Filed Pursuant to Rule 424(b)(3)
Registration No. 333-73254
We will amend and complete the information in this prospectus supplement. This
prospectus supplement and the prospectus are part of an effective registration
statement filed with the SEC. This prospectus supplement and the prospectus are
not offers to sell these securities or our solicitation of your offer to buy
these securities in any jurisdiction where that would not be permitted or legal.
SUBJECT TO COMPLETION, DATED DECEMBER 5, 2001
PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 30, 2001)
4,000,000 Shares
[LOGO] Airgate PCS
Common Stock
-------------
The selling stockholders named in this prospectus supplement are selling
4,000,000 shares of our common stock. We will not receive any proceeds from the
sale of the shares by the selling stockholders. We have granted the
underwriters an option to purchase up to 600,000 additional shares of our
common stock to cover over-allotments.
Our common stock trades on The Nasdaq National Market under the symbol
"PCSA." The last reported sale price of our common stock on December 4, 2001
was $53.05 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning
on page S-12 of this prospectus supplement.
Per Share Total
--------- -----
Public Offering Price................................ $ $
Underwriting Discounts and Commissions............... $ $
Proceeds to the selling stockholders, before expenses $ $
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
Delivery of the shares of common stock will be made on or about , 2001.
Credit Suisse First Boston Lehman Brothers
UBS Warburg
William Blair & Company
Thomas Weisel Partners LLC
TD Securities
, 2001.
-------------
TABLE OF CONTENTS
Prospectus Supplement
Page
----
ABOUT THIS PROSPECTUS SUPPLEMENT..... S-3
PROSPECTUS SUPPLEMENT SUMMARY........ S-4
RISK FACTORS......................... S-12
SPECIAL NOTE CONCERNING
FORWARD-LOOKING STATEMENTS......... S-21
USE OF PROCEEDS...................... S-22
DIVIDEND POLICY...................... S-22
PRICE RANGE OF COMMON STOCK.......... S-22
CAPITALIZATION....................... S-23
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)... S-24
SELECTED HISTORICAL FINANCIAL DATA... S-32
AIRGATE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. S-35
IPCS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............. S-42
OUR BUSINESS......................... S-49
MANAGEMENT........................... S-62
SELLING STOCKHOLDERS................. S-65
SHARES ELIGIBLE FOR FUTURE SALE...... S-67
UNDERWRITING......................... S-69
NOTICE TO CANADIAN RESIDENTS......... S-72
LEGAL MATTERS........................ S-73
EXPERTS.............................. S-73
WHERE YOU CAN FIND MORE INFORMATION.. S-73
INCORPORATION BY REFERENCE........... S-74
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS............... F-1
Prospectus
Page
----
ABOUT THIS PROSPECTUS.............. 1
RISK FACTORS....................... 1
OUR BUSINESS....................... 1
RATIO OF EARNINGS TO FIXED CHARGES. 2
USE OF PROCEEDS.................... 2
DESCRIPTION OF DEBT SECURITIES..... 2
DESCRIPTION OF OUR CAPITAL STOCK... 8
DESCRIPTION OF WARRANTS............ 11
SELLING STOCKHOLDERS............... 13
PLAN OF DISTRIBUTION............... 13
LEGAL MATTERS...................... 15
EXPERTS............................ 15
WHERE YOU CAN FIND MORE INFORMATION 16
INCORPORATION BY REFERENCE......... 16
-------------
You should rely only on the information contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus supplement or the accompanying prospectus or the documents
incorporated by reference is accurate as of any date other than the date on the
front of the respective documents. Our business, financial conditions, results
of operations and prospects may have changed since that date.
S-2
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement is a supplement to the accompanying prospectus
that is also a part of this document. This prospectus supplement and the
accompanying prospectus are part of a registration statement that we filed with
the SEC using a "shelf" registration process. Under the shelf registration
process, we may sell any combination of the securities described in the
accompanying prospectus up to a total dollar amount of $500,000,000. In
addition, the selling stockholders may offer up to 4,000,000 shares of our
common stock under the accompanying prospectus. In this prospectus supplement,
we provide you with specific information about the terms of this offering. Both
this prospectus supplement and the accompanying prospectus include important
information about us, our common stock and other information you should know
before investing in our common stock. This prospectus supplement also adds,
updates and changes information contained in the accompanying prospectus. To
the extent that any statement that we make in this prospectus supplement is
inconsistent with the statements made in the accompanying prospectus, the
statements made in the accompanying prospectus are deemed modified or
superseded by the statements made in this prospectus supplement. You should
read both this prospectus supplement and the accompanying prospectus as well as
the additional information described under the heading "Where You Can Find More
Information" beginning on page S-73 of this prospectus supplement before
investing in our common stock.
S-3
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus supplement and the accompanying prospectus. As a result, it does not
contain all of the information that you should consider before investing in our
common stock. You should read the entire prospectus supplement, including the
accompanying prospectus and the documents incorporated by reference, which are
described under "Where You Can Find More Information."
As required by the terms of our outstanding indebtedness, we conduct our
business operations through two separate entities: AirGate PCS, Inc. and its
subsidiaries, and iPCS, Inc. and its subsidiaries. For convenience in this
prospectus supplement, unless the context indicates otherwise, references to
"we," "our" or "us" refer to the combined operations of AirGate and its wholly
owned subsidiary iPCS and references to "AirGate" refer to the operations of
AirGate, exclusive of the operations of iPCS. "Sprint PCS" refers to Sprint
Communications Company, L.P., Sprint Spectrum L.P. and WirelessCo, L.P.
"Sprint" refers to Sprint Corporation and its affiliates other than Sprint PCS.
Statements in this prospectus supplement regarding Sprint or Sprint PCS are
derived from information contained in our agreements with Sprint PCS, periodic
reports and other documents filed by Sprint and Sprint Spectrum L.P. with the
SEC or press releases issued by Sprint or Sprint PCS.
AirGate PCS, Inc.
Our Business
We are the largest Sprint PCS network partner in terms of covered
population. We market and provide digital wireless personal communications
services, or PCS, to a service territory of approximately 14.5 million
residents with current network coverage of approximately 11.0 million residents
as of November 30, 2001. Through our management agreements with Sprint PCS, we
have the exclusive right to provide Sprint PCS products and services under the
Sprint and Sprint PCS brand names in our territories. Sprint PCS, directly and
indirectly through network partners such as us, operates the largest
all-digital, all-PCS nationwide wireless network in the United States based on
covered population, covering nearly 244 million residents in more than 4,000
cities and communities across the United States, Puerto Rico and the U.S.
Virgin Islands.
On November 30, 2001, AirGate acquired iPCS by merging a wholly owned
subsidiary of AirGate with iPCS. In connection with the merger, AirGate issued
to the former stockholders of iPCS approximately 12.4 million shares of our
common stock and assumed options and warrants to purchase approximately 1.1
million shares of our common stock. The acquisition of iPCS increased the total
resident population in our markets from approximately 7.1 million to
approximately 14.5 million. We believe the acquisition of iPCS increases
AirGate's strategic importance to Sprint PCS. We also believe the acquisition
adds attractive markets as well as a nearly complete network build-out and a
fully funded business plan.
Our Sprint PCS territories cover 58 basic trading areas, referred to as
markets, in parts of South Carolina, North Carolina, Georgia, Illinois,
Michigan, Iowa and Nebraska. Our major markets include:
. Grand Rapids, Michigan;
. Greenville-Spartanburg, South Carolina;
. Savannah, Georgia;
. Charleston, South Carolina;
. Columbia, South Carolina; and
. Saginaw-Bay City, Michigan.
S-4
As of September 30, 2001, AirGate and iPCS combined had 369,952 subscribers
and total network coverage of approximately 11.0 million residents,
representing approximately 76% of the resident population in these markets. For
the twelve months ended September 30, 2001, we generated revenue of
approximately $259.2 million on a pro forma basis.
Competitive Strengths
Our competitive strengths include:
Our Attractive Markets. We believe that our Sprint PCS territories have
attractive market characteristics, including:
-- proximity to major Sprint PCS markets, including Atlanta, Chicago,
Detroit, St. Louis, Indianapolis, Charlotte, Raleigh and Des Moines;
-- relatively high median household income, population densities and
interstate traffic density;
-- Sprint as the local exchange carrier in 30% of our southeast territory;
-- fewer competitors in our midwest territory;
-- a high concentration of headquarters for large corporations in our
midwest territory;
-- numerous vacation destinations in our southeast territory; and
-- a large student population, with over 115 colleges and universities.
Our Strategic Relationship with Sprint PCS. We believe that our strategic
relationship with Sprint PCS provides us with a significant competitive
advantage because of Sprint PCS':
-- strong brand name recognition;
-- all-digital nationwide coverage;
-- quality products and services;
-- advanced technology;
-- established distribution channels;
-- long-standing equipment vendor relationships; and
-- established back office support services.
Our Nearly Complete Network Build-Out. We have completed the network
build-out of our southeast markets and nearly completed the network build-out
of our midwest markets. As a result, we will be able to focus our management's
efforts and our cash resources on technology upgrades, increasing our market
penetration and improving operating efficiencies.
Our Fully Funded Business Plan. We believe our current business plan is
fully funded. Based on our current plan, we expect to generate positive
earnings before interest, taxes, depreciation and amortization, referred to as
EBITDA, in the third calendar quarter of 2002.
Business Strategies
Our business strategies include the following key elements:
Continuing to Improve Market Penetration in our Territories. We intend to
leverage the best operating practices of both AirGate and iPCS to more
effectively penetrate our markets.
S-5
Capitalizing on our Affiliation with Sprint PCS. We plan to capitalize on
our Sprint PCS affiliation by using the strength of the Sprint and Sprint PCS
brands to market our PCS services with strategies tailored to our specific
territories.
Pursuing Efficient Migration Path to 1XRTT. We plan to efficiently migrate
our network's technology to "one times radio transmission technology," or
"1XRTT." 1XRTT will provide increased network capacity, faster data download
speeds and longer battery life for handsets.
Capitalizing on our Experienced Management Team. We intend to use the depth,
experience and ability of our management team to successfully execute our
business strategies.
Selectively Pursuing Strategic Acquisitions. We may selectively pursue
strategic acquisitions of network partners that have attractive market
characteristics, a fully funded business plan and a completed or substantially
completed network build-out. We also may attempt to obtain additional markets
from Sprint PCS.
Contact Information
Our corporate office is located at Harris Tower, 233 Peachtree Street NE,
Suite 1700, Atlanta, Georgia 30303 and our telephone number is (404) 525-7272.
Our website is located at www.airgatepcsa.com. Information contained on our
website does not constitute a part of this prospectus supplement or
accompanying prospectus.
S-6
The Offering
Common stock offered by the
selling stockholders...... 4,000,000 shares.
Selling stockholders........ The selling stockholders received their shares of
our common stock in connection with AirGate's
acquisition of iPCS. Each of the selling
stockholders was a former stockholder of iPCS.
Common stock to be
outstanding after this
offering.................. 25,745,622 shares.
Over-allotment option....... 600,000 shares.
Use of proceeds............. We will not receive any proceeds from the sale of
our common stock by the selling stockholders.
We will use the net proceeds from the sale by us
of shares of our common stock, if any, pursuant
to the over-allotment option, for general
corporate purposes, which may include:
. providing working capital;
. funding capital expenditures;
. purchasing or repaying our debt; and
. paying for future acquisitions.
The Nasdaq National Market
symbol.................... "PCSA"
Risk factors................ Before investing in our common stock, you should
carefully read and consider the information set
forth in "Risk Factors" beginning on page S-12 of
this prospectus supplement and all other
information appearing elsewhere and incorporated
by reference in this prospectus supplement and
accompanying prospectus.
The number of shares to be outstanding after this offering is based on
25,745,622 shares of our common stock outstanding as of November 30, 2001. The
total number of shares of our common stock to be outstanding after the offering
does not include:
. options outstanding as of November 30, 2001 to purchase a total of
approximately 1,918,325 shares of common stock at a weighted average
exercise price of $33.75 per share or an additional 770,109 shares
reserved for future grants under our stock option plans; and
. warrants outstanding as of November 30, 2001 to purchase a total of
723,241 shares of common stock at a weighted average exercise price of
$30.85 per share.
-------------
Except as otherwise indicated, all information in this prospectus supplement
assumes no exercise of the underwriters' over-allotment option.
S-7
Summary Pro Forma and Historical Financial Data
AirGate PCS, Inc. and Subsidiaries Summary Unaudited Pro Forma Financial Data
The following unaudited pro forma condensed consolidated financial data
combine the historical consolidated balance sheets and statements of operations
of AirGate and iPCS. These unaudited pro forma financial data give effect to
the acquisition of iPCS by AirGate using the purchase method of accounting.
We derived the statement of operations and balance sheet data from the
audited consolidated financial statements of AirGate for the year ended
September 30, 2001 and the audited consolidated financial statements of iPCS
for the nine months ended September 30, 2001. The results of iPCS for the three
months ended December 31, 2000 are included in the twelve months ended
September 30, 2001 as follows (in thousands): Revenues--$11,340; Operating
loss--$16,469; Net loss--$20,155. This data is only a summary and should be
read in conjunction with the historical financial statements and related notes
contained elsewhere in this prospectus supplement for the periods presented.
For presentation of the pro forma financial aspects of this transaction, see
"Pro Forma Condensed Consolidated Financial Statements."
The unaudited pro forma condensed consolidated statements of operations for
the twelve months ended September 30, 2001 gives effect to the merger as if the
merger had been consummated at the beginning of the period presented. The
unaudited pro forma condensed consolidated balance sheet as of September 30,
2001 gives effect to the merger as if it was effected on September 30, 2001.
Certain reclassifications have been made to iPCS' historical presentation to
conform to AirGate's presentation. These reclassifications do not materially
impact AirGate's or iPCS' operations or financial position for the periods
presented.
We are providing the unaudited pro forma condensed consolidated financial
data for illustrative purposes only. The companies may have performed
differently had they been combined during the periods presented. You should not
rely on the unaudited pro forma condensed consolidated financial data as being
indicative of the historical results that would have been achieved had AirGate
and iPCS been combined during the periods presented or the future results that
we will experience.
S-8
For the
Twelve Months Ended
September 30, 2001
--------------------
(unaudited)
(In thousands,
except for per share
and subscriber data)
Statement of Operations Data:
Revenues:
Service revenue...................................... $ 157,561
Roaming revenue...................................... 84,198
Equipment and other revenue.......................... 17,455
----------
Total revenues....................................... $ 259,214
Operating expenses:
Cost of service and roaming.......................... (184,202)
Cost of equipment.................................... (38,923)
Selling and marketing................................ (102,948)
General and administrative........................... (29,002)
Noncash stock option compensation.................... (1,665)
Depreciation and amortization........................ (98,641)
----------
Total operating expenses............................. (455,381)
----------
Operating loss....................................... (196,167)
Interest expense, net................................ (44,742)
Other income......................................... 772
----------
Loss before income tax benefit....................... (240,137)
Income tax benefit................................... 69,284
----------
Net loss............................................. (170,853)
==========
Basic and diluted net loss per share of common stock. $ (6.71)
Other Data:
Number of subscribers at end of period............... 369,952
As of
September 30, 2001
--------------------
(unaudited)
(In thousands)
Balance Sheet Data:
Cash and cash equivalents............................ $ 47,369
Property and equipment, net.......................... 407,487
Total assets......................................... 1,399,672
Long-term debt....................................... 466,326
Total stockholders' equity........................... 743,903
Comparative Per Share Data
For the Year Ended
September 30, 2001
-----------------------
Historical Pro Forma/(1)/
---------- -------------
Basic and diluted net loss per share of common stock $(8.48) $(6.71)
---------------------
(1)Pro forma to give effect to the merger with iPCS on a purchase accounting
basis.
S-9
AirGate PCS, Inc. and Subsidiaries Summary Financial Data
The summary statement of operations and balance sheet data presented below
is derived from AirGate's audited consolidated financial statements as of and
for the years ended December 31, 1997 and 1998, the nine months ended September
30, 1999, and the years ended September 30, 2000 and 2001.
The data set forth below should be read in conjunction with AirGate's
consolidated financial statements and accompanying notes and "AirGate
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus supplement.
For the Year Ended For the Nine For the Year Ended
December 31, Months Ended September 30,
------------------- September 30, -------------------
1997 1998 1999 2000 2001
------- ------- ------------- -------- ---------
(In thousands, except for per share and subscriber data
Statement of Operations Data:
Revenues...................................... $ -- $ -- $ -- $ 25,065 $ 172,087
Cost of service, roaming and equipment........ -- -- -- (33,455) (136,950)
Total operating expenses...................... (2,099) (3,801) (6,241) (89,589) (256,641)
Operating loss................................ (2,099) (3,801) (6,241) (64,524) (84,554)
Net loss...................................... (2,916) (5,193) (15,599) (81,323) (110,990)
======= ======= ======== ======== =========
Basic and diluted net loss per share of common
stock....................................... $ (0.86) $ (1.54) $ (4.57) $ (6.60) $ (8.48)
======= ======= ======== ======== =========
Other Data:
Number of subscribers at end of period........ -- -- -- 56,689 235,025
As of December 31, As of September 30,
------------------- ----------------------------------
1997 1998 1999 2000 2001
------- ------- ------------- -------- ---------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents..................... $ 147 $ 2,296 $258,900 $ 58,384 $ 14,290
Property and equipment, net................... 17 12,545 44,206 183,581 209,326
Total assets.................................. 13,871 15,450 317,320 268,948 281,010
Long-term debt................................ 11,745 7,700 165,667 180,727 266,326
Total stockholders' equity (deficit).......... (1,750) (5,350) 127,846 49,873 (52,724)
S-10
iPCS, Inc. and Subsidiaries and Predecessor Summary Financial Data
The summary statement of operations and balance sheet data presented below
are derived from iPCS' audited consolidated financial statements as of and for
the period from January 22, 1999 (date of inception) through December 31, 1999,
as of and for the year ended December 31, 2000 and as of and for the nine
months ended September 30, 2000 and 2001. Operating results for the nine months
ended September 30, 2001 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 2001.
The data set forth below should be read in conjunction with iPCS'
consolidated financial statements and accompanying notes and "iPCS Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus supplement.
For the
Period from For the Nine
January 22, 1999 Months Ended
(date of inception) For the Year September 30,
through Ended -------------------
December 31, 1999 December 31, 2000 2000 2001
------------------- ----------------- -------- ---------
(In thousands, except for per share and subscriber data)
Statement of Operations Data:
Revenues...................................... $ 215 $ 21,229 $ 11,614 $ 77,512
Cost of service, roaming and equipment........ (2,179) (26,839) (14,789) (78,788)
Total operating expenses...................... (4,858) (68,329) (42,245) (125,183)
Operating loss................................ (4,643) (47,100) (30,631) (47,671)
Net loss...................................... (4,380) (56,157) (36,002) (60,659)
Net loss available to common stockholders..... (4,380) (104,507) (83,270) (68,127)
Basic and diluted net loss per share of common
stock....................................... $ (0.10) $ (2.33) $ (1.86) $ (1.52)
======= ========= ======== =========
Other Data:
Number of subscribers at end of period........ 1,981 46,773 25,150 134,927
As of December 31, As of
------------------ September 30,
1999 2000 2001
------- -------- -------------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents........... $ 2,733 $165,958 $ 54,579
Property and equipment, net......... 39,106 129,087 198,161
Total assets........................ 44,843 328,575 328,756
Long-term debt and accrued interest. 27,571 163,800 208,336
Redeemable preferred stock.......... -- 114,080 121,548
Total stockholders' equity (deficit) 9,120 12,718 (53,879)
S-11
RISK FACTORS
An investment in our common stock involves significant risks. You should
carefully consider these risk factors and the risk factors in the accompanying
prospectus as well as all of the other information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus before
you decide to invest in our common stock.
Risks Related to Our Business, Strategy and Operations
We have a limited operating history and we may not achieve or sustain
operating profitability or positive cash flows, which may result in a decrease
in our stock price.
AirGate and iPCS have limited operating histories. Our ability to achieve
and sustain operating profitability will depend upon many factors, including
our ability to market Sprint PCS services and manage customer turnover rates.
In addition, a key factor in our operational performance after the merger
depends upon our ability to manage the growth of iPCS through the completion of
its network build-out and through implementing the combined company's best
practices to increase market penetration in iPCS' and AirGate's current and
future markets. iPCS will require significant funds for the continued
development, construction, testing, deployment and operation of its network.
These activities are expected to place demands on our managerial, operational
and financial resources. If we do not achieve and maintain positive cash flows
from operations when projected, our stock price may decrease.
Our stock price may be volatile and you may not be able to sell your shares
at or above the price you paid for them.
The market price of our common stock could be subject to wide fluctuations
in response to factors such as the following, some of which are beyond our
control:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities analysts
and investors;
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
. changes in our relationship with Sprint PCS;
. announcements by Sprint PCS concerning developments or changes in its
business, financial condition or results of operations, or in its
expectations as to future financial performance;
. announcements of technological innovations, changes to existing products
and services or new products and services offered by Sprint PCS or our
competitors;
. changes in results of operations and market valuations of other
companies in the telecommunications industry in general and the wireless
industry in particular, including Sprint PCS and its network partners
and our competitors;
. changes in law and regulation;
. announcements by third parties of significant claims or proceedings
against us;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
. general economic and competitive conditions.
S-12
The integration of AirGate and iPCS following the merger will present
significant challenges that could adversely affect our results of operations.
AirGate acquired iPCS with the expectation that it would result in expanding
AirGate's existing network and customer base and leveraging the best operating
practices of both organizations. Achieving the benefits of the merger will
depend in part on integrating the operations of the two businesses in an
efficient manner. We cannot assure you that this will occur. To realize the
anticipated benefits of this combination, our management team must develop
strategies and implement a business plan that will successfully:
. manage our networks and markets;
. maintain adequate focus on existing business and operations while
working to integrate the two companies;
. combine two companies with limited operating histories;
. manage each company's cash and available credit lines for use in
financing future growth and working capital needs of such company;
. manage our marketing and sales;
. manage the transition of iPCS' senior management expertise to the
combined company; and
. retain and attract key employees of the combined company during a period
of transition.
We cannot assure you that combining the businesses of AirGate and iPCS, even
if achieved in an efficient, effective and timely manner, will result in
combined results of operations and financial conditions superior to those that
AirGate and iPCS could have achieved independently. The diversion of
management's attention from ongoing operations and any difficulties encountered
in the transition and integration process could have a material adverse effect
on our financial condition and results of operations.
Future sales of shares of our common stock, including sales of shares
offered hereby or following the expiration of "lock-up" arrangements, may
negatively affect our stock price.
As a result of the merger, the former iPCS securityholders received
approximately 12.4 million shares of our common stock and options and warrants
to purchase approximately 1.1 million shares of our common stock. The shares of
common stock issued in the merger represented approximately 47.5% of our common
stock, assuming the exercise of all outstanding warrants and options.
In connection with the merger, holders of substantially all of the
outstanding shares of iPCS common and preferred stock entered into "lock-up"
agreements with AirGate. The lock-up agreements impose restrictions on the
ability of such stockholders to sell or otherwise dispose of the shares of our
common stock that they received in the merger. The lock-up period commenced on
November 30, 2001 and extends for a minimum of 120 days and a maximum of 300
days after the effective time of the merger.
We have on file an effective registration statement on Form S-4 in order to
allow the former iPCS stockholders to freely resell the shares of our common
stock that they received in the merger. In addition, we entered into a
registration rights agreement at the effective time of the merger with some of
the former iPCS stockholders. The registration rights agreement requires us, at
the request of The Blackstone Group, referred to as Blackstone, to use our best
efforts to complete, within 120 days after the effective time of the merger, an
underwritten public offering of certain shares of our common stock received in
the merger by the former iPCS stockholders. This prospectus supplement and the
accompanying prospectus are part of the registration statement on Form S-3
which we have filed to effect, upon the request of Blackstone, an underwritten
public offering of a portion of the shares of our common stock held by certain
of the former iPCS stockholders. In addition, these former iPCS stockholders
have an additional demand registration right exercisable at any time after the
first anniversary of the effective time of the merger.
Sales of substantial amounts of shares of our common stock, or even the
potential for such sales, could lower the market price of our common stock and
impair our ability to raise capital through the sale of equity securities.
S-13
Parts of our territories have limited amounts of licensed spectrum, which
may adversely affect the quality of our service and our results of operations.
Sprint PCS has licenses covering 10 MHz of spectrum in our southeast
territory. While Sprint PCS has licenses covering 30 MHz of spectrum throughout
most of our midwest territory, it has licenses covering only 10 MHz or 20 MHz
in parts of Illinois. As the number of customers in our territories increase,
this limited amount of licensed spectrum may not be able to accommodate
increases in call volume, may lead to increased dropped calls and may limit our
ability to offer enhanced services, all of which could result in increased
customer turnover and adversely affect our results of operations.
If we lose the right to install our equipment on certain wireless towers or
are unable to renew expiring leases or locate new sites for wireless towers on
favorable terms, our business and results of operations could be adversely
impacted.
Substantially all of our cell sites are co-located on leased tower
facilities shared with one or more wireless providers. In addition, a large
portion of these leased tower sites are owned by a few tower companies. If a
master co-location agreement with one of these tower companies were to
terminate, or if one of these tower companies were unable to support our use of
its tower sites, we would have to find new sites or we may be required to
rebuild that portion of our network. In addition, the concentration of our cell
sites with a few tower companies could adversely affect our results of
operations if we are unable to renew expiring leases with such tower companies
on favorable terms.
The loss of the officers and skilled employees who we depend upon to operate
our business could adversely affect our results of operations.
Our business is managed by a small number of executive officers. We believe
that our future success depends in part on our continued ability to attract and
retain highly qualified technical and management personnel. 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 do not have long-term
employment agreements with any of our executive officers.
Expanding our territory includes numerous risks and our failure to overcome
these risks and any other problems encountered may have a material adverse
effect on our business and reduce the market value of our securities.
As part of our continuing operating strategy, we may expand our territory
through the grant of additional markets from Sprint PCS or through acquisitions
of other Sprint network partners. These transactions may require the approval
of Sprint PCS and commonly involve a number of risks, including the:
. difficulty of assimilating acquired operations and personnel;
. diversion of management's attention;
. disruption of ongoing business;
. impact on our cash and available credit lines for use in financing
future growth and working capital needs;
. inability to retain key personnel;
. inability to successfully incorporate acquired assets and rights into
our service offerings;
. inability to maintain uniform standards, controls, procedures and
policies; and
. impairment of relationships with employees, customers or vendors.
S-14
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In
connection with these transactions, we also may issue additional equity
securities, incur additional debt or incur significant amortization expenses
related to intangible assets.
Because the former iPCS stockholders did not provide AirGate with any
indemnification following the merger, iPCS will be responsible for any
undisclosed prior liabilities of iPCS, which could materially impact our
results of operations.
iPCS made certain representations and warranties to AirGate in the merger
agreement concerning iPCS' business and operations. The merger agreement did
not provide AirGate with any contractual indemnification from the iPCS
stockholders for any breaches of the representations and warranties of iPCS or
any failure of iPCS to comply with its obligations under the merger agreement.
As a result, iPCS will be responsible for any undisclosed prior liabilities of
iPCS. Such liabilities could materially impact our future consolidated results
of operations.
Risks Particular to Our Indebtedness
Both AirGate and iPCS have substantial debt that neither company may be able
to service; a failure to service such debt may result in the lenders under such
debt controlling AirGate's or iPCS' assets.
The substantial debt of AirGate and iPCS has a number of important
consequences for the combined company's operations and our investors, including
the following:
. each company has to dedicate a substantial portion of any cash flow from
its operations to the payment of interest on, and principal of, its
debt, which will reduce funds available for other purposes;
. each company has a fully-financed business plan, but neither may be able
to obtain additional financing for unanticipated capital requirements,
capital expenditures, working capital requirements or other corporate
purposes;
. some of each company's debt, including financing under each company's
senior credit facility, 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 each company's assets and the
pledges of stock of each company's existing and future subsidiaries that
secure AirGate's and iPCS' respective senior debt and senior
subordinated discount notes, lenders or holders of such senior
subordinated discount notes may control AirGate's or iPCS' assets or the
assets of the subsidiaries of either company in the event of a default.
The ability of both AirGate and iPCS to make payments on their respective
debt will depend upon each company's future operating performance which is
subject to general economic and competitive conditions and to financial,
business and other factors, many of which neither company can control. If the
cash flow from either company's operating activities is insufficient, we may
take actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance our debt, selling assets or operations, or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow us to service our debt obligations. Further, we may be unable to take any
of these actions on satisfactory terms, in a timely manner or at all. The
credit facilities and indentures governing AirGate's and iPCS' respective debt
will limit our ability to take several of these actions. The failure of AirGate
or iPCS to generate sufficient funds to pay its debts or to successfully
undertake any of these actions could, among other things, materially adversely
affect the market value of our common stock.
S-15
If either AirGate or iPCS does not meet all of the conditions required under
its respective credit facility, such company may not be able to draw down all
of the funds it anticipates receiving from its senior lenders and we may not be
able to fund operating losses and working capital needs.
As of November 30, 2001, AirGate had borrowed $95.3 million under its senior
credit facility and iPCS had borrowed $50.0 million under its senior credit
facility. The remaining $58.2 million available under AirGate's senior credit
facility and the remaining $90.0 million available under iPCS' senior credit
facility, a portion of which each company expects to borrow in the future, is
subject to the applicable company meeting all of the conditions specified in
its respective financing documents. In addition, additional borrowings are
subject to specific conditions on each funding date, including the following:
. that the representations and warranties in such company's loan documents
are true and correct;
. that certain of such company's financial covenant tests are satisfied,
including leverage and operating performance covenants and, solely with
respect to iPCS, loss covenants relating to earnings before interest,
taxes, depreciation and amortization; and
. the absence of a default under such company's loan documents.
If either company does not meet these conditions at each funding date, such
company's senior lenders may not lend some or all of the remaining amounts
available under such company's senior credit facility. If other sources of
funds are not available, neither company may be in a position to meet its
operating cash needs.
The ability of AirGate and iPCS to operate as a combined company is limited
by the separate public debt indentures and credit facilities of AirGate and
iPCS.
In order to assure continued compliance with the indenture governing
AirGate's senior notes, AirGate has designated iPCS as an "unrestricted
subsidiary." As a result, for purposes of their respective public debt
indentures, AirGate and iPCS operate as separate business entities. Due to
restrictions in AirGate's indenture, AirGate is unable to provide direct or
indirect credit support to iPCS and is significantly limited in its ability to
maintain or preserve iPCS' financial condition or cause iPCS to achieve a
specified level of operating results. Likewise, iPCS is restricted under its
debt instruments from paying dividends or freely transferring money to AirGate.
These restrictions may hinder the combined company's ability to achieve the
anticipated benefits of the merger, react to developments in either company's
business or take advantage of business opportunities.
If either AirGate or iPCS fails to pay the debt under its respective credit
facility, Sprint PCS has the option of purchasing such company's loans, giving
Sprint PCS certain rights of a creditor to foreclose on such company's assets.
Sprint PCS has contractual rights, triggered by an acceleration of the
maturity of the debt under AirGate's or iPCS' respective senior credit
facility, pursuant to which Sprint PCS may purchase AirGate's or iPCS'
obligations to its respective senior lenders 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 our interests. Sprint PCS' rights
as a senior lender would enable it to exercise rights with respect to the
related company's assets and continuing relationship with Sprint PCS in a
manner not otherwise permitted under our Sprint PCS agreements.
Risks Particular to Our Relationship with Sprint PCS
The termination of AirGate's or iPCS' affiliation with Sprint PCS or Sprint
PCS' failure to perform its obligations under the Sprint PCS agreements would
severely restrict our ability to conduct our business.
Neither AirGate nor iPCS owns the licenses to operate their wireless
networks. The ability of AirGate and iPCS to offer Sprint PCS products and
operate a PCS network is dependent on their Sprint PCS agreements remaining in
effect and not being terminated. The management agreements between Sprint PCS
and each of AirGate and iPCS are not perpetual. Sprint PCS can choose not to
renew iPCS' management agreement at the expiration of the 20-year initial term
or any ten-year renewal term. AirGate's management agreement automatically
renews at the expiration of the 20-year initial term for an additional 10-year
period unless AirGate
S-16
is in default. However, Sprint PCS can choose not to renew AirGate's management
agreement at the expiration of the ten-year renewal term or any subsequent
ten-year renewal term. In any event, AirGate's and iPCS' management agreements
terminate in 50 years. In addition, each of these agreements can be terminated
for breach of any material term, including, among others, build-out and network
operational requirements. iPCS recently received a 60 day extension of its
December 1, 2001 build-out requirements for certain Iowa and Nebraska markets.
AirGate and iPCS are also dependent on Sprint PCS' ability to perform its
obligations under the Sprint PCS agreements. The non-renewal or termination of
any of the Sprint PCS agreements or the failure of Sprint PCS to perform its
obligations under the Sprint PCS agreements would severely restrict our ability
to conduct business.
Sprint PCS may make business decisions that are not in our best interests,
which may adversely affect our relationships with customers in our territories,
increase our expenses and/or decrease our revenues.
Sprint PCS, under the Sprint PCS agreements, has a substantial amount of
control over the conduct of our business. Accordingly, Sprint PCS may make
decisions that adversely affect our business, such as the following:
. Sprint PCS could price its national plans based on its own objectives
and could set price levels or other terms that may not be economically
sufficient for our business;
. Sprint PCS could develop products and services or establish credit
policies which could adversely affect our results of operations;
. Sprint PCS could raise the costs for Sprint PCS to perform back office
services or reduce levels of services;
. Sprint PCS could prohibit us from selling non-Sprint PCS approved
equipment;
. Sprint PCS could, subject to limitations under our Sprint PCS
agreements, alter its network and technical requirements or request that
we build out additional areas within our territories, which could result
in increased equipment and build-out costs;
. Sprint or Sprint PCS could make decisions which could adversely affect
the Sprint and Sprint PCS brand names, products or services; and
. Sprint PCS could decide not to renew the Sprint PCS agreements or to no
longer perform its obligations, which would severely restrict our
ability to conduct business.
The occurrence of any of the foregoing could adversely affect our
relationships with customers in our territories, increase our expenses and/or
decrease our revenues.
Change in Sprint PCS products and services may reduce customer additions,
which would adversely affect our financial performance.
The competitiveness of Sprint PCS products and services is a key factor in
our ability to attract and retain customers. Under the Sprint PCS service
plans, customers who do not meet certain credit criteria can nevertheless
select any plan offered, subject to an account spending limit, referred to as
ASL, to control credit exposure. Account spending limits range from $125 to
$200 depending on the credit quality of the customer. Prior to May 2001, all of
these customers were required to make a deposit ranging from $125 to $200 that
could be credited against future billings. In May 2001, the deposit requirement
was eliminated on certain, but not all, credit classes ("NDASL"). As a result,
a significant amount of our new customer additions have been under the NDASL
program. The NDASL program has been replaced by the "Clear Pay Program." Sprint
PCS has the right to end or materially change the terms of the Clear Pay
Program. If Sprint PCS chooses to eliminate the Clear Pay Program or alter its
features, the growth rate we expect to achieve may decrease.
S-17
The inability of Sprint PCS to maintain high quality back office services,
or our inability to use Sprint PCS' back office services and third party
vendors' back office systems, could lead to customer dissatisfaction, increase
churn or otherwise increase our costs.
We rely on Sprint PCS' support systems, including customer care, billing and
back office support. Our operations could be disrupted if Sprint PCS is unable
to maintain and expand its internal support systems in a high quality manner,
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 these services and to provide these services
effectively and at competitive costs. Our Sprint PCS agreements provide that,
upon nine months' prior written notice, Sprint PCS may elect to terminate any
of these services. The inability of Sprint PCS to provide or maintain high
quality back office services, or our inability to use Sprint PCS' back office
services and third party vendors' back office systems, could lead to customer
dissatisfaction, increase churn or otherwise increase our costs.
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 currently intends to cover a significant portion of the
population of the United States, Puerto Rico and the U.S. Virgin Islands by
creating a nationwide PCS network through its own construction efforts and
those of its network partners. 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 management agreements similar to ours with companies in other
markets under 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 Sprint PCS' other network partners. 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.
Certain provisions of the Sprint PCS agreements may diminish the value of
our common stock and restrict the sale of our business.
Under limited circumstances and without further stockholder approval, Sprint
PCS may purchase the operating assets of AirGate or iPCS at a discount. In
addition, Sprint PCS must approve any change of control of the ownership of
AirGate or iPCS and must consent to any assignment of their Sprint PCS
agreements. Sprint PCS also has a right of first refusal if AirGate or iPCS
decides to sell its operating assets to a third party. Each of AirGate and iPCS
also is subject to a number of restrictions on the transfer of its business,
including a prohibition on the sale of AirGate or iPCS or their operating
assets to competitors of Sprint or Sprint PCS. These restrictions and other
restrictions contained in the Sprint PCS agreements could adversely affect the
value of our common stock, may limit our ability to sell our business, may
reduce the value a buyer would be willing to pay for our business and may
reduce the "entire business value," as described in our Sprint PCS agreements.
We may have difficulty in obtaining an adequate supply of certain handsets
from Sprint PCS, which could adversely affect our results of operations.
We depend on our relationship with Sprint PCS to obtain handsets. Sprint PCS
orders handsets from various manufacturers. We could have difficulty obtaining
specific types of handsets in a timely manner if:
. Sprint PCS does not adequately project the need for handsets for itself,
its Sprint PCS network partners and its other third party distribution
channels, particularly during a transition to new technologies, such as
"one times radio transmission technology," or 1XRTT;
. we do not adequately project our need for handsets;
. Sprint PCS modifies its handset logistics and delivery plan in a manner
that restricts or delays our access to handsets; or
. there is an adverse development in the relationship between Sprint PCS
and its suppliers or vendors.
The occurrence of any of the foregoing could disrupt customer service and/or
result in a decrease in our subscribers, which could adversely affect our
results of operations.
S-18
Non-renewal or revocation by the Federal Communications Commission of Sprint
PCS' licenses would significantly harm our business.
PCS licenses are subject to renewal and revocation by the Federal
Communications Commissions, referred to as the FCC. Sprint PCS' licenses in our
territories will begin to 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 FCC has
adopted specific standards to apply to PCS license renewals. Any failure by
Sprint PCS or us to comply with these standards could cause revocation or
forfeiture of the Sprint PCS licenses for our territories. If Sprint PCS loses
any of its licenses in our territories, we would be severely restricted in our
ability to conduct business.
If Sprint PCS does not maintain control over its licensed spectrum, the
Sprint PCS agreements may be terminated, which would severely restrict our
ability to conduct our business.
The FCC requires that licensees like Sprint PCS maintain control of their
licensed spectrum and not delegate control to third-party operators or
managers. Although the Sprint PCS agreements with AirGate and iPCS reflect an
arrangement that the parties believe meets the FCC requirements for licensee
control of licensed spectrum, we cannot assure you that the FCC will agree. If
the FCC were to determine that the Sprint PCS agreements 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 Sprint PCS agreements to comply with applicable
law. If we cannot agree with Sprint PCS to modify the Sprint PCS agreements,
they may be terminated. If the Sprint PCS agreements are terminated, we would
no longer be a part of the Sprint PCS network and would be severely restricted
in our ability to conduct business.
Risks Particular to Our Industry
Significant competition in the wireless communications services industry may
result in our competitors offering new or better products and services or lower
prices, which could prevent us from attaining operating profitability.
Competition in the wireless communications industry is intense. We
anticipate that competition will cause the prices for wireless products and
services to decline in the future. Our ability to compete will depend, in part,
on our ability to anticipate and respond to various competitive factors
affecting the telecommunications industry.
Our dependence on Sprint PCS to develop competitive products and services
and the requirement that we obtain Sprint PCS' consent to sell non-Sprint PCS
approved equipment may limit our ability to keep pace with competitors on the
introduction of new products, services and equipment. Some of our competitors
are larger than us, possess greater resources and more extensive coverage
areas, and may market other services, such as landline telephone service, cable
television and internet access, with their wireless communications services.
Furthermore, there has been a recent trend in the wireless communications
industry towards consolidation of wireless service providers through joint
ventures, reorganizations and acquisitions. We expect this consolidation to
lead to larger competitors over time. We may be unable to compete successfully
with larger companies that have substantially greater resources or that offer
more services than we do. In addition, we may be at a competitive disadvantage
since we may be more highly leveraged than some of our competitors.
Alternative technologies and current uncertainties in the wireless market
may reduce demand for PCS.
The wireless communications 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. Technological advances and industry changes could
cause the technology used on our network to become obsolete. Sprint PCS may not
be able to respond to such changes and implement new technology on a timely
basis, or at an acceptable cost.
If Sprint PCS is unable to keep pace with these technological changes or
changes in the wireless communications market based on the effects of
consolidation or from the uncertainty of future government regulation, the
technology used on our network or our business strategy may become obsolete. In
addition, wireless carriers are seeking to implement an upgrade to 1XRTT, as
well as "third generation," or "3G," technology throughout the industry. The 3G
technology promises high-speed, always-on Internet connectivity and
high-quality video and audio. We cannot assure you that we or Sprint PCS can
implement 1XRTT or 3G technology successfully or on a cost-effective basis.
S-19
We may experience a high rate of customer turnover which would adversely
affect our financial performance.
The wireless personal communications services industry in general and Sprint
PCS in particular have experienced a higher rate of customer turnover, commonly
known as churn, as compared to cellular industry averages. Factors which may
contribute to higher churn include:
. Sprint PCS' handset return policy that allows customers to return used
handsets within 14 days of purchase and receive a full refund;
. the attractiveness of our competitors' products and services;
. network performance;
. customer service; and
. customer mix and credit class, including those related to the NDASL
program and Clear Pay Program.
A high rate of customer turnover could adversely affect our competitive
position, results of operations and our costs of, or losses incurred in,
obtaining new subscribers, especially because we subsidize some of the costs of
initial purchases of handsets by customers.
We are a consumer business and a recession in the United States involving
significantly lowered spending could negatively affect our results of
operations.
Our primary customer base is individual consumers. In the event that the
economic downturn that the United States and our territories have recently
experienced becomes more pronounced or lasts longer than currently expected and
spending by individual consumers drops significantly, our business may be
negatively affected.
Regulation by government and taxing agencies may increase our costs of
providing service or require us to change our services, either of which could
impair our financial performance.
Our operations and those of Sprint PCS may be subject to varying degrees of
regulation by the FCC, the Federal Trade Commission, the Federal Aviation
Administration, the Environmental Protection Agency, the Occupational Safety
and Health Administration and state and local regulatory agencies and
legislative bodies. Adverse decisions or regulation of these regulatory bodies
could negatively impact our operations and our costs of doing business. For
example, changes in tax laws or the interpretation of existing tax laws by
state and local authorities could subject us to increased income, sales, gross
receipts or other tax costs or require us to alter the structure of our current
relationship with Sprint PCS.
Use of hand-held phones may pose health risks, which could result in the
reduced use of wireless services or liability for personal injury claims.
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. Any resulting
decrease in demand for wireless services, or costs of litigation and damage
awards, could impair our ability to achieve and sustain profitability.
Regulation by government or potential litigation relating to the use of
wireless phones while driving could adversely affect our results of operations.
Some studies have indicated that some aspects of using wireless phones while
driving may impair drivers' attention in certain circumstances, making
accidents more likely. These concerns could lead to potential litigation
relating to accidents, deaths or serious bodily injuries, or to new
restrictions or government regulations that restrict or prohibit wireless phone
use, any of which could have a material adverse effect on our results of
operations.
S-20
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and other
information incorporated by reference in this prospectus supplement contain
statements about future events and expectations, which are "forward-looking
statements." Any statement that is not a statement of historical fact may be
deemed to be a forward-looking statement. These forward-looking statements
include:
. forecasts of growth in the number of consumers using wireless personal
communications services and in estimated populations;
. statements regarding our plans for, schedule for and costs of the
build-out or upgrade of our Sprint PCS network;
. statements regarding our anticipated subscribers, revenues, expense
levels, liquidity and capital resources, operating losses and future
stock price performance;
. projections of when we will launch commercial wireless personal
communications service in particular markets;
. statements regarding expectations or projections about markets in our
service areas;
. statements regarding the anticipated benefits of the recently completed
merger between AirGate and iPCS; and
. other statements, including statements containing words such as "may,"
"might," "could," "would," "anticipate," "believe," "plan," "estimate,"
"project," "expect," "intend" and other similar words, that signify
forward-looking statements.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements.
Specific factors that might cause such a difference include, but are not
limited to:
. our ability to integrate iPCS' operations;
. our ability to finance future growth opportunities;
. our dependence on our affiliation with Sprint PCS;
. our ability to successfully complete the build-out of our Sprint PCS
network in our midwest territory or to upgrade our Sprint PCS network to
accommodate new technologies, including the upgrade to 1XRTT;
. our limited operating history and anticipation of future losses;
. our dependence on Sprint PCS' back office services;
. potential fluctuations in our operating results;
. changes or advances in technology;
. changes in government regulation;
. competition in the industry and markets in which we operate;
. future acquisitions;
. our ability to attract and retain skilled personnel; and
. general economic and business conditions.
For a discussion of some of these factors as well as additional factors, see
"Risk Factors" beginning on page S-12.
S-21
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our common
stock by the selling stockholders.
We will use the net proceeds we receive, if any, in connection with the
exercise of the underwriters' over-allotment option for general corporate
purposes, which may include:
. providing working capital;
. funding capital expenditures;
. purchasing or repaying our debt; and
. paying for future acquisitions.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or any
other of our securities. We intend to retain our future earnings, if any, to
fund the development and growth of our business and, therefore, do not
anticipate paying cash dividends in the foreseeable future. Our future
decisions concerning the payment of dividends on our common stock will depend
upon our results of operations, financial condition and capital expenditure
plans, as well as such other factors as our board of directors, in its sole
discretion, may consider relevant. In addition, our existing indebtedness
restricts, and we anticipate our future indebtedness may restrict, our ability
to pay dividends.
PRICE RANGE OF COMMON STOCK
Shares of our common stock began trading on The Nasdaq National Market on
September 28, 1999, under the symbol "PCSA." Prior to that date, there was no
public market for our common stock. On December 4, 2001, the last reported
sales price per share of our common stock on The Nasdaq National Market was
$53.05.
The following table lists the high and low bid prices for our common stock
for the periods indicated, as reported by The Nasdaq National Market.
Price Range of
Common Stock
--------------
High Low
------- ------
Year Ended September 30, 2002:
First Quarter (through December 4, 2001)...... $ 60.44 $42.96
Year Ended September 30, 2001:
Fourth Quarter (ended September 30, 2001)..... $ 60.05 $41.75
Third Quarter (ended June 30, 2001)........... $ 53.50 $30.88
Second Quarter (ended March 31, 2001)......... $ 49.88 $29.44
First Quarter (ended December 31, 2000)....... $ 48.00 $21.69
Year Ended September 30, 2000:
Fourth Quarter (ended September 30, 2000)..... $ 80.56 $31.00
Third Quarter (ended June 30, 2000)........... $114.50 $29.00
Second Quarter (ended March 31, 2000)......... $108.50 $50.13
First Quarter (ended December 31, 1999)....... $ 54.75 $23.00
S-22
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
debt, long-term debt, stockholders' equity and capitalization as of September
30, 2001:
. of AirGate on an actual basis; and
. of the combined company on a pro forma basis to give effect to the
merger of iPCS with AirGate as if the merger had been consummated as of
the period presented.
You should read this information in conjunction with our financial
statements and related notes and the other financial information appearing
elsewhere in or incorporated by reference in this prospectus supplement and
accompanying prospectus. The unaudited pro forma information gives effect to
the acquisition of iPCS by AirGate using the purchase method of accounting. The
pro forma adjustments, which are based upon available information and upon
certain assumptions that we believe are reasonable, are described more fully in
"Pro Forma Condensed Consolidated Financial Statements" included elsewhere in
this prospectus supplement.
We are providing unaudited pro forma financial information for illustrative
purposes only. We may have performed differently had AirGate and iPCS been
combined during the periods presented. You should not rely on the unaudited pro
forma condensed consolidated financial information as being indicative of the
historical results that would have been achieved had the companies been
combined during the periods presented or the future results that we will
experience.
As of September 30, 2001
-----------------------
Pro
Actual Forma
--------- ----------
(In thousands)
Cash and cash equivalents............................................................. $ 14,290 $ 47,369
========= ==========
Short-term debt:
Current portion of capital lease obligations....................................... $ -- $ 7
Long-term debt:
Senior secured credit facility, net................................................ 74,726 124,726
Senior discount notes, net......................................................... 191,600 341,600
Capitalized lease obligations...................................................... -- 373
--------- ----------
Total long-term debt.................................................................. 266,326 466,699
Stockholders' equity (deficit):
Preferred stock, par value $.01 per share: 5,000,000 shares authorized; no shares
issued and outstanding........................................................... -- --
Common stock, par value $.01 per share; 150,000,000 shares authorized; 13,364,980
shares issued and outstanding, actual; 25,727,140 shares issued and outstanding, pro
forma............................................................................... 134 257
Additional paid-in-capital............................................................ 168,255 1,098,215
Accumulated deficit................................................................... (219,567) (353,023)
Unearned stock compensation........................................................... (1,546) (1,546)
--------- ----------
Total stockholders' equity (deficit).................................................. (52,724) 743,903
--------- ----------
Total capitalization.................................................................. $ 213,602 $1,210,602
========= ==========
S-23
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma condensed consolidated financial
statements combine the historical consolidated balance sheets and statements of
operations of AirGate and iPCS. These unaudited pro forma financial statements
give effect to the acquisition of iPCS by AirGate using the purchase method of
accounting. To aid you in your analysis of the combined company of AirGate and
iPCS, we have presented this set of unaudited pro forma condensed consolidated
financial statements to demonstrate the financial aspects of the merger.
We derived the historical information from the audited consolidated
financial statements of AirGate for the year ended September 30, 2001 and the
audited consolidated financial statements of iPCS for the nine months ended
September 30, 2001. The results of iPCS for the three months ended December 31,
2000 are included in the twelve months ended September 30, 2001 as follows (in
thousands): Revenues--$11,340; Operating loss--$16,469; Net loss--$20,155.
These historical financial statements used in preparing the unaudited pro forma
financial statements are summarized and should be read in conjunction with the
complete historical financial statements and related notes of AirGate and iPCS
contained elsewhere in this prospectus supplement.
The unaudited pro forma condensed consolidated statement of operations for
the twelve months ended September 30, 2001 gives effect to the merger between
AirGate and iPCS as if the merger had been consummated at the beginning of the
period presented. The unaudited pro forma condensed consolidated balance sheet
as of September 30, 2001 gives effect to the merger as if it was effected
September 30, 2001. Certain reclassifications have been made to iPCS'
historical presentation to conform to AirGate's presentation. These
reclassifications do not materially impact AirGate's or iPCS' operations or
financial position for the periods presented.
The pro forma adjustments, which are based upon available information and
upon certain assumptions that we believe are reasonable, are described in the
accompanying notes. The final purchase price allocation will be different and
the difference may be material. We have engaged a nationally recognized
valuation expert to assist us in determining fair values of identifiable assets
and liabilities.
We are providing the unaudited pro forma condensed consolidated financial
statements for illustrative purposes only. We may have performed differently
had AirGate and iPCS been combined during the periods presented. You should not
rely on the unaudited pro forma condensed consolidated financial statements as
being indicative of the historical results that would have been achieved had
AirGate and iPCS been combined during the periods presented or the future
results that we will experience.
S-24
AIRGATE PCS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(In thousands)
Historical Historical Pro Forma Pro Forma
AirGate PCS iPCS Adjustments Total
----------- ---------- ----------- ----------
Assets
Current assets:
Cash and cash equivalents.................. $ 14,290 $ 54,579 $ (21,500)(1) $ 47,369
Accounts receivables, net.................. 23,798 14,964 (5,170)(2) 33,592
Receivable from Sprint PCS................. 10,200 -- 5,170 (2) 15,370
Other receivables.......................... -- 1,604 -- 1,604
Inventories................................ 4,639 3,379 -- 8,018
Prepaid expenses and other current assets.. 4,719 4,799 (1,720)(3) 7,798
Direct customer activation costs........... 3,693 -- 1,720 (3) 5,413
-------- -------- --------- ----------
Total current assets................... 61,339 79,325 (21,500) 119,164
Property and equipment, net................... 209,326 198,161 -- 407,487
Financing costs, net.......................... 7,888 9,558 -- 17,446
Intangible assets, net........................ -- 39,934 484,687 (4) 484,687
(39,934)(4)
Goodwill...................................... -- -- 366,653 (4) 366,653
Other assets.................................. 2,457 1,778 -- 4,235
-------- -------- --------- ----------
$281,010 $328,756 $ 789,906 $1,399,672
======== ======== ========= ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable........................... $ 10,210 $ 31,410 $ (10,306)(5) $ 31,314
Accrued expenses........................... 13,840 4,525 -- 18,365
Payable to Sprint PCS...................... 32,564 -- 10,306 (5) 42,870
Deferred revenue........................... 10,485 4,742 -- 15,227
Capital lease obligations.................. -- 7 -- 7
-------- -------- --------- ----------
Total current liabilities.............. 67,099 40,684 -- 107,783
Deferred revenue.............................. 309 1,763 -- 2,072
Deferred rent................................. -- 2,264 -- 2,264
Capital lease obligations..................... -- 373 -- 373
Deferred gain on tower sales.................. -- 7,667 -- 7,667
Accrued interest.............................. -- 16,944 (16,944)(6) --
Long-term debt................................ 266,326 191,392 16,944 (6) 466,326
(8,336)(4)
Deferred income tax........................... -- -- 102,722 (7) 69,284
(33,438)(4)
-------- -------- --------- ----------
Total liabilities...................... 333,734 261,087 60,948 655,769
-------- -------- --------- ----------
Redeemable preferred stock.................... -- 121,548 (121,548)(8) --
-------- -------- --------- ----------
Total stockholders' equity (deficit).......... (52,724) (53,879) 862,766 (8) 743,903
(14,100)(1)
8,336 (4)
(39,934)(4)
33,438 (4)
-------- -------- --------- ----------
$281,010 $328,756 $ 789,906 $1,399,672
======== ======== ========= ==========
S-25
AIRGATE PCS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 2001
(In thousands, except for share and per share amounts)
Historical Historical Pro Forma Pro Forma
AirGate PCS iPCS Adjustments Total
----------- ---------- ----------- -----------
Revenues:
Service revenue.................................. $ 105,976 $ 81,711 $(28,869)(9) $ 157,561
(71)(10)
(1,365)(11)
179 (12)
Roaming revenue.................................. 55,329 -- 28,869 (9) 84,198
Equipment and other revenue...................... 10,782 7,141 (289)(11) 17,455
(179)(12)
----------- --------- -------- -----------
Total revenues............................... 172,087 88,852 (1,725) 259,214
Operating expenses:
Cost of service and roaming...................... (116,732) (67,541) 71 (10) (184,202)
Cost of equipment................................ (20,218) (23,657) 3,919 (13) (38,923)
744 (14)
289 (11)
Selling and marketing............................ (71,617) (28,033) (3,919)(13) (102,948)
(744)(14)
1,365 (11)
General and administrative....................... (15,742) (13,260) -- (29,002)
Noncash stock option compensation................ (1,665) (2,056) 2,056 (15) (1,665)
Depreciation and amortization.................... (30,667) (18,445) (21,000)(16) (98,641)
(3,300)(17)
(25,229)(18)
----------- --------- -------- -----------
Total operating expenses......................... (256,641) (152,992) (45,748) (455,381)
----------- --------- -------- -----------
Operating loss............................... (84,554) (64,140) (47,473) (196,167)
Interest income..................................... 2,463 5,031 (860)(19) 6,634
Interest expense.................................... (28,899) (22,477) -- (51,376)
Other income........................................ -- 772 -- 772
----------- --------- -------- -----------
Loss before income tax benefit............... (110,990) (80,814) (48,333) (240,137)
Income tax benefit.................................. -- -- 69,284 (20) 69,284
----------- --------- -------- -----------
Net loss..................................... $ (110,990) $ (80,814) $ 20,951 $ (170,853)
=========== ========= ======== ===========
Basic and diluted net loss per share of common stock $ (8.48) $ (6.71)
=========== ===========
Weighted-average outstanding
common shares.................................... 13,089,285 25,451,445(21)
=========== ===========
S-26
AIRGATE PCS, INC.
FOOTNOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except for per share and per subscriber amounts)
(1)The following table represents the estimated transaction costs related to
the merger (see note 4), which include:
AirGate iPCS Total
------- ------- -------
Investment banking fees.............................................. $4,000 $ 7,500 $11,500
Legal, accounting and bank consent fees.............................. 3,400 2,600 6,000
Termination payments and benefits triggered upon a change in control. -- 4,000 4,000
------ ------- -------
$7,400 $14,100 $21,500
====== ======= =======
The pro forma adjustment gives effect to the reduction in cash and cash
equivalents reflecting the payment of these costs.
(2)Represents the reclassification of amounts receivable from Sprint PCS to
iPCS in the amount of $5,170 for consistency in presentation.
(3)Represents the reclassification of iPCS' direct customer activation costs in
the amount $1,720 from prepaid expenses and other current assets to direct
customer activation costs for consistency in presentation.
(4)Represents the intangibles and goodwill that AirGate will record upon
consummation of the merger. For purposes of these pro forma condensed
consolidated financial statements, the purchase price premium has been
preliminarily allocated to the acquired customer base, non-competition
agreements, right to provide service under the Sprint agreements and
goodwill, pending further study and analysis. We have engaged a nationally
recognized firm with valuation expertise to assist us in determining the
final values of identifiable assets and liabilities.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141,"Business Combinations"
("SFAS No. 141"), which is effective for all business combinations initiated
after June 30, 2001. SFAS No. 141 requires companies to account for all
business combinations using the purchase method of accounting, recognize
intangible assets if certain criteria are met, as well as provide additional
disclosures regarding business combinations and allocation of purchase price.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), which
requires nonamortization of goodwill and intangible assets that have
indefinite useful lives and annual tests of impairment of those assets. SFAS
No. 142 also provides specific guidance about how to determine and measure
goodwill and intangible asset impairment, and requires additional disclosure
of information about goodwill and other intangible assets. The provisions of
this statement are required to be applied starting with fiscal years
beginning after December 15, 2001 and applied to all goodwill and other
intangible assets recognized in its financial statements at that date.
Goodwill and intangible assets acquired after June 30, 2001 are subject to
the nonamortization provisions of the statement. AirGate has elected early
adoption of SFAS No. 142 beginning October 1, 2001.
S-27
AIRGATE PCS, INC.
FOOTNOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except for per share and per subscriber amounts)
AirGate PCS common shares issuable at closing....................................... 12,362,160
Closing price on August 28, 2001 which, approximates the average closing price three
days before and after the date preceding the announcement of the transaction...... $ 59.47
-----------
Market value of stock issued..................................................... $ 735,178
Value of options and warrants using a Black-Scholes option pricing model (a)........ 61,449
-----------
Total consideration................................................................. $ 796,627
Estimated AirGate transaction costs (see note 1).................................... 7,400
-----------
Total consideration and costs....................................................... $ 804,027
Less:
iPCS stockholders' deficit....................................................... $(53,879)
Adjustments to iPCS' stockholders' deficit:
Conversion of redeemable preferred stock to common stock immediately prior
to the transaction (see note 8).............................................. 121,548
Estimated iPCS transaction costs (see note 1).................................. (14,100)
Adjustment of iPCS long-term debt to fair value (b)............................ 8,336
Deferred income tax asset (c).................................................. 33,438
Elimination of existing iPCS intangible assets................................. (39,934)
--------
Adjusted iPCS stockholders' deficit.............................................. 55,409
-----------
Total purchase price premium........................................................ $ 748,618
===========
The purchase price premium has been allocated on a preliminary basis as
follows:
Deferred taxes on intangible assets acquired in the merger (see note 7) $ (102,722)
Intangible assets:
Acquired customer base (d).......................................... $ 52,487
Non-competition agreements (e)...................................... 3,300
Right to provide service under the Sprint agreements (f)............ 428,900
--------
Total intangible assets................................................ 484,687
Goodwill............................................................... 366,653
-------
851,340
-----------
$ 748,618
===========
(a)The fair value of the options and warrants was calculated using the
following assumptions:
(1)risk free interest rate of 3.5%;
(2)stock price of $59.47, the closing price of AirGate common stock on
August 28, 2001;
(3)dividend yield of 0%;
(4)remaining life of 6 to 9 years; and
(5)volatility of 100%.
S-28
AIRGATE PCS, INC.
FOOTNOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except for per share and per subscriber amounts)
(b)Long-term debt is comprised of the senior subordinated discount notes
and amounts outstanding under the senior credit facility. The fair value
of the senior subordinated discount notes is stated at quoted market
value as of September 30, 2001 of $150,000 as compared to the carrying
value of $158,336 which resulted in a decrease of $8,336. The carrying
amount of the senior credit facility is a reasonable estimate of its
fair value due to the debt being variable-rate debt.
(c)Represents the previously unrecognized deferred income tax assets of
iPCS.
(d)Allocation to the acquired customer base is calculated on 134,927
existing iPCS customers valued at $389 per subscriber, which reflects
the average cost for a Sprint PCS network partner to acquire a new
customer.
(e)Allocation to the non-competition agreements is based on management's
estimate of the cash flows from subscribers that would have been lost or
diverted.
(f)Allocation to the right to provide service under the Sprint PCS
management agreement is based upon management's estimate of the
after-tax present value of the right to use the Sprint PCS spectrum, the
Sprint PCS brand name, accelerated start-up, network equipment and
handset discounts, less the affiliation fee we are obligated to pay
Sprint PCS.
(5)Represents the reclassification of amounts payable by iPCS to Sprint PCS for
consistency in presentation in the amount of $10,306.
(6)Represents the reclassification of iPCS' accrued interest payable on the
senior subordinated discount notes to long-term debt for consistency in
presentation in the amount of $16,944.
(7)Represents the expected deferred tax liability to be recorded related to the
transaction using an effective tax rate of 38% as follows:
Deferred taxes on intangibles acquired in the merger (see note 4)................................ $(184,181)
Represents the reduction in the valuation allowance for the deferred income tax assets of AirGate 81,459
---------
$(102,722)
=========
(8)Represents the following:
Conversion of redeemable preferred stock to common stock immediately prior to the
transaction (see note 4)....................................................... $121,548
AirGate common stock issued and options and warrants assumed (see note 4)........ 796,627
Elimination of adjusted iPCS stockholders' deficit (see note 4).................. (55,409)
--------
$862,766
========
(9)Represents the reclassification of iPCS' roaming revenue from service
revenue for consistency in presentation in the amount of $28,869 for the
twelve months ended September 30, 2001.
(10)Represents the reclassification of the iPCS customer credits for billing
adjustments from cost of service to service revenue for consistency in
presentation. Customer credits for billing adjustments were $71 for the
twelve months ended September 30, 2001.
S-29
AIRGATE PCS, INC.
FOOTNOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except for per share and per subscriber amounts)
(11)Represents the reclassification of iPCS rebates and sales incentives to
conform with EITF-00-14 "Accounting for Certain Sales Incentives" as if it
had been retroactively applied at the beginning of the period presented.
The reclassification consists of the following:
Twelve Months Ended
September 30, 2001
-------------------
Reclassify iPCS promotional credits from selling and marketing expense to
service revenue................................................................ $1,365
Reclassify iPCS cash rebates related to local retailers from cost of equipment to
equipment and other revenues................................................... $ 289
(12)Represents the reclassification of iPCS Advantage Agreement early
termination fees from equipment and other revenue to service revenue for
consistency in presentation in the amount of $179 for the twelve months
ended September 30, 2001.
(13)Represents the reclassification of iPCS handset equipment subsidies on
units sold by third parties for which iPCS does not record revenue from
cost of equipment to selling and marketing expense for consistency in
presentation in the amount of $3,919 for the twelve months ended September
30, 2001.
(14)Represents the reclassification of iPCS rebates on units sold by third
parties for which iPCS does not record revenue, from cost of equipment to
selling and marketing expense for consistency in presentation in the amount
of $744 for the twelve months ended September 30, 2001.
(15)Represents the adjustment to remove iPCS noncash stock option compensation
expense related to the immediate vesting of iPCS common stock options in
the amount of $2,056 for the twelve months ended September 30, 2001.
(16)Represents amortization expense of the acquired customer base, which is
assumed to be over the average customer life of 30 months, based on gross
monthly churn of 3.3%.
Acquired customer base... $ 52,487
Number of months......... / 30 months
--------
Monthly amortization..... $ 1,750
Months in period......... x 12 months
--------
Twelve month amortization $21,000
=======
(17)Represents amortization expense of the non-competition agreements, which is
assumed to be over the life of such agreements of six months.
Non competition agreements $ 3,300
Number of months.......... / 6 months
-------
Monthly amortization...... $ 550
Months in period.......... x 6 months
-------
Amortization expense...... $3,300
======
S-30
AIRGATE PCS, INC.
FOOTNOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except for per share and per subscriber amounts)
(18)Represents amortization expense of the right to provide services under the
Sprint agreements, which is assumed to be over 17 years, the remaining life
in the initial term of the iPCS management agreements with Sprint PCS.
Right to provide service under the Sprint PCS management agreement (see
note 4).............................................................. $428,900
Number of years........................................................ / 17 years
--------
Twelve month amortization.............................................. $25,229
=======
(19)Represents reduced interest income on $21,500 used to fund the transaction
costs (see note 1) assuming an interest rate of 4% in the amount of $860
for the twelve months ended September 30, 2001.
(20)Represents the estimated recognition of the income tax benefit for the
twelve months ended September 30, 2001 up to the amount of the remaining
deferred income tax liability. No additional income tax benefit was
recorded as the remaining net deferred income tax benefit generated,
primarily from temporary differences related to the net operating losses,
would be offset by a full valuation allowance.
(21)The reconciliation of weighted-average common shares before the merger to
weighted-average common share after the merger is set forth below:
Twelve Months Ended
September 30, 2001
-------------------
Weighted-average outstanding AirGate common shares before the merger 13,089,285
AirGate common shares issuable at closing........................... 12,362,160
----------
Weighted-average outstanding common shares after the merger......... 25,451,445
==========
S-31
SELECTED HISTORICAL FINANCIAL DATA
AirGate PCS, Inc. and Subsidiaries Selected Financial Data
The statement of operations and balance sheet data presented below is
derived from AirGate's audited consolidated financial statements as of and for
the years ended December 31, 1997 and 1998, the nine months ended September 30,
1999, and the fiscal years ended September 30, 2000 and 2001.
The data set forth below should be read in conjunction with AirGate's
consolidated financial statements and accompanying notes and "AirGate
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus supplement.
For the
For the Year Ended Nine Months For the Year Ended
December 31, Ended September 30,
----------------- September 30, -------------------
1997 1998 1999 2000 2001
- ------- ------- ------------- -------- ---------
(In thousands, except for per share and subscriber data)
Statement of Operations Data:
Revenues:
Service revenue..................... $ -- $ -- $ -- $ 9,746 $ 105,976
Roaming revenue..................... -- -- -- 12,338 55,329
Equipment revenue................... -- -- -- 2,981 10,782
- ------- ------- -------- -------- ---------
Total revenues.................. -- -- -- 25,065 172,087
Operating expenses:
Cost of service and roaming......... -- -- -- (27,770) (116,732)
Cost of equipment................... -- -- -- (5,685) (20,218)
Selling and marketing............... -- -- -- (28,357) (71,617)
General and administrative.......... (1,101) (2,597) (5,294) (14,078) (15,742)
Noncash stock option compensation... -- -- (325) (1,665) (1,665)
Depreciation and amortization....... (998) (1,204) (622) (12,034) (30,667)
- ------- ------- -------- -------- ---------
Total operating expenses............... (2,099) (3,801) (6,241) (89,589) (256,641)
- ------- ------- -------- -------- ---------
Operating loss......................... (2,099) (3,801) (6,241) (64,524) (84,554)
Interest expense, net.................. (817) (1,392) (9,358) (16,799) (26,436)
- ------- ------- -------- -------- ---------
Net loss............................... $(2,916) $(5,193) $(15,599) $(81,323) $(110,990)
= ======= ======= ======== ======== =========
Basic and diluted net loss per share of
common stock......................... $ (0.86) $ (1.54) $ (4.57) $ (6.60) $ (8.48)
= ======= ======= ======== ======== =========
Other Data:
Number of subscribers at end of period. -- -- -- 56,689 235,025
As of December 31, As of September 30,
- ----------------- ---------------------------------
1997 1998 1999 2000 2001
- ------- ------- ------------- -------- ---------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents.............. $ 147 $ 2,296 $258,900 $ 58,384 $ 14,290
Property and equipment, net............ 17 12,545 44,206 183,581 209,326
Total assets........................... 13,871 15,450 317,320 268,948 281,010
Long-term debt /(1)/................... 11,745 7,700 165,667 180,727 266,326
Stockholders' equity (deficit)......... (1,750) (5,350) 127,846 49,873 (52,724)
---------------------
(1)Includes current maturities.
S-32
iPCS, Inc. and Subsidiaries and Predecessor Selected Financial Data
The statement of operations and balance sheet data presented below are
derived from iPCS' audited consolidated financial statements as of and for the
period from January 22, 1999 (date of inception) through December 31, 1999, as
of and for the year ended December 31, 2000, and as of and for the nine months
ended September 30, 2000 and 2001. Operating results for the nine-month period
ended September 30, 2001 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 2001.
The data set forth below should be read in conjunction with iPCS'
consolidated financial statements and accompanying notes and "iPCS Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus supplement.
For the Period
from January 22,
1999 (date of For the Year For the Nine Months
inception) through Ended Ended September 30,
December 31, December 31, ---------------------
1999 2000 2000 2001
------------------ ------------ -------- ---------
(In thousands, except for per share and subscriber data)
Statement of Operations Data:
Revenues:
Service revenue................................... $ 71 $ 18,534 $ 9,914 $ 71,834
Equipment and other revenue....................... 144 2,695 1,700 5,678
------- --------- -------- ---------
Total revenues................................ 215 21,229 11,614 77,512
Operating expenses:
Cost of service and roaming....................... (1,695) (16,786) (9,812) (60,496)
Cost of equipment................................. (484) (10,053) (4,977) (18,292)
Selling and marketing............................. (778) (10,783) (4,960) (20,845)
General and administrative........................ (1,520) (9,319) (4,694) (8,635)
Taxes on noncash compensation..................... -- (1,567) (1,567) --
Noncash stock option compensation................. -- (11,212) (10,686) (1,530)
Depreciation and amortization..................... (381) (8,609) (5,549) (15,385)
------- --------- -------- ---------
Total operating expenses............................. (4,858) (68,329) (42,245) (125,183)
------- --------- -------- ---------
Operating loss................................ (4,643) (47,100) (30,631) (47,671)
Interest income (expense), net....................... 89 (8,298) (4,310) (13,458)
Other income......................................... 174 726 424 470
------- --------- -------- ---------
Loss before extraordinary item....................... (4,380) (54,672) (34,517) (60,659)
Extraordinary item--loss on early extinguishment of
debt............................................... -- (1,485) (1,485) --
------- --------- -------- ---------
Net loss...................................... $(4,380) $ (56,157) $(36,002) $ (60,659)
======= ========= ======== =========
Loss before extraordinary item....................... $(4,380) $ (54,672) $(34,517) $ (60,659)
Beneficial conversion feature related to redeemable
preferred stock.................................... -- (46,387) (46,387) --
Dividends and accretion on redeemable preferred
stock.............................................. -- (1,963) (881) (7,468)
------- --------- -------- ---------
Loss available to common stockholders......... (4,380) (103,022) (81,785) (68,127)
Extraordinary item................................... -- (1,485) (1,485) --
------- --------- -------- ---------
Net loss available to common stockholders..... $(4,380) $(104,507) $(83,270) $ (68,127)
======= ========= ======== =========
Basic and diluted net loss per share of common stock. $ (0.10) $ (2.33) $ (1.86) $ (1.52)
======= ========= ======== =========
Other Data:
Number of subscribers at end of period............ 1,981 46,773 25,150 134,927
S-33
As of December 31, As of
------------------ September 30,
1999 2000 2001
------- -------- -------------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents............ $ 2,733 $165,958 $ 54,579
Property and equipment, net.......... 39,106 129,087 198,161
Total assets......................... 44,843 328,575 328,756
Long-term debt and accrued interest.. 27,571 163,800 208,336
Redeemable preferred stock........... -- 114,080 121,548
Total stockholders' equity (deficit). 9,120 12,718 (53,879)
S-34
AIRGATE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On July 22, 1998, AirGate entered into a management agreement with Sprint
PCS whereby AirGate became the Sprint PCS network partner with the right to
provide 100% digital, 100% PCS services under the Sprint and Sprint PCS brand
names in AirGate's Sprint PCS territory in the southeastern United States.
AirGate completed its radio frequency design, network design and substantial
site acquisition and cell site engineering, and commenced construction of its
PCS network in November 1998. In January 2000, AirGate began commercial
operations with the launch of four markets covering approximately 2.2 million
residents in AirGate's Sprint PCS territory. By September 30, 2000, AirGate had
launched commercial PCS service in all of the 21 markets that comprise its
Sprint PCS territory. At September 30, 2001, AirGate provided Sprint PCS
services to 235,025 subscribers.
Sprint PCS has invested $44.6 million to purchase the PCS licenses in
AirGate's territory and incurred additional expenses for microwave clearing.
Under AirGate's long-term agreements with Sprint PCS, AirGate manages the local
network on Sprint PCS' licensed spectrum as well as uses the Sprint and Sprint
PCS brand names royalty-free during AirGate's affiliation with Sprint PCS.
AirGate also has access to Sprint PCS' national marketing support and
distribution programs and is 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 and other benefits,
AirGate is entitled to receive 92%, and Sprint PCS is entitled to retain 8%, of
collected service revenues from customers in AirGate's Sprint PCS territory.
AirGate is entitled to 100% of revenues collected from the sale of handsets and
accessories and on roaming revenues received when Sprint PCS customers from a
different territory make a wireless call on AirGate's Sprint PCS network.
Through September 30, 2001, AirGate has incurred $237.6 million of capital
expenditures related to the build-out of its Sprint PCS network. At September
30, 2001, AirGate's Sprint PCS network covered 6.0 million of the 7.1 million
residents in its Sprint PCS territory based on 2000 estimates compiled by
Kagan's Wireless Telecom Atlas & Databook, 2001 Edition.
Results of Operations
For the year ended September 30, 2001 compared to the year ended September 30,
2000:
Customer Additions. As of September 30, 2001, AirGate provided personal
communication services to 235,025 customers compared to 56,689 customers as of
September 30, 2000, an increase of 178,336 customers. AirGate does not include
in its financial statements an estimate of revenues or subscribers related to
those customers for which collection of revenues is not reasonably assured. The
increased net customers acquired during the year ended September 30, 2001 are
attributable to having all of AirGate's 21 markets fully launched during fiscal
2001 and increasing demand for wireless services in the United States.
Average Revenue Per User (ARPU). An important operating metric in the
wireless industry is Average Revenue Per User (ARPU). ARPU summarizes the
average monthly service revenue per customer. ARPU is computed by dividing
service revenue by the average subscribers for the period (computed based upon
monthly subscriber counts). AirGate previously reported ARPU net of an
adjustment for the provision for doubtful accounts. As of September 30, 2001,
AirGate began reporting ARPU gross of the provision for doubtful accounts, to
be consistent with current industry practices. For the year ended September 30,
2001, ARPU was $62. For the year ended September 30, 2000, ARPU was $59. The
increase in ARPU primarily resulted from customers selecting rate plans with
higher monthly recurring charges.
Revenues. Service revenue and equipment revenue were $106.0 million and
$10.8 million, respectively, for the year ended September 30, 2001, compared to
$9.7 million and $3.0 million, respectively, for the year ended September 30,
2000, an increase of $96.3 million and $7.8 million, respectively. These
increased revenues reflect
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that all of AirGate's markets were commercially operational in fiscal 2001
whereas fiscal 2000 reflected a launch year for AirGate's markets. Service
revenue consists of monthly recurring access and feature charges and monthly
non-recurring charges for local, long distance and roaming airtime usage in
excess of the pre-subscribed usage plan. Equipment revenue is derived from the
sale of handsets and accessories from AirGate's Sprint PCS stores, net of an
allowance for returns. AirGate's handset return policy allows customers to
return their handsets for a full refund within 14 days of purchase. When
handsets are returned to AirGate, AirGate may be able to reissue the handsets
to customers at little additional cost. However, when handsets are returned to
Sprint PCS for refurbishing, AirGate receives a credit from Sprint PCS, which
is less than the amount AirGate originally paid for the handset.
AirGate recorded roaming revenue of $55.3 million during the year ended
September 30, 2001 compared to $12.3 million for the year ended September 30,
2000, an increase of $43.0 million. The increase is attributable to the
completion of the network build-out and a larger customer base for Sprint PCS
and its other network partners. AirGate receives Sprint PCS roaming revenue at
a per-minute rate from Sprint PCS or another Sprint PCS network partner when
Sprint PCS subscribers outside of AirGate's territory use AirGate's network. In
accordance with an agreement in principle with Sprint PCS, announced in April
2001, Sprint PCS provided notice of reduction of the reciprocal roaming rate
from $0.20 to $0.15 per minute of use on June 1, 2001, and to $0.12 per minute
of use on October 1, 2001. The details of the agreement in principle with
respect to periods after December 31, 2001 have not yet been finalized, but the
reciprocal rate cannot be less than $0.10 per minute until after December 31,
2002. As a result of these changes, increased inbound roaming minutes from a
growing Sprint PCS subscriber base will be partially offset by the lower per
minute rate.
Cost of Service and Roaming. The cost of service and roaming was $116.7
million for the year ended September 30, 2001, compared to $27.8 million for
the year ended September 30, 2000, an increase of $88.9 million. Cost of
service and roaming includes roaming expense when customers from AirGate's
territory place calls on Sprint PCS' network or other wireless networks and
costs to support AirGate's customer base including: network operating costs
(including salaries, cell site lease payments, fees related to the connection
of AirGate's switches to the cell sites that they support, inter-connect fees
and other expenses related to network operations), back office services
provided by Sprint PCS such as customer care, billing and activation, the 8% of
collected service revenue representing the Sprint affiliation fee, the
provision for doubtful accounts and long distance expense relating to inbound
roaming revenue and the long distance cost of customers in AirGate's territory.
Roaming expense included in the cost of service and roaming was $35.4
million for the year ended September 30, 2001, compared to $2.5 million for the
year ended September 30, 2000, an increase of $32.9 million, resulting from the
substantial increase in AirGate's customer base. As discussed above, the per
minute rate AirGate pays Sprint PCS when customers from AirGate's territory
roam onto Sprint PCS' or an affiliates' network decreased beginning June 1,
2001. The increased roaming costs resulting from increasing subscriber levels
in AirGate's territory will be partially offset by the lower per minute rate
paid to Sprint PCS.
We were supporting 235,025 customers at September 30, 2001, compared to
56,689 customers at September 30, 2000. At September 30, 2001, AirGate's
network consisted of 719 active cell sites and four switches compared to 567
active cell sites and three switches at September 30, 2000. There were
approximately 79 employees performing network operations functions at September
30, 2001, compared to 59 employees at September 30, 2000. The Sprint
affiliation fee totaled $7.6 million in the year ended September 30, 2001,
compared to $0.8 million for the year ended September 30, 2000, a $6.8 million
increase related to the growth in service revenues.
Cost of Equipment. Cost of equipment was $20.2 million for the year ended
September 30, 2001, and $5.7 million for the year ended September 30, 2000, an
increase of $14.5 million. This increase is attributable to the increase in the
number of customers, as cost of equipment includes the cost of handsets and
accessories sold to customers from AirGate's Sprint PCS stores. The cost of
handsets generally exceeds the amount received from customers because AirGate
subsidizes the price of handsets to remain competitive in the marketplace.
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Selling and Marketing. AirGate incurred selling and marketing expenses of
$71.6 million during the year ended September 30, 2001 compared to $28.4
million in the year ended September 30, 2000, an increase of $43.2 million.
These amounts include retail store costs such as salaries and rent in addition
to promotion, advertising and commission costs, and handset subsidies on units
sold by third parties for which AirGate does not record revenue. At September
30, 2001, there were approximately 388 employees performing sales and marketing
functions, compared to 246 employees as of September 30, 2000. A net 178,336
customers were added in the year ended September 30, 2001 compared to 56,689
net customers added in the year ended September 30, 2000. Handset subsidies on
units sold by third parties totaled $12.8 million for the year ended September
30, 2001, compared to $3.7 million for the year ended September 30, 2000, an
increase of $9.1 million.
General and Administrative. For the year ended September 30, 2001, AirGate
incurred expenses of $15.7 million, compared to $14.1 million for the year
ended September 30, 2000, an increase of $1.6 million. Increased compensation
and benefit amounts related to the growth in employees were partially offset by
lower amounts earned under the retention bonus agreement with AirGate's chief
executive officer. Of the 529 employees at September 30, 2001, approximately 62
employees were performing corporate support functions compared to 36 employees
as of September 30, 2000.
Noncash Stock Option Compensation. Noncash stock option compensation
expense was $1.7 million for the years ended September 30, 2001 and 2000.
AirGate 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 AirGate's common stock at the date of grant for options
that are compensatory and is recognized as noncash stock option compensation
expense in the period in which the related services are rendered.
Depreciation and Amortization. For the year ended September 30, 2001,
depreciation and amortization expense increased to $30.7 million, compared to
$12.0 million for the year ended September 30, 2000, an increase of $18.7
million. The increase in depreciation and amortization expense relates
primarily to the completion of AirGate's network build-out during fiscal year
2000 to support AirGate's commercial launch. Depreciation and amortization will
continue to increase modestly as additional portions of AirGate's network are
placed into service. AirGate incurred capital expenditures of $56.1 million in
the year ended September 30, 2001, which included approximately $2.9 million of
capitalized interest compared to capital expenditures of $151.4 million and
capitalized interest of $5.9 million in the year ended September 30, 2000.
Interest Income. For the year ended September 30, 2001, interest income was
$2.5 million compared to $9.3 million for the year ended September 30, 2000, a
decrease of $6.8 million. AirGate had higher cash and cash equivalent balances
for the year ended September 30, 2000, resulting from the remaining proceeds
from AirGate's September 1999 equity and debt offerings. As capital
expenditures were required to complete the build-out of AirGate's PCS network,
and as working capital and operating losses were funded, decreasing cash
balances and a lower short-term interest rate environment resulted in lower
levels of interest income.
Interest Expense. For the year ended September 30, 2001, interest expense
was $28.9 million, compared to $26.1 million for the year ended September 30,
2000, an increase of $2.8 million. The increase is primarily attributable to
increased debt related to accreted interest on the senior subordinated discount
notes and increased borrowings under the senior credit facility, partially
offset by lower commitment fees on undrawn balances of the senior credit
facility, a lower interest rate on variable rate borrowings under the senior
credit facility and lower capitalized interest. AirGate had borrowings of
$266.3 million as of September 30, 2001, compared to $180.7 million as of
September 30, 2000.
Net Loss. For the year ended September 30, 2001, the net loss was $111.0
million, an increase of $29.7 million over a net loss of $81.3 million for the
year ended September 30, 2000.
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For the year ended September 30, 2000 compared to the nine months ended
September 30, 1999:
AirGate did not launch commercial operations until January 2000. For the
nine months ended September 30, 1999, AirGate had no customers and thus no
service, roaming and equipment revenues or the related costs of revenues and
sales and marketing costs.
Customer Additions. For the year ended September 30, 2000, AirGate added a
net 56,689 customers since the launch of its commercial operations in January
2000. AirGate launched all 21 of the markets that comprise its Sprint PCS
territory during 2000.
Average Revenue Per User (ARPU). ARPU, which summarizes the average monthly
service revenue per customer, was $59 for the year ended September 30, 2000
from the time commercial operations were launched in January 2000.
Revenues. Service revenue and equipment revenue were $9.7 million and $3.0
million, respectively, for the year ended September 30, 2000. These revenues
were the result of launching commercial operations in 21 markets during the
year and the resulting acquisition of 56,689 customers in the year ended
September 30, 2000.
Roaming revenue of $12.3 million was recorded during the year ended
September 30, 2000.
Cost of Service and Roaming and Cost of Equipment. The cost of service and
roaming and the cost of equipment was $27.8 million and $5.7 million,
respectively, for the year ended September 30, 2000. The Sprint PCS affiliation
fee totaled $0.8 million in the year ended September 30, 2000. There were
approximately 59 employees performing network operations functions at September
30, 2000.
Cost of equipment includes the cost of handsets and accessories sold to
customers during the year ended September 30, 2000. The cost of handsets
generally exceeds the amount received from customers because AirGate subsidizes
the price of handsets to remain competitive in the marketplace.
Selling and Marketing. AirGate incurred expenses of $28.4 million during
the year ended September 30, 2000 for selling and marketing costs associated
with the launch of AirGate's 21 markets in 2000. Handset subsidies related to
amounts paid for indirect subscriber additions totaled $3.7 million for the
year ended September 30, 2000. At September 30, 2000, there were approximately
246 employees performing sales and marketing functions.
General and Administrative. For the year ended September 30, 2000, AirGate
incurred expenses of $14.1 million compared to $5.3 million for the nine months
ended September 30, 1999, an increase of $8.8 million. The increase is
primarily comprised of additional rent, professional fees, consulting fees for
outsourced labor and compensation, recruiting and relocation costs relating to
growth in the number of employees. Of the total 341 employees at September 30,
2000, approximately 36 employees were performing corporate support functions
compared to 19 employees performing those functions at September 30, 1999.
AirGate incurred $2.1 million of legal and professional fees related to
business development activities in 2000. On May 4, 2000, AirGate entered into a
retention bonus agreement with its chief executive officer that provides for
the payment of periodic retention bonuses. Included in compensation expense in
the year ended September 30, 2000 was $1.2 million related to the retention
bonus agreement with AirGate's chief executive officer.
Noncash Stock Option Compensation. Noncash stock option compensation
expense was $1.7 million for the year ended September 30, 2000 compared to $0.3
million in the nine months ended September 30, 1999. The increase in noncash
stock option compensation resulted from a full twelve months expense in 2000
compared to only two months of expense in 1999 related to July 1999 stock
option grants.
Depreciation and Amortization. For the year ended September 30, 2000,
depreciation and amortization expense increased $11.4 million to $12.0 million
compared to $0.6 million for the nine months ended
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September 30, 1999. The increase in depreciation and amortization expense
relates primarily to network assets placed in service to support AirGate's
commercial launch. AirGate incurred capital expenditures of $151.4 million in
the year ended September 30, 2000 related to the continued build-out of its PCS
network, which included approximately $5.9 million of capitalized interest
compared to capital expenditures of $32.2 million and capitalized interest of
$1.1 million for the nine months ended September 30, 1999.
Interest Income. For the year ended September 30, 2000, interest income was
$9.3 million. Interest income was generated from cash proceeds originating from
AirGate's initial public equity and units offering completed on September 30,
1999. No significant interest income was recorded in the nine months ended
September 30, 1999.
Interest Expense. For the year ended September 30, 2000, interest expense
was $26.1 million, an increase of $16.7 million compared to the nine months
ended September 30, 1999. The increase is primarily attributable to the $23.0
million associated with the senior subordinated discount notes and $7.3 million
associated with AirGate's senior credit facility partially offset by $4.8
million of increased capitalized interest. AirGate had borrowings of $180.7
million outstanding at September 30, 2000 compared to $165.7 million
outstanding at September 30, 1999.
Net Loss. For the year ended September 30, 2000, the net loss was $81.3
million, an increase of $65.7 million over a net loss of $15.6 million for the
nine months ended September 30, 1999.
For the nine months ended September 30, 1999:
On October 21, 1999, AirGate changed its fiscal year from a calendar year
ending on December 31 to a fiscal year ending on September 30, effective
September 30, 1999. From January 1, 1999 through September 30, 1999, AirGate
was focused on raising capital to continue its PCS network build-out.
Revenues. AirGate had no commercial operations in the nine months ended
September 30, 1999, resulting in no revenues or costs of service being recorded.
General and Administrative Expenses. From January 1, 1999 through September
30, 1999, we were focused on raising capital to continue our PCS network
build-out. AirGate incurred general and administrative expenses of $5.3 million
during the nine months ended September 30, 1999. The amount was primarily
comprised of cell site lease payments related to AirGate's PCS network
build-out, compensation, employee bonus accruals and relocation liabilities.
Noncash Stock Option Compensation. Noncash stock option compensation
expense was $0.3 million for the nine months ended September 30, 1999 related
to the granting of compensatory options in July 1999.
Depreciation and Amortization. For the nine months ended September 30,
1999, depreciation and amortization expense was $0.6 million. AirGate made
capital expenditures of $32.2 million in the nine months ended September 30,
1999 related to the continued build-out of its PCS network, which included
approximately $1.1 million of capitalized interest.
Interest Expense. For the nine months ended September 30, 1999, interest
expense was $9.4 million, net of capitalized interest of $1.1 million. Interest
expense for the 1999 period included an $8.7 million charge to record the fair
value of warrants and the beneficial conversion feature related to the
convertible promissory notes issued to affiliates of Weiss, Peck & Greer
Venture Partners and affiliates of JAFCO America Ventures Inc. Capitalized
interest of $1.1 million for the nine months ended September 30, 1999 related
to the build-out of our PCS network.
Net Loss. For the nine months ended September 30, 1999, AirGate's net loss
was $15.6 million.
S-39
Liquidity and Capital Resources
As of September 30, 2001, AirGate had $14.3 million in cash and cash
equivalents, compared to $58.4 million in cash and cash equivalents as of
September 30, 2000. AirGate's net working capital deficit was $5.8 million at
September 30, 2001, compared to positive working capital of $36.6 million at
September 30, 2000.
Net Cash Used in Operating Activities. The $40.9 million of cash used in
operating activities in the year ended September 30, 2001 was the result of
AirGate's $111.0 million net loss being partially offset by a net $10.6 million
in cash provided by changes in working capital and $59.5 million of non-cash
items such as depreciation and amortization, accretion of discounts, provision
for doubtful accounts, amortization of financing costs, and non-cash stock
option compensation. The $41.6 million of cash used in operating activities in
the year ended September 30, 2000 was the result of AirGate's $81.3 million net
loss being partially offset by a net $1.2 million in cash provided by changes
in working capital and $38.5 million of depreciation, accretion of discounts,
provision for doubtful accounts, amortization of financing costs, and noncash
stock option compensation.
Net Cash Used in Investing Activities. The $71.8 million of cash used in
investing activities represents cash outlays of $71.3 million for capital
expenditures and $0.5 million to purchase certain assets of one of AirGate's
distributors during the year ended September 30, 2001. Cash payments of $15.2
million were made for equipment purchases made through accounts payable and
accrued expenses at September 30, 2000, in addition to $56.1 million of cash
capital expenditures in the year ended September 30, 2001. For the year ended
September 30, 2000, cash outlays of $152.4 million represented cash payments
for equipment purchases.
Net Cash Provided by Financing Activities. The $68.5 million in cash
provided by financing activities during the year ended September 30, 2001
consisted of $61.8 million of borrowings under AirGate's senior credit facility
and $6.7 million of proceeds received from the exercise of options to purchase
common stock by employees and common stock purchase warrants. The $6.5 million
of cash used in financing activities in the year ended September 30, 2000
consisted of the repayment of a $7.7 million unsecured promissory note
partially offset by $1.2 million received from the exercise of options to
purchase common stock by employees and common stock purchase warrants.
Liquidity. AirGate closed its offerings of equity and debt funding on
September 30, 1999 with net proceeds of $269.9 million. The senior subordinated
discount notes due 2009 will require cash payments of interest beginning on
April 1, 2005.
AirGate's $153.5 million senior credit facility 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 I. The second installment, or tranche II,
under the senior credit agreement is for a $140.0 million senior secured term
loan which matures on September 30, 2008. The credit agreement requires AirGate
to make quarterly payments of principal beginning December 31, 2002 for tranche
I and March 31, 2004 for tranche II initially in the amount of 3.75% of the
loan balance then outstanding and increasing thereafter. The commitment fee on
unused borrowings is 1.50%, payable quarterly. As of September 30, 2001, $78.2
million remained available for borrowing under AirGate's senior credit
facility. AirGate's obligations under the credit agreement are secured by all
of its assets (other than ownership interest in iPCS, Inc. and iPCS, Inc.'s
assets). AirGate expects that cash and cash equivalents together with future
advances under the senior credit facility will fund AirGate's capital
expenditures, operating losses and working capital requirements through the end
of fiscal 2002, at which time AirGate expects to generate positive earnings
before interest, taxes, depreciation and amortization (EBITDA). The senior
credit facility is subject to certain restrictive covenants including
maintaining certain financial ratios, reaching defined subscriber growth and
network covered population goals, and limiting annual capital expenditures.
Further, the senior credit facility restricts the payment of dividends on
AirGate's common stock.
S-40
On April 26, 2001, Lehman Brothers Commercial Paper, Inc., a subsidiary of
Lehman Brothers, Inc., assumed the responsibilities of Lucent Technologies Inc.
as administrative agent under the $153.5 million senior credit facility
(formerly the Lucent Financing). Lucent Technologies Inc. no longer holds a
financial position in the senior credit facility. On October 5, 2001 and
November 23, 2001, AirGate made borrowings totaling an additional $20 million
under the senior credit facility. As a result, as of November 30, 2001,
availability under the senior credit facility totaled $58.2 million.
As of September 30, 2001, AirGate's management believes that AirGate is in
compliance in all material respects with the covenants associated with the
senior credit facility, senior subordinated discount notes, and Sprint PCS
Agreements.
Inflation
AirGate's management believes that inflation has not had, and does not
expect inflation to have, a material adverse effect on AirGate's results of
operations.
S-41
iPCS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
On January 22, 1999, iPCS entered into a Sprint PCS management agreement
whereby iPCS became the exclusive Sprint PCS network partner with the right to
market 100% digital, 100% PCS wireless products and services under the Sprint
and Sprint PCS brand names in fifteen markets in Illinois and Iowa. The Sprint
PCS agreements were amended in March 2000 to add twenty additional markets. On
February 28, 2001, the Sprint PCS agreements were amended to add the Iowa City
and Cedar Rapids, Iowa markets to iPCS' territory. With these two amendments,
the size of iPCS' territory was increased from a total population of 2.8
million residents to a total population of 7.4 million residents.
Since the date of inception, iPCS has incurred substantial costs to
negotiate the Sprint PCS agreements and iPCS' debt and equity financing, to
design, engineer and build-out iPCS' network in its initial territory and to
open iPCS' retail stores. iPCS launched service in its first two markets in
December 1999, and in 2000 iPCS launched service in sixteen additional markets.
In the nine months ended September 30, 2001, iPCS launched service in eleven
markets, including two markets previously launched by Sprint PCS. By December
31, 2001, iPCS anticipates launching its remaining eight markets in Nebraska
and Iowa, at which time iPCS will provide service in each of its markets.
iPCS will incur costs of approximately $15.5 million in connection with the
merger, of which approximately $14.1 million was accrued and expensed at the
closing of the merger.
Results of Operations
For the nine months ended September 30, 2001 compared to the nine months ended
September 30, 2000:
Service Revenues. For the nine months ended September 30, 2001, service
revenue totaled approximately $71.8 million and was comprised of customer
revenue of approximately $46.5 million and roaming revenue of approximately
$25.3 million. For the same nine months ended September 30, 2000 service
revenue totaled approximately $9.9 million and was comprised of customer
revenue of approximately $6.0 million and roaming revenue of approximately $3.9
million. iPCS' ARPU, including long distance and roaming, for the nine months
ended September 30, 2001, was approximately $87. Without roaming revenue,
average monthly revenue per user was approximately $56. For the nine months
ended September 30, 2000, ARPU with and without roaming was $100 and $60,
respectively.
Equipment and Other Revenues. iPCS records revenue from the sale of its
equipment from its retail stores, net of an allowance for returns and net of
any cash incentives related to these equipment sales, as equipment revenue. The
amount recorded during the nine months ended September 30, 2001 totaled
approximately $5.7 million. The amount recorded for the same period in 2000
totaled approximately $1.7 million. The increase in revenue since September 30,
2000 is due to the increase in new customer additions from iPCS' launched
markets.
Cost of Service. Cost of providing service to Sprint PCS customers totaled
approximately $60.5 million for the nine months ended September 30, 2001,
compared to approximately $9.8 million for the same period in 2000. Cost of
service includes billing, customer care, bad debt expense, network monitoring,
cost of operations, fees related to facilities and other transport lines,
interconnection fees, Sprint PCS roaming fees, non-Sprint PCS roaming fees and
other expenses related to operations. iPCS pays Sprint PCS roaming fees when
its customers use the Sprint PCS network outside of its territory. iPCS pays
non-Sprint PCS roaming fees to other wireless service providers when its
customers use their network. Also included in the cost of service expenses for
the nine months ended September 30, 2001 is the 8% of collected service revenue
retained by Sprint PCS of
S-42
approximately $3.8 million compared to approximately $0.5 million for the nine
months ended September 30, 2000. The increase in cost of service is due to an
increased customer base and a larger in-service network.
Cost of Equipment. Cost of equipment, which includes the costs of handsets,
accessories, and handset subsidies, totaled approximately $18.3 million for the
nine months ended September 30, 2001. Cost of equipment for the nine months
ended September 30, 2000 was approximately $5.0 million. The increase in costs
is due substantially to the increase in new customer additions in iPCS'
launched markets. Because iPCS subsidizes the price of handsets for competitive
reasons, iPCS expects and has budgeted for the cost of handsets to continue to
exceed the retail sales price for the foreseeable future.
Selling. Selling expenses totaled approximately $20.8 million and
approximately $5.0 million for the nine months ended September 30, 2001 and
September 30, 2000, respectively. Included in selling expenses are advertising
and promotional costs, salaries and sales commissions and expenses related to
iPCS' distribution channels. The increase in costs as compared to the period
ended September 30, 2000 is due substantially to the launching of twelve
markets and to the addition to iPCS' territory of two markets previously
launched by Sprint PCS.
General and Administrative. General and administrative expenses were
approximately $10.2 million for the nine months ended September 30, 2001 and
approximately $16.9 million for the nine months ended September 30, 2000.
Included in general and administrative costs are administrative salaries and
bonuses, employee benefit costs, legal fees, insurance expense and other
professional service fees. Also included for the nine months ended September
30, 2001 are $2.4 million of merger related expenses and non-cash compensation
expense of approximately $1.5 million related to the amortization of the
deferred compensation expense associated with the stock options granted in July
2000. During the nine months ended September 30, 2000, iPCS recorded a one-time
charge of approximately $10.1 million for the issuance of a 1.5% ownership
interest to its President and Chief Executive Officer based on an expected
initial public offering price. Included in this charge was approximately $8.5
million of non-cash compensation expense and approximately $1.6 million of
payroll taxes paid in connection with the issuance of this 1.5% ownership
interest. In addition, iPCS recorded $2.2 million of non-cash compensation
related to the amortization of deferred compensation expense associated with
the stock options granted in July 2000. The remaining increase in general and
administrative expenses from the first nine months of 2001 compared to the same
period in 2000 is due to an increase in personnel and other corporate
infrastructure associated with the growth of iPCS.
Depreciation and Amortization. For the nine months ended September 30, 2001,
depreciation and amortization totaled approximately $15.4 million compared to
approximately $5.5 million for the nine months ended September 30, 2000. The
increase is due to assets placed in service for fourteen additional markets
since September 30, 2000.
Interest Income. For the nine months ended September 30, 2001, interest
income was approximately $3.5 million and was earned on the investment of
available funds. For the nine months ended September 30, 2000, investment
income was approximately $1.9 million. Interest income increased due to the
investment of the proceeds from the senior discount notes received in July
2000, the proceeds from the sale of Series A-1 and Series A-2 convertible
preferred stock in July and December 2000, respectively, and the proceeds from
iPCS' borrowing under the senior secured credit facility in December 2000 and
June 2001.
Interest Expense. Interest expense of approximately $17.0 million, net of
capitalized interest of approximately $6.6 million, was recorded in the nine
months ended September 30, 2001 and related primarily to interest accrued on
the senior discount notes, the amortization of the discount and warrants issued
in connection with the issuance of the senior discount notes, and interest
expense on iPCS' borrowings under the senior secured credit facility. For the
same period in 2000, iPCS recorded interest expense of approximately $6.3
million, net of capitalized interest of approximately $1.5 million, related to
the Nortel financing, which was in place prior to iPCS' current senior secured
credit facility. The increase in interest expense in 2001 is the result of
higher outstanding debt compared to September 30, 2000.
S-43
Other Income (Expense), Net. Other income is principally comprised of gain
on tower sales. For the nine months ended September 30, 2001, twelve towers
were sold to American Tower for $3.4 million, resulting in a gain of
approximately $1.6 million, of which approximately $0.5 million was recognized
at the time of the sale and the remainder was deferred and is being amortized
as a reduction in rental expense over the initial lease term of ten years for
the related towers. In addition, sixteen towers were sold to Trinity Wireless
for $4.8 million, resulting in a gain of approximately $2.1 million, of which
approximately $1.0 million was recognized at the time of the sale and remainder
was deferred and is being amortized as a reduction in rental expense over the
initial lease term of five years for the related towers. Offsetting these gains
was a loss of approximately $1.0 million for site acquisition costs for sites
that were either not feasible or not necessary for iPCS' network build-out. For
the same nine months ended September 30, 2000, thirty-seven towers were sold to
American Tower for $9.3 million resulting in a total gain of approximately $3.7
million, of which approximately $0.5 million was recognized and the remainder
is being amortized over the initial lease term of ten years.
Extraordinary Item. In connection with the refinancing of the Nortel credit
facility with the Toronto Dominion and GE Capital Corporation credit facility,
in the nine months ended September 30, 2000, iPCS recorded an extraordinary
loss on the early extinguishment of debt of approximately $1.5 million related
to the write-off of the unamortized deferred financing costs of the Nortel
credit facility.
Net Loss. iPCS' net loss for the nine months ended September 30, 2001 was
approximately $60.7 million and was the result of increased operating expenses
associated with maintaining a larger customer base and a larger network along
with significantly higher customer additions. Additionally, higher depreciation
expense for a larger in-service network coupled with increased interest expense
related to iPCS' debt was recorded during the first nine months of this year
than in the same period in the prior year. The increase in operating expenses
was partially offset with increased service, equipment and other revenues.
iPCS' net loss for the nine months ended September 30, 2000 was approximately
$36.0 million and included a one-time charge of approximately $8.5 million of
non-cash compensation expense and $1.6 million of related payroll taxes that
was the result of issuing a 1.5% ownership interest in iPCS to iPCS' President
and Chief Executive Officer. The remaining loss for the same nine months in
2000 resulted primarily from selling, general and administrative, depreciation
and amortization expenses and cost of providing service exceeding service
revenues, all of which were associated with the markets launched in 1999 and
the first nine months of 2000.
For the year ended December 31, 2000 compared to the period January 22, 1999
(date of inception) through December 31, 1999:
Service Revenues. For the year ended December 31, 2000, service revenue
totaled approximately $18.5 million and was comprised of customer revenue of
approximately $11.0 million and roaming revenue of approximately $7.5 million.
For the period ended December 31, 1999, iPCS had service revenue of
approximately $71,000, which included approximately $28,000 of customer revenue
and approximately $43,000 of travel and roaming revenue. The number of iPCS
subscribers increased from 1,981 at December 31, 1999 to 46,773 at December 31,
2000. For the full year 2000, iPCS' average monthly revenue per user, including
long distance and roaming revenue, was approximately $93. Without roaming
revenue, average monthly revenue per user was approximately $55. Because iPCS
only launched its first markets in December 1999, average revenue per user for
1999 is not meaningful.
Equipment and Other Revenue. Equipment and other revenue from the sale of
phones and accessories, net of a sales allowance, totaled approximately $2.7
million for the year ended December 31, 2000. For the period ended December 31,
1999, iPCS had equipment and other revenue of approximately $144,000. Lower
revenues in 1999 were attributable to the fact that iPCS had just launched
service in December 1999.
Cost of Service. Cost of providing service to Sprint PCS customers in iPCS'
territory totaled approximately $16.8 million and $1.7 million for the year
ended December 31, 2000 and the period ended December 31, 1999, respectively.
Cost of service includes billing, customer care, network monitoring, cost of
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operations, fees related to facilities and other transport lines,
interconnection fees, Sprint PCS roaming fees, non-Sprint PCS roaming fees and
other expenses related to operations. Included in the cost of service expenses
for the year ended December 31, 2000 is the 8% collected revenue retained by
Sprint PCS in the amount of approximately $0.9 million.
Cost of Equipment. Cost of equipment sold for the year ended December 31,
2000 totaled approximately $10.1 million. Cost of equipment expense recorded
for the period ended December 31, 1999 was $0.5 million. Because iPCS
subsidizes the price of handsets for competitive reasons, iPCS expects and has
budgeted for the cost of handsets to continue to exceed the retail sales price
for the foreseeable future. The increase in costs is substantially due to the
increase in new subscribers associated with the launching of sixteen new
markets during 2000.
Selling. Selling expenses include advertising and promotional costs,
salaries, sales commissions, and expenses related to iPCS' distribution
channels. For the year ended December 31, 2000, selling expenses totaled
approximately $10.8 million compared with approximately $0.8 million for the
period ended December 31, 1999. The increase in costs is substantially due to
the launching of sixteen new markets during 2000.
General and Administrative. General and administrative expenses were
approximately $22.1 million for the year ended December 31, 2000 and
approximately $1.5 million for the period ended December 31, 1999. Included in
general and administrative costs are administrative salaries and bonuses,
employee benefit costs, legal fees, insurance expense and other professional
service fees. Also included in the year ended December 31, 2000 is non-cash
compensation expense and taxes on non-cash compensation expense totaling
approximately $12.8 million. Of this amount, approximately $8.5 million was the
non-cash compensation expense which related to a one-time charge for the
issuance of a 1.5% ownership interest to iPCS' President and Chief Executive
Officer based on an expected initial public offering price and approximately
$1.6 million of withholding taxes iPCS has paid in connection with the issuance
of this 1.5% ownership interest. The other $2.7 million of non-cash
compensation expense is related to the amortization of the deferred
compensation expense associated with the stock options granted in July 2000.
iPCS did not grant any options during 1999. In addition, iPCS recorded
approximately $1.3 million of expenses related to a planned initial public
offering of stock that did not occur in 2000. The remaining increase in general
and administrative expenses is due to the launching of sixteen new markets
during 2000.
Depreciation and Amortization. Depreciation and amortization expense for the
year ended December 31, 2000 totaled approximately $8.6 million. iPCS recorded
$0.4 million of depreciation and amortization expense for the period ended
December 31, 1999. The increase in depreciation and amortization costs is due
to assets placed in service for the sixteen markets launched during 2000.
Interest Income. For the year ended December 31, 2000, interest income was
approximately $3.4 million and was earned on the investment of available funds.
For the period ended December 31, 1999, interest income was approximately $0.1
million. Interest income increased due to the investment of the proceeds from
the senior discount notes and the sale of the Series A-1 convertible preferred
stock in July 2000.
Interest Expense. For the year ended December 31, 2000, interest expense was
approximately $11.7 million, net of capitalized interest of approximately $3.0
million. In 1999, total interest expense of approximately $0.5 million, which
related to iPCS' Nortel credit facility, was capitalized. The increase in
interest expense in 2000, which related both to the Nortel financing and the
senior discount notes, was the result of the higher borrowings.
Other Income (Expense), Net. Other income is principally comprised of gain
on tower sales. For the year ended December 31, 2000, 55 towers were sold to
American Tower for approximately $14.0 million resulting in a gain of
approximately $5.4 million, of which approximately $0.8 million was recognized
at the time of the sales and the remainder was deferred and is being amortized
as a reduction in rental expense over the initial lease
S-45
term of ten years for the related towers. For the period ended December 31,
1999, iPCS sold 18 towers for $4.5 million resulting in a gain of approximately
$1.9 million, of which approximately $0.2 million was recognized and the
remainder was deferred.
Extraordinary Item. In connection with the refinancing of the Nortel credit
facility with the Toronto Dominion and GE Capital Corporation credit facility,
iPCS recorded an extraordinary loss on the early extinguishment of debt of
approximately $1.5 million in the year ended December 31, 2000 related to the
write-off of the unamortized deferred financing costs of the Nortel credit
facility.
Net Loss. For the year ended December 31, 2000, iPCS recorded a loss of
approximately $56.2 million on total revenues of approximately $21.2 million.
The loss was caused primarily by cost of services exceeding service revenues
and costs associated with handset subsidies, selling, general and
administrative expenses, depreciation and amortization associated with the
markets launched in 1999 and 2000. Also in 2000 iPCS recorded the following:
. an extraordinary loss of approximately $1.5 million on the early
extinguishment of debt related to the write-off of the unamortized
deferred financing costs of the Nortel credit facility;
. non-cash compensation expense of approximately $8.5 million and related
taxes of approximately $1.6 million associated with the issuance of a
1.5% ownership interest in iPCS' predecessor, Illinois PCS, LLC, to
iPCS' President and Chief Executive Officer;
. non-cash compensation expense of approximately $2.7 million, which is
related to the amortization of the deferred compensation expense
associated with the stock options granted in July 2000; and
. expenses of approximately $1.3 million related to a planned initial
public offering of stock that did not occur in 2000.
iPCS' net loss for the period ended December 31, 1999 was approximately $4.4
million and was comprised primarily of network build-out, selling, and general
and administrative expenses associated with the preparation of the launch of
its initial markets.
Income Taxes
Prior to July 12, 2000, iPCS' predecessor operated as a limited liability
company and, as a result, its losses were included in the income tax returns of
its members. Subsequent to July 12, 2000, the date of reorganization as
discussed in the notes to iPCS' financial statements, iPCS became a C
Corporation and began accounting for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." No benefit for federal income taxes has
been recorded for the periods ended September 30, 2001 and December 31, 2000 as
the net deferred tax asset generated, primarily from temporary differences
related to the net operating loss carry forwards, would have been offset by a
full valuation allowance because it is not considered more likely than not that
these benefits will be realized due to iPCS' losses since inception.
Liquidity and Capital Resources
Since inception, iPCS has financed its operations through capital
contributions from its initial investors, through debt financing and from the
proceeds of the sale of its Series A-1 and Series A-2 convertible preferred
stock.
On July 12, 2000, iPCS entered into a new senior secured credit facility
with Toronto Dominion (Texas), Inc. and GE Capital Corporation for $140.0
million to replace its original credit facility with Nortel that was repaid in
full on this same date. On February 23, 2001, iPCS entered into an amendment to
the senior secured credit facility, which included a consent to the acquisition
from Sprint PCS of the Iowa City and Cedar Rapids, Iowa markets, and which
amended certain covenant definitions and requirements. On September 28, 2001,
iPCS
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entered into an amendment for the senior secured credit facility which included
a consent to the merger with AirGate and which also amended certain covenant
definitions and requirements. As of September 30, 2001, iPCS believes that it
is in compliance with the amended covenants. iPCS had outstanding borrowings of
$50.0 million at September 30, 2001 under the senior secured credit facility.
iPCS' senior discount notes mature on July 15, 2010, carry a coupon rate of
14% and provide for interest deferral for the first five years. The senior
discount notes will accrete in value at a rate of 14% per annum until July 15,
2005, after which interest will begin to accrue and will be payable
semiannually beginning on January 15, 2006.
iPCS believes that the net proceeds of its senior discount notes, the net
proceeds from the sales of its convertible preferred stock and borrowings under
its senior secured credit facility will be adequate to fund its network
build-out, anticipated operating losses, working capital requirements and other
capital needs through 2003.
Net cash used in operating activities was approximately $16.7 million for
the nine months ended September 30, 2001 and was approximately $11.9 million
for the nine months ended September 30, 2000. Cash used in operating activities
was primarily attributable to operating losses offset by depreciation and
amortization expense, non-cash interest, non-cash compensation expense and
working capital needs.
Net cash used in investing activities was approximately $119.3 million for
the nine months ended September 30, 2001 and approximately $60.2 million for
the same period in 2000. The expenditures related primarily to the purchase of
iPCS' network infrastructure equipment and the acquisition of the markets in
Iowa from Sprint PCS in February 2001, offset partially with the proceeds from
tower sales and iPCS' build-to-suit agreement.
Net cash provided by financing activities was approximately $24.7 million
for the nine months ended September 30, 2001 and consisted primarily of
proceeds of $25.0 million drawn on iPCS' senior secured credit facility offset
somewhat by debt issuance and interest rate protection costs. Net cash provided
by financing activities during the nine months ended September 30, 2000 was
approximately $177.6 million and consisted primarily of equity contributions
and debt borrowings, and also cash provided by the proceeds from the sale of
redeemable convertible preferred stock and the issuance of iPCS' senior
discount notes offset by the repayment in full of the Nortel debt of
approximately $40.3 million.
As of September 30, 2001, iPCS' primary source of liquidity was
approximately $54.6 million in cash and cash equivalents.
The senior secured credit agreement provides for two different tranches of
borrowings totaling $140.0 million. The Tranche A Commitment provides for
borrowings up to $90.0 million and the Tranche B Commitment provides for
borrowings up to $50.0 million.
Commencing March 31, 2004, and on the last day of each calendar quarter
ending during the periods set forth below, the tranche A Commitment as of March
30, 2004 shall be automatically and permanently reduced by the percentage
amount set forth below for the quarters indicated:
. for the four quarters commencing with the fiscal quarter ending March
31, 2004, 2.50% per quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.5% per quarter.
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Commencing March 31, 2004, iPCS must begin to repay, in quarterly
installments, the principal on all borrowings outstanding as of March 30, 2004
made under the tranche B Commitment. A fixed percentage on all tranche B
borrowings will be due each quarter as follows:
. for the first four quarters commencing with the fiscal quarter ending
March 31, 2004, 2.50% of the principal balance of the loan is due per
quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.5% per quarter.
iPCS may voluntarily prepay any of the loans at any time. All prepayments
described above are applied to the outstanding loan balances pro rata between
tranche A and tranche B and pro rata across the maturities. Tranche A permits
reborrowings on a revolving basis but amounts repaid under tranche B may not be
reborrowed. Any principal that has not been paid by the maturity date, June 30,
2008, is due at that time.
From the date of the senior credit agreement through and including the date
on which EBITDA is greater than zero for two consecutive fiscal quarters, iPCS
may borrow money at the lesser of either:
. a base rate loan with an interest rate equal to 2.75% plus the higher of:
. the prime rate of the Toronto-Dominion Bank, New York Branch; or
. the federal funds effective rate plus 0.50%; or
. a Eurodollar loan with an interest rate equal to the London interbank
offered rate, plus 3.75%.
After the date on which EBITDA is greater than zero for two consecutive
fiscal quarters, the base rate margin will range from 2.75% to 2.25% and the
Eurodollar loan margin will range from 3.75% to 3.25%, depending upon iPCS'
leverage ratio as of the most recently ended fiscal quarter.
iPCS' senior secured credit facility will be used to finance capital
expenditures, certain acquisitions and investments for working capital needs
and other general corporate purposes.
Inflation
iPCS' management believes that inflation has not had, and will not have, a
material adverse effect on iPCS' results of operations.
S-48
OUR BUSINESS
Overview
We are the largest Sprint PCS network partner in terms of covered
population. We market and provide digital wireless personal communications
services, or PCS, to a service territory of approximately 14.5 million
residents with current network coverage of approximately 11.0 million
residents. Through our management agreements with Sprint PCS, we have the
exclusive right to provide Sprint PCS products and services under the Sprint
and Sprint PCS brand names in our territories. Sprint PCS, directly and
indirectly through network partners such as us, operates the largest
all-digital, all-PCS nationwide wireless network in the United States based on
covered population, covering nearly 244 million residents in more than 4,000
cities and communities across the United States, Puerto Rico and the U.S.
Virgin Islands.
On November 30, 2001, AirGate acquired iPCS by merging a wholly owned
subsidiary of AirGate with iPCS. In connection with the merger, AirGate issued
to the former stockholders of iPCS approximately 12.4 million shares of our
common stock and assumed options and warrants to purchase approximately 1.1
million shares of our common stock. The acquisition of iPCS increased the total
resident population in our markets from approximately 7.1 million to
approximately 14.5 million. We believe the acquisition of iPCS increases
AirGate's strategic importance to Sprint PCS. We also believe the acquisition
adds attractive markets as well as a nearly complete network build-out and a
fully funded business plan.
Our Sprint PCS territories cover 58 basic trading areas, referred to as
markets, in parts of South Carolina, North Carolina, Georgia, Illinois,
Michigan, Iowa and Nebraska. Our major markets include:
. Grand Rapids, Michigan;
. Greenville-Spartanburg, South Carolina;
. Savannah, Georgia;
. Charleston, South Carolina;
. Columbia, South Carolina; and
. Saginaw-Bay City, Michigan.
As of September 30, 2001, AirGate and iPCS combined had 369,952 subscribers
and total network coverage of approximately 11.0 million residents,
representing approximately 76% of the resident population in these markets. For
the twelve months ended September 30, 2001, we generated revenue of
approximately $259.2 million on a pro forma basis.
The following table presents selected information for AirGate, iPCS and the
combined company as of September 30, 2001, except where indicated:
AirGate iPCS Pro Forma
------- ------- ---------
Total resident population (in millions)... 7.1 7.4 14.5
Total covered population (in millions).... 6.0 5.1 11.1
% of covered population................. 84% 68% 76%
Total subscribers......................... 235,025 134,927 369,952
Penetration of covered population......... 3.9% 2.7% 3.4%
Average monthly revenue per user/(1)/..... $62 $58 $60
Number of operational markets............. 21 29 50
Number of operational cell sites.......... 719 451 1,170
Employees................................. 529 255 784
---------------------
(1)Excludes in-bound roaming revenue. Information presented is for the quarter
ended September 30, 2001.
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Competitive Strengths
Our competitive strengths include:
Our Attractive Markets. We believe that our Sprint PCS territories have
attractive market characteristics, including:
Our proximity to major Sprint PCS markets. Our markets are located near
or around several major Sprint PCS markets, including Atlanta, Chicago,
Detroit, St. Louis, Indianapolis, Charlotte, Raleigh and Des Moines. We
believe that connecting these Sprint PCS markets with our markets is an
important part of Sprint PCS' ongoing strategy to provide seamless,
nationwide PCS service to its subscribers. Our proximity to these Sprint PCS
markets provides us with additional opportunities for increased roaming
revenue.
High median household income. The median household income of residents in
our markets is higher than that of any other publicly-traded Sprint PCS
network partner. Our residents have a median household income of $29,400
compared to a weighted average median of $26,700 for the other
publicly-traded Sprint PCS network partners.
High population density. The population density of our markets is higher
than that of any other publicly-traded Sprint PCS network partner. Our
markets have a population density of 113 people per square mile, compared to
a weighted average median of 61 people per square mile for the other
publicly-traded Sprint PCS network partners. We believe that the high
population density of our markets allows us to more efficiently build-out
our network and market our products and services.
High interstate traffic density. The interstate traffic density of our
markets is higher than that of any other publicly-traded Sprint PCS network
partner. Our markets have interstate traffic density of 20,400 daily vehicle
miles traveled per interstate highway mile, compared to a weighted average
median of 15,400 for the other publicly-traded Sprint PCS network partners.
We believe that the higher interstate traffic density of our markets
provides increased opportunities for us to receive roaming revenue when
customers based outside of our territories roam on our portion of the Sprint
PCS network.
Sprint as the local exchange carrier. Sprint is the local exchange
carrier in 30% of our southeast territory. This enables us to take advantage
of Sprint's strong brand name and marketing of our services in these markets.
Fewer competitors in our midwest territory. We believe that we currently
face a smaller number of competitors in our midwest markets than the typical
Sprint PCS market.
Concentration of corporate headquarters. We have a high concentration of
headquarters for large corporations in our midwest territory. Several
Fortune 500 companies such as State Farm Insurance, Archer Daniels Midland,
Dow Chemical, John Deere, Rockwell Collins, and Caterpillar, as well as
other large corporations, have their headquarters in our midwest territory.
Numerous vacation destinations in our southeast territory. There are many
vacation destinations in our southeast territory, including Charleston,
Savannah, Hilton Head and Myrtle Beach in South Carolina and the Outer Banks
area in North Carolina. These vacation destinations provide us with
additional opportunities to receive roaming revenue from customers based
outside of our territory.
Large student population. Our markets have a large student population,
with over 90 colleges and universities in our midwest territory and over 25
more colleges and universities in our southeast territory. We believe that
college students are more likely to use wireless communications services and
at a greater frequency than other segments of the population.
Our Strategic Relationship with Sprint PCS. We believe that our strategic
relationship with Sprint PCS provides us with a significant competitive
advantage.
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Strong brand name recognition. We feature exclusively and prominently the
Sprint and Sprint PCS brand names in our marketing effort. We benefit from
our affiliation with the nationally recognized Sprint and Sprint PCS brand
names and from Sprint PCS' national advertising.
All-digital nationwide coverage. We offer access to Sprint PCS'
all-digital, all-PCS nationwide wireless network, including access to the
Sprint PCS Wireless Web. We derive additional revenue from Sprint PCS when
its customers based outside of our territories roam on our portion of the
Sprint PCS network.
Quality products and services. We offer high quality PCS products and
services that are designed and offered by Sprint PCS and that provide
seamless integration with the Sprint PCS nationwide network.
Advanced Technology. We believe that the code division multiple access,
or CDMA, digital technology around which Sprint PCS built its network,
provides advantages in capacity and voice quality, as well as access to
advanced features such as wireless Internet access.
Established distribution channels. We benefit from relationships with
major national retailers who distribute Sprint PCS products and services
under existing Sprint PCS contracts. These national retailers have
approximately 530 retail stores in our territories. We also benefit from
sales made by Sprint PCS to customers in our territories through Sprint PCS'
national telemarketing sales force, national account sales team and Internet
sales capability.
Long-standing equipment vendor relationships. We purchase our network
equipment and handsets pursuant to various Sprint PCS vendor agreements. Our
affiliation with Sprint PCS enables us to acquire network equipment and
handsets more quickly and at a lower cost than we would be able to obtain on
our own.
Established back office support services. We have contracted with Sprint
PCS to provide critical back office services, including customer activation,
handset logistics, billing, customer care and network monitoring services.
Because we do not have to establish and operate these systems, we are able
to capitalize upon Sprint PCS' economies of scale.
Our Nearly Complete Network Build-Out. We have completed the network
build-out of our southeast markets and nearly completed the network build-out
of our midwest markets. As a result, we will be able to focus our management's
efforts and our cash resources on technology upgrades, increasing our market
penetration and improving operating efficiencies.
Our Fully Funded Business Plan. We believe our current business plan is
fully funded. Based on our current plan, we expect to generate positive EBITDA
in the third calendar quarter of 2002.
Business Strategies
Our business strategies include the following key elements:
Continuing to Improve Market Penetration in our Territories. We intend to
leverage the best operating practices of both AirGate and iPCS to more
effectively penetrate our markets. We believe that there will be significant
opportunities to increase sales by implementing throughout our territories the
operating strategies that AirGate and iPCS found to be effective in their
separate territories prior to the merger.
Capitalizing on our Affiliation with Sprint PCS. In all of our markets, we
plan to capitalize on our Sprint PCS affiliation by using the strength of the
Sprint and Sprint PCS brands to market our PCS services with strategies
tailored to our specific territories.
S-51
Pursuing Efficient Migration Path to 1XRTT. We plan to efficiently migrate
our network's technology to 1XRTT, which will provide increased network
capacity, faster data download speeds and longer battery life for handsets. We
will pursue an upgrade path that is consistent with the availability of
handsets compatible with 1XRTT. We believe that 1XRTT will provide operating
benefits to us and is more cost efficient than the technology choices of other
digital wireless technologies.
Capitalizing on our Experienced Management Team. We believe that the depth,
experience and ability of our management team has led to the successful
execution of our build-out and current business strategy. Our executive
officers and key managers, led by Thomas M. Dougherty, President and Chief
Executive Officer, have substantial experience in the telecommunications
industry. We intend to use the depth, experience and ability of our management
team to successfully execute our business strategies.
Selectively Pursuing Strategic Acquisitions. As part of our continuing
operating strategy, we may selectively pursue strategic acquisitions of network
partners that have attractive market characteristics, a fully funded business
plan and a completed or substantially completed network build-out. We also may
attempt to obtain additional markets from Sprint PCS. We are among 12 network
partners, which we believe are unrelated to each other and to Sprint PCS, that
have entered into management agreements with Sprint PCS to provide Sprint PCS
products and services throughout the United States. We believe that there will
be further consolidation opportunities among these network partners.
Our Relationship with Sprint PCS
Sprint PCS is a wholly owned subsidiary of Sprint Corporation, a diversified
telecommunications service provider. Sprint PCS operates a 100% digital PCS
wireless network in the United States and holds the licenses to provide PCS
nationwide using a single frequency band and a single technology. Sprint PCS
directly operates its PCS network in major metropolitan markets throughout the
United States. Sprint PCS has also entered into independent agreements with
various network partners, such as us, under which the network partners have
agreed to construct and manage PCS networks in smaller metropolitan areas and
along major highways.
Markets
Our Sprint PCS territories include 58 markets containing a total population
of over 14.5 million residents. Our management agreements with Sprint PCS
require us to provide PCS coverage to certain percentages of the residents in
each of the markets granted to us by those agreements. Both AirGate and iPCS
are currently in compliance with their network build-out requirements. Our
Sprint PCS network currently covers approximately 11.0 million, or 76%, of the
14.5 million residents in our Sprint PCS territories. iPCS expects to launch
its remaining markets by December 31, 2001, which is ahead of the schedule
established by Sprint PCS. Upon completion of iPCS' build-out, we expect that
our Sprint PCS network will cover approximately 12.0 million, or 82%, of the
14.5 million residents in our Sprint PCS territories.
AirGate's Sprint PCS territory includes 21 markets containing a total
population of over 7.1 million residents in:
. almost the entire state of South Carolina, including Charleston,
Columbia and Greenville-Spartanburg;
. portions of North Carolina, including Asheville, Wilmington and Hickory;
and
. the eastern Georgia cities of Augusta and Savannah.
AirGate currently offers services in all of its markets.
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The following table sets forth the location, estimated population and date
on which AirGate began providing commercial Sprint PCS service in each of the
markets that comprise its Sprint PCS territory:
Market Launch
AirGate Basic Trading Areas /(1)/ Population/(2)/ Date
--------------------------------- -------------- -------------
Greenville-Spartanburg, SC..... 897,700 January 2000
Savannah, GA................... 737,100 May 2000
Charleston, SC................. 686,800 April 2000
Columbia, SC................... 657,000 June 2000
Asheville-Hendersonville, NC... 588,700 January 2000
Augusta, GA.................... 579,400 June 2000
Anderson, SC................... 346,600 January 2000
Hickory-Lenoir-Morganton, NC... 331,100 January 2000
Wilmington, NC................. 327,600 February 2000
Florence, SC................... 260,200 June 2000
Greenville-Washington, NC...... 245,100 July 2000
Goldsboro-Kinston, NC.......... 232,000 March 2000
Rocky Mount-Wilson, NC......... 217,200 March 2000
Myrtle Beach, SC............... 186,400 February 2000
New Bern, NC................... 174,700 June 2000
Sumter, SC..................... 156,700 July 2000
Jacksonville, NC............... 148,400 May 2000
Orangeburg, SC................. 119,600 June 2000
The Outer Banks, NC/(3)/....... 92,000 July 2000
Roanoke Rapids, NC............. 76,800 May 2000
Greenwood, SC.................. 74,400 August 2000
---------
Total....................... 7,135,500
=========
---------------------
(1)Each of AirGate's markets contains 10 MHz of spectrum.
(2)Based on 2000 estimates compiled by Kagan's Wireless Telecom Atlas &
Databook, 2001 Edition, as reported per individual basic trading area.
(3)Territory covered by AirGate's Sprint PCS management agreements do not
comprise a complete basic trading area.
iPCS' territory includes 37 markets containing a total population of over
7.4 million residents in portions of:
. Illinois, including Peoria, Springfield, Champaign-Urbana,
Decatur-Effingham, Bloomington and the Quad Cities (Rock Island and
Moline, Illinois; and Davenport and Bettendorf, Iowa);
. Michigan, including Grand Rapids, Saginaw-Bay City, Muskegon and
Traverse City;
. Iowa, including Cedar Rapids, Iowa City, Waterloo-Cedar Falls and
Dubuque; and
. eastern Nebraska.
iPCS currently offers service in 29 of its markets.
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The following table sets forth the location, MHz of spectrum, estimated
population and date of actual or expected launch of commercial Sprint PCS
service in each of the markets that comprise iPCS' Sprint PCS territory:
Market Launch
iPCS Basic Trading Areas MHz Population/(1)/ Date/(2)/
------------------------ --- -------------- --------------
Grand Rapids, MI................ 30 1,060,600 November 2000
Saginaw-Bay City, MI............ 30 634,100 November 2000
Peoria, IL...................... 10 464,600 March 2000
Davenport, IA and Moline, IL.... 30 430,500 December 1999
Cedar Rapids, IA/(3)/........... 30 285,700 March 2001
Springfield, IL................. 10 267,200 February 2000
Waterloo-Cedar Falls, IA........ 30 259,600 March 2001
Omaha (Partial), NE/(4)/........ 30 248,800 December 2001
Decatur-Effingham, IL........... 10 247,600 June 2000
Traverse City, MI............... 30 241,000 May 2001
Bloomington, IL................. 10 234,100 December 1999
Muskegon, MI.................... 30 223,100 November 2000
Champaign-Urbana, IL............ 10 221,100 June 2000
Dubuque, IA..................... 30 177,800 March 2001
Des Moines, IA (Partial)/(4)/... 30 170,900 December 2001
LaSalle-Peru-Ottawa-Streator, IL 20 152,300 June 2000
Grand Island-Kearney, NE........ 30 147,100 December 2001
Clinton, IA and Sterling, IL.... 30 146,600 September 2000
Burlington, IA.................. 30 136,400 June 2001
Kankakee, IL.................... 20 135,600 June 2000
Mount Pleasant, MI.............. 30 130,700 June 2001
Fort Dodge, IA.................. 30 126,400 December 2001
Iowa City, IA/(3)/.............. 30 125,400 March 2001
Ottumwa, IA..................... 30 123,400 June 2001
Mount Vernon-Centralia, IL...... 30 121,900 September 2000
Mason City, IA.................. 30 115,500 December 2001
Danville, IL.................... 20 110,700 September 2000
Norfolk, NE..................... 30 110,600 December 2001
Lincoln, NE (Partial)/(4)/...... 30 98,300 December 2001
Galesburg, IL................... 10 73,500 June 2000
Hastings, NE.................... 30 71,700 December 2001
Jacksonville, IL................ 10 70,500 September 2000
Mattoon, IL..................... 10 62,600 September 2000
Lansing, MI (Partial)/(4)/...... 30 61,900 March 2001
Marshalltown, IA................ 30 56,600 September 2001
Battle Creek, MI (Partial)/(4)/. 30 54,600 March 2001
St. Louis, MO (Partial)/(4)/.... 30 46,700 February 2000
---------
Total........................ 7,445,700
=========
---------------------
(1)Based on 2000 estimates compiled by Kagan's Wireless Telecom Atlas &
Databook, 2001 Edition, as reported per individual basic trading area.
(2)Expected commercial launch dates for these markets may change based on a
number of factors, including shifts in populations, target markets or
network focus, changes or advances in technology, acquisition of other
markets and delays in network build-out.
(3)These markets represent the Iowa option territory acquired by iPCS on
February 28, 2001, which markets were previously launched by Sprint PCS in
February 1997.
(4)Territory covered by iPCS' Sprint PCS management agreements do not comprise
a complete basic trading area.
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Products and Services
We offer PCS products and services throughout our Sprint PCS territories.
These products and services are designed and offered by Sprint PCS and provide
seamless integration with the Sprint PCS nationwide network.
100% Digital Wireless Network with Service Across the Country. Our primary
service is wireless mobility coverage. As a Sprint PCS network partner, our
existing PCS network is part of the largest 100% digital wireless PCS network
in the United States. Sprint PCS customers in our territories may use Sprint
PCS services throughout our contiguous markets and seamlessly throughout the
Sprint PCS network.
Access to the Sprint PCS Wireless Web. We support and market the Sprint
Wireless Web throughout our territories. The Sprint Wireless Web allows
subscribers with data-capable handsets to connect their portable computers or
personal digital assistants to the Internet. Sprint PCS subscribers with
web-browser enabled handsets also have the ability to receive periodic
information updates such as stock prices, airline schedules, sports scores and
weather reports directly on their handsets by connecting to and browsing
specially designed text-based Internet sites such as Yahoo!, Amazon.com,
Bloomberg.com, CNN.com, MapQuest.com, Fox Sports, Ameritrade, InfoSpace.com,
ABC News.com, AOL.com, ESPN.com, E*Trade, USA Today.com and Weather.com. Sprint
PCS offers various pricing options including a fixed number of updates or a
bundle of data minutes as add-ons to existing Sprint PCS Free and Clear pricing
plans or a bundle of minutes for a set price that can be used for either data
or voice.
CDMA and Dual-Band/Dual-Mode Handsets. We offer CDMA handsets weighing
approximately five to seven ounces and offering up to three to five days of
standby time and approximately two to four hours of talk time. We also offer
dual-band/dual-mode handsets that allow customers to make and receive calls on
both PCS and cellular frequency bands and both digital or analog technology.
All handsets are equipped with preprogrammed features, and are sold under the
Sprint and Sprint PCS brand names.
Sprint PCS and Non-Sprint PCS Roaming. We provide roaming services to Sprint
PCS subscribers that use a portion of our Sprint PCS network, and to non-Sprint
subscribers when they use a portion of our Sprint PCS network pursuant to
roaming agreements between Sprint PCS and other wireless service providers.
Sprint PCS and other wireless service providers supply similar services to our
subscribers when our subscribers use a portion of their networks.
Marketing Strategy
Our marketing and sales strategy uses the advertising and marketing programs
that have been developed by Sprint PCS. We enhance Sprint PCS' marketing with
strategies we have tailored to our specific markets.
Use Sprint PCS' brand equity and marketing. We feature exclusively and
prominently the nationally recognized Sprint and Sprint PCS brand names in our
marketing effort. From our customers' point of view, they use our network and
the Sprint PCS national network seamlessly as a unified nationwide network.
Pricing. Our use of the Sprint PCS national pricing strategy offers our
customers simple, easy-to-understand service plans. Sprint PCS' pricing plans
are typically structured with monthly recurring charges, large local calling
areas, bundles of minutes and service features such as voicemail, caller ID,
call waiting, call forwarding and three-way calling. We also feature Sprint PCS
Free and Clear plans, which offer simple, affordable plans for every consumer
and business customer, include long distance calling from anywhere on its
nationwide network. In addition, under the Sprint PCS service plans, customers
who do not meet certain credit criteria can qualify for our digital wireless
services under the Clear Pay Program. The Clear Pay Program replaced the NDASL
program and is substantially similar but with an increased emphasis on payment
of outstanding amounts. Under the Clear Pay Program, customers who do not meet
certain credit criteria can select any plan offered, subject to an account
spending limit.
S-55
Local focus. Our local focus enables us to supplement Sprint PCS' marketing
strategies with our own strategies tailored to each of our specific markets.
These include attracting local businesses as agents to enhance our sales and
distribution channels and drawing on our management team's experience in the
southeastern and midwestern United States. We use local radio, television and
newspaper advertising to sell our products and services in each of our markets.
We have established a local sales force to execute our marketing strategy
through our Sprint PCS stores. We also employ a direct sales force dedicated to
business sales.
Advertising and promotions. Sprint PCS uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote
its products. We benefit from this national advertising in our territories at
no additional cost to us. Sprint PCS also runs numerous promotional campaigns
which provide customers with benefits such as additional features at the same
rate, free minutes of use for limited time periods or special prices on
handsets and other accessories. We are able to purchase promotional materials
related to these programs from Sprint PCS at their cost.
Sponsorships. Sprint PCS sponsors numerous national, regional and local
events. These sponsorships provide Sprint PCS with brand name and product
recognition in high profile events, create a forum for sales and promotional
events and enhance our promotional efforts in our territories. Additionally, we
sponsor other local events in our territories to increase customer awareness of
the Sprint PCS network.
Sales and Distribution
Our sales and distribution plan mirrors Sprint PCS' proven multiple channel
sales and distribution plan. Key elements of our sales and distribution plan
consist of the following:
Sprint PCS stores. We currently operate 36 Sprint PCS stores within our
southeast territory and 16 Sprint PCS stores within our midwest territory. We
plan to open two additional stores in our midwest territory as we launch
service in our remaining markets in 2001. These stores are located in
metropolitan markets within our territories, providing us with a strong local
presence and a high degree of visibility. We train our sales representatives to
be informed and persuasive advocates for Sprint PCS' services. Following the
Sprint PCS model, these stores have been designed to facilitate retail sales,
bill collection and customer service.
Sprint store within a RadioShack store. Sprint has an arrangement with
RadioShack to install a "store within a store." Currently, RadioShack has 98
stores in our southeast territory and 95 stores in our midwest territory that
are available to offer Sprint PCS products and services to our customers.
Other national third-party retail stores. In addition to RadioShack, we
benefit from the sales and distribution agreements established by Sprint PCS
with other national retailers, which currently include Best Buy, Circuit City,
Staples, Target, Office Max, Office Depot and Ritz Camera. These retailers and
others have approximately 187 retail stores in our southeast territory and 150
retail stores in our midwest territory.
Local third-party retail stores. We benefit from the sales and distribution
agreements that we enter into with local retailers in our territories. We have
entered into sales and distribution agreements related to more than 50 local
stores in our southeast territory and more than 130 local stores in our midwest
territory.
National accounts and direct selling. We participate in Sprint PCS' national
accounts program. Sprint PCS has a national accounts team which focuses on the
corporate headquarters of large companies. Several Fortune 500 companies such
as State Farm Insurance, Archer Daniels Midland, Dow Chemical, John Deere,
Rockwell Collins, and Caterpillar, as well as other large companies, have their
headquarters in our territories. Our direct sales force will target the
employees of these companies in our territories and cultivate other local
business customers. In addition, once a Sprint PCS national account manager
reaches an agreement with any company headquartered outside of our territories,
we service the offices and subscribers of that company located in our
territories.
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Inbound telemarketing. Sprint PCS provides inbound telemarketing sales to
answer our prospective customers' calls. As the exclusive provider of Sprint
PCS products and services in our territories, we use the national Sprint
1-800-480-4PCS number campaigns that generate call-in leads. Sprint PCS'
inbound telemarketing group handles these leads and the new subscriber will be
assigned to our territory.
Electronic commerce. Sprint PCS maintains an Internet site at
www.sprintpcs.com, which contains information on Sprint PCS products and
services. A visitor to the Sprint PCS Internet site can order, pay for a
handset, and activate their phone. Subscribers visiting the site can also
review the status of their account, including the number of minutes used in the
current billing cycle. Site visitors in our territories who purchase products
and services over the Sprint PCS Internet site will be assigned to our
territory.
Suppliers and Equipment Vendors
We do not manufacture any of the handsets or network equipment we use in our
operations. We purchase our network equipment and handsets pursuant to various
Sprint PCS vendor arrangements that provide us with volume discounts. These
discounts have significantly reduced the overall capital required to build our
network and the costs of handsets to us.
Under such arrangements, we currently purchase from Lucent Technologies,
Inc. and Nortel Networks our network equipment and infrastructure, including
switches and base station controllers. In addition, we currently purchase our
handsets directly from Sprint PCS and our accessories from certain other third
party vendors.
Network Operations
The effective operation of our portion of the Sprint PCS network requires:
. public switched and long distance interconnection;
. the implementation of roaming arrangements; and
. the development of network monitoring systems.
We utilize Sprint PCS' Network Operations Control Center for
around-the-clock monitoring as well as our own switching centers' capabilities
for our network base stations and switches.
Sprint PCS, AirGate and iPCS developed the initial plan for the build-out of
our Sprint PCS network. We have further enhanced this plan to provide better
coverage for our Sprint PCS territories. Pursuant to our network operations
strategy, we have provided PCS to the largest communities in our markets and
have covered interstates and primary roads connecting these communities to each
other and to the adjacent major markets owned and operated by Sprint PCS.
Our southeast network consisted of four switches at two switch centers and
719 operating cell sites as of September 30, 2001. Our midwest network
consisted of two switches and approximately 451 operating cell sites as of
September 30, 2001. With the launch of our remaining midwest markets by
December 31, 2001, we anticipate that our midwest network will include
approximately 600 operating cell sites. Ninety-nine percent of our southeast
operating cell sites and approximately eighty-five percent of our midwest
operating cell sites are co-located. Co-location describes the strategy of
leasing available space on a tower or cell site owned by another company rather
than building and owning the tower or cell site directly.
Our network connects to the public telephone network through local exchange
carriers, which facilitate the origination and termination of traffic between
our network and both local exchange and long distance carriers. Through our
Sprint PCS management agreements, we have the benefit of Sprint PCS-negotiated
interconnection agreements with local exchange carriers.
S-57
We use Sprint and other third party providers for long distance services and
for back haul services. Under our management agreements with Sprint PCS, we are
required to use Sprint for long distance services and Sprint PCS provides us
with preferred rates for long distance services. Backhaul services are the
telecommunications services which other carriers provide to carry our voice
traffic from our cell sites to our switching facilities. When we use Sprint for
back haul services, we receive the same preferred rates made available to
Sprint PCS.
Technology
In 1993, the FCC allocated the 1900 MHz frequency block of the radio
spectrum for wireless PCS. Wireless PCS operates at a higher frequency and
employs more advanced digital technology than traditional analog cellular
telephone service. The enhanced capacity of digital systems, along with
enhancements in digital protocols, allows digital-based wireless technologies,
whether using wireless PCS or cellular frequencies, to offer new and enhanced
services, including greater call privacy and more robust data transmission,
such as facsimile, electronic mail and connecting notebook computers with
computer/data networks.
Presently, wireless PCS systems operate under one of three principal air
interface protocols: CDMA, time division multiple access (TDMA) or global
system for mobile communications (GSM). Wireless PCS operators in the United
States now have dual-mode or tri-mode handsets available so that their
customers can operate on different networks that employ different protocols.
CDMA Technology
Sprint PCS' network and its affiliates' networks all use CDMA technology.
CDMA technology is fundamental to accomplishing our business objective of
providing high volume, high quality airtime at a low cost. We believe that CDMA
provides important system performance benefits. CDMA systems offer more
powerful error correction, less susceptibility to fading and reduced
interference than analog systems. Using enhanced voice coding techniques, CDMA
systems achieve voice quality that is comparable to that of the typical
wireline telephone. This CDMA vocoder technology also employs adaptive
equalization which filters out annoying background noise more effectively than
existing wireline, analog cellular or other digital PCS phones. CDMA technology
also allows a greater number of calls within one allocated frequency and reuses
the entire frequency spectrum in each cell. In addition, CDMA technology
combines a constantly changing coding scheme with a low power signal to enhance
security and privacy. Vendors are currently developing additional encryption
capabilities which will further enhance overall network security. CDMA
technology is designed to provide flexible or "soft" capacity that permits a
system operator to temporarily increase the number of telephone calls that can
be handled within a cell. As a subscriber travels from one cell site to another
cell site, the call must be "handed off" to the second cell site. CDMA systems
transfer calls throughout the network using a technique referred to as a soft
hand-off, which connects a mobile customer's call with a new cell site while
maintaining a connection with the cell site currently in use.
CDMA offers a cost effective migration to the next generation of wireless
services. CDMA standards and products currently in place will allow existing
CDMA networks to be upgraded in a cost efficient manner to the next generation
of wireless technology. We anticipate that this next generation of technology
will offer data speeds of up to 144 kilobits per second, voice capacity
improvements of over 50% and improved battery life in the handset. It is
expected that these services will be deployed in CDMA networks no later than
mid-2002. Further standards are being developed for CDMA that will offer data
speeds in excess of 2,000 kilo bits per second and additional improvements in
voice capacity.
Research and Development
We currently do not conduct our own research and development. Instead we
benefit from Sprint PCS' and our vendors' extensive research and development
effort, which provides us with access to new technological
S-58
products and enhanced service features without significant research and
development expenditures of our own. We have been provided prompt access to any
developments produced by Sprint PCS for use in our network. We believe that new
features and services will be developed on the Sprint PCS network to take
advantage of CDMA technology. We may incur additional expenses in modifying our
network to provide these additional features and services.
Intellectual Property
Other than AirGate's and iPCS' corporate names, we do not own any
intellectual property that is material to our business. "Sprint," the Sprint
diamond design logo, "Sprint PCS," "Sprint Personal Communication Services,"
"The Clear Alternative to Cellular" and "Experience the Clear Alternative to
Cellular Today" are service marks registered with the United States Patent and
Trademark Office and owned by Sprint, Sprint PCS or their affiliates. Pursuant
to our Sprint PCS management agreements, we have the right to use,
royalty-free, the Sprint and Sprint PCS brand names and the Sprint diamond
design logo and certain other service marks of Sprint in connection with
marketing, offering and providing licensed services to end-users and resellers,
solely within our Sprint PCS territories.
Except in certain instances, Sprint PCS has agreed not to grant to any other
person a right or license to provide or resell, or act as agent for any person
offering, licensed services under the licensed marks in our Sprint PCS
territories except as to Sprint PCS' marketing to national accounts and the
limited right of resellers of Sprint PCS to inform their customers of handset
operation on the Sprint PCS network. In all other instances, Sprint PCS has
reserved for itself and its network partners the right to use the licensed
marks in providing its services, subject to its exclusivity obligations
described above, whether within or without our Sprint PCS territories.
Our Sprint PCS management agreements contain numerous restrictions with
respect to the use and modification of any of the licensed marks.
Competition
Competition in the wireless communications industry is intense. We operate
in highly competitive markets. In our Sprint PCS territories, we compete with
national and regional cellular, PCS and other wireless providers. We believe
that our primary competition is with Verizon Wireless, Cingular, Alltel and
AT&T Wireless and its affiliates Triton PCS and Telecorp. These wireless
service providers offer services that are generally comparable to our PCS
service. Many of our competitors have financial resources and customer bases
greater than ours.
Our ability to compete effectively with these other providers will depend on
a number of factors, including:
. the continued success of CDMA technology in providing better call
clarity and quality as compared to analog and cellular systems;
. our ability to upgrade our network to accommodate new technologies,
including the upgrade to 1XRTT;
. Sprint PCS' competitive pricing with various options suiting individual
customer's calling needs;
. the continued expansion and improvement of the Sprint PCS nationwide
network;
. our extensive direct and indirect sales channels;
. our centralized Sprint PCS customer care systems; and
. our selection of handset options.
Many of our competitors have access to more licensed spectrum than the 10
MHz licensed to Sprint PCS in our southeast territory or the 10 or 20 MHz
licensed to Sprint PCS in certain markets in our midwest territory in Illinois.
Cellular service providers have licenses covering at least 25 MHz of spectrum,
and two competing PCS providers have licenses to use at least 30 MHz in
AirGate's territory. In addition, certain of our competitors may
S-59
be able to offer coverage in areas not served by our Sprint PCS network, or,
because of their calling volumes or their affiliations with, or ownership of,
wireless providers, may be able to offer roaming rates that are lower than
those we offer. PCS providers compete with us in providing some or all of the
services available through the Sprint PCS network and may provide services that
we do not. Additionally, we expect that existing cellular providers, some of
whom have been operational for a number of years and have significantly greater
financial and technical resources and customer bases than us, will continue to
upgrade their systems to provide digital wireless communication services
competitive with Sprint PCS.
We also compete with paging, dispatch and other mobile telecommunications
companies in our markets. Potential users of PCS systems may find their
communication needs satisfied by other current and developing technologies. One
or two-way paging or beeper services that feature voice messaging and data
display as well as tone-only service may be adequate for potential customers
who do not need immediate two-way voice communications.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While some of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
Sprint PCS. Based upon increased competition, we anticipate that market prices
for two-way wireless voice and data services generally will decline in the
future. Our ability to attract and retain customers will depend primarily on:
. the strength of the Sprint and Sprint PCS brand name, services and
features;
. our ability to upgrade our network to accommodate new technologies,
including the upgrade to 1XRTT;
. pricing;
. the location of our Sprint PCS markets;
. the size of our Sprint PCS territories;
. national network coverage and reliability; and
. customer care.
Our ability to compete successfully also will depend, in part, on the
ability of Sprint, Sprint PCS and us to anticipate and respond to various
competitive factors affecting the industry, including:
. new services that may be introduced;
. changes in consumer preferences;
. demographic trends;
. economic conditions; and
. discount pricing strategies by competitors.
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 higher customer additions and handset sales in the fourth
calendar quarter when 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
S-60
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 our
available financial resources during this period.
Employees and Labor Relations
As of September 30, 2001, we had 784 full-time employees; 529 with AirGate
and 255 with iPCS. None of our employees are represented by a labor union. We
believe that we have good relations with our employees.
Properties
As of September 30, 2001, our properties were as follows:
Corporate offices. Our principal executive offices consist of a 19,000
square foot leased office space located in Atlanta, Georgia. We also lease a
40,000 square foot office space located in Greenville, South Carolina, a 24,000
square foot office space located in Columbia, South Carolina and a 6,200 square
foot office space located in Schaumburg, Illinois.
Sprint PCS stores. We lease space for 36 and 16 Sprint PCS retail stores in
our southeast and midwest territories, respectively.
Switching Centers. We have five leased switching centers in various
locations in our territories.
Cell Sites. We lease space on approximately 1,100 cell site towers and own
approximately 70 tower sites. We co-locate on approximately 99% of our cell
sites in our southeast markets and approximately 85% of our cell sites in our
midwest markets. We believe that our facilities are in good operating condition
and are currently suitable and adequate for our business operations.
Legal Proceedings
We are not aware of any pending legal proceedings against us which,
individually or in the aggregate, are likely, in the opinion of our management,
to have a material adverse effect on our financial condition or results of
operations.
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MANAGEMENT
Executive Officers and Key Employees
The following table presents information with respect to our executive
officers and key employees:
Name Age Position(s)
---- --- -----------
Thomas M. Dougherty. 57 President and Chief Executive Officer and Director
J. Mark Allen....... 41 Vice President of Marketing
Barbara L. Blackford 43 Vice President, General Counsel and Secretary
Alan B. Catherall... 48 Chief Financial Officer
Charles S. Goldfarb. 36 Vice President of Sales, Coastal Region
Jonathan M. Pfohl... 35 Vice President, Sales Operations
Michael D. Picchi... 34 Vice President, Controller
Dennis K. Rabon..... 32 Vice President of Sales, Interior Region
David C. Roberts.... 39 Vice President of Engineering and Network Operations
Thomas M. Dougherty has been our president and chief executive officer since
April 1999. From March 1997 to April 1999, Mr. Dougherty was a senior executive
of Sprint PCS. From June 1996 to March 1997, Mr. Dougherty served as executive
vice president and chief operating officer of Chase Telecommunications, a
personal communications services company. Mr. Dougherty served as president and
chief operating officer of Cook Inlet BellSouth PCS, L.P., a start-up wireless
communications company, from November 1995 to June 1996. Prior to October 1995,
Mr. Dougherty was vice president and chief operating officer of BellSouth
Mobility DCS Corporation, a PCS company.
J. Mark Allen has been our vice president of marketing since June 2000. From
January 2000 to June 2000, Mr. Allen served as vice president of marketing with
RetailExchange.com in Boston. From July 1999 to January 2000, Mr. Allen served
as a management consultant to several internet start-up companies. During the
previous five years, Mr. Allen was vice president of marketing for Conxus
Communications a wireless email and voice mail start-up supported by Motorola,
Inc. and was responsible for a number of marketing leadership roles in the
launch of the first PCS service in the nation under the Sprint Spectrum brand
with Sprint PCS (American Personal Communications). Prior to that, Mr. Allen
held several management positions at SkyTel in marketing, international
operations and customer management. Mr. Allen has over 15 years of marketing
and operations management experience.
Barbara L. Blackford has been our vice president, general counsel and
secretary since September 2000. From October 1997 to September 2000, Ms.
Blackford was associate general counsel and secretary with Monsanto Company,
serving in a variety of roles, including head of the corporate and mergers and
acquisitions law groups and general counsel of Cereon Genomics. Prior to
joining Monsanto Company, Ms. Blackford was a partner with the private law firm
Long, Aldridge & Norman in Atlanta, Georgia. Ms. Blackford spent twelve years
with the law firm Kutak Rock, which is consistently ranked among the top ten
public finance firms nationally.
Alan B. Catherall has been our chief financial officer since March 1998.
From April 1996 to present, Mr. Catherall has served as a partner in Tatum CFO
Partners, a financial consulting firm. From August 1994 to April 1996, Mr.
Catherall was chief financial officer of Syncordia Services, a joint venture of
MCI and British Telecom that provides telecom outsourcing services.
Charles S. Goldfarb has been our vice president of sales, coastal region,
since January 2000. From September 1991 to January 2000, Mr. Goldfarb worked at
Paging Network Inc., most recently as its area vice president and general
manager for the Virginia, North Carolina and South Carolina region. Mr.
Goldfarb has over 10 years of wireless experience and has been successful in
numerous start-up markets. Prior to his wireless experience, Mr. Goldfarb
worked at ITT Financial Services as its assistant vice president of operations
in the Washington, DC area.
S-62
Jonathan M. Pfohl has been our vice president, sales operations, since
January 2001. Mr. Pfohl joined AirGate in June 1999 as the company's vice
president, financial operations. Prior to joining AirGate, Mr. Pfohl was
responsible for oversight of regional financial and planning activities at
Sprint PCS. He has over 10 years of wireless telecommunications industry
experience, including financial and strategic planning roles at Frontier
Corporation.
Michael D. Picchi has been our vice president, controller since November
1999. From May 1997 until November 1999, Mr. Picchi served as controller for
OutSource Partners, Inc., a privately held building services company. Prior to
joining OutSource Partners, Mr. Picchi held various corporate finance and
accounting positions with Fruehauf Trailer Corporation, Conseco, Arvin
Industries and Coopers & Lybrand, LLP.
Dennis K. Rabon has been our vice president of sales, interior region, since
September 2000. Mr. Rabon joined AirGate in October 1999 as market manager for
the Columbia, South Carolina market. From July 1999 to September 1999, Mr.
Rabon was a general sales manager for PageNet in Atlanta, Georgia. From
December 1996 to July 1999, Mr. Rabon worked for Bandag Inc. initially as a
sales development manager and most recently as a fleet sales manager. From
August 1995 to December 1996, Mr. Rabon was a territory manager at Michelin
Tire Corporation in Greenville, South Carolina. Mr. Rabon has ten years of
management experience.
David C. Roberts has been our vice president of engineering and network
operations since July 1998. From July 1995 to July 1998, Mr. Roberts served as
director of engineering for AirLink II LLC, an affiliate of AirGate's
predecessor company.
Board of Directors
Our board of directors is fixed at nine members. We currently have eight
members on our board of directors. The former iPCS stockholders have the right,
subject to our approval, to designate prior to December 31, 2001 an independent
member to our board of directors. The board of directors is divided into three
classes of directors, as nearly equal in number as possible, with one class
elected each year at the annual meeting of stockholders.
Bernard A. Bianchino, age 53, has served as one of our directors since May
2001. Mr. Bianchino has more than fourteen years of telecommunications
experience. Most recently, from January to May 2001, Mr. Bianchino served as
the Chief Executive Officer of OnFiber Communications, a privately held local
fiber access company. From October 1995 through December 2000, Mr. Bianchino
was employed by Sprint Corporation. During this period he served as the Chief
Business Development Officer of Sprint PCS from October 1995 through July 2000
and Chief Executive Officer of Pegaso PCS, a Mexican carrier in which Sprint
Corporation holds a minority interest, from July 2000 through December 2000.
Prior to that time, Mr. Bianchino served in a variety of telecommunications
industry and legal positions, including various legal positions with Sprint
Corporation culminating as Vice President Law-General Business, and a period as
Executive Vice President, General Counsel and External Affairs at Qwest
Communications. Prior to 1986, he served as an attorney with Exxon Corporation
and its affiliates and as an attorney with the U.S. Department of Energy and
its predecessors. Mr. Bianchino holds a B.A. (1970) and J.D. (1974) from
Washburn University.
Michael S. Chae, age 33, has served as one of our directors since November
30, 2001. Mr. Chae served as a director of iPCS from August 2000 until
resigning from such position at the effective time of iPCS' merger with
AirGate. Mr. Chae also serves as a Principal of the Principal Investment Group
of The Blackstone Group, L.P. Since joining Blackstone in 1997, Mr. Chae has
been responsible for the execution of many of Blackstone's principal
investments in the communications sector. Prior to joining Blackstone, Mr. Chae
worked at the Carlyle Group, L.P., a Washington, D.C. based private equity
investment firm and at Dillon, Read & Co. Mr. Chae is a graduate of Harvard
College, Cambridge University and Yale Law School.
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John R. Dillon, age 60, has served as one of our directors since February
2000. Mr. Dillon retired from Cox Enterprises in December 1996. Prior to his
retirement, Mr. Dillon was responsible for all of Cox Enterprises' corporate
financial activities as well as planning and development. Mr. Dillon joined Cox
Communications in 1981 as its vice president and chief financial officer. Mr.
Dillon was instrumental in taking Cox Communications private in 1985 and
merging it with Cox Newspapers to form Cox Enterprises at which time he was
elected senior vice president, chief financial officer and as a member of its
board of directors. Mr. Dillon initiated numerous telephony ventures and was
Cox Enterprises' founding board member of Sprint PCS. Mr. Dillon holds an
M.B.A. from Harvard Business School and a B.E.E. degree from Georgia Institute
of Technology. Mr. Dillon is also a director of Ciena Corp., a manufacturer of
optical networking equipment.
Thomas M. Dougherty, age 57, has served as one of our directors since April
1999 and has been our president and chief executive officer since April 1999.
From March 1997 to April 1999, Mr. Dougherty was a senior executive of Sprint
PCS. From June 1996 to March 1997, Mr. Dougherty served as executive vice
president and chief operating officer of Chase Telecommunications, a personal
communications services company. Mr. Dougherty served as president and chief
operating officer of Cook Inlet BellSouth PCS, L.P., a start-up wireless
communications company, from November 1995 to June 1996. Prior to October 1995,
Mr. Dougherty was vice president and chief operating officer of BellSouth
Mobility DCS Corporation, a PCS company.
Robert A. Ferchat, age 66, has served as one of our directors since October
1999. From November 1994 to January 1999, Mr. Ferchat served as the chairman of
the board of directors, president and chief executive officer of BCE Mobile
Communications, a wireless telecommunications company. From January 1999 until
May 1999, Mr. Ferchat was chairman of BCE Mobile Communications. Mr. Ferchat is
also a director and non-executive chairman of GST Telecommunications and a
director of Brookfield Properties Corp., as well as two other companies that
are traded on the Toronto Exchange.
Sidney E. Harris, age 52, has served as one of our directors since May 2001.
Dr. Harris is the Dean of the J. Mack Robinson College of Business at Georgia
State University, and has held such position since 1997. From July 1987 to July
1997, Dr. Harris was Professor of Management at the Peter F. Drucker Graduate
School of Management at the Claremont Graduate School, and he was Dean of the
School of Management from September 1991 to July 1996. Dr. Harris is also a
director of Transamerica Investors, Inc., an investment management company, and
TSYS, Inc., a credit/debit card processor, and the ServiceMaster Company, a
home and institutional services company.
Barry J. Schiffman, age 55, has served as one of our directors and our
chairman since October 1998. Mr. Schiffman is the president and executive
managing director of JAFCO America Ventures, Inc., a venture capital firm, and
has held such position since 1996. From 1994 until he joined JAFCO, he was a
general partner at Weiss, Peck & Greer Venture Partners. Mr. Schiffman is also
a member of the board of directors of Lightspan.com, a publicly held
educational software company, and of several other private companies.
Timothy M. Yager, age 32, has served as one of our directors since November
30, 2001. Mr. Yager served as the President and Chief Executive Officer and a
director of iPCS from its formation in early 1999 until resigning from such
positions at the effective time of iPCS' merger with AirGate. From January 1995
to January 1999, he was the Senior Vice President of Geneseo Communications,
Inc., an independent telephone company in Illinois. During this time, he
founded and was also the Chief Operating Officer, General Manager and later the
President of GenSoft Systems, Inc., a subsidiary of Geneseo Communications,
Inc., that designs software to provide information and billing services to the
telecommunications industry.
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SELLING STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock by the selling stockholders, as of November 30,
2001 and as adjusted to reflect the sale of the shares offered hereby:
Beneficial Ownership Beneficial Ownership
Prior to the Offering/(1)/ Number of After the Offering/(1)/
- ------------------------ Shares ---------------------
Name and Address Shares Percentage Offered Shares Percentage
---------------- --------- ---------- --------- --------- ----------
Geneseo Communications, Inc./(2),(3)/.... 2,465,253 9.6% 350,000 2,115,253 8.2%
Cambridge Telcom, Inc./(2)/.............. 2,113,074 8.2 250,000 1,863,074 7.2
The Blackstone Group/(4),(5)/............ 4,253,397 16.5 1,675,018 2,578,379 10.0
The TCW Group, Inc./(6)/................. 566,190 2.2 512,793 53,397 *
TCW/Crescent Mezzanine, LLC/(7)/......... 576,652 2.2 512,797 63,855 *
Cass Communications Management, Inc./(2)/ 704,358 2.7 200,000 504,358 2.0
Technology Group, LLC/(2)/............... 704,358 2.7 150,000 554,358 2.2
Montrose Mutual PCS, Inc./(2)/........... 704,358 2.7 175,000 529,358 2.1
Gridley Enterprises, Inc./(2),(8)/....... 352,179 1.4 141,892 210,287 *
Timothy M. Yager/(9)/.................... 266,630 1.0 32,500 234,130 *
---------
Total Shares Offered.................. 4,000,000
=========
---------------------
* Less than 1%.
(1)Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934, as amended. A person is deemed to be the
beneficial owner of common stock if such person has or shares the right to
vote or dispose of such common stock, or has the right to acquire beneficial
ownership at any time within 60 days of the date of this table.
(2)This stockholder, together with other investors, formed Illinois PCS, LLC.
In exchange for its capital contribution, the stockholder received
membership interests in Illinois PCS, LLC. Such entity was then reorganized
as a corporation on July 12, 2000 when the stockholder's limited liability
company interests were converted into iPCS common stock.
(3)Geneseo Communications, Inc. leases T-1 lines and provides other
telecommunication services to iPCS.
(4)This stockholder, together with certain of its affiliates, purchased a
portion of an aggregate of $120.0 million of iPCS convertible preferred
stock in July and December 2000. Such iPCS convertible preferred stock was
automatically converted into iPCS common stock immediately prior to the
effective time of the merger, and then exchanged into our common stock at
the effective time. Pursuant to the merger agreement, this group of
stockholders has designated Michael S. Chae to serve on our board of
directors.
(5)Of the 4,253,397 shares, 1,928,344 are held by Blackstone Communications
Partners I L.P. ("BCOM"), 1,658,694 are held by Blackstone iPCS Capital
Partners L.P. ("BICP"), 582,354 are held by Blackstone/iPCS L.L.C. ("BLLC"),
4,780 are shares issuable to Blackstone Management Partners III pursuant to
options that vested at the effective time of the merger, 71,302 are shares
issuable upon exercise of warrants by Blackstone Mezzanine Partners L.P.
("BMP") and 7,923 are shares issuable upon exercise of warrants by
Blackstone Mezzanine Holdings L.P. ("BMH"). Blackstone Communications
Management Associates I L.L.C. is the general partner of BCOM. Blackstone
Media Management Associates III, L.L.C. is the general partner of BICP.
Blackstone Media Management Associates III, L.L.C. is the manager of BLLC.
Blackstone Mezzanine Associates L.P. is the general partner of BMP and BMH.
Messrs. Peter G. Peterson and Stephen A. Schwarzman are the founding members
of Blackstone, and as such may also be deemed to share beneficial ownership
of the shares held by each of these entities.
(6)Consists of 512,793 shares and warrants to purchase 53,397 shares held by
the following affiliates of The TCW Group, Inc.: TCW Leveraged Income Trust,
L.P., TCW Leveraged Income Trust II, L.P., TCW Leveraged Income Trust IV,
L.P., TCW Shared Opportunity Fund II, L.P., Shared Opportunity Fund IIB,
L.L.C. and TCW Shared Opportunity Fund III, L.P. The TCW Group, Inc. may be
deemed to be controlled by Societe Generale Asset Management, S.A., a
company incorporated under the laws of France ("SGAM"). SGAM is owned by
Societe Generale, S.A., a company incorporated under the laws of France.
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(7)Consists of 512,797 shares and warrants to purchase 63,855 shares held by
the following affiliates of TCW/Crescent Mezzanine, LLC: TCW/Crescent
Mezzanine Partners II, L.P. and TCW/Crescent Mezzanine Trust II. The
business, property and affairs of TCW/Crescent Mezzanine, LLC are managed
exclusively by its board or directors, which consists of the following
individuals: Mark L. Attanasio, Robert D. Beyer, Jean-Marc Chapus, Jack D.
Furst, Thomas O. Hicks, William C. Sonneborn and Marc I. Stern. These
entities, together with the affiliates of The TCW Group, Inc. specified in
(6) above, are referred to in this document as TCW.
(8)Gridley Enterprises, Inc. leases a switching location to iPCS.
(9)Pursuant to the merger agreement, iPCS designated Mr. Yager to serve on our
board of directors at the effective time of the merger. Mr. Yager was one of
the members of Illinois PCS, LLC prior to its reorganization. Of the 266,630
shares, 46,131 are held individually by Mr. Yager, 53,631 are held
individually by his wife, 7,500 are held by a charitable foundation
established by Mr. Yager, and 159,368 are shares issuable to Mr. Yager
pursuant to options that vest at the effective time of the merger. Mr. Yager
disclaims beneficial ownership of shares owned by his wife and the
charitable foundation.
See the accompanying prospectus and information incorporated by reference
for additional information regarding our relationship with the selling
stockholders.
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SHARES ELIGIBLE FOR FUTURE SALE
As of November 30, 2001, we had issued and outstanding an aggregate of
25,745,622 shares of our common stock. All of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended, unless such shares are purchased by our
affiliates as that term is defined in Rule 144 under the Securities Act. Upon
completion of this offering, approximately 4,645,675 shares of our common stock
will be restricted securities or control securities, each as defined in Rule
144 under the Securities Act, which may only be sold in the public market if
registered under the Securities Act or in accordance with an exemption from the
registration requirements of the Securities Act or an exemption from
registration under Rule 144 under the Securities Act. Of these restricted and
control securities, all will be available for sale in the public market,
subject to the volume limitations and other conditions of Rule 144, immediately
upon the expiration of the lock-up period described below.
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed since the later of the date the "restricted securities"
were acquired from us or the date they were acquired from an affiliate, then
the holder of such restricted securities, including an affiliate, is entitled
to sell in the public market a number of shares within any three-month period
that does not exceed the greater of 1% of the then outstanding shares of the
common stock or the average weekly reported volume of trading of the common
stock on The Nasdaq National Market during the four calendar weeks preceding
such sale. The holder may only sell such shares through "brokers' transactions"
or in transactions directly with a "market maker," as such terms are defined in
Rule 144. Sales under Rule 144 are also subject to requirements regarding
providing notice of such sales and the availability of current public
information concerning us. Affiliates may sell shares not constituting
restricted securities in accordance with the foregoing volume limitations and
other requirements but without regard to the one-year holding period.
Under Rule 144(k), if a period of at least two years has elapsed between the
later of the date restricted securities were acquired from us or the date they
were acquired from an affiliate, as applicable, a holder of such restricted
securities who is not an affiliate at the time of the sale and has not been an
affiliate for at least three months prior to the sale would be entitled to sell
the shares in the public market without regard to the volume limitations and
other restrictions described above.
Lock-Up Agreements
In connection with the closing of the iPCS merger, we entered into a lock-up
agreement with each of the selling stockholders. The lock-up agreements
prohibit the selling stockholders from selling or otherwise disposing of the
shares of our common stock they received in the merger for a minimum of 120
days after the completion of the merger, other than in connection with this
offering. For the founding iPCS stockholders, 20% of their shares of our common
stock generally will be released from the lock-up restrictions 120 days after
the effective time of the merger, an additional 30% will be released 211 days
after the effective time and the remaining 50% will be released 301 days after
the effective time. For iPCS stockholders that are affiliates of Blackstone and
TCW, the lock-up period will apply for a period of 120 days after the effective
time of the merger. The expiration of the lock-up period for the founding iPCS
stockholders, Blackstone and TCW is subject to the expiration of the 90-day
lock up period the selling stockholders agreed to with the underwriters.
Registration Rights
In connection with the closing of the iPCS merger, we entered into a
registration rights agreement with the selling stockholders. The registration
rights agreement gives the selling stockholders, upon the request of
Blackstone, the right to demand that we undertake an underwritten public
offering of shares of our common stock
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acquired by the selling stockholders in connection with the merger. The selling
stockholders have the right to demand that we effect an underwritten public
offering one time during the 120-day period following the completion of the
merger and one time after the one-year anniversary of the completion of the
merger. In the event that Blackstone transfers 75% of the shares of our common
stock held by it immediately after the effective time of the merger without
exercising this demand right, Geneseo Communications, Inc., one of the iPCS
founding stockholders, will have the ability to exercise such demand right. The
registration statement of which this prospectus supplement and accompanying
prospectus are a part was filed by us in accordance with our obligations under
the registration rights agreement.
The number of shares of our common stock to be sold in a public offering
following exercise of a demand right by the selling stockholders is subject to
market conditions and depends upon the number of shares of our common stock
that the selling stockholders request to be included in such offering.
Generally, 75% of the shares included in an offering will be shares owned by
Blackstone and TCW and 25% will be shares owned by the founding iPCS
stockholders. We have no obligation, however, to complete an underwritten
public offering unless the sale of shares of our common stock requested to be
included in such offering would result in initial aggregate proceeds of at
least $40 million. The registration rights agreement prohibits us from
undertaking a separate public sale or distribution of our common stock during a
period of 90 days after the completion of an underwritten offering following
exercise of a demand right by the selling stockholders.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated December , 2001, we and the selling stockholders have agreed
to sell to the underwriters named below, for whom Credit Suisse First Boston
Corporation, Lehman Brothers Inc., UBS Warburg LLC, William Blair & Company,
L.L.C., Thomas Weisel Partners LLC and TD Securities (USA) Inc. are acting as
representatives, the following respective numbers of shares of our common stock:
Number
Underwriter of Shares
----------- ---------
Credit Suisse First Boston Corporation
Lehman Brothers Inc...................
UBS Warburg LLC.......................
William Blair & Company, L.L.C........
Thomas Weisel Partners LLC............
TD Securities (USA) Inc...............
Total..............................
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of the non-defaulting underwriters may be increased or the
offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 600,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the
representatives may change the public offering price and concession and
discount to broker/dealers.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay:
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-allotment Over-allotment Over-allotment Over-allotment
-------------- -------------- -------------- --------------
Underwriting Discounts and Commissions
paid by selling stockholders.............. $ $ $ $
Expenses payable by the selling stockholders $ $ $ $
Underwriting Discounts and Commissions
paid by us................................ $ $ $ $
Expenses payable by us...................... $ $ $ $
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act relating to, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, or publicly disclose the intention to make any
offer, sale, pledge, disposition or filing, without the prior written consent
of Credit Suisse First Boston Corporation and Lehman Brothers Inc. for a period
of 90 days after the date of this prospectus supplement, except issuances
pursuant to the exercise of employee stock options outstanding on the date
hereof.
Our officers, directors and the selling stockholders have agreed that they
will not offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any shares of our common stock or securities convertible
S-69
into or exchangeable or exercisable for any shares of our common stock, enter
into a transaction that would have the same effect, or enter into any swap,
hedge or other arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of our common stock, whether any of these
transactions are to be settled by delivery of our common stock or other
securities, in cash or otherwise, or publicly disclose the intention to make
any offer, sale, pledge or disposition, or to enter into any transaction, swap,
hedge or other arrangement, without, in each case, the prior written consent of
Credit Suisse First Boston Corporation and Lehman Brothers Inc. for a period of
90 days after the date of this prospectus supplement.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments that
the underwriters may be required to make in that respect.
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions,
penalty bids and passive market making in accordance with Regulation M under
the Securities Exchange Act of 1934 (the "Exchange Act").
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any covered short position by
either exercising their over-allotment option and/or purchasing shares
in the open market.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among
other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares
through the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked short
position, the position can only be closed out by buying shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there could be downward pressure on the
price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
. In passive market making, market makers in the common stock who are
underwriters or prospective underwriters may, subject to limitations,
make bids for or purchases of our common stock until the time, if any,
at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of the
common stock. As a result the price of our common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make internet distributions on the
same basis as other allocations. Credit Suisse First Boston Corporation may
effect an on-line distribution through its affiliate, CSFBdirect Inc., an
on-line broker dealer, as a selling group member.
S-70
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
numerous public offerings of equity securities. Thomas Weisel Partners does not
have any material relationship with us or any of our officers, directors, or
other controlling persons, except with respect to its contractual relationship
with us under the underwriting agreement entered into in connection with this
offering.
Credit Suisse First Boston Corporation, Lehman Brothers Inc. and UBS Warburg
LLC have performed and expect to continue to perform financial advisory
investment banking services for us for which they have received and will
receive customary compensation. An affiliate of Lehman Brothers Inc. also is
acting as the administrative agent under AirGate's senior credit facility for
which they have received and will receive customary compensation. In addition,
an affiliate of TD Securities (USA) Inc. is acting as the administrative agent
under iPCS' senior secured credit facility for which they have received and
will receive customary compensation.
S-71
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
stockholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of common stock are made. Any resale
of the common stock in Canada must be made under applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made under available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the common stock.
Representations of Purchasers
By purchasing common stock in Canada and accepting a purchase confirmation a
purchaser is representing to us, the selling stockholders and the dealer from
whom the purchase confirmation is received that:
. the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
. where required by law, that the purchaser is purchasing as principal and
not as agent, and
. the purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action--Ontario Purchasers Only
Under Ontario securities legislation, a purchaser who purchases a security
offered by this prospectus during the period of distribution will have a
statutory right of action for damages, or while still the owner of the common
stock, for rescission against us and the selling stockholders in the event that
this prospectus contains a misrepresentation. Such a purchaser will be deemed
to have relied on the misrepresentation. The right of action for damages is
exercisable not later than the earlier of 180 days from the date the purchaser
first had knowledge of the facts giving rise to the cause of action and three
years from the date on which payment is made for the common stock. The right of
action for rescission is exercisable not later than 180 days from the date on
which payment is made for the common stock. If such a purchaser elects to
exercise the right of action for rescission, the purchaser will have no right
of action for damages against us or the selling stockholders. In no case will
the amount recoverable in any action exceed the price at which the common stock
was offered to the purchaser and if the purchaser is shown to have purchased
the securities with knowledge of the misrepresentation, we and the selling
stockholders will have no liability. In the case of an action for damages, we
and the selling stockholders will not be liable for all or any portion of the
damages that are proven to not represent the depreciation in value of the
common stock as a result of the misrepresentation relied upon. These rights are
in addition to, and without derogation from, any other rights or remedies
available at law to an Ontario purchaser. The foregoing is a summary of the
rights available to an Ontario purchaser. Ontario purchasers should refer to
the complete text of the relevant statutory provisions.
Enforcement of Legal Rights
All of our directors and officers as well as the experts named herein and
the selling stockholders may be located outside of Canada and, as a result, it
may not be possible for Canadian purchasers to effect service of process within
Canada upon us or those persons. All or a substantial portion of our assets and
the assets of those persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against us or those persons in
Canada or to enforce a judgment obtained in Canadian courts against us or
persons outside of Canada.
S-72
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon by our
counsel, Winston & Strawn. Certain legal matters will be passed upon for the
underwriters by Mayer, Brown & Platt.
EXPERTS
The consolidated financial statements and schedule of AirGate PCS, Inc. and
subsidiaries as of September 30, 2001 and 2000, and for the years ended
September 30, 2001, and 2000, the nine month period ended September 30, 1999
have been included herein and in the registration statement and incorporated by
reference herein in reliance upon the reports of KPMG LLP, independent
certified public accountants, appearing herein and in the registration
statement and incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of iPCS, Inc. and Subsidiaries and
Predecessor as of September 30,
2001, December 31, 2000 and 1999, and for the nine months ended September 30,
2001 and 2000, for the year ended December 31, 2000 and for the period from
January 22, 1999 (date of inception) through December 31, 1999, included in
this prospectus supplement and registration statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein and elsewhere in the registration statement, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room located at 450 5th Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
SEC at: http://www.sec.gov. Reports, proxy statements and other information
pertaining to us may also be inspected at the offices of The Nasdaq National
Market, which is located at 1735 K. Street, N.W., Washington, D.C. 20006.
We filed a registration statement on Form S-3 to register with the SEC our
common stock to be issued in this offering. This prospectus supplement and the
accompanying prospectus is a part of that registration statement. As allowed by
SEC rules, this prospectus supplement and the accompanying prospectus do not
contain all of the information you can find in our registration statement or
the exhibits to the registration statement.
You should rely only on the information or representations provided in this
prospectus supplement, the accompanying prospectus or any additional prospectus
supplement. We have not authorized anyone else to provide you with different
information. We may not make an offer of our common stock in any state where
the offer is not permitted. The delivery of this prospectus supplement and
accompanying prospectus does not, under any circumstances, mean that there has
not been a change in our affairs since the date of such document. It also does
not mean that the information in this prospectus supplement and accompanying
prospectus is correct after this date.
Our address on the world wide web is http://www.airgatepcsa.com. The
information on our web site is not a part of this document.
S-73
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this document, and information that we file later with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we will make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:
Filings Period or Date Filed
------- --------------------
Annual Report on Form 10-K.......................... Year ended September 30, 2001
Current Reports on Form 8-K......................... November 30, 2001
The description of our common stock set forth in the
registration statement on Form 8-A (File
No. 0-27455), as filed with the SEC on
September 24, 1999
We incorporate by reference additional documents that we may file with the
SEC between the date of this document and the date of the completion of the
offering. These documents include periodic reports, such as Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as
well as proxy statements.
You can obtain any of the documents incorporated by reference in this
document from us, or from the SEC through the SEC's Internet world wide web
site at the address described above. Documents incorporated by reference are
available from us without charge, excluding any exhibits to those documents,
unless the exhibit is specifically incorporated by reference as an exhibit in
this document. You can obtain documents incorporated by reference in this
document by requesting them in writing or by telephone from us at the following
address:
AirGate PCS, Inc.
Harris Tower
233 Peachtree Street NE, Suite 1700
Atlanta, Georgia 30303
Attention: Sharon Kushner
(404) 525-7272
E-mail: skushner@airgatepcsa.com
Any statement contained in a document incorporated or deemed incorporated
herein by reference shall be deemed to be modified or superseded for the
purpose of this prospectus supplement and accompanying prospectus to the extent
that a statement contained herein or in any subsequently filed document which
also is, or is deemed to be, incorporated herein by reference modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this prospectus supplement and accompanying prospectus.
S-74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARIES--CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-2
Consolidated Balance Sheets as of September 30, 2001 and 2000....................................... F-3
Consolidated Statements of Operations for the Years Ended September 30, 2001 and 2000, and the Nine
Months Ended September 30, 1999................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended September 30, 2001 and
2000, and the Nine Months Ended September 30, 1999................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended September 30, 2001 and 2000, and the Nine
Months Ended September 30, 1999................................................................... F-6
Notes to Consolidated Financial Statements.......................................................... F-8
Schedule--Valuation and Qualifying Accounts......................................................... F-29
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR--CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ F-30
Consolidated Balance Sheets as of September 30, 2001, December 31, 2000 and 1999.................... F-31
Consolidated Statements of Operations for the Nine Months Ended September 30, 2001 and 2000, for the
Year Ended December 31, 2000 and for the Period from January 22, 1999 (date of inception) through
December 31, 1999................................................................................. F-32
Consolidated Statements of Redeemable Preferred Stock and Equity (Deficiency) for the Nine Months
Ended September 30, 2001, for the Year Ended December 31, 2000 and for the Period from January 22,
1999 (date of inception) through December 31, 1999................................................ F-33
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000, for the
Year Ended December 31, 2000 and for the Period from January 22, 1999 (date of inception) through
December 31, 1999................................................................................. F-34
Notes to Consolidated Financial Statements.......................................................... F-35
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AirGate PCS, Inc.:
We have audited the accompanying consolidated balance sheets of AirGate PCS,
Inc. and subsidiaries as of September 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years ended September 30, 2001 and 2000, and the nine months
ended September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AirGate
PCS, Inc. and subsidiaries as of September 30, 2001 and 2000 and the results of
their operations and their cash flows for the years ended September 30, 2001
and 2000, and the nine months ended September 30, 1999, in conformity with
accounting principles generally accepted in the United States of America.
/S/ KPMG LLP
Atlanta, Georgia
November 9, 2001
F-2
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
September 30,
--------------------
2001 2000
--------- ---------
ASSETS
------
Current assets:
Cash and cash equivalents.......................................................... $ 14,290 $ 58,384
Accounts receivable, net (note 3).................................................. 23,798 4,928
Receivable from Sprint PCS......................................................... 10,200 3,768
Inventories........................................................................ 4,639 2,902
Prepaid expenses................................................................... 3,428 2,106
Direct customer activation costs................................................... 3,693 627
Other current assets............................................................... 1,291 1,600
--------- ---------
Total current assets........................................................... 61,339 74,315
Property and equipment, net (note 4).................................................. 209,326 183,581
Site lease deposits................................................................... -- --
Financing costs....................................................................... 7,888 9,098
Other assets.......................................................................... 2,457 1,954
--------- ---------
$ 281,010 $ 268,948
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable................................................................... $ 10,210 $ 21,009
Accrued expenses................................................................... 13,840 9,548
Payable to Sprint PCS.............................................................. 32,564 5,292
Deferred revenue................................................................... 10,485 1,828
--------- ---------
Total current liabilities...................................................... 67,099 37,677
Deferred revenue...................................................................... 309 671
Long-term debt (note 5)............................................................... 266,326 180,727
--------- ---------
Total liabilities.............................................................. 333,734 219,075
--------- ---------
Stockholders' equity (deficit) (note 7):
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;
13,364,980 and 12,816,783 shares issued and outstanding at September 30, 2001
and 2000, respectively........................................................... 134 128
Additional paid-in-capital......................................................... 168,255 161,575
Accumulated deficit................................................................ (219,567) (108,577)
Unearned stock option compensation................................................. (1,546) (3,253)
--------- ---------
Total stockholders' equity (deficit)........................................... (52,724) 49,873
--------- ---------
Commitments and contingencies (notes 2, 5, 9 and 11).................................. -- --
--------- ---------
$ 281,010 $ 268,948
========= =========
See accompanying notes to the consolidated financial statements.
F-3
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
Nine Months
Year Ended September 30, Ended
------------------------ September 30,
2001 2000 1999
----------- ----------- -------------
Revenues:
Service revenue.................................................. $ 105,976 $ 9,746 $ --
Roaming revenue.................................................. 55,329 12,338 --
Equipment revenue................................................ 10,782 2,981 --
----------- ----------- ----------
Total revenues............................................ $ 172,087 $ 25,065 $ --
----------- ----------- ----------
Operating expenses:
Cost of service and roaming...................................... (116,732) (27,770) --
Cost of equipment................................................ (20,218) (5,685) --
Selling and marketing............................................ (71,617) (28,357) --
General and administrative....................................... (15,742) (14,078) (5,294)
Noncash stock option compensation
(In 2001, $1,399 related to general and administrative, $177
related to cost of service and roaming, and $89 related to
selling and marketing. In 2000, $1,260 related to general
and administrative, $223 related to cost of service and
roaming, and $182 related to selling and marketing. In
1999, $325 related to general and administrative)............ (1,665) (1,665) (325)
Depreciation and amortization.................................... (30,667) (12,034) (622)
----------- ----------- ----------
Total operating expenses.................................. (256,641) (89,589) (6,241)
----------- ----------- ----------
Operating loss............................................ (84,554) (64,524) (6,241)
Interest income..................................................... 2,463 9,321 --
Interest expense.................................................... (28,899) (26,120) (9,358)
----------- ----------- ----------
Net loss.................................................. $ (110,990) $ (81,323) $ (15,599)
=========== =========== ==========
Basic and diluted net loss per share of common stock................ $ (8.48) $ (6.60) $ (4.57)
=========== =========== ==========
Weighted-average outstanding common shares.......................... 13,089,285 12,329,149 3,414,276
=========== =========== ==========
Weighted-average potentially dilutive
common stock equivalents:
Common stock options...................................... 510,620 777,758 42,157
Stock purchase warrants................................... 94,078 142,492 29,187
Convertible promissory notes.............................. -- -- 433,249
----------- ----------- ----------
Weighted-average outstanding common shares including potentially
dilutive common stock equivalents................................. 13,693,983 13,249,399 3,918,869
=========== =========== ==========
See accompanying notes to the consolidated financial statements.
F-4
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except share amounts)
Years ended September 30, 2001 and 2000, and
the nine months ended September 30, 1999
Total
Common Stock Additional Unearned stockholders'
----------------- paid-in Accumulated stock option equity
Shares Amount capital deficit compensation (deficit)
---------- ------ ---------- ----------- ------------ -------------
Balance at December 31, 1998...................... 3,382,518 $ 34 $ 6,271 $ (11,655) $ -- $ (5,350)
Issuance of stock purchase warrants in connection
with issuance of convertible notes payable to
stockholders and senior credit facility (notes
7(b)(i) and 7(b)(ii))............................ -- -- 2,369 -- -- 2,369
Beneficial conversion feature of convertible notes
payable to stockholders (note 7(a)(iii))......... -- -- 6,979 -- -- 6,979
Unearned compensation related to grant of
compensatory stock options (note 7(c))........... -- -- 3,225 -- (3,225) --
Stock option compensation (note 7(c))............. -- -- -- 325 325
Issuance of common stock, net of offering costs
(note 7(a)(ii)).................................. 7,705,000 77 120,391 -- -- 120,468
Issuance of warrants in connection with units
offering (note 7(b)(iii))........................ -- -- 10,948 -- -- 10,948
Conversion of notes payable to stockholders to
common stock (note 7(a)(iii)).................... 869,683 9 7,697 -- -- 7,706
Net loss.......................................... -- -- -- (15,599) -- (15,599)
---------- ---- -------- --------- ------- ---------
Balance at September 30, 1999..................... 11,957,201 120 157,880 (27,254) (2,900) 127,846
Conversion of notes payable to stockholders to
common stock including beneficial conversion
feature (note 7(a)(iii))......................... 12,533 -- 213 -- -- 213
Exercise of common stock purchase warrants (notes
7(b)(i), 7(b)(ii) and 7(b)(iii))................. 762,444 8 (3) -- -- 5
Unearned compensation related to grant of
compensatory stock options (note 7(c))........... -- -- 2,231 -- (2,231) --
Issuance of stock purchase warrants in connection
with senior credit facility (note 7(b)(ii))...... -- -- 282 -- -- 282
Exercise of stock options (note 7(c))............. 84,605 -- 1,185 -- -- 1,185
Forfeiture of compensatory stock options
(note 7(c))...................................... -- -- (213) -- 213 --
Stock option compensation (note 7(c))............. -- -- -- 1,665 1,665
Net loss.......................................... -- -- -- (81,323) -- (81,323)
---------- ---- -------- --------- ------- ---------
Balance at September 30, 2000..................... 12,816,783 128 161,575 (108,577) (3,253) 49,873
---------- ---- -------- --------- ------- ---------
Exercise of common stock purchase warrants
(notes 7(a)(iii)................................. 80,641 1 -- -- -- 1
Exercise of stock options (note 7(c))............. 467,556 5 6,722 -- -- 6,727
Forfeiture of compensatory stock options
(note 7(c))...................................... -- -- (81) -- 81 --
Stock option compensation (note 7(c))............. -- -- 39 -- 1,626 1,665
Net loss.......................................... -- -- -- (110,990) -- (110,990)
---------- ---- -------- --------- ------- ---------
Balance at September 30, 2001..................... 13,364,980 $134 $168,255 $(219,567) $(1,546) $ (52,724)
========== ==== ======== ========= ======= =========
See accompanying notes to the consolidated financial statements.
F-5
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended Nine Months
September 30, Ended
-------------------- September 30,
2001 2000 1999
--------- --------- -------------
Cash flows from operating activities:
Net loss................................................................................. $(110,990) $ (81,323) $(15,599)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................... 30,667 12,034 622
Amortization of financing costs included in interest expense............................ 1,210 1,192 --
Provision for doubtful accounts......................................................... 10,999 563 --
Loss on sale of fixed assets............................................................ -- -- 19
Interest expense not payable and associated with accretion of original issue discounts
and beneficial conversion features..................................................... 23,799 23,043 8,707
Stock option compensation............................................................... 1,665 1,665 325
(Increase) decrease in:
Account receivable, net.............................................................. (29,869) (5,491) --
Receivable from Sprint PCS........................................................... (6,432) (3,768) --
Inventories.......................................................................... (1,737) (2,902) --
Prepaid expenses..................................................................... (1,322) (511) (1,496)
Direct customer activation costs..................................................... (3,066) (627) --
Other current assets................................................................. 309 374 (373)
Other assets......................................................................... (391) (1,709) (114)
Increase (decrease) in:
Accounts payable..................................................................... 2,977 5,016 767
Accrued expenses..................................................................... 5,764 3,044 4,669
Payable to Sprint PCS................................................................ 27,272 5,292 --
Deferred revenue..................................................................... 8,295 2,499 --
--------- --------- --------
Net cash used in operating activities............................................. (40,850) (41,609) (2,473)
--------- --------- --------
Cash flows from investing activities:
Capital expenditures................................................................. (71,270) (152,397) (15,706)
Acquisition of assets................................................................ (502) -- --
--------- --------- --------
Net cash used in investing activities............................................. (71,772) (152,397) (15,706)
--------- --------- --------
Cash flows from financing activities:
Proceeds from borrowings under the senior secured credit facility....................... 61,800 -- 13,500
Proceeds from issuance of notes payable and related warrants to Lucent.................. -- -- 5,000
Payment on notes payable to Lucent...................................................... -- -- (10,000)
Proceeds from issuance of warrants and senior subordinated discount notes in units
offering............................................................................... -- -- 156,057
Financing cost on senior credit facility and units offering............................. -- -- (11,622)
Proceeds from issuance of common stock.................................................. -- -- 130,985
Offering costs.......................................................................... -- -- (10,517)
Payment of note payable................................................................. -- -- (1,000)
Payment of note payable to Sprint PCS................................................... -- (7,700) --
Proceeds from issuance of convertible notes payable to stockholders and related
warrants............................................................................... -- -- 2,530
Payments on notes payable to stockholders............................................... -- -- (150)
Proceeds from exercise of common stock purchase warrants................................ 1 5 --
Proceeds from exercise of employee stock options........................................ 6,727 1,185 --
--------- --------- --------
Net cash provided by (used in) financing activities............................... 68,528 (6,510) 274,783
--------- --------- --------
Net (decrease) increase in cash and cash equivalents.............................. (44,094) (200,516) 256,604
Cash and cash equivalents at beginning of period........................................... 58,384 258,900 2,296
--------- --------- --------
Cash and cash equivalents at end of period................................................. $ 14,290 $ 58,384 $258,900
========= ========= ========
Supplemental disclosure of cash flow information-cash paid for interest.................... $ 3,846 $ 2,609 $ 503
========= ========= ========
(continued)
F-6
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in thousands)
Year Ended Nine Months
September 30, Ended
--------------- September 30,
2001 2000 1999
------ ------- -------------
Supplemental disclosure of non-cash investing and financing activities:
Capitalized interest................................................................ $2,917 $ 5,938 $ 1,109
Grant of common stock purchase warrants related to senior credit facility........... -- 282 658
Convertible notes payable to stockholders and accrued interest converted to equity.. -- 102 7,706
Beneficial conversion feature of convertible notes payable to stockholders.......... -- 111 6,979
Grant of compensatory stock options................................................. -- 2,231 3,225
Forfeiture of compensatory stock options............................................ (81) (213) --
Modification of stock options....................................................... 39 -- --
Network assets acquired and not yet paid............................................ -- 15,248 16,236
See accompanying notes to the consolidated financial statements.
F-7
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) Business, Basis of Presentation and Summary of Significant Accounting
Policies
(a) Business and Basis of Presentation
AirGate PCS, Inc. and subsidiaries and predecessors (collectively, the
"Company") were formed for the purpose of becoming a leading provider of
wireless Personal Communication Services ("PCS"). In July 1998, the Company's
predecessor entered into a series of agreements with Sprint and Sprint PCS
under which it agreed to construct and manage a PCS network using Sprint PCS'
licensed spectrum and supporting Sprint PCS' services within a specified
territory in the southeastern United States. AirGate PCS, Inc., formed in
October 1998, is the exclusive network partner of Sprint PCS products and
services in its territory and is licensed to use the Sprint PCS brand name in
21 markets located in the southeastern United States. The consolidated
financial statements included herein include the accounts of AirGate PCS, Inc.
and its wholly-owned subsidiaries, AGW Leasing Company, Inc., and AirGate
Network Services, LLC for all periods presented. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, increasing competition and the cost associated with the
build-out of a PCS network. The Company's continuing operations are dependent
upon Sprint's and Sprint PCS' ability to perform their obligations under the
Company's Sprint Agreements. Additionally, the Company's ability to attract and
maintain a sufficient customer base is critical to achieving breakeven cash
flow. Changes in technology, increased competition, economic conditions or
inability to achieve breakeven cash flow, among other factors, could have an
adverse effect on the Company's financial position and results of operations.
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits, money
market accounts, and investments in commercial paper rated A-1/P-1 or better
with original maturities of three months or less.
(c) Inventories
Inventories consist of handsets and related accessories. Inventories are
carried at the lower of cost (determined using the weighted average method) or
market. Market is determined using replacement cost.
(d) Property and Equipment, net
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives used by the Company are as follows:
Useful Life
-----------
Network assets........................... 7 years
Computer equipment....................... 3 years
Furniture, fixtures, and office equipment 5 years
Construction in progress includes expenditures for the purchase of capital
equipment, design services, and construction services, and testing of the
Company's network. The Company capitalizes interest on its construction in
progress activities. Interest capitalized for the years ended September 30,
2001 and 2000, totaled
F-8
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$2.9 million and $5.9 million, respectively. When the network assets are placed
in service, the Company transfers the assets from construction in progress to
network assets and depreciates those assets over their estimated useful life.
(e) Financing Costs
Costs incurred in connection with the senior credit facility and senior
subordinated discount notes were deferred and are amortized into interest
expense over the term of the respective financing using the straight-line
method.
(f) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
basis and net operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rate expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the statement of
operations in the period that includes the enactment date.
(g) 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." Basic
and diluted net loss per share of common stock is computed by dividing net loss
for each period by the weighted-average outstanding common shares. No
conversion of common stock equivalents has been assumed in the calculations
since the effect would be antidilutive. As a result, the number of
weighted-average outstanding common shares as well as the amount of net loss
per share are the same for basic and diluted net loss per share calculations
for all periods presented.
(h) Revenue Recognition
The Company sells handsets and accessories which are recorded as equipment
revenue at the time of the sale. Service revenue is recognized as service is
provided. Roaming revenue is recognized when subscribers from Sprint PCS' and
its network partners' and non-Sprint PCS subscribers roam onto the Company's
network.
Sprint PCS retains 8% of collected service revenues from subscribers based
in the Company's markets and from non-Sprint PCS subscribers who roam onto the
Company's network. Affiliation fees accrued or paid to Sprint PCS for the years
ended September 30, 2001 and 2000 were $7.6 million and $0.8 million,
respectively, and are included in cost of service and roaming. Revenues
generated from the sale of handsets and accessories and from roaming services
provided to Sprint PCS and its networks partners' customers are not subject to
the 8% affiliation fee payable to Sprint PCS.
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." The Company does not recognize
revenue from subscribers for which the likelihood of collecting such revenue is
not reasonably assured.
Activation fee revenue and direct customer activation costs have been
deferred and are recorded over the average life for those customers (30 months)
that pay an activation fee. Those customers for which the Company
F-9
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
waives the activation fee must enter into an Advantage Agreement and the direct
customer activation cost is deferred and recorded over the contractual term of
the Advantage Agreement (12 months). For the years ended September 30, 2001 and
2000, the Company recognized approximately $3.4 million and $0.1 million of
activation fee revenue, respectively, and $2.8 million and $0.1 million of
direct customer activation costs, respectively. The Company has deferred $5.1
million and $1.2 million of activation fee revenue as of September 30, 2001 and
2000, respectively, to future periods. Further, the Company has deferred $3.9
million and $1.2 million of direct customer activation costs to future periods,
as of September 30, 2001 and 2000, respectively.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of ("SFAS No. 121")." SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. At September 30, 2001 and 2000, the
Company did not have any impaired assets.
(j) Selling and Marketing
The Company expenses advertising costs when the advertisement occurs. Total
advertising expense was approximately $13.0 million and $7.5 million for the
years ended September 30, 2001 and 2000, respectively, and $0.1 million for the
nine months ended September 30, 1999. The Company also includes handset
subsidies on units sold by third parties in selling and marketing. Handset
subsidies for the years ended September 30, 2001 and 2000 were $12.8 million
and $3.7 million, respectively.
(k) New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations ("SFAS
No. 141")", which is effective for all business combinations initiated after
June 30, 2001. SFAS No. 141 requires companies to account for all business
combinations using the purchase method of accounting, recognize intangible
assets if certain criteria are met, as well as provide additional disclosures
regarding business combinations and allocation of purchase price. The Company
has adopted SFAS No. 141 as of July 1, 2001, and the impact of such adoption
did not have an impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets ("SFAS No. 142")," which eliminates amortization of goodwill and
intangible assets that have indefinite useful lives and requires annual tests
of impairments of those assets. SFAS No. 142 also provides specific guidance
about how to determine and measure goodwill and intangible asset impairments,
and requires additional disclosures of information about goodwill and other
intangible assets. The provisions of SFAS No. 142 are required to be applied
starting with fiscal years beginning after December 15, 2001 and applied to all
goodwill and other intangible assets recognized in its financial statements at
that date. Goodwill and intangible assets acquired after June 30, 2001 will be
subject to the amortization provisions of the statement. The Company adopted
SFAS No. 142 effective October 1, 2001. The adoption is not expected to have a
material effect on the Company's consolidated results of operations, financial
position, or cash flows.
F-10
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets ("SFAS No. 144")," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The provisions of the Statement are
effective for financial statements issued for fiscal years beginning after
December 31, 2001. The adoption is not expected to have a material effect on
the Company's consolidated results of operations, financial position or cash
flows.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities at the dates of the consolidated balance sheets and
revenues and expenses during the reporting periods to prepare these
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
from those estimates.
(m) Change of Fiscal Year
On October 21, 1999, the Company changed its fiscal year from a calendar
year ending on December 31 to a fiscal year ending on September 30 effective
September 30, 1999.
(n) Concentration of Risk
The Company maintains cash and cash equivalents in an account with a
financial institution in excess of the amount insured by the Federal Deposit
Insurance Corporation. The financial institution is one of the five largest
banks in the United States and management does not believe there is significant
credit risk associated with deposits in excess of federally insured amounts.
Further, the Company maintains accounts with nationally recognized
investment managers. Such deposits are not insured by the Federal Deposit
Insurance Corporation. Management does not believe there is significant credit
risk associated with these uninsured deposits.
(o) Comprehensive Income (Loss)
No statements of comprehensive income (loss) have been included in the
accompanying consolidated financial statements since the Company does not have
any "Other Comprehensive Income (Loss)" to report.
(p) Reclassifications
Certain reclassifications have been made to prior year amounts to conform to
the current year presentation.
(2) Sprint Agreements
In July 1998, the Company signed four major agreements with Sprint and
Sprint PCS. They are the management agreement, the services agreement, the
trademark and service license agreement with Sprint and the trademark and
service license agreement with Sprint PCS. These agreements allow the Company
to exclusively offer Sprint PCS products and services in the Company's
territory.
F-11
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management Agreement
The management agreement has an initial term of 20 years with three 10-year
renewals, the first renewal being automatic unless the Company is in material
default under the management agreement. The key clauses within the management
agreement refer to exclusivity, network build-out, products and services
offered for sale, service pricing, roaming, advertising and promotion, program
requirements including technical and customer care standards, non-competition,
inability to use non-Sprint PCS brands and rights of first refusal and are
summarized as follows:
(a) Exclusivity. The Company is designated as the only person or entity
that can manage or operate a PCS network for Sprint PCS in the Company's
territory. Except as provided in the management agreement, Sprint PCS and
related persons are prohibited from owning, operating, building or managing
another wireless mobility communications network in the Company's territory
while the management agreement is in place and no event has occurred that
would permit the agreement to be terminated.
(b) Network build-out. In the management agreement, the Company agreed to
cover specified percentages of the population at specified coverage levels
by specified dates. As of September 30, 2001, the Company had exceeded its
initial build-out requirements in all 21 of its markets.
(c) Products and services offered for sale. The management agreement
identifies the products and services that the Company can offer for sale in
the Company's territory. The Company cannot offer wireless local loop
services specifically designed for the competitive local market in areas
where Sprint owns the local exchange carrier unless the Sprint owned local
exchange carrier is named as the exclusive distributor or Sprint PCS
approves the terms and conditions.
(d) Service pricing. The Company must offer Sprint PCS subscriber pricing
plans designated for regional or national offerings. The Company is
permitted to establish local price plans for Sprint PCS products and
services only offered in the Company's market, subject to approval rights of
Sprint PCS. Sprint PCS retains 8% of the Company's collected service
revenues, but remits 100% of revenues derived from roaming by Sprint PCS
subscribers located outside the Company's territory, sales of handsets and
accessories and proceeds from sales not in the ordinary course of business.
(e) Roaming. The Company will earn roaming revenues when a Sprint PCS
customer from outside of the Company's territory roams onto the Company's
network. There are established rates for Sprint PCS' subscribers roaming and
similarly, the Company will pay Sprint PCS when subscribers based in the
Company's territory use the Sprint PCS nationwide network outside the
Company's territory. Pursuant to an agreement in principle announced in
April 2001, Spring PCS provided notice of a reduction of the reciprocal
roaming rate from $0.20 to $0.15 per minute of use effective June 1, 2001,
and to $0.12 per minute of use effective October 1, 2001. The details of the
agreement in principle with respect to periods after December 31, 2001 have
not yet been finalized, but the reciprocal rate cannot be less than $0.10
per minute until after December 31, 2002.
(f) Advertising and promotion. Sprint PCS is responsible for all national
advertising and promotion of Sprint PCS products and services. The Company
is responsible for local advertising and promotion of Sprint PCS products
and services in the Company's territory.
(g) Program requirements including technical and customer care standards.
The Company is required to comply with Sprint PCS' program requirements,
including technical standards, customer service standards, national and
regional distribution and national accounts programs. Sprint PCS can adjust
the program requirements under the conditions provided in the management
agreement.
(h) Non-competition. The Company may not offer Sprint PCS products and
services outside the Company's territory without the consent of Sprint PCS.
F-12
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(i) Inability to use non-Sprint PCS brands. Without Sprint PCS' consent,
the Company may not market, promote, advertise, distribute, lease or sell
any of the Sprint PCS products or services on a non-branded, "private label"
basis or under any brand, trademark or trade name other than the Sprint PCS
brand, except for certain sales to resellers.
(j) Rights of first refusal. Sprint PCS has certain rights of first
refusal to buy the Company's assets upon a proposed sale of all or
substantially all of the Company's assets.
The management agreement can be terminated as a result of a number of events
including an uncured breach of the management agreement or bankruptcy of either
party to the agreement. In the event that the management agreement is not
renewed or terminated, certain formulas apply to the valuation and disposition
of the Company's assets.
Amounts related to the Sprint agreements are as follows (dollars in thousands):
Year Year Nine months
ended ended ended
September 30, September 30, September 30,
2001 2000 1999
------------- ------------- ------------- -
Amounts included in the Consolidated
Statements of Operations:
Cost of service and roaming...... $70,776 $6,935 --
Selling expense and marketing.... 20,827 5,716 --
Service Agreement
The services agreement outlines various support services such as activation,
billing and customer care that are provided to the Company by Sprint PCS. These
services are available to the Company at established rates. Sprint PCS can
change any or all of the service rates one time in each twelve-month period.
The Company may discontinue the use of any service upon three months written
notice. Sprint PCS may discontinue a service provided that it gives nine months
written notice. The services agreement automatically terminates upon
termination of the management agreement.
Trademark and Service License Agreements
The trademark and service mark license agreements with Sprint and Sprint PCS
provide the Company with non-transferable, royalty free licenses to use the
Sprint and Sprint PCS brand names, the "diamond" symbol and several other
trademarks and service marks. The Company's use of the licensed marks is
subject to adherence to quality standards determined by Sprint and Sprint PCS.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if the Company files for bankruptcy, materially breaches the
agreement or if the management agreement is terminated.
(3) Accounts receivable, net
On May 1, 2001, pursuant to an agreement in principle, Sprint PCS provided
notice of a reduction of the reciprocal roaming rate exchanged between Sprint
PCS and the Company for customers who roam into the other party's (or another
Sprint PCS network partners') territory. The rate was reduced from $0.20 per
minute of use to $0.15 per minute of use beginning June 1, 2001, and to $0.12
per minute of use beginning October 1, 2001. The details of the agreement in
principle with respect to periods after December 31, 2001 have not yet been
finalized, but the reciprocal rate cannot be less than $0.10 per minute until
after December.
In accordance with the agreement in principle announced in April 2001,
Sprint PCS provided notice of reduction of the roaming rate to $0.15 per minute
of use on June 1, 2001, and to $0.12 per minute of use on October 1, 2001. The
details of the agreement in principle with respect to periods after December
31, 2001 have not yet been finalized, but the reciprocal rate cannot be less
than $0.10 per minute until after December 31, 2002.
F-13
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts receivable, net, includes amounts from customers with respect to
airtime service charges and amounts from local third party distributors
relating to the sale of handsets and accessories. For the years ended September
30, 2001 and 2000, roaming revenues from Sprint PCS totaled $55.3 million and
$12.3 million, respectively, or 32% and 49% of total revenues. Of this amount,
$10.2 million and $3.8 million was recorded as receivable from Sprint PCS at
September 30, 2001 and 2000, respectively.
The Company records an allowance for doubtful accounts to reflect the
expected loss on the collection of receivables. Such allowance is recorded for
accounts receivable from customers and third party distributors and totaled
$2.8 million at September 30, 2001 compared to $0.6 million at September 30,
2000.
(4) Property and Equipment
Property and equipment consists of the following at September 30 (dollars in
thousands):
2001 2000
-------- --------
Network assets................................ $217,788 $158,720
Computer equipment............................ 3,684 3,081
Furniture, fixtures, and office equipment..... 11,592 6,800
-------- --------
Total network assets and equipment......... 233,064 168,601
Less accumulated depreciation and amortization (43,621) (13,005)
-------- --------
Total network assets and equipment, net.... 189,443 155,596
Construction in progress...................... 19,883 27,985
-------- --------
Property and equipment, net................ $209,326 $183,581
======== ========
(5) Long-Term Debt
Long-termdebt consists of the following at September 30 (dollars in thousands):
2001 2000
-------- --------
Senior Credit Facility dated August 16, 1999; variable interest of LIBOR + 3.75% (7.28%
and 10.44% at September 30, 2001 and 2000, respectively); interest due quarterly; (net
of unaccreted original issue discount of $574 and $772 at September 30, 2001 and
2000, respectively, see note 7(b)(ii))................................................ $ 74,726 $ 12,728
Senior Subordinated Discount Notes due 2009; interest at 13.5%; interest accretes until
October 1, 2004 after which semi-annual interest payments are required beginning
April 1, 2005 (net of unaccreted original issue discount of $9,524 and $9,853 at
September 30, 2001 and 2000, respectively, see note 7(b)(iii))........................ 191,600 167,999
-------- --------
Long-term debt, net.................................................................. $266,326 $180,727
======== ========
Senior Credit Facility
On August 16, 1999, the Company entered into a $153.5 million Credit
Agreement (the "Senior Credit Facility" or "Credit Agreement"). The Credit
Agreement provides for (i) a $13.5 million senior secured term loan (the
"Tranche I Term Loan") which matures on June 6, 2007, and (ii) a $140.0 million
senior secured term loan (the "Tranche II Term Loan") which matures on
September 30, 2008. Mandatory quarterly payments of principal are required
beginning December 31, 2002 for the Tranche I Term Loan and March 31, 2004 for
the Tranche II Term Loan initially in the amount of 3.75% of the loan balance
then outstanding and increasing thereafter. A
F-14
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
commitment fee of 1.50% on unused borrowings under the Senior Credit Facility
is payable quarterly and included in interest expense. For the years ended
September 30, 2001 and 2000, commitment fees totaled $1.5 million and $6.0
million, respectively. The Credit Agreement is secured by all the assets of the
Company. In connection with this financing, the Company issued to Lucent
Technologies, in its capacity as administrative agent and arranger, warrants to
purchase 139,035 shares of common stock that were exercisable upon issuance
(see note 7(b)(ii)). Additionally, the Company incurred origination fees and
expenses of $5.0 million, which have been recorded as financing costs and are
amortized as interest expense using the straight-line method.
The Senior Credit Facility is subject to certain restrictive covenants
including maintaining certain financial ratios, reaching defined subscriber
growth and network covered population goals, and annual capital expenditures.
Further, the Credit Agreement restricts the payment of dividends on the
Company's common stock. As of September 30, 2001, the Company is in compliance
with all covenants governing the Senior Credit Facility.
Senior Subordinated Discount Notes
On September 30, 1999, the Company received proceeds of $156.1 million from
the issuance of 300,000 units, each unit consisting of $1,000 principal amount
at maturity of 13.5% senior subordinated discount notes due 2009 and one
warrant to purchase 2.148 shares of common stock at a price of $0.01 per share
(see note 7(b)(iii)). The aggregate principal amount outstanding as of
September 30, 2001 of the senior subordinated discount notes was $201.1 million
(net of unaccreted original issue discount of $9.5 million). The Company
incurred expenses, underwriting discounts and commissions of $6.6 million
related to the senior subordinated discount notes which have been recorded as
financing costs and are amortized as interest expense using the straight-line
method.
The senior subordinated discount notes contain certain covenants relating to
limitations on the Company's ability to, among other acts, sell assets, incur
additional indebtedness, and make certain payments. As of September 30, 2001,
the Company is in compliance with all covenants governing the senior
subordinated discount notes.
Aggregate minimum annual principal payments due on all issues of long-term
debt for the next five years at September 30, 2001 and thereafter are as
follows (dollars in thousands):
Years ending September 30,
--------------------------
2002............................................... $ --
2003............................................... 2,025
2004............................................... 8,977
2005............................................... 11,970
2006............................................... 15,445
Thereafter......................................... 336,883
--------
Total........................................... 375,300
Less: Unaccreted interest portion of long-term debt (98,876)
Unaccreted original issue discounts............ (10,098)
--------
Total long-term debt........................ $266,326
========
(6) Fair Value of Financial Instruments
Fair value estimates and assumptions and methods used to estimate the fair
value of the Company's financial instruments are made in accordance with the
requirements of SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments." The Company has used available information to derive its
estimates. However, because these estimates are made as of a specific point in
time, they are not necessarily indicative of amounts the Company could realize
currently. The use of different assumptions or estimating methods may have a
material effect on the estimated fair value amounts (dollars in thousands).
F-15
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 2001 September 30, 2000
------------------- -------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
Cash and cash equivalents. $ 14,290 $ 14,290 $ 58,384 $ 58,384
Accounts receivable, net.. 23,798 23,798 4,928 4,928
Receivable from Sprint PCS 10,200 10,200 3,768 3,768
Accounts payable.......... 15,286 15,286 21,009 21,009
Accrued expenses.......... 13,840 13,840 9,548 9,548
Payable to Sprint PCS..... 27,488 27,488 5,292 5,292
Long-term debt............ 266,326 267,300 180,727 181,500
(a) Cash and cash equivalents, accounts receivable, receivable from Sprint PCS,
accounts payable, accrued expenses and payable to Sprint PCS
The carrying amounts of these items are a reasonable estimate of their fair
value due to the short-term nature of the instruments.
(b) Long-term debt
Long-term debt is comprised of the senior subordinated discount notes and
the senior credit facility. The fair value of the senior subordinated discount
notes is stated at quoted market value as of September 30, 2001 and 2000. As
there is no active market for the senior credit facility and the interest rate
is variable, management believes that the carrying amount of the senior credit
facility is a reasonable estimate of its fair value.
(7) Stockholders' Equity (Deficit)
(a) Common stock
(i) Increase in Authorized Common Shares
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 to 150,000,000 shares.
(ii) Initial Public Offering
On September 30, 1999, the Company sold 7,705,000 shares of its common stock
at a price of $17.00 per share in its initial public offering pursuant to a
registration statement filed on Form S-1 declared effective by the Securities
and Exchange Commission on September 27, 1999. Proceeds from the initial public
offering were $131.0 million. The Company incurred expenses, underwriting
discounts and commissions related to the initial public offering of $10.5
million, which have been reflected as a reduction of the offering proceeds.
(iii) Conversion of Notes Payable to Stockholders to Common Stock
On September 30, 1999, $7.3 million of convertible notes payable to
stockholders and accrued interest were converted into 869,683 shares of common
stock at the applicable conversion price of $8.84 per share, a 48% discount
from the initial public offering price. The amount related to the fair value of
the beneficial conversion feature of $7.0 million as of the date of issuance
(May 1999) has been recorded as additional paid-in-capital and recognized as
interest expense from the date of issuance to the expected date of conversion
(August 1999).
F-16
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 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 American Ventures, Inc.
pursuant to a previously authorized promissory note issued by the Company. The
shares were authorized for issuance in consideration of $0.1 million of
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 American Ventures, Inc. The promissory
notes and related accrued interest were converted into shares of common stock
at a price 48% less than the price of a share of common stock sold in the
Company's initial public offering of common stock. The amount related to the
fair value of the beneficial conversion feature of $0.1 million has been
recorded as additional paid-in-capital and recognized as interest expense in
the year ended September 30, 2000.
(iv) Stock splits
Shares of common stock outstanding reflect a 39,134-for-one stock split
effective July 9, 1999 and subsequent reverse stock splits of 0.996-for-one,
which was effective July 28, 1999, 0.900-for-one which was effective September
15, 1999, and 0.965-for-one which was effective September 27, 1999. All share
and stockholders' equity amounts have been restated for all periods presented
for these stock splits.
(b) Common Stock Purchase Warrants
(i) Warrants Issued to Stockholders
In August 1998, the Company issued stock purchase warrants to stockholders
in consideration for: (1) loans made by the stockholders to the Company which
have been converted to additional paid-in capital, (2) guarantees of certain
bank loans provided by the stockholders, and (3) in connection with $4.8
million in convertible notes provided by the stockholders.
In connection with a refinancing of the convertible notes payable to
stockholders in May 1999, the Company cancelled the August 1998 warrants and
issued new warrants to Weiss, Peck & Greer Venture Partners Affiliated Funds to
purchase shares of common stock for an aggregate amount up to $2.7 million at
an exercise price 25% less than the price of a share of common stock sold in
the initial public offering, or $12.75 per share. The warrants for 214,413
shares were exercisable upon issuance and may be exercised for two years from
the date of issuance. The Company allocated $1.7 million of the proceeds from
this refinancing to the fair value of the warrants and recorded a discount on
the related debt, which was recognized as interest expense from the date of
issuance (May 1999) to the expected date of conversion (August 1999).
In July 2000, all of such warrants were exercised. Net of 40,956 shares
surrendered in payment of the exercise price, 173,457 shares of common stock
were issued.
(ii) Senior Credit Facility
On August 16, 1999, the Company issued stock purchase warrants to Lucent
Technologies in consideration of the senior credit facility. The base price of
the warrants equals 120% of the price of one share of common stock at the
closing of the initial public offering, or $20.40 per share, and the warrants
are exercisable for an aggregate of 128,860 shares of the Company's common
stock. The warrants expire on August 15, 2004. The Company allocated $0.7
million of the proceeds from the senior credit facility to the fair value of
the warrants calculated using the Black-Scholes option pricing model and
recorded an original issue discount on the senior credit facility, which is
recognized as interest expense over the period from the date of issuance to the
maturity date using the effective interest method.
F-17
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 2000, AirGate PCS issued stock purchase warrants to Lucent
Technologies to acquire 10,175 shares of common stock on terms identical to
those discussed in the previous paragraph. The Company recorded a discount on
the senior credit facility of $0.3 million, which represents the fair value of
the warrants on the date of grant using a Black-Scholes option pricing model.
The discount is recognized as interest expense over the period from the date of
issuance to maturity using the effective interest method.
Interest expense relating to both grants of Lucent Technologies warrants for
the years ended September 30, 2001 and 2000 and the nine months ended September
30, 1999, was $0.2 million, $0.2 million and $0.02 million, respectively.
In September 2000, warrants to acquire 128,860 shares of common stock at a
price of $20.40 per share were exercised. Net of 48,457 shares surrendered in
payment of the exercise price, 80,403 shares of common stock were issued. As of
September 30, 2001, warrants to acquire 10,175 shares of common stock remain
outstanding.
(iii) Senior Subordinated Discount Notes
On September 30, 1999, as part of the Company's senior subordinated discount
note offering, the Company issued warrants to purchase 2.148 shares of common
stock for each unit at a price of $0.01 per share. In January 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. The Company allocated
$10.9 million of the proceeds from the units offering to the fair value of the
warrants and recorded a discount on the notes, which is recognized as interest
expense over the period from issuance to the maturity date using the effective
interest method. For the years ended September 30, 2001 and 2000, amortization
of the fair value of the warrants totaling $0.8 million and $0.7 million was
recorded as interest expense respectively. The warrants were exercisable
beginning upon the effective date of the registration statement registering
such warrants, for an aggregate of 644,400 shares of common stock. The warrants
expire October 1, 2009. As of September 30, 2001, warrants representing 589,225
shares of common stock had been exercised (80,641 in 2001 and 508,584 in 2000),
and warrants representing 55,175 shares of common stock remain outstanding.
(c) Stock Option Plan
In July 1999, the Board of Directors approved the 1999 Stock Option Plan, an
incentive stock option plan whereby 2.0 million shares of common stock were
reserved for issuance to current and future employees. Options under the plan
vest at various terms up to a five year period beginning at the grant date and
expire ten years from the date of grant. In the nine months ended September 30,
1999, unearned stock option compensation of $3.2 million was recorded for
grants made during that period representing the difference between the initial
public offering price of $17.00 per share and the exercise price at the date of
grant of $14.00 per share. During the year ended September 30, 2000, unearned
stock option compensation of $2.2 million was recorded for grants made during
that period representing the difference between the exercise price at the date
of grant and the fair value at the date of grant. Noncash stock option
compensation is recognized over the period in which the related services are
rendered and totaled $1.7 million and $1.7 million for the years ended
September 30, 2001 and 2000, respectively, and $0.3 million for the nine months
ended September 30, 1999.
On January 31, 2001, the Board of Directors approved the 2001 Non-Executive
Stock Option Plan, whereby 150,000 shares of common stock were reserved for
issuance to current and future employees who are not eligible for grants under
the 1999 Stock Option Plan. Options under the plan vest ratably over a
four-year period beginning at the grant date and expire ten years from the date
of grant. As of September 30 2001, options to acquire 95,300 shares were
outstanding under the terms of the plan.
F-18
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On January 31, 2001, the Board of Directors approved the 2001 Employee Stock
Purchase Plan, which made available for issuance 200,000 shares of common
stock. The 2001 Employee Stock Purchase Plan allows employees to make voluntary
payroll contributions towards the purchase of the Company's common stock. At
the end of the offering period, initially the calendar year, the employee will
be able to purchase stock at a 15% discount to the market price of the
Company's common stock at the beginning or end of the offering period,
whichever is lower. As of September 30, 2001 employees had contributed $0.4
million to the plan.
On July 31, 2001, the Company's Board of Directors approved the AirGate PCS,
Inc. 2001 Non-Employee Director Compensation Plan. Pursuant to the plan,
non-employee directors receive an annual retainer, which may be comprised of
cash, restricted stock or options to purchase shares of the Company's common
stock. From May 1, 2001 to September 30, 2001, each of Messrs. Dillon, Ferchat
and Schiffman received $5,000 under the plan and each of Messrs. Bianchino and
Harris received approximately $4,200. For each plan year (defined as the
starting on the day of an annual meeting of the Company's stockholders and
ending on the day before the next annual meeting of the Company's stockholders)
beginning in 2002, each non-employee director of the Company that chairs one or
more committees of the board of directors will receive an annual retainer of
$12,000 and all other non-employee directors shall receive $10,000. The
recipient may elect to receive up to 50% of such amount in the form of
restricted stock or options to purchase shares of the Company's common stock.
In addition, each non-employee director that joins the Company's Board of
Directors after May 1, 2001, shall receive an initial grant of options to
acquire 5,000 shares of the Company's common stock. The options will vest in
three equal annual installments beginning on the first day of the plan year
following the year of grant. Each participant will also receive an annual grant
of options to acquire 5,000 shares of the Company's common stock which shall
vest on the first day of the plan year following the year of grant. In lieu of
this annual grant, the recipient may elect to receive three year's worth of
annual option grants in a single upfront grant of options to acquire 15,000
shares of the Company's common stock exercisable in three equal annual
installments on the first day of each of the three succeeding plan years. All
options will have an exercise price equal to the fair market value of the
Company's common stock on the date of grant. The Company will also reimburse
each of the non-employee directors for reasonable travel expenses to board and
committee meetings.
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for its stock option and stock purchase plans.
Had compensation costs for the Company's stock option and stock purchase plans
been determined in accordance with SFAS No. 123, the Company's net loss and
basic and diluted net loss per share of common stock for the year ended
September 30, 2001 and 2000 and the nine months ended September 30, 1999 would
have increased to the pro forma amounts indicated below (dollars in thousands,
except for per share amounts):
Year Ended Nine Months
September 30, Ended
------------------- September 30,
2001 2000 1999
--------- -------- -------------
Net loss:
As reported....................................... $(110,990) $(81,323) $(15,599)
Pro forma......................................... (117,017) (84,521) (16,274)
Basic and diluted net loss per share of common stock:
As reported....................................... $ (8.48) $ (6.60) $ (4.57)
Pro forma......................................... (8.94) $ (6.86) $ (4.77)
F-19
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value for stock options granted was estimated at the date of the
grant using the Black-Scholes option pricing model with the following
assumptions:
Year Ended Nine Months
September 30, Ended
------------ September 30,
2001 2000 1999
----- ----- -------------
Risk-free interest return 3.5% 6.5% 6.0%
Volatility............... 100.0% 120.0% 60.0%
Dividend yield........... 0 0 0
Expected life in years... 4 5 5
The following table summarizes activity under the Company's stock option
plans:
Weighted-
average
exercise
Number of price
Options per share
--------- ---------
Options outstanding as of December 31, 1998. -- --
Granted.................................... 1,075,000 $14.00
--------- ------
Options outstanding as of September 30, 1999 1,075,000 $14.00
Granted.................................... 600,500 $51.63
Exercised.................................. (84,605) $14.00
Forfeited.................................. (86,250) $19.15
--------- ------
Options outstanding as of September 30, 2000 1,504,645 $28.72
Granted.................................... 502,587 $41.35
Exercised.................................. (467,556) $14.39
Forfeited.................................. (82,741) $36.66
--------- ------
Options outstanding as of September 30, 2001 1,456,935 $37.23
========= ======
Options exercisable as of September 30, 2001 406,455 $30.05
========= ======
The following table summarizes information for stock options outstanding and
exercisable at September 30, 2001:
Weighted-
average Options Exercisable
remaining ----------------------------
Range of Number of Weighted-average contractual Number Weighted-average
exercise prices options exercise price life (in years) exercisable exercise price
--------------- --------- ---------------- --------------- ----------- ----------------
$2.00 10,000 $ 2.00 8.31 5,000 $ 2.00
14.00 485,089 14.00 7.82 244,093 14.00
35.63--47.50 678,646 41.79 9.00 84,862 44.33
52.00--66.94 263,200 64.96 8.84 65,500 66.59
98.50 20,000 98.50 8.44 7,000 98.50
--------- ------ ---- ------- ------
1,456,935 $37.23 8.57 406,455 $30.05
========= ====== ==== ======= ======
(d) Preferred Stock
The Company's articles of incorporation authorize the Company's Board of
Directors to issue up to 5 million shares of preferred stock without
stockholder approval. The Company has not issued any preferred stock as of
September 30, 2001.
F-20
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) Income Taxes
The provision for income taxes includes income taxes currently payable and
those deferred because of temporary differences between the financial statement
and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future and any increase or decrease in the valuation
allowance for deferred income tax assets.
Income tax expense (benefit) for the years ended September 30, 2001 and
2000, and the nine months ended September 30, 1999 differed from the amounts
computed by applying the statutory U.S. Federal income tax rate of 34% to loss
before income taxes as a result of the following (dollars in thousands):
Year Ended Nine Months
September 30, Ended
------------------ September 30,
2001 2000 1999
-------- -------- -------------
Computed "expected" tax benefit.......................... $(37,737) $(27,650) $(5,304)
(Increase) decrease in income tax benefit resulting from:
Expenses related to LLC predecessors..................... -- -- 7
Stock option deductions.................................. (2,224) -- --
State income tax benefit, net of Federal effect.......... (6,120) (5,116) (325)
Increase in valuation allowance.......................... 44,697 31,000 3,869
Nondeductible interest expense........................... 1,308 1,224 1,916
Other, net............................................... 76 542 (163)
-------- -------- -------
Total income tax expense (benefit)................ $ -- $ -- $ --
======== ======== =======
The income tax effect of temporary differences that give rise to significant
portions of the Company's deferred income tax assets and liabilities as of
September 30, 2001 and 2000 are presented below (dollars in thousands):
2001 2000
-------- --------
Deferred income tax assets:
Net operating loss carryforwards................................... $ 67,818 $ 24,549
Capitalized start-up costs......................................... 3,942 7,259
Accrued expenses................................................... 409 295
Deferred interest expense.......................................... 15,735 7,321
-------- --------
Gross deferred income tax assets................................... 87,904 39,424
Less valuation allowance........................................... (81,459) (36,762)
-------- --------
Net deferred income tax assets..................................... 6,445 2,662
Deferred income tax liabilities, principally due to differences in
depreciation and amortization.................................... (6,445) (2,662)
-------- --------
Net deferred income tax assets..................................... $ -- $ --
======== ========
Deferred income tax assets and liabilities are recognized for differences
between the financial statement carrying amounts and the tax basis of assets
and liabilities which result in future deductible or taxable amounts and for
net operating loss and tax credit carryforwards. In assessing the realizability
of deferred income tax assets, management considers whether it is more likely
than not that some portion of the deferred income tax assets will be realized.
The ultimate realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management has provided a valuation allowance
against all of its deferred income tax assets because the realization of those
deferred tax assets is uncertain.
F-21
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The valuation allowance for deferred income tax assets as of September 30,
2001 and 2000 was $81.5 million and $36.8 million, respectively. The net change
in the total valuation allowance for the years ended September 30, 2001 and
2000 and the nine months ended September 30, 1999 was an increase of $44.7
million, $31.0 million and $3.9 million, respectively.
At September 30, 2001, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $172 million, which will expire in
various amounts beginning in the year 2019. Approximately $1.4 million of the
net operating loss carryforwards that the Company may use to offset taxable
income in future years is limited as a result of an ownership change, as
defined under Internal Revenue Code Section 382, which occurred effective with
the Company's initial public offering of stock on September 30, 1999. The
amount of this annual limitation is approximately $2.8 million per year. As a
result, it is anticipated that the net operating losses of the Company will be
free of any limitation, as a result of the September 30, 1999 change of
ownership, in the year ended September 30, 2001. At September 30, 2001, the
Company also has a South Carolina general business credit carryforward of
approximately $0.5 million available to offset income tax expense from this
state that will expire in the year 2009.
The net operating loss carryforward of $172 million includes deductions of
approximately $8.6 million related to the exercise of stock options, which will
be credited to additional paid in capital when recognized.
F-22
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Condensed Consolidating Financial Information
AGW Leasing Company, Inc. ("AGW") is a wholly-owned subsidiary of AirGate
PCS, Inc. AGW has fully and unconditionally guaranteed the Company's senior
subordinated discount notes and senior credit facility. AGW was formed to hold
the real estate interests for the Company's PCS network. AGW also was a
registrant under the Company's registration statement declared effective by the
Securities and Exchange Commission on September 27, 1999. AGW jointly and
severally guarantees the Company's long-term debt.
During fiscal 2000, AirGate Network Services, LLC ("ANS") was created as a
wholly-owned subsidiary of AirGate PCS, Inc. ANS has fully and unconditionally
guaranteed the Company's senior subordinated discount notes and senior credit
facility. ANS was formed to provide construction management services for the
Company's PCS network. ANS jointly and severally guarantees the Company's
long-term debt.
The condensed consolidating Balance Sheet for the Company as of September
30, 2001 is as follows (dollars in thousands):
AGW AirGate
Leasing Network
AirGate Company, Services,
PCS, Inc. Inc. LLC Eliminations Consolidation
--------- -------- --------- ------------ -------------
Cash and cash equivalents..................... $ 14,447 $ -- $ (157) $ -- $ 14,290
Property and equipment, net................... 160,203 -- 49,123 -- 209,326
Investment in subsidiaries.................... 37,540 -- -- (37,540) --
Other assets.................................. 142,738 -- 501 (85,845) 57,394
-------- -------- ------- --------- --------
Total assets............................... $354,928 $ -- $49,467 $(123,385) $281,010
======== ======== ======= ========= ========
Current liabilities........................... $ 68,402 $ 26,301 $58,241 $ (85,845) $ 67,099
Noncurrent deferred revenue................... 309 -- -- -- 309
Long-term debt................................ 266,326 -- -- -- 266,326
-------- -------- ------- --------- --------
Total liabilities.......................... 335,037 26,301 58,241 (85,845) 333,734
-------- -------- ------- --------- --------
Stockholders' Equity (deficit)................ 19,891 (26,301) (8,774) (37,540) (52,724)
-------- -------- ------- --------- --------
Total liabilities and stockholders' equity
(deficit)................................ $354,928 $ -- $49,467 $(123,385) $281,010
======== ======== ======= ========= ========
The condensed consolidating statement of operations for the Company for the
year ended September 30, 2001 is as follows (dollars in thousands):
AGW AirGate
Leasing Network
AirGate Company, Services,
PCS, Inc. Inc. LLC Eliminations Consolidation
--------- -------- --------- ------------ -------------
Total revenues................................ $ 172,087 $ -- $ -- $-- $ 172,087
Cost of service and roaming................... (103,804) (12,928) -- -- (116,732)
Selling and marketing......................... (69,833) (1,784) -- -- (71,617)
General and administrative.................... (14,562) (866) (313) -- (15,741)
Other......................................... (50,310) -- 1,991 -- (48,319)
Depreciation and amortization................. (23,354) 15,578 (7,313) -- (30,667)
--------- -------- -------- --- ---------
Total expenses............................. (261,863) (15,578) (5,635) -- (283,076)
--------- -------- -------- --- ---------
Net loss...................................... $ (89,776) $(15,578) $ (5,635) $-- $(110,989)
========= ======== ======== === =========
Operating activities.......................... $ (53,024) -- $ 12,174 -- $ (40,850)
Investing activities.......................... (59,693) -- (12,079) -- (71,772)
Financing activities.......................... 68,525 -- -- -- 68,525
--------- -------- -------- --- ---------
Decrease in cash or cash equivalents.......... (44,192) -- 95 -- (44,097)
Cash and cash equivalents at beginning of year 58,639 -- (252) -- 56,387
--------- -------- -------- --- ---------
Cash and cash equivalents at end of year...... $ 14,447 $ -- $ (157) $-- $ 14,290
========= ======== ======== === =========
F-23
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The condensed consolidating Balance Sheet for the Company as of September
30, 2000 is as follows (dollars in thousands):
AGW AirGate
Leasing Network
AirGate Company, Services,
PCS, Inc. Inc. LLC Eliminations Consolidation
--------- -------- --------- ------------ -------------
Cash and cash equivalents..................... $ 58,636 $ -- $ (252) $ -- $ 58,384
Property and equipment, net................... 138,924 -- 44,657 -- 183,581
Investment in subsidiaries.................... 16,326 -- -- (16,326) --
Other assets.................................. 85,055 -- 500 (58,572) 26,983
-------- -------- ------- -------- --------
Total assets............................... $298,941 $ -- $44,905 $(74,898) $268,948
======== ======== ======= ======== ========
Current liabilities........................... $ 36,760 $ 11,133 $48,356 $(58,572) $ 37,677
Long-term deferred revenue.................... 671 -- -- -- 671
Long-term debt................................ 180,727 -- -- -- 180,727
-------- -------- ------- -------- --------
Total liabilities.......................... 218,158 11,133 48,356 (58,572) 219,075
-------- -------- ------- -------- --------
Stockholders' equity (deficit)................ 80,783 (11,133) (3,451) (16,326) 49,873
-------- -------- ------- -------- --------
Total liabilities and stockholders' equity
(deficit)................................ $298,941 $ -- $44,905 $(74,898) $268,948
======== ======== ======= ======== ========
The condensed consolidating statement of operations for the Company for the
year ended September 30, 2000 is as follows (dollars in thousands):
AGW AirGate
Leasing Network
AirGate Company, Services,
PCS, Inc. Inc. LLC Eliminations Consolidation
--------- -------- --------- ------------ -------------
Total revenues............................ $ 25,065 $ -- $ -- $-- $ 25,065
Cost of service and roaming............... (18,913) (8,857) -- -- (27,770)
Selling and marketing..................... (27,832) (525) -- -- (28,357)
General and administrative................ (12,108) (1,440) (530) -- (14,078)
Other..................................... (84,037) -- -- -- (84,037)
Depreciation and amortization............. (8,583) -- (3,451) -- (12,034)
--------- -------- -------- --- ---------
Total expenses......................... (151,473) (10,822) (3,981) -- (166,276)
--------- -------- -------- --- ---------
Net loss.................................. $(126,408) $(10,822) $ (3,981) $-- $(141,211)
========= ======== ======== === =========
Operating activities...................... $ (89,165) -- $ 47,556 -- $ (41,609)
Investing activities...................... (104,589) -- (47,808) -- (152,397)
Financing activities...................... (6,510) -- -- -- (6,510)
--------- -------- -------- --- ---------
Decrease in cash or cash equivalents...... (200,264) -- (252) -- (200,516)
Cash and cash equivalents at the beginning
of year................................. 258,900 -- -- -- 258,900
--------- -------- -------- --- ---------
Cash and cash equivalents at end of year.. $ 58,636 $ -- $ (252) -- $ 58,384
========= ======== ======== === =========
F-24
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The condensed consolidating Balance Sheet for the Company as of September
30, 1999 and for the nine months then ended is as follows (dollars in
thousands):
AGW AirGate
Leasing Network
AirGate Company, Services,
PCS, Inc. Inc. LLC Eliminations Consolidation
--------- -------- --------- ------------ -------------
Cash and cash equivalents..................... $258,900 $ -- $ -- $ -- $258,900
Property and equipment, net................... 44,206 -- -- -- 44,206
Investment in subsidiaries.................... 1,524 -- -- (1,524) --
Other assets.................................. 15,593 -- -- (1,379) 14,214
-------- ------- ---- ------- --------
Total assets............................... $320,223 $ -- $ -- $(2,903) $317,320
======== ======= ==== ======= ========
Current liabilities........................... $ 31,509 $ 1,379 $ -- $(1,379) $ 31,509
Long-term debt................................ 157,967 -- -- -- 157,967
-------- ------- ---- ------- --------
Total liabilities.......................... 189,476 1,379 -- (1,379) 189,476
-------- ------- ---- ------- --------
Stockholders' equity (deficit)................ 130,749 (1,379) -- (1,524) 127,846
-------- ------- ---- ------- --------
Total liabilities and stockholders' equity
(deficit)................................ $320,225 $ -- $ -- $(2,903) $317,322
======== ======= ==== ======= ========
The condensed consolidating statement of operations for the Company for the
year ended September 30, 1999 is as follows (dollars in thousands):
AGW AirGate
Leasing Network
AirGate Company, Services,
PCS, Inc. Inc. LLC Eliminations Consolidation
--------- -------- --------- ------------ -------------
Total expenses $(14,075) $(1,524) $-- $-- $(15,599)
-------- ------- --- --- --------
Net loss...... $(14,075) $(1,524) $-- $-- $(15,599)
======== ======= === === ========
(10) Acquisition of assets
On February 28, 2001, certain operating assets and intangibles (primarily
leasehold interests) were acquired to convert one of the Company's distributors
into Company owned retail outlets. The Company paid a total purchase price of
approximately $0.5 million, and allocated $0.3 million to operating equipment
and leasehold improvements for eight retail stores and two mall kiosks and $0.2
million to a two-year non-compete agreement. The amount relating to the
non-compete agreement is amortized over the contractual period of two years.
(11) Commitments
(a) Operating Leases
The Company is obligated under noncancelable operating lease agreements for
office space, cell sites, vehicles and office equipment. Future minimum annual
lease payments under these noncancelable operating lease agreements for the
next five years and in the aggregate at September 30, 2001, are as follows
(dollars in thousands):
Years ending September 30,
--------------------------
2002.......................................... $17,740
2003.......................................... 17,461
2004.......................................... 16,693
2005.......................................... 8,998
2006.......................................... 3,986
Thereafter.................................... 6,581
-------
Total future minimum annual lease payments. $71,459
=======
F-25
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense for all operating leases was $15.2 million, $9.8 million, and
$1.4 million for the years ended September 30, 2001 and 2000, and for the nine
months ended September 30, 1999, respectively.
(b) Employment Agreements
The Company has entered into employment agreements with certain employees,
which provide that the employee will not compete in the business of wireless
telecommunications in the Company's territory for a specified period after
their respective termination dates. The employment agreements also define
employment terms including salary, bonus and benefits to be provided to the
respective employees.
In May 2000, the Company entered into a retention bonus agreement with
Thomas M. Dougherty, its Chief Executive Officer. So long as Mr. Dougherty is
not terminated for cause or does not voluntarily terminate employment, the
Company must make on specified payment dates, generally quarterly, extending to
January 15, 2004, periodic retention bonuses totaling $3.6 million. For the
years ended September 30, 2001 and 2000, the Company has recorded compensation
expense of $0.7 million and $1.2 million 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.
(c) 401(k) Plan
In February 2000, the Company established the AirGate PCS 401(k) Retirement
Plan, a defined contribution employee savings plan under Section 401(k) of the
Internal Revenue Code. For the years ended September 30, 2001 and 2000,
employer contributions of $0.6 million and $0.2 million, respectively, were
made to the plan.
(12) Related Party
For the year ended September 30, 2001, a director of the Company received
$50,000 for consulting services related to the pending merger with iPCS, Inc.
(13) Selected Quarterly Financial Data (Unaudited):
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- ---------
Year ended September 30, 2001:
Total revenue....................... $ 23,019 $ 37,078 $ 49,738 $ 62,252 $ 172,087
Operating loss...................... (27,404) (21,338) (16,295) (19,517) (84,554)
Net loss............................ (33,863) (28,372) (23,743) (25,012) (110,990)
Net loss per share--basic and diluted... (2.64) (2.18) (1.80) (1.88) (8.48)
Year ended September 30, 2000:
Total revenue.......................... $ 130 $ 1,604 $ 6,680 $ 16,651 $ 25,065
Operating loss......................... (6,331) (13,987) (20,300) (23,906) (64,524)
Net loss............................... (9,828) (17,104) (25,196) (29,195) (81,323)
Net loss per share--basic and diluted.... (0.82) (1.40) (2.03) (2.30) (6.60)
(14) Subsequent Events (Unaudited):
(a) On October 5, 2001 and November 23, 2001, the Company received advances
totaling an additional $20.0 million under the senior credit facility.
As of November 30, 2001, there is $58.2 million of borrowings available
under the senior credit facility
(b) On October 15, 2001, the Securities and Exchange Commission declared the
Company's merger proxy on Form S-4 related to the iPCS merger effective.
F-26
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c)Merger with iPCS, Inc.
The Company and iPCS, Inc. announced the execution of a definitive
merger agreement, to combine in a tax-free, stock for stock transaction
for 13.5 million shares of AirGate common stock, which includes 1.1
million shares reserved for the assumption of outstanding iPCS options
and warrants.
Completion of the merger was subject to shareholder approval by both
companies. iPCS will merge with a wholly owned subsidiary created by
AirGate for the purposes of this transaction. Under the terms of the
transaction, AirGate will issue approximately 12.4 million shares of
AirGate common stock. AirGate is holding in reserve an additional 1.1
million shares reserved for the assumption of outstanding iPCS options
and warrants. Assuming the full conversion of each company's options and
warrants, AirGate's shareholders will own 52.5 percent of the combined
company, and iPCS' shareholders will own 47.5 percent. The combination
will be accounted for using the purchase method of accounting. Following
the merger, AirGate will own 100% of iPCS. Each share of iPCS common
stock owned by iPCS stockholders will be exchanged in the merger for
0.1594 of a share of AirGate common stock. iPCS stockholders receive
only whole shares of AirGate common stock and cash in lieu of any
fractional shares. The transaction is anticipated to close on November
30, 2001.
Other conditions of the merger include consent or approval of Sprint PCS
and consent or approval of lenders under the AirGate and iPCS credit
facilities, all of which have been obtained. All consents, permits,
licenses and approvals required by any governmental authority have been
obtained and no legal restraints or prohibitions exist which prevent
completion of the merger.
F-27
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AirGate PCS, Inc.:
Under date of November 9, 2001, we reported on the consolidated balance
sheets of AirGate PCS, Inc. and subsidiaries as of September 30, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the years ended September 30, 2001 and 2000, and
the nine months ended September 30, 1999. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule included in the annual report on Form 10-K, as
listed in the index under Item 14(b). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Atlanta, Georgia
November 9, 2001
F-28
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended September 30, 2001 and 2000, and
the Nine Months Ended September 30, 1999
(in thousands)
Additions
Blance at Charged to Balance
Beginning Costs and at End of
Classification of Period Expenses Deductions Period
-------------- --------- ---------- ---------- ---------
September 30, 2001
Allowance for Doubtful Accounts. $ 563 $10,999 $(8,803) $ 2,759
Income Tax Valuation Allowance.. $36,762 $44,697 $ -- $81,459
September 30, 2000
Allowance for Doubtful Accounts. $ -- $ 563 $ -- $ 563
Income Tax Valuation Allowance.. $ 5,762 $31,000 $ -- $36,762
September 30, 1999
Allowance for Doubtful Accounts. $ -- $ -- $ -- $ --
Income Tax Valuation Allowance.. $ 1,893 $ 3,869 $ -- $ 5,762
F-29
INDEPENDENT AUDITORS' REPORT
iPCS, Inc. Schaumburg, Illinois
We have audited the accompanying consolidated balance sheets of iPCS, Inc.
and Subsidiaries and Predecessor (the "Company") as of September 30, 2001 and
December 31, 2000 and 1999, the consolidated statements of operations and of
cash flows for the nine months ended September 30, 2001 and 2000, for the year
ended December 31, 2000 and for the period from January 22, 1999 (date of
inception) through December 31, 1999, and the consolidated statements of
redeemable preferred stock and equity (deficiency) for the nine months ended
September 30, 2001, for the year ended December 31, 2000 and for the period
from January 22, 1999 (date of inception) through December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September
30, 2001 and December 31, 2000 and 1999, and the results of its operations and
its cash flows for the nine months ended September 30, 2001 and 2000, for the
year ended December 31, 2000 and for the period from January 22, 1999 (date of
inception) through December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
/S/ DELOITTE & TOUCHE LLP
Davenport, Iowa
November 5, 2001
F-30
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
September 30, -----------------
2001 2000 1999
------------- -------- -------
Assets
------
Current Assets:
Cash and cash equivalents........................................ $ 54,579 $165,958 $ 2,733
Accounts receivable, less allowance: 2001--$2,713; 2000--$328;
1999--$1....................................................... 14,964 5,350 92
Other receivables................................................ 1,604 231 39
Inventories...................................................... 3,379 3,314 927
Prepaid expenses and other assets................................ 4,799 1,839 432
--------- -------- -------
Total current assets......................................... 79,325 176,692 4,223
Property and equipment including construction in progress, net...... 198,161 129,087 39,106
Financing costs, less accumulated amortization: 2001--$1,173; 2000--
$445; 1999--$66................................................... 9,558 10,045 1,514
Intangible assets, net.............................................. 39,934 12,359 --
Other assets........................................................ 1,778 392 --
--------- -------- -------
Total assets................................................. $ 328,756 $328,575 $44,843
========= ======== =======
Liabilities, Redeemable Preferred Stock and Equity (Deficiency)
---------------------------------------------------------------
Current Liabilities:
Accounts payable................................................. $ 31,410 $ 27,294 $ 3,839
Accrued expenses................................................. 4,446 2,686 393
Accrued interest................................................. 79 22 265
Deferred revenue................................................. 4,742 1,346 --
Capital lease obligations--current portion....................... 7 12 --
Advance on tower sales........................................... -- -- 2,000
--------- -------- -------
Total current liabilities.................................... 40,684 31,360 6,497
Deferred gain on tower sales........................................ 7,667 6,000 1,655
Deferred rent....................................................... 2,264 -- --
Deferred revenue.................................................... 1,763 392 --
Capital lease obligations--long-term portion........................ 373 225 --
Accrued interest.................................................... 16,944 6,219 --
Long-term debt...................................................... 191,392 157,581 27,571
--------- -------- -------
Total liabilities............................................ 261,087 201,777 35,723
--------- -------- -------
Redeemable preferred stock $0.01 par value; 75,000,000 shares
authorized; 23,090,909 shares issued and outstanding.............. 121,548 114,080 --
--------- -------- -------
Commitments and contingencies
Equity (Deficiency):
Common stock, $0.01 par value; 300,000,000 shares authorized;
44,869,643 shares issued and outstanding.......................... 449 449 --
Additional paid in capital.......................................... 70,853 78,321 --
Contributed capital--Predecessor Company............................ -- -- 13,500
Unearned compensation............................................... (3,985) (5,515) --
Accumulated deficit................................................. (121,196) (60,537) (4,380)
--------- -------- -------
Total equity (deficiency).................................... (53,879) 12,718 9,120
--------- -------- -------
Total liabilities, redeemable preferred stock and equity
(deficiency)............................................... $ 328,756 $328,575 $44,843
========= ======== =======
See notes to consolidated financial statements.
F-31
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
For the Period from
For the Nine Months Ended For the Year January 22, 1999
September 30, Ended (date of inception)
------------------------ December 31, through
2001 2000 2000 December 31, 1999
----------- ----------- ------------ -------------------
Revenues:
Service................................... $ 71,834 $ 9,914 $ 18,534 $ 71
Equipment and other....................... 5,678 1,700 2,695 144
----------- ----------- ----------- -----------
Total revenues..................... 77,512 11,614 21,229 215
----------- ----------- ----------- -----------
Operating Expenses:
Cost of service........................... 60,496 9,812 16,786 1,695
Cost of equipment......................... 18,292 4,977 10,053 484
Selling................................... 20,845 4,960 10,783 778
General and administrative:
Non-cash compensation................. 1,530 10,686 11,212 --
Taxes on non-cash compensation........ -- 1,567 1,567 --
Other general and administrative...... 8,635 4,694 9,319 1,520
Depreciation and amortization......... 15,385 5,549 8,609 381
----------- ----------- ----------- -----------
Total operating expenses........... 125,183 42,245 68,329 4,858
----------- ----------- ----------- -----------
Loss from operations (47,671) (30,631) (47,100) (4,643)
Other Income (Expense):
Interest income........................... 3,537 1,949 3,443 89
Interest expense.......................... (16,995) (6,259) (11,741) --
Other income.............................. 470 424 726 174
----------- ----------- ----------- -----------
Loss Before Extraordinary Item............... (60,659) (34,517) (54,672) (4,380)
Extraordinary item--loss on early
extinguishment of debt..................... -- (1,485) (1,485) --
----------- ----------- ----------- -----------
Net Loss..................................... $ (60,659) $ (36,002) $ (56,157) $ (4,380)
=========== =========== =========== ===========
Loss before extraordinary item............... $ (60,659) $ (34,517) $ (54,672) $ (4,380)
Beneficial conversion feature related to
redeemable preferred stock................. -- (46,387) (46,387) --
Dividends and accretion on redeemable
preferred stock............................ (7,468) (881) (1,963) --
----------- ----------- ----------- -----------
Loss available to common stockholders........ (68,127) (81,785) (103,022) (4,380)
Extraordinary item........................... -- (1,485) (1,485) --
----------- ----------- ----------- -----------
Net loss available to common stockholders.... $ (68,127) $ (83,270) $ (104,507) $ (4,380)
=========== =========== =========== ===========
Pro forma basic and diluted loss per share of
common stock (unaudited):
Loss available to common stockholders
before extraordinary item............... $ (1.52) $ (1.83) $ (2.30) $ (0.10)
Extraordinary item........................ $ -- $ (0.03) $ (0.03) $ --
Net loss available to common stockholders. $ (1.52) $ (1.86) $ (2.33) $ (0.10)
Pro forma weighted average common shares
outstanding (unaudited).................... 44,869,643 44,869,643 44,869,643 44,869,643
=========== =========== =========== ===========
See notes to consolidated financial statements.
F-32
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND EQUITY (DEFICIENCY)
(In thousands, except share data)
Redeemable Contributed
Preferred Stock Common Stock Additional Capital-
------------------- ----------------- Paid in Predecessor Unearned Accumulated
Shares Amount Shares Amount Capital Company Compensation Deficit
---------- -------- ---------- ------ ---------- ----------- ------------ -----------
BALANCE AT JANUARY 22,
1999 (DATE OF
INCEPTION)
Members' contributions........ $ 13,500
Net loss...................... $ (4,380)
-------- ---------
BALANCE AT DECEMBER
31, 1999 13,500 (4,380)
Members' contributions from
January 1, 2000 to July 11,
2000......................... 16,500
Issuance of 1.5% interest in
Predecessor Company to
Mr. Yager.................... 8,480
Reorganization of Predecessor
Company to C Corporation..... 44,869,643 $449 $ 38,031 (38,480)
Sale of Series A-1 redeemable
preferred stock.............. 9,090,909 $ 46,387
Beneficial conversion feature
related to Series A-1
redeemable preferred stock... 46,387
Accretion of Series A-1
redeemable preferred
stock beneficial conversion
feature...................... (46,387)
Grant of stock options........ 8,247 $(8,247)
Amortization of unearned
compensation................. 2,732
Issuance of warrants in
connection with the senior
discount notes............... 24,859
Issuance of warrants to Sprint
PCS.......................... 9,147
Sale of Series A-2 redeemable
preferred stock.............. 14,000,000 65,730
Accrued dividends on
redeemable preferred stock... 1,808 (1,808)
Accretion to redemption amount
of redeemable preferred stock 155 (155)
Net loss...................... (56,157)
---------- -------- ---------- ---- -------- -------- ------- ---------
BALANCE AT DECEMBER
31, 2000 23,090,909 114,080 44,869,643 449 78,321 (5,515) (60,537)
Accrued dividends on
redeemable preferred stock... 6,937 (6,937)
Accretion to redemption amount
of redeemable preferred stock 531 (531)
Amortization of unearned
compensation................. 1,530
Net loss...................... (60,659)
---------- -------- ---------- ---- -------- -------- ------- ---------
BALANCE AT DECEMBER
31, 2001..................... 23,090,909 $121,548 44,869,643 $449 $ 70,853 $ -- $(3,985) $(121,196)
========== ======== ========== ==== ======== ======== ======= =========
See notes to consolidated financial statements.
F-33
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months For the Period from
Ended For the January 22, 1999
September 30, Year Ended (date of inception)
------------------- December 31, through
2001 2000 2000 December 31, 1999
--------- -------- ------------ -------------------
Cash Flows from Operating Activities:
Net loss.................................................... $ (60,659) $(36,002) $(56,157) $ (4,380)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization.............................. 15,385 5,549 8,609 381
Loss on disposal of property and equipment................. 1,042 56 56 --
Gain on tower sales........................................ (1,509) (479) (778) (174)
Amortization of deferred gain on tower sales............... (543) (180) (298) (22)
Amortization of deferred rent.............................. (135) -- -- --
Amortization of financing costs............................ 729 234 604 --
Non-cash interest.......................................... 8,842 2,322 5,109 --
Extraordinary loss on early extinguishment of debt......... -- 1,485 1,485 --
Non-cash compensation...................................... 1,530 10,686 11,212 --
Changes in assets and liabilities:
Accounts receivable....................................... (8,657) (3,313) (5,258) (92)
Other receivables......................................... (650) (141) (192) (39)
Inventories............................................... (66) 222 (2,387) (927)
Prepaid expenses and other assets......................... (4,333) (2,259) (1,799) (432)
Accounts payable, accrued expenses and accrued interest... 27,509 9,395 16,020 1,758
Deferred revenue.......................................... 4,768 521 1,738 --
--------- -------- -------- --------
Net cash flows from operating activities................ (16,747) (11,904) (22,036) (3,927)
--------- -------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures........................................ (98,394) (65,194) (90,993) (39,331)
Intangible acquired in purchase of network assets........... -- (3,526) (3,526) --
Acquisition of the Iowa City/Cedar Rapids, Iowa markets..... (31,678) -- -- --
Proceeds from disposition of fixed assets................... 42 -- -- --
Proceeds from build to suit agreement....................... 2,496 -- -- --
Proceeds from tower sales................................... 8,204 8,500 12,036 4,500
Advance on tower sales...................................... -- -- -- 2,000
--------- -------- -------- --------
Net cash flows from investing activities................ (119,330) (60,220) (82,483) (32,831)
--------- -------- -------- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt................................ 25,000 165,106 190,106 27,571
Repayment of Nortel debt.................................... C (40,346) (40,346) --
Payments on capital lease obligations....................... (13) -- (13) --
Debt financing costs........................................ (243) (10,023) (10,620) (1,580)
Interest rate protection costs.............................. (46) -- -- --
Proceeds from sale of Series A-1 redeemable preferred
stock, net of offering costs of $3,613..................... -- 46,387 46,387 --
Proceeds from sale of Series A-2 redeemable preferred
stock, net of offering costs of $4,270..................... -- -- 65,730 --
Members' contributions...................................... -- 16,500 16,500 13,500
--------- -------- -------- --------
Net cash flows from financing activities................ 24,698 177,624 267,744 39,491
--------- -------- -------- --------
Increase (decrease) in cash and cash equivalents.............. (111,379) 105,500 163,225 2,733
Cash and cash equivalents at beginning of period.............. 165,958 2,733 2,733 --
--------- -------- -------- --------
Cash and cash equivalents at end of period.................... $ 54,579 $108,233 $165,958 $ 2,733
========= ======== ======== ========
See notes to consolidated financial statements.
F-34
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS OPERATIONS
Illinois PCS, LLC was formed in January 1999 as an Illinois limited
liability company for the purpose of becoming a provider of wireless personal
communication services ("PCS"). On July 12, 2000, Illinois PCS, LLC (the
"Predecessor Company") reorganized its business into a C Corporation in which
members of the Predecessor Company received 44,869,643 shares of common stock
of iPCS, Inc. in exchange for their ownership interests in the Predecessor
Company. The ownership percentages among the members following the
reorganization remained consistent with the ownership percentages at December
31, 1999 as adjusted for the effects of the agreement described in Note 15. As
of July 12, 2000, the Predecessor Company merged with and into iPCS Wireless,
Inc., a wholly owned subsidiary of iPCS, Inc. iPCS Equipment, Inc. was also
formed and is a wholly owned subsidiary of iPCS Wireless, Inc. iPCS Wireless,
Inc. has continued the activities of the Predecessor Company and, for
accounting purposes, this transaction was accounted for as a reorganization of
the Predecessor Company into a C Corporation. iPCS, Inc. and its subsidiaries,
including the Predecessor Company, are collectively referred to as the
"Company."
In January 1999, the Company entered into affiliation agreements (the
"Sprint PCS Agreements") with Sprint Communications Company, L.P. ("Sprint")
and Sprint Spectrum L.P. and SprintCom, Inc., entities controlled by the PCS
Group of Sprint ("Sprint PCS"). The Sprint PCS Agreements, as amended, provide
the Company with the exclusive right to build, own and manage a wireless voice
and data services network in 37 basic trading areas ("BTAs") located in
Illinois, Iowa, Michigan and Nebraska under the Sprint PCS brand.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, increasing competition and the cost associated with the
build-out of a PCS network. The Company's continuing operations are dependent
upon Sprint PCS' ability to perform its obligations under the Sprint PCS
Agreements and the ability of the Company to raise sufficient capital to fund
operating losses, to meet debt service requirements, and to complete the
build-out of its PCS network. Additionally, the Company's ability to attract
and maintain a sufficient customer base is critical to achieving breakeven
operating cash flow. Changes in technology, increased competition, or the
inability to obtain required financing or achieve breakeven operating cash
flow, among other factors, could have an adverse effect on the Company's
financial position and results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements of the Company include its
subsidiaries, iPCS Wireless, Inc. and iPCS Equipment, Inc., and the Predecessor
Company. All significant intercompany accounts or balances have been eliminated
in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Risk:
The Company's operations as currently conducted rely heavily on critical
functions performed by Sprint PCS. The termination of the Company's strategic
relationship with Sprint PCS or Sprint PCS' failure to perform its obligations
under the Sprint PCS Agreements (see Note 3) would severely restrict the
Company's ability to conduct its business.
F-35
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company maintains cash and cash equivalents in accounts with a financial
institution in excess of the amount insured by the Federal Deposit Insurance
Corporation. The Company monitors the financial stability of this institution
regularly and management does not believe there is significant credit risk
associated with deposits in excess of federally insured amounts.
Cash and Cash Equivalents:
For purposes of reporting cash flows, the Company considers all highly
liquid investments, with an original maturity of three months or less at the
time of purchase, to be a cash equivalent.
Inventories:
Inventories consist of handsets and related accessories. Inventories
purchased for resale will be carried at the lower of cost, determined using
weighted average cost, or market, determined using replacement cost.
Property, Equipment and Construction in Progress:
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Asset lives used by the Company are as
follows:
Useful life:
-------------
Network assets.................................................. 3 to 15 years
Computer equipment.............................................. 3 to 5 years
Furniture, fixtures, office equipment and leasehold improvements 5 to 21 years
Construction in progress includes expenditures for the purchase of capital
equipment, design services, and construction services of the Company's network.
The Company capitalizes interest on its construction in progress activities.
Interest capitalized for the nine months ended September 30, 2001 and 2000, for
the year ended December 31, 2000 and for the period ended December 31, 1999
totaled approximately $6.6 million, $1.5 million, $3.0 million, and $0.5
million, respectively. When the network assets are placed in service, the
Company transfers the assets from construction in progress to network assets
and depreciates those assets over their estimated useful life.
Financing Costs:
Deferred financing costs are amortized as interest expense over the term of
the respective financing using the effective interest method.
Income Taxes:
Prior to July 12, 2000, the Predecessor Company operated as a limited
liability company ("LLC") and, as a result, its losses were included in the
income tax returns of its members. Therefore, the accompanying consolidated
financial statements do not include any income tax amounts prior to July 12,
2000. Subsequent to July 12, 2000, the date of reorganization as discussed in
Note 1, the Company became a C Corporation and began accounting for income
taxes in accordance with Statement on Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." Deferred income taxes are provided for
the tax consequences in future years of temporary differences between the tax
basis of assets and liabilities and their financial reporting amounts, based on
enacted tax laws and the tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax
F-36
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets to the amounts expected to be realized. Income tax expense is the tax
payable for the year and the change during the period in deferred tax assets
and liabilities. The Company has not provided any pro forma income tax
information because any net deferred tax asset would have been offset by a full
valuation allowance due to the Company's losses since inception.
Revenue Recognition:
The Company began offering service to customers in December 1999.
The Company recognizes revenue as services are performed. Sprint PCS
collects all revenues from the Company's customers and remits the net amount to
the Company. An affiliation fee of 8% of collected service revenues from Sprint
PCS subscribers based in the Company's territory, excluding outbound roaming,
and from non-Sprint PCS subscribers who roam onto the Company's network is
retained by Sprint PCS and recorded as a cost of service. Revenues generated
from the sale of handsets and accessories, inbound Sprint PCS roaming fees, and
from roaming services provided to Sprint PCS customers who are not based in the
Company's territory are not subject to the 8% affiliation fee.
Sprint PCS pays the Company a Sprint PCS roaming fee for each minute that a
Sprint PCS subscriber based outside of the Company's territory roams onto the
Company's network. Revenues from these services are recognized as the services
are performed. Similarly, the Company pays roaming fees to Sprint PCS when a
Sprint PCS subscriber based in the Company's territory roams on the Sprint PCS
network outside of the Company's territory. These costs are included as cost of
services when incurred.
Equipment revenues consisting of proceeds from sales of handsets and
accessories are recorded net of an allowance for sales returns. The allowance
is estimated based on Sprint PCS' handset return policy, which allowed
customers to return handsets for a full refund within 14 days of purchase at
September 30, 2001 and December 31, 2000 and within 30 days of purchase at
December 31, 1999. When handsets are returned to the Company, the Company may
be able to reissue the handsets in the future to other customers at little
additional cost. However, when handsets are returned to Sprint PCS for
refurbishing, the Company receives a credit from Sprint PCS, which is less than
the amount the Company originally paid for the handset.
Prior to January 1, 2001, the Company recorded promotional cash credits and
rebates granted to customers as expenses. Effective January 1, 2001, the
Company adopted the Emerging Issues Task Force ("EITF") 00-14, "Accounting for
Certain Sales Incentives." The EITF requires that, when recognized, the
reduction in or refund of the selling price of the product or service resulting
from any cash incentive should be classified as a reduction in revenue and not
as an operating expense. The Company adopted EITF 00-14 in the first quarter of
2001. For the nine months ended September 30, 2001, a reduction in revenue of
approximately $10.4 million, and an offsetting reduction in operating expenses,
was recorded. In accordance with the provisions of EITF 00-14, approximately
$1.0 million and $2.7 million of operating expenses for the nine months ended
September 30, 2000 and for the year ended December 31, 2000, respectively, have
been reclassified as a reduction in revenue.
The Company recognizes activation fee revenue over the periods such revenue
is earned in accordance with SEC Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements." SAB 101 was adopted by the
Company in the fourth quarter of 2000. Accordingly, activation fee revenue and
direct customer activation expense have been deferred and are being recognized
over the average life for customers assessed an activation fee (30 months). For
the nine months ended September 30, 2001, the Company recognized approximately
$0.8 million of activation fee revenue and direct customer activation fee
expense and has deferred approximately $2.8 million of activation fee revenue
and direct customer activation expense to future periods. During the year ended
December 31, 2000, the Company recognized approximately $42,000 of activation
fee
F-37
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
revenue and direct customer activation expense and deferred approximately $0.7
million of activation fee revenue and direct customer activation expense to
future periods.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of:
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If such events or changes in circumstances occur,
the Company will recognize an impairment loss if the undiscounted future cash
flows expected to be generated by the asset (or acquired business) are less
than the carrying value of the related asset. The impairment loss would adjust
the asset to its fair value. The Company has identified no such impairment
losses.
Advertising Costs:
The Company expenses advertising costs when the advertisement occurs. Total
advertising expense was approximately $6.1 million, $1.9 million, $4.0 million
and $0.2 million for the nine months ended September 30, 2001 and 2000, for the
year ended December 31, 2000 and for the period ended December 31, 1999,
respectively.
Stock Compensation:
As allowed by SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123"), the Company has chosen to account for compensation expense
associated with its stock option plan in accordance with Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. The Company will disclose pro forma net loss as if
compensation expense had been determined consistent with SFAS No. 123.
Comprehensive Income:
A statement of comprehensive income has not been included in the
accompanying consolidated financial statements since the Company does not have
any "Other Comprehensive Income" to report.
Accretion on Redeemable Preferred Stock:
Up to the date of redemption, the Company accretes the carrying value of the
redeemable preferred stock to the redemption amount using the effective
interest method.
Cumulative Dividends on Redeemable Preferred Stock:
Cumulative dividends on the redeemable preferred stock are recorded as a
charge to additional paid-in-capital and an increase to the carrying value of
the redeemable preferred stock as the dividends are earned by the holders.
Pro Forma Loss Per Share (Unaudited):
Pro forma basic and diluted loss per share are calculated by dividing the
net loss available to common stockholders by the pro forma weighted average
number of shares of common stock of iPCS, Inc. as if the shares of common stock
of iPCS, Inc. into which the Predecessor Company's members' interests were
converted had
F-38
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been outstanding for all of the periods presented. The calculation was made in
accordance with SFAS No. 128, "Earnings Per Share." The pro forma basic and
diluted loss per share are the same because the inclusion of the incremental
potential common shares from any assumed conversion of redeemable preferred
stock or exercise of options and warrants is antidilutive.
Potential common shares excluded from the pro forma loss per share
computations because they were antidilutive are as follows:
For the Nine Months Ended For the
------------------------------------- Year Ended
September 30, 2001 September 30, 2000 December 31, 2000
------------------ ------------------ -----------------
Convertible preferred stock 23,090,909 9,090,909 23,090,909
Options.................... 3,005,251 1,556,000 1,590,000
Warrants................... 4,134,637 4,134,637 4,134,637
---------- ---------- ----------
Total............... 30,230,797 14,781,546 28,815,546
========== ========== ==========
Recently Issued Accounting Pronouncements:
In August 2001, the Financial Accounting Standards Board, ("FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS No. 144 provides new guidance on the recognition of impairment losses on
long-lived assets to be held and used or to be disposed of and also broadens
the definition of what constitutes a discontinued operation and how the results
of a discontinued operation are to be measured and presented. SFAS No. 144 is
effective for the Company's fiscal year beginning in 2002 and is not expected
to materially change the methods used by the Company to measure impairment
losses on long-lived assets.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles
will be evaluated against this new criteria and may result in certain
intangibles being subsumed into goodwill, or alternatively, amounts initially
recorded as goodwill may be separately identified and recognized apart from
goodwill. SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a
non-amortization approach, goodwill and certain intangibles will not be
amortized into results of operations, but instead will be reviewed for
impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement which apply to goodwill
and intangible assets acquired prior to June 30, 2001 will be adopted by the
Company on January 1, 2002. The Company is currently assessing but has not yet
determined the impact of these pronouncements on its financial position and
results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is effective for all fiscal years beginning after June 15, 2000. The adoption
by the Company on January 1, 2001 did not have an effect on the Company's
results of operations, financial position, or cash flows. However, as discussed
in Note 10, the Company did enter into an interest rate cap agreement on
January 12, 2001.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of Accounting Principles Board Opinion 25" ("Opinion 25"). FIN
44 clarifies (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for
F-39
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective July 1,
2000; however, certain conclusions in FIN 44 cover specific events that occur
after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did
not have an effect on the Company's results of operations, financial position,
or cash flows.
Reclassifications:
Certain amounts in prior periods' financial statements have been
reclassified to conform to the current year's presentation.
3. SPRINT PCS AGREEMENTS
In January 1999, the Company signed the following four agreements with
Sprint and Sprint PCS: management agreement, services agreement, trademark and
service license agreement with Sprint PCS, and the trademark and service
license agreement with Sprint. These agreements allow the Company to
exclusively offer Sprint PCS services in the Company's territory.
The management agreement has an initial term of 20 years with three 10-year
automatic renewals. The management agreement can be terminated as a result of a
number of events including an uncured breach of the management agreement or
bankruptcy of either party to the agreement. In the event that the management
agreement is terminated or not renewed, certain formulas apply to the valuation
and disposition of the Company's assets. The key clauses of the management
agreement are summarized as follows:
(a) Exclusivity: The Company is designated as the only person or entity
that can manage or operate a PCS network for Sprint PCS in the Company's
territory. Sprint PCS is prohibited from owning, operating, building or
managing another wireless mobility communications network in the Company's
territory while the management agreement is in place.
(b) Network build-out: The Company has agreed to build out the service
area network in accordance with build-out plans developed jointly by Sprint
PCS and the Company. Sprint PCS and the Company intend to expand network
coverage to cover population areas of at least ten thousand residents and
all interstate and major highways.
(c) Products and services offered for sale: The management agreement
identifies the products and services that can be offered for sale in the
Company's territory. The Company cannot offer wireless local loop services
specifically designed for the competitive local market in areas where Sprint
owns the local exchange carrier unless the Sprint-owned local exchange
carrier is named as the exclusive distributor or Sprint PCS approves the
terms and conditions.
(d) Service pricing: The Company must offer Sprint PCS subscriber pricing
plans designated for regional or national offerings. With prior approval
from Sprint PCS, the Company is permitted to establish local price plans for
Sprint PCS products and services offered only in the Company's territory.
Sprint PCS will pay to the Company 92% of the Company's collected service
revenues and of its roaming revenues from non-Sprint PCS subscribers but
will remit 100% of revenues derived from roaming of other Sprint PCS
customers and sales of handsets and accessories and proceeds from sales not
in the ordinary course of business.
(e) Roaming: When a Sprint PCS customer from outside of the Company's
territory roams onto the Company's network, the Company will earn roaming
revenues based on established rates. Similarly, the
F-40
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company will pay Sprint PCS when the Company's own subscribers use the
Sprint PCS nationwide network outside the Company's territory.
(f) Advertising and promotion: Sprint PCS is responsible for all national
advertising and promotion of Sprint PCS products and services. The Company
is responsible for advertising and promotion in the Company's territory.
(g) Program requirements including technical and customer care standards:
The Company will comply with Sprint PCS' program requirements for technical
standards, customer service standards, national and regional distribution
and national accounts programs.
(h) Non-competition: The Company may not offer Sprint PCS products and
services outside the Company's territory.
(i) Inability to use non-Sprint PCS brands: The Company may not market,
promote, advertise, distribute, lease or sell any of the Sprint PCS products
on a non-branded, "private label" basis or under any brand, trademark or
trade name other than the Sprint PCS brand, except for sales to resellers.
(j) Rights of first refusal: Sprint PCS has certain rights of first
refusal to buy the Company's assets upon a proposed sale.
The services agreement outlines various support services such as activation,
billing, collections and customer care that will be provided to the Company by
Sprint PCS. These services are available to the Company at established rates.
Sprint PCS can change any or all of the service rates one time in each twelve
month period. The Company may discontinue the use of any service upon three
months written notice. Sprint PCS may discontinue a service provided that
Sprint PCS provides the Company with nine months prior written notice. The
services agreement automatically terminates upon termination of the management
agreement.
The trademark and service mark license agreements with Sprint and Sprint PCS
provide the Company with non-transferable, royalty free licenses to use the
Sprint and Sprint PCS brand names, the "diamond" symbol and several other
trademarks and service marks. The Company's use of the licensed marks is
subject to adherence to quality standards determined by Sprint and Sprint PCS.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if the Company files for bankruptcy, materially breaches the
agreement or if the management agreement is terminated.
Amounts related to the Sprint PCS Agreements are as follows (in thousands):
Nine Months Ended Year Period
September 30, Ended Ended
-------------------- December 31, December 31,
2001 2000 2000 1999
------------- ------ ------------ ------------
Amounts included in the Consolidated Statements
of Operations:
Cost of service............................. $38,140 $4,492 $ 8,570 $115
Cost of equipment........................... 18,290 5,023 10,255 222
Selling expense............................. 2,600 695 1,184 81
General and administrative expense.......... 39 22 36 7
December 31,
September 30, -------------------
2001 2000 1999
------------- ------ ------------
Amount included in the Consolidated Balance
Sheets:
Inventory................................... $ 3,379 $3,236 $ 918
Accounts receivable due from Sprint PCS,
net....................................... 15,105 5,499 92
Accounts payable due to Sprint PCS.......... 10,306 6,610 663
F-41
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. PROPERTY AND EQUIPMENT INCLUDING CONSTRUCTION IN PROGRESS
Property and equipment including construction in progress consists of the
following (in thousands):
December 31,
September 30, -----------------
2001 2000 1999
------------- -------- -------
Network assets..................................... $148,351 $ 82,094 $22,737
Computer equipment................................. 3,153 1,816 675
Furniture, fixtures, office equipment and leasehold
improvements..................................... 4,170 2,698 626
-------- -------- -------
Total property and equipment....................... 155,674 86,608 24,038
Less accumulated depreciation and amortization..... (22,067) (8,338) (315)
-------- -------- -------
Property and equipment, net........................ 133,607 78,270 23,723
Construction in progress (network build-out)....... 64,554 50,817 15,383
-------- -------- -------
Property and equipment including construction in
progress, net.................................... $198,161 $129,087 $39,106
======== ======== =======
The Company has reclassified the December 31, 2000 microwave relocation
costs totaling $2.3 million from intangible assets to property and equipment to
be consistent with industry practice.
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Exclusive provider rights which arose with the issuance of
warrants to Sprint PCS (see Note 6)..................... $ 9,147 $ 9,147
Exclusive provider rights which arose with the purchase of
assets in Michigan from Sprint PCS (see Note 6)......... 3,526 3,526
Exclusive provider rights which arose with the acquisition
of the Iowa markets from Sprint PCS (see Note 6)........ 29,039 --
------- -------
Total intangible assets................................... 41,712 12,673
Less accumulated amortization............................. (1,778) (314)
------- -------
Intangible assets, net.................................... $39,934 $12,359
======= =======
6. AMENDMENTS TO SPRINT PCS AGREEMENT
On March 8, 2000, the Company entered into an amendment to the Sprint PCS
agreements to expand its service area to include 20 BTAs located in Michigan,
Iowa and Nebraska (the "Expansion"). In connection with the Expansion, the
Company agreed to purchase certain network assets under construction in four
BTAs in Michigan, for a purchase price to be determined on the closing date
based upon the assets to be purchased and the stage of completion of those
assets as of the closing date. In addition, in connection with the Expansion,
the Company was granted an option, exercisable by the Company at any time prior
to January 31, 2001, to add the Iowa City and Cedar Rapids, Iowa BTAs to its
service area. As consideration to be the exclusive provider of Sprint PCS
services in the Expansion territory, the Company committed to grant to Sprint
PCS a warrant to acquire 2% of the equity of the Company at the earliest of
July 15, 2000, the closing of an initial public offering, or the consummation
of a private placement of equity in an amount equal to at least $70.0 million.
In connection
F-42
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with the closing of the sale of the convertible preferred stock discussed in
Note 14, the Company issued Sprint PCS a warrant to acquire 1,151,938 shares of
common stock of the Company on July 12, 2000 at an exercise price of $4.95 per
share. The warrants are exercisable by Sprint PCS beginning on or after July
15, 2001 and expiring on July 15, 2007. The fair value of the warrants, as
determined using the Black-Scholes model, was approximately $9.1 million and
was recorded as an increase to paid in capital with a corresponding amount
recorded as an intangible asset representing the right to be the exclusive
provider of Sprint PCS services in the Expansion territory. Such intangible
asset is being amortized over a life of 18.5 years, which is the remaining term
of the Sprint PCS agreement at the date the warrants were issued. The fair
value of the warrants was calculated using the following assumptions:
(1) risk free interest rate of 6.35%;
(2) stock price based on a planned initial public offering;
(3) dividend yield of 0%;
(4) life of 7 years; and
(5) volatility of 40%.
Also, on July 12, 2000 the Company purchased the assets under construction
in Michigan from Sprint PCS for approximately $12.7 million. The Company
allocated approximately $9.2 million of the purchase price to property based on
the fair value of the assets acquired, with the excess amount of $3.5 million
allocated to the intangible asset representing the right to be the exclusive
provider of Sprint PCS services in Michigan. The intangible asset is being
amortized over a life of 18.5 years, which is the remaining term of the Sprint
PCS agreement at the date the assets were acquired.
On January 10, 2001 the Company exercised its option to purchase from Sprint
PCS certain telecommunications equipment and retail store assets and inventory
located in the Iowa City and Cedar Rapids, Iowa markets. Concurrently with the
closing, the Sprint PCS Management Agreement which sets forth the terms of the
Company's long-term affiliation with Sprint PCS was amended to reflect the
expansion of the Company's territory to include these two additional Iowa
markets which included approximately 14,000 customers. The Company closed on
this transaction on February 28, 2001 and paid approximately $31.7 million for
these two markets. The Company has accounted for this business combination
using the purchase method. The Company made a preliminary allocation of the
purchase price based on the fair values of the tangible assets and liabilities
acquired and allocated any excess amount over fair value to the intangible
asset representing the right to be the exclusive provider of Sprint PCS
services in the Iowa City and Cedar Rapids, Iowa markets.
7. DEFERRED GAIN ON TOWER SALES
On May 28, 1999 the Company signed a tower sale and leaseback agreement with
American Tower Corporation ("American Tower"). Under the agreement, the Company
was to locate sites for, develop and construct between sixty and eighty
wireless communication towers and then sell the towers to American Tower. The
term of this agreement was to expire at the earlier of the final tower sale or
December 31, 2000. In November 2000, the agreement was amended to extend the
expiration date to February 28, 2001 for the sale of the first eighty towers
and to increase the sales price from $250,000 to $272,000 for any tower with an
extendable height of 249 feet.
In 1999, American Tower advanced $2.0 million to the Company for the
purchases of the fifty-third through sixtieth towers. If the Company did not
construct and sell the required number of towers to American Tower by December
31, 2000, the Company was required to repay the advance plus accrued interest
at 5%. The advance on
F-43
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
tower sales of $2.0 million at December 31, 1999 was reduced to zero because
the fifty-third through sixtieth towers were sold by November 21, 2000.
For the period ended December 31, 1999, eighteen towers were sold to
American Tower for $4.5 million in cash, resulting in a gain of $1.9 million,
of which approximately $0.2 million was recognized at the time of the sale and
the remainder was deferred and is being amortized as a reduction to rental
expense over the initial lease term of ten years.
During the year ended December 31, 2000, fifty-five towers were sold to
American Tower for approximately $14.0 million, of which approximately $12.0
million was received in cash and $2.0 million represented a reduction in the
advance on tower sales. These tower sales resulted in a gain of approximately
$5.4 million, of which approximately $0.8 million was recognized at the time of
the sale and the remainder was deferred and is being amortized as a reduction
to rental expense over the initial lease term of ten years.
On January 2, 2001, twelve towers were sold to American Tower for
approximately $3.4 million, resulting in a gain of approximately $1.6 million
of which approximately $0.5 million was recognized at the time of the sale and
the remainder was deferred and is being amortized as a reduction to rental
expense over the initial lease term of ten years. The sale of the first seven
towers in this transaction satisfied the terms of the agreement signed in 1999.
The remaining five towers were sold as individual tower sales to American Tower.
On June 29, 2001, the Company signed a tower sale and leaseback agreement
with Trinity Towers Wireless, Inc. ("Trinity"). The Company has constructed
wireless communication towers, which it agreed to sell and lease back a portion
of these towers from Trinity. The agreement expires on December 31, 2001.
On June 29, 2001, the Company sold sixteen towers to Trinity for
approximately $4.8 million, resulting in a gain of approximately $2.1 million
of which approximately $1.0 million was recognized at the time of the sale and
the remainder was deferred and is being amortized as a reduction to rental
expense over the initial lease term of five years.
Upon the sale of a tower, the Company leases a portion, generally one-third,
of the tower to collocate antennas and other network communication equipment.
The leases are operating leases with initial terms between five and ten years.
8. DEFERRED RENT
On December 29, 2000, the Company signed a build-to-suit agreement with
Trinity whereby the Company agreed to locate and obtain ground leases for tower
sites and deliver assignments of these leases to Trinity for at least
seventy-five towers located in Iowa and Nebraska. Trinity agreed to reimburse
the Company for site acquisition and development costs, build a tower at these
sites, and purchase the site at the time of the commencement of the tower lease
with Trinity.
During the nine months ended September 30, 2001, the Company entered into
tower leases for forty-six sites under this agreement. The Company received
approximately $2.4 million from Trinity and recorded this amount as deferred
tower rent which will be amortized as a reduction to rental expense over the
life of the initial tower lease term of five years.
F-44
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES
Because the Predecessor Company was a nontaxable entity, the results
presented below relate solely to the periods subsequent to July 12, 2000.
The income tax expense (benefit) for the period differed from the amounts
computed by applying the statutory U.S. Federal income tax rate of 35% as set
forth below:
Nine Months Ended
September 30, Year Ended
---------------- December 31,
2001 2000 2000
------ ------ ------------
U.S. Federal statutory rate................... 35.00% 35.00% 35.00%
State income taxes, net of federal tax benefit 5.00 5.00 5.00
Non-deductible interest associated with senior
discount notes.............................. (2.98) (3.80) (2.90)
Non-deductible fees associated with merger.... (1.15) -- --
Other permanent non-deductible items.......... (0.19) -- --
Change in valuation allowance for deferred tax
assets...................................... (35.68) (36.20) (37.10)
------ ------ ------
Effective tax rate............................ 0.00% 0.00% 0.00%
====== ====== ======
The tax effects of significant temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
are as follows (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Deferred tax assets:
Accrued liabilities....................... $ 164.. $ 72..
Deferred transaction costs................ 558.. 1,068..
Compensation expense...................... 1,705.. 1,093..
Interest expense.......................... 5,566.. 2,720..
Deferred gain on tower sales.............. 3,973.. 2,400..
Net operating loss carryforwards.......... 29,529.. 9,299..
Allowance for bad debts................... 1,085.. 134..
-------- --------
Total gross deferred tax assets.............. 42,580.. 16,786..
Less valuation allowance..................... (33,438).. (12,647)..
-------- --------
Net deferred tax assets...................... 9,142 4,139
-------- --------
Deferred tax liabilities:
Capitalized interest...................... (529).. (649)..
Property, equipment and intangible assets. (8,384).. (3,278)..
Other..................................... (229).. (212)..
-------- --------
Total gross deferred tax liabilities......... (9,142).. (4,139)..
-------- --------
Net deferred tax liabilities................. $ --.. $ --..
======== ========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. No benefit for federal
income taxes has been recorded for the periods ended September 30, 2001 and
2000, and December 31, 2000 as the net deferred tax asset generated, primarily
from
F-45
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
temporary differences related to the net operating loss, was offset by a full
valuation allowance because it is not considered more likely than not that
these benefits will be realized due to the Company's losses since inception. At
September 30, 2001, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $73.8 million which are available
to offset future taxable income through 2021.
10. DEBT
Senior Discount Notes and Warrants
On July 12, 2000, the Company issued 300,000 units consisting of $300.0
million 14% senior discount notes due July 15, 2010 (the "Notes") and warrants
to purchase 2,982,699 shares of common stock at an exercise price of $5.50 per
share. The warrants become exercisable at any time after July 15, 2001 for a
period of ten years from the date of issuance. The Notes were issued at a
substantial discount such that the Company received gross proceeds from the
issuance of the units of approximately $152.3 million. On July 15, 2005 the
Company will begin incurring cash interest on the principal amount of the Notes
at the rate of 14% per annum, compounded semi-annually, payable beginning
January 15, 2006, and on each January 15 and July 15 thereafter. The Company is
amortizing the discount on the Notes as interest expense over the period from
date of issuance to the maturity date utilizing the effective interest method.
For the nine months ended September 30, 2001 and 2000, and the year ended
December 31, 2000, the Company recorded approximately $7.5 million, $1.8
million and $4.4 million, respectively, as interest expense related to the
amortization of the discount. In addition, the Company has recorded accrued
interest of approximately $10.7 million and $6.2 million at September 30, 2001
and December 31, 2000, respectively, utilizing the effective interest method.
The Notes are a general unsecured obligation, subordinated in right of
payment to all senior debt, including all obligations under the credit
facility. The Notes contain covenants which restrict the Company's ability to
incur additional indebtedness, pay dividends, merge, dispose of its assets, and
certain other matters as defined in the Indenture. During the first 36 months,
the Company may redeem up to 35% of the Accreted Value of Notes (as defined in
the Notes agreement) at a redemption price of 114% with the net cash proceeds
of one or more equity offerings excluding the first $70.0 million of equity
offerings. After July 15, 2005, the Notes may be redeemed at a price of 107%
beginning in 2005, 105% beginning in 2006, 102% beginning in 2007 and 100%
thereafter. Upon a change in control as defined in the Notes agreement, the
Company will be required to make an offer to purchase the Notes at a price
equal to 101% of the Accreted Value of Notes (as defined in the Notes
agreement) on any purchase date prior to July 15, 2005 or 101% of the aggregate
principal amount therefor, plus accrued and unpaid interest and Liquidated
Damages (as defined in the Notes agreement), if any, to the date of purchase if
on or after July 15, 2005.
The Company allocated approximately $24.9 million to the fair value of the
warrants, as determined by using the Black-Scholes model, and recorded a
discount on the Notes, which is being recognized as interest expense over the
period from date of issuance to the maturity date. For the nine months ended
September 30, 2001 and 2000, and the year ended December 31, 2000, the Company
recorded approximately $1.3 million, $0.3 million and $0.7 million,
respectively, as interest expense related to the amortization of the value of
the warrants.
The fair value of the warrants was calculated using the following
assumptions:
(1) risk free interest rate of 6.35%;
(2) stock price based on a planned initial public offering;
(3) dividend yield of 0%;
(4) life of 10 years; and
(5) volatility of 40%.
F-46
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company incurred approximately $6.3 million of costs associated with the
issuance of the Notes. Those costs consisted of investment banker fees, legal
fees and other issuance costs that have been capitalized and are being
amortized to interest expense using the effective interest method over the term
of the Notes.
Nortel Credit Facility
Effective May 14, 1999, the Company entered into a credit facility agreement
(the "Nortel Credit Facility") with Nortel Networks Inc. ("Nortel"). The
proceeds were used to purchase equipment and to fund the construction of the
Company's portion of the Sprint PCS network. The financing terms permitted the
Company to borrow $48.0 million through three commitment tranches (Tranche
A--$32.0 million, Tranche B--$11.0 million and Tranche C--$5.0 million) through
May 14, 2002, and required minimum equipment purchases of $32.0 million (see
Note 12).
The Company could borrow money at the lesser of either: (1) a base rate loan
with an interest rate equal to 3 percent plus the higher of (A) the prime rate
of Citibank, N.A. (New York) or (B) the federal fund effective rate plus one
half of a percent; or (2) a London interbank offered rate (Libor), as adjusted
for reserve requirements, plus 4 percent. All borrowings were based on the
Libor rate plus 4 percent (10% at December 31, 1999). Accrued interest was
generally payable quarterly. Interest incurred and capitalized for the period
ended December 31, 1999 totaled $471,000. The Company had outstanding
borrowings under the Nortel Credit Facility of approximately $27.6 million at
December 31, 1999.
On July 12, 2000, the Nortel Credit Facility was repaid in full with the
proceeds from the issuance of the Notes. In connection with the early
extinguishment of the Nortel Credit Facility, the Company recorded an
extraordinary loss of approximately $1.5 million related to the write-off of
the unamortized deferred financing costs at July 12, 2000.
An unused facility commitment fee ranging from 0.75% to 1.5% on the daily
average unused portion of the Nortel Credit Facility was due on a quarterly
basis. The commitment fee expense for each of the nine months ended September
30, 2000, the year ended December 31, 2000 and the period ended December 31,
1999 was approximately $81,000.
Senior Secured Credit Facility
On July 12, 2000, the Company entered into an amended and restated credit
facility with Toronto Dominion (Texas), Inc. and GE Capital Corporation for a
$140.0 million senior secured credit facility ("credit facility") to replace
the Nortel Credit Facility. The credit facility permits the Company to borrow
up to $140.0 million through two tranches (Tranche A--$90.0 million and Tranche
B--$50.0 million) subject to a borrowing base limitation which is an amount
equal to 100% of the gross book value of all the property and equipment owned
by the Company. The credit facility contains certain financial ratios and other
financial conditions similar to the Nortel Credit Facility and is
collateralized by all of the Company's assets and assignment of the Sprint PCS
Agreements.
As of September 30, 2001, the Company's borrowings under this credit
facility totaled $50.0 million and represents the entire Tranche B commitment.
The weighted average interest rate on these borrowings was 6.84%. The Company
had borrowed $25.0 million under this credit facility as of December 31, 2000
and such borrowings bore interest at 10.44% as of December 31, 2000.
F-47
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commencing March 31, 2004, and on the last day of each calendar quarter
ending during the periods set forth below, the Tranche A commitment as of March
30, 2004 shall be automatically and permanently reduced by the percentage
amount set forth below for the quarters indicated:
. for the four quarters commencing with the fiscal quarter ending March
31, 2004, 2.50% per quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.50% per quarter.
Commencing March 31, 2004, the Company must begin to repay, in quarterly
installments, the principal on all borrowings outstanding as of March 30, 2004
made under the Tranche B commitment. A fixed percentage on all Tranche B
borrowings will be due each quarter as follows:
. for the first four quarters commencing with the fiscal quarter ending
March 31, 2004, 2.50% of the principal balance of the loan is due per
quarter;
. for quarters five through eight, 3.75% per quarter;
. for quarters nine through sixteen, 6.25% per quarter; and
. for the last two quarters, 12.50% per quarter.
The aggregate amount required to be repaid under Tranche B for each of the
four periods above will be $5.0 million, $7.5 million, $25.0 million, and $12.5
million, respectively.
Any principal that has not been paid by the maturity date, June 30, 2008, is
due at that time.
The Company may voluntarily prepay any of the loans at any time. Tranche A
permits reborrowings on a revolving basis but amounts repaid under Tranche B
may not be reborrowed.
The Company will have to make mandatory prepayments under certain
circumstances, including among others:
. 50% of the Company's excess annual cash flow as computed under the
senior secured credit agreement, commencing April 30, 2004 with respect
to the fiscal year ending December 31, 2003;
. Any amount in excess of $1.0 million per calendar year received as net
proceeds of asset sales outside the ordinary course of business or
insurance proceeds subject to certain exceptions, to the extent not
reinvested in property or assets within a stated period of time;
. 50% of the net proceeds of any equity issuance excluding the committed
issuance of the convertible preferred stock, an initial public offering
and any offering to a borrower or guarantor party to the senior secured
financing; and
. 100% of the net proceeds of a debt issuance excluding permitted
indebtedness.
All prepayments described above are applied to the outstanding loan balances
pro rata between Tranche A and Tranche B and pro rata across the maturities.
F-48
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
From the date of the senior secured credit agreement through and including
the date on which earnings before interest, taxes and depreciation and
amortization ("EBITDA") is greater than zero for two consecutive fiscal
quarters, the Company may borrow money at the lesser of either:
. A base rate loan with an interest rate equal to 2.75% plus the higher of:
. The prime rate of the Toronto-Dominion Bank, New York Branch or
. The federal funds effective rate plus 0.5%; or
. A Eurodollar loan with an interest rate equal to the London interbank
offered rate ("LIBOR"), plus 3.75%.
After the date of which EBITDA is greater than zero for two consecutive
fiscal quarters, the base rate margin will range from 2.75% to 2.25% and the
Eurodollar loan margin will range from 3.75% to 3.25%, depending upon the
leverage ratio as of the most recently ended fiscal quarter.
The Company was required to maintain in full force and effect through the
maturity date one or more interest rate protection agreements (i.e. swap, cap,
collar or similar agreement) for a period of three years or the date ending on
the earlier to occur of the maturity date or the date upon which all of the
loans have been paid in full or have terminated or expired, to fix or place a
limit upon a rate of interest with respect to not less than an aggregate
notional amount equal to fifty percent of the aggregate principal amount of
credit facility debt that does not have a fixed interest rate until the credit
facility was amended on February 23, 2001. The amended credit facility expanded
the requirement of the Company to fix or place a limit upon a rate of interest
with respect to not less than fifty percent of the Company's total outstanding
debt.
On January 12, 2001, the Company entered into an interest rate cap agreement
with a counter party for a notional amount of $12.5 million to manage the
interest rate risk on the Company's variable rate debt. The agreement expires
in three years and caps the three-month LIBOR interest rate at 7.25%. For the
nine months ended September 30, 2001, the Company recorded a loss of
approximately $31,000 for this derivative.
The Company incurred approximately $4.1 million of costs associated with
obtaining the credit facility. Those costs consisted of loan origination fees,
legal fees and other debt issuance costs that have been capitalized and are
being amortized to interest expense using the effective interest method over
the term of the credit facility.
An unused facility commitment fee ranging from 1.0% to 1.5% on the daily
average unused portion of the credit facility is due on a quarterly basis. The
commitment fee expense for the nine months ended September 30, 2001 and 2000
and the year ended December 31, 2000 was approximately $1.1 million, $0.5
million and $1.0 million, respectively.
As a condition of the credit facility, Sprint PCS has entered into a consent
and agreement with the lenders that modifies Sprint PCS' rights and remedies
under its management agreement with the Company. Among other things, Sprint PCS
consented to the pledge of substantially all of the Company's assets, including
the management agreement, to the lenders. In addition, Sprint PCS may not
terminate the management agreement with the Company and must maintain 10 MHz of
PCS spectrum in the Company's markets until the credit facility is satisfied or
the Company's assets are sold pursuant to the terms of the consent and
assignment with the lenders.
The Company is required to maintain certain financial ratios and other
financial conditions including debt coverage ratios, minimum levels of revenue
and wireless subscribers, and limitations on capital expenditures.
Additionally, the Company has agreed not to merge, dispose of its assets, make
restricted payments, including
F-49
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dividends, and certain other matters as defined in the credit facility. On
February 23, 2001, the Company entered into an amendment to the credit facility
which included a consent to the purchase from Sprint PCS of the Iowa City and
Cedar Rapids, Iowa BTAs discussed in Note 6 and which amended certain covenant
definitions and requirements. On September 28, 2001, the Company entered into
an amendment which included a consent to the merger with AirGate PCS, Inc. as
discussed in Note 19 and which amended certain covenant definitions and
requirements.
At September 30, 2001, the Company was in compliance with these covenants in
accordance with the amended credit facility.
Annual maturities of the long-term debt are as follows as of September 30,
2001 (in thousands):
September 30,
2002....................... $ --
2003....................... --
2004....................... 3,750
2005....................... 6,875
2006....................... 11,250
Thereafter................. 328,125
---------
Total...................... 350,000
Less: Unamortized discount. (158,608)
---------
Total long-term debt....... $ 191,392
=========
11. LEASE COMMITMENTS
The Company is obligated under non-cancelable operating lease agreements for
offices, stores, network equipment space and cell sites. At September 30, 2001,
the future minimum annual lease payments under these non-cancelable operating
lease agreements are as follows (in thousands):
September 30,
2002....... $10,785
2003....... 10,619
2004....... 10,149
2005....... 9,305
2006....... 6,626
Thereafter. 21,547
-------
Total...... $69,031
=======
Rent expense was approximately $6.5 million, $1.7 million, $3.0 million and
$0.4 million for the nine months ended September 30, 2001 and 2000, for the
year ended December 31, 2000 and for the period ended December 31, 1999,
respectively, of which approximately $40,000, $40,000, $53,000 and $31,000,
respectively, was paid to one of the Company's stockholders/members. Included
in minimum lease commitments is approximately $0.4 million and $0.5 million,
respectively, for the nine months ended September 30, 2001 and 2000, and
approximately $0.5 million each for the year ended December 31, 2000 and the
period ended December 31, 1999, payable to one of the Company's
stockholders/members.
F-50
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company leases two tower sites and several phone systems under capital
leases. At September 30, 2001, the future payments under the capital lease
obligations, less imputed interest, are as follows (in thousands):
September 30,
2002........................................... $ 47
2003........................................... 43
2004........................................... 45
2005........................................... 47
2006........................................... 49
Thereafter..................................... 571
-----
Total minimum lease payments................... 802
Less amount representing interest.............. (422)
-----
Present value of net minimum lease payments.... 380
Less current obligations under a capital lease. (7)
-----
Long-term obligations under a capital lease.... $ 373
=====
The following is a summary of property and equipment under capital leases
included in the accompanying consolidated balance sheets as follows (in
thousands):
September 30, December 31,
2001 2000
------------- ------------
Network assets............... $380 $224
Office equipment............. 26 26
---- ----
406 250
Less accumulated depreciation (19) (5)
---- ----
$387 $245
==== ====
12. PURCHASE COMMITMENTS
On May 24, 1999 the Company entered into a three-year $32.0 million
agreement with Nortel for the purchase of network equipment and infrastructure,
including switches and base station controllers. On July 11, 2000 the amount
was increased from $32.0 million to $60.0 million. Nortel provided financing to
the Company until July 12, 2000 for these purchases pursuant to the Nortel
Credit Facility discussed in Note 10. iPCS has also committed to purchase
required equipment from Nortel related to certain expansion markets if they are
granted them by Sprint PCS. Under the agreement, the Company receives a
discount on the network equipment and services because of the Sprint PCS
affiliation, but pays a slight premium to the discounted price on any equipment
and services financed by Nortel. If the Company's affiliation with Sprint PCS
ends, Nortel has the right to either terminate the agreement or, with the
Company's consent, modify the agreement to establish new prices, terms and
conditions. As of September 30, 2001, the Company has met the requirements of
the agreement.
In July 2000 the Company entered into an equipment purchase agreement with
Lucent Technologies Inc. ("Lucent") for the purchase of network equipment and
infrastructure which includes one switch and 100 base station controllers for
the Michigan markets within the first year of the agreement and an additional
32 base station controllers within two years after the execution of the
agreement. As of September 30, 2001, the Company has satisfied these purchase
terms. In addition, the Company has agreed to use Lucent's equipment
exclusively in the construction of the Company's network located within the
state of Michigan. The Company has entered into this agreement with Lucent as
an additional affiliate of Sprint PCS and is subject to the terms
F-51
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and conditions of a procurement and services contract between Lucent and an
affiliate of Sprint PCS that will expire on January 31, 2006.
13. EMPLOYEE BENEFITS
The Company has established a 401(k) plan (the "Plan") in which
substantially all employees may participate. The Plan allows eligible employees
to contribute up to 15% of their compensation and provides that the Company
will make matching contributions of 50% up to the first eight percent of an
employee's contribution. In addition, the Company may make discretionary
contributions to the Plan. Company contributions to the Plan were approximately
$72,000, $28,000, $38,000 and $14,000 for the nine months ended September 30,
2001 and 2000, for the year ended December 31, 2000 and for the period ended
December 31, 1999, respectively.
14. REDEEMABLE PREFERRED STOCK
Contemporaneously with the issuance of the 300,000 units discussed in Note
10, the Company issued to an investor group 9,090,909 shares of Series A-1
convertible participating preferred stock ("Series A-1 preferred stock") at a
purchase price of $5.50 per share, yielding gross proceeds of $50.0 million;
net proceeds were approximately $46.4 million. On December 28, 2000, the
Company issued to the same investor group 14,000,000 shares of Series A-2
convertible participating preferred stock ("Series A-2 preferred stock") at a
purchase price of $5.00 per share, yielding gross proceeds of $70.0 million;
net proceeds were approximately $65.8 million.
The holders of Series A-1 preferred stock and Series A-2 preferred stock
may, at their option, convert all or any such shares into shares of common
stock. Each share of Series A-1 preferred stock and Series A-2 preferred stock
shall automatically convert into common stock under certain conditions
including a public offering of securities with gross proceeds of $50 million or
a change of control. The holders of Series A-1 preferred stock and Series A-2
preferred stock have the same voting rights as common stockholders. The Series
A-1 preferred stock ranks senior to common stock and on parity with the Series
A-2 preferred stock. In the event that the Company has not completed an initial
public offering of common stock or consummated a business transaction meeting
certain criteria by the fifth anniversary of the investment, the investor group
has the right to request the Company to repurchase the Series A-1 preferred
stock and Series A-2 preferred stock at fair market value, unless the Company's
Board of Directors determines, in its sole discretion, that it is not in the
Company's best interests to do so, whereupon the investor group would have the
right to force a sale of the Company subject to the rights of Sprint and Sprint
PCS under the Sprint PCS Agreements. The Series A-1 preferred stock and Series
A-2 preferred stock have a mandatory redemption for cash at an amount equal to
the stated value plus accrued dividends on July 12, 2011. The Company accretes
the carrying value of the Series A-1 preferred stock and Series A-1 preferred
stock (net of offering costs incurred) to the redemption amount by the
effective interest method. During the nine months ended September 30, 2001 and
the year ended December 31, 2000, the Company recorded approximately $0.2
million and $0.2 million, respectively, of accretion on the Series A-1
preferred stock and approximately $0.3 million and approximately $4,000,
respectively, of accretion on the Series A-2 preferred stock.
The Company allocated the entire net proceeds received from the issuance of
Series A-1 preferred stock of approximately $46.4 million to the beneficial
conversion feature on the issuance of Series A-1 preferred stock in accordance
with EITF Issue No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to
Certain Convertible Instruments." The beneficial conversion feature was
calculated at the issuance date of the Series A-1 preferred stock based on the
difference
F-52
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
between the conversion price of $5.50 per share and estimated fair value of the
common stock at that date. This amount, however, was limited to the proceeds
received from issuing the beneficial convertible security. As the Series A-1
preferred stock was immediately convertible, the Company also recorded
accretion of approximately $46.4 million to additional paid-in capital.
The Company allocated the entire net proceeds received from the issuance of
the Series A-2 preferred stock of approximately $65.8 million to the Series A-2
preferred stock in accordance with EITF Issue No. 00-27, "Application of EITF
Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion, Features or Contingently Adjustable Conversion Ratios to Certain
Convertible Instruments." No beneficial conversion feature was considered to
exist due to the conversion price of the Series A-2 preferred stock at time of
issuance exceeding the estimated fair value of the common stock at that date.
The Series A-1 preferred stock and Series A-2 preferred stock bear
cumulative dividends, whether or not declared, at the rate of 7.5% of the
preferred liquidation preference per year and, when paid, shall be paid only in
additional shares of preferred stock. Dividends shall accumulate and compound
semi-annually. The preferred liquidation preference is equal to $5.50 (Series
A-1) and $5.00 (Series A-2) per share plus any accrued but unpaid dividends on
such share of preferred stock. Dividends on each share shall accrue on a daily
basis and be cumulative from the date of original issue. During the nine months
ended September 30, 2001 and the year ended December 31, 2000, the Company
recorded approximately $2.9 million and $1.8 million, respectively, of accrued
dividends on the Series A-1 preferred stock and approximately $4.0 million and
approximately $0.1 million, respectively, of accrued dividends on the Series
A-2 preferred stock, as a charge to additional paid in capital.
In addition to the 7.5% dividend, when and if the Board of Directors
declares a dividend payable with respect to the then outstanding shares of
common stock, the holders of the Series A-1 preferred stock and Series A-2
preferred stock shall be entitled to the amount of dividends per share as would
be payable on the number of shares of common stock into which such shares of
Series A-1 preferred stock and Series A-2 preferred stock could then be
converted. Upon the occurrence of a change of control prior to July 12, 2005,
the Company will be obligated to pay a special dividend to each holder of
Series A-1 preferred stock and Series A-2 preferred stock (except as to any
changes of control in connection with a business combination with a private
company as to which the investor group waives its right to receive such
dividend) in an amount equal to the amount of all unpaid dividends that would
have been payable through July 12, 2005.
15. EQUITY
The Predecessor Company was organized as a LLC and, as such, had no
outstanding stock. Owners (members) actually held a membership interest in the
LLC. As a result, the investment of those members in the Predecessor Company is
reflected as Members contributions in the accompanying Consolidated Statements
of Redeemable Preferred Stock and Equity (Deficiency).
On March 12, 1999, the Company entered into a management agreement (the
"Management Agreement") with Mr. Yager to act as the Manager of the Predecessor
Company. The Management Agreement entitled Mr. Yager to a cash bonus equal to
2.5% of the fair market value of the Company in the event of a Transfer (as
defined in the Management Agreement) of all or substantially all of the assets
of the Company, or 2.5% of the fair market value of any transferred interests
in the Company, in excess of the applicable member's cumulative contributions.
Effective as of February 29, 2000, Mr. Yager and the Company agreed to
terminate the Management Agreement, and in exchange therefor Mr. Yager received
a 1.5% ownership interest in the Predecessor Company. In addition, the Company
paid the withholding tax obligation arising by reason of the issuance of the
1.5% ownership interest to Mr. Yager, and the federal and state taxes on the
issuance of the ownership interest and payment of the withholding tax
obligation. Based upon the expected offering price of the
F-53
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
initial public offering as determined on April 24, 2000, the Company recorded
non-cash compensation expense of approximately $8.5 million related to the
ownership interest granted and recorded general and administrative expense of
approximately $1.6 million related to taxes paid by the Company on behalf of
Mr. Yager for both the nine months ended September 30, 2000 and the year ended
December 31, 2000.
On July 11, 2000, the Board of Directors approved the amended and restated
2000 Long Term Incentive Stock Plan. Under the plan, the Company may grant
stock options, stock appreciation rights, shares of common stock and
performance units to employees, consultants and directors. The total number of
shares of common stock that can be awarded under the plan is 6,500,000 shares,
which will be increased on December 31 of each year beginning on December 31,
2000 by a number of shares equal to 1% of the number of shares then
outstanding, up to maximum of 8,000,000. On July 12, 2000, the Board of
Directors granted options to members of management, employees and directors to
acquire 1,558,750 shares of common stock with an exercise price of $5.50 per
share.
On February 28, 2001, the Board of Directors approved options for members of
management, employees and directors, with a grant date of January 1, 2001. The
vesting period for these employee stock options begins on the later of the
employee's hire date or January 1, 2001, and extends for four years. For
directors, the vesting period begins on January 1, 2001, and extends for four
years. During the nine months ended September 30, 2001, 1,427,750 options were
granted at an exercise price of $4.65.
At September 30, 2001 and December 31, 2000, the following is a summary of
options outstanding and exercisable:
Weighted
Average
Exercise
Shares Price
--------- --------
Outstanding at beginning of period
Granted................................. 1,592,750 $5.52
Exercised............................... -- --
Forfeited............................... (2,750) 5.50
--------- -----
Outstanding at December 31, 2000........... 1,590,000 5.52
Granted................................. 1,427,750 4.65
Exercised............................... -- --
Forfeited............................... (12,499) 5.30
--------- -----
Outstanding at September 30, 2001.......... 3,005,251 $5.11
========= =====
Options exercisable........................ 1,045,472
Weighted-average remaining contractual life 9.0 years
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations to account for its employee and
director stock options. Compensation expense is determined as the excess of the
fair value of the Company's common stock at date of grant over the exercise
price. Based upon the then expected offering price of a planned initial public
offering, the Company recognized total unearned compensation expense of
approximately $8.3 million related to the grants made in July 2000. This amount
is being amortized as compensation expense over the vesting period of the
options; such vesting period begins on the employee's date of hire and extends
for four years. For directors and all future grants to employees, the vesting
period begins on the date of grant and extends for four years. Total non-cash
compensation expense related to such options was approximately $1.5 million,
$2.2 million and $2.7 million, respectively, for the nine months ended
September 30, 2001 and 2000, and the year ended December 31, 2000. There was no
F-54
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compensation expense recorded for the grants made to employees and directors
during the nine months ended September 30, 2001 since the exercise price was
equal to the estimated fair value of the Company's common stock.
If compensation expense for the stock option grants had been determined
based on fair value at the grant date consistent with the requirements of SFAS
No. 123, "Accounting for Stock Based Compensation," the Company's net loss
applicable to common stockholders and net loss per share would have been the
pro forma amounts indicated below:
Nine Months Ended
September 30, Year Ended
------------------ December 31,
2001 2000 2000
-------- -------- ------------
Net loss applicable to common stockholders
(in thousands):
As reported............................ $(68,127) $(83,270) $(104,507)
Pro forma.............................. (69,678) (83,902) (105,290)
Basic and diluted loss per common share:
As reported............................ $ (1.52) $ (1.86) $ (2.33)
Pro forma.............................. (1.55) (1.87) (2.35)
The Company's calculation of fair value of the options was made using the
Black-Scholes model with the following assumptions:
Nine Months
Ended
September 30, Year Ended
------------- December 31,
2001 2000 2000
----- ----- ------------
Risk free interest rate 5.17% 6.35% 6.35%
Dividend yield......... 0% 0% 0%
Expected life in years. 4 4 4
Volatility............. 100% 40% 40%
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made pursuant to SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments." Fair value estimates are subject to inherent
limitations. Estimates of fair value are made at a specific point in time,
based on relevant market information and information about the financial
instrument. The estimated fair values of financial instruments are not
necessarily indicative of amounts the Company might realize in actual market
transactions. Estimates of fair value are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates. The carrying amounts at September 30, 2001, December 31, 2000
and 1999 for cash and cash equivalents, accounts receivable, other receivables,
accounts payable, accrued liabilities, and variable rate long-term debt are
reasonable estimates of their fair values. The fair value of our senior secured
notes based on closing market prices at September 30, 2001 and December 31,
2000 was approximately $150.0 million and $123.0 million, respectively.
F-55
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (in thousands)
Nine Months Ended
September 30, Year Ended Period Ended
----------------- December 31, December 31,
2001 2000 2000 1999
------ ------- ------------ ------------
Supplemental disclosure of cash flow information--cash paid
for interest................................................. $2,090 $ 1,971 $ 1,971 $ 206
Supplemental schedule of noncash investing and financial
activities:
Accounts payable incurred for the acquisition of property,
equipment and construction in progress.................... 7,592 10,223 16,610 2,739
Capital lease obligations incurred for the acquisition of
property and equipment.................................... 156 -- 250 --
Accrued dividends on redeemable preferred stock............. 6,937 812 1,808 --
Accretion to the redemption amount of redeemable
preferred stock........................................... 531 69 155 --
Grant of stock options...................................... -- 8,247 8,247 --
Issuance of warrants in connection with the senior discount
notes..................................................... -- 24,859 24,859 --
Issuance of warrants to Sprint PCS.......................... -- 9,147 9,147 --
18. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance
Beginning Costs and at End of
of Period Expenses Write-Offs Period
--------- --------- ---------- ---------
Period ended December 31, 1999
allowance for doubtful accounts... $ -- $ 1 $ -- $ 1
==== ====== ======= ======
Nine months ended September 30, 2000
allowance for doubtful accounts... $ 1 $ 305 $ (137) $ 169
==== ====== ======= ======
Year ended December 31, 2000
allowance for doubtful accounts... $ 1 $ 614 $ (287) $ 328
==== ====== ======= ======
Nine months ended September 30, 2001
allowance for doubtful accounts... $328 $5,042 $(2,657) $2,713
==== ====== ======= ======
F-56
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
19. MERGER
On August 28, 2001, the Company signed an agreement and plan of merger with
AirGate PCS, Inc. ("AirGate"), a Sprint PCS affiliate, under which AirGate and
the Company will combine in a tax-free stock for stock transaction. AirGate
will issue approximately 13.5 million shares of AirGate common stock, including
1.1 million shares reserved for issuance upon the exercise of the Company's
outstanding options and warrants. At the effective time of the merger, each
issued and outstanding share of the Company's common stock will be converted
into the right to receive approximately 0.1594 of a share of AirGate common
stock, referred to as the exchange ratio. All shares of the Company's preferred
stock will be converted into the Company's common stock immediately prior to
the effective time of the merger. At the effective time of the merger, AirGate
will assume each unexpired and unexercised option and warrant to purchase
shares of the Company's common stock and convert it into an option or warrant
to purchase AirGate common stock based on one share of the Company's common
stock equal to the exchange ratio of AirGate's common stock. In addition, the
exercise price per share of AirGate common stock issuable under each converted
option or converted warrant will be equal to the per share exercise price of
the Company option or warrant divided by the exchange ratio. The options will
be fully vested at the time of the merger and the warrants will remain subject
to the terms and conditions set forth in the applicable warrant agreement. The
total number of shares of AirGate common stock to be issued by AirGate in
connection with the merger will not exceed 13,500,000. The completion of the
merger is subject to approval by the stockholders of the Company and AirGate.
The special meetings of the AirGate stockholders and iPCS stockholders have
each been set for November 27, 2001. A majority of the stockholders of iPCS
have agreed to vote their shares in favor of the merger. The closing of the
merger is also subject to other customary conditions, including regulatory
approval under the Hart-Scott-Rodino Act and the consent or approval of Sprint
PCS and the lenders under the AirGate and iPCS credit facilities, all of which
have been obtained. The merger agreement will terminate if the merger is not
consummated on or before March 1, 2002. It is anticipated that the merger will
close around the end of November 2001.
F-57
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. CONSOLIDATING FINANCIAL INFORMATION
The Notes are fully, unconditionally, and joint and severally guaranteed by
iPCS Wireless, Inc. and iPCS Equipment, Inc., which are wholly-owned
subsidiaries of iPCS, Inc. The consolidating financial information for 1999 has
not been provided since iPCS, Inc. and its two wholly-owned subsidiaries did
not acquire the business of the Predecessor Company until July 12, 2000 as
discussed in Note 1 and only the Predecessor Company had activities in 1999.
Therefore, the 1999 consolidating financial information is identical to the
Consolidated Financial Statements. The following consolidating financial
information as of September 30, 2001 and December 31, 2000 and for the nine
months ended September 30, 2001 and for the year ended December 31, 2000 is
presented for iPCS, Inc., iPCS Wireless, Inc. and iPCS Equipment, Inc. (in
thousands):
Consolidating Balance Sheet
as of September 30, 2001
iPCS
Wireless, Inc.
and iPCS
iPCS, Predecessor Equipment,
Assets Inc. Company Inc. Eliminations Consolidated
------ -------- -------------- ---------- ------------ ------------
Current Assets:
Cash and cash equivalents.............................. $ 306 $ 53,890 $ 383 $ -- $ 54,579
Accounts receivable, less allowance.................... -- 14,964 -- -- 14,964
Other receivables...................................... -- 1,604 -- -- 1,604
Intercompany receivables............................... 102,050 -- 4 (102,054) --
Inventories............................................ -- 3,379 -- -- 3,379
Prepaid expenses and other assets...................... 235 4,564 -- -- 4,799
-------- -------- ------- --------- --------
Total current assets................................ 102,591 78,401 387 (102,054) 79,325
Property and equipment including construction in progress,
net...................................................... -- 160,546 37,651 (36) 198,161
Financing costs, less accumulated amortization............ 6,059 3,499 -- -- 9,558
Intangible assets, net.................................... 8,549 31,385 -- -- 39,934
Intercompany receivables--long term....................... 232,276 45,241 7,688 (285,205) --
Other assets.............................................. -- 1,778 -- -- 1,778
-------- -------- ------- --------- --------
Total assets........................................ $349,475 $320,850 $45,726 $(387,295) $328,756
======== ======== ======= ========= ========
F-58
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating Balance Sheet
as of September 30, 2001 (continued)
iPCSWireless,
Inc. and iPCS
Liabilities, Redeemable Preferred iPCS, Predecessor Equipment,
Stock and Equity (Deficiency) Inc. Company Inc. Eliminations Consolidated
----------------------------- -------- ------------- ---------- ------------ ------------
Current Liabilities:........................................
Accounts payable......................................... $ 721 $ 26,862 $ 3,827 $ -- $ 31,410
Accrued expenses......................................... 18 4,419 9 -- 4,446
Accrued interest......................................... -- 79 -- -- 79
Intercompany payables.................................... -- 102,054 -- (102,054) --
Deferred revenue......................................... -- 4,742 -- -- 4,742
Capital lease obligations--current portion............... -- 7 -- -- 7
-------- --------- ------- --------- ---------
Total current liabilities............................. 739 138,163 3,836 (102,054) 40,684
Deferred gain on tower sales................................ -- 7,667 -- -- 7,667
Deferred rent............................................... -- 2,264 -- -- 2,264
Deferred revenue............................................ -- 1,763 -- -- 1,763
Capital lease obligations--long term........................ -- 373 -- -- 373
Intercompany payables--long term............................ -- 239,964 45,241 (285,205) --
Accrued interest............................................ 16,944 -- -- -- 16,944
Long-term debt.............................................. 141,392 50,000 -- -- 191,392
-------- --------- ------- --------- ---------
Total liabilities..................................... 159,075 440,194 49,077 (387,259) 261,087
-------- --------- ------- --------- ---------
Redeemable preferred stock.................................. 121,548 -- -- -- 121,548
-------- --------- ------- --------- ---------
Equity (Deficiency):
Common stock............................................. 449 -- -- -- 449
Additional paid in capital............................... 70,853 -- -- -- 70,853
Unearned compensation.................................... (3,985) -- -- -- (3,985)
Accumulated deficit...................................... 1,535 (119,344) (3,351) (36) (121,196)
-------- --------- ------- --------- ---------
Total equity (deficiency)............................. 68,852 (119,344) (3,351) (36) (53,879)
-------- --------- ------- --------- ---------
Total liabilities, redeemable preferred stock and
equity (deficiency).................................. $349,475 $ 320,850 $45,726 $(387,295) $ 328,756
======== ========= ======= ========= =========
F-59
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating Statement of Operations for the Nine Months Ended September 30,
2001
iPCS
Wireless, Inc.
and
iPCS, Predecessor iPCS
Inc. Company Equipment, Inc. Eliminations Consolidated
-------- -------------- --------------- ------------ ------------
Revenues:
Service....................... $ -- $ 71,834 $ -- $ -- $ 71,834
Equipment and other........... -- 5,678 8,273 (8,273) 5,678
-------- -------- ------- -------- --------
Total revenues......... -- 77,512 8,273 (8,273) 77,512
-------- -------- ------- -------- --------
Operating Expenses:
Cost of service............... -- 61,042 -- (546) 60,496
Cost of equipment............. -- 18,292 7,691 (7,691) 18,292
Selling....................... -- 20,845 -- -- 20,845
General and administrative:
Non-cash compensation..... -- 1,530 -- -- 1,530
Other general and
administrative.......... 1,895 6,739 1 -- 8,635
Depreciation and amortization. 371 14,391 623 -- 15,385
-------- -------- ------- -------- --------
Total operating
expenses............. 2,266 122,839 8,315 (8,237) 125,183
-------- -------- ------- -------- --------
Loss from operations............. (2,266) (45,327) (42) (36) (47,671)
Other Income (Expense):
Interest Income............... 21,347 6,689 487 (24,986) 3,537
Interest expense.............. (13,249) (25,569) (3,163) 24,986 (16,995)
Other income.................. -- 470 -- -- 470
-------- -------- ------- -------- --------
Net Income (Loss)................ $ 5,832 $(63,737) $(2,718) $ (36) $(60,659)
======== ======== ======= ======== ========
F-60
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating Statement of Cash Flows for the Nine Months Ended September 30,
2001
iPCS
Wireless, Inc.
and
iPCS, Predecessor iPCS
Inc. Company Equipment, Inc. Eliminations Consolidated
-------- -------------- --------------- ------------ ------------
Cash Flows from Operating Activities:
Net loss........................................... $ 5,832 $ (63,737) $ (2,718) $(36) $ (60,659)
Adjustment to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization..................... 370 14,392 623 -- 15,385
Loss on disposal of property and equipment........ -- 1,042 -- -- 1,042
Gain on tower sales............................... -- (1,509) -- -- (1,509)
Amortization of deferred gain on tower sales...... -- (543) -- -- (543)
Amortization of deferred rent..................... -- (135) -- -- (135)
Amortization of financing costs................... 340 389 -- -- 729
Non-cash interest................................. 8,811 31 -- -- 8,842
Non-cash compensation............................. -- 1,530 -- -- 1,530
Changes in assets and liabilities:
Accounts receivable.............................. -- (8,657) -- -- (8,657)
Other receivables................................ -- (650) -- -- (650)
Inventories...................................... -- (66) -- -- (66)
Prepaid expenses and other assets................ (85) (4,248) -- -- (4,333)
Accounts payable, accrued expenses and
accrued interest................................ 10,664 16,864 (19) -- 27,509
Deferred revenue................................. -- 4,768 -- -- 4,768
-------- --------- -------- ---- ---------
Net cash flows from operating activities....... 25,932 (40,529) (2,114) (36) (16,747)
-------- --------- -------- ---- ---------
Cash Flows from Investing Activities:
Capital expenditures............................... -- (78,940) (19,490) 36 (98,394)
Acquisition of the Iowa City, Cedar Rapids, Iowa
markets........................................... -- (31,678) -- -- (31,678)
Proceeds from disposition of fixed assets.......... -- 42 -- -- 42
Proceed from build-to-suit agreement............... -- 2,496 -- -- 2,496
Proceeds from tower sales.......................... -- 8,204 -- -- 8,204
-------- --------- -------- ---- ---------
Net cash flows from investing activities....... -- (99,876) (19,490) 36 (119,330)
-------- --------- -------- ---- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt....................... -- 25,000 -- -- 25,000
Payments on capital lease obligations.............. -- (13) -- -- (13)
Debt financing costs............................... (243) -- -- -- (243)
Interest rate protection costs..................... -- (46) -- -- (46)
Intercompany receivables/payables.................. (25,685) 4,067 21,618 -- --
-------- --------- -------- ---- ---------
Net cash flows from financing activities....... (25,928) 29,008 21,618 -- 24,698
-------- --------- -------- ---- ---------
Increase (decrease) in cash and cash equivalents..... 4 (111,397) 14 -- (111,379)
Cash and cash equivalents at beginning of period..... 302 165,287 369 -- 165,958
-------- --------- -------- ---- ---------
Cash and cash equivalents at end of period........... $ 306 $ 53,890 $ 383 $ -- $ 54,579
======== ========= ======== ==== =========
F-61
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating Balance Sheet as of December 31, 2000
iPCS
Wireless, Inc.
and
iPCS, Predecessor iPCS
Assets Inc. Company Equipment, Inc. Eliminations Consolidated
------ -------- -------------- --------------- ------------ ------------
Current Assets:
Cash and cash equivalents...................... $ 302 $165,287 $ 369 $ -- $165,958
Accounts receivable, less allowance............ -- 5,350 -- -- 5,350
Other receivables.............................. -- 231 -- -- 231
Intercompany receivables....................... 307,110 15,930 -- (323,040) --
Inventories.................................... -- 3,314 -- -- 3,314
Prepaid expenses and other assets.............. 150 1,689 -- -- 1,839
-------- -------- ------- --------- --------
Total current assets........................ 307,562 191,801 369 (323,040) 176,692
Property and equipment including construction
in progress, net................................. -- 109,379 19,708 -- 129,087
Financing costs, less accumulated amortization.... 6,156 3,889 -- -- 10,045
Intangible assets, net............................ 8,921 3,438 -- -- 12,359
Other assets...................................... -- 392 -- -- 392
-------- -------- ------- --------- --------
Total assets................................ $322,639 $308,899 $20,077 $(323,040) $328,575
======== ======== ======= ========= ========
Liabilities, Redeemable
Preferred Stock and
Equity (Deficiency)
-----------------------
Current Liabilities:
Accounts payable............................... $ 729 $ 21,785 $ 4,780 $ -- $ 27,294
Accrued expenses............................... 72 2,614 -- -- 2,686
Accrued interest............................... -- 22 -- -- 22
Intercompany payables.......................... -- 307,110 15,930 (323,040) --
Deferred revenue............................... -- 1,346 -- -- 1,346
Capital lease obligations--current portion..... -- 12 -- -- 12
-------- -------- ------- --------- --------
Total current liabilities................... 801 332,889 20,710 (323,040) 31,360
Deferred gain on tower sales...................... -- 6,000 -- -- 6,000
Deferred revenue.................................. -- 392 -- -- 392
Capital lease obligations--long-term.............. -- 225 -- -- 225
Accrued interest.................................. 6,219 -- -- -- 6,219
Long-term debt.................................... 132,581 25,000 -- -- 157,581
-------- -------- ------- --------- --------
Total liabilities........................... 139,601 364,506 20,710 (323,040) 201,777
-------- -------- ------- --------- --------
Redeemable preferred stock........................ 114,080 -- -- -- 114,080
-------- -------- ------- --------- --------
Equity (Deficiency):
Common stock................................... 449 -- -- -- 449
Additional paid in capital..................... 78,321 -- -- -- 78,321
Unearned compensation.......................... (5,515) -- -- -- (5,515)
Accumulated deficit............................ (4,297) (55,607) (633) -- (60,537)
-------- -------- ------- --------- --------
Total equity (deficiency)................... 68,958 (55,607) (633) -- 12,718
-------- -------- ------- --------- --------
Total liabilities, redeemable preferred
stock and equity (deficiency).............. $322,639 $308,899 $20,077 $(323,040) $328,575
======== ======== ======= ========= ========
F-62
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating Statement of Operations
for the Nine Months Ended September 30, 2000
iPCS
Wireless, Inc.
and
iPCS, Predecessor iPCS
Inc. Company Equipment, Inc. Eliminations Consolidated
------- -------------- --------------- ------------ ------------
Revenues:
Service.................................. $ -- $ 9,914 $ -- $ -- $ 9,914
Equipment and other...................... -- 1,700 -- -- 1,700
------- -------- ------ ------ --------
Total revenues.................... -- 11,614 -- -- 11,614
------- -------- ------ ------ --------
Operating Expenses:
Cost of service.......................... -- 9,812 -- -- 9,812
Cost of equipment........................ -- 4,977 -- -- 4,977
Selling.................................. -- 4,960 -- -- 4,960
General and administrative:
Non-cash compensation................ -- 10,686 -- -- 10,686
Taxes on non-cash compensation....... -- 1,567 -- -- 1,567
Other general and administrative..... 898 3,708 88 -- 4,694
Depreciation and amortization............ 103 5,446 -- -- 5,549
------- -------- ------ ------ --------
Total operating expenses.......... 1,001 41,156 88 -- 42,245
------- -------- ------ ------ --------
Loss from operations........................ (1,001) (29,542) (88) -- (30,631)
Other Income (Expense):
Interest income.......................... 174 1,775 -- -- 1,949
Interest expense......................... (4,760) (1,499) -- -- (6,259)
Other income............................. -- 424 -- -- 424
------- -------- ------ ------ --------
Loss Before Extraordinary Item.............. (5,587) (28,842) (88) -- (34,517)
Extraordinary item--loss on early
extinguishment of debt.................... -- (1,485) -- -- (1,485)
------- -------- ------ ------ --------
Net Loss.................................... $(5,587) $(30,327) $ (88) $ -- $(36,002)
======= ======== ====== ====== ========
F-63
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating Statement of Operations
for the Year Ended December 31, 2000
iPCS
Wireless,
Inc. and iPCS
iPCS, Predecessor Equipment,
Inc. Company Inc. Eliminations Consolidated
------- ----------- ---------- ------------ ------------
Revenues:
Service.................................. $ -- $ 18,534 $ -- $ -- $ 18,534
Equipment and other...................... -- 2,695 -- -- 2,695
------- -------- ----- ------- --------
Total revenues.................... -- 21,229 -- -- 21,229
------- -------- ----- ------- --------
Operating Expenses:
Cost of service.......................... -- 16,786 -- -- 16,786
Cost of equipment........................ -- 10,053 -- -- 10,053
Selling.................................. -- 10,783 -- -- 10,783
General and administrative:
Non-cash compensation................ -- 11,212 -- -- 11,212
Taxes on non-cash compensation....... -- 1,567 -- -- 1,567
Other general and administrative..... 3,925 5,278 116 -- 9,319
Depreciation and amortization............ 227 8,382 -- -- 8,609
------- -------- ----- ------- --------
Total operating expenses.......... 4,152 64,061 116 -- 68,329
------- -------- ----- ------- --------
Loss from operations........................ (4,152) (42,832) (116) -- (47,100)
Other Income (Expense):
Interest income.......................... 9,403 3,780 -- (9,740) 3,443
Interest expense......................... (9,548) (11,416) (517) 9,740 (11,741)
Other income............................. -- 726 -- -- 726
------- -------- ----- ------- --------
Loss Before Extraordinary Item.............. (4,297) (49,742) (633) -- (54,672)
Extraordinary item--loss on early
extinguishment of debt.................... -- (1,485) -- -- (1,485)
------- -------- ----- ------- --------
Net Loss.................................... $(4,297) $(51,227) $(633) $ -- $(56,157)
======= ======== ===== ======= ========
F-64
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating Statement of Cash Flows
for the Nine Months Ended September 30, 2000
iPCS
Wireless,
Inc. and iPCS
iPCS, Predecessor Equipment,
Inc. Company Inc. Eliminations Consolidated
--------- ----------- ---------- ------------ ------------
Cash Flows from Operating Activities:
Net loss................................................ $ (5,587) $(30,327) $ (88) $-- $(36,002)
Adjustment to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization.......................... 103 5,446 -- -- 5,549
Loss on disposal of property and equipment............. -- 56 -- -- 56
Gain on tower sales.................................... -- (479) -- -- (479)
Amortization of deferred gain on tower sales........... -- (180) -- -- (180)
Amortization of financing costs........................ 69 165 -- -- 234
Non-cash interest...................................... 2,322 -- -- -- 2,322
Extraordinary loss on early extinguishment of debt..... -- 1,485 -- -- 1,485
Non-cash compensation.................................. -- 10,686 -- -- 10,686
Changes in assets and liabilities:
Accounts receivable................................... -- (3,313) -- -- (3,313)
Other receivables..................................... -- (141) -- -- (141)
Inventories........................................... -- 222 -- -- 222
Prepaid expenses and other assets..................... (1,318) (941) -- -- (2,259)
Accounts payable, accrued expenses and accrued
interest............................................. 3,167 4,853 1,375 -- 9,395
Deferred revenue...................................... -- 521 -- -- 521
--------- -------- -------- --- --------
Net cash flows from operating activities............ (1,244) (11,947) 1,287 -- (11,904)
--------- -------- -------- --- --------
Cash Flows from Investing Activities:
Capital expenditures.................................... -- (53,260) (11,934) -- (65,194)
Intangible acquired in purchase of network assets....... -- (3,526) -- -- (3,526)
Proceeds from tower sales............................... -- 8,500 -- -- 8,500
--------- -------- -------- --- --------
Net cash flows from investing activities............ -- (48,286) (11,934) -- (60,220)
--------- -------- -------- --- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt............................ 152,331 12,775 -- -- 165,106
Repayment of Nortel debt................................ -- (40,346) -- -- (40,346)
Debt financing costs.................................... (5,978) (4,045) -- -- (10,023)
Proceeds from sale of Series A-1 redeemable preferred
stock, net of offering costs of $3,613................. 46,387 -- -- 46,387
Members' contributions.................................. 16,500 -- -- 16,500
Intercompany receivables/payables....................... (191,117) 179,030 12,087 -- --
--------- -------- -------- --- --------
Net cash flows from financing activities............ 1,623 163,914 12,087 -- 177,624
--------- -------- -------- --- --------
Increase in cash and cash equivalents..................... 379 103,681 1,440 -- 105,500
Cash and cash equivalents at beginning of period.......... -- 2,733 -- -- 2,733
--------- -------- -------- --- --------
Cash and cash equivalents at end of period................ $ 379 $106,414 $ 1,440 $-- $108,233
========= ======== ======== === ========
F-65
iPCS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
Consolidating Statement of Cash Flows
for the Year Ended December 31, 2000
iPCS
Wireless, Inc.
and
iPCS, Predecessor iPCS
Inc. Company Equipment, Inc. Eliminations Consolidated
--------- -------------- --------------- ------------ ------------
Cash Flows from Operating Activities:
Net loss........................................... $ (4,297) $(51,227) $ (633) $ -- $(56,157)
Adjustment to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization..................... 227 8,382 -- -- 8,609
Loss on disposal of property and equipment........ -- 56 -- -- 56
Gain on tower sales............................... -- (778) -- -- (778)
Amortization of deferred gain on tower sales...... -- (298) -- -- (298)
Amortization of financing costs................... 185 419 -- -- 604
Non-cash interest................................. 5,109 -- -- -- 5,109
Extraordinary loss on early
extinguishment of debt........................... -- 1,485 -- -- 1,485
Non-cash compensation............................. -- 11,212 -- -- 11,212
Changes in assets and liabilities:
Accounts receivable.............................. -- (5,258) -- -- (5,258)
Other receivables................................ -- (192) -- -- (192)
Inventories...................................... -- (2,387) -- -- (2,387)
Prepaid expenses and other assets................ (150) (1,649) -- -- (1,799)
Accounts payable, accrued expenses and accrued
interest........................................ 7,020 8,972 28 -- 16,020
Deferred revenue................................. -- 1,738 -- -- 1,738
--------- -------- -------- ---- --------
Net cash flows from operating activities....... 8,094 (29,525) (605) -- (22,036)
--------- -------- -------- ---- --------
Cash Flows from Investing Activities:
Capital expenditures............................... -- (76,037) (14,956) -- (90,993)
Intangible acquired in purchase of network assets.. -- (3,526) -- -- (3,526)
Proceeds from tower sales.......................... -- 12,036 -- -- 12,036
--------- -------- -------- ---- --------
Net cash flows from investing activities....... -- (67,527) (14,956) -- (82,483)
--------- -------- -------- ---- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt....................... 152,331 37,775 -- -- 190,106
Repayment of Nortel debt........................... -- (40,346) -- -- (40,346)
Payments on capital lease obligations.............. -- (13) -- -- (13)
Debt issuance costs................................ (6,341) (4,279) -- -- (10,620)
Proceeds from sale of Series A-1 redeemable
preferred stock, net of offering costs............ 46,387 -- -- -- 46,387
Proceeds from sale of Series A-2 redeemable
preferred stock, net of offering costs............ 65,730 -- -- -- 65,730
Members' contributions............................. -- 16,500 -- -- 16,500
Intercompany receivables/payables.................. (265,899) 249,969 15,930 -- --
--------- -------- -------- ---- --------
Net cash flows from financing activities....... (7,792) 259,606 15,930 -- 267,744
--------- -------- -------- ---- --------
Increase in cash and cash equivalents................ 302 162,554 369 -- 163,225
Cash and cash equivalents at beginning of period..... -- 2,733 -- -- 2,733
--------- -------- -------- ---- --------
Cash and cash equivalents at end of period........... $ 302 $165,287 $ 369 $ -- $165,958
========= ======== ======== ==== ========
F-66
PROSPECTUS
[LOGO] Airgate PCS
$500,000,000
Common Stock
Preferred Stock
Warrants to Purchase Common Stock
Warrants to Purchase Preferred Stock
Warrants to Purchase Debt Securities
Debt Securities
Guarantees of Debt Securities
4,000,000 shares of Common Stock
-------------
We may use this prospectus from time to time to offer common stock,
preferred stock, warrants to purchase common stock, warrants to purchase
preferred stock, warrants to purchase debt securities, debt securities and
guarantees of debt securities. The securities we offer will have an aggregate
public offering price of up to $500,000,000.
We will identify the particular securities we offer and their specific terms
in a supplement to this prospectus. The prospectus supplement will also
describe the manner in which the securities will be offered. You should read
this prospectus and the prospectus supplement carefully before you invest. We
will not use this prospectus to confirm sales of any security unless it is
attached to a prospectus supplement.
The selling stockholders may offer up to 4,000,000 shares of our common
stock under this prospectus. Such selling stockholders received their shares of
our common stock in connection with our acquisition of iPCS, Inc.
For additional information on the methods of sale, you should refer to the
section entitled "Plan of Distribution."
Our common stock is listed on The Nasdaq National Market under the symbol
"PCSA."
-------------
Investing in our securities involves certain risks. See "Risk Factors" on
page 1.
-------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
November 30, 2001.
EXPLANATORY NOTE
The registration statement of which this prospectus is a part covers the
primary issuance of securities by us and the secondary resale of certain shares
of our common stock by former stockholders of iPCS, Inc. On November 30, 2001,
we acquired iPCS, Inc. by merging a wholly owned subsidiary of AirGate with and
into iPCS, Inc. In order to satisfy contractual obligations to the former
stockholders of iPCS, Inc., we are including in the registration statement of
which this prospectus is a part up to 4,000,000 of the shares of our common
stock that the selling stockholders received upon the closing of the iPCS
merger.
TABLE OF CONTENTS
Page Page
---- ----
About this Prospectus............. 1 Description of Warrants............ 11
Risk Factors...................... 1 Selling Stockholders............... 13
Our Business...................... 1 Plan of Distribution............... 13
Ratio of Earnings to Fixed Charges 2 Legal Matters...................... 15
Use of Proceeds................... 2 Experts............................ 15
Description of Debt Securities.... 2 Where You Can Find More Information 16
Description of Our Capital Stock.. 8 Incorporation by Reference......... 16
-------------
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in or incorporated by reference in
this prospectus. We and the selling stockholders are offering securities and
seeking offers to buy our securities only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of our securities.
ii
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we filed with the SEC
using a "shelf" registration process. Under this shelf process, we may offer
and sell any combination of the securities described in this prospectus in one
or more offerings up to an initial aggregate offering price of $500,000,000.
The selling stockholders may also sell shares of our common stock under this
prospectus, up to a total of 4,000,000 shares. We will not receive any proceeds
from any sale of our common stock by the selling stockholders.
This prospectus provides you with a general description of the securities we
and the selling stockholders may offer. Each time we or the selling
stockholders sell securities, we will provide a prospectus supplement
containing specific information about the terms of that offering. The
prospectus supplement may also add, update, or change information contained in
this prospectus. You should read both this prospectus and any prospectus
supplement, together with additional information described under the heading
"Where You Can Find More Information."
We, or the selling stockholders, may sell securities to underwriters who
will sell the securities to the public on terms fixed at the time of sale. In
addition, the securities may be sold by us directly or through dealers or
agents designated from time to time. If we, directly or through agents, solicit
offers to purchase securities, we reserve the sole right to accept and,
together with our agents, to reject, in whole or in part, any offer.
Unless the context indicates otherwise, references in this prospectus to
"we", "our" or "us" refer to the combined operations of AirGate PCS, Inc. and
iPCS, Inc. and references to "AirGate" refer to the operations of AirGate PCS,
Inc., exclusive of the operations of its wholly owned subsidiary iPCS, Inc.
RISK FACTORS
Our risk factors are incorporated herein by reference from our Annual Report
on Form 10-K and other documents we have filed with the Securities and Exchange
Commission.
OUR BUSINESS
We are the largest Sprint PCS network partner in terms of covered
population. We market and provide digital wireless personal communications
services, or PCS, to a service territory of approximately 14.5 million
residents with current network coverage of approximately 11.0 million residents
as of November 30, 2001. Through our management agreements with Sprint PCS, we
have the exclusive right to provide Sprint PCS products and services under the
Sprint and Sprint PCS brand names in our territories. Sprint PCS, directly and
indirectly through network partners such as us, operates the largest
all-digital, all-PCS nationwide wireless network in the United States based on
covered population, covering nearly 244 million residents in more than 4,000
cities and communities across the United States, Puerto Rico and the U.S.
Virgin Islands.
On November 30, 2001, AirGate acquired iPCS by merging a wholly owned
subsidiary of AirGate with iPCS. In connection with the merger, AirGate issued
to the former stockholders of iPCS approximately 12.4 million shares of our
common stock and assumed options and warrants to purchase approximately 1.1
million shares of our common stock. The acquisition of iPCS increased the total
resident population in our markets from approximately 7.1 million to
approximately 14.5 million. We believe the acquisition of iPCS increases
AirGate's strategic importance to Sprint PCS. We also believe the acquisition
adds attractive markets as well as a nearly complete network build-out and a
fully funded business plan.
Our Sprint PCS territories cover 58 basic trading areas, referred to as
markets, in parts of South Carolina, North Carolina, Georgia, Illinois,
Michigan, Iowa and Nebraska. Our major markets include:
. Grand Rapids, Michigan;
. Greenville-Spartanburg, South Carolina;
. Savannah, Georgia;
. Charleston, South Carolina;
. Columbia, South Carolina; and
. Saginaw-Bay City, Michigan.
As of September 30, 2001, AirGate and iPCS combined had 369,952 subscribers
and total network coverage of approximately 11.0 million residents,
representing approximately 76% of the resident population in these markets. For
the twelve months ended September 30, 2001, we generated revenue of
approximately $259.2 million on a pro forma basis.
RATIO OF EARNINGS TO FIXED CHARGES
The dollar amount of the deficiency of earnings to fixed charges of AirGate
was calculated by adding fixed charges and the amortization of capitalized
interest to net loss, and then deducting interest capitalized. Fixed charges
were calculated by adding interest expense, interest capitalized, and 10% of
rental expense under operating leases, assumed to be representative of the
interest factor of rent.
The dollar amount of the deficiency of earnings to fixed charges is
summarized as follows (in millions):
Year Ended Year Ended
September 30, Nine Months Ended December 31,
------------- September 30, --------------
2001 2000 1999 1998 1997 1996
------ ----- ----------------- ---- ---- ----
$112.9 $87.1 $16.7 $5.2 $2.9 $1.9
USE OF PROCEEDS
Unless we state otherwise in any applicable prospectus supplement, we intend
to use the net proceeds from the sale of the securities by us for general
corporate purposes, including the purchase or repayment of indebtedness
outstanding at a particular time, acquisitions, capital expenditures, working
capital and investments. Pending such uses, we intend to invest such funds in
short-term, investment-grade, interest-bearing instruments.
We will not receive any proceeds from the sale of our common stock by the
selling stockholders.
DESCRIPTION OF DEBT SECURITIES
The debt securities will be direct obligations of ours. They may be secured
or unsecured, and may be senior or subordinated indebtedness. The debt
securities may be fully and unconditionally guaranteed on a secured or
unsecured, senior or subordinated basis, jointly and severally by substantially
all of our wholly owned domestic subsidiaries. As a result of certain
restrictions set forth in the indenture relating to iPCS' senior discount notes
and in iPCS' senior credit facility, neither of iPCS nor its subsidiaries may
guarantee our debt securities so long as iPCS' senior discount notes are
outstanding. We will issue the debt securities, if at all, under one or more
indentures between us and a trustee. Any indenture will be subject to, and
governed by, the Trust Indenture Act of 1939, as amended. The statements made
in this prospectus relating to any indentures and the debt securities to be
issued under the indentures are summaries of certain anticipated provisions of
the indentures and are not complete.
We have filed copies of the forms of indentures as exhibits to the
registration statement of which this prospectus is part and will file any final
indentures and supplemental indentures if we issue debt securities. You should
refer to those indentures for the complete terms of the debt securities.
General
We may issue debt securities that rank "senior" or "subordinated." The debt
securities that we refer to as "senior securities" will be our direct
obligations and will rank equally and ratably in right of payment with our
other indebtedness that is not subordinated. We may also issue debt securities
that may be subordinated in right of payment to the senior securities. We refer
to these securities as "subordinated securities." We have filed with the
registration statement of which this prospectus is a part two separate forms of
indenture, one for the senior securities and one for the subordinated
securities.
We may issue the debt securities without limit as to aggregate principal
amount, in one or more series, in each case as we establish in one or more
supplemental indentures. We need not issue all debt securities of one
2
series at the same time. Unless we otherwise provide, we may reopen a series,
without the consent of the holders of such series, for issuances of additional
securities of that series.
We anticipate that any indenture will provide that we may, but need not,
designate more than one trustee under an indenture, each with respect to one or
more series of debt securities. Any trustee under any indenture may resign or
be removed with respect to one or more series of debt securities, and we may
appoint a successor trustee to act with respect to that series.
The applicable prospectus supplement will describe the specific terms
relating to the series of debt securities we will offer, including, where
applicable, the following:
. the title and series designation and whether they are senior securities or
subordinated securities;
. the aggregate principal amount of the securities;
. the percentage of the principal amount at which we will issue the debt
securities and, if other than the principal amount of the debt securities,
the portion of the principal amount of the debt securities payable upon
maturity of the debt securities;
. if convertible, the initial conversion price, the conversion period and
any other terms governing such conversion;
. the stated maturity date;
. any fixed or variable interest rate or rates per annum;
. the place where principal, premium, if any, and interest will be payable
and where the debt securities can be surrendered for transfer, exchange or
conversion;
. the date from which interest may accrue and any interest payment dates;
. any provisions for redemption, including the redemption price and any
remarketing arrangements;
. the events of default and covenants of such securities, to the extent
different from or in addition to those described in this prospectus;
. whether we will issue the debt securities in certificated or book-entry
form;
. whether we will issue the debt securities in registered or bearer form
and, if in registered form, the denominations if other than in even
multiples of $1,000;
. whether we will issue any of the debt securities in permanent global form
and, if so, the terms and conditions, if any, upon which holders may
exchange interests in the global security, in whole or in part, for the
individual debt securities that the global security represents;
. the applicability, if any, of the defeasance and covenant defeasance
provisions described in this prospectus or any prospectus supplement;
. whether we will pay additional amounts on the securities in respect of any
tax, assessment or governmental charge and, if so, whether we will have
the option to redeem the debt securities instead of making this payment;
. the subordination provisions, if any, relating to the debt securities;
. the provisions relating to any security provided for the debt securities;
and
. the provisions relating to any guarantee of the debt securities.
We may issue debt securities at less than the principal amount payable upon
maturity. We refer to these securities as "original issue discount securities."
If material or applicable, we will describe in the applicable
3
prospectus supplement special U.S. federal income tax, accounting and other
considerations applicable to original issue discount securities.
Except as we may set forth in any prospectus supplement, an indenture will
not contain any other provisions that would limit our ability to incur
additional indebtedness or that would afford holders of the debt securities
protection in the event of a highly leveraged or similar transaction involving
us or in the event of a change of control. You should review carefully the
applicable prospectus supplement for information with respect to events of
default and covenants applicable to the debt securities we may offer.
Denominations, Interest, Registration and Transfer
Unless we otherwise describe in the applicable prospectus supplement, we
will issue the debt securities of any series that are registered securities in
denominations of $1,000 or any even multiple thereof, other than global
securities, which may be of any denomination.
Unless we otherwise describe in the applicable prospectus supplement, we
will pay the interest, principal and any premium at the corporate trust office
of the trustee. At our option, however, we may make payment of interest by
check mailed to the address of the person entitled to the payment as it appears
in the applicable register or by wire transfer of funds to that person at an
account maintained within the United States.
If we do not punctually pay or duly provide for interest on any interest
payment date, the defaulted interest will be paid either:
. to the person in whose name the debt security is registered at the close
of business on a special record date the applicable trustee will fix; or
. in any other lawful manner, all as the applicable indenture describes.
You may have your debt securities divided into more debt securities of
smaller denominations or combined into fewer debt securities of larger
denominations, as long as the total principal amount is not changed. We call
this an "exchange."
You may exchange or transfer debt securities at the office of the applicable
trustee. The trustee acts as our agent for registering debt securities in the
names of holders and transferring debt securities. We may change this
appointment to another entity or perform it ourselves. We call the entity
performing the role of maintaining the list of registered holders the
"registrar." It will also perform transfers.
You need not pay a service charge to transfer or exchange debt securities,
but certain governmental agencies or offices may require you to pay for any tax
or other governmental charge associated with the exchange or transfer. The
security registrar will make the transfer or exchange only if it is satisfied
with your proof of ownership.
Merger, Consolidation or Sale of Assets
Under any indenture, we are generally permitted to consolidate or merge with
another company. We are also permitted to sell substantially all of our assets
to another company, or to buy substantially all of the assets of another
company. However, we may not take any of these actions unless all the following
conditions are met:
. if we merge out of existence or sell our assets, the corresponding company
must be a corporation, partnership or other entity organized under the
laws of a State or the District of Columbia or under federal law and must
agree to be legally responsible for the debt securities; and
. immediately after the merger, sale of assets or other transaction we are
not in default on the debt securities. A default for this purpose includes
any event that would be an event of default if the requirements for giving
us default notice or our default having to exist for a specific period of
time were disregarded.
4
We will describe in the applicable prospectus supplement additional
restrictions, if any, on our ability to consolidate or merge with another
company or to sell substantially all of our assets to another company or to buy
substantially all of the assets of another company.
Events of Default and Related Matters
Unless we otherwise describe in an applicable prospectus supplement, an
"event of default" with respect to each series of debt securities means any of
the following:
. we fail to pay interest on any debt security of that series for 30 days;
. we fail to pay the principal or any premium on any debt security of that
series when due;
. we fail to comply with the provisions of the related indenture or any
supplemental indenture relating to consolidations, mergers and sales of
assets;
. we fail to perform any other covenant with respect to that series in the
related indenture or any supplemental indenture that continues for a
certain number of days after being given written notice unless we are
granted an extension of such time period by the trustee, or the trustee
and the holders who gave the notice, to pursue corrective action;
. certain events in bankruptcy, insolvency or reorganization of us or a
guarantor; or
. any other event of default included in the related indenture or any
supplemental indenture.
An event of default for a particular series of debt securities does not
necessarily constitute an event of default for any other series of debt
securities.
The consequences of an event of default, and the remedies available under
the indentures or any supplemental indentures, will vary depending upon the
type of event of default that has occurred.
If an event of default relating to certain events in bankruptcy, insolvency
or reorganization of us or a subsidiary guarantor occurs and continues, the
entire principal of all the debt securities of all series will be due and
payable immediately.
If any other event of default for any series of debt securities occurs and
continues, the trustee or the holders of a majority of the aggregate principal
amount of the debt securities of the series may declare the entire principal of
all the debt securities of that series to be due and payable immediately. If
this happens, subject to certain conditions, the holders of a majority of the
aggregate principal amount of the debt securities of that series can void the
declaration. The trustee may withhold notice to the holders of debt securities
of any default (except in the payment of principal or interest or in the making
of any sinking fund payment) if it considers such withholding of notice to be
in the interests of the holders.
Other than its duties in case of a default, a trustee is not obligated to
exercise any of its rights or powers under the indentures or any supplemental
indentures at the request, order or direction of any holders, unless the
holders offer the trustee reasonable indemnity. If they provide this reasonable
indemnity, the holders of a majority of the aggregate principal amount of any
series of debt securities may direct the time, method and place of conducting
any proceeding or any remedy available to the trustee, or exercising any power
conferred upon the trustee, for any series of debt securities.
No holder of any debt security can institute any action or proceeding with
respect to an indenture or any supplemental indenture unless the holder gives
written notice of an event of default to the trustee, the holders of a
specified percentage of the aggregate principal amount of the outstanding debt
securities of the applicable series shall have requested the trustee to
institute the action or proceeding and shall have appropriately indemnified the
trustee, and the trustee has failed to institute the action or proceeding
within a specified time period.
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Modification of an Indenture
We can make three types of changes to the indentures and the debt securities:
Changes Requiring Your Approval. We cannot make the following changes to
your debt securities without your specific approval:
. change the stated maturity of the principal or interest on a debt security;
. reduce any amounts due on a debt security;
. reduce the amount of principal payable upon acceleration of the maturity
of a debt security following a default;
. change the currency of payment on a debt security;
. waive a default in the payment of principal of, premium, if any, or
interest on the debt security;
. modify the subordination provisions, if any, in a manner that is adverse
to you; or
. reduce the percentage of holders of debt securities whose consent is
needed to modify or amend an indenture or to waive compliance with certain
provisions of an indenture or to waive certain defaults.
Changes Requiring a Majority Vote. Certain changes to an indenture and the
debt securities require a vote in favor by holders of debt securities owning a
majority of the principal amount of the particular series affected. Most
changes fall into this category, except for clarifying changes and certain
other changes that would not adversely affect holders of the debt securities.
We require the same vote to obtain a waiver of a past default. However, we
cannot obtain a waiver of a payment default or any other aspect of an indenture
or the debt securities listed in the first category described above under
"--Changes Requiring Your Approval" unless we obtain your individual consent to
the waiver.
Changes Not Requiring Approval. Without a vote by holders of debt
securities, we may make clarifications and certain other changes that:
. cure any ambiguity, defect, omission or inconsistency in the indenture;
provided that such amendments do not adversely affect the interests of the
holders of the debt securities of the particular series in any material
respect; or
. make any change with respect to a series of debt securities that, in the
good faith opinion of our board of directors, does not materially and
adversely affect the rights of the holder of such series of debt
securities.
Discharging our Obligations
Except as we may otherwise set forth in any applicable prospectus
supplement, we may choose to either discharge our obligations on the debt
securities of any series in a "legal defeasance" or release ourselves from our
covenant restrictions on the debt securities of any series in a "covenant
defeasance." We may do so at any time prior to the stated maturity or
redemption of the debt securities of the series if, among other conditions:
. we deposit with the trustee sufficient cash or U.S. government securities
to pay the principal, interest, any premium and any other sums due to the
stated maturity date or redemption date of the debt securities of the
series; and
. we provide an opinion of our counsel that holders of the debt securities
will not be affected for U.S. federal income tax purposes by the
defeasance.
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If we provide the deposit and opinion described above, holders of the debt
securities of that series will not be entitled to the benefits of the related
indenture except for registration of transfer and exchange of debt securities,
replacement of lost, stolen or mutilated debt securities, any required
conversion or exchange of debt securities, any required sinking fund payments
and receipt of principal and interest on the original stated due dates or
specified redemption dates.
Subordination
We will describe in the applicable prospectus supplement the terms and
conditions, if any, upon which any series of subordinated securities is
subordinated to debt securities of another series or to our other indebtedness.
The terms will include a description of:
. the indebtedness ranking senior to the debt securities being offered;
. the restrictions, if any, on payments to the holders of the debt
securities being offered while a default with respect to the senior
indebtedness is continuing;
. the restrictions, if any, on payments to the holders of the debt
securities being offered following an event of default; and
. provisions requiring holders of the debt securities being offered to remit
some payments to holders of senior indebtedness.
Conversion
We may issue debt securities from time to time that are convertible into our
common stock or our other securities or any securities of third parties. If you
hold convertible debt securities, you will be permitted at certain times
specified in the applicable prospectus supplement to convert your debt
securities into our common stock, other securities or securities of third
parties for a specified price. We will describe the conversion price (or the
method for determining the conversion price) and the other terms applicable to
conversion in the applicable prospectus supplement.
Guarantees
One or more of our subsidiaries, as guarantors, may, jointly and severally,
fully and unconditionally guarantee our obligations under the debt securities
on an equal and ratable basis, subject to the limitation described in the next
paragraph. In addition, any supplemental indenture may require us to cause
certain or all domestic entities that become one of our subsidiaries after the
date of any supplemental indenture to enter into a supplemental indenture
pursuant to which such subsidiary agrees to guarantee our obligations under the
debt securities. If we default in payment of the principal, interest or any
premium on such debt securities, the guarantors, jointly and severally, will be
unconditionally obligated to duly and punctually make such payments.
Notwithstanding the foregoing, as a result of certain restrictions set forth in
the indenture relating to iPCS' senior discount notes, none of iPCS nor any of
its subsidiaries may guarantee our debt securities so long as iPCS' senior
discount notes are oustanding.
Each guarantor's obligations will be limited to the maximum amount that
(after giving effect to all other contingent and fixed liabilities of such
guarantor any collections from, or payments made by or on behalf of, any other
guarantors) will result in the obligations of such guarantor under the
guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal or state law. Each guarantor that makes a payment or distribution under
its guarantee shall be entitled to contribution from each other guarantor in a
pro rata amount based on the net assets of each guarantor.
Guarantees of senior debt securities (including the payment of principal,
interest and any premium on such debt securities) will rank pari passu in right
of payment with all other unsecured and unsubordinated indebtedness of the
guarantor and will rank senior in right of payment to all subordinated
indebtedness of such
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guarantor. Guarantees of subordinated debt securities will generally be
subordinated and junior in right of payment to the prior payment in full of all
senior indebtedness of the guarantor.
The prospectus supplement for a particular issue of debt securities will
describe the subsidiary guarantors and any additional material terms of the
guarantees.
Global Securities
If so described in the applicable prospectus supplement, we may issue the
debt securities of a series in whole or in part in the form of one or more
global securities that will be deposited with a depositary identified in the
prospectus supplement. We may issue global securities in either registered or
bearer form and in either temporary or permanent form. The specific terms of
the depositary arrangement with respect to any series of debt securities will
be described in the prospectus supplement.
DESCRIPTION OF OUR CAPITAL STOCK
General
The following summarizes all of the material terms and provisions of our
capital stock. We have 155,000,000 shares of authorized capital stock,
including 150,000,000 shares of common stock, par value $0.01 per share, and
5,000,000 shares of preferred stock, par value $0.01 per share. As of November
30, 2001, we had issued and outstanding 25,745,622 shares of our common stock.
We have no shares of our preferred stock issued and outstanding.
Common Stock
The holders of shares of our common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders and do
not have any cumulative rights. Subject to the rights of the holders of any
series of preferred stock, holders of shares of our common stock are entitled
to receive ratably such dividends as may be declared by our board of directors
out of funds legally available to pay dividends. Holders of shares of our
common stock have no preemptive, conversion, redemption, subscription or
similar rights. If we liquidate, dissolve or wind up, the holders of shares of
our common stock are entitled to share ratably in the assets which are legally
available for distribution, if any, remaining after the payment or provision
for the payment of all debts and other liabilities and the payment and setting
aside for payment of any preferential amount due to the holders of shares of
any series of preferred stock.
Preferred Stock
Under our certificate of incorporation, our board of directors is
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, from time to time to issue up to an aggregate of
5,000,000 shares of preferred stock, par value $0.01 per share. The preferred
stock may be issued in one or more series.
We will describe in the applicable prospectus supplement the specific
financial and other terms of each series of preferred stock. The description of
the preferred stock that is set forth in any prospectus supplement is not
complete without reference to the documents that govern the preferred stock,
including our certificate of incorporation and the certificate of designations
relating to the applicable series of preferred stock. These documents have been
or will be included or incorporated by reference as exhibits to the
registration statement of which this prospectus is a part.
Each series may have different rights, preferences and designations and
qualifications, limitations and restrictions that our board of directors may
establish without approval from our stockholders. These rights, designations
and preferences include:
. the maximum number of shares we will issue in the series;
. the name of the series;
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. dividend rights;
. dividend rate or basis for determining such rate if any, on the shares of
the series;
. whether dividends will be cumulative and, if so, from which date or dates;
. whether we may redeem the shares of the series and if so, the dates,
prices and other terms and conditions of redemption;
. whether we will be obligated to purchase or otherwise redeem shares of the
series pursuant to a sinking fund or otherwise, and the prices, periods
and other terms and conditions upon which the shares of the series will be
redeemed or purchased;
. the rights, if any, of holders of the shares of the series to convert such
shares into, or exchange such shares for, shares of any other class of
stock;
. the voting rights of the shares of the series, in addition to the voting
rights provided by law, if any, and the terms of those voting rights; and
. the rights of the shares of the series in the event of a liquidation,
dissolution or winding up.
Our board of directors could authorize us to issue preferred stock with
voting, conversion and other rights that could adversely affect the voting
power and other rights of holders of shares of our common stock or other series
of preferred stock. In addition, if our board of directors decides to issue any
preferred stock, it could have the effect of delaying or preventing another
party from taking control of us. This is because we could design the terms of
the preferred stock to make it prohibitively expensive for any unwanted third
party to make a bid for shares of our common stock.
Delaware Law and Certain Charter and By-Law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a certain period of time. That period is
three years after the date of the transaction in which the person became an
interested stockholder, unless the interested stockholder attained that status
with the approval of the board of directors or unless the business combination
is approved in a prescribed manner. A "business combination" includes certain
merger, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
Our certificate of incorporation provides that holders of at least 80% of
the voting power of the then-outstanding shares of our capital stock entitled
to vote in the election of directors, voting together as a single class must
approve certain business transactions with interested stockholders.Such
business transactions include:
. mergers or consolidations with an interested stockholder;
. sales, leases, exchanges, mortgages, pledges, transfers or other
dispositions of any of our assets to an interested stockholder;
. certain sizable issuances or transfers of any of our securities to an
interested stockholder;
. the adoption of any plan or proposal for our liquidation proposed by or on
behalf of an interested stockholder; or
. any reclassification of securities or recapitalization which increases the
proportionate share of any class of securities of an interested
stockholder.
However, the affirmative vote of a majority of the shares of outstanding stock
entitled to vote, or such vote as is required by law or our certificate of
incorporation, will suffice with respect to a business combination with an
interested stockholder if the consideration received meets certain fair price
standards.
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Our certificate of incorporation and by-laws provide for the division of our
board of directors into three classes, as nearly equal in size as possible,
with each class beginning its three year term in a different year. Our
stockholders may remove a director only for cause with the affirmative vote of
the holders of at least 80% of the voting power of all of the then-outstanding
shares of capital stock entitled to vote generally for the election of
directors voting together as a single class.
Our by-laws also require a stockholder who intends to nominate a candidate
for election to the board of directors, or to raise new business at a
stockholder meeting to give at least 90 days advance notice to our Secretary.
The notice provision requires a stockholder who desires to raise new business
to provide us certain information concerning the nature of the new business,
the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide us with certain information concerning the nominee and
the proposing stockholder.
Our certificate of incorporation empowers our board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include:
. comparison of the proposed consideration to be received by stockholders in
relation to the then current market price of our capital stock, our
estimated current value in a freely negotiated transaction and our
estimated future value as an independent entity; and
. the impact of a transaction on our employees, suppliers and clients and
its effect on the communities in which we operate.
Our certificate of incorporation also contains a provision which
acknowledges that certain of our Sprint PCS agreements establish a process for
the sale of our operating assets in the event of a default by us and an
acceleration of the obligations under AirGate's senior secured credit facility.
This provision of the certificate of incorporation is intended to permit the
sale of such assets without further stockholder approval.
The provisions described above could make it more difficult for a third
party to acquire control of us and, furthermore, could discourage a third party
from making any attempt to acquire control of us.
Our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders may be taken only at a duly called
annual or special meeting of the stockholders, and that special meetings may be
called only by resolution adopted by a majority of the board of directors, or
as otherwise provided in the bylaws. These provisions could have the effect of
delaying until the next annual stockholders meeting stockholder actions that
are favored by the holders of a majority of the outstanding voting securities.
These provisions may also discourage another person or entity from making an
offer to stockholders for our common stock. This is because the person or
entity making the offer, even if it acquired a majority of our outstanding
voting securities, would be unable to call a special meeting of the
stockholders and would further be unable to act pursuant to a unanimous written
consent of the stockholders. As a result, any meeting as to matters they
endorse, including the election of new directors or the approval of a merger,
would have to wait for the next duly called stockholders meeting.
Delaware law provides that the amendment of a corporation's certificate of
incorporation or by-laws requires the affirmative vote of a majority of the
shares entitled to vote on any matter, unless the corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage.
Our certificate of incorporation requires the affirmative vote of the holders
of at least 80% of our outstanding voting stock to amend or repeal any of the
provisions of the certificate of incorporation described above. The 80% vote is
also required to amend or repeal any of our by-law provisions described above.
Our board of directors may also amend or repeal our by-laws. This 80%
stockholder vote would be in addition to the separate vote to which each class
of our preferred stock that may be outstanding at the time we submit any
amendment to our stockholders may be entitled in accordance with the terms of
such preferred stock.
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Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
Listing
Our common stock has been approved for quotation and is traded on The Nasdaq
National Market under the symbol "PCSA."
DESCRIPTION OF WARRANTS
Currently Outstanding Warrants
We currently have outstanding warrants to purchase 723,241 shares of our
common stock as set forth below.
AirGate Warrants
In connection with AirGate's units offering, which was completed on
September 30, 1999, we issued warrants to purchase 644,400 shares of our common
stock. Of these, warrants to purchase 590,269 shares of our common stock have
been exercised and warrants to purchase 54,131 shares of our common stock
remain outstanding as of November 30, 2001. Such warrants may be exercised at
an exercise price of $0.01 per share of our common stock and expire on October
1, 2009.
On August 16, 1999, in connection with entering into AirGate's senior credit
facility, we issued warrants to Lucent Technologies exercisable for 128,860
shares of our common stock at an exercise price of $20.40 per share. The
warrants expire on August 15, 2004. In June 2000, we issued Lucent Technologies
warrants to acquire an additional 10,175 shares of our common stock on terms
identical to those described above. Of these, warrants to purchase 128,860
shares of our common stock were exercised and warrants to purchase 10,175 of
our shares of common stock remain outstanding.
iPCS Warrants
In connection with the merger, AirGate also assumed all of iPCS' obligations
under iPCS' then-outstanding warrants to purchase iPCS common stock.
Sprint Warrants. As additional consideration to Sprint Spectrum L.P. for its
agreement to expand iPCS' initial territory by an additional 20 markets, iPCS
issued to Sprint Spectrum L.P. a warrant which is currently exercisable for
183,584 shares of our common stock. The warrant is exercisable by Sprint
Spectrum L.P. at any time prior to July 15, 2007 at an exercise price of $31.06
per share. Sprint Spectrum L.P. may transfer its rights with respect to the
warrant only to a company that directly, or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Sprint Spectrum L.P., and any warrant so transferred will be subject to the
exercise time period. We have granted Sprint Spectrum L.P. demand registration
rights for the shares of our common stock subject to the warrant until the
common stock may be sold without registration.
Unit Warrants. As part of iPCS' units offering, iPCS issued and sold
warrants which are currently exercisable for 475,351 shares of our common
stock, pursuant to a warrant agreement between iPCS and Mellon Investor
Services LLC (formerly known as ChaseMellon Shareholder Services, L.L.C.), as
the warrant agent. The unit warrants are exercisable at any time prior to July
15, 2010 at an exercise price of $34.51 per share. The unit warrants trade
separately from the notes in the Private Offerings and Resales trading through
Automated Linkages (PORTAL) market.
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Under the terms of a registration rights agreement entered into by iPCS in
connection with the issuance of the unit warrants, we are required to keep
effective a shelf registration statement covering the resale of the unit
warrants and the resale of the shares of our common stock issuable upon the
exercise of the unit warrants until the date on which all of the unit warrants
or shares of our common stock issuable thereunder have been sold pursuant to
the shelf registration statement or the unit warrants have expired. If we fail
to maintain the effectiveness of the shelf registration statement, a
registration default will occur and we will be required to pay liquidated
damages to each holder of a unit warrant. The liquidated damages will be in an
amount equal to $0.03 per week per unit warrant held by each holder for each
week or portion thereof that the registration default continues for the first
90-day period immediately following the occurrence of such registration
default. This amount will increase by an additional $0.02 per week per unit
warrant with respect to each subsequent 90-day period, up to a maximum of $0.07
per week per unit warrant. The provision for liquidated damages will continue
until the registration default has been cured. We are not required to pay
liquidated damages for more than one registration default at any given time. No
liquidated damages are currently payable.
We have agreed to cause a shelf registration statement on Form S-3 to become
effective to cover the resale of the unit warrants, as discussed above, and the
issuance and resale of the shares of our common stock issuable upon the
exercise of all of the assumed warrants. We will maintain the effectiveness of
the registration statement until the earlier of the expiration of the assumed
warrants or the date on which all of the assumed warrants have been exercised
and all shares of our common stock issuable upon exercise of the assumed unit
warrants have been sold.
Warrants to be Issued
We currently have no outstanding warrants to purchase preferred stock or
warrants to purchase debt securities. We may issue warrants for the purchase of
common stock, preferred stock or debt securities. We may issue warrants
independently or together with any other securities offered by any prospectus
supplement and we may attach or separate the warrants from those securities.
Each series of warrants will be issued under a separate warrant agreement to be
entered into between us and a warrant agent specified in the applicable
prospectus supplement, the form of which will be filed or incorporated by
reference as an exhibit to the registration statement of which this prospectus
is a part. The warrant agent will act solely as our agent in connection with
the warrants of such series and will not assume any obligation or relationship
of agency or trust for or with any provisions of the warrants offered by this
prospectus. We will set forth further terms of the warrants and the applicable
warrant agreements in the applicable prospectus supplement relating to our
issuance of any warrants.
The applicable prospectus supplement will describe the terms of the warrants
offered by this prospectus including, where applicable, the following:
. the title of the warrants;
. the aggregate number of the warrants;
. the price or prices at which we will issue warrants;
. the designation, terms and number of shares of common stock, shares of
preferred stock or debt securities purchasable upon exercise of the
warrants;
. the designation and terms of the securities, if any, with which the
warrants are issued and the number of the warrants issued with each such
offered security;
. the date, if any, on and after which the warrants and the related common
stock, preferred stock or debt securities will be separately transferable;
. the antidilution provisions of the warrants;
. whether we will have a right to call the warrants, and, if so, the terms
of any such call right;
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. the price at which each share of common stock or preferred stock or debt
security purchasable upon exercise of the warrants may be purchased;
. the date on which the right to exercise the warrants shall commence and
the date on which the right shall expire;
. the minimum or maximum amount of the warrants which a holder may exercise
at any one time;
. information with respect to book-entry procedures, if any;
. a discussion of certain material federal income tax considerations; and
. any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants.
SELLING STOCKHOLDERS
In addition to covering the offering of our common stock by us, this
prospectus covers the offering for resale of our common stock by the selling
stockholders. The selling stockholders, each a former stockholder of iPCS,
received their shares of our common stock in connection with our acquisition of
iPCS.
The prospectus supplement for any offering of our common stock by the
selling stockholders will include the following information:
. the names of the selling stockholders;
. the nature of any position, office or other material relationship which
any of the selling stockholders will have had during the prior three years
with us or any of our predecessors or affiliates;
. the number of shares of our common stock held by each of the selling
stockholders;
. the percentage of our common stock held by each of the selling
stockholders; and
. the number of shares of our common stock offered by each of the selling
stockholders.
PLAN OF DISTRIBUTION
Distributions by Us
We may sell the securities in one or more of the following ways from time to
time:
. directly to purchasers;
. through agents;
. through underwriters;
. to or through underwriters or dealers; and
. through a combination of any of these methods of sale.
We may directly solicit offers to purchase securities or agents designated
by us from time to time may solicit such offers. We will set forth in the
applicable prospectus supplement any such agent, who shall be deemed to be an
underwriter as that term is defined in the Securities Act of 1933, as amended
(the "Securities Act"), involved in the offer or the sale of the securities in
respect of which this prospectus is delivered will be named, and any
commissions payable by us to such agent. Unless we otherwise indicate in the
prospectus supplement, any such agent will be acting on a best efforts basis
for the period of its appointment. Agreements which we may enter into with
agents may entitle them to indemnification by us against certain civil
liabilities,
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including liabilities under the Securities Act, and may be customers of, engage
in transactions with or perform services for us in the ordinary course of
business.
If we use any underwriters in the sale by us of the securities in respect of
which this prospectus is delivered, we will enter into an underwriting
agreement with such underwriters at the time of sale to them. We will set forth
in the applicable prospectus supplement, which will be used by the underwriters
to make resales of the securities in respect of which this prospectus is
delivered to the public, the names of the underwriters and the terms of the
transaction. The relevant underwriting agreement may entitle the underwriters
to indemnification by us against certain liabilities, including liabilities
under the Securities Act. The underwriters may be customers of, engage in
transactions with or perform services for us in the ordinary course of business.
If we utilize a dealer in the sale of the securities in respect of which
this prospectus is delivered, we will sell such securities to the dealer, as
principal. The dealer may then resell such securities to the public at varying
prices to be determined by such dealer at the time of the resale. We may
indemnify dealers against certain liabilities, including liabilities under the
Securities Act. Dealers may be customers of, engage in transactions with, or
perform services for us in the ordinary course of business.
Certain of the underwriters and their affiliates may engage in transactions
with and perform services for us in the ordinary course of business for which
they receive compensation.
The place and time of delivery for the securities in respect of which this
prospectus is delivered will be set forth in the accompanying prospectus
supplement.
Distributions by the Selling Stockholders
For purposes of this document, selling stockholders include partners,
donees, pledgees, transferees or other successors-in-interest from time to time
selling shares received from a named selling stockholder as a gift, pledge,
partnership distribution or other non-sale transfer. We will not receive any
proceeds from the sale of shares of our common stock held by the selling
stockholders pursuant to this document. The selling stockholders may offer and
sell their shares of our common stock from time to time in one or more of the
following transactions:
. on The Nasdaq National Market or any exchange or market on which shares of
our common stock are listed or quoted;
. in the over-the-counter market;
. in privately negotiated transactions;
. for settlement of short sales, or through long sales, options or hedging
transactions involving cross or block trades;
. by pledge to secure debts and other obligations;
. block transactions (which may involve crosses) in which a broker-dealer
may sell all or a portion of the shares as agent but may position and
resell all or a portion of the block as a principal to facilitate the
transaction;
. purchases by one or more underwriters on a firm commitment or best efforts
basis;
. purchases by a broker-dealer as principal and resale by the broker-dealer
for its own account pursuant to a prospectus supplement;
. a special offering, an exchange distribution or a secondary distribution
in accordance with the applicable rules of The Nasdaq National Market or
of any stock exchange on which shares of our common stock may be listed; or
. through a combination of any of these transactions.
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The selling stockholders may sell their shares of our common stock at any of
the following prices:
. fixed prices which may be changed;
. market prices prevailing at the time of sale;
. prices related to prevailing market prices; or
. privately negotiated prices.
The selling stockholders may use broker-dealers to sell their shares of our
common stock. In connection with such sales the broker-dealers may either
receive discounts, concessions or commissions from the selling stockholders, or
they may receive commissions from purchasers of shares of our common stock for
whom they acted as agents. In order to comply with the securities laws of
certain states, the selling stockholders may only sell their shares of our
common stock through registered or licensed broker-dealers.
The selling stockholders and any agents or broker-dealers that the selling
stockholders use to sell their shares of our common stock may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any discount, concession or commission received by them and any profit on the
resale of shares as principal may be deemed to be underwriting discounts or
commissions under the Securities Act. Because the selling stockholders may be
deemed to be underwriters, the selling stockholders may be subject to the
prospectus delivery requirements of the Securities Act.
The selling stockholders and any other person participating in the
distribution of their shares of our common stock described in this prospectus
and/or any applicable prospectus supplement will be subject to applicable
provisions of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder, including, without limitation,
the anti-manipulation provisions of Regulation M of the Exchange Act, which may
limit the timing of purchases and sales of any of such shares by the selling
stockholders or any other person. Furthermore, Regulation M may restrict the
ability of any person engaged in the distribution of the shares offered by the
selling stockholders pursuant to this prospectus and/or any applicable
prospectus supplement to engage in market-making activities with respect to the
particular shares being distributed. All of the foregoing may affect the
marketability of the shares offered by the selling stockholders pursuant to
this prospectus and/or any applicable prospectus supplement and the ability of
any person or entity to engage in market-making activities with respect to such
shares.
We may, if so indicated in the applicable prospectus supplement, agree to
indemnify any underwriters and the selling stockholders against certain civil
liabilities, including liabilities under the Securities Act.
The registration contemplated hereby is being effected under the
requirements of the merger agreement. We will pay substantially all of the
expenses incident to the registration of the shares of our common stock offered
by the selling stockholders pursuant to this prospectus and/or any applicable
prospectus supplement, including all costs incident to the offering and sale of
the shares by the selling stockholders to the public, including in an
underwritten public offering, other than any brokerage fees, selling
commissions or underwriting discounts.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us and
the selling stockholders by Winston & Strawn, Chicago, Illinois. Legal matters
will be passed upon for the underwriters, dealers or agents by counsel which we
will name in the applicable prospectus supplement.
EXPERTS
The consolidated financial statements and schedule of AirGate PCS, Inc. and
subsidiaries as of September 30, 2001 and 2000, and for the years ended
September 30, 2001 and 2000, and for the nine months
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ended September 30, 1999, have been incorporated by reference herein and in the
registration statement in reliance upon the reports of KPMG LLP, independent
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements of iPCS, Inc. and Subsidiaries and
Predecessor as of September 30, 2001 and December 31, 2000, and for the nine
months ended September 30, 2001, for the year ended December 31, 2000 and for
the period from January 22, 1999 (date of inception) through December 31, 1999,
incorporated by reference from the Current Report on Form 8-K of AirGate PCS,
Inc. filed with the Commission on November 30, 2001 have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which
is incorporated herein by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room located at 450 5th Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
SEC at: http://www.sec.gov. Reports, proxy statements and other information
pertaining to us may also be inspected at the offices of The Nasdaq National
Market, which is located at 1735 K. Street, N.W., Washington, D.C. 20006.
We filed a registration statement on Form S-3 to register with the SEC the
securities offered by this prospectus. This prospectus is a part of that
registration statement. As allowed by SEC rules, this prospectus does not
contain all of the information you can find in our registration statement or
the exhibits to the registration statement.
You should rely only on the information or representations provided in this
prospectus or any prospectus supplement. We have not authorized anyone else to
provide you with different information. Neither we nor the selling stockholders
may make an offer of our securities in any state where the offer is not
permitted. The delivery of this prospectus does not, under any circumstances,
mean that there has not been a change in our affairs since the date of this
prospectus. It also does not mean that the information in this prospectus is
correct after this date.
Our address on the world wide web is http://www.airgatepcsa.com. The
information on our web site is not a part of this document.
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this document, and information that we file later with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we will make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:
Filings Period or Date Filed
------- --------------------
Annual Report on Form 10-K............. Year ended September 30, 2001
Current Report on Form 8-K............. November 30, 2001
The description of our common stock set
forth on Form 8-A (File No. 0-27455). September 24, 1999
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We incorporate by reference additional documents that we may file with the
SEC between the date of this document and the date of the completion of the
offering of the securities described in this prospectus. These documents
include periodic reports, such as Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
You can obtain any of the documents incorporated by reference in this
document from us, or from the SEC through the SEC's Internet world wide web
site at the address described above. Documents incorporated by reference are
available from us without charge, excluding any exhibits to those documents,
unless the exhibit is specifically incorporated by reference as an exhibit in
this document. You can obtain documents incorporated by reference in this
document by requesting them in writing or by telephone from us at the following
address:
AirGate PCS, Inc.
Harris Tower
233 Peachtree Street NE, Suite 1700
Atlanta, Georgia 30303
Attention: Sharon Kushner
(404) 525-7272
E-mail: skushner@airgatepcsa.com
Any statement contained in a document incorporated or deemed incorporated
herein by reference shall be deemed to be modified or superseded for the
purpose of this prospectus to the extent that a statement contained herein or
in any subsequently filed document which also is, or is deemed to be,
incorporated herein by reference modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this prospectus.
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