<PAGE>
Prospectus Supplement filed under Rule 424(b)(3)
Registration Number 333-91749
Prospectus Supplement No. 1, dated February 8, 2000
(To Prospectus dated January 3, 2000)
[AirGate PCS logo]
644,400 Shares of Common Stock Issuable Upon Excercise 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
and supercedes certain information contained in the prospectus dated
January 3, 2000.
This investment involves risk. See "Risk Factors" beginning on page 14 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 February 8, 2000, AirGate PCS, Inc. filed with the Securities and
Exchange Commission the attached Quarterly Report of Form 10-Q for the fiscal
quarter ended December 31, 1999.
<PAGE>
AS FILED FEBRUARY 8, 2000
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 DECEMBER 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 027455
AirGate PCS, Inc.
Harris Tower
233 Peachtree St. NE
Suite 1700
ATLANTA, GA 30303
(404) 525-7272
DELAWARE 58-2422929
- ------------------------------------ ---------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
11,969,734 shares of Common Stock, $0.01 par value per share, were outstanding
as of February 4, 1999.
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities 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
----- -----
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q - December 31, 1999 Page 1
<PAGE>
AS FILED FEBRUARY 8, 2000
AIRGATE PCS, INC.
FIRST QUARTER REPORT
Table of Contents
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at December 31, 1999 and
September 30, 1999
Consolidated Statements of Operations (unaudited) for the three months
ended December 31, 1999 and 1998 and for the period from inception,
June 15, 1995, to December 31, 1999
Consolidated Statements of Cash Flows (unaudited) for the three months
ended December 31, 1999 and 1998 and for the period from inception,
June 15, 1995, to December 31, 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 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q - December 31, 1999 Page 2
<PAGE>
AS FILED FEBRUARY 8,2000
PART I. FINANCIAL INFORMATION
ITEM 1-FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
Assets 1999 1999
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 208,929 $ 258,900
Due from AirGate Wireless, LLC 766 751
Other current assets 5,117 2,819
------------ -------------
Total current assets 214,812 262,470
Property and equipment, net 77,556 44,206
Financing costs 10,114 10,399
Other assets 256 245
------------ -------------
$ 302,738 $ 317,320
============ =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,729 $ 2,216
Accrued expenses 14,711 20,178
Accrued interest 119 1,413
Current maturities of long-term debt -- 7,700
------------ -------------
Total CURRENT LIABILITIES 20,559 31,507
Long-term debt, excluding current maturities 163,544 157,967
------------ -------------
Total liabilities 184,103 189,474
------------ -------------
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;
25,000,000 shares authorized; 11,969,734
and 11,957,201 shares issued and
outstanding at December 31, 1999 and
September 30, 1999, respectively 120 120
Additional paid-in capital 159,693 157,880
Accumulated deficit (37,082) (27,254)
Unearned stock option compensation (4,096) (2,900)
------------ -------------
Total stockholders' equity 118,635 127,846
Commitments and contingencies -- --
------------ -------------
$ 302,738 $ 317,320
============ =============
</TABLE>
See accompanying notes to consolidated financial statements
- --------------------------------------------------------------------------------
Air-Gate PCS Form 10-Q-December 31,1999 Page 3
<PAGE>
AS FILED FEBRUARY 8, 2000
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period from
Three Months Inception,
Ended June 15, 1995 to
December 31, December 31,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Roaming revenues $ 130 $ -- $ 130
------------ ------------ ------------
Operating expenses:
Cost of revenues (2,136) -- (2,136)
Selling and marketing (1,133) -- (1,133)
General and administrative (2,270) (1,045) (13,972)
Noncash stock option compensation (404) -- (729)
Depreciation and amortization (518) (176) (3,379)
------------ ------------ ------------
Operating loss (6,331) (1,221) (21,220)
Interest income 3,470 -- 3,470
Interest expense (6,967) (377) (19,333)
------------ ------------ ------------
Net loss $ (9,828) $ (1,598) $ (37,082)
============ ============ ============
Basic and diluted net loss per
share of common stock $ (0.82) $ (0.47)
============ ============
Weighted-average outstanding
common shares 11,967,009 3,382,518
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Period from
Three Months Inception,
ended June 15, 1995
December 31, to December 31,
1999 1998 1999
---------- ---------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,828) $ (1,598) $ (37,082)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization: 518 176 3,379
Loss on sale of fixed assets -- -- 19
Accretion of original issue discount on long-term debt 5,577 -- 14,268
Amortization of financing costs 285 -- 302
Stock option compensation 404 -- 729
(Increase) decrease in:
Due from AirGate Wireless, LLC (15) (378) (766)
Other current assets (2,298) 117 (3,895)
Other assets (11) (131) 2,091
Increase (decrease) in:
Accounts payable 3,364 409 5,568
Accrued expenses (877) -- 3,065
Accrued interest (1,191) 219 1,979
---------- ---------- ----------------
Net cash used in operating activities (4,072) 1,186 (10,343)
---------- ---------- ----------------
Cash flows from investing activities:
Capital expenditures (38,199) (2,744) (59,142)
Purchase of FCC licenses -- -- (2,936)
---------- ---------- ----------------
Net cash used in investing activities (38,199) (2,744) (62,078)
---------- ---------- ----------------
Cash flows from financing activities:
Proceeds from notes payable -- 5,000 26,300
Payment on notes payable (7,700) -- (17,700)
Proceeds from high yield debt -- -- 156,057
Financing cost on Lucent and high yield offering -- -- (11,622)
Proceeds from equity offering -- -- 130,985
Offering costs -- -- (10,517)
Payment of note payable to bank -- -- (1,000)
Proceeds from notes payable to stockholders -- -- 28,150
Payments on notes payable to stockholders -- (700) (20,850)
Cash distributions -- -- 1,547
---------- ---------- ----------------
Net cash (used in) provided by financing activities (7,700) 4,300 281,350
---------- ---------- ----------------
Net (decrease) increase in cash and cash equivalents (49,971) 370 208,929
Cash and cash equivalents at beginning of period 258,900 1,926 --
---------- ---------- ----------------
Cash and cash equivalents at end of period $ 208,929 $ 2,296 $ 208,929
========== ========== ================
Supplemental disclosures of cash flow information-
cash paid for interest $ 1,696 $ 349 $ 3,905
========== ========== ================
Supplemental disclosures of noncash investing and
financing activities:
Assets acquired through debt financing:
FCC licenses $ -- $ -- $ 11,745
Site acquisition and engineering costs -- -- 7,700
Notes payable and accrued interest converted to equity 102 -- 13,142
Fair value of warrants -- -- 13,319
Compensatory stock options 1,600 -- 4,825
Beneficial conversion of convertible notes -- -- 6,979
Network assets acquired through payables 11,906 -- 28,142
Distribution of FCC licenses:
Accrued interest -- -- (894)
Long-term debt -- -- (11,745)
FCC licenses -- -- 12,846
Line of credit -- -- (1,800)
</TABLE>
See accompanying notes to consolidated financial statements
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q - December 31, 1999 Page 5
<PAGE>
AS FILED FEBRUARY 8, 2000
AIRGATE PCS, INC. AND SUBSIDIARY AND PREDECESSORS
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(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 months ended December 31, 1999 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.
On October 21, 1999, the Company changed its fiscal year from a calendar
year ending December 31 to a fiscal year ending September 30 effective
September 30, 1999.
(2) Development Stage Enterprise
AirGate, LLC, the first predecessor of the Company, was established on June
15, 1995 (inception). The Company had devoted most of its efforts through
December 31, 1999, to activities such as preparing business plans, raising
capital and planning and executing the build-out of its PCS network. From
inception through December 31, 1999, the Company has not generated any
significant revenues and has incurred expenses of $37.2 million, resulting
in an accumulated deficit during the development stage of $37.1 million as
of December 31, 1999.
(3) 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 net loss per share is the same for
both the basic and diluted net loss per share calculations for all periods
presented.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q - December 31, 1999 Page 6
<PAGE>
AS FILED FEBRUARY 8, 2000
<TABLE>
<CAPTION>
The reconciliation of weighted-average outstanding common shares is set forth below:
Three Months
Ended
December 31,
1999 1998
------------ ------------
<S> <C> <C>
Weighted-average outstanding common shares 11,967,009 3,382,518
============ ============
Weighted-average potentially dilutive common stock equivalents:
Common stock options 725,709 --
Stock purchase warrants 857,538 --
------------ ------------
Weighted-average outstanding shares including potentially dilutive
common stock equivalents 13,550,256 3,382,518
============ ============
(4) Other Current Assets
<CAPTION>
Other current assets consists of the following at December 31, 1999 and September 30, 1999 (dollars in
thousands):
December 31, September 30,
1999 1999
------------ ------------
<S> <C> <C>
Prepaid expenses $ 2,739 $ 1,596
Current portion of financing costs 1,223 1,223
Other receivables 914 --
Inventories 241 --
------------ ------------
Other current assets $ 5,117 $ 2,819
============ ============
(5) Property and Equipment
Property and equipment consists of the following at December 31, 1999 and September 30, 1999 (dollars in
thousands):
<CAPTION>
December 31, September 30,
1999 1999
------------ ------------
<S> <C> <C>
Network assets $ 30,173 $ 7,700
Computer equipment 679 89
Furniture, fixtures, and office equipment 214 87
------------ ------------
31,066 7,876
Less accumulated depreciation and amortization (1,489) (971)
------------ ------------
29,577 6,905
Construction in progress (network build-out) 47,979 37,301
------------ ------------
Property and equipment, net $ 77,556 $ 44,206
============ ============
</TABLE>
(6) Financing Transactions
(a) 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 and related accrued interest were convertible into
shares of common stock at a price 48% less than the price of a
share of common stock sold in the Company's initial public offering
of common stock.
(b) On November 15, 1999, the Company repaid in full the $7.7 million
unsecured promissory note plus accrued interest.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q - December 31, 1999 Page 7
<PAGE>
AS FILED FEBRUARY 8, 2000
(7) Stock Option Grants
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
granted to employees have an exercise price equal to the fair market value
on the date of grant ($43.60 per share), 40,000 options (compensatory
options) granted to employees have an exercise price of $14.00 per share
(fair value on date of grant of $38.50 per share), and 10,000 options
(compensatory options) granted to a director have an exercise price of
$2.00 per share (fair value on date of grant of $42.59 per share). These
options vest over various terms from two to five years beginning on the
grant date. An increase in additional paid-in capital and unearned stock
option compensation of $1.6 million was recorded by the Company which
represents the difference between the exercise price and the fair market
value of the Company's common stock at the date of grant and will be
recognized as noncash stock option compensation expense in the period in
which the related services are rendered.
On December 14, 1999, the Company's Board of Directors granted options to
purchase 93,000 shares of common stock to certain employees pursuant to the
1999 Stock Option Plan. All of these options have an exercise price equal
to the fair market value on the date of grant. These options vest over five
years beginning on the grant date, except that 10,000 options granted to an
employee were exercisable immediately.
(8) Subsequent Events
(a) 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, AirGate
PCS, Inc. received gross 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. 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.
(b) On January 21, 2000, the Company's Board of Directors granted options
to purchase 90,000 shares of common stock to a director and certain
employees pursuant to the 1999 Stock Option Plan. Of these options,
80,000 options granted to employees have an exercise price equal to
the fair market value on the date of grant ($65.75) and 10,000 options
(compensatory options) granted to a director have an exercise of $2.00
per share (fair value on date of grant of $64.71 per share). These
options vest at various terms from two to five years beginning at the
grant date. An increase in additional paid-in capital and unearned
stock option compensation of $638,000 will be recorded by the Company,
which represents the difference between the exercise price and the
fair market value of the Company's common stock at the date of grant
and will be recognized as noncash stock option compensation expense in
the period in which the related services are rendered.
(c) On January 27, 2000, the Company collected all principal and accrued
interest relating to the receivable from AirGate Wireless, LLC.
(9) AGW Leasing Company, Inc. - Wholly-Owned Subsidiary
AGW Leasing Company, Inc. ("AGW") is a wholly-owned subsidiary of AirGate.
AGW has fully and unconditionally guaranteed the Company's senior
subordinated discount notes. AGW is the Company's only subsidiary and was
formed to hold the real estate interests for the Company's PCS network. AGW
also was a registrant under the Company's registration statement
(Registration File Number 333-78189-01) declared effective by the
Securities and Exchange Commission on September 27, 1999.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q - December 31, 1999 Page 8
<PAGE>
AS FILED FEBRUARY 8, 2000
The unaudited condensed consolidating financial statements as of and for
the three months ended December 31, 1999 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 $ 208,929 $ - $ - $ 208,929
Other current assets 8,782 - (2,899) 5,883
Property and equipment, net 77,556 - - 77,556
Other assets 10,370 - - 10,370
------------- ------------- ------------- -------------
Total assets $ 305,637 - $ (2,899) $ 302,738
============= ============= ============= =============
Accounts payable $ 5,729 $ - $ - $ 5,729
Accrued expenses and other current liabilities 14,830 2,899 (2,899) 14,830
Long-term debt 163,544 - - 163,544
------------- ------------- ------------- -------------
Total liabilities 184,103 2,899 (2,899) 184,103
Common stock 120 - - 120
Additional paid-in capital 159,693 - - 159,693
Accumulated deficit (34,183) (2,899) - (37,082)
Unearned stock option compensation (4,096) - - (4,096)
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity(deficit) $ 305,637 $ - $ (2,899) $ 302,738
============= ============= ============= =============
Total revenues $ 130 $ - $ - $ 130
Total expenses (8,438) (1,520) - (9,958)
------------- ------------- ------------- -------------
Net loss $ (8,308) $ (1,520) $ - $ (9,828)
============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q - December 31, 1999 Page 9
<PAGE>
AS FILED FEBRUARY 8, 2000
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained herein regarding expected financial results and other
planned events are forward-looking statements that involve risk and
uncertainties. Actual future events or results may differ materially from these
statements. Readers are referred to the documents filed by AirGate with the
Securities and Exchange Commission, specifically the most recent filings which
identify important risk factors that could cause actual results to differ from
those contained in the forward-looking statements, including potential
fluctuations in quarterly results, 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. These and other applicable 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 are a development stage
company and have not generated significant revenues to date. 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.
Sprint PCS has invested $44.6 million to purchase the PCS licenses in our
territory and incurred additional expenses for microwave clearing. Under our
long term agreements with Sprint PCS, we will manage the network on Sprint PCS'
licensed spectrum as well as the Sprint and Sprint PCS brand names royalty-free
during our affiliation with Sprint PCS. We also have access to Sprint PCS'
national marketing support and distribution programs and are entitled to buy
network and subscriber equipment and handsets at the same discounted rates
offered by vendors to Sprint PCS based on its large volume purchases. In
exchange for these benefits, we are entitled to receive 92%, and Sprint PCS is
entitled to retain 8%, of collected service revenues from customers in our
territory. We are entitled to 100% of revenues collected from the sale of
handsets and accessories, on 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 December 31, 1999, we have incurred $78.9 million of capital
expenditures related to the build-out of our PCS network. As a result of the
progress made on our PCS network build-out, we 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 January 2000
we launched commercial PCS operations in the Greenville-Spartanburg and
Anderson, South Carolina, Hickory and Asheville, North Carolina markets. We
expect to extend our commercial operations during the balance of 2000 and
anticipate substantially completing the build-out of our PCS network by the end
of 2000 covering approximately 74% of the resident population in our territory
of 6.8 million.
Results of Operations
For the three months ended December 31, 1999 compared to the three months
ended December 31, 1998:
Roaming Revenues
As a development stage enterprise, AirGate had not generated any significant
revenues prior to December 31, 1999. Roaming revenue of $130,000 was recognized
during the three months ended December 31, 1999 compared to no revenue for the
three months ended December 31, 1998 and was derived from both Sprint PCS
customers from different territories and non-Sprint PCS customers.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 10
<PAGE>
AS FILED FEBRUARY 8, 2000
Cost of Revenues
Cost of revenues of $2.1 million for the three months ended December 31, 1999
represent network operating costs including 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. There were no revenues or cost
of revenues recognized for the three months ended December 31, 1998.
Selling and Marketing
We incurred expenses of $1.1 million during the three month period ended
December 31, 1999 for marketing costs associated with our market launches in
January 2000. These amounts include retail store costs such as salaries and rent
in addition to promotion and advertising costs. The Company did not incur any
significant selling and marketing expenses prior to the three months ended
December 31, 1999.
General and Administrative
For the three months ended December 31, 1999, we focused on building-out our PCS
network. We incurred expenses of $2.3 million during the three months ended
December 31, 1999 compared to $1.0 million for the three months ended December
31, 1998, an increase of $1.3 million. The increase is primarily comprised of
additional salaries and relocation costs relating to growth in the number of
employees.
Noncash Stock Option Compensation
Noncash stock option compensation expense was $404,000 for the three months
ended December 31, 1999. 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 December 31, 1999, depreciation and amortization
expense increased $342,000 to $518,000 compared to $176,000 for the same period
in 1998. The increase in depreciation and amortization expense relates primarily
to network equipment placed in service during the three months ended December
31, 1999. Depreciation and amortization will continue to increase as additional
portions of our network are placed into service. We incurred capital
expenditures of $33.9 million in the three months ended December 31, 1999
related to the continued build-out of our PCS network which included
approximately $1.6 million of capitalized interest.
Interest Income
For the three months ended December 31, 1999, interest income was $3.5 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.
Interest Expense
For the three months ended December 31, 1999, interest expense was $7.0 million,
an increase of $6.6 million over the same period in 1998. The increase is
primarily attributable to the accretion of original issue discount on the senior
subordinated discount notes of $5.5 million, commitment fees on the unused
portion of the Lucent Financing of $1.9 million, interest of $312,000 on the
Lucent Financing, amortization of financing costs of $286,000 and accretion of
original issue discount on the Lucent Financing of $33,000, partially offset by
$1.6 million of capitalized interest. The Company had borrowings of $163.5
million as of December 31, 1999 compared to $158.0 million at September 30, 1999
and $18.7 million at December 31, 1998.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 11
<PAGE>
AS FILED FEBRUARY 8, 2000
Net Loss
For the three months ended December 31, 1999, the net loss was $9.8 million, an
increase of $8.2 million compared to the net loss of $1.6 million for the same
period in 1998. The Company expects that its net losses will continue to
increase throughout fiscal 2000.
Liquidity and Capital Resources
As of December 31, 1999, the Company had $208.9 million in cash and cash
equivalents, as compared to $258.9 million in cash and cash equivalents at
September 30, 1999. Working capital was $194.3 million at December 31, 1999 as
compared to working capital of $231.0 million at September 30, 1999.
Net Cash Used in Operating Activities
The $4.1 million of cash used in operating activities was the result of the
Company's $9.8 million net loss for the three months ended December 31, 1999 in
addition to a net $1.2 million in cash used for working capital being partially
offset by depreciation, amortization and amortization of note discounts of $6.9
million.
Net Cash Used in Investing Activities
The $38.2 million of cash used in investing activities represents capital
expenditures with respect to the network build-out during the three months ended
December 31, 1999. We made a total of $33.9 million of capital expenditures in
addition to $4.3 million in cash payments to satisfy the net decrease in accrued
expenses relating to capital expenditures in the three months ended December 31,
1999.
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 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.
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 matures on September 30, 2008. Mandatory
quarterly payments of principal are required beginning December 31, 2002 for
Tranche 1 and March 31, 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.
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.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 12
<PAGE>
AS FILED FEBRUARY 8, 2000
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 significant 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 do 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 any of these third party vendors fails to become year 2000 compliant or
maintain its compliance, our ability to continue expanding our operations may be
materially delayed. We have contacted our third party vendors and believe that
they are and will continue to be year 2000 compliant. However, we have no
contractual or other right to compel compliance by them.
The passing of year 2000 did not result in any delays in our launching
commercial PCS operations or a disruption in service. As of the date of this
quarterly report, neither we, nor to our knowledge, Sprint PCS or any third
party vendor with whom we have relationships, have experienced any material year
2000 problems.
Inflation
Management believes that inflation has not had, and does not expect 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 ($161.3 million at December 31, 1999). Our
variable rate debt consists of borrowings made under the Lucent Financing ($13.5
million at December 31, 1999). 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 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 evaluate
our interest rate risk on an ongoing basis.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 13
<PAGE>
AS FILED FEBRUARY 8, 2000
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>
Years Ending December 31,
--------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Senior subordinated discount notes..... $ 183,851 $ 209,534 $ 238,793 $ 272,134 $ 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 $ 121,679 $ 152,994 $ 150,969 $ 127,775 --
Variable interest rate (1)............. 9.85% 9.85% 9.85% 9.85% 9.85% 9.85%
Principal payments..................... -- -- $ 506 $ 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 6.1% for all periods
presented.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted to a vote of its stockholders of record as of
December 2, 1999, through a solicitation by proxy, the election of two Class I
directors. Gill Cogan and Barry Schiffman were nominated to serve as Class I
directors for a three year term. The matter was submitted for a vote at the
Company's annual meeting on January 21, 2000. A total of 10,280,488 shares were
represented by proxy at the meeting, representing 85.8% of the 11,969,734 shares
eligible to vote. Of the shares represented, 10,255,528 were voted in favor of
the election of each of Gill Cogan and Barry Schiffman to continue to serve as
directors for a new three year term; 24,960 of the votes were withheld for each
director nominee. After the annual meeting, Thomas M. Dougherty, Thomas D. Body
III, W. Chris Blane and Robert A. Ferchat continued to serve their terms as
directors.
ITEM 5. OTHER INFORMATION
Additional Director Named
On February 1, 2000, the Company announced that John R. Dillon, retired senior
vice president and chief financial officer of Cox Enterprises, was appointed to
fill the remaining vacancy on the Board of Directors with a term to expire at
the annual meeting in 2001.
Risk Factors
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.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 14
<PAGE>
AS FILED FEBRUARY 8, 2000
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 104 employees as of December 31, 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 plan to launch commercial PCS operations in the first quarter of 2000 in
certain markets in our territory. We will require expenditures of significant
funds for the development, construction, testing and deployment of our PCS
network. These activities are expected to place significant demands on our
managerial, operational and financial resources.
The inability to use Sprint PCS' back office services and third party vendors'
back office systems could disrupt our business
Our operations could be disrupted if Sprint PCS is unable to maintain and expand
its back office services such as customer activation, billing and customer care,
or to efficiently outsource those services and systems through third party
vendors. The rapid expansion of Sprint PCS' business is expected to continue to
pose a significant challenge to its internal support systems. Additionally,
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.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 15
<PAGE>
AS FILED FEBRUARY 8, 2000
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
. 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 December 31, 1999, our outstanding long-term debt totaled $163.5 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
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 16
<PAGE>
AS FILED FEBRUARY 8, 2000
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 and subscriber equipment
required in order to meet our network construction deadlines required under our
management agreement and attract customers
If we are not able to acquire the equipment required to build our PCS network in
a timely manner, we may be unable to provide wireless communications services
comparable to those of our competitors or to meet the requirements of our
agreements with Sprint PCS. The demand for the equipment that we require to
construct our PCS network is considerable, and manufacturers of this equipment
could have substantial order backlogs. Accordingly, the lead time for the
delivery of this equipment may be long. Some of our competitors purchase large
quantities of communications equipment and may have established relationships
with the manufacturers of this equipment. Consequently, they may receive
priority in the delivery of this equipment. We also 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.
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
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 17
<PAGE>
AS FILED FEBRUARY 8, 2000
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.
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
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 18
<PAGE>
AS FILED FEBRUARY 8, 2000
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 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
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 19
<PAGE>
AS FILED FEBRUARY 8, 2000
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.
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.
- --------------------------------------------------------------------------------
AirGate PCS Form 10-Q -- December 31, 1999 Page 20
<PAGE>
AS FILED FEBRUARY 8, 2000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3* (i) Amended and Restated Certificate of Incorporation of AirGate
PCS, Inc.
(ii) Amended and Restated Bylaws of AirGate PCS, Inc.
4* Specimen of Common Stock Certificate of AirGate PCS, Inc.
4.2* Form of warrant issued in units offering
4.3* Form of Weiss, Peck & Greer warrants
4.4* Form of Lucent warrants
4.5* Form of Indenture for senior subordinated discount notes
(including form of pledge agreement)
4.6* Form of unit (included in exhibit 10.5)
10.1* Sprint PCS Management Agreement between SprintCom, Inc. and
AirGate Wireless, L.L.C.
10.2* Sprint PCS Services Agreement between Sprint Spectrum L.P. and
AirGate Wireless, L.L.C.
10.3* Sprint Spectrum Trademark and Service Mark License Agreement
10.4* Sprint Trademark and Service Mark License Agreement
10.5* Master Site Agreement dated August 6, 1998 between AirGate and
BellSouth Carolinas PCS, L.P., BellSouth Personal Communications,
Inc. and BellSouth Mobility DCS
10.6* Compass Telecom, L.L.C. Construction Management Agreement
10.7* Commercial Real Estate Lease dated August 7, 1999 between AirGate
and Perry Company of Columbia, Inc. to lease a warehouse facility
10.8* Form of Indemnification Agreement
10.9* Employment Agreement date April 9, 1999 between AirGate and Thomas
M. Dougherty
10.10* Form of Executive Employment Agreement
10.11* 1999 Stock Option Plan
10.12* Credit Agreement with Lucent (including form of pledge agreement
and form of intercreditor agreement)
10.13* Consent and Agreement
10.14* Assignment of Sprint PCS Management Agreement, Sprint Spectrum
Services Agreement and Trademark and Service Mark Agreements from
AirGate Wireless, L.L.C. to AirGate Wireless, Inc. dated November
20, 1998
10.15* Form of Warrant for units offering (including form of warrant in
units offering and form of unit)
27 Financial Data Schedule
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AirGate PCS Form 10-Q -- December 31, 1999 Page 21
<PAGE>
AS FILED FEBRUARY 8, 2000
* Incorporated herein by reference from exhibits contained in the
registration statement on Form S-1 (Registration File Nos. 333-79189-02 and
333-79189-01) declared effective by the Securities and Exchange Commission
on September 27, 1999
(b) Reports on Form 8-K
On November 4, 1999, the Company filed a Current Report on Form 8-K
with the Securities and Exchange Commission that indicated the Company
had changed its fiscal year from a calendar year ending on December 31
to a fiscal year ending on September 30 effective September 30, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer duly authorized.
AirGate PCS, Inc.
By: /s/ Alan B. Catherall
-----------------------
Name: Alan B. Catherall
Title: Chief Financial Officer
Date: February 8, 2000 /s/ Alan B. Catherall
------------------------
Alan B. Catherall
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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AirGate PCS Form 10-Q -- December 31, 1999 Page 22