- 2 -
ATL01/10677657V1
Prospectus Supplement filed under Rule 424(b)(3)
Registration Number 333-91749
Prospectus Supplement No. 8, dated August 14, 2000
(To Prospectus, dated January 3, 2000)
[AIRGATE PCS LOGO]
644,400 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF WARRANTS
This prospectus supplement to the prospectus dated January 3, 2000 relates
to our offering of 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.
This prospectus supplement should be read in conjunction with the
prospectus dated January 3, 2000, which is to be delivered with this prospectus
supplement. The information in this prospectus supplement updates certain
information contained in the prospectus dated January 3, 2000 and the Prospectus
Supplement No. 5 dated May 16, 2000.
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 18 OF
THIS PROSPECTUS SUPPLEMENT.
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.
<PAGE>
On August 14, 2000, AirGate PCS, Inc. filed with the Securities and
Exchange Commission the attached Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2000.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 027455
AIRGATE PCS, INC.
Harris Tower
233 Peachtree St. NE
Suite 1700
Atlanta, Georgia 30303
(404) 525-7272
DELAWARE 58-2422929
-------------------- ---------------------------
_
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
12,682,971 shares of Common Stock, $0.01 par value per share, were outstanding
as of August 8, 2000.
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes __X___ No ____
<PAGE>
AIRGATE PCS, INC.
THIRD QUARTER REPORT
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at June 30, 2000 and
September 30, 1999
Consolidated Statements of Operations (unaudited) for the three
and nine months ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows (unaudited) for the nine
months ended June 30, 2000 and 1999
Notes to the Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 92,221 $258,900
Trade receivables, net 3,659 -
Due from AirGate Wireless, LLC - 751
Other current assets 6,593 2,819
-------- ---------
Total current assets 102,473 262,470
Property and equipment, net 160,830 44,206
Financing costs 9,502 10,399
Other assets 290 245
-------- ---------
$273,095 $317,320
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,230 $ 2,216
Accrued expenses 12,311 20,178
Accrued interest 392 1,413
Current maturities of long-term debt - 7,700
-------- ---------
Total current liabilities 20,933 31,507
Long-term debt, excluding
current maturities 174,861 157,967
-------- ---------
Total liabilities 195,794 189,474
-------- ---------
Stockholders' equity:
Preferred stock, par value, $.01 per share;
5,000,000 shares authorized; no shares
issued and outstanding - -
Common stock, par value, $.01 per share;
150,000,000 shares authorized;
12,473,802 and 11,957,201 shares
issued and outstanding at June 30, 2000
and September 30, 1999, respectively 125 120
Additional paid-in capital 160,622 157,880
Accumulated deficit (79,382) (27,254)
Unearned stock option compensation (4,064) (2,900)
--------- ---------
Total stockholders' equity 77,301 127,846
Commitments and contingencies - -
--------- --------
$273,095 $317,320
======= =======
See accompanying notes to consolidated financial statements
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except share and per share amounts)
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Service revenue $ 2,034 $ - $ 2,494 $ -
Roaming revenue 3,771 - 4,717 -
Equipment revenue 737 - 1,041 -
------------ ----------- ------------ -----------
Total revenues $ 6,542 $ - $ 8,252 $ -
Operating expenses:
Cost of service and roaming (7,382) - (15,786) -
Cost of equipment (1,363) - (1,974) -
Selling and marketing (8,685) - (13,723) -
General and administrative (4,823) (1,201) (9,525) (2,844)
Noncash stock option compensation (354) - (1,067) -
Depreciation and amortization (4,235) (171) (6,795) (585)
------------ ----------- ------------ -----------
Operating loss (20,300) (1,372) (40,618) (3,429)
Interest income 2,005 - 8,083 -
Interest expense (6,901) (4,813) (19,593) (5,934)
------------ ----------- ------------ -----------
Net loss $ (25,196) $ (6,185) $ (52,128) $ (9,363)
============ =========== ============ ===========
Basic and diluted net loss per
share of common stock $ (2.03) $ (1.83) $ (4.27) $ (2.77)
============ =========== ============ ===========
Weighted-average outstanding
common shares 12,435,644 3,382,518 12,212,480 3,382,518
============ =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months
ended June 30,
2000 1999
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (52,128) $(9,363)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,795 585
Provision for doubtful accounts 162 -
Accretion of original issue discounts on long-term debt 17,091 5,037
Amortization of financing costs 897 -
Noncash stock option compensation 1,067 -
(Increase) decrease in:
Due from AirGate Wireless, LLC 751 (751)
Trade receivables (3,821) -
Other current assets (3,773) (313)
Other assets (45) (131)
Increase (decrease) in:
Accounts payable 1,238 354
Accrued expenses 7,107 -
Accrued interest (919) 1,213
---------- --------
Net cash used in operating activities (25,578) (3,369)
---------- --------
Cash flows from investing activities:
Capital expenditures (133,506) (7,140)
---------- --------
Net cash used in investing activities (133,506) (7,140)
---------- --------
Cash flows from financing activities:
Proceeds from notes payable - 12,530
Payment on notes payable (7,700) -
Proceeds from exercise of stock purchase warrants 5 -
Proceeds from exercise of common stock options 100 -
Offering costs - (337)
Payments on notes payable to stockholders - (700)
---------- ----------
Net cash (used in) provided by financing activities (7,595) 11,493
---------- --------
Net (decrease) increase in cash and cash equivalents (166,679) 984
Cash and cash equivalents at beginning of period 258,900 1,926
---------- --------
Cash and cash equivalents at end of period $ 92,221 $ 2,910
========== ========
Supplemental disclosure of cash flow information -
cash paid for interest $ 2,094 $ 852
========== ========
Supplemental disclosure of noncash investing and
financing activities:
Capitalized interest 4,733 -
Grant of warrants related to Lucent Financing 198 -
Notes payable and accrued interest converted to equity 102 -
Grant of compensatory stock options 2,231 -
Network assets acquired and not yet paid for 6,149 -
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been
prepared by management. 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. In the opinion
of management, these consolidated financial statements contain all of the
adjustments, consisting of normal recurring adjustments, necessary to present
fairly, in summarized form, the financial position and the results of operations
of AirGate PCS, Inc. ("AirGate" or the "Company") and subsidiary and
predecessors. The results of operations for the three and nine months ended
June 30, 2000 are not indicative of the results that may be expected for the
full fiscal year of 2000. The financial information presented herein should be
read in conjunction with the Company's Form 10-K for the year ended September
30, 1999 which includes information and disclosures not included herein. All
significant intercompany accounts or balances have been eliminated in
consolidation. Certain amounts have been reclassified to conform to the current
year presentation.
(2) Net Loss Per Share
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 net loss per share is
the same for both the basic and diluted net loss per share calculations for all
periods presented.
The reconciliation of weighted-average outstanding common shares to
weighted-average outstanding shares including potentially dilutive common stock
equivalents is set forth below:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Weighted-average outstanding common shares 12,435,644 3,382,518 12,212,480 3,382,518
Weighted-average potentially dilutive
common stock equivalents:
Common stock options 907,416 - 884,135 -
Stock purchase warrants 411,035 - 407,787 -
---------- ---------- --------- ---------
Weighted-average outstanding shares
including potentially dilutive common
stock equivalents 13,754,095 3,382,518 13,504,402 3,382,518
========== ========= ========== =========
</TABLE>
(3) Revenue Recognition
The accounting policy for the recognition of activation fee revenue is to record
the revenue over the periods such revenue is earned in accordance with the
current interpretations of Staff Accounting Bulletin No. 101 (SAB 101), "Revenue
Recognition in Financial Statements." Accordingly, a like amount of direct
customer activation and acquisition expense has been deferred and will be
recorded over the same period. As of June 30, 2000, the Company has recognized
$20,000 of activation fee revenue and expense and has deferred $437,000 of
activation fee revenue and expense to future periods.
(4) Due from AirGate Wireless, LLC
On January 27, 2000, the Company collected all principal and accrued interest
relating to the receivable from AirGate Wireless, LLC.
(5) Trade Receivables, net
Trade receivables represent amounts due from Sprint PCS related to roaming
revenues and amounts due from customers for services provided including monthly
airtime charges. Trade receivables are recorded net of the allowance for
doubtful accounts of $162,000.
(6) Other Current Assets
Inventories consist of handsets and related accessories. Inventories are
carried at the lower of cost (determined using the weighted average method) or
market. Other current assets consists of the following at June 30, 2000 and
September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------ ------
<S> <C> <C>
Prepaid expenses $3,127 $1,596
Inventories 1,378 -
Current portion of financing costs 1,223 1,223
Interest receivable and other 865 -
------ ------
Other current assets $6,593 $2,819
====== ======
</TABLE>
<PAGE>
(7) Property and Equipment, net
Property and equipment consists of the following at June 30, 2000 and September
30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
--------- --------
<S> <C> <C>
Network assets $140,880 $ 7,700
Computer equipment 1,795 89
Furniture, fixtures, and office equipment 4,754 87
--------- --------
147,429 7,876
Less accumulated depreciation and amortization (7,765) (971)
--------- --------
139,664 6,905
Construction in progress (network build-out) 21,166 37,301
--------- --------
Property and equipment, net $160,830 $44,206
========= ========
</TABLE>
(8) Common Stock Purchase Warrants
Senior Subordinated Discount Notes
On January 3, 2000, the Company's registration statement on Form S-1, relating
to warrants to purchase 644,400 shares of common stock issued together, as
units, with the Company's $300 million of 13.5% senior subordinated discount
notes due 2009, was declared effective by the Securities and Exchange
Commission. On September 30, 1999, the Company received gross proceeds of
$156.1 million from the issuance of 300,000 units, each unit consisting of a
$1,000 principal amount at maturity 13.5% senior subordinated discount note due
2009 and one warrant to purchase 2.148 shares of common stock at a price of
$0.01 per share. The warrants are exercisable beginning 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. As of June 30, 2000,
warrants representing 496,921 shares of common stock had been exercised and
warrants representing 147,479 shares of common stock remain outstanding.
Lucent Financing
On June 1, 2000, the Company issued stock purchase warrants to Lucent
Technologies in consideration of the Lucent Financing (as defined below). The
exercise price of the warrants equals $20.40 per share, and the warrants are
exercisable for an aggregate of 10,175 shares of the Company's common stock at
any time. 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 recorded a discount
on the associated credit facility of $198,000 which represents the fair value of
the warrants on the date of grant using a Black-Schoales valuation. The
discount will be recognized as interest expense over the period from the date of
issuance to maturity using the effective interest method. All of these warrants
remain outstanding at June 30, 2000.
<PAGE>
(9) Common Stock
On May 26, 2000, at a Special Meeting of the stockholders of AirGate PCS, Inc.,
the stockholders voted to amend our Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of our common stock,
par value $0.01 per share, from 25,000,000 shares to 150,000,000 shares.
(10) Commitment and Contingencies
On May 4, 2000, the Company entered into a retention bonus agreement with Thomas
M. Dougherty, its Chief Executive Officer. Provided Mr. Dougherty is employed by
the Company on specified payment dates, generally quarterly, extending to
January 15, 2004, periodic retention bonuses totaling $3.6 million will be
earned and paid to Mr. Dougherty by the Company. Compensation expense of $1.1
million was recorded in the three months ended June 30, 2000 related to amounts
earned under the retention bonus agreement. Under the terms of the agreement,
partial acceleration of the future payments would occur upon a change in control
of the Company.
(11) Subsequent Events
(a) On July 11, 2000, warrants held by Weiss, Peck and Greer Venture
Partners Affiliated Funds to acquire 214,413 shares of common stock at a price
of $12.75 per share were exercised. Net of shares surrendered in payment of the
exercise price, 173,457 shares of common stock were issued.
(b) On August 9, 2000, our Vice President of Law and Secretary terminated
employment with the Company. Pursuant to the 1999 stock option plan, the
vesting of previously unvested stock options will result in the company
recording non-cash stock option compensation expense of $259,000 in the three
months ended September 30, 2000.
(12) AGW Leasing Company, Inc. - Wholly-Owned Subsidiary
AGW Leasing Company, Inc. ("AGW") is a wholly-owned subsidiary of AirGate. AGW
has fully and unconditionally guaranteed the Company's senior subordinated
discount notes and Lucent Financing. AGW was formed to hold the leasehold
interests for the Company's PCS network. AGW also was a registrant under the
Company's registration statement (Registration File Number 333-78189-01)
declared effective by the Securities and Exchange Commission on September 27,
1999.
<PAGE>
The unaudited condensed consolidating financial statements as of and for the
nine months ended June 30, 2000 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
AirGate PCS, Inc. AGW Leasing
and Predecessors Company, Inc. Eliminations Consolidated
------------------ --------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 92,221 $ - $ - $ 92,221
Trade receivables and other current assets 18,238 - (7,986) 10,252
Property and equipment, net 160,830 - - 160,830
Other assets 9,792 - - 9,792
------------------ --------------- -------------- --------------
Total assets $ 281,081 $ - $ (7,986) $ 273,095
================== =============== ============== ==============
Accounts payable $ 8,230 $ - $ - $ 8,230
Accrued expenses 12,703 7,986 (7,986) 12,703
Long-term debt 174,861 - - 174,861
------------------ --------------- -------------- --------------
Total liabilities 195,794 7,986 (7,986) 195,794
Common stock 125 - - 125
Additional paid-in capital 160,622 - - 160,622
Accumulated deficit (71,396) (7,986) - (79,382)
Unearned stock option compensation (4,064) - - (4,064)
------------------ --------------- -------------- --------------
Total liabilities and stockholders' equity(deficit) $ 281,081 $ - $ (7,986) $ 273,095
================== =============== ============== ==============
Total revenues $ 8,252 $ - $ - $ 8,252
Total expenses (53,773) (6,607) - (60,380)
------------------ --------------- -------------- --------------
Net loss $ (45,521) $ (6,607) $ - $ (52,128)
================== =============== ============== ==============
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained herein regarding expected financial results and other
planned events are forward-looking statements that involve risk and
uncertainties. Actual future events or results may differ materially from these
statements. Readers are referred to the documents filed by AirGate PCS, Inc.
with the Securities and Exchange Commission, specifically the most recent
filings which identify important risk factors that could cause actual results to
differ from those contained in the forward-looking statements, including
potential fluctuations in quarterly results, our dependence on our affiliation
with Sprint PCS, an adequate supply of infrastructure and subscriber equipment,
dependence on new product development, rapid technological and market change,
risks related to future growth and expansion, our significant level of
indebtedness and volatility of stock prices. Certain of these risks are
summarized under the caption "Risk Factors" included under Item 5 - Other
Information of this quarterly report.
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 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. In
January 2000 we began commercial operations with the launch of two markets
covering 1.5 million residents in our territory.
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 manage the network on Sprint PCS'
licensed spectrum as well as use the Sprint and Sprint PCS brand names
royalty-free during our affiliation with Sprint PCS. We also have access to
Sprint PCS' national marketing support and distribution programs and are
entitled to buy network and subscriber equipment and handsets at the same
discounted rates offered by vendors to Sprint PCS based on its large volume
purchases. In exchange for these benefits, we are entitled to receive 92%, and
Sprint PCS is entitled to retain 8% of collected service revenues from customers
in our territory. We are entitled to 100% of revenues collected from the sale of
handsets and accessories, on roaming revenues received when Sprint PCS customers
from a different territory make a wireless call on our PCS network, and on
roaming revenues from non-Sprint PCS customers.
Through June 30, 2000, we have incurred $162.0 million of capital
expenditures related to the build-out of our PCS network. As a result of the
progress made on our PCS network build-out, we were able to open the network for
a portion of our territory for roaming coverage along Interstate 85 between
Atlanta, Georgia and Charlotte, North Carolina in November 1999. In the three
months ended March 31, 2000, we launched commercial PCS operations in the
Greenville-Spartanburg, Anderson and Myrtle Beach, South Carolina markets and
the Hickory, Asheville, Wilmington and Rocky Mount, North Carolina markets. In
the three months ended June 30, 2000, we launched commercial PCS operations in
the Charleston, Columbia and Florence, South Carolina markets, the Augusta and
Savannah, Georgia markets and the Goldsboro, Jacksonville, New Bern, Orangeburg,
Roanoke Rapids and Greenville-Washington, North Carolina markets. At June 30,
2000, we offered personal communication services to 5.0 million residents in our
territory of 7.1 million residents based on 1998 population data. We expect to
extend our commercial operations during the next three months and anticipate
substantially completing the build-out of our PCS network by the end of our
fiscal year 2000 covering approximately 75% of the resident population in our
territory of 7.1 million.
<PAGE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1999:
Customer Additions
As of June 30, 2000, the Company provided personal communication services
to 23,482 customers, a net increase of 17,105 during the three months then
ended, resulting from the commercial launch of eleven markets in the third
fiscal quarter.
Average Revenue Per User (ARPU)
An important operating metric in the wireless industry is Average Revenue
Per User (ARPU) which summarizes the average monthly service revenue per
customer, net of an allowance for doubtful accounts. For the three months ended
June 30, 2000, ARPU was $54.
Revenues
Service revenue and equipment revenue were $2.0 million and $737,000,
respectively, for the three months ended June 30, 2000. These revenues were the
result of launching commercial operations in eleven markets during the quarter.
Service revenue consists of monthly recurring access and feature charges and
monthly non-recurring charges for local, long distance, travel and roaming
airtime usage in excess of the pre-subscribed usage plan. Equipment revenue is
derived from the sale of handsets and accessories, net of an allowance for
returns. Our handset return policy allows customers to return their handsets
for a full refund within 14 days of purchase. When handsets are returned to us,
we may be able to reissue the handsets to customers at little additional cost to
us. However, when handsets are returned to Sprint PCS for refurbishing, we
receive a credit from Sprint PCS, which is less than the amount we originally
paid for the handset.
Roaming revenue of $3.8 million was recorded during the three months ended June
30, 2000. We receive Sprint PCS roaming revenue at a per-minute rate from
Sprint PCS or another Sprint PCS affiliate when Sprint PCS subscribers outside
of our territory use our network. We also receive non-Sprint PCS roaming
revenue when subscribers of other wireless service providers roam on our
network.
Cost of Service and Roaming and Cost of Equipment
The cost of service and roaming and the cost of equipment was $7.4 million
and $1.4 million, respectively, for the three months ended June 30, 2000. Cost
of service represents network operating costs (including salaries, cell site
lease payments, fees related to data transfer via T-1 and other transport lines,
inter-connect fees and other expenses related to network operations), roaming
expense when AirGate customers place calls on Sprint PCS's network or other
third party networks, back office services provided by Sprint PCS such as
customer care and billing, long distance expense relating to inbound roaming
revenue and the 8% of collected service revenue representing the Sprint PCS
affiliation fee. The Sprint PCS affiliation fee totaled $173,000 in the three
month period ended June 30, 2000. There were approximately 45 employees
performing network operations functions at June 30, 2000.
Cost of equipment includes the cost of handsets and accessories sold to
customers during the three months ended June 30, 2000. The cost of handsets
exceeds the retail price because we subsidize the price of handsets to remain
competitive in the marketplace.
Selling and Marketing
We incurred expenses of $8.7 million during the three month period ended
June 30, 2000 for selling and marketing costs associated with our market
launches in 2000. These amounts include retail store costs such as salaries and
rent in addition to promotion, advertising, commission costs, and handset
subsidies on units sold by third parties for which the Company does not record
revenue. At June 30, 2000, there were approximately 189 employees performing
sales and marketing functions compared to one employee as of June 30, 1999.
<PAGE>
General and Administrative
For the three months ended June 30, 2000, we incurred expenses of $4.8
million compared to $1.2 million for the three months ended June 30, 1999, an
increase of $3.6 million. The increase is primarily comprised of additional
rent, professional and consulting fees and compensation, recruiting and
relocation costs relating to growth in the number of employees. Increased
professional fees accounted for approximately $1.0 million of the increase.
Compensation expense of $1.1 million was recorded in the three months ended June
30, 2000 related to the retention bonus agreement with our Chief Executive
Officer. Of the approximately 272 employees at June 30, 2000, approximately 38
employees were performing corporate support functions compared to 10 employees
as of June 30, 1999.
Noncash Stock Option Compensation
Noncash stock option compensation expense was $354,000 for the three months
ended June 30, 2000. The Company applies the provisions of APB Opinion No. 25
and related interpretations in accounting for its stock option plan. Unearned
stock option compensation is recorded for the difference between the exercise
price and the fair market value of the Company's common stock at the date of
grant and is recognized as noncash stock option compensation expense in the
period in which the related services are rendered.
Depreciation and Amortization
For the three months ended June 30, 2000, depreciation and amortization
expense increased $4.0 million to $4.2 million compared to $171,000 for the same
period in 1999. The increase in depreciation and amortization expense relates
primarily to network assets placed in service to support our commercial launch.
Depreciation and amortization will continue to increase as additional portions
of our network are placed into service. We incurred capital expenditures of
$31.2 million in the three months ended June 30, 2000 related to the continued
build-out of our PCS network which included approximately $1.2 million of
capitalized interest.
Interest Income
For the three months ended June 30, 2000, interest income was $2.0 million.
Interest income is generated from cash proceeds originating from our initial
public equity and units offering completed on September 30, 1999. As capital
expenditures are made to complete the build-out of our PCS network, decreasing
cash balances will result in lower interest income for the remainder of fiscal
2000. No significant interest income was recorded in the three month period
ended June 30, 1999.
Interest Expense
For the three months ended June 30, 2000, interest expense was $6.9
million, an increase of $2.1 million over the same period in 1999. The increase
is primarily attributable to the $5.9 million accretion of original issue
discount on the senior subordinated discount notes and $1.7 million associated
with the Lucent Financing partially offset by $1.2 million of capitalized
interest. The Company had borrowings of $174.9 million as of June 30, 2000
compared to $165.7 million at September 30, 1999 and $20.8 million at June 30,
1999.
Net Loss
For the three months ended June 30, 2000, the net loss was $25.2 million,
an increase of $19.0 million compared to the net loss of $6.2 million for the
same period in 1999.
<PAGE>
FOR THE NINE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE NINE MONTHS ENDED
JUNE 30, 1999:
Customer Additions
In the nine months ended June 30, 2000, the Company added a net 23,482
customers since the launch of commercial operations in January 2000.
Average Revenue Per User (ARPU)
Average Revenue Per User (ARPU) which summarizes the average monthly
service revenue per customer, net of an allowance for doubtful accounts was $54
for the period since commercial operations were launched in January 2000.
Revenues
Service revenue and equipment revenue were $2.5 million and $1.0 million
for the nine months ended June 30, 2000, respectively, as a result of launching
commercial operations in eighteen markets during the nine months ended June 30,
2000. Roaming revenue of $4.7 million was recorded during the nine months ended
June 30, 2000.
Cost of Service and Roaming and Cost of Equipment
The cost of service and roaming and the cost of equipment was $15.8
million and $2.0 million, respectively, for the nine months ended June 30, 2000,
related directly to the launch of commercial operations in January 2000. The
Sprint PCS affiliation fee totaled $213,000 in the nine month period ended June
30, 2000.
Selling and Marketing
We incurred expenses of $13.7 million during the nine month period ended
June 30, 2000 for marketing costs associated with our eighteen market launches
in 2000. Handset subsidies on units sold for which we did not record revenue
totaled $1.6 million for the nine months ended June 30, 2000.
General and Administrative
For the nine months ended June 30, 2000, we incurred expenses of $9.5
million compared to $2.8 million for the nine months ended June 30, 1999, an
increase of $6.7 million. The increase is primarily comprised of additional
rent, professional fees, consulting fees for outsourced labor and salaries and
compensation, recruiting and relocation costs relating to growth in the number
of employees. Compensation expense of $1.1 million was recorded in the nine
months ended June 30, 2000 related to the retention bonus agreement with our
Chief Executive Officer.
Noncash Stock Option Compensation
Noncash stock option compensation expense was $1.1 million for the nine
months ended June 30, 2000.
Depreciation and Amortization
For the nine months ended June 30, 2000, depreciation and amortization
expense was $6.8 million compared to $585,000 for the same period in 1999. The
increase in depreciation and amortization expense relates primarily to network
equipment placed in service to support our commercial launch. Depreciation and
amortization will continue to increase as additional portions of our network are
placed into service. We incurred capital expenditures of $123.4 million in the
nine months ended June 30, 2000 primarily related to the continued build-out of
our PCS network which included approximately $4.7 million of capitalized
interest.
Interest Income
For the nine months ended June 30, 2000, interest income was $8.1 million.
Interest income is generated from cash proceeds originating from our initial
public equity and units offering completed on September 30, 1999. As capital
expenditures are made to complete the build-out of our PCS network, decreasing
cash balances will result in lower interest income for the remainder of fiscal
2000.
<PAGE>
Interest Expense
For the nine months ended June 30, 2000, interest expense was $19.6
million, an increase of $13.7 million over the same period in 1999. The increase
is primarily attributable to the $16.4 million accretion of original issue
discount on the senior subordinated discount notes and $5.6 million associated
with the Lucent Financing partially offset by $4.7 million of capitalized
interest. The Company had borrowings of $174.9 million as of June 30, 2000
compared to $165.7 million at September 30, 1999 and $20.8 million at June 30,
1999.
Net Loss
For the nine months ended June 30, 2000, the net loss was $52.1 million, an
increase of $42.7 million compared to a net loss of $9.4 million for the nine
months ended June 30, 1999. The Company expects that its net losses will
continue to increase throughout fiscal 2000 and into fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had $92.2 million in cash and cash
equivalents, as compared to $258.9 million in cash and cash equivalents at
September 30, 1999. Working capital was $82.9 million at June 30, 2000 as
compared to working capital of $231.0 million at September 30, 1999.
Net Cash Used In Operating Activities
The $25.6 million of cash used in operating activities in the nine months
ended June 30, 2000 was the result of the Company's $52.1 million net loss being
partially offset by a net $538,000 in cash provided by changes in working
capital and $26.0 million of depreciation, amortization of note discounts,
amortization of financing costs and noncash stock option compensation.
Net Cash Used in Investing Activities
The $133.5 million of cash used in investing activities represents cash
outlays for capital expenditures during the nine months ended June 30, 2000. We
incurred a total of $123.4 million of capital expenditures in the nine months
ended June 30, 2000. Further, cash payments of $16.2 million were made for
equipment purchases made through accrued expenses at September 30, 1999
partially offset by equipment purchases of $6.1 million made through accounts
payable and accrued expenses at June 30, 2000.
Net Cash Used In Financing Activities
The $7.7 million in cash used in financing activities consisted of the
repayment of the $7.7 million unsecured promissory note.
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 644,400 shares of our common stock at $0.01 per share.
The gross proceeds from the units offering were $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.
The Company's $153.5 million Credit Agreement with Lucent (the "Lucent
Financing") 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 Lucent Financing is for a $140.0
million senior secured term loan which becomes available for borrowing on
October 1, 2000 and which matures on September 30, 2008. Mandatory quarterly
payments of principal are required beginning December 31, 2002 for Tranche 1 and
June 30, 2004 for Tranche 2 initially in the amount of 3.75% of the loan balance
then outstanding and increasing thereafter. We expect that cash and cash
equivalents together with future advances under the Lucent Financing will fund
the Company's capital expenditures including the completion of our network
build-out and the Company's working capital requirements through 2002 in the
absence of any corporate development activities. If any corporate development
event such as an acquisition are effected, additional debt and/or equity capital
may be needed.
<PAGE>
SEASONALITY
Our business is subject to seasonality because the wireless industry is
heavily dependent on fourth calendar quarter results. Among other things, the
industry relies on significantly higher customer additions and handset sales in
the fourth calendar quarter as compared to the other three calendar quarters. A
number of factors contribute to this trend, including: the increasing use of
retail distribution, which is heavily dependent upon the year-end holiday
shopping season; the timing of new product and service announcements and
introductions; competitive pricing pressures; and aggressive marketing and
promotions. The increased level of activity requires a greater use of the
Company's available financial resources during this period.
INFLATION
Management believes that inflation has not had, and does not expect
inflation to have, a material adverse effect on our results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 carrying value of the
senior subordinated discount notes ($172.2 million at June 30, 2000). Our
variable rate debt consists of borrowings made under the Lucent Financing ($13.5
million at June 30, 2000). The Company's primary interest rate risk exposures
relate to (i) the interest rate on the Company's long-term borrowings; (ii) the
Company's ability to refinance its senior subordinated discount notes at
maturity at market rates; and (iii) the impact of interest rate movements on the
Company's ability to meet interest expense requirements and financial covenants
under the Company's debt instruments.
We manage the interest rate risk on our outstanding long-term debt through
the use of fixed and variable rate debt and expect in the future to use interest
rate swaps. While we cannot predict our ability to refinance existing debt or
the impact interest rate movements will have on our existing debt, we continue
to evaluate our interest rate risk on an ongoing basis.
The following table presents the estimated future balances of outstanding
long-term debt at the end of each period and future required annual principal
payments for each period then ended associated with the senior subordinated
discount notes and the Lucent Financing based on our projected level of
long-term indebtedness:
<TABLE><CAPTION>
TWELVE MONTHS ENDED JUNE 30,
------------------------------------------------------- ------------
2001 2002 2003 2004 2005 THEREAFTER
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C><S>
Senior subordinated discount notes $189,865 $216,379 $246,593 $281,023 $300,000 -
Fixed interest rate 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Principal payments - - - - - $300,000
Lucent Financing $ 55,500 $133,325 $151,002 $142,325 $120,005 -
Variable interest rate (1) . 10.49% 10.49% 10.49% 10.49% 10.49% 10.49%
Principal payments . - - $ 1,519 $2,025 $ 2,025 $120,005
___________________
(1) Interest rate on the Lucent Financing equals the London Interbank
Offered Rate (''LIBOR'') +3.75%. LIBOR is assumed to equal 6.74% for all
periods presented.
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 30, 1999, we completed the concurrent offerings of equity and
debt funding with total net proceeds of approximately $269.9 million. In the
nine months ended June 30, 2000, we have utilized $105.6 million to fund capital
expenditures relating to the build-out of our PCS network and $7.7 million to
repay indebtedness.
On May 26, 2000 our Amended and Restated Certificate of Incorporation was
amended to increase the number of authorized shares of common stock, par value
$.01 per share, from 25,000,000 to 150,000,000. The future issuance of
additional shares of common stock on other than a pro rata basis may dilute the
ownership of current stockholders. Such additional shares could be used to
block an unsolicited acquisition through the issuance of large blocks of stock
to persons or entities considered by our officers and directors to be opposed to
such acquisitions, which might be deemed to have an anti-takeover effect (i.e.,
might impede the completion of a merger, tender offer or other takeover
attempt). In fact, the mere existence of such a block of authorized but
unissued shares, and our Board of Directors' ability to issue such shares
without stockholder approval, might deter a bidder from seeking to acquire
shares of our common stock on an unfriendly basis. See Item 4 for additional
discussion of the adoption of the amendment to our Amended and Restated
Certificate of Incorporation.
On July 11, 2000, warrants held by Weiss, Peck and Greer Venture Partners
Affiliated Funds to acquire 214,413 shares of common stock of the Company, par
value $.01 per share, at a price of $12.75 per share were exercised. The
exercise was a cashless exercise, with 40,956 of the 214,413 shares being
surrendered in payment of the exercise price. Net of shares surrendered in
payment of the exercise price, 173,457 shares of common stock were issued. The
exemption claimed for the issuance is Section 4(2) of the Securities Act of
1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The company submitted to a vote of its stockholders of record as of April
24, 2000, through a solicitation by proxy, an amendment to its Amended and
Restated Certificate of Incorporation to increase the number of authorized
shares of our common stock, par value $0.01 per share, from 25,000,000 to
150,000,000 shares. The matter was submitted for a vote at a Special Meeting on
May 26, 2000. A total of 11,473,833 shares were represented by proxy at the
meeting, representing 92.4% of the 12,421,802 shares eligible to vote. Of the
shares represented, 8,220,239 were voted in favor of the amendment to the
Company's Amended and Restated Certificate of Incorporation, 2,841,489 were
voted against the proposal and 412,105 votes were withheld.
ITEM 5. OTHER INFORMATION
SPRINT MANAGEMENT AGREEMENT
On May 12, 2000, the Company signed an amendment to its management
agreement with SprintCom, Inc. The amendment incorporates several
clarifications and amendments to our management agreement: (1) The amendment
specifies that we will purchase long distance services for our customers and
connect our network to Sprint PCS services from Sprint through Sprint PCS rather
than purchasing those services directly from Sprint as was previously the case
in the management agreement. Sprint PCS will bill us for the long distance at
the rate paid by Sprint PCS plus an administrative fee to cover Sprint PCS'
processing costs. The amendment also specifies that we can not resell the long
distance services we purchase from Sprint under the management agreement. (2)
The amendment modifies Sprint PCS' right of last offer to provide backhaul and
transport services to exclude from this right backhaul services relating to
national platform and IT application connections. Prior to the amendment, these
services were not excluded. (3) The amendment also eliminates, as no longer
applicable, the reference in the management agreement to the restructuring of
ownership in Sprint Spectrum L.P., Sprint Com, Inc. PhillieCo Partners I, L.P.
and Cox Communications PCS, L.P. (4) The amendment modifies our representation
of delivery of existing contracts that affect the right of Sprint PCS under our
agreement to include contracts disclosed by us verbally or in writing copies of
which are delivered to Sprint PCS at its request. (5) The amendment amends our
services agreement with Sprint PCS to provide that our monthly charge for fees
for services (other than billing-related services) provided by Sprint PCS will
be determined based on the number of subscribers as of the 15th of each month.
Sprint PCS will bill us for billing related services based on our subscribers at
the end of the prior month and gross activations on the last day of the current
calendar month. Previously all charges were determined as of the 15th of each
month including charges for billing related services.
<PAGE>
In addition, the amendment removes prohibitions on the transfer or assignment of
ownership interests by certain individuals identified in the management
agreement for a period of five years from the date of the management agreement
as follows: (1) As of May 12, 2000, the amendment allows the pledge of stock by
certain individuals identified in the management agreement that was previously
prohibited for a period of five years from the date of the management agreement.
(2) The amendment removes prohibitions on any transfer or assignment of
ownership interests by certain individuals identified in the management
agreement for a period of five years from the date of the management agreement.
The restrictions will be eliminated on June 30, 2000 if our network is declared
network ready by Sprint PCS and meets our network coverage requirements under
our agreement with Sprint PCS for all of our markets except the Greenwood, S.C.
BTA, Sumter, S.C. BTA, New Bern, N.C. BTA, Camden County, N.C., Currituck
County, N.C., Dare County, N.C. and Pasquotank, N.C. If our network was not
declared network ready in these markets by June 30, 2000 or the coverage
requirements for these markets were not met, the restrictions would have
remained in place until we achieved network ready status and provided the
coverage. AirGate did meet the network coverage requirements, by June 30, 2000,
necessary to eliminate the restrictions noted above so the possible event of
termination for prohibitions on transfer or assignment of ownership interests by
certain identified individuals no longer exists. As a result, 1,041,227 shares
of our common stock became eligible for sale, subject to compliance with Rule
144 of the Securities Act (including Rule 144(k) for persons who are not
affiliates or whose affiliate status is terminated). In July 1998, the certain
identified individuals executed five year employment agreements not impacted by
the amendment to the Company's management agreement with SprintCom, Inc. noted
herein.
RISK FACTORS
The following risk factors update the risk factors contained in our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000.
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.
We may not receive as much Sprint PCS roaming revenue as we anticipate because
Sprint PCS can change the rate we receive or fewer people may travel in our
network area
We are paid a fee from Sprint PCS for every minute that a Sprint PCS
subscriber based outside of our markets uses our network, which we refer to as
roaming revenue. Similarly, we pay a fee to Sprint PCS for every minute that
our customers use the Sprint PCS network outside of our markets, which we refer
to as travel fees. Roaming revenue will continue to represent a substantial
portion of our revenue in the future. Under our agreements with Sprint PCS,
Sprint PCS can change the current fee we receive for each Sprint PCS roaming
minute or pay for each roaming minute. The change by Sprint PCS in the roaming
revenue we are paid could substantially decrease our revenues and net income.
In addition, our customers may spend more time in other Sprint PCS coverage
areas than we anticipate and Sprint PCS customers from outside our markets may
spend less time in our markets or may use our services less than we anticipate,
which will reduce our roaming revenue. As a result, we may receive less Sprint
PCS roaming revenue than we anticipate or we may have to pay more Sprint PCS
roaming fees than the roaming revenue we collect.
<PAGE>
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 other risk factors contained below.
Sprint PCS' and its other affiliates' PCS operations may not be successful.
We have a limited operating history and if we do not successfully manage our
anticipated rapid growth, our operating performance may be adversely impacted
We launched commercial operations in January 2000 and have grown our
employee base to 272 employees as of June 30, 2000. Our performance as a PCS
provider depends on our ability to implement operational and administrative
systems, including the training and management of our engineering, marketing and
sales personnel. These activities are expected to place demands on our
managerial, operational and financial resources.
The inability to use Sprint PCS' back office services and third party vendors'
back office systems could disrupt our business
Our operations could be disrupted if Sprint PCS is unable to maintain and
expand its back office services such as customer activation, billing and
customer care, or to efficiently outsource those services and systems through
third party vendors. The rapid expansion of Sprint PCS' business is expected to
continue to pose a significant challenge to its internal support systems.
Additionally, 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
As of June 30, 2000, we have completed the network build-out in 18 of the
21 markets which make up our territory. We expect to complete out network
build-out in all 21 markets by August 31, 2000. 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.
<PAGE>
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 the Lucent Financing, will be
at variable rates of interest, which could result in higher interest expense in
the event of increases in market interest rates; and
- due to the liens on substantially all of our assets and the pledges of
stock of our subsidiary and future subsidiaries that secure our senior debt and
our senior subordinated discount notes, lenders or holders of our senior
subordinated discount notes may control our assets or our subsidiaries' assets
upon a default.
As of June 30, 2000, our outstanding long-term debt totaled $174.9 million.
Under our current business plan, we expect to incur substantial additional debt
before achieving break-even operating cash flow. Accordingly, we may utilize
some portion, if not all, of the $140.0 million of additional available
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
More than 95% of our cell sites are collocated on facilities shared with
one or more wireless providers. We 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.
<PAGE>
We may have difficulty in obtaining subscriber equipment required in order to
attract customers
We depend on equipment vendors for an adequate supply of subscriber
equipment, including handsets. If the supply or subscriber equipment is
inadequate or delayed, we may have difficulty in attracting customers.
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 affect the valuation of
our company, thereby, among other things reducing the market prices of our
securities and decreasing our ability to raise additional capital necessary to
complete our network build-out. Under our agreements with Sprint PCS, subject to
the requirements of applicable law, there are circumstances under which Sprint
PCS may purchase our operating assets or capital stock for 72% or 80% of the
"entire business value" of our company, as defined in our management agreement
with Sprint PCS. In addition, Sprint PCS must approve any change of control of
our ownership and consent to any assignment of our agreements with Sprint PCS.
Sprint PCS also has been granted a right of first refusal if we decide to sell
our operating assets. We are also subject to a number of restrictions on the
transfer of our business including the prohibition on selling our company or our
operating assets to a number of identified and as yet to be identified
competitors of Sprint PCS or Sprint. These and other restrictions in our
agreements with Sprint PCS may limit the saleability and/or reduce the value a
buyer may be willing to pay for our business and may operate to reduce the
"entire business value" of our company.
We may not be able to compete with larger, more established businesses offering
similar products and services
Our ability to compete will depend, in part, on our ability to anticipate
and respond to various competitive factors affecting the telecommunications
industry, including new services that may be introduced, changes in consumer
preferences, demographic trends, economic conditions and discount pricing
strategies by competitors. We will compete in our territory with two cellular
providers, both of which have an infrastructure in place and have been
operational for a number of years. They have significantly greater financial and
technical resources than we do, could offer attractive pricing options and may
have a wider variety of handset options. We expect that existing cellular
providers will upgrade their systems and provide expanded, digital services to
compete with the Sprint PCS 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.
<PAGE>
Our services may not be broadly used and accepted by consumers
PCS systems have a limited operating history in the United States. The
extent of potential demand for PCS in our markets cannot be estimated with any
degree of certainty. If we are unable to establish and successfully market PCS
services we may not be able to attract customers in sufficient numbers to
operate our business successfully.
The technology we use has limitations and could become obsolete
We intend to employ digital wireless communications technology selected by
Sprint PCS for its network. Code division multiple access, known as CDMA,
technology is a relatively new technology. CDMA may not provide the advantages
expected by Sprint PCS. If another technology becomes the preferred industry
standard, we may be at a competitive disadvantage and competitive pressures may
require Sprint PCS to change its digital technology which, in turn, may require
us to make changes at substantially increased costs. We may not be able to
respond to such pressures and implement new technology on a timely basis, or at
an acceptable cost.
If Sprint PCS customers are not able to roam instantaneously or efficiently onto
other wireless networks, prospective customers could be deterred from
subscribing for our Sprint PCS services
The Sprint PCS network operates at a different frequency and uses or may
use a different technology than many analog cellular and other digital systems.
To access another provider's analog cellular or digital system outside of the
Sprint PCS network, a Sprint PCS customer is required to utilize a dual-
band/dual-mode handset compatible with that provider's system. Generally,
because dual-band/dual-mode handsets incorporate two radios rather than one,
they are more expensive and are larger and heavier than single-band/single-mode
handsets. The Sprint PCS network does not allow for call hand-off between the
Sprint PCS network and another wireless network, thus requiring a customer to
end a call in progress and initiate a new call when leaving the Sprint PCS
network and entering another wireless network. In addition, the quality of the
service provided by a network provider during a roaming call may not approximate
the quality of the service provided by Sprint PCS. The price of a roaming call
may not be competitive with prices of other wireless companies for roaming
calls, and Sprint PCS customers may not be able to use Sprint PCS advanced
features, such as voicemail notification, while roaming.
Non-renewal or revocation by the Federal Communications Commission of the Sprint
PCS licenses would significantly harm our business
PCS licenses are subject to renewal and revocation. Sprint PCS' licenses in
our territory will expire in 2007 but may be renewed for additional ten year
terms. There may be opposition to renewal of Sprint PCS' licenses upon their
expiration and the Sprint PCS licenses may not be renewed. The Federal
Communications Commission, generally referred to as the FCC, has adopted
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. Our operating
profitability will depend upon many factors, including, among others, our
ability to market our services, achieve our projected market penetration and
manage customer turnover rates. If we do not achieve and maintain operating
profitability and positive cash flow from operating activities on a timely
basis, we may not be able to meet our debt service requirements.
<PAGE>
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.
Our relationship with Sprint PCS or any possible successor may be adversely
affected by any acquisition or merger of Sprint
Sprint or Sprint PCS may experience a change of control, sale or merger
that could adversely affect our relationships with them. On July 13, 2000,
Sprint and WorldCom announced the termination of their definitive merger
agreement. There is widespread speculation with respect to Sprint's future
intentions, including the possibility of Sprint seeking a new merger partner.
If any sale or merger of Sprint is completed, we expect that our affiliation
agreements with the merged company would be on the same terms as our current
affiliation agreements with Sprint PCS. The results of any such transaction may
alter the nature of our relationship with Sprint PCS, which could restrict our
ability to operate successfully. Any negative impact on Sprint as a result of
such a transaction could have a negative impact on us as a Sprint PCS affiliate.
<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 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of AirGate PCS, Inc.
3.2 Amended and Restated Bylaws of AirGate PCS, Inc. (Incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form S-1/A filed by
the Company with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and
333-79189-01)
4.1 Specimen of common stock certificate of AirGate PCS, Inc. (Incorporated
by reference to Exhibit 4.1 to the Registration Statement on Form S-1/A filed by
the Company with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and
333-79189-01))
<PAGE>
4.2 Form of warrant issued in units offering (included in Exhibit 10.15)
4.3.1 Form of Weiss, Peck and Greer warrants (Incorporated by reference to
Exhibit 4.3 to the Registration Statement on Form S-1/A filed by the Company
with the Commission on August 9, 1999 (SEC File Nos. 333-79189-02 and
333-79189-01))
4.3.2 Form of Lucent Warrants (Incorporated by reference to Exhibit 4.4 to
the Registration Statement on Form S-1/A filed by the Company with the
Commission on September 17, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))
4.3.3 Form of Indenture for senior subordinated discount notes (including
form of pledge agreement) (Incorporated by reference to Exhibit 4.5 to the
Registration Statement on Form S-1/A filed by the Company with the Commission on
September 23, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))
4.4 Form of unit (included in Exhibit 10.15)
10.1.1 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/A filed by the Company with the Commission on June 15,
1999 (SEC File Nos. 333-79189-02 and 333-79189-01))
10.1.2 Addendum V to Sprint PCS Management Agreement dated May 12, 2000 by
and among SprintCom, Inc., Sprint Communications Company, L.P. and AirGate PCS,
Inc.
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/A filed by the Company with the Commission on June 15,
1999 (SEC File Nos. 333-79189-02 and 333-79189-01))
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/A filed by the Company with the Commission on June 15, 1999 (SEC File 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/A filed by
the Company with the Commission on June 15, 1999 (SEC File 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 DCS (Incorporated by reference to Exhibit 10.5 to the
Registration Statement on Form S-1/A filed by the Company with the Commission on
June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))
10.6.1 Compass Telecom, L.L.C. Construction Management Agreement
(Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form
S-1/A filed by the Company with the Commission on June 15, 1999 (SEC File Nos.
333-79189-02 and 333-79189-01))
10.6.2* First Amendment to Services Agreement between AirGate PCS, Inc. and
COMPASS Telecom Services, L.L.C. dated May 30, 2000
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/A filed by
the Company with the Commission on July 12, 1999 (SEC File Nos. 333-79189-02 and
333-79189-01))
10.8.1 Form of Indemnification Agreement (Incorporated by reference to
Exhibit 10.8 to the Registration Statement on Form S-1/A filed by the Company
with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and
333-79189-01))
<PAGE>
10.9 Employment Agreement dated April 9, 1999 by and between AirGate PCS,
Inc. and Thomas M. Dougherty (Incorporated by reference to Exhibit 10.9 to the
Registration Statement on Form S-1/A filed by the Company with the Commission on
June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))
10.10.1 Form of Executive Employment Agreement (Incorporated by reference to
Exhibit 10.10 to the Registration Statement on Form S-1/A filed by the Company
with the Commission on July 12, 1999 (SEC File Nos. 333-79189-02 and
333-79189-01))
10.11 AirGate PCS, Inc. 1999 Stock Option Plan (Incorporated by
reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed by the
Company with the Commission on April 10, 2000 (SEC File No. 333-34416))
10.11.1 Form of AirGate PCS, Inc. Option Agreement
10.12 Credit Agreement with Lucent (including form of pledge agreement and
form of intercreditor agreement) (Incorporated by reference to Exhibit 10.12 to
the Registration Statement on Form S-1/A filed by the Company with the
Commission on September 17, 1999 (SEC File 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/A filed by the Company with the
Commission on September 17, 1999 (SEC File 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 Agreement from AirGate
Wireless, L.L.C. to AirGate Wireless, Inc. dated November 20, 1998 (Incorporated
by reference to Exhibit 10.14 to the Registration Statement on Form S-1/A filed
by the Company with the Commission on August 9, 1999 (SEC File Nos. 333-79189-02
and 333-79189-01))
10.15 Form of Warrant for units offering (including from of warrant in units
offering and form of unit) (Incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-1/A filed by the Company with the Commission on
September 23, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01))
10.16 First Amendment to Employment Agreement dated December 20, 1999
between AirGate PCS, Inc. and Thomas M. Dougherty (Incorporated by reference to
Exhibit 10.16 to the quarterly report on Form 10-Q filed by the Company with the
Commission on May 15, 2000 for the quarter ended March 31, 2000 (SEC File
No.000-27455))
10.17 Retention Bonus Agreement dated May 4, 2000 between AirGate PCS, Inc.
and Thomas M. Dougherty (Incorporated by reference to Exhibit 10.17 to the
quarterly report on Form 10-Q filed by the Company with the Commission on May
15, 2000 for the quarter ended March 31, 2000 (SEC File No.000-27455))
27 Financial Data Schedule
*Confidential Treatment Requested
<PAGE>
(b) Reports on Form 8-K
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer thereunto duly authorized.
AirGate PCS, Inc.
By: /s/ Alan B. Catherall
---------------------------------
Name: Alan B. Catherall
Title: Chief Financial Officer
(Duly Authorized Officer)
Date: August 14, 2000 /s/ Alan B. Catherall
-----------------------------
Alan B. Catherall
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
<PAGE>
