SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 027455
AirGate PCS, Inc.
----------------------------------------------
(Exact name of registrant as
specified in its charter)
Delaware 58-2422929
---------------------------------------------------------- -------------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
Harris Tower, 233 Peachtree St. NE, Suite 1700, Atlanta,
Georgia 30303
---------------------------------------------------------- -------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (404) 525-7272
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
25,795,024 shares of common stock, $0.01 par value per share, were outstanding
as of February 5, 2002.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 1
AIRGATE PCS,INC.
FIRST QUARTER REPORT
TABLE OF CONTENTS
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 2001 and September 30,
2001 (unaudited)
Consolidated Statements of Operations for the three months ended
December 31, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
December 31, 2001 and 2000 (unaudited)
Notes to the Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 2
PART I. FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except share and per share amounts)
December 31, September 30,
Assets 2001 2001
----------------- -----------------
Current assets:
Cash and cash equivalents $ 25,149 $ 14,290
Accounts receivable, net 39,012 23,798
Receivable from Sprint PCS 14,033 10,200
Inventories, net 8,651 4,639
Prepaid expenses 6,517 3,428
Direct customer activation costs 5,301 3,693
Other current assets 1,301 1,291
----------------- -----------------
Total current assets 99,964 61,339
Property and equipment, net (note 3) 434,845 209,326
Financing costs 17,019 7,888
Intangible assets, net 486,864 1,889
Goodwill 387,392 --
Other assets 4,516 568
----------------- -----------------
$ 1,430,600 $ 281,010
================= =================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 47,266 $ 10,210
Accrued expenses 24,776 13,840
Payable to Sprint PCS 43,579 32,564
Deferred revenue 16,478 10,485
Current maturities of long-term debt 506 --
Capital lease obligations - short term 4 --
----------------- -----------------
Total current liabilities 132,609 67,099
Other long-term liabilities 15,396 309
Long-term debt, excluding current maturities 555,890 266,326
Deferred income taxes 53,885 --
----------------- -----------------
Total liabilities 757,780 333,734
----------------- -----------------
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; 25,762,539 and 13,364,980 shares issued
and outstanding at December 31, 2001 and
September 30, 2001, respectively 258 134
Additional paid-in-capital 923,088 168,255
Accumulated deficit (249,211) (219,567)
Unearned stock option compensation (1,315) (1,546)
----------------- -----------------
Total stockholders' equity (deficit) 672,820 (52,724)
Commitments and contingencies -- --
----------------- -----------------
$ 1,430,600 $ 281,010
================= =================
See accompanying notes to the unaudited consolidated financial statements.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 3
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except share and per share amounts)
Three Months
Ended
December 31,
2001 2000
-----------------------------------
Revenues:
Service revenue $ 55,849 $ 13,341
Roaming revenue 21,303 7,388
Equipment revenue 4,545 2,290
------------ -----------
Total revenues $ 81,697 $ 23,019
------------ -----------
Operating expenses:
Cost of service and roaming (57,757) (16,970)
Cost of equipment (9,583) (5,072)
Selling and marketing (29,845) (16,678)
General and administrative (5,200) (4,709)
Noncash stock option
compensation (231) (332)
Depreciation and amortization (11,266) (6,662)
Amortization of intangible assets (4,539) --
------------ ------------
Operating expenses (118,421) (50,423)
------------ ------------
Operating loss (36,724) (27,404)
Interest income 99 1,289
Interest expense (10,283) (7,748)
Other expense (95) --
------------ ------------
Loss before income tax benefit (47,003) (33,863)
Income tax benefit 17,359 --
------------ -----------
Net loss $ (29,644) $ (33,863)
============ ===========
Basic and diluted net loss per
share of common stock $ (1.68) $ (2.64)
============ ===========
Weighted-average outstanding common shares 17,675,349 12,835,296
============ ===========
Weighted-average potentially dilutive common stock equivalents:
Common stock options 577,680 556,674
Stock purchase warrants 127,196 135,605
------------ -----------
Weighted average outstanding shares including potentially
dilutive common stock equivalents 18,380,225 13,527,575
============ ===========
See accompanying notes to the unaudited consolidated financial statements.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 4
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three Months
Ended December 31,
2001 2000
------------- -------------
Cash flows from operating activities:
Net loss $ (29,644) $ (33,863)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 11,220 6,662
Amortization of intangible 4,539 --
Amortization of financing costs 386 303
Provision for doubtful accounts 6,731 1,057
Interest expense associated with accretion
of discount and beneficial conversion
feature 9,069 6,330
Stock option compensation 231 332
Deferred income tax benefit (17,359) --
(Increase) decrease in:
Accounts receivable, net (9,540) (11,910)
Receivable from Sprint PCS 827 --
Inventories, net 1,066 (393)
Prepaid expenses (584) (1,470)
Direct customer acquisition costs 335 --
Other current assets 62 (413)
Other assets (2,150) (844)
Increase (decrease) in:
Accounts payable 11,413 (3,675)
Accrued expenses (2,841) 2,770
Payable to Sprint PCS (1,841) 10,537
Deferred revenue 3,426 2,010
Other liabilities 46 --
---------- ----------
Net cash used in operating activities (14,608) (22,567)
---------- ----------
Cash flows from investing activities:
Capital expenditures (23,639) (25,858)
Cash acquired from iPCS, Inc. 24,401 --
Acquisition of iPCS, Inc. (5,880) --
---------- ----------
Net cash used in investing activities (5,118) (25,858)
---------- ----------
Cash flows from financing activities:
Proceeds from borrowings under the AirGate PCS
Senior credit facility 30,000 42,000
Proceeds from issuance of warrants -- --
Proceeds from exercise of employee stock options 585 506
---------- ----------
Net cash provided by financing
activities 30,585 42,506
---------- ----------
Net increase (decrease) in cash and
cash equivalents 10,859 (5,919)
Cash and cash equivalents at beginning of period 14,290 58,384
---------- ----------
Cash and cash equivalents at end of period $ 25,149 $ 52,465
========== ==========
See accompanying notes to the unaudited consolidated financial statements.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 5
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(unaudited)
(dollars in thousands)
Three Months
Ended December 31,
2001 2000
---------- ----------
Supplemental disclosure of cash flow information -
cash paid for interest $ 1,738 $ 1,502
========== ==========
Supplemental disclosure for non-cash investing
activities:
Capitalized interest $ 1,317 $ 762
iPCS acquisition:
Stock issued (706,645) --
Value of common stock options and
warrants assumed (47,727) --
Liabilities assumed (282,714) --
Assets acquired 315,029 --
See accompanying notes to the unaudited consolidated financial statements.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 6
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
(unaudited)
(1) Business, Basis of Presentation and Summary of Significant Accounting
Policies
(a) Business and Basis of Presentation
AirGate PCS, Inc. and subsidiaries (collectively, the "Company" or "AirGate")
were created for the purpose of becoming a leading provider of wireless Personal
Communication Services ("PCS"). AirGate PCS, Inc., formed in October 1998, is
the Sprint PCS network partner with the exclusive right to market and provide
Sprint PCS products and services in its territory and is licensed to use the
Sprint PCS brand name in its original 21 markets located in the southeastern
United States. On November 30, 2001, AirGate PCS, Inc. acquired iPCS, Inc.
(together with its subsidiaries "iPCS"), a Sprint PCS network partner with 37
markets in the midwestern United States. The unaudited 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. The accounts of iPCS, Inc. and
subsidiaries, a wholly-owned unrestricted subsidiary of AirGate PCS, Inc. (see
note 8), are included as of and for the one month ended December 31, 2001. In
the opinion of management, these consolidated financial statements contain all
of the adjustments, consisting of normal recurring adjustments, necessary to
present fairly, in summarized form, the financial position and the results of
operations of AirGate. The results of operations for the three months ended
December 31, 2001 are not indicative of the results that may be expected for the
full fiscal year of 2002. The financial information presented herein should be
read in conjunction with the Company's Form 10-K for the year ended September
30, 2001 which includes information and disclosures not included herein. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior year balances
to conform to the current year presentation.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, increasing competition and the cost associated with the
build-out of a PCS network. The Company's continuing operations are dependent
upon Sprint's ability to perform its obligations under the various agreements
between the Company and Sprint under which the Company has agreed to construct
and manage its networks (the "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) Revenue Recognition
The Company sells handsets and accessories, which are recorded at the time of
the sale as equipment revenue. After the handset has been purchased, the
subscriber purchases a service package, which is recognized monthly as service
is provided and is included as service revenue. Roaming revenue is recorded when
Sprint PCS subscribers from outside our territory and non-Sprint PCS subscribers
roam onto the Company's network.
Sprint retains 8% of collected service revenues from Sprint PCS customers based
in the Company's markets and from non-Sprint PCS subscribers who roam onto the
Company's network. The amount retained by Sprint is recorded as cost of service
and roaming. Revenues generated from the sale of handsets and accessories and
from roaming services provided to Sprint PCS customers who are not based in the
Company's markets are not subject to the 8% affiliation fee for Sprint.
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). For the
three months ended December 31, 2001 and 2000, the Company recognized
approximately $0.8 million and $0.2 million of activation fee revenue,
respectively, and $0.4 million and $0.2 million of direct customer activation
costs, respectively. The Company deferred $11.6 million and $2.4 million of
activation fee
(c) 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
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 144 is effective
for fiscal years beginning after December 15, 2001. The adoption by the Company
is not expected to materially change the methods used by the Company to measure
impairment losses on long-lived assets.
In June, 2001, the FASB issued SFAS No. 141, "Business Combinations", which is
effective for all business combinations initiated after June 30, 2001. SFAS 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 a material adverse impact on
the Company's financial statements.
In June, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires nonamortization of goodwill and intangible assets that
have indefinite useful lives and annual tests of impairments of those assets.
The statement also provides specific guidance about how to determine and measure
goodwill and intangible asset impairments, 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 will be subject to the nonamortization
provisions of the statement. The Company adopted SFAS No. 142 as of October 1,
2001, and the impact of such adoption did not have a material adverse impact on
the Company's financial statements.
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 October 1, 2000 did not have an effect on the Company's results
of operations, financial position, or cash flows.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 7
revenue as of December 31, 2001 and 2000, respectively, to future periods.
Further, the Company deferred $9.5 million and $2.3 million of direct customer
activation costs to future periods, as of December 31, 2001 and 2000,
respectively.
(2) Sprint Agreements
Amounts relating to the Sprint Agreements for the three months ended December
31, 2001 and December 31, 2000 are as follows (in thousands):
Three Months Ended
-----------------------------
Amounts included in the December 31, December 31,
Consolidated Statement of Operations: 2001 2000
------------------------------------- ------------ ------------
Cost of service and roaming $35,064 $7,212
Cost of equipment 8,641 4,196
Selling and marketing 10,069 4,941
(3) Property and Equipment
Property and equipment reflects the acquisition of the iPCS property and
equipment on November 30, 2001 and consists of the following at December 31,
2001 and September 30, 2001 (dollars in thousands):
December 31, September 30,
2001 2001
--------------- ----------------
Network assets....................................... $ 375,160 $ 217,788
Computer equipment................................... 6,609 3,684
Furniture, fixtures, and office equipment............ 16,533 11,592
--------------- ---------------
Total network assets and equipment............ 398,302 233,064
Less accumulated depreciation and amortization....... (54,840) (43,621)
--------------- ---------------
Total network assets and equipment, net....... 343,462 189,443
Construction in progress............................. 91,383 19,883
--------------- ---------------
Property and equipment, net................... $ 434,845 $ 209,326
=============== ===============
(4) Long-Term Debt
Long-term debt reflects the assumption of the iPCS long term debt on November
30, 2001 and consists of the following at December 31, 2001 and September 30,
2001 (dollars in thousands):
December 31, September 30,
2001 2001
--------------- -----------------
AirGate PCS senior credit facility:
Outstanding borrowing $ 105,300 $ 75,300
Unaccreted original issue discount (524) (574)
--------------- -----------------
Net AirGate PCS senior credit facility 104,776 74,726
iPCS senior credit facility 50,000 --
1999 AirGate Senior Subordinated Discount Notes:
Outstanding borrowing 207,806 201,124
Unaccreted original issue discount (9,313) (9,524)
--------------- -----------------
Net 1999 AirGate Senior Subordinated Discount Notes 198,493 191,600
2000 iPCS Senior Subordinated Discount Notes 203,127 --
--------------- -----------------
Total long-term debt 556,396 266,326
Current maturities of long-term debt (506) --
=============== =================
Long-term debt $ 555,890 $ 266,326
=============== =================
As of December 31, 2001, $48.2 million and $90.0 million remained available for
borrowing under the AirGate senior credit facility and the iPCS senior credit
facility, respectively.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 8
(5) Stock Option Plan
The following table reflects the assumption of the iPCS common stock options on
November 30, 2001 and summarizes activity under the Company's stock option
plans. With respect to the information set forth regarding the options assumed
from iPCS, both the number of options and the weighted-average exercise prices
have been adjusted to reflect the exchange ratio used in connection with our
acquisition of iPCS.
Weighted-average
Number of exercise price
Options per share
----------- ----------------
Options outstanding as of September 30, 2001 1,456,935 $37.23
Granted(1) 768,717 $38.87
Exercised (20,416) $28.66
Forfeited -- $ --
----------- -----------
Options outstanding as of December 31, 2001 2,205,236 $37.88
Options exercisable as of December 31, 2001 979,432 $31.74
=========== ===========
(1) Includes 478,417 common stock options converted with the iPCS acquisition at
a weighted-average exercise price of $31.99 per share.
The following table summarizes information for stock options outstanding at
December 31, 2001:
Weighted-average
Number of remaining Options Exercisable
options Weighted-average contractual life at December 31,
Exercise prices outstanding in exercise price (in years) 2001
--------------- --------------- ------------------- ----------------- --------------------
$ 2.00 6,000 $ 2.00 8.06 3,000
14.00 484,839 14.00 7.57 265,633
29.18 - 47.50 1,346,897 39.14 8.76 625,799
52.00 - 66.94 347,500 63.48 8.93 77,000
98.50 20,000 98.50 8.19 8,000
------------ ---------- ---------- -----------
2,205,236 $37.88 8.52 979,432
============ ========== ========== ===========
(6) Common Stock Purchase Warrants
(a) AirGate senior credit facility
On June 1, 2000, the Company issued stock purchase warrants to Lucent
Technologies in consideration of the senior credit facility. The
exercise price of the warrants equals $20.40 per share, and the
warrants are exercisable for an aggregate of 10,175 shares of the
Company's common stock at any time. The warrants expire on
August 15, 2004. All of these warrants remain outstanding at December
31, 2001.
(b) 1999 AirGate senior subordinated discount notes
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 9
On September 30, 1999, the Company received gross proceeds of $156.1
million from the issuance of 300,000 units, each unit consisting of a
$1,000 principal amount at maturity 13.5% senior subordinated discount
note due 2009 and one warrant to purchase 2.148 shares of common stock
at a price of $0.01 per share. The warrants were exercisable for an
aggregate of 644,400 shares of common stock. The warrants expire
October 1, 2009. As of December 31, 2001, warrants representing 603,801
shares of common stock had been exercised, and warrants representing
40,599 shares of common stock remain outstanding.
(c) Warrants assumed in iPCS acquisition
On November 30, 2001, AirGate assumed warrants to issue 475,351 shares
of common stock at $34.51 per share. Such warrants are held by the
investors in the 2000 iPCS senior subordinated discount notes. The
warrants expire July 16, 2010. As of December 31, 2001, warrants
representing all 475,351 shares of common stock remain outstanding.
On November 30, 2001, AirGate assumed warrants to issue 183,584 shares
of common stock at $31.06 per share. Such warrants are held by Sprint
and were originally issued in consideration for iPCS receiving the
right to provide Sprint PCS service in the expansion territory of
Michigan, Iowa and Nebraska. The warrants expire July 15, 2007. As of
December 31, 2001, warrants representing all 183,584 shares of common
stock remain outstanding.
(7) Income Taxes
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. Prior to the acquisition of iPCS, management
provided a valuation allowance against all of its deferred income tax assets
because the realization of those deferred tax assets was uncertain. As part of
the iPCS acquisition on November 30, 2001, a deferred income tax liability was
established related to the intangible assets acquired. The previously recorded
valuation allowance of $81.5 million against deferred tax assets was
subsequently eliminated as a result of the acquisition.
(8) 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 1999 AirGate senior
subordinated discount notes and the AirGate $153.5 million 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 severably guarantees the Company's long-term debt.
AirGate Network Services LLC ("ANS") was created as a wholly-owned subsidiary of
AirGate PCS, Inc. ANS has fully and unconditionally guaranteed the 1999 AirGate
senior subordinated discount notes and AirGate senior credit facility. ANS was
formed to provide construction management services for the Company's PCS
network. ANS jointly and severably guarantees AirGate's long-term debt.
iPCS is a wholly-owned unrestricted subsidiary of AirGate PCS, Inc. As an
unrestricted subsidiary, iPCS provides no guarantee to either the 1999 AirGate
senior subordinated discount notes or the AirGate $153.5 million senior credit
facility and AirGate and its restricted subsidiaries provide no guarantee to the
2000 iPCS senior subordinated discount notes or the iPCS $140 millon senior
credit facility.
AGW, ANS and iPCS are 100% owned by AirGate PCS, Inc. and no other persons have
an equity or other interest in such entities.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 10
The unaudited condensed consolidating financial information for AGW,
ANS, and iPCS as of December 31, 2001 and for the three months then
ended is as follows (dollars in thousands):
AGW Leasing AirGate iPCS AirGate
AirGate PCS, Company, Network Elimina- Consoli- Non-Guarantor Elimina- PCS, Inc.
Inc. Inc. Services, LLC tions dated Subsidiary tions Consolidated
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 15,230 $ - $ (25) $ - $ 15,205 $ 9,944 $ - $ 25,149
Property and equipment, net 158,453 - 48,115 - 206,568 228,277 - 434,845
Intangible assets 833,128 - - 41,128 874,256 39,488 (39,488) 874,256
Other assets 149,220 - 500 (89,718) 60,002 36,348 - 96,350
-------------------------------------------------------------------------------------------------------
Total assets $1,156,031 $ - $ 48,590 $ (48,590) $1,156,031 $ 314,057 $(39,488) $1,430,600
======================================================================================================
Current liabilities $ 109,968 $ 30,733 $ 58,985 $ (89,718) $ 109,968 $ 62,129 $(39,488) $ 132,609
Other long-term 57,103 - - - 57,103 12,178 - 69,281
Long-term debt 345,852 - - - 345,852 210,038 - 555,890
------------------------------------------------------------------------------------------------------
Total liabilities 512,923 30,733 58,985 (89,718) 512,923 284,345 (39,488) 757,780
Common stock 258 - - - 258 - - 258
Additional paid-in capital 730,238 - - - 730,238 192,850 - 923,088
Accumulated deficit (86,073) (30,733) (10,395) 41,128 (86,073) (163,138) (249,211)
Unearned stock option
compensation (1,315) - - - (1,315) - - (1,315)
-------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders'
equity(deficit) $1,156,031 $ - $ 48,590 $ (48,590) $1,156,031 $ 314,057 $(39,488) $1,430,600
=======================================================================================================
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 11
AGW Leasing AirGate iPCS AirGate
AirGate PCS, Company, Network Elimina- Consoli- Non-Guarantor Elimina- PCS, Inc.
Inc. Inc. Services, LLC tions dated Subsidiary tions Consolidated
----------------------------------------------------------------------------------------------------
Total revenues $ 67,671 $ - $ - $ - $ 67,671 $ 14,026 $ - $ 81,697
Cost of revenues (49,498) (3,745) - - (53,243) (14,097) - (67,340)
Selling and marketing (24,621) (468) - - (25,089) (4,756) - (29,845)
General and administrative (3,677) (219) (80) - (3,976) (1,224) - (5,200)
Other (8,565) - - - (8,565) (1,945) - (10,510)
Depreciation and amortization (11,941) - (1,541) - (13,482) (2,323) - (15,805)
-----------------------------------------------------------------------------------------------------
Total expenses (98,302) (4,432) (1,621) - (104,355) (24,345) - (128,700)
-----------------------------------------------------------------------------------------------------
Loss before income tax benefit (30,631) (4,432) (1,621) - (36,684) (10,319) - (47,003)
Income tax benefit 17,359 - - - 17,359 - - 17,359
----------------------------------------------------------------------------------------------------
Net loss $(13,272) $(4,432) $(1,621) $ - $ (19,325) $(10,319) $ - $ (29,644)
=====================================================================================================
Operating activities, net $(18,737) - 1,193 - (17,544) 2,936 - (14,608)
Investing activities, net (11,065) - (1,061) - (12,126) (17,393) - (29,519)
Financing activities, net 30,585 - - - 30,585 - - 30,585
-----------------------------------------------------------------------------------------------------
(Decrease) increase in cash
and cash equivalents 783 - 132 - 915 (14,457) - (13,542)
Cash and cash equivalents at
beginning of period 14,447 - (157) - 14,290 24,401 - 38,691
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of period $15,230 $ - $ (25) $ - $ 15,205 $ 9,944 $ - $ 25,149
=====================================================================================================
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 12
The unaudited condensed consolidating financial information for AGW and ANS as
of December 31, 2000 and for the three months then ended is as follows (dollars
in thousands):
AGW Leasing AirGate
AirGate PCS, Company, Network
Inc. Inc. Services, LLC Eliminations Consolidated
------------- ----------- ------------- ------------ ------------
Balance sheet:
Cash and cash equivalents $ 52,465 $ - $ - $ - $ 52,465
Trade receivables and other current assets 29,060 - - - 29,060
Property and equipment, net 140,255 - 47,274 - 187,529
Other assets 76,005 - - (64,295) 11,710
--------- -------- --------- --------- ---------
Total assets $ 297,785 $ - $ 47,274 $ (64,295) $ 280,764
========= ======== ========= ========= =========
Current liabilities 32,116 $ 14,591 $ 51,128 $ (64,295) $ 33,540
Long-term deferred revenue 1,318 - - - 1,318
Long-term debt 229,057 - - - 229,057
--------- -------- --------- --------- ---------
Total liabilities 262,491 14,591 51,128 (64,295) 263,915
Common stock 129 - - - 129
Additional paid-in capital 162,081 - - - 162,081
Accumulated deficit (123,995) (14,591) (3,854) - (142,440)
Unearned stock option compensation (2,921) - - - (2,921)
--------- -------- --------- ---------- ---------
Total liabilities and stockholders'
equity(deficit) $ 297,785 $ - $ 47,274 $ (64,295) $ 280,764
========= ======== ========= ========== =========
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 13
AirGate PCS, Company, Network
Inc. Inc. Services, LLC Eliminations Consolidated
------------- -------------- ------------- ------------- --------------
Statement of Operations:
Total revenues 23,019 $ - $ - $ - $ 23,019
Total expenses (53,021) (3,458) (403) - (56,882)
--------- --------- --------- -------- ---------
Net loss $ (30,002) $ (3,458) $ (403) $ - $(33,863)
========= ========= ========= ======== ========
Statement of Cash Flow:
Operating activities, net (25,839) - 3,272 - (22,567)
Capital expenditures (22,838) - (3,020) - (25,858)
Financing activities, net 42,506 - - - 42,506
--------- --------- --------- -------- --------
Decrease (increase) in cash
and cash equivalents (6,171) - 252 - (5,919)
Cash and cash equivalents at
beginning of period 58,636 - (252) - 58,384
--------- --------- --------- ------- --------
Cash and cash equivalents at end of period $ 52,465 $ - $ - $ - $ 52,465
========= ========= ========= ======= ========
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 14
(9) Merger with iPCS, Inc.
On November 30, 2001, the Company completed the acquisition of iPCS, Inc. In
connection with the iPCS acquisition, AirGate issued 12.4 million shares of
AirGate common stock valued at $57.16 per share which totalled $706.6 million.
As of December 31, 2001, the Company was holding in reserve an additional 1.1
million shares for the assumption of outstanding iPCS options and warrants
valued at $47.7 million using a Black-Scholes option pricing model. The
transaction was accounted for under the purchase method of accounting. AirGate
owns 100 percent of iPCS. Subsequently, certain former shareholders of iPCS sold
4.0 million shares of AirGate common stock in an underwritten offering. The
accounts of iPCS, Inc. are included as of and for the one month ended December
31, 2001.
The acquisition of iPCS represented a strategic opportunity to significantly
expand the size and scope of our operations. The acquisition increases the total
resident population in our territory from 7.1 million to approximately 14.6
million, in markets adjacent to Chicago, Illinois, Detroit, Michigan, Des
Moines, Iowa, Indianapolis, Indiana and St. Louis, Missouri. We believe the
acquisition of iPCS and its proximity to these markets increases AirGate's
strategic importance to Sprint. We believe the iPCS territory has attractive
market characteristics, and that we will be able to leverage the best operating
practices of both companies to more effectively penetrate these markets.
The acquisition activity is summarized as follows:
The Company has engaged a nationally recognized valuation expert to assist us in
determining fair values of identifiable assets and liabilities. The allocation
of purchase price at December 31, 2001 is preliminary.
Stock issued $ 706,645
Value of options and warrants converted 47,727
Costs associated with acquisition 7,173
Liabilities assumed 282,714
-----------
Net Book Value of assets acquired, including intangibles $ 1,044,259
===========
As a result of the acquisition of iPCS, the Company recorded goodwill of
$379,643 and intangible assets of $491,384, which will be amortized over the
following periods:
Value Amortization
Assigned Period
--------- ------------
Acquired customer base $ 52,400 30 months
Non-competition agreements 3,900 6 months
Right to provide service under the Sprint
Agreements 435,084 205 months
---------
$ 491,384
=========
The unaudited pro forma condensed consolidated statements of income for the
three months ended December 31, 2001 and 2000 set forth below, present the
results of operations as if the acquisition had occurred at the beginning of
each period and are not necessarily indicative of future results or actual
results that would have been achieved had the acquisition occurred as of the
beginning of the period.
Three Months ended December 31,
-------------------------------
2001 2000
---------- -----------
Total revenues $ 108,038 $ 33,302
Operating loss (66,228) (43,873)
Loss before income tax benefit (83,655) (54,018)
Income tax benefit 30,952 19,987
---------- -----------
Net loss $ (52,703) $ (34,031)
========== ===========
Basic and diluted net loss per share $ (2.05) $ (1.35)
========== ===========
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 15
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINACIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained herein regarding expected financial results and other
planned events, including but not limited to, anticipated liquidity, churn
rates, ARPU (as defined below), decreases in roaming rates, EBITDA (as defined
below), capital expenditures and other statements that include words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "seek",
"project" and similar expressions are forward-looking statements that involve
risk and uncertainties. Actual future events or results may differ materially
from these statements. Readers are referred to the documents filed by AirGate
and iPCS with the Securities and Exchange Commission, specifically the most
recent filings which identify important risk factors that could cause actual
results to differ from those contained in the forward-looking statements,
including:
o the ability to successfully integrate the businesses of AirGate and
iPCS;
o the competitiveness and impact of Sprint PCS' pricing plans,
products and services;
o customer quality;
o the ability of Sprint to provide back office, customer care and
other services;
o customer purchasing patterns;
o potential fluctuations in quarterly results;
o an adequate supply of infrastructure and subscriber equipment;
o risks related to future growth and expansion;
o rates of penetration in the wireless industry;
o the potential need for additional sources of liquidity;
o anticipated future losses;
o our significant level of indebtedness;
o adequacy of bad debt and other reserves;
o the potential to experience a high rate of customer turnover; and
o the volatility of the market price of our common stock.
These and other applicable risks are summarized under the captions
"Factors That May Affect Operating Results and Liquidity" and "Future Trends
Analysis", both included in this Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations" of this Form 10-Q and
"Investment Considerations" included under Item 5 - Other Information of this
Form 10-Q and elsewhere in this report.
Overview
On July 22, 1998, we entered into a management agreement with Sprint and
became the Sprint network partner with the exclusive right to provide 100%
digital PCS products and services under the Sprint and Sprint PCS brand names in
our original Sprint PCS territory in the southeastern United States. In January
2000 we began commercial operations with the launch of four markets covering 2.2
million residents in our southeastern territory. By September 30, 2000, we had
launched commercial PCS service in all of the 21 basic trading areas, referred
to as markets, that comprise our original southeastern territory. On November
30, 2001, AirGate acquired iPCS, Inc., a Sprint PCS network partner with 37
markets in the midwestern states of Michigan, Illinois, Iowa and Nebraska. The
acquisition of iPCS increased the total resident population in our markets from
7.1 to approximately 14.6 million. Additionally, iPCS served 149,119 subscribers
as of November 30, 2001. At December 31, 2001, we provided Sprint PCS services
to 453,359 subscribers. iPCS is a wholly-owned subsidiary of AirGate. As
required by the terms of AirGate's and iPCS' respective outstanding
indebtedness, each of AirGate's and iPCS' conducts its business as a separate
entity from the other.
Under our long-term agreements with Sprint, we manage the network on Sprint
PCS' licensed spectrum as well as use the Sprint and Sprint PCS brand names
royalty-free during our PCS affiliation with Sprint. We also have access to
Sprint PCS' national marketing support and distribution programs and are
generally entitled to buy network and subscriber equipment and handsets at the
same discounted rates offered by vendors to Sprint based on its large volume
purchases. In exchange for these and other benefits, we are entitled to receive
92%, and Sprint is entitled to retain 8%, of collected service revenues from
customers in our territories. We are 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 our PCS
network.
At December 31, 2001, our Sprint PCS network covered 11.3 million of
the 14.6 million residents in our Sprint PCS territory based on 2000 estimates
compiled by Kagan's Wireless Telecom Atlas & Databook, 2001 Edition.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 16
Significant Accounting Policies
We rely on the use of estimates and make assumptions that impact our
financial condition and results. These estimates and assumptions are based on
historical results and trends as well as our forecasts as to how these might
change in the future. Some of the most critical accounting policies that might
materially impact our results include:
Valuation of Accounts Receivable and Inventories:
Reserve for Doubtful Accounts - Estimates are used in determining our
allowance for bad debt and are based both on our historical collection
experience, current trends, credit policy and on a percentage of our accounts
receivables by aging category. In determining these percentages, we look at
historical write-offs of our receivables and our history is limited. We also
look at current trends in the credit quality of our customer base and changes in
the credit policies. 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 (approximately 50% since May 2001) have been under the NDASL
program. The NDASL program has been replaced by the "Clear Pay Program," which
re-instated the deposit requirement for the lowest credit class and featured
increased back-office controls with respect to credit collection efforts. We
anticipate the implementation of the deposit for all new sub-prime customers on
the Clear Pay program by the end of February and we believe that this policy
will reduce our future bad debt exposure. If the deposit is not re-implemented
or these estimates are insufficient for any reason, our operating income, EBITDA
and available cash would be reduced.
Reserve for First Payment Default Customers - We reserve a portion of
our new customers and related revenues from those customers that we anticipate
will never pay a bill. Using historical information of the percentage of
customers whose service was cancelled for non-payment without ever making a
payment, we estimate the number of customers activated in the current period
that will never pay a bill. For these customers, we record a reserve for their
monthly revenues that will never be collected and as a result is not included in
the churn statistics. We anticipate that the requirement of a deposit for
sub-prime customers activating on the Clear Pay program will reduce the number
of first payment default customers for which we will need to record a reserve
and will reduce customer churn. If the estimate for first payment default
customers is inadequate, our operating income, EBITDA and available cash would
be reduced.
Reserve for Obsolete/Excess Inventory - We currently record a reserve
for obsolete or excess handset inventory for models that are no longer
manufactured. With the migration to a 1XRTT network, we will need to continue to
monitor the depletion of our current inventory levels. If we do not deplete the
inventory that is not capable of providing 1XRTT services prior to our complete
rollout of 1XRTT, we may have to record a reserve for any remaining obsolete or
excess inventory due to lower realizeable retail prices on those handsets. If
the estimate of obsolete inventory is understated operating income and EBITDA
would be reduced.
Revenue Recognition:
We record equipment revenue for the sale of handsets and accessories to
customers in our retail stores and to local resellers in our territories. We do
not record equipment revenue on handsets and accessories purchased by our
customers from national third party resellers such as Radio Shack, Best Buy and
Circuit City, or directly from Sprint. Our customers pay an activation fee when
they initiate service. We defer this activation fee and record activation fee
revenue over the average life of our customers, which we estimate to be
30 months. We recognize service revenue from our customers as they use the
service. Additionally, the Company provides a reduction of recorded revenue for
billing adjustments and billing corrections.
Goodwill and Intangible Assets:
Purchase price accounting requires extensive use of accounting
estimates and judgments to allocate the purchase price to the fair market value
of the assets and liabilities purchased. In our recording of the purchase of
iPCS, we engaged a nationally recognized valuation expert to assist us in
determining the fair value of these assets and liabilities. Included in the
asset valuation for this purchase was the valuation of three intangible assets:
the iPCS customer base, non-compete
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 17
agreements for certain former iPCS employees, and the right to be
the exclusive provider of Sprint PCS services in the 37 markets in which iPCS
operates. For the customer base, the non-compete agreement, and the right to
provide service under the Sprint Agreements, finite useful lives of thirty
months, six months and 205 months, respectively, have been assigned to these
intangible assets and they will each be amortized over these respective useful
lives.
Effective October 1, 2001, we adopted 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. One of the evaluating
factors in assessing goodwill impairment is a company's stock price. The market
price for our common stock has decreased significantly since December 31, 2001.
As a result, a goodwill and intangible asset impairment evaluation will have to
be made in the future and there is an increased risk of a write-off of a portion
of the $387.4 million in goodwill or the $486.9 million of intangible assets
recorded at December 31, 2001. Any write-offs would result in a charge to
earnings and a reduction in equity in the period taken.
Results of Operations
For the three months ended December 31, 2001 compared to the three
months ended December 31, 2000:
Terms such as customer additions, average revenue per user, churn and cost per
gross addition are metrics used in the wireless telecommunications industry.
None of these terms are measures of financial performance under generally
accepted accounting principles in the United States.
Customer Additions
As of December 31, 2001, we provided personal communication services to
453,359 customers compared to 103,440 customers as of December 31, 2000, an
increase of 349,919 customers. The company does not include in its customer base
an estimate of first payment default customers. The increased net customers
acquired during the three months ended December 31, 2001 includes 149,119
customers acquired from iPCS on November 30, 2001, new customers attracted from
other wireless carriers and increasing demand for wireless services in the
United States.
Average Revenue Per User
An important operating metric in the wireless industry is Average
Revenue Per User (ARPU). ARPU summarizes the average monthly service revenue per
customer, excluding roaming revenue. ARPU is computed by dividing service
revenue for the period by the average subscribers for the period, which is net
of an adjustment for first payment default customers. For the three months ended
December 31, 2001, ARPU was $60. For the three months ended December 31, 2000,
ARPU was $59. The increase in ARPU primarily resulted from customers selecting
rate plans with higher monthly recurring charges.
Churn
Churn is the monthly rate of customer turnover expressed as the percentage
of customers of the average customer base that both voluntarily and
involuntarily discontinued service during the month. Churn is computed by
dividing the number of customers that discontinued service during the month, net
of 30 day returns and an adjustment for estimated first payment default
customers, by the average customer base for the period. Churn for the three
months ended December 31, 2001 was 3.0%, compared to 2.9% for the three months
ended December 31, 2000. The increase in churn is a result of an increase in the
amount of sub-prime credit quality customers the Company added whose service was
involuntarily discontinued during the period.
Cost Per Gross Addition
Cost Per Gross Addition (CPGA) summarizes the average cost to acquire
new customers during the period. CPGA is computed by adding the income statement
components of selling and marketing, cost of equipment and activation costs
(which are included as a component of cost of service) and reducing that amount
by the Equipment Revenue recorded. That net amount is then divided by the total
new customers acquired during the period, reduced for the reserve for first
payment default customers. CPGA was $351 for the three months ended December 31,
2001 compared to
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 18
$367 for the three months ended December 31, 2000. The higher number of total
new customers acquired in the three months ended December 31, 2001 compared to
the year earlier period leveraged down the fixed costs of selling such as store
costs and advertising over a greater number of customers.
Revenues
Service revenue and equipment revenue were $55.8 million and $4.5
million, respectively, for the three months ended December 31, 2001, compared to
$13.3 million and $2.3 million, respectively, for the three months ended
December 31, 2000, an increase of $42.5 million and $2.2 million, respectively.
These increased revenues reflect the substantially higher average number of
customers using the Company's network. 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 our Sprint PCS stores, net of sales incentives, rebates and an
allowance for returns. Our handset return policy allows customers to return
their handsets for a full refund within 14 days of purchase. When handsets are
returned to us, we may be able to reissue the handsets to customers at little
additional cost to us. However, when handsets are returned to Sprint for
refurbishing, we receive a credit from Sprint, which is less than the amount we
originally paid for the handset.
We recorded roaming revenue of $21.3 million during the three months
ended December 31, 2001 (see roaming expense in Cost of Service and Roaming
below) compared to $7.4 million for the three months ended December 31, 2000, an
increase of $13.9 million. The increase is attributable to the larger wireless
customer base for Sprint and its other network partners and the additional
coverage territory acquired with iPCS. We receive roaming revenue at a
per-minute rate from Sprint or another Sprint PCS network partner when Sprint
PCS subscribers outside of our territory use our network. For the three months
ended December 31, 2001, such roaming revenue was $20.1 million, or 94% of the
roaming revenue recorded in the period. We also receive non-Sprint PCS roaming
revenue when subscribers of other wireless service providers who have roaming
agreements with Sprint roam on our network.
On April 27, 2001, we and Sprint announced that we had reached an
agreement in principle to reduce the reciprocal roaming rate exchanged between
Sprint and AirGate for PCS customers who roam into the other party's, or another
network partner's, 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. iPCS and Sprint PCS had an agreement which fixed
the reciprocal roaming rate exchanged between Sprint PCS and iPCS for customers
who roam into the other party's, or another network partner's, territory at
$0.20 per minute of use through December 31, 2001. Under the agreement in
principle, the roaming rate for both AirGate and iPCS with respect to calendar
2002 will not be less than $0.10 per minute. For calendar year 2003 and beyond,
the details of the agreement in principle have not yet been finalized.
Depending on the details of the final agreement, the reciprocal roaming rate
may be less than the rate charged in 2002. The reduction in revenues from any
rate decrease will be partially offset by lower cost of roaming expense.
Cost of Service and Roaming
The cost of service and roaming was $57.8 million for the three months
ended December 31, 2001, compared to $17.0 million for the three months ended
December 31, 2000, an increase of $40.8 million. Cost of service and roaming
principally consists of roaming expense when customers from our territory place
calls on Sprint PCS's network and costs to support the Company customer base
including: (i) network operating costs (including salaries, cell site lease
payments, fees related to the connection of our switches to the cell cites that
they support, inter-connect fees and other expenses related to network
operations), (ii) back office services provided by Sprint PCS such as customer
care, billing and activation, (iii) the 8% of collected service revenue
representing the Sprint affiliation fee, (iv) bad debt related to uncollectible
accounts receivable and (v) long distance expense relating to inbound roaming
revenue and our own customer's long distance usage.
Roaming expense included in the cost of service and roaming was $17.1
million for the three months ended December 31, 2001, compared to $3.6 million
for the three months ended December 31, 2000, an increase of $13.5 million as a
result of the substantial increase in our customer base. As discussed above, the
per minute rate we pay Sprint when customers from our territory roam onto the
Sprint PCS network decreased beginning June 1, 2001. The increased roaming
minutes resulting from increasing subscriber levels will be partially offset by
the lower per minute rate paid to Sprint.
We were supporting 453,359 customers at December 31, 2001, compared to
103,440 customers at December 31, 2000. At December 31, 2001, our network,
including the territory of iPCS, consisted of 1,258 active cell sites and 6
switches compared to 598 active cell sites and three switches at December 31,
2000. There were approximately 147 employees performing network operations
functions at December 31, 2001, compared to 64 employees at December 31,
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 19
2000. The Sprint 8% affiliation fee totaled $4.1 million in the three months
ended December 31, 2001, compared to $1.0 million for the three months ended
December 31, 2000, a $3.1 million increase related to the growth in service
revenues.
Cost of Equipment
Cost of equipment was $9.6 million for the three months ended December
31, 2001, and $5.1 million for the three months ended December 31, 2000, an
increase of $4.5 million. This increase is attributable to the increase in the
number of customers added during the period, as cost of equipment includes the
cost of handsets and accessories sold to customers from our Sprint PCS stores.
The cost of handsets exceeds the amount received from customers because we
subsidize the price of handsets to remain competitive in the marketplace.
Selling and Marketing
We incurred selling and marketing expenses of $29.8 million during the
three months ended December 31, 2001 compared to $16.7 million in the three
months ended December 31, 2000, an increase of $13.1 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
national third party retailers for which we do not record revenue. At December
31, 2001, there were approximately 607 employees performing sales and marketing
functions, compared to 264 employees as of December 31, 2000. The majority of
the increase in employees is due to the acquisition of iPCS. A net 69,215
customers were added in the three months ended December 31, 2001 (excluding
149,119 iPCS customers acquired on November 30, 2001 and net of expected first
payment default customers) compared to 46,751 net customers added in the three
months ended December 31, 2000. Handsets subsidies on units sold by third
parties totaled $6.2 million for the three months ended December 31, 2001,
compared to $3.3 million for the three months ended December 31, 2000, an
increase of $4.1 million.
General and Administrative
For the three months ended December 31, 2001, we incurred general and
administrative expenses of $5.2 million, compared to $4.7 million for the three
months ended December 31, 2000, an increase of $0.5 million. For the three
months ended December 31, 2001, increased compensation and benefit amounts
related to the growth in our number of employees and $0.7 million of merger
related expenses incurred by iPCS in December 2001 relating to legal,
accounting, and severance payments pursuant to employment agreements were
partially offset by $0.8 million of legal and professional fees related to
acquisition activities in the three months ended December 31, 2000. Of the 842
employees at December 31, 2001, approximately 88 employees were performing
corporate support functions compared to 44 employees as of December 31, 2000.
Noncash Stock Option Compensation
Noncash stock option compensation expense related to general and
administrative was $0.2 million for the three months ended December 31, 2001,
and $0.3 million related to general and administrative for the three months
ended December 31, 2000. We apply the provisions of APB Opinion No. 25 and
related interpretations in accounting for our stock option plans. Unearned stock
option compensation is recorded for the difference between the exercise price
and the fair market value of our common stock at the date of grant and is
recognized as noncash stock option compensation expense in the period in which
the related services are rendered.
Depreciation and Amortization
For the three months ended December 31, 2001, depreciation and
amortization increased to $11.3 million, compared to $6.7 million for the three
months ended December 31, 2000, an increase of $4.6 million. The increase in
depreciation expense relates primarily to additional network assets placed in
service in 2001 and the depreciation of the acquired iPCS property and
equipment. Depreciation and amortization will continue to increase as additional
portions of our network are placed into service. We incurred capital
expenditures of $23.7 million in the three months ended December 31, 2001, which
included approximately $1.3 million of capitalized interest compared to capital
expenditures of $10.7 million and capitalized interest of $0.8 million in the
three months ended December 31, 2000.
Amortization of Intangible Assets
Amortization of intangible assets relates to the amounts recorded from
the iPCS acquisition for the acquired customer base, non-competition agreements,
and the right to provide service under the Sprint Agreements. With the
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 20
completion of the iPCS acquisition on November 30, 2001, amortization of the
intangible assets of $4.5 million represented only one month of expense
during the three months ended December 31, 2001.
Interest Income
For the three months ended December 31, 2001, interest income was $0.1
million compared to $1.3 million for the three months ended December 31, 2000, a
decrease of $1.2 million. We had higher cash and cash equivalent balances for
the three months ended December 31, 2000, resulting from the remaining proceeds
from our September 1999 equity and debt offerings and a $42.0 million borrowing
under the AirGate senior credit facility. As capital expenditures were required
to complete the build-out of our PCS network, and as working capital and
operating losses were funded, decreasing cash balances and lower interest rates
resulted in lower interest income.
Interest Expense
For the three months ended December 31, 2001, interest expense was
$10.3 million, compared to $7.7 million for the three months ended December 31,
2000, an increase of $2.6 million. The increase is primarily attributable to
increased debt related to accreted interest on the 1999 AirGate senior
subordinated discount notes, the 2000 iPCS senior subordinated discount notes
and increased borrowings under the AirGate senior credit facility, partially
offset by lower commitment fees on undrawn balances of the AirGate senior credit
facility, and a lower interest rate on variable rate borrowings under the
AirGate senior credit facility. We had borrowings of $556.4 million as of
December 31, 2001, compared to $229.1 million at December 31, 2000.
Income Tax Benefit
For the three months ended December 31, 2001, the income tax benefit
was $17.4 million. No income tax benefit was recognized for the three months
ended December 31, 2000. Prior to the acquisition of iPCS on November 30, 2001,
AirGate did not recognize an income tax benefit because a full valuation
allowance was provided against all deferred income tax assets. An income tax
benefit will continue to be recognized in future periods to the extent that
management believes realizability of deferred tax assets is more likely than
not.
Net Loss
For the three months ended December 31, 2001, the net loss was $29.6
million, a decrease of $4.3 million from a net loss of $33.9 million for the
three months ended December 31, 2000.
Liquidity and Capital Resources
As of December 31, 2001, we had $25.1 million in cash and cash
equivalents, compared to $14.3 million in cash and cash equivalents at September
30, 2001. Our net working capital deficit was $32.1 million at December 31,
2001, compared to working capital of $5.8 million at September 30, 2001.
Net Cash Used in Operating Activities
The $14.6 million of cash used in operating activities in the three
months ended December 31, 2001 was the result of the company's $29.6 million net
loss and a net $13.0 million in cash used in changes in working capital being
partially offset by $28.0 million of depreciation, amortization of note
discounts, financing costs and intangibles, and noncash stock option
compensation. The $22.6 million of cash used in operating activities in the
three months ended December 31, 2000 was the result of the Company's $33.9
million net loss being partially offset by a net $4.4 million in cash provided
by changes in working capital and $6.9 million of depreciation, amortization of
note discounts, amortization of financing costs and noncash stock option
compensation.
Net Cash Used in Investing Activities
The $5.1 million of cash used in investing activities during the three
months ended December 31, 2001, represents $23.6 million for capital
expenditures and $5.9 million of cash acquisition costs related to the
merger with iPCS partially offset by $24.4 million of cash acquired from
iPCS. For the three months ended December 31, 2000, cash outlays of $25.9
million represented cash payments of $15.2 made for equipment purchases made
through accounts payable and accrued expenses
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 21
at September 30, 2000, in addition to $10.7 million of capital expenditures
made in the three months ended December 31, 2000.
Net Cash Provided by Financing Activities
The $30.6 million in cash provided by financing activities during the
three months ended December 31, 2001 consisted of $30.0 million in borrowings
under the AirGate senior credit facility and $0.6 million of proceeds received
from the exercise of options and warrants. The $42.5 million of cash provided by
financing activities in the three months ended December 31, 2000 consisted of
$42.0 million borrowed under the AirGate senior credit facility and $0.5 million
of proceeds received from exercise of options and warrants.
Liquidity
At December 31, 2001, we had $25.1 million of cash and cash equivalents and
total availability under the AirGate senior credit facility of $48.2 million and
total availability under the iPCS senior credit facility of $90.0 million. iPCS
is an unrestricted subsidiary. As a result of this designation, funds available
under each of AirGate's and iPCS' senior credit facilities can only be used by
AirGate or iPCS, as applicable. To date, we have used proceeds from our 1999
initial public offering of equity, the 1999 AirGate senior subordinated discount
notes and borrowings from the AirGate senior credit facility to fund capital
expenditures, operating losses, working capital and cash interest needs while we
built out our digital PCS network and acquired customers. By June 2003, we
expect that our customer base will have increased to a size sufficient for us to
generate free cash flow (EBITDA plus non-cash stock option expense minus capital
expenditures, cash interest payments and required amortization of principal
under the senior credit facilities). We expect our free cash flow after June
2003 will be sufficient to meet the cash requirements of the business including:
capital expenditures, cash interest, required amortizations of principal under
the senior credit facilities and working capital needs. Our projections contain
significant assumptions including projections for gross new customer additions,
ARPU, churn, bad debt expense and roaming revenue. Based on internal projections
and the current condition and trends of our business and industry, we anticipate
that from January 1, 2002, until we become a net generator of cash (free cash
flow positive) in the three months ended June 30, 2003, a portion of the
$163.3 million of cash and cash equivalents and availability under the senior
secured credit facilities discussed above, will be utilized as follows (amounts
in millions):
Stand Alone Stand Alone Consolidated
AirGate PCS, iPCS, Inc. AirGate PCS,
Inc. Inc.
-------------- ------------- -------------
At December 31, 2001:
Cash and cash equivalents $15.2 $ 9.9 $ 25.1
Borrowing availability under senior
secured credit facilities 48.2 90.0 138.2
-------------- ------------ -------------
Total available cash at December 31, 2001 $63.4 $ 99.9 $ 163.3
Ranges of estimated sources (uses) from
January 1, 2002 to June 2003:
EBITDA (Earnings before interest,
taxes, depreciation and $25 - $27 ($18) - ($20) $5 - $9
amortization)
Sale of tower assets --- 10 - 12 10 - 12
Capital expenditures (45) - (48) (45) - (46) (90) - (94)
Cash interest payments (9) - (10) (8) - ( 9) (17) - (19)
Working capital requirements (8) - ( 9) (9) - (10) (17) - (19)
------------ ------------ --------------
Estimated net uses ($37) - ($40) ($72) - ($73) ($109) - ($113)
------------ ------------ --------------
Estimated cash available at June 30, 2003 $23 - $26 $27 - $28 $50 - $54
------------ ------------ --------------
Factors That May Affect Operating Results and Liquidity
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 22
In addition to the Investment Considerations included herein, the
following risk factors could materially and adversely affect our future
operating results and could cause actual events to differ materially from those
predicted in forward-looking statements related to our business.
We may not be able to sustain our growth or obtain sufficient revenue
to achieve and sustain profitability. We incurred EBITDA (Earnings before
interest, taxes, depreciation and amortization) losses excluding noncash stock
option compensation expense of ($20.7) million in the three months ended
December 31, 2001. Our business projections reflect continuing growth in our
subscriber base and a reduction and eventual elimination of EBITDA losses as the
cash flow generated by the growing subscriber base exceeds costs incurred to
acquire new customers. If we acquire more new customers than we project, the
upfront costs to acquire those customers (including the handset subsidy,
commissions and promotional expenses) may result in greater EBITDA losses in the
near term but higher cash flows in later periods. Conversely, if there is a
slowdown in new subscriber growth in the wireless industry, we may acquire fewer
new customers, which would result in lower EBITDA losses in the near term but
lower cash flows in later periods.
We may experience a higher churn rate. Our average customer monthly
churn (net of 30 day returns and a reserve for first payment default customers)
for the three months ended December 31, 2001 was 3.0%. This rate of churn was
higher than our historical average and is expected to continue into 2002 before
declining in the second half of calendar 2002. If the rate of churn were not to
decline as expected or to increase materially above its current levels and
remain there, we would lose the cash flow attributable to these customers and
have greater EBITDA losses.
We may not be able to re-instate the deposit requirement for new
sub-prime credit customers. We have requested that Sprint allow us to re-instate
a customer deposit for all sub-prime customers added after February 24, 2002.
Sprint has indicated its willingness to make the required program changes to
effect the deposit requirement for sub-prime customers (which was present in all
of our distribution channels until May 2001, when Sprint introduced No Deposit
Account Spending Limits (NDASL)). As of December 31, 2001, approximately 38% of
our 453,359 customers had a credit rating placing them in the sub-prime
category. In addition, because Sprint does not plan to re-instate a deposit in
its markets, we may experience difficulty in implementing a deposit requirement
in national third party retailers in our territory. Our inability to collect a
deposits from sub-prime customers may result in a higher rate of customer churn
and additional bad debt expense than our business plan projects.
We may receive a significantly lower roaming rate in 2003 and
thereafter. We are paid a fee from Sprint for every minute that a Sprint PCS
subscriber based outside of our territory uses our network; we refer to such
fees as roaming revenue. Similarly, we pay a fee to Sprint for every minute that
our customers use the Sprint PCS network outside of our markets; we refer to
such fees as roaming expense. Under our original agreements with Sprint, Sprint
had the right to change the reciprocal roaming rate exchanged for customers who
roam into the other party's or another network partner's network. On April 27,
2001, we and Sprint announced an agreement in principle to reduce this
reciprocal roaming rate exchanged between Sprint and AirGate for customers who
roam into the other party's, or another network partner's, 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. iPCS and
Sprint had an agreement which fixed the reciprocal roaming rate exchanged
between Sprint and iPCS for customers who roam into the other party's, or
another network partner's, territory at $0.20 per minute of use through December
31, 2001. Under the agreement in principle, the roaming rate for both AirGate
and iPCS with respect to calendar 2002 will not be less than $0.10 per minute.
For calendar year 2003 and beyond, the details of the agreement in principle
have not yet been finalized. Depending on the details of the final agreement,
the reciprocal roaming rate may be less than the rate charged in 2002. While a
much lower roaming rate would significantly reduce the roaming revenue we
receive, it would also significantly reduce the roaming expense we pay to
Sprint. The ratio of roaming revenue to expense for the three months ended
December 31, 2001 was 1.3 to one. We project that by 2003, the growth in our
customer base will result in a ratio of revenue to expense approaching one to
one, minimizing the net earnings and EBITDA impact of any substantial reduction
in the roaming rate. If the ratio of roaming revenue to roaming expense were not
to decline, a reduction in the reciprocal roaming rate could have an adverse
affect on our cash cushion.
Our ability to borrow funds under the senior credit facilities may be
terminated due to our failure to maintain or comply with the restrictive
financial and operating covenants contained in the agreements governing the
senior credit facilities. The AirGate senior credit facility contains covenants
specifying the maintenance of certain financial ratios, reaching defined
subscriber growth and network covered population goals, minimum quarterly
service revenues and limiting capital expenditures. We believe that we are
currently in compliance, and will remain in compliance for the foreseeable
future, with all financial and operational covenants relating to the AirGate
senior credit facility. The iPCS senior credit facility contains covenants
specifying the maintenance of certain financial ratios, reaching defined
subscriber
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 23
growth and network covered population goals, minimum quarterly service revenues,
maximum EBITDA losses and limiting capital expenditures. We believe that we are
currently in compliance with all financial and operational covenants relating to
the iPCS senior credit facility. Following the merger with iPCS, we proposed a
new business plan for fiscal year 2002 which would have violated the maximum
EBITDA loss covenants of the iPCS senior credit facility in the second half of
the fiscal year. We have recently completed an amendment to the iPCS senior
credit facility, primarily to provide additional relief under this maximum
EBITDA losses covenant. If we are unable to operate either the AirGate or iPCS
business within the covenants specified in the AirGate senior credit facility or
the iPCS senior credit facility, as amended, as applicable, our ability to
obtain future amendments to the covenants in the applicable senior credit
facility is not guaranteed and our ability to make borrowings required to
operate the AirGate or iPCS business, as applicable, could be restricted or
terminated. Such a restriction or termination would have a material adverse
affect on our liquidity.
We may not be able to sell enough towers at an adequate price to
generate proceeds projected in the iPCS business plan. Upon completion of the
initial iPCS network build-out at March 31, 2002, we expect iPCS to own
approximately 90 towers. We do not consider towers a strategic asset and plan on
selling some or all of these assets as market terms and conditions permit. There
are several companies that have traditionally been purchasers of towers in the
wireless industry. However, the financial condition of these tower companies and
their willingness and ability to purchase towers we own is not certain.
Variable interest rates may increase substantially. At December 31,
2001, we had borrowed $155.3 million under the senior credit facilities. The
rate of interest on those facilities is based on a margin above either the
alternate bank rate (the prime lending rate in the United States) or the London
Interbank Offer Rate (LIBOR). Our weighted average borrowing rate on variable
rate borrowings at December 31, 2001 was 5.8%. While our business plan uses a
7.0% base borrowing rate, increases in a market interest rate substantially
above our estimates may result in unanticpated cash interest costs.
We operate with negative working capital because of amounts owed to
Sprint. Each month we pay Sprint amounts relating to: (i) roaming expense, (ii)
the 8% affiliation fee, (iii) costs for customer support and billing, (iv)
handsets purchased from Sprint, (v) reimbursements for commissions paid to
national third party retailers such as Radio Shack, Best Buy and Circuit City,
(vi) reimbursement for subsidies related to handsets sold by national third
party retailer, and (vii) wholesale long distance expense that our customers
incur and that Sprint PCS customers incur related to roaming revenue. A
reduction in the amounts we owe Sprint may result in a greater use of cash for
working capital purposes than our business plan currently projects.
We may not be able to access the credit markets for additional capital
if the liquidity discussed above is insufficient for the cash needs of our
business. We frequently evaluate options for additional financings to supplement
our liquidity position and maintain maximum financial flexibility. However, if
the assumptions used in our projections are incorrect, we may be unable to raise
additional capital.
Future Trends Analysis
AirGate has provided investors and analysts guidance for the second
fiscal quarter as discussed below. Such guidance is considered to be forward
looking statements and is subject, in all cases, to the Factors That May Affect
Operating Results and Liquidity set forth above and the Investment
Considerations set forth in Item 5 of this report.
Net additions refer to the increase in total subscribers between
periods, net of an adjustment for first payment default customers. The company
expects that net additions for the three months ended March 31, 2002 will be
approximately 38,000 to 45,000 subscribers. This would reflect a reduction for
net new additions on a combined pro forma basis from the same period last year.
First, we believe that the general economic condition in the United States may
dampen new customer additions for the wireless industry. Recent estimates for
wireless industry growth have been adjusted downward and if these estimates are
correct, we would expect to acquire fewer new customers. Second, we are
reorganizing the iPCS sales organization from a geographically based structure
to a channel focused structure. Such reorganization is expected to briefly
disrupt the selling trends in the iPCS markets as employees shift positions and
undergo additional training. Third, we expect that Sprint PCS will re-institute
the deposit requirement for sub-prime customers in our markets by the end of
February 2002. The deposit requirement could reduce the number of potential new
customers. Lastly, we expect that churn will continue in the range of 3%, which
was our churn for the three months ended December 31, 2001.
ARPU (Average Revenue Per User) summarizes the average monthly service
revenue per customer, excluding roaming revenue. ARPU is computed by dividing
service revenue by the average subscribers for the period, net of an
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 24
adjustment for first payment default customers. ARPU for the three months ended
March 31, 2002 is expected to be approximately $59 to $61 compared to the $60
result reported in the three months ended December 31, 2001.
Roaming revenue received from Sprint PCS customers based outside of our
territory using our network is expected to be approximately $20 million to $22
million. Similarly, roaming expense for our customers' use of the Sprint PCS
network outside of our markets is expected to be approximately $16 million to
$18 million. We anticipate that the reciprocal roaming rate that both AirGate
and iPCS will pay Sprint PCS will be reduced to $0.10 per minute for a local
call or approximately $0.12 per minute for a long distance call. For the three
months ended December 31, 2001, AirGate received $0.12 per minute for a local
call or $0.16 per minute for a long distance call and iPCS received $0.20 per
minute for a local call or $0.26 per minute for a long distance call. The
anticipated decrease in the reciprocal roaming rate should be partially offset
by increased roaming minutes from a growing Sprint PCS and other Sprint PCS
network partner customer base.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
excluding merger related expenses and non-cash stock option compensation expense
is expected to be approximately ($8) million to ($10) million. Increased cash
flows from a larger average customer base combined with lower customer
acquisition costs from acquiring fewer new customers than during the three
months ended December 31, 2001 should result in a lower EBITDA loss excluding
merger related expenses and non-cash stock option compensation expense than the
($20.0) million EBITDA loss reported for the three months ended December 31,
2001.
Capital expenditures for the three months ended March 31, 2002 are
expected to be approximately $40 million to $45 million. These amounts will be
used to substantially complete our investment to upgrade our network to 1XRTT,
the CDMA network platform for migration to next generation voice and data
services. Additionally, amounts will be incurred to increase switch capacity in
the company's six operating switches in anticipation of future customer growth
and an increase in the average minutes per month a customer uses the service.
For the remaining nine months of the fiscal year (January 1, 2002 to September
30, 2002), capital expenditures are expected to total approximately $75 million
to $80 million. In addition to the expenditures expected to be incurred in the
three months ended March 31, 2002, there will be purchases of equipment to
establish new cell sites and supplement existing cell sites with additional
radios, or carriers.
Capital Resources
The 1999 AirGate senior subordinated discount notes due 2009 will
require cash payments of interest beginning on April 1, 2005. The 2000 iPCS
senior secured discount notes due 2010 will require cash payments of interest
beginning on January 15, 2006.
The AirGate $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 December 31, 2008. The credit agreement requires us
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 December 31, 2001, $48.2
million remained available for borrowing under the AirGate senior credit
facility. Our obligations under the AirGate senior credit agreement are secured
by all of AirGate's assets, but not assets of iPCS and its subsidiaries. As
discussed above, we expect that cash and cash equivalents together with future
advances under the AirGate senior credit facility will fund AirGate's capital
expenditures, operating losses and working capital requirements through the end
of fiscal 2002, at which time we expect to generate positive earnings before
interest, taxes, depreciation and amortization (EBITDA). The AirGate senior
credit facility is subject to certain restrictive covenants including
maintaining certain financial ratios, reaching defined subscriber growth and
network covered population goals, minimum quarterly service revenues and
limiting annual capital expenditures. Further, the AirGate senior credit
facility restricts the payment of dividends on our common stock.
The iPCS $140.0 million senior credit facility provides for a $90.0
million senior secured term loan which matures on December 31, 2008, which is
the first installment of the loan, or tranche A. The second installment, or
tranche B, under the senior credit agreement is for a $50.0 million senior
secured term loan, which matures on December 31, 2008. The credit agreement
requires us to make quarterly payments of principal beginning March 31, 2004 for
tranche A and tranche B, initially in the amount of 2.5% of the loan balance
then outstanding and increasing thereafter. The commitment fee on unused
borrowings ranges from 1.00% to 1.50%, payable quarterly. As of December 31,
2001, $90.0 million remained available for borrowing under the iPCS senior
credit facility. Our obligations under the iPCS senior credit agreement are
secured by all of iPCS' assets, but not other assets of AirGate and its
subsidiaries. As discussed above, we expect that cash and cash equivalents
together with future advances under the iPCS senior credit facility will fund
iPCS'
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 25
capital expenditures, operating losses and working capital requirements through
the end of fiscal 2002, at which time we expect to generate positive earnings
before interest, taxes, depreciation and amortization (EBITDA). The iPCS senior
credit facility is subject to certain restrictive covenants including
maintaining certain financial ratios, reaching defined subscriber growth and
network covered population goals, minimum quarterly service revenues, maximum
EBITDA losses and limiting annual capital expenditures. We have recently
completed an amendment to the iPCS senior credit facility, primarily to provide
additional relief under the maximum EBITDA losses covenant, which we anticipated
violating in future quarters.
As of December 31, 2001, management believes that we are in compliance
with all financial and operational covenants associated with our senior credit
facilities, senior subordinated discount notes, and Sprint Agreements.
Contractual Obligations
We are obligated to make future payments under various contracts we
have entered into, including amounts pursuant to the senior credit facilities,
the 1999 AirGate senior subordinated discount notes, the iPCS senior secured
discount notes, capital leases and noncancelable operating lease agreements for
office space, cell sites, vehicles and office equipment. Future minimum
contractual cash obligations for the next five years and in the aggregate at
December 31, 2001, are as follows (dollars in thousands):
Payments Due By Period
----------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------
Contractual Obligation Total 2002 2003 2004 2005 2006 Thereafter
---------------------- ----- ---- ---- ---- ---- ---- ----------
AirGate senior credit
facility (1) $ 105,300 $ 506 $ 2,025 $15,964 $16,759 $22,217 $ 47,829
iPCS senior credit facility (1) 50,000 -- -- 5,000 7,500 12,500 25,000
AirGate operating leases (2) 67,023 17,670 17,269 14,769 7,745 3,812 5,758
iPCS operating leases (2) 70,442 11,430 11,271 10,714 9,483 6,331 21,213
iPCS capital leases 788 44 44 45 47 49 559
1999 AirGate senior
subordinated discount notes 300,000 -- -- -- -- -- 300,000
2000 iPCS senior subordinated
discount notes 300,000 -- -- -- -- -- 300,000
------------ --------- --------- --------- --------- -------- ---------
Total $ 893,553 $29,650 $30,609 $46,492 $41,534 $44,909 $700,359
============ ========= ========= ========= ========= ======== =========
(1) Total repayments are based on borrowings outstanding as of December 31,
2001, not projected borrowings under the respective senior credit
facility.
(2) Does not include payments due under renewals to the original lease term.
There are provisions in each of the agreements governing the senior credit
facilities, the 1999 AirGate senior subordinated discount notes and the 2000
iPCS senior subordinated discount notes that provide for an acceleration of
repayment upon an event of default, as defined in the respective agreements.
Seasonality
Our business is subject to seasonality because the wireless industry
historically has been heavily dependent on fourth calendar quarter results.
Among other things, the industry relies on significantly higher customer
additions and handset sales in the fourth calendar quarter as compared to the
other three calendar quarters. A number of factors contribute to this trend,
including: the increasing use of retail distribution, which is heavily dependent
upon the year-end holiday shopping season; the timing of new product and service
announcements and introductions; competitive pricing pressures; and aggressive
marketing and promotions. The increased level of activity requires a greater use
of our available financial resources during this period.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 26
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our operations are exposed to
interest rate risk on our senior credit facilities and any future financing
requirements. Our fixed rate debt consists primarily of the accreted carrying
value of the 1999 AirGate senior subordinated discount notes ($207.8 million at
December 31, 2001) and the 2000 iPCS senior subordinated discount notes ($203.1
million at December 31, 2001). Our variable rate debt consists of borrowings
made under the AirGate senior credit facility ($105.3 million at December 31,
2001) and the iPCS senior credit facility ($50.0 million at December 31, 2001).
Our primary interest rate risk exposures relate to (i) the interest rate on
long-term borrowings; (ii)our ability to refinance the senior subordinated
discount notes at maturity at market rates; and (iii) the impact of interest
rate movements on our ability to meet interest expense requirements and
financial covenants under our debt instruments.
We manage the interest rate risk on our outstanding long-term debt
through the use of fixed and variable rate debt and the use of an interest rate
cap. While we cannot predict our ability to refinance existing debt or the
impact interest rate movements will have on our existing debt, we continue to
evaluate our interest rate risk on an ongoing basis.
The following table presents the estimated future balances of
outstanding long-term debt projected at the end of each period and future
required annual principal payments for each period then ended associated with
the senior subordinated discount notes and our senior credit facilities based on
our projected level of long-term indebtedness:
Years Ending September 30,
----------------------------------------------------- -------------
2002 2003 2004 2005 2006 Thereafter
---------------------------------------------------- -------------
(Dollars in thousands)
1999 AirGate senior subordinated
discount notes ...................... $228,813 $260,630 $297,191 $297,289 $297,587 --
Fixed interest rate ................. 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Principal payments .................. -- -- -- -- -- $300,000
2001 iPCS senior subordinated
discount notes ...................... $222,896 $252,095 $285,118 $296,967 $297,165 --
Fixed interest rate ................. 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Principal payments .................. -- -- -- -- -- $300,000
AirGate senior credit facility ...... $128,500 $126,475 $117,498 $105,528 $ 90,083 --
Variable interest rate (1) .......... 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
Principal payments .................. -- $ 2,025 $ 8,977 $ 11,970 $ 15,445 $ 87,083
iPCS senior credit facility ......... $105,500 $125,000 $115,625 $ 98,436 $ 70,309 --
Variable interest rate (1) .......... 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
Principal payments .................. -- -- $ 9,375 $ 17,189 $ 28,127 $ 70,309
-------------------
(1) The interest rate on the senior credit facility equals the London
Interbank Offered Rate ("LIBOR") +3.75%. LIBOR is assumed to equal 2.0%
for all periods presented, which is the current LIBOR rate. A 1%
increase (decrease) in the variable interest rate would result in a
$2.6 million increase (decrease) in the interest expense.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 27
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
With respect to the Special Meeting of Shareholders held November 27,
2001, reference is made to the AirGate PCS, Inc. Form 10-K as filed on November
30, 2001 with the SEC.
Item 5. OTHER INFORMATION
Execution of Limited 10b5-1 Plans
Certain executives have initiated structured diversification plans to
sell a limited portion of their AirGate stock holdings at specified prices over
a fixed period. The plans, adopted under Rule 10b5-1 of the Securities Exchange
Act of 1934, are designed to avoid any real or perceived conflicts of interest
that might arise from these sales due to these executives involvement with
AirGate PCS, Inc., while enabling these executives to diversify their respective
holdings. Further, the plans will help avoid an aggregation of sales of our
common stock during our "trading window" periods that typically follow quarterly
announcements of our earnings.
Investment Considerations
Risks Related to the Combined Company's 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 adversely affect 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 additional expenditures 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 be affected.
Our stock price may be volatile and you may not be able to sell your shares at
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:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities analysts
and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
o changes in the company's relationship with Sprint;
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 28
o announcements by Sprint concerning developments or changes in
its business, financial condition or results of operations, or in its
expectations as to future financial performance;
o announcements of technological innovations or changes to, or new
products and services by Sprint or our competitors;
o changes in the market perception about the prospects in the
wireless telecommunications industry and results of operations and
market valuations of other companies in the telecommunications
industry in general and the wireless industry in particular, including
Sprint and its PCS network partners and our competitors;
o changes in law and regulation;
o announcements by third parties of significant claims or proceedings
against us;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
o general economic and competitive conditions.
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 and timely 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:
o manage our network and markets;
o maintain adequate focus on existing business and operations while
working to integrate the two companies;
o combine two companies with limited operating histories;
o manage each company's cash and available credit lines for use
in financing future growth and working capital needs of such company;
o manage our marketing and sales;
o manage the transition of iPCS' senior management expertise to the
combined company; and
o 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 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.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 29
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. We completed an offering of 4,000,000 shares of
AirGate common stock held by former iPCS stockholders on December 18, 2001,
under the terms of the registration rights agreement. The Blackstone Group,
referred to as Blackstone, has an additional demand registration right
exercisable at any time after the first anniversary of the effective time of the
merger. In addition, the former iPCS stockholders, including Blackstone, have
incidental registration rights pursuant to which they can, in general, include
their shares of our common stock in any public registration e initiate, whether
or not for sale for our own amount.
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.
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 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
Many 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 or change of control agreements with any of our executive officers,
and most of the options granted to senior management are at a strike price below
current market prices of our stock.
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 or through acquisitions
of other Sprint network partners. These transactions may require the approval of
Sprint and commonly involve a number of risks, including the:
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 30
o difficulty of assimilating acquired operations and personnel;
o diversion of management's attention;
o disruption of ongoing business;
o impact on our cash and available credit lines for use in
financing future growth and working capital needs;
o inability to retain key personnel;
o inability to successfully incorporate acquired assets and rights into
our service offerings;
o inability to maintain uniform standards, controls, procedures and
policies; and
o impairment of relationships with employees, customers or vendors.
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
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 by iPCS or any failure of
iPCS to comply with its obligations under the merger agreement. As a result,
iPCS will be responsible for any of its prior undisclosed liabilities. Such
liabilities could materially impact our future consolidated results of
operations.
We may experience a higher rate of customer turnover in the future compared to
historical rates which would adversely affect our financial performance.
The wireless personal communications services industry in general and
Sprint in particular have experienced a higher rate of customer turnover,
commonly known as churn, as compared to cellular industry averages. This churn
rate has been driven higher in recent months due to the introduction of the
NDASL and Clear Pay programs as described elsewhere in this report. In addition,
due to significant competition in our industry and general economic conditions,
among other things, our future rate of customer turnover may be higher than our
historical rate. Factors which may contribute to higher churn include:
o Our handset return policy that allows customers to return used
handsets within 14 days of purchase and receive a full refund;
o the attractiveness of our competitors' products and services;
o network performance;
o customer service;
o increased prices;
o any future changes by us in the products and services we offer,
especially to the Clear Pay Program; and
o customer mix and credit class, including those related to the NDASL
program and Clear Pay program, which accounted for 38% of our customers
at December 31, 2001.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 31
A high rate of customer turnover could adversely affect our competitive
position, liquidity, 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.
Our allowance for doubtful accounts may not be sufficient to cover
uncollectible accounts
On an ongoing basis, we estimate the amount of customer receivables that we
will not collect to reflect the expected loss on such accounts in the current
period. However, our allowance for doubtful accounts may underestimate actual
unpaid receivables for various reasons, including:
o adverse changes in our churn rate exceeding our estimates;
o adverse changes in the economy generally exceeding our expectations; or
o unanticipated changes in Sprint PCS' products and services.
If our allowance for doubtful accounts is insufficient to cover losses on
our receivables, our business, financial position or results of operations could
be materially adversely affected.
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 will have a number of important
consequences for our operations and our investors, including the following:
o each company will have 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;
o we anticipate that each company has sufficient resources to
finance its currently projected business plan, but neither may be able
to obtain additional financing if the assumptions underlying the
business plan are not correct for unanticipated capital requirements,
capital expenditures, working capital requirements and other corporate
purposes;
o 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
o 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 AirGate's common stock.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 32
If either AirGate or iPCS does not meet all of the conditions required under its
respective senior secured 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 December 31, 2001, AirGate had borrowed $105.3 million under its
senior credit facility and iPCS had borrowed $50.0 million under its
senior credit facility. The remaining $48.2 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. We recently
completed an amendment to the iPCS senior credit facility, primarily to provide
additional relief under the minimum EDITDA covenant, which we anticipated not
meeting in future quarters. In addition, additional borrowings are subject to
specific conditions on each funding date, including the following:
o that the representations and warranties in such company's loan documents
are true and correct;
o 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
o 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 under
such company's senior secured 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 will be limited
by the separate public debt indentures and senior secured credit facilities of
AirGate and iPCS
In order to assure continued compliance with the indenture governing
AirGate's senior subordinated discount notes, AirGate has designated iPCS as an
"unrestricted subsidiary." As a result, for purposes of their respective public
debt indentures, AirGate and iPCS will operate as separate business entities.
Due to restrictions in AirGate's indenture, AirGate will be unable to provide
direct or indirect credit support to iPCS and will be 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 will be
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 senior
secured credit facility, Sprint has the option of purchasing such company's
loans, giving Sprint certain rights of a creditor to foreclose on such company's
assets
Sprint has contractual rights, triggered by an acceleration of the maturity
of the debt under AirGate's or iPCS' respective senior secured credit facility,
pursuant to which Sprint may purchase AirGate's or iPCS' obligations to its
respective senior lenders and obtain the rights of a senior lender. To the
extent Sprint purchases these obligations, Sprint's interests as a creditor
could conflict with our interests. Sprint's rights as a senior lender would
enable it to exercise rights with respect to the related company's assets and
continuing relationship with Sprint in a manner not otherwise permitted under
our Sprint agreements.
Risks Particular to Our Relationship with Sprint
The termination of AirGate's or iPCS' affiliation with Sprint or Sprint's
failure to perform its obligations under the Sprint agreements would severely
restrict our ability to conduct our business
Neither AirGate nor iPCS owns the licenses to operate their wireless
network. The ability of AirGate and iPCS to offer Sprint PCS products and
operate a PCS network is dependent on their Sprint agreements remaining in
effect and not being terminated. The management agreements between Sprint and
each of AirGate and iPCS are not perpetual. Sprint 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
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 33
an additional 10-year period unless AirGate is in default. Sprint 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. We have
constructed and are now in the testing phase for four cell sites located in a
portion of a market in Nebraska. Due to issues beyond our control, those sites
are not yet operational. We have received two extensions from Sprint to make
these cell sites operational. The current extension is until February 28, 2002.
We believe these sites will be operational by this date. AirGate and iPCS also
are dependent on Sprint's ability to perform its obligations under the Sprint
agreements. The non-renewal or termination of any of the Sprint PCS agreements
or the failure of Sprint to perform its obligations under the Sprint agreements
would severely restrict our ability to conduct business.
Sprint may make business decisions that are not in our best interests, which may
adversely affect our relationships with customers in our territory, increase our
expenses and/or decrease our revenues
Sprint, under the Sprint agreements, has a substantial amount of control
over the conduct of our business. Accordingly, Sprint may make decisions that
adversely affect our business, such as the following:
o Sprint 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;
o Sprint could develop products and services or establish credit
policies, such as NDASL, which could adversely affect our results of
operations;
o Sprint could raise the costs for Sprint to perform back office services
or reduce levels of services;
o Sprint could prohibit us from selling non-Sprint approved PCS equipment;
o Sprint could, subject to limitations under our Sprint
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;
o Sprint could make decisions which could adversely affect the
Sprint and Sprint PCS brand names, products or services; and
o Sprint could decide not to renew the Sprint 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 relationship
with customers in our territories, increase our expenses and/or decrease our
revenues.
Change in Sprint PCS Products and Services May Reduce Customer Additions.
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 (38% of our customer base at December 31, 2001). Sprint has replaced
the NDASL program with the "Clear Pay Program" without re-instating the deposit
requirement. Sprint has the right to end or materially change the terms of
the Clear Pay Program. If Sprint chooses to eliminate the Clear Pay Program
or alter its features, the growth rate we expect to achieve may decrease. We
have requested re-instatement of the deposit for sub-prime customers in our
territory, which could reduce the number of potential customers.
The inability of Sprint to maintain high quality back office services, or
our inability to use Sprint's back office services and third party vendors'
back office systems, could lead to customer dissatisfaction, increased churn or
otherwise increase our costs
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 34
We rely on Sprint's internal support systems, including customer care,
billing and back office support. Our operations could be disrupted if Sprint 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's PCS business is expected to
continue to pose a significant challenge to its internal support systems.
Additionally, Sprint 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. The combined company will
depend on Sprint's willingness to continue to offer these services and to
provide these services effectively and at competitive costs. Our Sprint
agreements provide that, upon nine months' prior written notice, Sprint may
elect to terminate any of these services. The inability of Sprint to maintain
high quality back office services, or our inability to use Sprint back office
services and third party vendors' back office systems, could lead to customer
dissatisfaction, increase churn or otherwise increase our costs.
If Sprint does not complete the construction of its nationwide PCS network, we
may not be able to attract and retain customers
Sprint 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 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 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's national network and, to a lesser extent, on the networks of Sprint's
other PCS network partners. Sprint's 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 agreements may diminish the value of AirGate's
common stock and restrict the sale of our business
Under limited circumstances and without further stockholder approval,
Sprint may purchase the operating assets of AirGate or iPCS at a discount.
In addition, Sprint must approve any change of control of the ownership of
AirGate or iPCS and must consent to any assignment of their Sprint agreements.
Sprint 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 agreements could adversely affect the value of AirGate's 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 agreements.
We may have difficulty in obtaining an adequate supply of certain handsets from
Sprint, which could adversely affect our results of operations
We depend on our relationship with Sprint to obtain handsets. Sprint orders
handsets from various manufacturers. We could have difficulty obtaining specific
types of handsets in a timely manner if:
o Sprint does not adequately project the need for handsets for
itself, its Sprint PCS network partners and its other third party
distribution channels, particularly in transition to new technologies;
such as "one time radio transmission technology," or "1XRTT;"
o we do not adequately project our need for handsets;
o Sprint modifies its handset logistics and delivery plan in a
manner that restricts or delays our access to handsets; or
o there is an adverse development in the relationship between Sprint and
its suppliers or vendors.
The occurrence of any of the foregoing could disrupt our customer service
and/or result in a decrease in our subscribers, which could adversely affect our
results of operations.
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 35
Non-renewal or revocation by the Federal Communications Commission of the Sprint
PCS licenses would significantly harm our business
PCS licenses are subject to renewal and revocation 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's 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 or us to comply with these standards could cause revocation or forfeiture
of the Sprint PCS licenses for our territories. If Sprint loses any of its
licenses in our territory, we would be severely restricted in our ability to
conduct business.
If Sprint does not maintain control over its licensed spectrum, the Sprint
agreements may be terminated, which would result in our inability to provide
service
The FCC requires that licensees like Sprint maintain control of their
licensed spectrum and not delegate control to third-party operators or managers.
Although the Sprint 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 agreements need to be modified to increase the level
of licensee control, AirGate and iPCS have agreed with Sprint to use their best
efforts to modify the Sprint agreements to comply with applicable law. If we
cannot agree with Sprint to modify the Sprint agreements, they may be
terminated. If the Sprint 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 operating profitably
Competition in the wireless communications industry is intense. We
anticipate that competition will cause the market prices for two-way 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 to develop competitive products and services and
the requirement that we obtain Sprint's consent to sell non-Sprint approved PCS
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.
Increased penetration rates could limit or decrease our rate of new customer
additions
Intense competition in the wireless communications industry could cause
prices for wireless products and services to decline. If prices drop, then our
rate of net customer additions will take on greater significance in improving
our financial condition and results of operations. However, as our and our
competitor's
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 36
penetration rates in our markets increases over time, our rate of adding net
customers could decrease. If this decrease were to happen, our business and
financial results could be materially adversely affected.
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 may not
be able to respond to such changes and implement new technology on a timely
basis, or at an acceptable cost.
If Sprint is unable to keep pace with these technological changes or
changes in the wireless communications market based on the effects of
consolidation from the Telecommunications Act of 1996 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 "one times radio transmission technology," or "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 Sprint or the
combined company can implement 1XRTT or 3G technology successfully or on a
cost-effective basis.
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 and our accounts
receivable represent unsecured credit. 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 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.
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
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 37
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 regulations on wireless phone use, any of which also could have material
adverse effects on our results of operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Registration Rights Agreement dated November 30, 2001 by and among
AirGate PCS, Inc., Blackstone/iPCS, L.L.C., Blackstone iPCS Capital Partners
L.P., Blackstone Communications Partners I L.P., TCW/Crescent Mezzannine
Partners II, L.P., TCW/Crescent Mezzanine Trust II, TCW Leveraged Income Trust,
L.P., TCW Leveraged Income Trust II, L.P., TCW Leveraged Income Trust IV, TCW
Shared Opportunity Fund II, Shared Opportunity Fund IIB, L.L.C., TCW Shared
Opportunity Fund III, L.P., Geneseo Communications, Inc., Cambridge Telecom,
Inc., Cass Communications, Inc., Technology Group, LLC, Montrose Mutual PCS,
Inc., Gridley Enterprises, Inc. Timothy M. Yager and Kelly M. Yager (A form of
this document is incorporated by reference to Exhibit 10.2 to the current report
on Form 8-K filed by AirGate PCS, Inc. with the Commission on August 31, 2001
(SEC File No. 000-27455))
(b) Reports on Form 8-K
On November 14, 2001, we filed a Current Report on Form 8-K pursuant to
which we announced our fourth quarter and fiscal year-end 2001 results.
On November 16, 2001, we filed a Current Report on Form 8-K pursuant to
which we filed iPCS, Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001.
On November 19, 2001, we filed a Current Report on Form 8-K reporting,
pursuant to Item 9, that we held a conference call to report our fourth quarter
and fiscal year-end 2001 results.
On November 27, 2001, we filed a Current Report on Form 8-K pursuant to
which we announced that our shareholders had approved our acquisition of iPCS,
Inc. at a special meeting of shareholders.
On November 30, 2001, we filed a Current Report on Form 8-K pursuant to
which we announced the completion of our acquisition of iPCS, Inc. In connection
with such Form 8-K, we filed the following financial statements: (i) the audited
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 and (ii)
unaudited pro forma condensed consolidated financial statements of AirGate PCS,
Inc. as of September 30, 2001 and for the twelve months ended September 30,
2001.
On December 20, 2001, we filed a Current Report on Form 8-K pursuant to
which we announced that certain of our shareholders had sold 4 million shares of
our common stock in a public offering.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer thereunto duly authorized.
AirGate PCS, Inc.
By: /s/ Alan B. Catherall
---------------------------
Name: Alan B. Catherall
Title: Chief Financial Officer
(Duly Authorized Officer)
Date: February 14, 2002 /s/ Alan B. Catherall
---------------------------
Alan B. Catherall
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
AirGate PCS, Inc. Form 10-Q - December 31, 2001 Page 38