the first renewal being automatic. The key clauses within the
management agreement refer to exclusivity, network build-out, products and
services offered for sale, service pricing, roaming, advertising and promotion,
program requirements including technical and customer care standards, non-
competition, inability to use non-Sprint PCS brands and rights of first refusal
and are summarized as follows:
(a) Exclusivity. The Company is designated as the only person or entity
that can manage or operate a PCS network for Sprint PCS in the
Company's territory. Sprint PCS is prohibited from owning,
F-10
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
operating, building or managing another wireless mobility
communications network in the Company's territory while the management
agreement is in place.
(b) Network build-out. In the management agreement, the Company has agreed
to cover a specified percentage of the population at coverage levels
ranging from 39% to 86% within each of the 21 markets that comprise
the Company's territory by specified dates beginning on March 31, 2000
and ending on December 31, 2000. The aggregate coverage of all markets
will result in network coverage of approximately 65% of the 6.8
million in population within the Company's territory by December 31,
2000.
(c) Products and services offered for sale. The management agreement
identifies the products and services that can be offered for sale in
the Company's territory. The Company cannot offer wireless local loop
services specifically designed for the competitive local market in
areas where Sprint owns the local exchange carrier unless the Sprint
owned local exchange carrier is named as the exclusive distributor or
Sprint PCS approves the terms and conditions.
(d) Service pricing. The Company must offer Sprint PCS subscriber pricing
plans designated for national offerings. The Company is permitted to
establish local price plans for Sprint PCS products and services only
offered in the Company's market. Sprint PCS will retain 8% of the
Company's collected service revenues but will remit 100% of revenues
derived from roaming and sales of handsets and accessories and
proceeds from sales not in the ordinary course of business.
(e) Roaming. The Company will earn roaming revenues when a Sprint PCS
customer from outside of the Company's territory roams onto the
Company's network. There are established rates for Sprint PCS' or
affiliates' subscribers roaming and similarly, the Company will pay
Sprint PCS when the Company's own subscribers use the Sprint PCS
nationwide network outside the Company's territory.
(f) Advertising and Promotion. Sprint PCS is responsible for all national
advertising and promotion of Sprint PCS products and services. The
Company is responsible for advertising and promotion in the Company's
territory.
(g) Program requirements including technical and customer care standards.
The Company will comply with Sprint PCS' program requirements for
technical standards, customer service standards, national and regional
distribution and national accounts programs.
(h) Non-competition. The Company may not offer Sprint PCS products and
services outside the Company's territory.
(i) Inability to use non-Sprint PCS brands. The Company may not market,
promote advertise, distribute, lease or sell any of the Sprint PCS
products on a non-branded, "private label" basis or under any brand,
trademark or trade name other than the Sprint PCS brand, except for
sales to resellers.
(j) Rights of first refusal. Sprint PCS has certain rights of first
refusal to buy the Company's assets upon a proposed sale.
The management agreement can be terminated as a result of a number of events
including an uncured breach of the management agreement or bankruptcy of either
party to the agreement. In the event that the management agreement is not
renewed or terminated, certain formulas apply to the valuation and disposition
of the Company's assets.
The services agreement outlines various support services such as activation,
billing and customer care that will be provided to the Company by Sprint PCS.
These services are available to the Company at established rates. Sprint
F-11
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
PCS can change any or all of the service rates one time in each twelve month
period. The Company may discontinue the use of any service upon three months
written notice. Sprint PCS has agreed that the services presently offered will
be available until at least December 31, 2001. After that date, Sprint PCS may
discontinue a service provided that it gives nine months written notice. The
services agreement automatically terminates upon termination of the management
agreement.
The trademark and service mark license agreements with Sprint and Sprint PCS
provide the Company with non-transferable, royalty free licenses to use the
Sprint and Sprint PCS brand names, the "diamond" symbol and several other
trademarks and service marks. The Company's use of the licensed marks is subject
to adherence to quality standards determined by Sprint and Sprint PCS. Sprint
and Sprint PCS can terminate the trademark and service mark license agreements
if the Company files for bankruptcy, materially breaches the agreement or if the
management agreement is terminated.
(3) Development Stage Enterprise
AirGate, LLC, the first predecessor entity of AirGate PCS, Inc., was established
on June 15, 1995 (inception). The Company has devoted most of its efforts to
date on 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.
(4) Property and Equipment
Property and equipment consists of the following at September 30, 1999 and
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Network assets.............................................. $ 7,700 $ 7,700
Computer equipment.......................................... 89 74
Furniture, fixtures, and office equipment................... 87 25
------------- -------------
Total network assets and equipment................... 7,876 7,799
Less accumulated depreciation and amortization.............. (971) (392)
------------- -------------
Total network assets and equipment, net.............. 6,905 7,407
Construction in progress (network build-out)................ 37,301 5,138
------------- -------------
Property and equipment, net.......................... $44,206 $12,545
============= =============
</TABLE>
(5) 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 $373,000 during the nine month period ended September 30, 1999 and
$378,000 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 within twelve months.
F-12
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
(6) Notes Payable and Long-Term Debt
(a) Notes payable consist of the following at September 30, 1999 and
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ------------
<S> <C> <C>
Note payable to bank; interest at prime plus .5% due monthly
(8.25% at December 31, 1998); matures on November 9, 1999;
guaranteed by affiliates...................................... $ -- $1,000
Secured promissory note, dated November 25, 1998, interest at
9.25%; interest and principal due at the earlier of: (1) the
first drawdown on the Lucent Financing or (2) June 30, 1999... -- 5,000
---------- ------------
$ -- $6,000
========== ============
</TABLE>
(b) Notes payable to stockholders consist of the following at September
30, 1999 and December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------- ------------
<S> <C> <C>
Notes payable to stockholders dated June 11, 1996; interest at
8%; payable based upon the occurrence of an equity financing
or October 15, 1999........................................... $ -- $ 150
Convertible notes payable to stockholders dated August 8,
1998; interest at 8%; principal and interest due on September
18, 1999 (notes 8(a)(ii) and 8(b)(i))......................... -- 4,815
---------- ------------
$ -- $4,965
========== ============
</TABLE>
(c) Long-term debt consists of the following at September 30, 1999 and
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Unsecured promissory note dated July 22, 1998; interest
at 14%; due November 15, 1999................................. $7,700 $7,700
Lucent Financing dated August 16, 1999; variable interest of
LIBOR + 3.75% (9.25% at September 30, 1999); interest due
quarterly; (net of unaccreted original issue discount of
$642, see note 8(b)(ii))...................................... 12,858 --
Senior Subordinated Discount Notes due 2009; interest at
13.5%; interest accretes until October 1, 2004 after which
quarterly interest payments are required beginning April 1,
2005 (net of unaccreted original issue discount of $10,948,
see note 8(b)(iii))........................................... 145,109 --
---------- ------------
Total long-term debt..................................... 165,667 7,700
Less current maturities of long-term debt...................... 7,700 3,381
---------- ------------
Long-term debt, excluding current maturities............. $157,967 $4,319
=========== ============
</TABLE>
Unsecured Promissory Note
On August 31, 1999, the Company entered into a loan modification agreement with
the holder to defer the initial principal and interest payments due on the
Company's $7.7 million unsecured promissory note from March 1, 1999 to October
15, 1999. On November 15, 1999, the Company entered into an additional loan
modification to defer the maturity date to November 15, 1999. On November 15,
1999, the Company paid all outstanding principal and interest due under the
unsecured promissory note.
F-13
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
Lucent Financing
On August 16, 1999, the Company entered into a $153.5 million Credit Agreement
with Lucent. 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
financing, the Company issued to Lucent warrants to purchase common stock that
were exercisable upon issuance (see note 8(b)(ii)). Additionally, the Company
incurred origination fees and expenses of $5.0 million which have been recorded
as financing cost and will be amortized to interest expense using the effective
interest method.
The Lucent Financing contains numerous financial and operating covenants
including the maintenance of certain financial ratios. As of September 30,
1999, management believes that the Company is in compliance with all covenants
governing the Lucent Financing.
Senior Subordinated Discount Notes
On September 30, 1999, the Company received proceeds of $156.1 million from the
issuance of 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 (see note
8(b)(iii)) pursuant to a registration statement filed on Form S-1 declared
effective by the Securities and Exchange Commission on September 27, 1999. The
aggregate principal amount outstanding as of September 30, 1999 of the senior
subordinated discount notes was $145.1 million (net of original issue discount
of $10.9 million (note 8(b)(iv)) which will accrete to the full aggregate
principal amount of $300.0 million by October 1, 2004. The Company incurred
expenses, underwriting discounts and commissions of $6.6 million related to the
units offering which have been recorded as financing costs and will be amortized
to interest expense using the effective interest method.
The senior subordinated discount notes contain certain covenants relating to
limitations on the Company's ability to, among other acts, sell assets, incur
additional indebtedness, and make certain payments. As of September 30, 1999,
management believes that the Company is in compliance with all covenants
governing the senior subordinated discount notes.
Aggregate minimum annual principal payments due on all issues of long-term debt
for the next five years at September 30, 1999 and thereafter are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Years ending September 30,
---------------------------
<S> <C>
2000............................................................................ $ 7,700
2001............................................................................ --
2002............................................................................ --
2003............................................................................ 2,025
2004............................................................................ 2,025
Thereafter...................................................................... 309,450
---------
Total..................................................................... 321,200
Less: Unaccreted interest portion of long-term debt............................ (143,943)
Unaccreted original issue discounts...................................... (11,590)
---------
Total long-term debt............................................. $ 165,667
=========
</TABLE>
F-14
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
(7) Fair Value of Financial Instruments
Fair value estimates, assumptions, and methods used to estimate the fair value
of the Company's financial instruments are made in accordance with the
requirements of SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments." The Company has used available information to derive its
estimates. However, because these estimates are made as of a specific point in
time, they are not necessarily indicative of amounts the Company could realize
currently. The use of different assumptions or estimating methods may have a
material effect on the estimated fair value amounts (dollars in thousands).
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $258,900 $258,900 $2,296 $2,296
Accounts payable............................... 2,216 2,216 1,449 1,449
Accrued expenses............................... 20,178 20,178 -- --
Notes payable.................................. -- -- 6,000 6,000
Notes payable to stockholders.................. -- -- 4,965 4,965
Long-term debt................................. 165,667 165,667 7,700 7,700
</TABLE>
(a) Cash and cash equivalents, accounts payable, and accrued expenses
The carrying amounts of these items are a reasonable estimate of their fair
value due to the short-term nature of the instruments.
(b) Notes payable and long-term debt
Long-term debt is comprised of the senior subordinated discount notes and the
Lucent Financing. The fair value of the senior subordinated discount notes is
stated at quoted market value. As there is no active market for the remaining
items of long-term debt and notes payable, management believes that the carrying
amount of the Lucent Financing and notes payable is a reasonable estimate of
their fair value.
(8) Stockholders' Equity (Deficit)
(a) Common stock
(i) Stock splits
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 (deficit) amounts have been restated for all periods
presented for these stock splits.
(ii) Conversion of Notes Payable to Stockholders to Common Stock
On September 30, 1999, $4.8 million plus an additional $2.5 million of
convertible notes payable to stockholders and accrued interest were converted
into 869,683 shares of common stock at the applicable conversion price of $8.84
per share, a 48% discount from the initial public offering price. The amount
related to the fair value of the beneficial conversion feature of $7.0 million
as of the date of issuance (May 1999) has been recorded as additional
F-15
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
paid-in-capital and recognized as interest expense from the date of issuance to
the expected date of conversion (August 1999).
(iii) Initial Public Offering
On September 30, 1999, the Company sold 7,705,000 shares of its common stock at
a price of $17.00 per share in its initial public offering pursuant to a
registration statement filed on Form S-1 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, which have been reflected as a reduction of the offering proceeds.
(b) Common Stock Purchase Warrants
(i) Warrants Issued to Stockholders
In August 1998, the Company issued stock purchase warrants to stockholders in
consideration for: (1) loans made by the stockholders to the Company which have
been converted to additional paid-in capital, (2) guarantees of certain bank
loans provided by the stockholders, and (3) in connection with $4.8 million in
financing provided by the stockholders.
In connection with a refinancing of the convertible notes payable to
stockholders in May 1999, the Company cancelled the August 1998 warrants and
issued new warrants to Weiss, Peck and Greer Venture Partners Affiliated Funds
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 per share. The warrants for 214,413 shares
were exercisable upon issuance and may be exercised for two years from the date
of issuance. The Company allocated $1.7 million of the proceeds from this
refinancing to the fair value of the warrants and recorded a discount on the
related debt, which was recognized as interest expense from the date of issuance
(May 1999) to the expected date of conversion (August 1999).
(ii) Lucent Financing
On August 16, 1999, the Company issued stock purchase warrants to Lucent in
consideration of the Lucent Financing. 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 per share, and the warrants are exercisable for an
aggregate of 128,860 shares of the Company's 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 has allocated $658,000 of the proceeds from the Lucent
Financing to the fair value of the warrants and has recorded a discount on the
associated credit facility, which will be recognized as interest expense over
the period from the date of issuance to the maturity date using the effective
interest method. Through September 30, 1999 the Company has recognized $16,500
of interest expense related to the accretion of this original issue discount.
(iii) Senior Subordinated Discount Notes
On September 30, 1999, as part of the Company's senior subordinated discount
note offering, the Company issued warrants to purchase 2.148 shares of common
stock for each unit at a price of $0.01 per share. The warrants will be
exercisable upon the effective date of the registration statement registering
such warrants, for an aggregate of 644,400 shares of common stock and expire
October 1, 2009. The Company has allocated $10.9 million of the proceeds from
the units offering to the fair value of the warrants and recorded a discount on
the notes, which will be recognized as interest expense over the period from
issuance to the maturity date using the effective interest method.
F-16
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
(iv) Outstanding Warrants
The following table summarizes the common stock purchase warrants outstanding as
of September 30, 1999:
<TABLE>
<CAPTION>
Weighted-average
Common shares exercise price per
Date issued represented share Expiration date
- ----------- ----------- ------------------ ---------------
<S> <C> <C> <C>
May 18, 1999 214,413 $12.75 May 18, 2001
August 16, 1999 128,860 20.40 Earlier of August 15, 2004 or August 15,
2001 based on certain events
September 30, 1999 644,400 0.01 October 1, 2009
------- ------
Total 987,673 $ 5.33
======= ======
</TABLE>
(c) Stock Option Plan
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 were granted as
nonqualified stock options on July 28, 1999 at an exercise price of $14.00 per
share. These options vest at various terms up to a 5 year period beginning at
the grant date and expire ten years from the date of grant. Unearned
compensation of $3.2 million was recorded for the difference between the initial
public offering price of $17.00 per share and the exercise price at the date of
grant of $14.00 per share and is being recognized over the period in which the
related employee services are rendered. Stock option compensation expense of
$325,000 was recognized during the nine month period ended September 30, 1999.
There were no forfeitures, cancellations, or exercises of stock options during
1999.
Of the 1,075,000 options outstanding, with a weighted-average exercise price of
$14.00 per share, 75,000 were vested. The fair value of the stock options
granted during the nine month period ended September 30, 1999 was estimated on
the date of grant to be $10.41 per share using the Black-Scholes option pricing
model, using the following assumptions: expected volatility of 60%, risk-free
interest rate of 6.0%, and an expected life of 10 years.
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for its stock option plan. Had compensation costs
for the Company's stock option plan been determined in accordance with SFAS No.
123, the Company's net loss and basic and diluted net loss per share of common
stock for the nine month period ended September 30, 1999 would have increased to
the pro forma amounts indicated below as this is the only period presented in
which stock options were outstanding (dollars in thousands, except for per share
amounts):
<TABLE>
<CAPTION>
September 30,
1999
----
<S> <C>
Net loss:
As reported ................................ $(15,599)
Pro forma................................... $(15,699)
Basic and diluted net loss per
share of common stock:
As reported....................................$(4.57)
Pro forma......................................$(4.60)
</TABLE>
(d) 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 stockholder
approval. The Company has no present plans to issue any preferred stock.
F-17
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
(e) 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 $12.8 million, $11.7 million, $1.8 million and
$894,000 at August 4, 1998, respectively.
(9) 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 periods ended September 30, 1999 and
December 31, 1998 differed from the amounts computed by applying the statutory
U.S. Federal income tax rate of 34% to loss before income taxes as a result of
the following (dollars in thousands):
<TABLE>
<CAPTION>
For the periods ended
------------------------------------
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Computed "expected" tax benefit...................................... $(5,304) $(1,765)
(Increase) decrease in income tax benefit resulting from:
Expenses related to LLC predecessors............................. 7 569
State income tax benefit, net of Federal effect.................. (325) (187)
Increase in valuation allowance.................................. 3,869 1,893
Benefit derived from contribution of tax assets.................. -- (415)
Nondeductible interest expense................................... 1,916 --
Other, net....................................................... (163) (95)
------- =======
Total income tax expense (benefit)............................ $ -- $ --
======= =======
</TABLE>
F-18
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
The income tax effect of temporary differences that give rise to significant
portions of the Company's deferred income tax assets and liabilities as of
September 30, 1999 and December 31, 1998 are presented below (dollars in
thousands):
<TABLE>
<CAPTION>
As of
-------------------------------------------
September 30, December 31,
1999 1998
---------------------- -------------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards..................................... $ 1,784 $ 302
Capitalized start-up costs........................................... 3,669 1,382
Accrued expenses..................................................... 10 28
Property and equipment, principally due to differences
in depreciation and amortization................................ 299 181
------- -------
Gross deferred income tax assets..................................... 5,762 1,893
Less valuation allowance............................................. (5,762) (1,893)
------- -------
Net deferred income tax assets....................................... $ -- $ --
======= =======
</TABLE>
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. In assessing the realizability of
deferred income tax assets, management considers whether it is more likely than
not that some portion of the deferred income tax assets will 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 has provided a valuation allowance
against all of its deferred income tax assets because the realization of those
deferred tax assets is uncertain.
The valuation allowance for deferred income tax assets as of September 30, 1999
and December 31, 1998 was $5.8 million and $1.9 million, respectively. The net
change in the total valuation allowance for the periods ended September 30, 1999
and December 31, 1998 was an increase of $3.9 million and $1.9 million,
respectively.
At September 30, 1999, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $4.5 million, which will expire in
various amounts beginning in the year 2018. Approximately $4.5 million of the
net operating loss carryforwards that the Company may use to offset taxable
income in future years is limited as a result of an ownership change, as defined
under Internal Revenue Code Section 382, which occurred effective with the
Company's initial public offering of stock on September 30, 1999. The amount of
this annual limitation is approximately $3.1 million per year.
(10) Year 2000 (unaudited)
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
year 2000
F-19
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
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 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 any of these other third-party vendors 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 believes 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.
(11) Condensed Consolidating Financial Statements
AGW Leasing Company, Inc. ("AGW") is a wholly-owned subsidiary of AirGate PCS,
Inc. 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 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 as of September 30,
1999 and for the nine-months then ended are as follows (dollars in thousands):
<TABLE>
<CAPTION>
AirGate PCS, Inc. AGW Leasing
and Predecessors Company, Inc. Eliminations Consolidation
------------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 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 and accrued expenses.......... $ 22,394 $ - $ - $ 22,394
Accrued interest and current maturities
of long-term debt............................ 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
Additional paid-in-capital..................... 157,880 - - 157,880
Deficit accumulated during the
development stage............................ (25,875) (1,379) - (27,254)
Unearned stock option compensation............. (2,900) - - (2,900)
------------ ------------ ---------- -----------
Total liabilities and stockholders' equity... $ 318,699 $ - $ (1,379) $ 317,320
============ ============ ========== ===========
Total expenses................................. $ (14,220) $ (1,379) $ - $ (15,599)
Net loss....................................... (14,220) (1,379) - (15,599)
============ ============ ========== ===========
</TABLE>
F-20
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
(12) Commitments
(a) Leases
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 at September 30, 1999, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Years ending September 30,
--------------------------
<S> <C>
2000...................................................................... $ 6,003
2001...................................................................... 6,571
2002...................................................................... 6,646
2003...................................................................... 6,529
2004...................................................................... 5,580
Thereafter................................................................ 2,786
-------
Total future minimum annual lease payments............................. $34,115
=======
</TABLE>
Rental expense for all operating leases was $1.4 million and $115,000 for the
nine months ended September 30, 1999 and 1998, and $294,000 and $44,000 for the
years ended December 31, 1998 and 1997, respectively.
(b) Employment Agreements
The Company has entered into employment agreements with certain employees which
provide that the employee will not compete in the business of wireless
telecommunications in the Company's territory for a specified period after their
respective termination dates. The employment agreements also define employment
terms including salary, bonus and benefits to be provided to the respective
employees.
(13) Subsequent Events
(a) On October 21, 1999, the Company changed its fiscal year from a calendar
year ending December 31 to a fiscal year ending on 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 to effect 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 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 converted 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. The amount related to the fair value of the
beneficial conversion feature of $111,000 will be recorded as additional
paid-in-capital and recognized as interest expense.
F-21
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 1999 and December 31, 1998
(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 grant
($43.60 per share), 40,000 options have an exercise price of $14.00 per
share (compensatory options), and 10,000 options granted to a director have
an exercise price of $2.00 per share (compensatory options). These options
vest at various terms over a five year period beginning at the grant date.
Unearned compensation of $1.6 million will be recorded by the Company,
which represents the difference between the exercise price and the fair
market value of the options at the date of grant and will be recognized as
compensation expense in the period in which the related services are
rendered.
F-22
<PAGE>
___, 1999
LOGO
644,400 Shares of Common Stock Issuable Upon Exercise of Warrants
PROSPECTUS
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
of the sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or our affairs have not
changed since the date hereof.
<PAGE>
Part II
Information Not Required in the Prospectus
Item 13. Other Expenses of Issuance and Distribution
AirGate PCS, Inc. (the "Registrant") estimates that expenses in
connection with the offering described in this Registration Statement will be as
set forth in the following table. All amounts shown are estimates except for the
Securities and Exchange Commission registration fee.
Securities and Exchange Commission registration fee..... $ 1.79
Printing and engraving expenses......................... 75,000*
Accountants' fees and expenses.......................... 70,000*
Legal fees and expenses................................. 85,000*
Fees and expenses for qualifications under state
securities laws (including legal fees).................. 5,000*
Miscellaneous........................................... 10,000*
----------
Total............................................. $ 245,002*
==========
* estimated fees
Item 14. Indemnification of Directors and Officers
In accordance with General Corporation Law of the State of Delaware (being
Chapter 1 of Title 8 of the Delaware Code), the Registrant's Certificate of
Incorporation provides that the Registrant shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Registrant to procure a
judgment in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses (including attorney's fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if such person acted under similar standards,
provided that the Registrant receives a written undertaking by or on behalf of
the director or officer to repay such amount if it is ultimately determined that
such person is not entitled to be indemnified by the Registrant.
The Registrant's Certificate of Incorporation further provides that to the
extent that a director or officer of the Registrant has been successful in the
defense of any action, suit or proceeding referred to above or in the defense of
any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorney's fees) actually and reasonably incurred by him or
her in connection therewith, that indemnification provided for by the
Certificate of Incorporation shall not be deemed exclusive of any other rights
to which the indemnified party may be entitled; and that the Registrant is
empowered to purchase and maintain insurance on behalf of a director or officer
of the Registrant against any liability asserted against him or here in any such
capacity, or arising out of such person's status as such, whether or not the
Registrant would have the power to indemnify him or her against such liabilities
under the Certificate of Incorporation.
In addition to indemnification provided to the Registrant's officers and
directors in the Certificate of Incorporation and under the laws of Delaware,
the Registrant has entered into indemnification agreements with certain officers
and directors to provide further assurances and protection from liability that
they may incur in their respective positions and duties in connection with the
public offering or as a fiduciary of the Registrant and its stockholders. The
Registrant has agreed to indemnify and hold harmless, to the extent permitted
under Delaware law, each person and affiliated person (generally, any director,
officer, employee, controlling person, agent, or fiduciary of the indemnified
person), provided
<PAGE>
that the indemnified person was acting or serving at our request in his capacity
as either an officer, director, employee, controlling person, fiduciary or other
agent or affiliate of the Registrant. Under the indemnification agreements, each
person is indemnified against any and all losses, claims, damages, expenses and
liabilities, joint or several, (including attorney's fees, expenses and amount
in settlement) that occur in connection with any threatened, pending or
completed action, suit, proceeding, alternative dispute resolution mechanism or
hearing, inquiry or investigation that such indemnified person believes in good
faith may lead to the institution of such action, under the Securities Act of
1933, Securities Exchange Act of 1934 or other federal or state statutory law or
regulation, at common law or otherwise, which relate directly or indirectly to
the registration, purchase, sale or ownership of any securities of the
Registrant or to any fiduciary obligation owed with respect to the Registrant
and its stockholders. As a condition to receiving indemnification, indemnified
persons are required to give us notice in writing of any claim for which
indemnification may be sought under this agreement.
The agreement provides that an indemnified person may receive
indemnification against (1) expenses (including attorney's fees and other costs,
expenses and obligations incurred), judgments, fines and penalties; (2) amounts
paid in settlement (approved by the Registrant); (3) federal, state, local taxes
imposed as a result of receipt of any payments under the indemnification
agreement; and (4) all interest, assessments and other charges paid or payable
in connection with any expenses, costs of settlement or taxes. An indemnified
person will be indemnified against expenses to the extent that he or she is
successful on the merits or otherwise, including dismissal of an action without
prejudice, in defense of any action, suit, proceeding, inquiry or investigation.
Expenses that the indemnified person have or will incur in connection with a
suit or other proceeding may be received in advance within 10 days of written
demand to the Registrant.
Prior to receiving indemnification or being advanced expenses, a committee,
consisting of either members of the board of directors or any person appointed
by the board of directors, must make a determination of whether the indemnified
person is entitled to indemnification under Delaware law. If there is a change
in control (as defined in the indemnification agreement) that occurs without
majority approval of the board of directors, then the committee will consist of
independent legal counsel selected by the indemnified person and approved by the
Registrant to render a written opinion as to whether and the extent of
indemnification that the indemnified person is entitled, which will be binding
on the Registrant. Under the indemnification agreement, an indemnified person
may appeal a determination by the committee's determination not to grant
indemnification or advance expenses by commencing a legal proceeding. Failure
of the committee to make a indemnification determination or the termination of
any claim by judgment, order, settlement, plea of nolo contendere, or conviction
does not create a presumption that either (1) the indemnified person did not
meet a particular standard of conduct or belief or (2) that the court has
determined that indemnification is not available.
Under the indemnification agreement, an indemnified person is entitled to
contribution from the Registrant for losses, claims, damages, expenses or
liabilities as well as other equitable considerations upon the determination of
a court of competent jurisdiction that indemnification is not available. The
amount contributed by the Registrant will be in proportion, as appropriate, to
reflect the relative benefits received by us and the indemnified person or, if
such contribution is not permitted under Delaware law, then the relative benefit
will be considered with the relative fault of both parties. In connection with
the registration of the Registrant's securities, the relative benefits received
by the Registrant and indemnified person will be deemed to be in the same
respective proportions of the net proceeds from the offering (less expenses)
received by the Registrant and the indemnified person. The relative fault of
the Registrant and the indemnified person is determined by reference to the
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to
II-2
<PAGE>
information supplied by the Registrant or the indemnified person and their
relative intent, knowledge, access to information and opportunity to correct
such statement or omission.
Contribution paid takes into account the equitable considerations, if any,
instead of a pro rata or per capital allocation. In connection with the public
offering of the Registrant securities, an indemnified person will not be
required to contribute any amount in excess of the lessor of (1) the proportion
of the total of such losses, claims, damages, or liabilities indemnified against
equal to the proportion of the total securities sold under the registration
statement sold by the indemnified person or (2) the proceeds received by the
indemnified person from the sale of securities under the registration statement.
Contribution will not be available if such person is found guilty of fraudulent
misrepresentation, as defined in the agreement.
In the event that the Registrant is also obligated under a claim and upon
written notice to the indemnified person, the Registrant is entitled to assume
defense of the claim and select counsel which is approved by the indemnified
person. Upon receipt of the indemnified person's approval, the Registrant will
directly incur the legal expenses and as a result will have the right to conduct
the defense as it sees fit in its sole discretion, including the right to settle
any claim against any indemnified party, without consent of the indemnified
person.
Item 15. Recent Sales of Unregistered Securities
In accordance with Item 701 of Regulation S-K, the following information is
presented with respect to the securities sold by the Registrant within the past
three years which were not registered under the Securities Act.
(i) The 1998 Financing
(a) Between August and September 1998, the Registrant sold $4,815,000 of
8% Convertible Promissory Notes. $3 million of the notes was due on September
18, 1999, while $1.815 million was due on August 20, 1999, unless converted. The
notes are convertible into Series A preferred stock or common stock upon the
satisfaction of certain conditions. The Registrant also issued warrants to
purchase the preferred stock to the purchasers of the notes, which warrants were
to be exercised on the earlier of five years from the date of issuance or an
initial public offering. These notes were rolled into the May 1999 Refinancing.
(b) The notes and warrants were sold to two related party venture funds
and their affiliates who qualified as accredited investors within the meaning of
Regulation D under the Securities Act.
(c) The notes and the warrants were sold for a total aggregate
consideration of $4,815,000.
(d) The notes were offered and sold in reliance upon an exemption from
registration under Section 4(2) of the Securities Act.
(e) Not applicable
(f) Not applicable
II-3
<PAGE>
(ii) The 1999 Financings
(a) In March, April and May 1999 the Registrant sold an aggregate of $2.5
million of 8% subordinated notes.
(b) The notes and warrants were sold to two related party venture funds,
Weiss, Peck and Greer Venture Partners affiliated funds and JAFCO America
Ventures, Inc. affiliated funds, who qualified as accredited investors within
the meaning of Regulation D under the Securities Act.
(c) The notes were sold for a total aggregate consideration of $2.5
million.
(d) The notes were offered and sold in reliance upon an exemption from
registration under Section 4(2) of the Securities Act.
(e) Not applicable
(f) Not applicable
(iii) The May 1999 Refinancing
(a) In May 1999, the Registrant consolidated the promissory notes issued
to the two related party venture funds in the 1998 financing and the March,
April and May 1999 financings totaling $7.325 million into promissory notes that
will be converted into shares of the Registrant's common stock concurrently with
the completion of the offering contemplated hereby at a price 48% less than the
price of a share of common stock sold in the offering. The warrants held by
these funds were terminated. In addition, the Registrant issued warrants to
Weiss, Peck and 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 this offering.
(b) The promissory notes and the warrants were issued to two related party
venture funds, Weiss, Peck and Greer Venture Partners affiliated funds and JAFCO
America Ventures, Inc. affiliated funds, who qualified as accredited investors
within the meaning of Regulation D under the Securities Act.
(c) The aggregate consideration received in exchange for the promissory
notes and the warrant was the refinancing of $7.561 million of promissory notes
and the cancellation of warrants held by each venture fund.
(d) The notes and the warrant were offered and sold in reliance upon an
exemption from registration under Section 4(2) of the Securities Act.
(e) Not applicable
(f) Not applicable
II-4
<PAGE>
(iv) The August 1999 Lucent Financing
(a) In connection with the Lucent financing in August 1999, AirGate issued
warrants to Lucent representing in the aggregate of 1% of the number of fully-
diluted shares of common stock outstanding on the closing of our initial public
offering.
(b) The warrants were sold to Lucent Technologies Inc., which qualifies as
an accredited investor for purposes of Regulation D under the Securities Act.
(c) The warrants were issued to Lucent as inducement to Lucent to enter
into a credit agreement with no additional consideration.
(d) The warrants were offered and sold in reliance of an exemption from
registration under Section 4(2) of the Securities Act.
(e) Not applicable.
(f) Not applicable.
II-5
<PAGE>
Item 16. Exhibits
The exhibits and financial statement schedules filed as a part of the
Registration Statement are as follows:
(a) List of Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the registration statement on
Form S-1, Registration Nos. 333-79189-02 and 333-79189-01)
3.2 Amended and Restated Bylaws of the Registrant (incorporated by reference to
Exhibit 3.2 to the registration statement on Form S-1, Registration Nos.
333-79189-02 and 333-79189-01)
4.1 Specimen of Common Stock Certificate of the Registrant (incorporated by
reference to Exhibit 4.1 to the registration statement on Form S-1,
Registration Nos. 333-79189-02 and 333-79189-01)
4.2 Form of warrant issued in units offering (included in Exhibit 10.15)
4.3 Form of Weiss, Peck & Greer warrants (incorporated by reference to Exhibit
4.3 to the registration statement on Form S-1, Registration Nos.
333-79189-02 and 333-79189-01)
4.4 Form of Lucent warrants (incorporated by reference to Exhibit 4.4 to the
registration statement on Form S-1, Registration Nos. 333-79189-02 and 333-
79189-01)
4.5* Indenture for senior subordinated discount notes (including the form of
pledge agreement) between AirGate PCS, Inc. and Bankers Trust Company, as
trustee, dated September 30, 1999
4.6 Form of unit (included in exhibit 10.15)
5.1* Opinion of Patton Boggs LLP regarding legality of the common stock
10.1 Sprint PCS Management Agreement between SprintCom, Inc. and AirGate
Wireless, L.L.C. (incorporated by reference to Exhibit 10.1 to the
registration statement on Form S-1, Registration Nos. 333-79189-02 and
333-79189-01)
10.2 Sprint PCS Services Agreement between Sprint Spectrum L.P. and AirGate
Wireless, L.L.C. (incorporated by reference to Exhibit 10.2 to the
registration statement on Form S-1, Registration Nos. 333-79189-02 and
333-79189-01)
II-6
<PAGE>
10.3 Sprint Spectrum Trademark and Service Mark License Agreement
(incorporated by reference to Exhibit 10.3 to the registration statement
on Form S-1, Registration Nos. 333-79189-02 and 333-79189-01)
10.4 Sprint Trademark and Service Mark License Agreement (incorporated by
reference to Exhibit 10.4 to the registration statement on Form S-1,
Registration Nos. 333-79189-02 and 333-79189-01)
10.5 Master Site Agreement dated August 6, 1998 between AirGate and BellSouth
Carolinas PCS, L.P., BellSouth Personal Communications, Inc. and
BellSouth Mobility PCS. (incorporated by reference to Exhibit 10.5 to the
registration statement on Form S-1, Registration Nos. 333-79189-02 and
333-79189-01)
10.6 Compass Telecom, L.L.C. Construction Management Agreement (incorporated
by reference to Exhibit 10.6 to the registration statement on Form S-1,
Registration Nos. 333-79189-02 and 333-79189-01)
10.7 Commercial Real Estate Lease dated August 7, 1998 between AirGate and
Perry Company of Columbia, Inc. to lease a warehouse facility.
(incorporated by reference to Exhibit 10.7 to the registration statement
on Form S-1, Registration Nos. 333-79189-02 and 333-79189-01)
10.8 Form of Indemnification Agreements (incorporated by reference to Exhibit
10.8 to the registration statement on Form S-1, Registration Nos.
333-79189-02 and 333-79189-01)
10.9 Employment Agreement dated April 9, 1999 between AirGate and Mr. Thomas
M. Dougherty (incorporated by reference to Exhibit 10.9 to the
registration statement on Form S-1, Registration Nos. 333-79189-02 and
333-79189-01)
10.10 Form of Executive Employment Agreements (incorporated by reference to
Exhibit 10.10 to the registration statement on Form S-1, Registration
Nos. 333-79189-02 and 333-79189-01)
10.11 1999 Stock Option Plan
10.12 Credit Agreement with Lucent (including the pledge agreement and
intercreditor agreement) (incorporated by reference to Exhibit 10.12 to
the registration statement on Form S-1, Registration Nos. 333-79189-02
and 333-79189-01)
10.13 Consent and Agreement (incorporated by reference to Exhibit 10.13 to the
registration statement on Form S-1, Registration Nos. 333-79189-02 and
333-79189-01)
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 PCS, Inc dated November 20, 1998.
(incorporated by reference to Exhibit 10.14 to the registration statement
on Form S-1, Registration Nos. 333-79189-02 and 333-79189-01)
II-7
<PAGE>
10.15* Warrant Agreement for units offering (including form of warrant in units
offering and form of unit) between AirGate PCS, Inc. and Bankers Trust
Company, as warrant agent, dated September 30, 1999.
21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1
to the registration statement on Form S-1, Registration Nos. 333-79189-02
and 333-79189-01)
23.1 Consent of KPMG LLP
23.2* Consent of Patton Boggs LLP (included in Exhibit 5.1)
24.1* Powers of Attorney (located on the signature page hereto)
27.1* Financial Data Schedule
_______________
* Previously filed
II-8
<PAGE>
(b) Financial Statement Schedule
No financial statement schedules are filed because the required information
is not applicable or is included in the consolidated financial statements or
related notes.
Item 17. Undertakings
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
((S) 230.424(b) of this chapter) if, in the aggregate, the
changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of such Registrant pursuant to the foregoing
provisions, or otherwise, such Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by such Registrant of expenses incurred
or paid by a director, officer or controlling person of such Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, such Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-9
<PAGE>
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the County
of Fulton, State of Georgia, on December 28, 1999.
AirGate PCS, Inc.
By: /s/ Thomas M. Dougherty
-------------------------------
Name: Thomas M. Dougherty
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Thomas M. Dougherty Chief Executive Officer and December 28, 1999
- -----------------------
Thomas M. Dougherty Director (Principal Executive
Officer)
/s/ Alan B. Catherall Chief Financial Officer December 28, 1999
- -----------------------
Alan B. Catherall (Principal Financial and
Accounting Officer)
/s/ W. Chris Blane Vice President and Director December 28, 1999
- -----------------------
W. Chris Blane
/s/ Thomas D. Body III Vice President and Director December 28, 1999
- -----------------------
Thomas D. Body III
/s/ Barry Schiffman Director December 28, 1999
- -----------------------
Barry Schiffman
<PAGE>
/s/ Gill Cogan Director December 28, 1999
- -----------------------
Gill Cogan
/s/ Robert Ferchat Director December 28, 1999
- -----------------------
Robert Ferchat
<PAGE>
Exhibit 10.11
AIRGATE PCS, INC.
1999 STOCK OPTION PLAN
1. Purpose of the Plan. The purposes of this Stock Option Plan are to
-------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to such individuals, to reward
such individuals for exemplary service and to promote the success of the
Company's business by aligning employee financial interests with long-term
shareholder value.
Options granted hereunder may be either Incentive Stock Options or
Nonqualified Stock Options, at the discretion of the Board and as reflected in
the terms of the written option agreement.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" shall mean the Committee, if the Committee has been appointed, or
the Board of Directors of the Company, if the Committee has not been appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Compensation Committee appointed by the Board
of Directors in accordance with Section 4(a) of the Plan, if one is appointed.
(d) "Common Shares" shall mean the $.01 par value per share common capital
stock of the Company.
(e) "Company" shall mean AIRGATE PCS, INC., a Delaware corporation, and any
successor thereto.
(f) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of any leave of absence
authorized in writing by the Company prior to its commencement.
(g) "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company.
Notwithstanding the foregoing, for purposes of any Incentive Stock Option
granted hereunder, "Employee" includes only employees within the meaning of
Section 422 of the Code.
(h) "Incentive Stock Option" shall mean any option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(i) "Non-Employee Director" shall have the same meaning as defined or
interpreted for purposes of Rule 16b-3 (including amendments and successor
provisions) as promulgated by the Securities and Exchange Commission pursuant to
its authority under the Securities Exchange Act of 1934, as amended ("Rule 16b-
3").
(j) "Nonqualified Stock Option" shall mean an option not intended to qualify
as an Incentive Stock Option.
(k) "Option" shall mean a stock option granted pursuant to the Plan and
represented by a written option agreement.
(l) "Optioned Shares" shall mean the Common Shares subject to an Option.
(m) "Optionee" shall mean an Employee who receives an Option.
(n) "Outside Director" shall have the same meaning as defined or interpreted
for purposes of Section 162(m) of the Code.
(o) "Parent" shall mean a "parent corporation" whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(p) "Plan" shall mean this 1999 Stock Option Plan, including any amendments
hereto.
(q) "Share" shall mean one Common Share, as adjusted in accordance with
Section 11 of the Plan.
(r) "Subsidiary" shall mean (i) in the case of an Incentive Stock Option, a
"subsidiary corporation," whether now or hereafter existing, as defined in
Section 424(f) of the Code, and (ii) in the case of a Nonqualified Stock Option,
in addition to a subsidiary corporation as defined in (i), a limited liability
company, partnership or other entity in which the Company controls fifty percent
(50%) or more of the voting power or equity interests.
<PAGE>
3. Shares Subject to the Plan. Subject to the provisions of Section 11 of the
--------------------------
Plan, the maximum aggregate number of shares which may be optioned and sold
under the Plan is 1,500,000 Common Shares. The Shares may be authorized, but
unissued, or reacquired Common Shares.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure. The Plan shall be administered by the Board of Directors of
---------
the Company.
(i) The Board of Directors may appoint a Compensation Committee consisting
of not less than two members of the Board of Directors to administer the Plan on
behalf of the Board of Directors, subject to such terms and conditions as the
Board of Directors may prescribe. Once appointed, the Committee shall continue
to serve until otherwise directed by the Board of Directors.
(ii) Any grants of Options to officers and directors who are subject to
Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act') shall be made by (A) a Committee of two or more directors, each of whom is
a Non-Employee Director and an Outside Director or (B) as otherwise permitted by
Rule 16b-3, Section 162(m) of the Code and other applicable laws, rules and
regulations.
(iii) From time to time the Board of Directors may increase the size of
the Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, or fill
vacancies however caused.
(b) Powers of the Board. Subject to the provisions of the Plan, the Board
-------------------
shall have the authority, in its discretion (i) to grant Incentive Stock Options
or Nonqualified Stock Options; (ii) to determine, in accordance with Section
8(b) of the Plan, the fair market value of the Shares; (iii) to determine, in
accordance with Section 8(a) of the Plan, the exercise price per Share of
Options to be granted; (iv) to determine the Employees to whom, and the time or
times at which, Options shall be granted and the number of Shares to be
represented by each Option; (v) to interpret the Plan; (vi) to prescribe, amend,
and rescind rules and regulations relating to the Plan; (vii) to determine the
terms and provisions of each Option granted (which need not be identical and may
include, as conditions to exercise (as well as, in the case of Nonqualified
Stock Options, conditions to grant), vesting, forfeiture, performance criteria,
noncompete and such other restrictions, provisions and conditions as the Board
may determine) and, with the consent of the holder thereof, modify or amend each
Option; (viii) to reduce the exercise price per share of outstanding and
unexercised Options; (ix) to accelerate or defer (with the consent of the
Optionee) the exercise date of any Option; (x) to authorize any person to
execute on behalf of the Company any instrument required to effectuate the grant
of an Option previously granted by the Board; and (xi) to make all other
determinations deemed necessary or advisable for the administration of the Plan.
(c) Effect of Board's Decision. All decisions, determinations, and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
5. Eligibility.
-----------
(a) Options may be granted only to Employees.
(b) Each Option shall be designated in the written option agreement as either
an Incentive Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designations, to the extent that the aggregate fair market
value of the stock with respect to which options designated as Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar
year (under all plans of the Company and any Parent or Subsidiary of the
Company) exceeds $100,000, such options shall be treated as Nonqualified Stock
Options.
(c) For purposes of Section 5(b), options shall be taken into account in the
order in which they were granted, and the fair market value of stock shall be
determined as of the time the option with respect to such stock is granted.
(d) Nothing in the Plan or any Option granted hereunder shall confer upon any
Optionee any right with respect to continuation of employment with the Company,
nor shall it interfere in any way with the Optionee's right or the Company's
right to terminate the employment relationship at any time, with or without
cause.
2
<PAGE>
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect until December 31, 2009, unless sooner
terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be no more than ten (10)
--------------
years from the date of grant. However, in the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns Shares
representing more than ten percent (10%) of the voting power of all classes of
shares of the Company or any Parent or Subsidiary, the term of the Option shall
be no more than five (5) years from the date of grant.
8. Exercise Price and Consideration.
--------------------------------
(a) The per Share exercise price under each Option shall be such price as is
determined by the Board, subject to the following:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant of the Incentive
Stock Option, owns shares representing more than ten percent (10%) of the voting
power of all classes of shares of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than one hundred ten percent (110%) of
the fair market value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise price shall be
no less than one hundred percent (100%) of the fair market value per Share on
the date of grant.
(ii) In the case of a Nonqualified Stock Option, the per Share exercise
price may be less than, equal to, or greater than the fair market value per
Share on the date of grant, as determined by the Board in its discretion.
(b) The fair market value per Share shall be determined by the Board in its
discretion and, in the case of an Incentive Stock Option, in accordance with
Section 422 of the Code.
(c) The consideration to be paid for the Shares to be issued upon exercise of
an Option, including the method of payment, shall be determined by the Board at
the time of grant and may consist, without limitation, of cash and/or check
and/or promissory note. Without limiting the foregoing, if the Optionee is an
officer or director of the Company within the meaning of Section 16 of the
Exchange Act he may in addition be allowed to pay all or part of the purchase
price with Shares. Shares used by officers or directors to pay the exercise
price shall be valued at their fair market value on the exercise date.
(d) Prior to issuance of the Shares upon exercise of an Option, the Optionee
shall pay any federal, state, and local withholding obligations of the Company,
if applicable. If an Optionee is an officer or director of the Company within
the meaning of Section 16 of the Exchange Act, he may elect to pay such
withholding tax obligations by having the Company withhold Shares having a value
equal to the amount required to be withheld. The value of the Shares to be
withheld shall equal the fair market value of the Shares on the day the option
is exercised. The right of an officer or director to dispose of Shares to the
Company in satisfaction of withholding tax obligations shall be deemed to be
approved as part of the initial grant of an Option, unless thereafter rescinded,
and shall otherwise be made in compliance with Rule 16b-3 and other applicable
regulations.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable at such times and under such conditions as
determined by the Board at the time of grant, and as shall not violate the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such exercise
has been given to the Company in accordance with the terms of the Option by the
person entitled to exercise the Option and full payment for the Shares with
respect to which the Option is exercised has been received by the Company. Full
payment may, as authorized by the Board, consist of any consideration and method
of payment allowable under Section 8(c) of the Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the share certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Shares, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
share certificate promptly upon exercise of the Option. In the event that the
exercise of an Option
3
<PAGE>
is treated in part as the exercise of an Incentive Stock Option and in part as
the exercise of a Nonqualified Stock Option pursuant to Section 5(b), the
Company shall issue a share certificate evidencing the Shares treated as
acquired upon the exercise of an Incentive Stock Option and a separate share
certificate evidencing the Shares treated as acquired upon the exercise of a
Nonqualified Stock Option, and shall identify each such certificate accordingly
in its share transfer records. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the share certificate
is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the number
of Shares which thereafter may be available, both for purposes of the Plan and
for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Status as Employee. In the event of termination of an
---------------------------------
Optionee's Continuous Status as an Employee, such Optionee may exercise Options
to the extent exercisable on the date of termination. In the case of an
Incentive Stock Option and unless specified otherwise in the Option Agreement in
the case of a Nonqualified Stock Option, such exercise must occur within three
(3) months (or such shorter time as may be specified in the grant) after the
date of such termination (but in no event later than the date of expiration of
the term of such Option as set forth in the Option Agreement). To the extent
that the Optionee was not entitled to exercise the Option at the date of
termination, or does not exercise the Option within the time specified herein or
therein (whichever first occurs), the Option shall terminate. If the Optionee
returns to Continuous Status as an Employee before his deadline for exercise
pursuant to this Section 9(b), then Optionee shall be restored to the status as
Optionee he held immediately prior to his termination (provided no employment
credit will be earned for any period he was not in Continuous Status as an
Employee).
(c) Disability of Optionee. Notwithstanding the provisions of Section 9(b)
----------------------
above, in the event of termination of an Optionee's Continuous Status as an
Employee as a result of total and permanent disability (i.e., the inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
twelve (12) months), the Optionee may exercise the Option, but only to the
extent of the right to exercise that had accrued as of the date of termination.
In the case of an Incentive Stock Option and unless specified otherwise in the
Option Agreement in the case of a Nonqualified Stock Option, such exercise must
occur within twelve (12) months (or such shorter time as is specified in the
grant) from the date on which the Employee ceased working as a result of the
total and permanent disability (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement). To
the extent that the Optionee was not entitled to exercise such Option within the
time specified herein or therein (whichever first occurs), the Option shall
terminate. If the Optionee returns to Continuous Status as an Employee before
his deadline for exercise pursuant to this Section 9(c), then Optionee shall be
restored to the status as Optionee he held immediately prior to his termination
(provided no employment credit will be earned for any period he was not in
Continuous Status as an Employee).
(d) Death of Optionee. Notwithstanding the provisions of Section 9(b) above,
-----------------
in the event of the death of an Optionee --
(i) who is at the time of death an Employee, the Option may be exercised,
at any time within six (6) months following the date of death (but in no event
later than the date of expiration of the term of such Option as set forth in the
Option Agreement), by the Optionee's estate or by a person who acquired the
right to exercise the option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued as of the date of death; or
(ii) whose Option has not yet expired but whose Continuous Status as an
Employee terminated prior to the date of death, the Option may be exercised, at
any time within six (6) months following the date of death (but in no event
later than the date of expiration of the term of such Option as set forth in the
Option Agreement), by the Optionee's estate or by a person who acquired the
right to exercise the option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.
(e) Notwithstanding subsections (b), (c), and (d) above, the Board shall have
the authority to extend the expiration date of any outstanding option in
circumstances in which it deems such action to be appropriate (provided that no
such extension shall extend the term of an Option beyond the date on which the
Option would have expired if no termination of the
4
<PAGE>
Employee's Continuous Status as an Employee had occurred).
10. Non-Transferability of Options. An Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee; provided, however, that the
Board may permit further transferability, on a general or specific basis, and
may impose conditions and limitations on any permitted transferability.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
----------------------------------------------------
required action by the shareholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination, or reclassification of the Shares, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding, and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of any
class, or securities convertible into shares of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise an Option as to all or any part of the Optioned Shares, including
Shares as to which the Option would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation, each Option shall be
assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless such
successor corporation does not agree to assume the Option or to substitute an
equivalent Option, in which case the Board shall, to the extent required by law
or otherwise as determined by the Board, in lieu of such assumption or
substitution, provide for the Optionee to have the right to exercise the Option
as to all of the Optioned Shares, including Shares as to which the Option would
not otherwise be exercisable. If the Board makes an Option fully exercisable in
lieu of assumption or substitution in the event of a merger or sale of assets,
the Board shall notify the Optionee that the Option shall be fully exercisable
for a period of thirty (30) days from the date of such notice, and the Option
will terminate upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for all
------------------------
purposes, be the date on which the Company completes the corporate action
relating to the grant of an Option and all conditions to the grant have been
satisfied, provided that conditions to the exercise of an Option shall not defer
the date of grant. Notice of a grant shall be given to each Employee to whom an
Option is so granted within a reasonable time after the determination has been
made.
13. Substitutions and Assumptions. The Board shall have the right to
-----------------------------
substitute or assume Options in connection with mergers, reorganizations,
separations, or other transactions to which Section 424(a) of the Code applies,
provided such substitutions and assumptions are permitted by Section 424 of the
Code and the regulations promulgated thereunder. The number of Shares reserved
pursuant to Section 3 may be increased by the corresponding number of Options
assumed and, in the case of a substitution, by the net increase in the number of
Shares subject to Options before and after the substitution.
14. Amendment and Termination of the Plan. The Board may amend or terminate
-------------------------------------
the Plan from time to time in such respects as the Board may deem advisable
(including, but not limited to, amendments which the Board deems appropriate to
enhance the Company's ability to claim deductions related to stock option
exercises); provided, however, that any increase in the number of Shares subject
to the Plan, other than in connection with an adjustment under Section 11 of the
Plan, shall require approval of or ratification by the shareholders of the
Company.
5
<PAGE>
(a) Employees in Foreign Countries. The Board shall have the authority to
------------------------------
adopt such modifications, procedures, and subplans as may be necessary or
desirable to comply with provisions of the laws of foreign countries in which
the Company or its Parent or Subsidiaries may operate to assure the viability of
the benefits from Options granted to Employees employed in such countries and to
meet the objectives of the Plan.
(b) Effect of Amendment or Termination. Any such amendment or termination of
----------------------------------
the Plan shall not affect Options already granted and such Options shall remain
in full force and effect as if this Plan had not been amended or terminated,
unless mutually agreed otherwise between the Optionee and the Board, which
agreement may be in writing and signed by the Optionee and the Company.
15. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
----------------------------------
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder, any applicable state securities laws, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
16. Reservation of Shares. The Company, during the term of this Plan, will
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
17. Shareholder Approval. The Plan, as amended, is subject to approval by
--------------------
the shareholders of the Company and shall become effective on the date of such
approval.
18. Governing Law. The validity, construction, interpretation and effect of
-------------
this Plan shall exclusively be governed by and determined in accordance with the
laws of the State of Georgia, except to the extent preempted by federal law.
6
<PAGE>
Independent Accountants' Consent
The Board of Directors
AirGate PCS, Inc.:
We consent to the use of our report dated November 19, 1999 related to the
consolidated financial statements of AirGate PCS, Inc. and subsidiary and
predecessors included herein, and to the reference to our firm under the
headings "Selected Financial Data" and "Experts" in this Registration Statement
and the related prospectus.
Atlanta, Georgia
December 28, 1999
/s/ KPMG L.L.P.
