-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Woavuf3V5RnovfKYEyuYteGzSMeoHKVfapWT72N+fNYW+0G5itHCIce52b7IlF64 P/vgt0hMvbDgccSTJNpGCg== 0000931763-03-000100.txt : 20030117 0000931763-03-000100.hdr.sgml : 20030117 20030116194854 ACCESSION NUMBER: 0000931763-03-000100 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20030117 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRGATE PCS INC /DE/ CENTRAL INDEX KEY: 0001086844 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 582422929 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27455 FILM NUMBER: 03516929 BUSINESS ADDRESS: STREET 1: 233 PEACHTREE ST NE STREET 2: SUITE 1700 CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4045257272 MAIL ADDRESS: STREET 1: 233 PEACHTREE ST STREET 2: SUITE 1700 CITY: ATLANTA STATE: GA ZIP: 30303 10-K/A 1 d10ka.txt ANNUAL REPORT ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K/A Amendment No. 1 For Annual and Transition Reports Pursuant to Section 13 or 15(d) of the Securities Act of 1934 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended September 30, 2002. 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 other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Harris Tower, 233 Peachtree St. NE, Suite 1700, Atlanta, Georgia 30303 (Address of principal executive offices) (Zip code) (404) 525-7272 Registrant's telephone number, including area code ---------- Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) 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 |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes |_| No |X| The aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the closing sale price on the Nasdaq Stock Market on March 29, 2002, the last business day of the registrant's most recently completed second fiscal quarter, was approximately $322,982,898. (For purposes of determination of the foregoing amount, only our directors and executive officers have been deemed affiliates). As of December 27, 2002, there were 25,836,520 shares of common stock, $0.01 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Definitive Proxy Statement to be filed within 120 days after September 30, 2002 for the Registrant's Annual Shareholder Meeting are incorporated into Part III of this Report on Form 10-K. ================================================================================ EXPLANATORY NOTE This Form 10-K/A is being amended solely for the purpose of correcting parenthetical errors in the Consolidated Statements of Stockholders' Equity (Deficit), and mechanical errors in the financial information in Note 1(b) and the Selected Quarterly Financial Data (Unaudited) with respect to Net loss per share--basic and diluted for the fourth quarter of fiscal 2002 in Note 14, and to update the signature page and the certifications required by the Sarbanes-Oxley Act of 2002 in Item 15 and Exhibits 99.1 and 99.2, and to update KPMG LLP's report on the financial statement schedule to reference this 10-K/A and the consent of KPMG LLP in Exhibit 23. This Form 10-K/A does not reflect events occurring after the filing of the original Form 10-K, or modify or update the disclosures therein in any way other than as required to reflect these changes. AIRGATE PCS, INC. ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PAGE ITEM NO. NO. -------- --- PART I .............................................................................................. 1 ITEM 1. Business ................................................................................. 1 ITEM 2. Properties ............................................................................... 37 ITEM 3. Legal Proceedings ........................................................................ 37 ITEM 4. Submission of Matters to a Vote of Security Holders ...................................... 37 PART II ............................................................................................. 38 ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters .................... 38 ITEM 6. Selected Financial Data .................................................................. 39 ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations .... 40 ITEM 7A. Quantitative And Qualitative Disclosures About Market Risk ............................... 60 ITEM 8. Financial Statements ..................................................................... 60 ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure ..... 60 PART III ............................................................................................ 61 ITEM 14. Controls and Procedures .................................................................. 61 PART IV ............................................................................................. 62 ITEM 15. Financial Statements, Schedules, And Reports On Form 8-K and Exhibits .................... 62
PART I ITEM 1. Business Special Caution Regarding Forward-Looking Statements This annual report on Form 10-K and other documents we file with the Securities and Exchange Commission ("SEC") contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our liquidity, the wireless industry, our beliefs and our management's assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by or on our behalf. Words such as "anticipate," "believe," "estimate," "expect," "goal," "intend," "plan," "project," "seek," "target," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this annual report on Form 10-K, whether as a result of new information, future events, changes in assumptions, or otherwise. Important factors that could cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the "Risk Factors" section in this Item 1, in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report. Certain Definitions In this annual report on Form 10-K, we refer to AirGate PCS, Inc. and its subsidiaries, other than iPCS, Inc. and its subsidiaries, as "AirGate." We refer to iPCS, Inc. and its subsidiaries as "iPCS." Unless the context otherwise requires, the use of "we," "our," "us" or "the Company," refers to the combined company of AirGate and iPCS after giving effect to the merger. AirGate has three other wholly-owned subsidiaries, AGW Leasing Company, Inc., AirGate Network Services, LLC and AirGate Service Company, Inc. iPCS has two wholly-owned subsidiaries, iPCS Wireless, Inc. and iPCS Equipment, Inc. "Sprint PCS" refers to Sprint Communications Company, L.P., Sprint Spectrum L.P. and WirelessCo, L.P. In this annual report on Form 10-K, we refer to Sprint Corporation and its affiliates, including Sprint PCS, as "Sprint". Statements in this report regarding Sprint are derived from information contained in our agreements with Sprint, periodic reports and other documents filed by Sprint with the Securities and Exchange Commission or press releases issued by Sprint. BUSINESS OVERVIEW Background AirGate PCS, Inc. and its subsidiaries and predecessors were formed for the purpose of becoming a leading regional provider of wireless Personal Communication Services, or PCS. We are a network partner of Sprint PCS, a wholly owned subsidiary of Sprint Corporation, a diversified telecommunications service provider. On November 30, 2001, AirGate acquired iPCS, Inc., another Sprint network partner, by merging a wholly-owned subsidiary with and into iPCS. As required by the terms of our outstanding indebtedness, we conduct our business operations through two separate corporate entities: (i) AirGate and its wholly-owned unrestricted subsidiaries and (ii) iPCS and its wholly-owned subsidiaries. Sprint operates a 100% digital PCS wireless network in the United States and holds the licenses to provide PCS nationwide using a single frequency band and a single technology. Sprint, directly and indirectly through network partners such as us, provides wireless services in more than 4,000 cities and communities across the country. Sprint directly operates its PCS network in major metropolitan markets throughout the United States. Sprint has also entered into independent agreements with various network partners, such as us, under which the network partners have agreed to construct and manage PCS networks in smaller metropolitan areas and along major highways. Through AirGate's management agreement with Sprint, AirGate has the right to market and provide Sprint PCS products and services in a territory that covers almost the entire state of South Carolina, parts of North Carolina, and the eastern Georgia cities of Augusta and Savannah. AirGate's territory encompasses 21 markets and approximately 7.1 million residents. Through iPCS' management agreement with Sprint, iPCS has the right to market and provide Sprint PCS products and services in a territory that 1 covers mid-sized cities and rural areas in parts of Illinois, Michigan, Iowa and eastern Nebraska. iPCS' territory encompasses 37 markets with approximately 7.4 million residents. As of September 30, 2002, AirGate had 339,139 subscribers and total network coverage of approximately 5.9 million residents, representing approximately 83% of the residents in its territory. For the year ended September 30, 2002, AirGate generated revenue of approximately $313.5 million. As of September 30, 2002, iPCS had 215,694 subscribers and total network coverage of approximately 5.6 million residents, representing approximately 76% of the residents in its territory. For the year ended September 30, 2002, iPCS generated revenue of approximately $144.1 million. As of September 30, 2002, the combined Company had 554,833 subscribers and total network coverage of approximately 11.5 million residents, representing approximately 79% of the residents in our territories. For the year ended September 30, 2002, the Company generated revenue of approximately $456.6 million. Current Operating Environment and its Impact on the Company Since the beginning of the year, the wireless communications industry, as well as the Company, has experienced significant declines in per share equity prices. We believe that this decline in wireless stocks results from a weaker outlook for the wireless industry than previously expected. Reasons for a weaker operating environment include: o declining rates of subscriber growth in the United States as overall rates of penetration in the wireless industry approach and exceed 50%, which decline may have been exacerbated by a widespread economic slowdown; o concerns that these declines, coupled with intense competition among wireless service providers in the United States, will continue to lead to service offerings of increasingly large bundles of minutes at lower prices; o higher rates of churn resulting from intense competition and programs for sub-prime credit quality subscribers; and o the highly leveraged capital structures of many wireless providers and a lack of viable financing alternatives. Our business has been and continues to be affected by these market conditions. In addition, as a result of our dependence on Sprint, AirGate and iPCS are also confronted with additional factors that have had a negative impact on our operations such as: o We offered a program that attracted sub-prime credit quality subscribers and contributed to high rates of churn. The introduction of this program was required under our agreements with Sprint until late February, 2002 (See "Marketing Strategy--Pricing" for a description of the program and "Sprint Relationship and Agreements"); o Over the past year, Sprint has taken a number of actions which resulted in unanticipated charges or increases in charges to the Company. Some of these charges resulted from errors by Sprint, while others were charges to which we had little or no advance notice. The effect of these actions was to reduce our liquidity and interject a greater degree of uncertainty to our business and financial planning (See "Sprint Relationship and Agreements"); o Our dependence on Sprint to provide customer care provides us limited tools to improve the quality of customer care, which may contribute to higher churn; o Because 60% of our costs of service and roaming is paid to Sprint as service, affiliation, roaming, long-distance and other fees and expenses under our agreements, our ability to control costs through our own cost cutting measures is more limited (See "Related Party Transactions--Transactions with Sprint"); and o a more limited control of our own working capital. These factors and the lack of additional sources of capital led us to revise our business plans to reflect this less-favorable operating environment. Over the near term, we have been and are managing both AirGate and iPCS to: o restructure the organizations and eliminate positions to operate in the most cost efficient manner possible; o significantly reduce capital expenditures; o cut back on spending for advertising and promotions; and o restrict availability of programs for sub-prime subscribers to reduce churn and improve the credit quality of our new subscribers and our subscriber base. Despite these measures, liquidity is an issue for iPCS in the near term. We retained Houlihan Lokey Howard & Zukin Capital to review iPCS' revised long range business plan, the strategic alternatives available to iPCS and to assist iPCS in developing and 2 implementing a plan to improve its capital structure. Because current conditions in the capital markets make additional financing unlikely, iPCS has undertaken efforts to restructure its relationship with its secured lenders, its public noteholders and Sprint, and we have begun restructuring discussions with informal committees of these creditors. While the lenders and noteholders have expressed willingness to work with iPCS, Sprint has informed us it is unwilling to restructure its agreements with iPCS. Because of its deteriorating financial condition, it is probable that iPCS will soon be required to seek protection under the federal bankruptcy laws in an effort to effect a court-administered reorganization. Even if a cooperative restructuring is possible, it is likely that a court-administered reorganization would be a part of that process. As a result of the industry trends discussed above and the fact that wireless industry acquisitions subsequent to the Company's acquisition of iPCS have been valued substantially lower on a price per population and price per subscriber basis, the Company believed that the fair value of iPCS and its assets had been reduced. The Company engaged a nationally recognized valuation expert on two occasions during 2002 to perform fair value assessments of iPCS and its assets. The Company recorded a goodwill impairment of approximately $261.2 million during the quarter ended March 31, 2002. In the quarter ended September 30, 2002, the Company took total impairment charges of $556.2 million associated with the impairment of goodwill, tangible and intangible assets related to iPCS (See Note 2 to the consolidated financial statements). Because iPCS is an unrestricted subsidiary, AirGate is generally unable to provide capital or other financial support to iPCS. Further, iPCS lenders, noteholders and creditors do not have a lien on or encumbrance on assets of AirGate. We believe AirGate operations will continue independent of the outcome of the iPCS restructuring. However, it is likely that AirGate's ownership interest in iPCS will have no value after the restructuring is complete. It is also possible that AirGate will no longer provide management services to iPCS if ownership of iPCS changes. If this were to occur, AirGate would need to reduce operating costs in an amount sufficient to recover the general and administrative costs currently shared by both companies (estimated to be $4.6 million in fiscal 2003). As described under "Liquidity and Capital Resources," as of December 30, 2002, iPCS was in default under certain covenants contained in its senior secured credit facility (the "iPCS credit facility") and indenture governing its notes (the "iPCS notes"). Because of these events of default, the senior lenders will have the ability to accelerate iPCS' payment obligations under the iPCS credit facility and the holders of iPCS notes will have the ability to accelerate iPCS' payment obligations under iPCS' indenture, after giving notice and the expiration of applicable cure periods. iPCS is working with its lenders and noteholders on a forbearance agreement, however there is no assurance that these negotiations will be successful. In any event, we anticipate that iPCS will default on certain financial covenants as of March 31, 2003 and iPCS expects to file for bankruptcy in the near term, and these events are also events of default under the iPCS credit facility. While AirGate has also experienced a deterioration in its liquidity, it appears that it is in a better position to address the issues discussed above. It has a larger subscriber base than iPCS and, as a stand alone operation, AirGate's business is more mature. Based upon its current business plan, which continues to be revised and evaluated in light of evolving circumstances, we believe that AirGate will have sufficient funds from operations and amounts available under its senior secured credit facility (the "AirGate credit facility") to satisfy our working capital needs, capital expenditures and other liquidity requirements through fiscal 2003. Business Strategy Our goal is to become one of the most profitable regional wireless providers through a conservative growth strategy of adding higher credit quality subscribers with higher revenues while reducing costs. We believe the following elements are critical to enable us to achieve this goal: o continue to take advantage of our strategic relationship with Sprint, o maximize free cash flow by lowering our capital spending and operating costs, o reduce churn and improve the credit quality of our new subscribers, o work with Sprint to increase the predictability of costs and financial information, and o in the longer term, take advantage of the Sprint brand recognition to capitalize on new growth initiatives, including data services and wireline-to-wireless migration opportunities. Continue to capitalize on our strategic relationship with Sprint. The underlying premise of our business plan is to continue to capitalize on our strategic relationship with Sprint. We believe this relationship provides us with a significant competitive advantage over other regional wireless providers because of Sprint's: o strong brand name recognition, o all-digital nationwide coverage, 3 o quality products and services, o advanced technology, and o established distribution channels. Maximize free cash flow by lowering capital spending and operating costs. We believe our success will depend in large part on our ability to lower our capital spending and operating costs and be cost competitive. With the primary build-out of our network complete, we are reducing capital spending. In addition, we have already taken a number of steps to lower our sales, marketing and network service costs, including the following: o reductions in discretionary spending, o tightening management of vendors, o closely examining our spending in sales and marketing, including: o a management restructuring in our retail channel and closing our least productive retail stores, o a reduction in support to our indirect distribution channels to reflect reduced productivity in certain of these outlets, such as Radio Shack and Walmart, o a reduction in support to our business distribution channel. As of January 10, 2003, these measures have resulted in a reduction in work force of 106 (72 at AirGate and 34 at iPCS). We are continuing to re-examine our business processes to identify other cost savings opportunities and gain efficiencies. We are also undertaking a review of our corporate staff functions to determine their optimal structure, both with and without a management role with respect to iPCS. Reduce churn and improve the credit quality of our subscribers. The high costs associated with subscriber churn makes reducing churn critical to our success. Currently, rates of churn, or customer turnover, are highest among sub-prime credit quality customers. As a result, we have eliminated the program features which were most attractive to sub-prime credit quality customers (See "Marketing Strategy--Pricing" for a discussion of these programs and features). During the last half of 2002, churn also increased in our prime credit quality customer segments. The Company has implemented a customer education program with the goal of both reducing churn in all customer segments and our exposure to non-paying customers. We are also dedicating resources to identify other avenues to reduce subscriber churn. Work with Sprint to increase the predictability and accuracy of cost and financial information. As described in more detail under "Sprint Relationship and Agreements," over the past year, Sprint has taken actions which resulted in unanticipated charges. Some of these charges resulted from errors by Sprint, while others were charges to which we had little or no advance notice. The effect of these actions were to reduce our liquidity and interject a greater degree of uncertainty to our business and financial planning. We are working with Sprint to provide greater visibility and predictability and to improve accuracy of billing and other financial information. In the longer term, take advantage of the Sprint brand recognition to capitalize on new growth initiatives, including data services and wireline-to-wireless migration opportunities. Data Services and PCS Vision. The development of compelling data applications will be critical to the growth in usage of wireless data network services. In the third quarter of 2002, Sprint launched PCS Vision, a third generation technology. Vision-enabled PCS devices take and receive pictures, check personal and corporate e-mail, play games with full-color graphics and polyphonic sounds and browse the Internet wirelessly with speeds that equal or exceed a home computer's dial-up connection. At the same time, Sprint began to roll out a broad portfolio of Vision-enabled devices that incorporate voice and data functionality, expanded memory, high-resolution and larger color screens that allow greater mobility, convenience and productivity. While the uptake of these services has been slower than expected, we believe PCS Vision will provide a vehicle for growth for data and wireless internet services. Targeted Marketing. In addition to Sprint's national marketing plans, we plan to develop local plans in conjunction with Sprint to target groups who share common characteristics or have common needs in our territory. Wireline-to-Wireless Migration Opportunities. We believe wireless will continue to grow as a substitution for wireline services. Wireless internet access, wireless local loop and other wireless applications can spur this migration and increase sales of wireless services. Other Recent Developments AirGate's senior secured credit facility required that AirGate deliver audited financial statements accompanied by an unqualified opinion of its independent auditors by December 30, 2002, along with certain related documents. Similarly, AirGate's discount 4 notes (the "AirGate notes") required that AirGate deliver an audit opinion of its independent auditors, along with certain related documents, by December 30, 2002. As described in this report under "Item 14. Controls and Procedures," we discovered inconsistencies between certain accounts receivable reports provided to us by Sprint. In early December, Sprint informed us that certain of these reports could not be relied on for financial reporting purposes. While Sprint and the Company worked diligently to resolve issues related to this discrepancy, we were unable to complete our financial statements by December 30, 2002. Because AirGate did not deliver the required information on December 30, 2002, AirGate was in default under its credit facility and the indenture governing the AirGate notes. Under the AirGate credit facility and indenture governing the AirGate notes, the default did not constitute an event of default until the giving of notice and expiration of the applicable cure period. On December 31, 2002, Standard & Poor's ("S&P") downgraded AirGate's corporate rating from CCC+ to CCC- and its rating of the AirGate notes from CCC- to CC. In addition, S&P downgraded iPCS' corporate rating from CCC- to CC. AirGate has also been placed on credit watch with negative implications pending the cure of the default under its credit facility and its notes. AirGate has cured any defaults under its credit facility and indenture by delivery of the required information. Risk Factors We strongly encourage you to read the discussions under "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and elsewhere in this report for a discussion of factors which could cause our results to differ materially from our expectations. Markets We believe that connecting Sprint's existing PCS markets with our PCS markets is an important part of Sprint's on-going strategy to provide seamless, nationwide PCS service to its subscribers. We believe our combined territories, with 14.5 million residents, have attractive demographic characteristics. AirGate's territory has many vacation destinations, covers substantial highway mileage and includes a large student population, with at least 27 colleges and universities. iPCS' territory includes markets that are adjacent to several major metropolitan operational markets in the Midwestern United States, including Chicago, Detroit, Des Moines, Indianapolis, Omaha and St. Louis, and also includes a large student population, with over 90 colleges and universities. The following table sets forth the location and estimated population in each of the markets that comprise the Company's territories: AirGate Basic Trading Areas (1) Population (2) - --------------------------- ---------- Greenville-Spartanburg, SC .............................. 897,700 Savannah, GA ............................................ 737,100 Charleston, SC .......................................... 686,800 Columbia, SC ............................................ 657,000 Asheville-Hendersonville, NC ............................ 588,700 Augusta, GA ............................................. 579,400 Anderson, SC ............................................ 346,600 Hickory-Lenoir-Morganton, NC ............................ 331,100 Wilmington, NC .......................................... 327,600 Florence, SC ............................................ 260,200 Greenville-Washington, NC ............................... 245,100 Goldsboro-Kinston, NC ................................... 232,000 Rocky Mount-Wilson, NC .................................. 217,200 Myrtle Beach, SC ........................................ 186,400 New Bern, NC ............................................ 174,700 Sumter, SC .............................................. 156,700 Jacksonville, NC ........................................ 148,400 Orangeburg, SC .......................................... 119,600 The Outer Banks, NC (3) ................................. 92,000 Roanoke Rapids, NC ...................................... 76,800 Greenwood, SC ........................................... 74,400 ------- 5 Total ............................................. 7,135,500 ========= (1) Each of the AirGate markets contains 10 MHz of spectrum. (2) Based on 2000 estimates compiled by Kagan's Wireless Telecom Atlas & Databook, 2001 Edition, as reported per individual basic trading area. (3) Territory covered by our Sprint PCS management agreements do not comprise a complete basic trading area. iPCS Basic Trading Areas MHz Population(1) - ------------------------ ---------- Grand Rapids, MI ..................................... 30 1,060,600 Saginaw-Bay City, MI ................................. 30 634,100 Peoria, IL ........................................... 10 464,600 Davenport, IA and Moline, IL ......................... 30 430,500 Cedar Rapids, IA ..................................... 30 285,700 Springfield, IL ...................................... 10 267,200 Waterloo-Cedar Falls, IA ............................. 30 259,600 Omaha (Partial), NE (2) .............................. 30 248,800 Decatur-Effingham, IL ................................ 10 247,600 Traverse City, MI .................................... 30 241,000 Bloomington, IL ...................................... 10 234,100 Muskegon, MI ......................................... 30 223,100 Champaign-Urbana, IL ................................. 10 221,100 Dubuque, IA .......................................... 30 177,800 Des Moines, IA (Partial) (2) ......................... 30 170,900 LaSalle-Peru-Ottawa-Streator, IL ..................... 20 152,300 Grand Island-Kearney, NE ............................. 30 147,100 Clinton, IA and Sterling, IL ......................... 30 146,600 Burlington, IA ....................................... 30 136,400 Kankakee, IL ......................................... 20 135,600 Mount Pleasant, MI ................................... 30 130,700 Fort Dodge, IA ....................................... 30 126,400 Iowa City, IA ........................................ 30 125,400 Ottumwa, IA .......................................... 30 123,400 Mount Vernon-Centralia, IL ........................... 30 121,900 Mason City, IA ....................................... 30 115,500 Danville, IL ......................................... 20 110,700 Norfolk, NE .......................................... 30 110,600 Lincoln, NE (Partial) (2) ............................ 30 98,300 Galesburg, IL ........................................ 10 73,500 Hastings, NE ......................................... 30 71,700 Jacksonville, IL ..................................... 10 70,500 Matoon, IL ........................................... 10 62,600 Lansing, MI (Partial) (2) ............................ 30 61,900 Marshalltown, IA ..................................... 30 56,600 Battle Creek, MI (Partial) (2) ....................... 30 54,600 St. Louis, MO (Partial) (2) ......................... 30 46,700 --------- Total .......................................... 7,445,700 ========= (1) Based on 2000 estimates compiled by Kagan's Wireless Telecom Atlas & Databook, 2001 Edition, as reported per individual basic trading area. (2) Territory covered by iPCS' Sprint management agreement does not comprise a complete basic trading area. AirGate's Sprint agreements required it to cover a specified percentage of the population at a range of coverage levels within each of the markets granted to it by those agreements by specified dates. AirGate is fully compliant with these build-out requirements. iPCS' Sprint agreements required it to launch certain markets by specified dates. We believe iPCS has satisfied these build-out requirements as of September 30, 2002. iPCS' agreement with Sprint requires iPCS to construct an additional four to five cell sites by December 31, 2004. Products and Services We offer Sprint PCS products and services throughout our territories. These PCS products and services are generally designed to mirror the services offered by Sprint. 6 100% Digital Wireless Network with Service Across the Country. Our primary service is wireless mobility coverage. As Sprint network partners, our existing PCS network is part of the largest 100% digital wireless PCS network in the United States. Subscribers in our territory may use Sprint PCS services throughout our contiguous markets and seamlessly throughout the Sprint PCS network. PCS Vision Service. In the third calendar quarter of 2002, Sprint launched PCS Vision, a third generation technology. Vision-enabled PCS devices take and receive pictures, check personal and corporate e-mail, play games with full-color graphics and polyphonic sounds and browse the Internet wirelessly with speeds that equal or exceed a home computer's dial-up connection. At the same time, Sprint began to roll out a broad portfolio of Vision-enabled devices that incorporate voice and data functionality, expanded memory, high-resolution and larger color screens that allow greater mobility, convenience and productivity. The Company supports and offers PCS Vision services and phones in the majority of its territories. Wireless Internet Access. Wireless Internet access is available through both the new PCS Vision service and PCS Vision-enabled phones as well as the Sprint Wireless Web and other data capable PCS phones. PCS subscribers with web browser-enabled phones have the ability to receive information such as stock prices, airline schedules, sports scores and weather updates directly on their handsets. Subscribers with PCS Vision phones can browse full color, graphic versions of popular web sites. Those subscribers with other browser-enabled phones are able to browse specially designated text based sites. CDMA and Dual Band/Dual Mode Handsets. We offer code division multiple access, or CDMA, digital technology handsets. These handsets range from full-featured models with special features such as Palm OS and built-in digital cameras to models with voice only capability. The phones can weigh as little as 2.65 ounces and can have standby times surpassing 300 hours. We offer dual band/dual mode handsets that allow subscribers to make and receive calls on both PCS and cellular frequency bands and both digital or analog technology. Sprint and Non-Sprint Roaming. We provide roaming services to Sprint PCS subscribers that use a portion of our PCS network, and to non-Sprint subscribers when they use a portion of our PCS network pursuant to roaming agreements between Sprint and other wireless service providers. Sprint and other wireless service providers supply similar services to our subscribers when our subscribers use a portion of their networks. Marketing Strategy Our marketing and sales strategy generally uses the national advertising and marketing programs that have been developed by Sprint. We enhance the Sprint marketing strategy with strategies and tactics we have tailored to our specific markets. Use Sprint's brand equity and marketing. We feature exclusively and prominently the nationally recognized Sprint brand in our marketing effort. From our subscribers' point of view, they use our network and the PCS national network seamlessly as a unified nationwide network. Pricing. Our use of the Sprint national pricing strategy offers our subscribers simple, easy-to-understand service plans. Sprint's pricing plans are typically structured with monthly recurring charges, large local calling areas, bundles of minutes and service features such as voicemail, caller ID, call waiting, call forwarding and three-way calling. We also feature Sprint Free and Clear plans, which offer simple, affordable plans for consumer and business subscribers, and include long distance calling from anywhere on the Sprint PCS nationwide network. A significant pricing plan for the Company is the Clear Pay program and its predecessors, the Account Spending Limit ("ASL") and no-deposit ASL ("NDASL") programs. Under these programs, subscribers who did not meet certain credit criteria could qualify for our digital wireless services. Subscribers were classified into prime and sub-prime credit quality, with those in the sub-prime category further designated into credit classes. Under the ASL program, sub-prime credit quality subscribers could select any plan offered subject to an account spending limit. Prior to May 2001, all of these subscribers were required to make a deposit ranging from $125 to $200 that could be credited against future billings. In May 2001, the NDASL program eliminated the deposit requirement on all credit classes. In November 2001, the NDASL program was replaced with a substantially similar program known as Clear Pay. The primary difference between the two programs was the re-introduction of a deposit requirement in the lowest credit class and an increased emphasis on collection processes. In late February 2002, the Clear Pay II Program replaced the Clear Pay Program for new subscribers in select PCS network partner markets, including the Company's territories. The Clear Pay II Program reinstates a $125 deposit for all sub-prime quality subscribers. A further, recent enhancement to the Clear Pay II Program requires a $250 deposit from those sub-prime subscribers in the lowest credit class. Although iPCS removed these deposit requirements in its territory for all sub-prime credit quality subscribers except for the lowest credit class at certain times between June 2002 and November 2002, the Clear Pay II Program and its deposit requirements are currently in effect in most of AirGate's and iPCS' respective markets. As a result, sub-prime credit quality subscribers accounted for 55% of our gross subscriber additions since the introduction of the NDASL program in May, 2001 and as of September 30, 2002, sub-prime credit quality subscribers accounted for 36% of AirGate subscribers and 35% of iPCS subscribers, or 35% of the combined Company subscribers. 7 Local focus. Our local focus enables us to supplement Sprint's marketing strategies with our own strategy and tactics tailored to each of our specific markets. This focus can include local advertising, sponsorships and distribution. We also enhance our local focus with specific service plans called Area-wide Plans. These plans are designed for our territories to create a more competitive product to those offered by other regional or local providers. Advertising and promotions. Sprint uses national as well as regional television, radio, print, outdoor and other advertising campaigns to promote its products. We benefit from this national advertising in our territory at no additional cost to us. Sprint also runs numerous promotional campaigns that provide subscribers with benefits such as additional features at the same rate, free minutes of use for limited time periods or special prices on handsets and other accessories. Sponsorships. Sprint sponsors numerous national, regional and local events. These sponsorships provide Sprint with brand name and product recognition in high profile events, create a forum for sales and promotional events and enhance our promotional efforts in our territory. Sales and Distribution Our agreements with Sprint require us to use Sprint's and our own sales and distribution channels in our territories. Key elements of our sales and distribution plan consist of the following: Sprint stores. AirGate currently operates 38 and iPCS currently operates 27 retail Sprint stores within its territory. These stores are located in metropolitan markets within our territories, providing us with a local presence and visibility. These stores have been designed to facilitate retail sales, bill collection and subscriber service. Sprint store within a Radio Shack store. Sprint has an arrangement with RadioShack to install a "store within a store." Currently, RadioShack has 102 stores in AirGate's territory and 92 stores in iPCS' territory that are authorized to offer Sprint PCS products and services to potential subscribers. Other national third-party retail stores. In addition to RadioShack, we benefit from the sales and distribution agreements established by Sprint with other national retailers, which currently include Best Buy, Circuit City, Staples, Target, Office Max, Wal-Mart, Office Depot and Ritz Camera. These retailers and others have approximately 243 retail stores in AirGate's territory and 218 retail stores in iPCS' territory. Local third-party retail stores. We benefit from the sales and distribution agreements that we enter into with local retailers in our territory. We have entered into sales and distribution agreements related to approximately 47 local stores in AirGate's territory and 139 local stores in iPCS' territory. National accounts and direct selling. We participate in Sprint's national accounts program. Sprint has a national accounts team which focuses on the corporate headquarters of large companies. Our direct sales force targets the employees of these companies in our territories and cultivates other local business subscribers. In addition, once a Sprint national account manager reaches an agreement with any company headquartered outside of our territory, we service the offices and subscribers of that company located in our territory. Sprint Distribution Channels. Sprint directly controls various distribution channels that sell Sprint PCS products and services in our markets. These channels with significant activity in our markets include: Sprint Inbound Telemarketing, Sprint web-based electronic commerce, Sprint Local Telephone Division Retail, and Sprint Local Telephone Division Telemarketing. In addition to these channels, Sprint's retail and business sales activities often have some incidental overflow into our markets. For the twelve months ended September 30, 2002, the following table sets forth the percentage of gross activations that certain of our distribution channels generated for each of AirGate and iPCS: iPCS AirGate ---- ------- Retail Sprint Stores 32% 33% RadioShack 14 23 Other National Third-Party 15 11 Local Third-Party 26 7 National Accounts 3 10 Sprint 10 16 ----- ------ 100% 100% 8 Suppliers and Equipment Vendors We do not manufacture any of the handsets or network equipment we use in our operations. We purchase our network equipment and handsets pursuant to various Sprint vendor arrangements that provide us with volume discounts. These discounts have significantly reduced the overall capital required to build our network. Under such arrangements, AirGate currently purchases its network equipment from Lucent Technologies, Inc. ("Lucent") and iPCS currently purchases its network equipment from Lucent and Nortel Networks, Inc. In addition, we currently purchase our handsets directly from Sprint and our accessories from Sprint and certain other third-party vendors. Our agreements with Sprint require us to pay Sprint $4.00 for each 3G handset that we purchase either directly from Sprint or from a Sprint authorized distributor. We agreed to pay this fee starting with purchases on July 1, 2002 and ending on the earlier of December 31, 2004 or the date on which the cumulative 3G handset fees received by Sprint from all Sprint network partners equal $25,000,000. We further agreed to purchase 3G handsets only from Sprint or a Sprint authorized distributor during this period. Seasonality Our business is subject to seasonality because the wireless industry is heavily dependent on fourth calendar quarter results. Among other things, the industry relies on higher subscriber additions and handset sales in the fourth calendar quarter when compared to the other three calendar quarters. A number of factors contribute to this trend, including: the increasing use of retail distribution, which is heavily dependent upon the year-end 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. We expect, however, that fourth calendar quarter seasonality will have less impact in the future. Employees and Labor Relations As of September 30, 2002, AirGate and iPCS employed approximately 650 and 325 full-time employees, respectively. Of these, the service company formed to provide management services to AirGate and iPCS leases approximately 150 employees from AirGate and 40 employees from iPCS. None of our employees are represented by a labor union. We believe that we have good relations with our employees. Competition Competition in the wireless communications industry is intense. We operate in highly competitive markets, particularly in the southeast. In our territories, we compete with national and regional cellular, PCS and other wireless providers. We believe that our primary competition is with Verizon Wireless, Nextel, Cingular Wireless, AT&T Wireless and its affiliates, Alltel and US Cellular. These wireless service providers offer services that are generally comparable to our PCS service. Most of our competitors have financial resources and subscriber bases greater than ours. Many of our competitors have access to more licensed spectrum than the 10 MHz licensed to Sprint in AirGate's territory and the 10 MHz or 20 MHz licensed to Sprint in parts of iPCS' territory. In addition, certain of our competitors may be able to offer coverage in areas not served by our PCS network, or, because of their calling volumes or their affiliations with, or ownership of, wireless providers, may be able to offer roaming rates that are lower than those we offer. PCS providers compete with us in providing some or all of the services available through the Sprint PCS network and may provide services that we do not. Additionally, we expect that existing cellular providers, some of whom have been operational for a number of years and have significantly greater financial and technical resources and subscriber bases than us, will continue to upgrade their systems to provide digital wireless communication services competitive with Sprint. Our ability to compete effectively with these other providers will depend on a number of factors, including: o the continued success of CDMA technology in providing competitive call clarity and quality; o our ability to provide quality network service in a limited capital environment; o the competitiveness of Sprint's pricing plans; o our spending on marketing and promotions compared to our competitors; o liquidity and capital resources; o our ability to upgrade our networks to accommodate new technologies; o the continued expansion and improvement of the Sprint PCS nationwide network; o the quality of Sprint customer care systems; and o our selection of handset options. 9 Our ability to compete successfully will also depend, in part, on the ability of Sprint and us to anticipate and respond to various competitive factors affecting the industry, including: o new services that may be introduced; o changes in consumer preferences; o demographic trends; o economic conditions; and o discount pricing strategies by competitors. NETWORK OPERATIONS General The effective operation of our portions of the Sprint PCS network require: o public switched and long distance interconnection; o the implementation of roaming arrangements; and o the development of network monitoring systems. We utilize Sprint's Network Operations Control Center for around-the-clock monitoring as well as our own switching centers' capabilities for our network base stations and switches. Sprint developed the initial plan for the build-out of our Sprint networks. We have further enhanced this plan to provide better coverage for our territories. Pursuant to our network operations strategy, we have provided PCS service to the largest communities in our markets and have covered interstates and primary roads connecting these communities to each other and to the adjacent major markets owned and operated by Sprint. As of September 30, 2002, AirGate's network consisted of four switches located at two switch centers and approximately 802 operating cell sites, and iPCS' network consisted of three switches located at three switch centers and approximately 633 operating cell sites. A switching center serves several purposes, including routing calls, managing call handoff, managing access to the public telephone network and providing access to voice mail. 99% of AirGate's and 86% of iPCS' operating cell sites are co-located. Co-location describes the strategy of leasing available space on a tower or cell site owned by another company rather than building and owning the tower or cell site directly. Our networks connect to the public telephone network through local exchange carriers, which facilitate the origination and termination of traffic between our networks and both local exchange and long distance carriers. Through our management agreements with Sprint, we have the benefit of Sprint-negotiated interconnection agreements with local exchange carriers. Under our management agreements with Sprint, we are required to use Sprint for long distance services and Sprint provides us with preferred rates for these services. Backhaul services are provided by other third-party vendors. These services carry traffic from our cell sites and local points of interconnection to our switching facilities. TECHNOLOGY General In 1993, the FCC allocated the 1900 MHz frequency block of the radio spectrum for wireless PCS Systems. PCS networks operate at a higher frequency and employ more advanced digital technology than traditional analog cellular telephone service. The enhanced capacity of digital systems, along with enhancements in digital protocols, allows digital-based wireless technologies, whether using PCS or cellular frequencies, to offer new and enhanced services, including greater call privacy and more robust data transmission, such as facsimile, electronic mail and connecting notebook computers with computer/data networks. Presently, wireless PCS systems operate under one of three principal air interface protocols: CDMA, time division multiple access (TDMA) or global system for mobile communications (GSM). Wireless PCS operators in the United States now have dual-mode or tri-mode handsets available so that their customers can operate on different networks that employ different protocols. 10 CDMA Technology Sprint's network and Sprint's network partners' networks all use CDMA technology. CDMA technology is fundamental to accomplishing our business objective of providing high volume, high quality airtime at a low cost. We believe that CDMA provides important system performance benefits. CDMA systems offer more powerful error correction, less susceptibility to fading and reduced interference than analog systems. Using enhanced voice coding techniques, CDMA systems achieve voice quality that is comparable to that of the typical wireline telephone. This CDMA vocoder technology also employs adaptive equalization, which filters out annoying background noise more effectively than existing wireline, analog cellular or other digital PCS phones. CDMA technology also allows a greater number of calls within one allocated frequency and reuses the entire frequency spectrum in each cell. In addition, CDMA technology combines a coding scheme with a low power signal to enhance security and privacy. As a subscriber travels from one cell site to another cell site, the call must be "handed off" to the second cell site. CDMA systems transfer calls throughout the network using a technique referred to as soft hand-off, which connects a mobile subscriber's call with a new cell site while maintaining a connection with the cell site currently in use. CDMA offers a cost effective migration to the next generation of wireless services. CDMA standards and products currently in place will allow existing CDMA networks to be upgraded in a cost efficient manner to the next generation of wireless technology. As of September 30, 2002, we have upgraded our network to the next generation of technology known as "one times radio transmission technology" or "1XRTT." This technology offers data speeds of up to 144 kilobits per second, voice capacity improvements of over 50% and improved battery life in the handset. Further standards are being developed for CDMA that will offer data speeds in excess of 2,000 kilo bits per second and additional improvements in voice capacity. Research and Development We currently do not conduct our own research and development. Instead we benefit from Sprint's and our vendors' extensive research and development effort, which provides us with access to new technological products and enhanced service features without significant research and development expenditures of our own. We have been provided prompt access to any developments produced by Sprint for use in our network. We believe that new features and services will be developed for the Sprint PCS network to take advantage of CDMA technology. We may be required to incur additional expenses in modifying our network to provide these additional features and services. Intellectual Property Other than our corporate names, we do not own any intellectual property that is material to our business. "Sprint," the Sprint diamond design logo, "Sprint PCS," "Sprint Personal Communication Services," "The Clear Alternative to Cellular" and "Experience the Clear Alternative to Cellular Today" are service marks registered with the United States Patent and Trademark Office and owned by Sprint or its affiliates. Pursuant to our management agreements with Sprint, we have the right to use, royalty-free, the Sprint and Sprint PCS brand names and the Sprint diamond design logo and certain other service marks of Sprint in connection with marketing, offering and providing licensed services to end-users and resellers, solely within our territories. Except in certain instances, Sprint has agreed not to grant to any other person a right or license to provide or resell, or act as agent for any person offering, licensed services under the licensed marks in our territories, except as to Sprint's marketing to national accounts and the limited right of resellers of Sprint to inform their subscribers of handset operation on the Sprint PCS network. In all other instances, Sprint has reserved for itself and its network partners the right to use the licensed marks in providing its services, subject to its exclusivity obligations described above, whether within or without our territories. Our agreements with Sprint contain numerous restrictions with respect to the use and modification of any of the licensed marks. SPRINT RELATIONSHIP AND AGREEMENTS The following includes a summary of the material terms and provisions of each of AirGate's and iPCS' separate Sprint agreements and the consent and agreements modifying the Sprint management agreements. The Sprint agreements and consent and agreements have been filed by each of AirGate and iPCS, as applicable, as exhibits to certain of their respective filings with the SEC. AirGate and iPCS urge you to carefully review the Sprint agreements and the consent and agreements. Overview of Sprint Relationship and Agreements Under their respective long-term agreements with Sprint, AirGate and iPCS market PCS products and services under the Sprint brand names in their territories. The agreements with Sprint require AirGate and iPCS to build-out their systems, platforms, products and services to seamlessly interface with the Sprint PCS wireless network. The Sprint agreements also give AirGate and iPCS access to Sprint's equipment discounts, roaming revenue from Sprint PCS and its PCS network partner subscribers traveling 11 into our territory, and various other back office services. AirGate's and iPCS' relationship and agreements with Sprint provide strategic advantages, including avoiding the need to fund up-front spectrum acquisition costs and the costs of establishing billing and other subscriber services infrastructure. The Sprint agreements have an initial term of 20 years with three 10-year renewals which can lengthen the contracts to a total term of 50 years. AirGate's Sprint agreements will automatically renew for the first 10-year renewal period unless AirGate is in material default on its obligations under the agreements. The Sprint agreements will automatically renew for two additional 10-year terms (and three additional 10-year terms in the case of iPCS) unless either AirGate or iPCS on the one hand, or Sprint on the other hand, provides the other with two years prior written notice to terminate the agreements. Each of AirGate and iPCS has four major agreements with Sprint: o the management agreement; o the services agreements; and o two separate trademark and service mark license agreements. In addition, Sprint has entered into a consent and agreement with each of AirGate and iPCS that modifies the respective management agreements for the benefit of the lenders under AirGate's senior secured credit facility, in the case of AirGate, and for the benefit of the lenders under iPCS' senior secured credit facility, in the case of iPCS. Dependence on Sprint Approximately 60% of cost of service and roaming in our consolidated financial statements relate to charges from Sprint for its affiliation fee, roaming, long-distance, services provided such as billing, collections and customer care, pass-through and other fees and expenses (See "Related Party Transactions - Transactions with Sprint"). In addition, because Sprint provides billing and collection services for the Company, approximately 96% of our revenues are remitted to us by Sprint. As a result, we are dependent on Sprint to perform its obligations under its agreements with us, including payment of collected revenues, and on financial information provided by Sprint. In addition, over the past year, our dependence on Sprint has interjected a greater degree of uncertainty to our business and financial planning. During this time: o we agreed to a new $4 logistics fee for each 3G enabled handset to avoid a prolonged dispute over certain charges for which Sprint sought reimbursement; o Sprint PCS sought to recoup $4.9 million in long-distance access revenues previously paid by Sprint PCS to the Company, of which $3.9 million related to AirGate and $1.0 million related to iPCS (See "Legal Proceedings" herein); o Sprint sought to charge in excess of $15 per month per 3G subscriber in 2002 (declining in 2003 and beyond) to reimburse Sprint for its 3G related expenses; o Sprint informed the Company on December 23, 2002 that it had miscalculated software maintenance fees for 2002 and future years, which would result in an annualized increase of $2.0 million if owed by the Company; o Sprint notified the Company that it intends to reduce the reciprocal roaming rate charged by Sprint and its network partners for use of our respective networks from $0.10 per minute of use to $0.058 per minute of use in 2003 (see "Sprint Agreements - The Management Agreement - Service pricing, roaming and fees" herein). We have questioned whether certain of these charges and actions are appropriate and authorized under our Sprint agreements. We plan to work with Sprint to increase the predictability of fees, charges and revenues and to resolve open issues. We expect that it will take time to resolve these issues, and the ultimate outcome is uncertain. See "Risk Factors - Risks Particular to Our Relationship with Sprint." Some of these items arose because of errors made by Sprint in billing the Company. As described herein under "Item 14. Controls and Procedures," we discovered that certain information previously provided to us by Sprint regarding our subscriber accounts receivable balances was not reliable for financial reporting purposes. We plan to strengthen our internal systems for verifying information provided by Sprint and to work cooperatively with Sprint to improve the accuracy of information we receive from Sprint for our financial reporting purposes. The Management Agreements Under AirGate's and iPCS' management agreements with Sprint, AirGate and iPCS have each agreed to: o construct and manage a network in its territory in compliance with Sprint's PCS licenses and the terms of the management agreement; 12 o distribute during the term of the management agreement Sprint PCS products and services; o use Sprint's and its own distribution channels in its territory; o conduct advertising and promotion activities in its territory; and o manage that portion of Sprint's subscriber base assigned to its territory. Exclusivity. AirGate and iPCS are designated as the only person or entity that can manage or operate a PCS network for Sprint in their respective territories. Sprint is prohibited from owning, operating, building or managing another wireless mobility communications network in AirGate's or iPCS' territories while their respective management agreements are in place and no event has occurred that would permit the agreements to terminate. Under the iPCS agreement, a wireless mobility communications network is defined as one operating in the 1900 MHz spectrum. The AirGate agreement does not limit the definition of a wireless mobility communications network to a specific spectrum. Sprint is permitted under the agreements to make national sales to companies in the covered territories and, as required by the FCC, to permit resale of the Sprint PCS products and services in the covered territory. Network build-out. The management agreements each specify the terms of the Sprint affiliation, including the required network build-out plan. a) AirGate: AirGate agreed to cover a specified percentage of the population at coverage levels ranging from 39% to 86% within each of the 21 markets which make up its territory by specified dates. AirGate has satisfied these network build-out requirements. AirGate has agreed to operate its PCS network, if technically feasible and commercially reasonable, to provide for a seamless handoff of a call initiated in its territory to a neighboring Sprint PCS network. If Sprint decides to expand coverage within AirGate's territory, Sprint must provide AirGate with written notice of the proposed expansion. AirGate has 90 days to determine whether AirGate will build out the proposed area. If AirGate does not exercise this right, Sprint can build out the territory or permit another third-party to do so. Any new area that Sprint or a third-party builds out is removed from AirGate's territory. b) iPCS: iPCS agreed to launch certain markets by specified dates. iPCS has satisfied these network build-out requirements. The management agreement also requires iPCS to reimburse Sprint for 50% of the microwave clearing cost for all of its territory except Champaign, Illinois, where iPCS is required to reimburse Sprint 100% of the microwave clearing costs. iPCS has agreed to operate its PCS network, if technically feasible and commercially reasonable, to provide for a seamless handoff of a call initiated in its territory to a neighboring Sprint PCS network. Sprint can decide to expand the coverage requirements of its territory by providing iPCS with written notice as long as the expanded coverage requirements are for proposed areas in which a tower would cover at least 10,000 residents. iPCS has 90 days after receiving notice from Sprint to determine whether it will build-out the proposed area. If iPCS does not exercise this right, Sprint can build out the territory or permit another third-party to do so. Any new area that Sprint or a third-party builds out is removed from iPCS' territory. Products and services. The respective management agreements identify the products and services that AirGate and iPCS can offer in their respective territories. AirGate and iPCS may offer non-Sprint PCS products and services in their respective territories under limited circumstances and with Sprint's concurrence. Neither company may offer products and services that are confusingly similar to Sprint PCS products and services. AirGate and iPCS may cross-sell services such as Internet access, subscriber premises equipment and prepaid phone cards with Sprint and other Sprint network partners. If AirGate or iPCS decide to use third parties to provide these services, AirGate and iPCS must give Sprint an opportunity to provide the services on the same terms and conditions. AirGate and iPCS cannot offer wireless local loop services specifically designed for the competitive local exchange market in areas where Sprint owns the local exchange carrier without Sprint's consent, unless AirGate or iPCS, as the case may be, name the Sprint-owned local exchange carrier as the exclusive distributor. AirGate and iPCS are required to participate in the Sprint sales programs for national sales to subscribers, and to pay the expenses related to sales from national accounts located in their respective territories. Long distance service. AirGate and iPCS must use Sprint's long distance service which AirGate and iPCS can buy at the best prices offered to comparably situated Sprint customers, plus an additional administrative fee. Sprint has a right of last offer to provide backhaul and transport services. Service pricing, roaming and fees. AirGate and iPCS must each offer Sprint subscriber pricing plans designated for regional or national offerings. AirGate and iPCS are to be paid 92% of collected revenues received by Sprint for Sprint PCS products and services from subscribers in their respective territories. Collected revenues exclude, among other things, outbound roaming revenues and related charges, roaming revenues from Sprint PCS and its PCS network partner subscribers, sales of handsets and accessories, proceeds from sales not in the ordinary course of business and amounts collected with respect to taxes. Except in the case of taxes, AirGate and iPCS retains 100% of these revenues. Although many Sprint subscribers purchase a bundled pricing plan that allows roaming anywhere on Sprint's and its network partners' networks without incremental roaming charges, AirGate 13 and iPCS earn roaming revenues from every minute that a Sprint subscriber from outside the AirGate or iPCS territory is carried on their respective PCS networks. AirGate and iPCS earn revenues from Sprint based on an established per minute rate for Sprint's subscribers roaming in their territory. Similarly, AirGate and iPCS pay for every minute subscribers from their respective territories use the Sprint PCS nationwide network outside such territories. On April 27, 2001, AirGate and Sprint announced an agreement in principle to reduce the reciprocal roaming rate exchanged between Sprint and AirGate for PCS subscribers 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 subscribers 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 year 2002 is $0.10 per minute. The Company has been notified by Sprint that it intends to decrease the reciprocal roaming rate to $0.058 per minute in 2003. On August 2, 2002, we entered into an agreement with Sprint, pursuant to which we agreed to pay Sprint an additional $4.00 logistics fee for each 3G handset that we purchased either directly from Sprint or from a Sprint authorized distributor. We agreed to pay this fee starting with purchases on July 1, 2002 and ending on the earlier of December 31, 2004 or the date on which the cumulative 3G handset fees received by Sprint from all Sprint network partners equal $25,000,000. We further agreed to purchase 3G handsets only from Sprint or a Sprint authorized distributor during this period. Advertising and promotions. Sprint is responsible for all national advertising and promotion of the Sprint PCS products and services. AirGate and iPCS are responsible for advertising and promotion in their respective territories, including a portion of the cost of any promotion or advertising done by any third-party retailers in its territory pursuant to cooperative advertising agreements with Sprint based on per unit handset sales. Program requirements. AirGate and iPCS are required to comply with Sprint's program requirements for technical standards, subscriber service standards, national and regional distribution and national accounts programs. Sprint can adjust the program requirements from time to time under the conditions provided in the management agreements. AirGate and iPCS each have the right to appeal Sprint's adjustments to the program requirements, if the adjustment: (1) causes AirGate or iPCS, as the case may be, to spend more than 5% of the sum of the applicable company's equity and long term debt, or (2) causes AirGate's or iPCS' operating expenses to increase by more than 10% on a net present value basis. If Sprint denies the company's appeal, then such company has 10 days after the denial to submit the matter to arbitration. If the company does not submit the matter to arbitration within the 10-day period or comply with the program adjustment, Sprint has the termination rights described below. Non-competition. AirGate and iPCS may not offer Sprint PCS products and services outside their respective territories without the prior written approval of Sprint. Within their respective territories, AirGate and iPCS may offer, market or promote telecommunications products and services only under the Sprint brands, their own brands, brands of related parties of theirs or other products and services approved under the management agreements, except that no brand of a significant competitor of Sprint or its related parties may be used for those products and services. To the extent AirGate and iPCS have or obtain licenses to provide PCS services outside their respective territories, neither AirGate nor iPCS may use the spectrum to offer Sprint PCS products and services without prior written consent from Sprint. Inability to use non-Sprint brand. AirGate and iPCS may not market, promote, advertise, distribute, lease or sell any of the Sprint PCS products and services on a non-branded, "private label" basis or under any brand, trademark or trade name other than the Sprint brand, except for sales to resellers approved by Sprint or required by law or as otherwise permitted under the trademark and service mark license agreements. Rights of first refusal. Sprint has certain rights of first refusal to buy AirGate's and iPCS' assets upon a proposed sale of all or substantially all of their respective assets. Termination of management agreements. Each management agreement can be terminated as a result of: o termination of Sprint's PCS licenses in the related company's territory; o failure by a party to pay any amount due under the management agreement or any other agreement between the parties or their respective related parties; o any other uncured breach under the related management agreement; o bankruptcy of a party to the related management agreement; o subject to the limitations in the related management agreement, such management agreement not complying with any applicable law in any material respect; or o the termination of either of the related trademark and service mark license agreements. The termination or non-renewal of the management agreements triggers certain of AirGate's and iPCS' rights, as applicable, and those of Sprint. 14 If AirGate or iPCS has the right to terminate its management agreement because of an event of termination caused by Sprint, generally the affected party may: o require Sprint to purchase all of its operating assets used in connection with its PCS networks for an amount equal to at least 80% of its entire business value as described below (88% in the case of AirGate, unless Sprint becomes the licensee for 20 MHz of spectrum in AirGate's territory); o if Sprint is the licensee for 20 MHz or more of the spectrum on the date AirGate terminates the management agreement (or in the case of iPCS, the date the management agreement was executed), require Sprint to sell to AirGate or iPCS, as applicable, subject to governmental approval, up to 10 MHz of licensed spectrum for an amount equal to the greater of (1) the original cost to Sprint of the license plus any microwave relocation costs paid by Sprint or (2) 9% of its entire business value; or o sue Sprint for damages or submit the matter to arbitration and not terminate the related management agreement. If Sprint has the right to terminate a management agreement because of an event of termination caused by AirGate or iPCS, as the case may be, generally Sprint may: o require the defaulting party to sell its operating assets to Sprint for an amount equal to 72% of its entire business value; o require the defaulting party to purchase, subject to governmental approval, the licensed spectrum in its territory for an amount equal to the greater of (1) the original cost to Sprint of the license plus any microwave relocation costs paid by Sprint or (2) 10% of its entire business value; o take any action as Sprint deems necessary to cure the defaulting party's breach of its management agreement, including assuming responsibility for, and operating, the related PCS network; or o sue the defaulting party for damages or submit the matter to arbitration and not terminate the related management agreement. Non-renewal. If Sprint gives either AirGate or iPCS timely notice that it does not intend to renew such company's management agreement, AirGate or iPCS, as the case may be, may: o require Sprint to purchase all of its operating assets used in connection with the PCS network for an amount equal to at least 80% of its entire business value (88% in the case of AirGate, unless Sprint becomes the licensee for 20 MHz of spectrum in AirGate's territory); or o if Sprint is the licensee for 20 MHz or more of the spectrum on the date AirGate terminates the management agreement (or in the case of iPCS, the date the management agreement is executed), require Sprint to assign to it, subject to governmental approval, up to 10 MHz of licensed spectrum for an amount equal to the greater of (1) the original cost to Sprint of the license plus any microwave relocation costs paid by Sprint or (2) 10% of its entire business value. If AirGate or iPCS gives Sprint timely notice of non-renewal of the related management agreement, or such company and Sprint both give notice of non-renewal, or the related management agreement can be terminated for failure to comply with legal requirements or regulatory considerations, Sprint may: o purchase all of the related company's operating assets for an amount equal to 80% of its entire business value; or o require the related company to purchase, subject to governmental approval, the licensed spectrum for an amount equal to the greater of (1) the original cost to Sprint of the license plus any microwave relocation costs paid by Sprint or (2) 10% of its entire business value. Determination of Entire Business Value. If the entire business value is to be determined, AirGate or iPCS, as the case may be, and Sprint will each select one independent appraiser and the two appraisers will select a third appraiser. The three appraisers will determine the entire business value on a going concern basis using the following guidelines: o the entire business value is based on the price a willing buyer would pay a willing seller for the entire on-going business; o then-current customary means of valuing a wireless telecommunications business will be used; o the business is conducted under the Sprint brands and the related Sprint agreements; o that the related company owns the spectrum and frequencies presently owned by Sprint and subject to the related Sprint agreements; and o the valuation will not include any value for businesses not directly related to the Sprint PCS products and services, and such businesses will not be included in the sale. 15 The rights and remedies of Sprint outlined in the respective management agreements resulting from an event of termination of the management agreement have been materially amended by the related consent and agreement as discussed below. However, until such time that there is no outstanding debt under the related consent and agreement, such amendments to the rights and remedies of Sprint reflected in the related consent and agreement will not be in effect. Insurance. AirGate and iPCS are each required to obtain and maintain with financially reputable insurers, who are licensed to do business in all jurisdictions where any work is performed under the related management agreement and who are reasonably acceptable to Sprint, workers' compensation insurance, commercial general liability insurance, business automobile insurance, umbrella excess liability insurance and "all risk" property insurance. Indemnification. AirGate and iPCS have each agreed to indemnify Sprint and its directors, employees and agents and related parties of Sprint and their directors, employees and agents against any and all claims against any of the foregoing arising from such company's violation of any law, a breach by such company of any representation, warranty or covenant contained in their respective management agreement or any other agreement between AirGate, iPCS or either of their related parties and Sprint, such company's ownership of the operating assets or the actions or the failure to act of anyone employed or hired by such company in the performance of any work under the related management agreement, except AirGate and iPCS will not indemnify Sprint for any claims arising solely from the negligence or willful misconduct of Sprint. Sprint has agreed to indemnify AirGate and iPCS, as the case may be, and their directors, employees and agents against all claims against any of the foregoing arising from Sprint's violation of any law and from Sprint's breach of any representation, warranty or covenant contained in the related management agreement or any other agreement between Sprint and its related parties and AirGate and iPCS or their related parties, except Sprint will not indemnify AirGate or iPCS for any claims arising solely from AirGate's or iPCS' negligence or willful misconduct. The Services Agreements The respective services agreements outline various back office services provided by Sprint and available to each of AirGate and iPCS at rates established by Sprint. Sprint can change any or all of the service rates one time in each 12-month period. Some of the available services include: billing, subscriber care, activation, credit checks, handset logistics, home locator record, voice mail, prepaid services, directory assistance, operator services, roaming fees, roaming clearinghouse fees, interconnect fees and inter-service area fees. Sprint may contract with third parties to provide expertise and services identical or similar to those to be made available or provided to AirGate and iPCS. AirGate and iPCS have agreed not to use the services received under their respective services agreement in connection with any other business or outside their respective territories. AirGate and iPCS may discontinue use of selected services upon three months' prior written notice. Sprint may discontinue a service upon nine months' prior written notice. The services agreements automatically terminate upon termination of the applicable management agreement. The services agreements may not be terminated for any reason other than the termination of the applicable management agreement. AirGate or iPCS on the one hand and Sprint on the other hand have each agreed to indemnify each other as well as officers, directors, employees and certain other related parties and their officers, directors and employees for violations of law or the services agreement except for any liabilities resulting from the indemnitee's negligence or willful misconduct. The services agreement also provides that no party to the agreement will be liable to the other party for special, indirect, incidental, exemplary, consequential or punitive damages, or loss of profits arising from the relationship of the parties or the conduct of business under, or breach of, the services agreement except as may otherwise be required by the indemnification provisions. The Trademark and Service Mark License Agreements Both AirGate and iPCS have non-transferable, royalty-free licenses to use the following trademarks and service marks of Sprint: "Sprint," together with the related "Diamond" logo, "Sprint PCS" and "Sprint Personal Communications Services." In addition, we have licenses to use the following trademarks and service marks of Sprint: "The Clear Alternative to Cellular," "Experience the Clear Alternative to Cellular Today," and such other marks as may be adopted in the future. AirGate and iPCS believe that the Sprint brand names and symbols enjoy a very high degree of awareness, providing AirGate and iPCS an immediate benefit in the market place. AirGate's and iPCS' use of the licensed marks is subject to their adherence to quality standards determined by Sprint and use of the licensed marks in a manner which would not reflect adversely on the image of quality symbolized by the licensed marks. AirGate and iPCS have agreed to promptly notify Sprint of any infringement of any of the licensed marks within their respective territories of which AirGate and iPCS become aware and to provide assistance to Sprint in connection with Sprint's enforcement of its respective rights. AirGate and iPCS have agreed with Sprint to indemnify each other for losses incurred in connection with a material breach of the trademark license agreements. In addition, AirGate and iPCS have agreed to indemnify Sprint from any loss suffered by reason of its use of the licensed marks or marketing, promotion, advertisement, distribution, lease or sale of any Sprint PCS products and services other than losses arising solely out of its use of the licensed marks in compliance with certain guidelines. 16 Sprint can terminate the trademark and service mark license agreements if AirGate or iPCS, as the case may be, file for bankruptcy, materially breach the agreement or its management agreement is terminated. AirGate and iPCS can terminate their respective trademark and service mark license agreements upon Sprint's abandonment of the licensed marks or if Sprint files for bankruptcy, or the related management agreement is terminated. Consents and Agreements in Connection with the Senior Credit Facilities Sprint has entered into a consent and agreement with the administrative agent under AirGate's credit facility, which AirGate has acknowledged, that modifies Sprint's rights and remedies under AirGate's management agreement for the benefit of the senior lenders and any refinancing of AirGate's credit facility. Lehman Commercial Paper, Inc., a subsidiary of Lehman Brothers, Inc., is the administrative agent under AirGate's credit facility. Similarly, Sprint has entered into a consent and agreement with the administrative agent under the iPCS credit facility, which has been acknowledged by iPCS, and modifies Sprint's rights and remedies under iPCS' management agreement, for the benefit of the existing and future holders of indebtedness under iPCS' credit facility, and any refinancing thereof. Toronto Dominion (Texas), Inc. is the administrative agent under iPCS' credit facility. The consent and agreement of one party and the rights and obligations of the parties thereunder, including its lenders, are independent of the consent and agreement of the other party and the rights and obligations of the parties under its consent and agreement. Each consent generally provides, among other things, the following: o Sprint's consent to the pledge of the respective company's subsidiary stock and the grant of a security interest in all of the respective company's assets including the Sprint agreements of such party; o that the respective company's Sprint agreements may not be terminated by Sprint until the respective credit facility is satisfied in full pursuant to the terms of the respective consent, unless AirGate's or iPCS' assets, including stock or equity interests, as the case may be, are sold to a purchaser who does not continue to operate such business as a Sprint PCS network, which sale is at the discretion of the applicable administrative agent; o a prohibition on competing Sprint PCS networks in AirGate's or iPCS' territory; o for Sprint to maintain 10 MHz of PCS spectrum in all of either AirGate's or iPCS' markets; o for redirection of payments from Sprint to the applicable administrative agent under specified circumstances; o for Sprint and the applicable administrative agent to provide to each other notices of default; o the ability to appoint an interim replacement, including Sprint, to operate AirGate's or iPCS', as applicable, PCS network under such party's Sprint agreements after an event of default of the respective credit facility or an event of termination under the respective Sprint agreements; o the ability of the applicable administrative agent or Sprint to assign the Sprint agreements and sell AirGate's or iPCS' respective assets or the equity interests of iPCS' operating subsidiaries, as the case may be, to a qualified purchaser other than a major competitor of Sprint; o the ability to purchase spectrum from Sprint and sell AirGate's or iPCS' respective assets to any qualified purchaser; and o the ability of Sprint to purchase AirGate's or iPCS' respective assets or debt. Consent to security interest and pledge of stock. Sprint has consented to the grant of a first priority security interest in and lien on all of the applicable party's assets and property, including such party's Sprint agreements and the capital stock and equity interests of the applicable party's subsidiaries and future subsidiaries. Agreement not to terminate Sprint agreements until the obligations under related financings are repaid. Sprint has agreed not to exercise its rights or remedies under the respective Sprint agreements, except its right to cure certain defaults, including its right to terminate the applicable Sprint agreements and withhold payments, other than rights of setoff, until the respective financing is satisfied in full pursuant to the terms of the respective consent. Sprint has also agreed that until such obligations are satisfied, a failure to pay any amount by any related party of AirGate or iPCS, as applicable, under any agreement with Sprint or with any of Sprint's related parties (other than AirGate's or iPCS' respective Sprint agreements) would not constitute a default under AirGate's or iPCS' respective management agreement. No competition until obligations under the credit facilities are repaid. Sprint has agreed that it will not permit any person other than AirGate or iPCS, as applicable, or a successor manager to be a manager or operator for Sprint in AirGate's or iPCS' applicable territories, until that company's credit facility is satisfied in full pursuant to the terms of that company's consent. Consistent with the management agreements, while the applicable credit facility is outstanding, Sprint can sell PCS services 17 through its national accounts, permit resellers and build new geographical areas within AirGate's or iPCS', as applicable, territory for which the respective company has chosen not to exercise its rights of first refusal. Similarly, Sprint has agreed that it will not own, operate, build or manage another wireless mobility communications network in AirGate's or iPCS', as applicable, territory unless it is permitted under the applicable management agreement or such management agreement is terminated in accordance with the applicable consent, and, in each case, the applicable credit facility is satisfied in full pursuant to the terms of the applicable consent. Maintain 10 MHz of spectrum. Sprint has agreed to own at least 10 MHz of PCS spectrum in each of AirGate's and iPCS' territories until the first of the following events occurs: o the obligations under the applicable credit facility is satisfied in full pursuant to the terms of AirGate's or iPCS' respective consent; o the sale of spectrum is completed under the applicable consent, as discussed below; o the sale of operating assets is completed under the applicable consent, as discussed below; or o the termination of AirGate's or iPCS', as applicable, management agreement. Restrictions on assignment and change of control do not apply to lenders and the administrative agent. Sprint has agreed not to apply the restrictions on assignment of the Sprint agreements and changes in control of AirGate's or iPCS' ownership to the lenders under the credit facilities or the administrative agents. The assignment and change of control provisions in the Sprint agreements will apply if the assignment or change of control is to someone other than the applicable administrative agent or a lender under the credit facilities, or is not permitted under the consents. Redirection of payments from Sprint PCS to the applicable administrative agent. Sprint has agreed to make all payments due from Sprint to AirGate or iPCS under the respective Sprint agreements directly to the applicable administrative agent if such administrative agent provides Sprint with notice that an event of default has occurred and is continuing under the applicable credit facility. Payments to such administrative agent would cease upon the cure of the event of default. Notice of defaults. Sprint has agreed to provide to the applicable administrative agent a copy of any written notice it sends to either AirGate or iPCS regarding an event of termination or an event that if not cured, or if notice is provided, would be an event of termination under the applicable Sprint agreements. Sprint also has acknowledged that an event of termination under the Sprint agreements constitutes an event of default under the credit facilities. The administrative agents have agreed to provide Sprint a copy of any written notice sent to either AirGate or iPCS, as applicable, regarding an event of default or default under the respective credit facility instruments. Right to cure. Sprint and the respective applicable administrative agents have the right, but not the obligation, to cure a default under the respective Sprint agreements. During the first six months as interim manager Sprint's right to reimbursement of any expenses incurred in connection with the cure are subordinated to the satisfaction in full, pursuant to the terms of the consents, of the obligations under the applicable credit facility. Modification of termination rights. The consents modify the rights and remedies under the management agreements provided in an event of termination and grant the providers of the credit facilities certain rights in the event of a default under the instruments governing the applicable senior debt. The rights and remedies of the administrative agent under each credit facility vary based on whether AirGate or iPCS, as applicable, has: o defaulted under its debt obligations but no event of termination has occurred under its respective management agreement; or o breached its respective management agreement. Each consent generally permits the appointment of a person to run AirGate's or iPCS' business, as the case may be, under its Sprint agreements on an interim basis and establishes a process for sale of such business. The person designated to operate such business on an interim basis is permitted to collect a reasonable management fee. If Sprint or a related party is the interim operator, the amount of the fee is not to exceed the amount of direct expenses of its employees to operate such business plus out-of-pocket expenses. Sprint shall collect its fee by setoff against the amounts owed to the defaulting party under its Sprint agreements. In the event of an acceleration of obligations under the applicable credit facility and for up to two years thereafter, Sprint may retain only one-half of the 8% of collected revenues that it would otherwise be entitled to retain under the defaulting party's Sprint agreements. Sprint may retain the full 8% after the first anniversary of the date of acceleration if Sprint has not been appointed to run such business on an interim basis or earlier if such business is sold to a third-party, or after the second anniversary if Sprint is running such business. The defaulting party or the applicable administrative agent, as the case may be, is entitled to receive the remaining one-half of the collected revenues that Sprint would otherwise have retained. The amount advanced to the defaulting party or the applicable administrative agent is to be evidenced by an interest-bearing promissory note. The promissory note will mature on the earlier of (1) the date on which a successor manager is qualified and assumes the 18 defaulting party's rights and obligations, as the case may be, under its Sprint agreements or (2) the date on which such company's operating assets or equity are purchased by a third-party. Default under the credit facility without a management agreement breach. If AirGate defaults on its obligations under its credit facility and there is no existing default under its management agreement with Sprint, Sprint has agreed to permit the administrative agent to elect to take any of the following actions: o allow AirGate to continue to operate its business under its Sprint agreements; o appoint Sprint to operate such business on an interim basis; or o appoint a person other than Sprint to operate such business on an interim basis. If iPCS defaults on its obligations under its credit facility and there is no existing default under its management agreement with Sprint, Sprint has agreed to permit the administrative agent to elect to take any of the following actions: o allow iPCS to continue to operate its business under its Sprint agreements; o after an acceleration of the debt payment or in the event iPCS is in bankruptcy, appoint Sprint to operate such business on an interim basis; or o after an acceleration of the debt payment or in the event iPCS is in bankruptcy, appoint a person other than Sprint to operate such business on an interim basis. Appointment of Sprint or third-party designee by applicable administrative agent to operate business. If an applicable administrative agent appoints Sprint to operate AirGate's or iPCS', as applicable, business, Sprint must accept the appointment within 14 days or designate to operate such business another person who also is a network partner of Sprint or is acceptable to such administrative agent. Sprint or its designated person must agree to operate the business for up to six months. At the end of the six months, the period may be extended by such administrative agent for an additional six months or an additional 12 months if the aggregate population served by all of Sprint's network partners is less than 40 million. If the term is extended beyond the initial six-month period, each administrative agent has agreed that Sprint or its designated person's right to be reimbursed by the defaulting party for amounts previously expended and to be incurred as interim manager to cure a default up to an aggregate amount that is equal to 5% of the sum of the defaulting party's stockholders' equity value plus the outstanding amount of the defaulting party's long term debt will no longer be subordinated to the defaulting party's obligations under our senior credit facility. Sprint or its designated person is not required to incur expenses beyond this 5% limit. At the end of the initial six-month interim term, the applicable administrative agent has the right to appoint a successor to the defaulting party subject to the requirements described below. Appointment of third-party by administrative agent to operate business. If an administrative agent appoints a person other than Sprint to operate a defaulting party's business on an interim basis, the third-party must: o agree to serve for six months unless terminated by Sprint for cause or such administrative agent in its discretion; o meet the requirements for a successor to an affiliate and not be challenged by Sprint for failing to meet these requirements within 20 days after the administrative agent provides Sprint with information on the third-party; and o agree to comply with the terms of the applicable Sprint agreements. The third-party is required to operate the Sprint network in the defaulting party's territory but is not required to assume its existing liabilities. If the third-party materially breaches the defaulting party's Sprint agreements, this breach will be treated as an event of default under the related management agreement with Sprint. Management agreement breach. If AirGate or iPCS breaches its Sprint agreements and such breach causes a default under such company's respective credit facility, Sprint has the right to designate who will operate the business of the defaulting party on an interim basis. Sprint has the right to: o allow the defaulting party to continue to operate such business under its Sprint agreements if approved by its administrative agent; o operate such business on an interim basis; or o appoint a person other than Sprint that is acceptable to the applicable administrative agent, which acceptance cannot be unreasonably withheld and must be given for another Sprint network partner, to operate such business on an interim basis. When a debt default is caused by a breach of AirGate's or iPCS' management agreement with Sprint, the applicable administrative agent only has a right to designate who will operate such business on an interim basis if Sprint elects not to operate such business or designate a third-party to operate such business on an interim basis. 19 Election of Sprint to serve as interim manager or designate a third-party to operate business. If Sprint elects to operate such business on an interim basis or designate a third-party to operate such business on an interim basis, Sprint or the third-party may operate such business for up to six months at the discretion of Sprint. At the end of the six months, the period may be extended for an additional six months or an additional 12 months if the aggregate population served by AirGate and iPCS and all other network partners of Sprint is less than 40 million. If the term is extended beyond the initial six-month period, each administrative agent has agreed that Sprint or its designee's right to be reimbursed by the defaulting party for amounts previously expended and to be incurred as interim manager to cure a default up to an aggregate amount that is equal to 5% of the sum of the defaulting party's stockholder's equity value plus the outstanding amount of such company's long term debt will no longer be subordinated by the defaulting party's obligations under the senior credit facility. Sprint or its third-party designee is not required to incur expenses beyond this 5% limit. At the end of the initial six-month interim term, Sprint, subject to the approval of the applicable administrative agent, has the right to appoint a successor interim manager to operate such business. Appointment of third-party by administrative agent to operate business. If Sprint gives the applicable administrative agent notice of a breach of AirGate's or iPCS' management agreement, the debt repayment is accelerated, and Sprint does not agree to operate such business or is unable to find a designee, such administrative agent may designate a third-party to operate such business. Such administrative agent has this same right if Sprint or the third-party designated by Sprint resigns and is not replaced within 30 days. The third-party selected by such administrative agent must: o agree to serve for six months unless terminated by Sprint for cause or by such administrative agent; o meet the requirements for a successor to a network partner and not be challenged by Sprint for failing to meet the requirements within 20 days after such administrative agent provides Sprint with information on the third-party; and o agree to comply with the terms of the applicable Sprint agreements. The third-party may continue to operate the business after the six month period at the applicable administrative agent's discretion, so long as the third-party continues to satisfy the requirements to be a successor to a network partner and is in material compliance with the terms or the applicable Sprint agreements. The third-party is required to operate the Sprint PCS network in the defaulting party's territory, but is not required to assume such company's existing liabilities. Purchase and sale of operating assets. Each of the consents establishes a process for the sale of either AirGate's or iPCS' operating assets, as the case may be, in the event of a default and acceleration under the applicable credit facility. AirGate's stockholders have approved the sale of its operating assets pursuant to the terms of AirGate's consent. Sprint's right to purchase on acceleration of amounts outstanding under the respective credit facility. Subject to the requirements of applicable law, Sprint has the right to purchase AirGate's or iPCS' operating assets, as applicable, upon notice of an acceleration of the respective senior credit facility under the following terms: o in addition to the purchase price requirements of the respective management agreement, the purchase price must include the payment or assumption in full, pursuant to the terms of the respective consent, of the respective credit facility; o Sprint must notify the applicable administrative agent of its intention to exercise the purchase right within 60 days of receipt of the notice of acceleration; o such administrative agent is prohibited for a period of at least 120 days after the acceleration or until Sprint rescinds its intention to purchase from enforcing its security interest if Sprint has given notice of its intention to exercise the purchase right; o if the defaulting party receives a written offer that is acceptable to such company to purchase its operating assets within a specified period after the acceleration, Sprint has the right to purchase, subject to the administrative agent's consent, such operating assets on terms and conditions at least as favorable to such company as the offer such company receives. Sprint must agree to purchase the operating assets within 14 business days of its receipt of the offer, on acceptable conditions, and in an amount of time acceptable to such company; and o upon completion of the sale to Sprint, such administrative agent must release the security interests upon satisfaction in full pursuant to the terms of the respective consent of the obligations under the respective credit facility. If the applicable administrative agent acquires the defaulting party's operating assets, Sprint has the right for 60 days to notify such administrative agent that it wants to purchase such operating assets for an amount not less than the sum of the aggregate amount paid by the lenders under the related credit facility for such operating assets plus an aggregate amount sufficient to satisfy in full the obligations under such credit facility pursuant to the terms of the respective company's consent. If Sprint purchases such operating assets under these provisions, the administrative agent must release the security interests securing such senior credit facility. In the event that a bankruptcy petition is filed by or with respect to AirGate or iPCS, Sprint has the right to purchase the defaulting party's operating assets from the applicable administrative agent by repaying the obligations in full. Such 20 right may be exercised by giving the administrative agent notice of Sprint's intent to exercise such purchase right no later than 60 days following the date of filing of the bankruptcy petition. If such administrative agent receives an offer to purchase the operating assets of the defaulting party, Sprint has the right to purchase the operating assets on terms and conditions at least as favorable as the terms and conditions in the proposed offer within 14 days of Sprint's receipt of notice of the offer, and so long as the conditions of Sprint's offer and the amount of time to complete the purchase is acceptable to the administrative agent. Sale of operating assets to third parties. If Sprint does not purchase the operating assets, following an acceleration of the obligations under the related senior credit facility, the applicable administrative agent may sell the operating assets of the defaulting party. Subject to the requirements of applicable law, such administrative agent has two options: o to sell the assets to an entity that meets the requirements to be a successor under the related Sprint agreements; or o to sell the assets to any third-party, subject to specified conditions. Sale of assets to qualified successor. Subject to the requirements of applicable law, the related administrative agent may sell the operating assets and assign the agreements to entities that meet the following requirements to succeed the defaulting party: o the person has not materially breached a material agreement with Sprint or its related parties that has resulted in the exercise of a termination right or in the initiation of judicial or arbitration proceedings during the past three years; o the person is not named by Sprint as a prohibited successor; o the person has reasonably demonstrated its credit worthiness and can demonstrate the ability to service the indebtedness and meet the requirements of the related build-out plan; and o the person agrees to be bound by the applicable Sprint agreements. Such administrative agent is required to provide Sprint with information necessary to determine if a buyer meets the requirements to succeed the defaulting party. Sprint has 20 days after its receipt of this information to object to the qualifications of the buyer to succeed the defaulting party. If Sprint does not object to the buyer's qualifications, subject to the requirements of applicable law, the buyer can purchase the assets and assume our rights and responsibilities under the related Sprint agreements. The consents will remain in full force and effect for the benefit of the buyer and its lenders. The buyer also has a period to cure any defaults under the applicable Sprint agreements. Sale of assets to non-successor. Subject to the requirements of applicable law, the related administrative agent may sell a defaulting party's assets to a party that does not meet the requirements to succeed the defaulting party. If such a sale is made: o Sprint may terminate the related Sprint agreements; o the buyer may purchase from Sprint 5, 7.5 or 10 MHz of the PCS spectrum licensed to Sprint in AirGate's or iPCS' territory under specified terms, as the case may be; o if the buyer controls, is controlled by or is under common control with an entity that owns a license to provide wireless service to at least 50% of the population in a basic trading area where the buyer proposes to purchase the spectrum from Sprint, the buyer may only buy 5MHz of spectrum; o the price to purchase the spectrum is equal to the sum of the original cost of the license to Sprint pro rated on a population and a spectrum basis, plus the cost paid by Sprint for microwave clearing in the spectrum ultimately acquired by the buyer of the defaulting party's assets and the amount of carrying costs attributable to the license and microwave clearing costs from the date of the appropriate consent until the closing of the sale, based on a rate of 12% per annum; o the buyer will receive from Sprint the subscribers with the MIN assigned to the market area covered by the purchased spectrum except for subscribers of national accounts and resellers; o with limited exceptions, Sprint will not solicit for six months the subscribers transferred to the buyer with the MIN assigned to the market area; o the buyer and Sprint will enter into a mutual roaming agreement with prices equal to the lesser of the most favored pricing provided by buyer to third parties roaming in the geographic area and the national average paid by Sprint to third parties; and o Sprint will have the right to resell the buyer's wireless services at most favored nations pricing. Right to purchase debt obligations. Following an acceleration under the applicable senior credit facility and until the 60-day anniversary of the filing of a petition of bankruptcy, Sprint has the right to purchase AirGate's or iPCS' obligations under such credit facility, as the case may be, at a purchase price equal to the amount of the obligations under such credit facility. In the event that Sprint purchases the obligations within 60 days following the earlier of acceleration or the date of the filing of a 21 bankruptcy petition, the purchase price for the obligations will be reduced by accrued interest and any fees and expenses that are unreasonable. Modification and amendment of consent. If Sprint modifies or amends the form of consent and agreement it enters into with a lender to another Sprint network partner that serves an area with population exceeding 5.0 million, then Sprint agrees to give the administrative agents written notice of the amendments and to amend the consents in the same manner at the applicable administrative agent's request; provided, however, that Sprint is not required to amend the consents to: o incorporate selected changes designated by such administrative agent unless Sprint consents to making only the selected changes; or o incorporate changes made for the benefit of a lender because of circumstances related to a particular Sprint network partner other than AirGate or iPCS. The following circumstances would not be considered related to a particular Sprint network partner and, subject to the provisions described in the preceding sentence, could result in amendment of the consents (if the 5.0 million population threshold is met as described above): o any form of recourse to Sprint or similar form of credit enhancement; o any change in Sprint's right to purchase our operating assets or capital stock, as applicable, under the management agreement or Sprint's right to purchase the obligations under the credit facilities; o any change to the right of AirGate or iPCS or the right of the related administrative agent or the lenders under the related credit facilities to sell the collateral or purchase spectrum from Sprint; o any change in the ownership status, terms of usage or the amount of spectrum that may be purchased by AirGate or iPCS from Sprint; o any material change in the flow of certain revenues between Sprint and AirGate or iPCS; o any changes to the obligations required to be assumed by, or qualifications for, or appointment of, anyone other than AirGate or iPCS who can be appointed to operate such business on an interim basis under such management agreement or purchase such business and continue to operate under such management agreement; o any changes to the consent and agreements terms on confidentiality, non-compete or eligible buyers of the business; o any clarifications of FCC compliance issues; o any issuance of legal opinions; and o any changes to the requirements described in this section. Termination of consents. The consents will terminate upon the first to occur of: o repayment in full of all obligations under the applicable credit facility and termination of such credit facility; and o termination of the applicable Sprint agreements. REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY Federal Regulation Federal Communications Commission Regulation. The FCC regulates the licensing, construction, operation, acquisition and interconnection arrangements of wireless telecommunications systems in the United States. Specifically, we are subject to radio license regulation under Title III of the Communications Act, as amended, as well as common carrier regulation under Title II of the Communications Act, as amended. In addition, our operations are subject to regulation as commercial mobile radio services, commonly referred to as CMRS, and to service-specific personal communications service regulations. The FCC has promulgated, and is in the process of promulgating and revising, a series of rules, regulations and policies that affect our operations. Penalties for violating the FCC's rules and policies can range from monetary forfeitures to license revocation or non-renewal of licenses. The FCC Title II regulations applicable to our wireless operations include, among other things: o requirements and standards, discussed further below, for the interconnection of PCS networks with other wireless and wireline carriers; o requirements to provide service upon reasonable request and prohibitions on unjust or unreasonable discrimination by carriers between similarly situated subscribers and the charging of unreasonable or unjust rates; and o requirements to pay access charges, universal service funding (as discussed below), and other regulatory and non-regulatory fees and charges. 22 We do not hold any radio licenses, but rather operate using spectrum licensed to Sprint under the Sprint management agreements. Nonetheless, we are subject to, or impacted by, a number of additional regulations and requirements under Title III of the Communications Act, as amended. These requirements include, among other things: o requirements in most cases to obtain prior consent before the assignment and/or transfer of control of a PCS license, as discussed below; o limitations on the extent of non-U.S. ownership of radio licenses and the qualifications of holders of radio licenses; and o requirements for compliance of antenna sites with the National Environmental Policy Act of 1969, including restrictions on emissions of radio frequency radiation, as well as requirements on the marking and lighting of antenna structures, and related notifications to the Federal Aviation Administration, for certain antenna sites. Furthermore, our operations are also subject to CMRS and service specific regulation by the FCC. CMRS regulations include, among other things: o limitations on having attributable interests (usually 20% or greater) in broadband PCS, cellular and specialized mobile radio service, or SMR, spectrum totaling more than 55 MHz in a given market (while these limitations will expire on January 1, 2003, the FCC will consider competitive factors when licensees seek to aggregate large amounts of spectrum in an area); o requirements for carriers to provide access to 9-1-1 services from mobile handsets, including handsets of users who are not subscribers of such carrier, and for the network to provide enhanced location and other mobile identification information to public safety answering points, as discussed below; o requirements to comply with the Communications Assistance to Law Enforcement Act, commonly known as CALEA, including the dedication of capacity and provision of access points for law enforcement agencies to facilitate wiretaps and intercepts with valid authority; and o rules requiring implementation by November 24, 2003 of local number portability, including the ability to deliver calls from the company's networks to ported numbers anywhere in the country, and to contribute to the Local Number Portability Fund. The FCC has divided the 120 MHz of spectrum allocated to broadband PCS into six frequency blocks, A through F. Through Sprint, we operate under blocks B, D and E. PCS specific regulations that affect our operations include, among other things: o presumptions regarding the grant or denial of PCS license renewals, as discussed below; o rules governing the height, power and physical emissions characteristics of PCS transmitters; o rules, discussed further below, requiring service providers to meet specific coverage benchmarks by the end of the fifth year from being licensed and, in some cases, by the end of the license term; o rules to allow broadband PCS licensees to partition their market areas and/or to disaggregate their assigned spectrum and to transfer partial market areas or spectrum assignments to eligible third parties; and o rules requiring PCS providers to relocate, or otherwise compensate, incumbent microwave users (or share in the relocation costs, if the microwave user has already relocated) in the band if the deployment of PCS would interfere with the microwave user's system. Interconnection The FCC has the authority to order interconnection between CMRS providers (which includes us) and any other common carrier. The FCC has ordered local exchange carriers to provide reciprocal compensation to CMRS providers for the termination of traffic. Under these new rules, we benefit from interconnection agreements negotiated by Sprint for AirGate's network with BellSouth and Verizon and for iPCS' network with Qwest, SBC and Ameritech, and for both networks with several smaller independent local exchange carriers. Interconnection agreements are negotiated on a statewide basis. If an agreement cannot be reached, parties to interconnection negotiations can submit outstanding disputes to state authorities for arbitration. Negotiated interconnection agreements are subject to state approval. Universal Service Requirements The FCC and the states are required to establish a universal service program to ensure that affordable, quality telecommunications services are available to all residents of the United States of America. Sprint PCS is required to contribute to the federal universal service program as well as existing state programs. The FCC has determined that the contribution to the federal universal service program is a variable percentage of interstate end-user telecommunications revenues and was approximately 6.8% for the first quarter of 2002, rising to approximately 7.3% for the second through fourth quarters of 2002. Although many states are likely to 23 adopt a similar assessment methodology for intrastate revenues, the states are free to calculate telecommunications service provider contributions in any manner they choose as long as the process is not inconsistent with the FCC's rules. At the present time it is not possible to predict the extent of our total federal and state universal service assessments or our ability to recover costs associated with the universal service fund. Transfers, Assignments and Control of PCS Licenses The FCC must give prior approval to the assignment of, or transfers involving, substantial changes in ownership or control of a PCS license. Non-controlling interests in an entity that holds a PCS license or operates PCS networks generally may be bought or sold without prior FCC approval. In addition, the FCC requires only post-consummation notification of certain pro forma assignments or transfers of control. An integral element of these rules is that the FCC also requires licensees to maintain a certain degree of control over their licenses. The Sprint PCS agreements reflect an alliance that the parties believe meets the FCC requirements for licensee control of licensed spectrum. If the FCC were to determine that the Sprint PCS agreements need to be modified to increase the level of licensee control, we have agreed with Sprint PCS under the terms of our Sprint PCS agreements to use our best efforts to modify the agreements as necessary to cause the agreements to comply with applicable law and to preserve to the extent possible the economic arrangements set forth in the agreements. If the agreements cannot be modified, the agreements may be terminated pursuant to their terms. In addition to revoking the licenses, the FCC could also impose monetary penalties on us. Enhanced 911 In June 1996, the FCC adopted rules requiring broadband PCS and other CMRS providers to implement Phase I enhanced emergency 911 calling capabilities by October 1, 2001 to requesting public safety answering points. In addition, the FCC has required implementation of Phase II enhanced 911 capabilities by October 1, 2002, including the ability to provide automatic location identification (or ALI) of subscribers by latitude and longitude with a specified accuracy. Sprint PCS has obtained waivers of the relevant ALI enhanced 911 requirements based on a modified deployment plan, which includes a number of interim benchmarks and other conditions, and would provide for completing Phase II enhanced 911 deployment by 2005. Communications Assistance for Law Enforcement Act CALEA was enacted in 1994 to preserve electronic surveillance capabilities by law enforcement officials in the face of rapidly changing telecommunications technology. CALEA requires telecommunications carriers, including us, to modify their equipment, facilities, and services to allow for authorized electronic surveillance based on either industry or FCC standards. Following adoption of interim standards and a lengthy rulemaking proceeding, including an appeal and remand proceeding, as of June 30, 2002, all carriers were required to be in compliance with the CALEA requirements. The Company is currently in compliance with the CALEA requirements. PCS License Renewal PCS licensees can renew their licenses for additional 10 year terms. PCS renewal applications are not subject to auctions. However, under the FCC's rules, third parties may oppose renewal applications and/or file competing applications. If one or more competing applications are filed, a renewal application will be subject to a comparative renewal hearing. The FCC's rules afford PCS renewal applicants involved in comparative renewal hearings with a "renewal expectancy." The renewal expectancy is the most important comparative factor in a comparative renewal hearing and is applicable if the PCS renewal applicant has: o provided "substantial service" during its license term; and o substantially complied with all applicable laws and FCC rules and policies. The FCC's rules define "substantial service" in this context as service that is sound, favorable and substantially above the level of mediocre service that might minimally warrant renewal. Build-Out Conditions of PCS Licenses All PCS licenses are granted for 10-year terms conditioned upon timely compliance with the FCC's build-out requirements. Pursuant to the FCC's build-out requirements, all 30 MHz broadband PCS licensees must construct facilities that offer coverage to one-third of the population within 5 years and to two-thirds of the population within 10 years, and all 10 MHz broadband PCS licensees must construct facilities that offer coverage to at least one-quarter of the population within 5 years or make a showing of "substantial service" within that 5 year period. Rule violations could result in license cancellation or revocation. 24 Other Federal Regulations Wireless systems, which we use in the provision of services, must comply with certain FCC and FAA regulations regarding the siting, marking, lighting and construction of transmitter towers and antennas. The FCC also requires that aggregate radio wave emissions from every site location meet certain standards. Although we believe that our existing network meets these standards, a site audit may reveal the need to reduce or modify emissions at one or more sites. This would increase our costs and could have a material adverse affect on our operations. In addition, these regulations will also affect site selection for new network build-outs and may increase the costs of improving our network. The increased costs and delays from these regulations may have a material adverse affect on our operations. In addition, the FCC's decision to license a proposed tower may be subject to environmental review pursuant to the National Environmental Policy Act of 1969, or NEPA, which requires federal agencies to evaluate the environmental impacts of their decisions under certain circumstances. FCC regulations implementing NEPA place responsibility on each applicant to investigate any potential environmental effects, including health effects relating to radio frequency emissions, of a proposed operation and to disclose any significant effects on the environment to the agency prior to commencing construction. In the event that the FCC determines that a proposed tower would have a significant environmental impact, the FCC would require preparation of an environmental impact statement. This process could significantly delay or prevent the registration or construction of a particular tower or make tower construction more costly. In certain jurisdictions, local laws or regulations may impose similar requirements. Wireless Facilities Siting States and localities are not permitted to regulate the placement of wireless facilities so as to prohibit the provision of wireless services or to discriminate among providers of such services. In addition, as long as a wireless system complies with the FCC's rules, states and localities are prohibited from using radio frequency health effects as a basis to regulate the placement, construction or operation of wireless facilities. State and localities are, however, permitted to engage in other forms of regulation, including zoning regulation, that impacts the Company's ability to select and modify sites. The FCC is considering numerous requests for preemption of local actions affecting wireless facilities siting. State Regulation of Wireless Service Section 332 of the Communications Act preempts states from regulating the rates and entry of CMRS providers. However, states may petition the FCC to regulate such providers and the FCC may grant such petition if the state demonstrates that: o market conditions fail to protect subscribers from unjust and unreasonable rates or rates that are unjustly or unreasonably discriminatory; or o when CMRS is a replacement for landline telephone service within the state. To date, the FCC has granted no such petition. To the extent we provide fixed wireless service in the future, we may be subject to additional state regulation. RISK FACTORS OUR BUSINESS AND OUR PROSPECTS ARE SUBJECT TO MANY RISKS. THE FOLLOWING ITEMS ARE REPRESENTATIVE OF THE RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT COULD AFFECT OUR BUSINESS, OUR FUTURE PERFORMANCE, OUR LIQUIDITY AND THE OUTCOME OF THE FORWARD-LOOKING STATEMENTS WE MAKE. IN ADDITION, OUR BUSINESS, OUR FUTURE PERFORMANCE, OUR LIQUIDITY AND FORWARD-LOOKING STATEMENTS COULD BE AFFECTED BY GENERAL INDUSTRY AND MARKET CONDITIONS AND GROWTH RATES, GENERAL ECONOMIC AND POLITICAL CONDITIONS, INCLUDING THE GLOBAL ECONOMY AND OTHER FUTURE EVENTS, INCLUDING THOSE DESCRIBED BELOW AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. Risks Related to Our Business, Strategy and Operations - ------------------------------------------------------ Our revenues may be less than we anticipate which could materially adversely affect our liquidity, financial condition and results of operations Revenue growth is primarily dependent on the size of our subscriber base, average monthly revenues per user and roaming revenue. During the year ended September 30, 2002, we experienced slower net subscriber growth rates than planned, which we believe is due in large part to increased churn, declining rates of wireless subscriber growth in general, the re-imposition of deposits for most sub-prime credit subscribers during the last half of the year, the current economic slowdown and increased competition. Other carriers also have reported slower subscriber growth rates compared to prior periods. We have seen a 25 continuation of competitive pressures in the wireless telecommunications market causing some major carriers to offer plans with increasingly large bundles of minutes of use at lower prices which may compete with the calling plans we offer, including the Sprint calling plans we support. While our business plan anticipates lower subscriber growth, it assumes average monthly revenues per user will remain relatively stable. Increased price competition may lead to lower average monthly revenues per user than we anticipate. In addition, the lower reciprocal roaming rate that Sprint intends to institute in 2003 will reduce our roaming revenue, which may not be offset by the reduction in our roaming expense. If our revenues are less than we anticipate, it could materially adversely affect our liquidity, financial condition and results of operation. Our costs may be higher than we anticipate which could materially adversely affect our liquidity, financial condition and results of operations Our business plan anticipates that we will be able to lower our operating and capital costs, including costs per gross addition and cash cost per user. Increased competition may lead to higher promotional costs, losses on sales of handset and other costs to acquire subscribers. Further, as described below under "Risks Related to Our Relationship With Sprint," a substantial portion of costs of service and roaming are attributable to fees and charges we pay Sprint for billing and collections, customer care and other back-office support. Our ability to manage costs charged by Sprint is limited. If our costs are more than we anticipate, the actual amount of funds to implement our strategy and business plan may exceed our estimates, which could have a material adverse affect on our liquidity, financial condition and results of operations. The unsettled nature of the wireless market may limit the visibility of key operating metrics Our business plan and estimated future operating results are based on estimates of key operating metrics, including subscriber growth, subscriber churn, average monthly revenue per subscriber, losses on sales of handsets and other subscriber acquisitions costs and other operating costs. The unsettled nature of the wireless market, the current economic slowdown, increased competition in the wireless telecommunications industry, new service offerings of increasingly large bundles of minutes of use at lower prices by some major carriers, and other issues facing the wireless telecommunications industry in general have created a level of uncertainty that may adversely affect our ability to predict these key operating metrics. We may continue to experience a high rate of subscriber turnover, which would adversely affect our financial performance The wireless personal communications services industry in general, and Sprint and its network partners in particular, have experienced a higher rate of subscriber turnover, commonly known as churn, as compared to cellular industry averages. This churn rate has been driven higher over the past year due to the NDASL and Clear Pay programs and the removal of deposit requirements as described elsewhere in this report. Our business plan assumes that churn will decline significantly over the course of fiscal 2003. Due to significant competition in our industry and general economic conditions, among other things, this decline may not occur and our future rate of subscriber turnover may be higher than our historical rate. Factors may contribute to higher churn include: o inability or unwillingness of subscribers to pay which results in involuntary deactivations, which accounted for 67% of our deactivations in the year ended September 30, 2002; o subscriber mix and credit class, particularly sub-prime credit subscribers which have accounted for approximately 55% of our gross subscriber additions since May 2001 and account for approximately 35% of our subscriber base as of September 30, 2002; o the attractiveness of our competitors' products, services and pricing; o network performance and coverage relative to our competitors; o customer service; o increased prices; and o any future changes by us in the products and services we offer, especially to the Clear Pay Program. A high rate of subscriber turnover could adversely affect our competitive position, liquidity, financial position, results of operations and our costs of, or losses incurred in, obtaining new subscribers, especially because we subsidize some of the costs of initial purchases of handsets by subscribers. Our allowance for doubtful accounts may not be sufficient to cover uncollectible accounts On an ongoing basis, we estimate the amount of subscriber receivables that we will not collect to reflect the expected loss on such accounts in the current period. Our business plan assumes that bad debt as a percentage of service revenues will decline significantly during fiscal 2003. Our allowance for doubtful accounts may underestimate actual unpaid receivables for various reasons, including: o our churn rate may exceed our estimates; 26 o bad debt as a percentage of service revenues may not decline as we assume in our business plan; o adverse changes in the economy; or o unanticipated changes in Sprint's PCS products and services. If our allowance for doubtful accounts is insufficient to cover losses on our receivables, it could materially adversely affect our liquidity, financial condition and results of operations. Roaming revenue could be less than anticipated, which could adversely affect our liquidity, financial condition and results of operations The Company has been notified by Sprint that it intends to reduce the reciprocal rate from $0.10 per minute to $0.058 per minute in 2003. While the Company believes this reduction is not in accordance with its agreements with Sprint, it is reviewing its options, and its recourse against Sprint for this reduction may be limited. Based upon 2002 historical roaming data, a reduction in the roaming rate to $0.058 per minute would have reduced roaming revenue by approximately $36 million ($23 million for AirGate and $13 million for iPCS) and would have reduced roaming expense by approximately $26 million ($16 million for AirGate and $10 million for iPCS). The ratio of roaming revenue to expense for the year ended September 30, 2002 was 1.3 to one. The amount of roaming revenue we receive also depends on the minutes of use of our network by PCS subscribers of Sprint and Sprint PCS network partners. If actual usage is less than we anticipate, our roaming revenue would be less and our liquidity, financial condition and results of operations could be materially adversely affected. Our efforts to reduce costs may have adverse affects on our business As a result of the current business environment, AirGate has revised its business plan and is seeking to manage expenses to improve its liquidity position. AirGate has significantly reduced projected capital expenditures, advertising and promotion costs and other operating costs. Reduced capital expenditures could, among other things, force us to delay improvements to our networks, which could adversely affect the quality of service to our subscribers. These actions could reduce our subscriber growth and increase churn, which could materially adversely affect our financial condition and results of operation. The Company may incur significantly higher wireless handset subsidy costs than we anticipate for existing subscribers who upgrade to a new handset As the Company's subscriber base matures, and technological innovations occur, more existing subscribers will begin to upgrade to new wireless handsets. The Company subsidizes a portion of the price of wireless handsets and incurs sales commissions, even for handset upgrades. Excluding sales commissions, the Company has experienced approximately $4.8 million associated with wireless handset upgrade costs for the year ended September 30, 2002. The Company does not have any historical experience regarding the adoption rate for wireless handset upgrades. If more subscribers upgrade to new wireless handsets than the Company projects, its results of operations would be adversely affected. The loss of the officers and skilled employees who we depend upon to operate our business could materially 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. Our ability to attract and retain such persons may be negatively impacted if our liquidity position does not improve. In addition, we grant stock options as a method of attracting and retaining employees, to motivate performance and to align the interests of management with those of our stockholders. Due to the decline in the trading price of our common stock, a substantial portion of the stock options held by employees have an exercise price that is higher than the current trading price of our common stock, and therefore these stock options may not be effective in helping us to retain valuable employees. We currently have "key man" life insurance for our Chief Executive Officer. The loss of our officers and skilled employees could materially adversely affect our results of operation. 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 AirGate's territory. While Sprint has licenses covering 30 MHz of spectrum throughout most of iPCS' territory, it has licenses covering only 10 MHz or 20 MHz in parts of Illinois. As the number of subscribers 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 and blocked calls and may limit our ability to offer enhanced services, all of which could result in increased subscriber turnover and adversely affect our financial condition and results of operations. 27 There is a high concentration of ownership of the wireless towers we lease and if we lose the right to install our equipment on certain wireless towers or are unable to renew expiring leases, our financial condition 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. A large portion of these leased tower sites are owned by a few tower companies. Approximately 75% of the towers leased by AirGate are owned by four tower companies (and their affiliates). Approximately 60% of the towers leased by iPCS are owned by four tower companies (and their affiliates), with one company owning approximately 29% of the combined Company's leased towers. 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, because of this concentration of ownership of our cell sites, our financial condition and results of operations could be materially and adversely affected if we are unable to renew expiring leases with such tower companies on favorable terms, or in the event of a disruption in any of their business operations. Risks Particular to AirGate's Indebtedness - ------------------------------------------ AirGate has substantial debt that it may not be able to service; a failure to service such debt may result in the lenders under such debt controlling AirGate's assets The substantial debt of AirGate has a number of important consequences for our operations and our investors, including the following: o AirGate 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 AirGate may not be able to obtain additional financing if the assumptions underlying the business plan are not correct and existing sources of funds, together with cash flow, are insufficient for capital requirements, working capital requirements and other corporate purposes; o some of AirGate's debt, including financing under AirGate's credit facility, is 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 AirGate's assets and the pledges of stock of AirGate's existing and future restricted subsidiaries that secure AirGate's credit facility and notes, lenders or holders of such notes may exercise remedies giving them the right to control AirGate's assets or the assets of the subsidiaries of AirGate, other than iPCS, in the event of a default. The ability of AirGate to make payments on its debt will depend upon its future operating performance which is subject to general economic and competitive conditions and to financial, business and other factors, many of which AirGate cannot control. If the cash flow from AirGate's operating activities is insufficient, it may take actions, such as further delaying or reducing capital expenditures, attempting to restructure or refinance its debt, selling assets or operations or seeking additional equity capital. Any or all of these actions may not be sufficient to allow AirGate to service its debt obligations. Further, AirGate may be unable to take any of these actions on satisfactory terms, in a timely manner or at all. The AirGate credit facility and indenture governing AirGate's debt limit our ability to take several of these actions. If AirGate does not meet all of the conditions required under its senior secured credit facility, it may not be able to draw down all of the funds it anticipates receiving from its senior lenders and AirGate may not be able to fund operating losses and working capital needs As of December 31, 2002, AirGate had borrowed $141.5 million under its credit facility. The remaining $12 million available under AirGate's credit facility is subject to AirGate meeting all of the conditions specified in its financing documents. Additional borrowings are subject to specific conditions on each funding date, including the following: o that the representations and warranties in the loan documents are true and correct; o that certain financial covenant tests are satisfied, including leverage, debt coverage and operating performance covenants, minimum subscriber revenues, maximum capital expenditures, and covenants relating to earnings before interest, taxes, depreciation and amortization; and o the absence of a default under the loan documents and agreements with Sprint. If AirGate does not meet these conditions at each funding date, its senior lenders may not lend some or all of the remaining amounts under its credit facility. If other sources of funds are not available, AirGate may not be in a position to meet its operating and other cash needs. 28 The AirGate indenture and credit facility contain provisions and requirements that could limit AirGate's ability to pursue borrowing opportunities The restrictions contained in the indenture governing the AirGate notes, and the restrictions contained in AirGate's credit facility, may limit AirGate's ability to implement its business plans, finance future operations, respond to changing business and economic conditions, secure additional financing, if needed, and engage in opportunistic transactions. The AirGate credit facility and notes also restricts the ability of AirGate and the ability of AirGate's subsidiaries, other than iPCS, and its future subsidiaries to do the following: o create liens; o make certain payments, including payments of dividends and distributions in respect of capital stock; o consolidate, merge and sell assets; o engage in certain transactions with affiliates; and o fundamentally change its business. If AirGate fails to pay the debt under its credit facility, Sprint has the option of purchasing AirGate's loans, giving Sprint certain rights of a creditor to foreclose on AirGate's assets Sprint has contractual rights, triggered by an acceleration of the maturity of the debt under AirGate's credit facility, pursuant to which Sprint may purchase AirGate's obligations to its 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 AirGate's interests. Sprint's rights as a senior lender would enable it to exercise rights with respect to AirGate's assets and continuing relationship with Sprint in a manner not otherwise permitted under its Sprint agreements. Risks Related to iPCS - --------------------- iPCS is in default on its senior credit facility and notes It is an event of default under iPCS' credit facility and the indenture governing its notes if, among other things, iPCS fails to file its periodic reports with the Securities and Exchange Commission, deliver its financial statements or provide the required opinion of its independent auditors on its financial statements. At December 30, 2002, iPCS failed to meet these requirements. Upon giving the appropriate notice and passage of cure periods, the lenders will have the ability to accelerate iPCS' payment obligations under the iPCS credit facility and the trustee for or the holders of its notes will have the ability to accelerate iPCS' payment obligations to them under the indenture governing such notes. iPCS does not anticipate being able to remedy these defaults within the cure periods. iPCS would not have sufficient resources to meet its payment obligations in the event of any such acceleration. In addition, the senior lenders and noteholders could foreclose on the collateral pledged to secure outstanding loans or institute an involuntary bankruptcy proceeding against iPCS. While iPCS is negotiating forbearance agreements with the lenders and certain noteholders, there can be no assurance that such negotiations will be successful. Even if those negotiations are successful, we do not expect that iPCS will be able to satisfy the financial covenants contained in its credit facility at March 31, 2003 and it is probable that iPCS will file for bankruptcy in the near term, and these events are also events of default under the iPCS credit facility. The restructuring of iPCS may cause the value of AirGate's ownership interest in iPCS to be worthless There is a substantial risk that AirGate will lose all of the value of its investment in iPCS in connection with any restructuring of iPCS. Because the amount of iPCS' obligations under its credit facility and its notes would be greater than its existing cash and other assets if its payment obligations are accelerated, there would likely be no assets available for distribution to AirGate as iPCS' sole stockholder. While AirGate may request an equity participation in a restructuring of iPCS, it is likely that AirGate will lose all of the value of its investment in iPCS in connection with any restructuring. AirGate cannot provide funding to iPCS In order to assure continued compliance with the indenture governing AirGate's notes, AirGate has designated iPCS as an "unrestricted subsidiary." As a result, for purposes of their respective public debt indentures, AirGate and iPCS operate as separate business entities. Due to restrictions in AirGate's indenture, AirGate is generally unable to provide funding, or direct or indirect credit or financial support to iPCS and may not maintain or preserve iPCS' financial condition or cause iPCS to achieve a specified level of operating results. 29 If iPCS fails to pay the debt under its senior secured credit facility, Sprint has the option of purchasing iPCS' loans, giving Sprint certain rights of a creditor to foreclose on iPCS' assets Sprint has contractual rights, triggered by an acceleration of the maturity of the debt under iPCS' senior secured credit facility, pursuant to which Sprint may purchase iPCS' obligations to its 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 the interests of iPCS. Sprint's rights as a senior lender would enable it to exercise rights with respect to iPCS' assets and its continuing relationship with iPCS in a manner not otherwise permitted under its Sprint agreements. The restructuring of iPCS may have adverse affects on AirGate AirGate has agreements and relationships with third parties, including suppliers, subscribers and vendors, that are integral to conducting its day-to-day operations. A restructuring of iPCS in or out of a bankruptcy proceeding could have a material adverse affect on the perception of AirGate and the AirGate business and its prospects in the eyes of subscribers, employees, suppliers, creditors and vendors. These persons may perceive that there is increased risk in doing business with AirGate as a result of iPCS' restructuring. Some of these persons may terminate their relationships with AirGate which would make it more difficult for AirGate to conduct its business. In the event of iPCS' bankruptcy or insolvency, AirGate may not be able to reduce its general and administrative costs in an amount sufficient to subsidize the portion of the combined Company's costs currently borne by iPCS On a net basis, we estimate that iPCS will pay approximately $4.6 million of the combined Company's general and administrative costs in fiscal 2003. If AirGate no longer owns iPCS and the management services agreement is terminated, AirGate will be required to lower its costs and expenses to meet its business plan. AirGate may have little notice of any such termination. A failure to reduce these expenses in a timely manner could adversely affect AirGate's liquidity, financial condition and results of operations. iPCS' net operating loss and credit carryforwards may be significantly reduced in the event of a restructuring If a restructuring of iPCS is implemented and there is a significant elimination or reduction of iPCS' outstanding indebtedness, iPCS' net operating loss and credit carryforwards and the tax bases of its assets may be significantly reduced. Risks Related to Our Relationship with Sprint - --------------------------------------------- The termination of AirGate's or iPCS' affiliation with Sprint would severely restrict our ability to conduct our business Neither AirGate nor iPCS own the licenses to operate their wireless network. The ability of AirGate and iPCS to offer Sprint PCS products and services and operate a PCS network is dependent on their Sprint agreements remaining in effect and not being terminated. All of our subscribers have purchased Sprint PCS products and services to date, and we do not anticipate any change in the future. 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 an additional 10-year period unless AirGate is in material 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, marketing, build-out and network operational requirements. Many of these requirements are extremely technical and detailed in nature. In addition, many of these requirements can be changed by Sprint with little notice. As a result, we may not always be in compliance with all requirements of the Sprint agreements. For example, Sprint conducts periodic audits of compliance with various aspects of its program guidelines and identifies issues it believes needs to be addressed. There may be substantial costs associated with remedying any non-compliance, and such costs may adversely affect our liquidity, financial condition and results of operations. 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 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 subscribers 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: 30 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, such as a one-rate plan where subscribers are not required to pay roaming charges, or establish credit policies, such as an NDASL program, which could adversely affect our results of operations; o Sprint could raise the costs to perform back office services or maintain the costs above those expected, reduce levels of services or expenses or otherwise seek to increase expenses and other amounts charged; o Sprint can seek to further reduce the reciprocal roaming rate charged when Sprint's or other Sprint network partners' PCS subscribers use our network; o Sprint could limit our ability to develop local and other promotional plans to enable us to attract sufficient subscribers; 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 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 subscribers in our territories, increase our expenses and/or decrease our revenues and have a material adverse affect on our liquidity, financial condition and results of operation. Our dependence on Sprint for services may limit our ability to reduce costs, which could materially adversely affect our financial condition and results of operation Approximately 60% of cost of service and roaming in our financial statements relate to charges from Sprint. As a result, a substantial portion of our cost of service and roaming is outside our control. There can be no assurance that Sprint will lower its operating costs, or, if these costs are lowered, that Sprint will pass along savings to its PCS network partners. If these costs are more than we anticipate in our business plan, it could materially adversely affect our liquidity, financial condition and results of operations and as noted below, our ability to replace Sprint with lower cost providers may be limited. Our dependence on Sprint may adversely affect our ability to predict our results of operations As described herein under "Sprint Relationship and Agreements - Dependence on Sprint," over the past year our dependence on Sprint has interjected a greater degree of uncertainty to our business and financial planning. Unanticipated expenses and reductions in revenue have had and, if they occur in the future, will have a negative impact on our liquidity and make it more difficult to predict with reliability our future performance. Inaccuracies in data provided by Sprint could understate our expenses or overstate our revenues and result in out-of-period adjustments that may materially adversely affect our financial results Approximately 60% of cost of service and roaming in our financial statements relate to charges from Sprint. In addition, because Sprint provides billing and collection services for the Company, Sprint remits approximately 96% of our revenues to us. As a result, we rely on Sprint to provide accurate, timely and sufficient data and information to properly record our revenues, expenses and accounts receivables which underlie a substantial portion of our periodic financial statements and other financial disclosures. The Company and Sprint have discovered billing and other errors or inaccuracies, which, while not material to Sprint, could be material to the Company. If the Company is required in the future to make additional adjustments or charges as a result of errors or inaccuracies in data provided to us by Sprint, such adjustments or charges may have a material adverse affect on our financial results in the period that the adjustments or charges are made and our ability to satisfy covenants contained in AirGate's credit facility. The inability of Sprint to provide high quality back office services, or our inability to use Sprints back office services and third-party vendors' back office systems, could lead to subscriber dissatisfaction, increased churn or otherwise increase our costs We rely on Sprint's internal support systems, including subscriber care, billing and back office support. Our operations could be disrupted if Sprint is unable to provide 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, together with cost pressures, is expected to continue to pose a significant challenge to its internal support systems. Additionally, Sprint has made reductions in its customer service support structure and may continue to do so in the future, which may have an adverse 31 effect on our churn rate. Further, 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. We depend on Sprint's willingness to continue to offer these services and to provide these services effectively and at competitive costs. These costs were approximately $40.4 million for AirGate and $19.7 million for iPCS for the year ended September 30, 2002. 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 provide high quality back office services, or our inability to use Sprint back office services and third-party vendors' back office systems, could lead to subscriber dissatisfaction, increase churn or otherwise increase our costs. Further, our ability to replace Sprint in providing back office services may be limited. While the services agreements allow the Company to use third-party vendors to provide certain of these services instead of Sprint, the high startup costs and necessary cooperation associated with interfacing with Sprint's system may significantly limit our ability to use back office services provided by anyone other than Sprint. This could limit our ability to lower our operating costs. Changes in Sprint PCS products and services may reduce subscriber additions, increase subscriber turnover and decrease subscriber credit quality The competitiveness of Sprint PCS products and services is a key factor in our ability to attract and retain subscribers, and we believe was a factor in the slowing subscriber growth in the last two quarters of fiscal 2002. Certain Sprint pricing plans, promotions and programs may result in higher levels of subscriber turnover and reduce the credit quality of our subscriber base. For example, as described herein under "Marketing Strategy--Pricing", we believe that the NDASL and Clear Pay Program resulted in increased churn and an increase in sub-prime credit subscribers. Sprint's roaming arrangements may not be competitive with other wireless service providers, which may restrict our ability to attract and retain subscribers and create other risks for us We rely on Sprint's roaming arrangements with other wireless service providers for coverage in some areas where Sprint service is not yet available. The risks related to these arrangements include: o the quality of the service provided by another provider during a roaming call may not approximate the quality of the service provided by the Sprint PCS network; o the price of a roaming call off our network may not be competitive with prices of other wireless companies for roaming calls; o subscribers must end a call in progress and initiate a new call when leaving the Sprint PCS network and entering another wireless network; o Sprint customers may not be able to use Sprint's advanced features, such as voicemail notification, while roaming; and o Sprint or the carriers providing the service may not be able to provide us with accurate billing information on a timely basis. If Sprint customers are not able to roam instantaneously or efficiently onto other wireless networks, we may lose current Sprint subscribers and our Sprint PCS services will be less attractive to new subscribers. 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 decide 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. 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, and we have agreed to purchase all of our 3G capable handsets from Sprint or a Sprint authorized distributor through the earlier of December 31, 2004 or the date on which the cumulative 3G handset fees received by Sprint from all Sprint network partners equal $25,000,000. Sprint orders handsets from various manufacturers. We could have difficulty obtaining specific types of handsets in a timely manner if: 32 o Sprint does not adequately project the need for handsets for itself, its 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 Sprint gives preference to other distribution channels; 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 subscriber service and/or result in a decrease in our subscribers, which could adversely affect our results of operations. If Sprint does not complete the construction of its nationwide PCS network, we may not be able to attract and retain subscribers 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 network partners. Sprint's PCS network may not provide nationwide coverage to the same extent as its competitors, which could adversely affect our ability to attract and retain subscribers. If other Sprint network partners have financial difficulties, the Sprint PCS network could be disrupted Sprint's national network is a combination of networks. The large metropolitan areas are owned and operated by Sprint, and the areas in between them are owned and operated by Sprint network partners, all of which are independent companies like we are. We believe that most, if not all, of these companies have incurred substantial debt to pay the large cost of building out their networks. If other network partners experience financial difficulties, Sprint's PCS network could be disrupted. If Sprint's agreements with those network partners are like ours, Sprint would have the right to step in and operate the network in the affected territory. In such event, there can be no assurance that Sprint could transition in a timely and seamless manner. Non-renewal or revocation by the Federal Communications Commission of Sprint's PCS licenses would significantly harm our business PCS licenses are subject to renewal and revocation by the Federal Communications Commission referred to as the FCC. Sprint 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 Sprint's 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 Sprint's 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. Competition has caused, and we anticipate that competition will continue to cause, the market prices for two-way wireless products and services to decline in the future. Our ability to compete 33 will depend, in part, on our ability to anticipate and respond to various competitive factors affecting the telecommunications industry. (See "Item 1. Business - Competition" herein). Our dependence on Sprint to develop competitive products and services and the requirement that we obtain Sprint's consent to sell local pricing plans and non-Sprint approved equipment may limit our ability to keep pace with competitors on the introduction of new products, services and equipment. Many 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 many of our competitors. Market saturation could limit or decrease our rate of new subscriber additions Intense competition in the wireless communications industry could cause prices for wireless products and services to continue to decline. If prices drop, then our rate of net subscriber additions will take on greater significance in improving our financial condition and results of operations. However, as our and our competitor's penetration rates in our markets increase over time, our rate of adding net subscribers could decrease. If this decrease were to happen, it could materially adversely affect our liquidity, financial condition and results of operations. 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. We are a consumer business and a recession in the United States involving significantly lowered spending could negatively affect our results of operations Our subscriber base is primarily individual consumers and our accounts receivable represent unsecured credit. We believe the economic downturn has had an adverse affect on our operations. 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 further 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. 34 Regulation by government or potential litigation relating to the use of wireless phones while driving could adversely affect our results of operations Some studies have indicated that some aspects of using wireless phones while driving may impair drivers' attention in certain circumstances, making accidents more likely. These concerns could lead to 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. A number of U.S. states and local governments are considering or have recently enacted legislation that would restrict or prohibit the use of a wireless handset while driving a vehicle or, alternatively, require the use of a hands-free telephone. Legislation of this sort, if enacted, would require wireless service providers to provide hands-free enhanced services, such as voice activated dialing and hands-free speaker phones and headsets, so that they can keep generating revenue from their subscribers, who make many of their calls while on the road. If we are unable to provide hands-free services and products to our subscribers in a timely and adequate fashion, the volume of wireless phone usage would likely decrease, and our ability to generate revenues would suffer. Risks Related to Our Common Stock - --------------------------------- We may not achieve or sustain operating profitability or positive cash flows, which may adversely affect AirGate's 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 products and services, manage churn, sustain monthly average revenues per user, and reduce capital expenditures and operating expenses. We have experienced slowing net subscriber growth, increased churn and increased costs to acquire new subscribers and as a result, have had to revise our business plans. As discussed elsewhere in this report, we do not believe that iPCS' existing capital resources will be sufficient to maintain its current and planned operations. If AirGate does not achieve and maintain positive cash flows from operations when projected, AirGate's stock price may be materially adversely affected. In addition, in the event of a bankruptcy of iPCS, AirGate's investment in iPCS is likely to be worthless, and such bankruptcy may materially adversely affect AirGate's stock price. Our stock price has suffered significant declines, remains volatile and you may not be able to sell your shares at the price you paid for them The market price of AirGate common stock has been and may continue to 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 concerns about liquidity, particularly with respect to iPCS; 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 market perception about the prospects 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 the Company's relationship with Sprint; 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 actual or potential defaults by us under any of our agreements; o actual or potential defaults in bank covenants by Sprint or Sprint PCS network partners, which may result in a perception that AirGate is unable to comply with its bank covenants; o announcements by Sprint or our competitors of technological innovations, new products and services or changes to existing products and services; 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. 35 Our business and the value of your securities may be adversely affected if the Company fails to maintain its listing on Nasdaq Since its initial public offering in September 1999, the Company's common stock has been listed on the Nasdaq National Market. We received notice from the Nasdaq National Market indicating that as of October 28, 2002, the closing bid price of our common stock had fallen below $1.00 for 30 consecutive trading days and that we would have 90 calendar days, or until January 27, 2003, to regain compliance with a minimum bid price of $1.00 if the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days during this time. As of January 10, 2003, we had not yet regained compliance. Nasdaq further advised us that we may wish to consider transferring the listing for our common stock to the Nasdaq SmallCap Market where it would be afforded an extended grace period through April 28, 2003 to satisfy the minimum bid price requirement to maintain its listing on the Nasdaq SmallCap Market and may also be eligible for an additional 180 day grace period thereafter. If we were to transfer the listing for our common stock to the SmallCap Market, we would be eligible to transfer back to the Nasdaq National Market if, by October 27, 2003, the closing bid price was $1.00 per share for 30 consecutive trading days and the Company had maintained compliance with all other National Market listing requirements. We are evaluating our alternatives in case the bid price requirement is not met during the 90-day period. If our common stock loses its Nasdaq National Market status, shares of our common stock would likely trade in the over-the-counter market in the so-called "pink sheets" or the OTC Bulletin Board. Selling our common stock would be more difficult because smaller quantities of shares would likely be bought and sold and transactions could be delayed. In addition, security analysts' and news media coverage of us may be further reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of our common stock. Such delisting from the Nasdaq National Market or further declines in our stock price could also greatly impair our ability to raise additional necessary capital through equity or debt financing and may significant increase the dilution to stockholders caused by issuing equity in financing or other transactions. In addition, if our common stock is not listed on the Nasdaq National Market, we may become subject to Rule 15g-9 under the Securities and Exchange Act of 1934 which imposes additional sales practice requirements on broker-dealers that sell low-priced securities, referred to as "penny stocks," to persons other than established subscribers and institutional accredited investors. A penny stock is generally any equity security that has a market price or exercise price of less than $5.00 per share, subject to certain exceptions, including listing on the Nasdaq National Market or the Nasdaq SmallCap Market. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such securities and must have received the purchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer is also subject to additional sales practice requirements. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell our securities and may affect the ability of holders to sell these securities in the secondary market and the price at which such holders can sell any such securities. 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 acquisition of iPCS, the former iPCS security holders 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 connection with the acquisition represented approximately 47.5% of our common stock, assuming the exercise of all outstanding warrants and options. In connection with the merger, holders of substantially all of the outstanding shares of iPCS common and preferred stock entered into "lock-up" agreements with the Company. The lock-up agreements imposed 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. As of September 26, 2002, all of such shares were released from the lock-up. We entered into a registration rights agreement at the effective time of the merger with some of the former iPCS stockholders. Under the terms of the registration rights agreement, Blackstone Communications Partners I L.P. and certain of its affiliates ("Blackstone") has a demand registration right, which became exercisable after November 30, 2002. 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 we initiate, whether or not for sale for our own account. 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 its ability to raise capital through the sale of equity securities. We do not intend to pay dividends in the foreseeable future We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain any future earnings to fund our growth, debt service requirements and other corporate needs. Accordingly, you will not receive a return on your investment in our common stock through the payment of dividends in the foreseeable future and may not realize a return on 36 your investment even if you sell your shares. Any future payment of dividends to our stockholders will depend on decisions that will be made by our board of directors and will depend on then existing conditions, including our financial condition, contractual restrictions, capital requirements and business prospects. ITEM 2. Properties As of September 30, 2002, our properties were as follows: Corporate offices. Our principal executive offices consist of leased office space located in Atlanta, Georgia. AirGate also leases office space in Charleston, Columbia and Greenville, South Carolina and Asheville, North Carolina. iPCS leases office space in Geneseo, Illinois, Grand Rapids, Michigan, Davenport, Iowa and Springfield, Illinois. Sprint PCS stores. AirGate and iPCS leased space for 41 and 19 retail Sprint stores, respectively, in their territory. As of December 27, 2002, AirGate and iPCS leased space for 38 and 27 retail stores in their territory. Switching Centers. AirGate leases switching centers in Greenville, South Carolina and Columbia, South Carolina. iPCS leases switching centers in Grand Rapids, Michigan, Gridley, Illinois and Davenport, Iowa. Cell Sites. AirGate leases space on approximately 800 cell site towers and owns 2 towers. AirGate co-locates on approximately 99% of its cell sites. iPCS leases space on approximately 546 cell cite towers and owns 87 towers. iPCS co-locates on approximately 86% of its cell sites. We believe our facilities are in good operating condition and are currently suitable and adequate for our business operations. ITEM 3. Legal Proceedings On July 3, 2002 the Federal Communications Commission (the "FCC") issued an order in Sprint PCS v. AT&T for declaratory judgment holding that PCS wireless carriers could not unilaterally impose terminating long distance access charges pursuant to FCC rules. This FCC order did not preclude a finding of a contractual basis for these charges, nor did it rule whether or not Sprint PCS had such a contract with carriers such as AT&T. AirGate and iPCS have previously received $3.9 and $1.0 million, respectively, from Sprint PCS. This is comprised of $4.3 and $1.1 million, respectively, of terminating long distance access revenues, less $0.4 and $0.1 million, respectively, of associated affiliation fees from Sprint PCS, and Sprint PCS has asserted its right to recover these revenues net of the affiliation fees. As a result of this ruling, and our assessment of this contingency under SFAS No. 5, "Accounting for Contingencies", the Company recorded a charge to revenues during the quarter ended June 30, 2002 to fully reserve for these amounts. However, we will continue to assess the ability of Sprint, Sprint PCS or other carriers to recover these charges and the Company is continuing to review the availability of defenses it may have against Sprint PCS' claim to recover these revenues. In May, 2002, putative class action complaints were filed in the United States District Court for the Northern District of Georgia against AirGate PCS, Inc., Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit Suisse First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company, Thomas Wiesel Partners LLC and TD Securities. The complaints do not specify an amount or range of damages that the plaintiffs are seeking. The complaints seek class certification and allege that the prospectus used in connection with the secondary offering of Company stock by certain former iPCS shareholders on December 18, 2001 contained materially false and misleading statements and omitted material information necessary to make the statements in the prospectus not false and misleading. The alleged omissions included (i) failure to disclose that in order to complete an effective integration of iPCS, drastic changes would have to be made to the Company's distribution channels, (ii) failure to disclose that the sales force in the acquired iPCS markets would require extensive restructuring and (iii) failure to disclose that the "churn" or "turnover" rate for subscribers would increase as a result of an increase in the amount of sub-prime credit quality subscribers the Company added from its merger with iPCS. On July 15, 2002, certain plaintiffs and their counsel filed a motion seeking appointment as lead plaintiffs and lead counsel. On November 26, 2002, the Court entered an Order requiring the plaintiffs to provide additional information in connection with their Motion for Appointment as Lead Plaintiff and in December 2002, the plaintiffs submitted Declarations in Support of Motion for Appointment of Lead Plaintiff. The Company believes the plaintiffs' claims are without merit and intends to vigorously defend against these claims. However, no assurance can be given as to the outcome of the litigation. ITEM 4. Submission Of Matters To A Vote Of Security Holders None. 37 PART II ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters AirGate's common stock has been traded on the Nasdaq National Market under the symbol "PCSA" since September 28, 1999. The following table sets forth, for the periods indicated, the range of high and low sales prices for AirGate's common stock as reported on the Nasdaq National Market. Price Range of Common Stock ------------ High Low ---- --- Fiscal Year Ended September 30, 2002: Fourth Quarter .............................. $ 1.88 $ 0.39 Third Quarter ............................... $ 17.53 $ 0.92 Second Quarter .............................. $ 47.97 $ 8.52 First Quarter ............................... $ 60.44 $42.20 Fiscal Year Ended September 30, 2001: Fourth Quarter .............................. $ 60.05 $41.75 Third Quarter ............................... $ 53.50 $30.88 Second Quarter .............................. $ 49.88 $29.44 First Quarter ............................... $ 48.00 $21.69 On December 27, 2002, the last reported sales price of AirGate's common stock as reported on the Nasdaq National Market was $0.84 per share. On December 27, 2002, there were 205 holders of record of AirGate's common stock. AirGate has never declared or paid any cash dividends on its common stock or any other of its securities. AirGate does not expect to pay cash dividends on its capital stock in the foreseeable future. AirGate currently intends to retain its future earnings, if any, to fund the development and growth of its business. AirGate's future decisions concerning the payment of dividends on its common stock will depend upon its results of operations, financial condition and capital expenditure plans, as well as such other factors as the board of directors, in its sole discretion, may consider relevant. In addition, AirGate's existing indebtedness restricts, and AirGate anticipates its future indebtedness may restrict, AirGate's ability to pay dividends. Recent Sales of Unregistered Securities On July 11, 2000, Weiss, Peck & Greer Venture Partners Affiliated Funds exercised their warrants to acquire 214,413 shares of AirGate's common stock, at a price of $12.75 per share. The exercise was a cashless exercise, with 40,956 of the 214,413 shares being surrendered to AirGate as payment of the exercise price. The exemption claimed for this issuance is Section 4(2) of the Securities Act of 1933. On September 14, 2000, Lucent Technologies exercised its warrants to acquire 128,860 shares of AirGate's common stock at a price of $20.40 per share. The exercise was a cashless exercise, with 48,457 of the 128,860 shares being surrendered to AirGate as payment of the exercise price. The exemption claimed for this issuance is Section 4(2) of the Securities Act of 1933. 38 ITEM 6. Selected Financial Data The selected financial data presented below under the captions "Statement of Operations Data," "Other Data," and "Balance Sheet Data" for, and as of the end of, the years ended September 30, 2002, 2001, and 2000, the nine months ended September 30, 1999 and the year ended December 31, 1998 and are derived from the consolidated financial statements of AirGate PCS, Inc. and subsidiaries, which consolidated financial statements have been audited by KPMG LLP, independent certified auditors. The consolidated financial statements as of September 30, 2002 and 2001, and for each of the years in the three-year period ended September 30, 2002, and the report thereon are included herein.
For the Nine Months Ended For the Year For the Year Ended September Ended September 30, 30, December 31, ------------------------------------------- ------------ ------------ 2002(1) 2001 2000 1999 1998 ---- ---- ---- ---- ---- Statement of Operations Data: (In thousands except per share subscriber data) Revenues: Service revenue ......................... $ 327,365 $ 105,976 $ 9,746 $ -- $ -- Roaming revenue ......................... 111,162 55,329 12,338 -- -- Equipment revenue ....................... 18,030 10,782 2,981 -- -- ------------ ------------ ------------ ------------ ------------ Total revenues .................... 456,557 172,087 25,065 -- -- ------------ ------------ ------------ ------------ ------------ Operating expenses: Cost of services and roaming (exclusive of depreciation as shown separately below). (311,135) (116,732) (27,770) -- -- Cost of equipment ........................ (43,592) (20,218) (5,685) -- -- Selling and marketing .................... (116,521) (71,617) (28,357) -- -- General and administrative ............... (25,339) (15,742) (14,078) (5,294) (2,597) Non-cash stock compensation .............. (769) (1,665) (1,665) (325) -- Depreciation ............................. (70,197) (30,621) (12,034) (622) (1,204) Amortization of intangible assets ........ (39,332) (46) -- -- -- Loss on disposal of property and equipment (1,074) -- -- -- -- ------------ ------------ ------------ ------------ ------------ Operating expenses before impairments... (607,959) (256,641) (89,589) (6,241) (3,801) Impairment of goodwill (3) ............... (460,920) -- -- -- -- Impairment of property and equipment (3) . (44,450) -- -- -- -- Impairment of intangible assets (3) ...... (312,043) -- -- -- -- ------------ ------------ ------------ ------------ ------------ Total operating expenses ............... (1,425,372) (256,641) (89,589) (6,241) (3,801) ------------ ------------ ------------ ------------ ------------ Operating loss ........................... (968,815) (84,554) (64,524) (6,241) (3,801) Interest income .......................... 590 2,463 9,321 Interest expense ......................... (57,153) (28,899) (26,120) (9,358) (1,392) Income tax benefit ....................... 28,761 -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net loss ................................. $ (996,617) $ (110,990) $ (81,323) $ (15,599) $ (5,193) ============ ============ ============ ============ ============ Basic and diluted net loss per share of common stock ........................... $ (41.96) $ (8.48) $ (6.60) $ (4.57) $ (1.54) Basic and diluted weighted-average outstanding common shares .............. 23,751,507 13,089,285 12,329,149 3,414,276 3,382,518 Other Data: Number of subscribers at end of period ... 554,833 235,025 56,689 -- -- Statement of Cash Flow Data: Cash used in operating activities ........ $ (45,242) $ (40,850) $ (41,609) $ (2,473) $ (989) Cash used in investing activities ........ (78,716) (71,772) (152,397) (15,706) (2,432) Cash provided by (used in) financing activities ............................. 142,143 68,528 (6,510) 274,783 5,200
As of As of September 30, December 31, -------------------------------------------- ------------ 2002(1) 2001 2000 1999 1998 ---- ---- ---- ---- ---- Balance Sheet Data (at period end): (In Thousands) Cash and cash equivalents $ 32,475 $ 14,290 $ 58,384 $ 258,900 $ 2,296 Total current assets 129,773 56,446 74,315 261,247 2,774 Property and equipment, net 399,155 209,326 183,581 44,206 12,545 Total assets 574,294 281,010 268,948 317,320 15,450 Total current liabilities (2) 494,173 61,998 37,677 31,507 16,481 Long-term debt and capital lease obligations 354,828 266,326 180,727 165,667 7,700 Stockholders' equity (deficit) (292,947) (52,724) 49,873 127,846 (5,350)
(1) On November 30, 2001, AirGate acquired iPCS, Inc. (together with its subsidiaries "iPCS"). The accounts of iPCS are included as of September 30, 2002, and the results of operations subsequent to November 30, 2001. (2) As a result of an event of default, the iPCS credit facility and iPCS notes have been classified as a current liability. (3) As a result of fair value assessments performed by a nationally recognized valuation expert, the Company recorded total impairment charges of $817.4 million associated with the impairment of goodwill and tangible and intangible assets related to iPCS. 39 ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations This Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A") contains forward looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our liquidity, the wireless industry, our beliefs and management's assumptions. In addition, other written and oral statements that constitute forward looking statements may be made by us or on our behalf. Such forward looking statements include statements regarding expected financial results and other planned events, including but not limited to, anticipated liquidity, churn rates, ARPU, CPGA and CCPU (all as defined in the Key Operating Metrics), roaming rates, EBITDA (as defined in the Key Operating Metrics), and capital expenditures. Words such as "anticipate," "assume," "believe," "estimate," "expect," "intend," "plan," "seek", "project," "target," "goal," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual future events or results may differ materially from these statements. These risks and uncertainties include: o the impact of an iPCS insolvency; o the competitiveness and impact of Sprint's pricing plans and PCS products and services; o subscriber credit quality; o the ability of Sprint to provide back office billing, subscriber care and other services and the costs of such services; o inaccuracies in data provided by Sprint; o new charges and fees, or increased charges and fees, charged by Sprint; o rates of penetration in the wireless industry; o our significant level of indebtedness; o adequacy of bad debt and other allowances; o the potential to experience a continued high rate of subscriber turnover; o the potential need for additional sources of liquidity; o anticipated future losses; o subscriber purchasing patterns; o potential fluctuations in quarterly results; o an adequate supply of subscriber equipment; o risks related to future growth and expansion; and o the volatility of the market price of AirGate's common stock. These and other applicable risks and uncertainties are summarized under the captions "Future Trends That May Affect Operating Results, Liquidity and Capital Resources" included in this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included under "Item 1. Business" of this annual report on Form 10-K and elsewhere in this report. For a further list of and description of such risks and uncertainties, see the reports filed by us with the SEC. Except as required under federal securities law and the rules and regulations of the SEC, we do have any intention or obligation to update publicly any forward looking statements after distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. Overview On July 22, 1998, AirGate entered into management and related agreements with Sprint whereby it became the network partner of Sprint with the right to provide 100% digital PCS products and services under the Sprint brand names in AirGate's original territory in the southeastern United States. In January 2000, AirGate began commercial operations with the launch of four markets covering 2.2 million residents in AirGate's territory. By September 30, 2000, AirGate had launched commercial PCS service in all of the 21 basic trading areas, referred to as markets, which comprise AirGate's original territory. On November 30, 2001, AirGate acquired iPCS, a network partner of Sprint with 37 markets in the midwestern states of Michigan, Illinois, Iowa and Nebraska. The acquisition of iPCS increased the total resident population in the Company's markets from approximately 7.1 million to approximately 14.5 million. Additionally, iPCS served 149,119 subscribers as of November 30, 2001. At September 30, 2002, AirGate and iPCS provided Sprint PCS services to 339,139 and 215,694 subscribers, respectively. At September 30, 2002, AirGate had total network coverage of approximately 5.9 million residents and iPCS had total network coverage of approximately 5.6 million residents, of the 7.1 and 7.4 million residents in its respective territory. 40 Under AirGate's and iPCS' long-term agreements with Sprint, we manage our networks on Sprint's licensed spectrum and have the right to use the Sprint brand names royalty-free during the respective company's PCS affiliation with Sprint. We also have access to Sprint's national marketing support and distribution programs and are generally entitled to buy network equipment and subscriber handsets at the same discounted rates offered by vendors to Sprint based on its large volume purchases. In exchange for these and other benefits, AirGate and iPCS each pay an affiliation fee of 8% of collected revenues to Sprint. We are entitled to 100% of revenues collected from the sale of handsets and accessories and on roaming revenues received when customers of Sprint and Sprint's other network partners make a wireless call on our PCS network. iPCS is a wholly-owned, unrestricted subsidiary of AirGate. As required by the terms of AirGate's and iPCS' respective outstanding indebtedness, each of AirGate and iPCS conducts its business as a separate corporate entity from the other. AirGate's notes require subsidiaries of AirGate to be classified as either "restricted subsidiaries" or "unrestricted subsidiaries". A restricted subsidiary is defined generally as any subsidiary that is not an unrestricted subsidiary. An unrestricted subsidiary includes any subsidiary which: o has been designated an unrestricted subsidiary by the AirGate board of directors, o has no indebtedness which provides recourse to AirGate or any of its restricted subsidiaries, o is not party to any agreement with AirGate or any of its restricted subsidiaries, unless the terms of the agreement are no less favorable to AirGate or such restricted subsidiary than those that might be obtained from persons unaffiliated with AirGate, o is a subsidiary with respect to which neither AirGate nor any of its restricted subsidiaries has any obligation to subscribe for additional equity interests, maintain or preserve such subsidiary's financial condition or cause such subsidiary to achieve certain operating results, o has not guaranteed or otherwise provided credit support for any indebtedness of AirGate or any of its restricted subsidiaries, and o has at least one director and one executive officer that are not directors or executive officers of AirGate or any of its restricted subsidiaries. AirGate's notes impose certain affirmative and restrictive covenants on AirGate and its restricted subsidiaries and also include as events of default certain events, circumstances or conditions involving AirGate or its restricted subsidiaries. Because iPCS is an unrestricted subsidiary, the covenants and events of default under AirGate's notes do not generally apply to iPCS. AirGate's credit facility also imposes certain restrictions on, and applies certain events of default to events, circumstances or conditions involving, AirGate and its subsidiaries. AirGate's senior credit facility, however, expressly excludes iPCS from the definition of "subsidiary." Therefore, these restrictions and events of default applicable to AirGate and its subsidiaries do not generally apply to iPCS. CRITICAL ACCOUNTING POLICIES The Company relies on the use of estimates and makes assumptions that impact its financial condition and results. These estimates and assumptions are based on historical results and trends as well as the Company's forecasts as to how these might change in the future. Several of the most critical accounting policies that materially impact the Company's results of operations include: Allowance for Doubtful Accounts Estimates are used in determining the allowance for doubtful accounts and are based on historical collection and write-off experience, current trends, credit policies and accounts receivable by aging category. In determining these estimates, the Company compares historical write-offs in relation to the estimated period in which the subscriber was originally billed. The Company also looks at the average length of time that elapses between the original billing date and the date of write-off in determining the adequacy of the allowance for doubtful accounts by aging category. From this information, the Company provides specific amounts to the aging categories. The Company provides an allowance for substantially all receivables over 90 days old. The provision for doubtful accounts as a percentage of service revenues for the years ended September 30 was as follows: 41 Provision for Doubtful Accounts as % of Service Revenue AirGate iPCS Combined Company ----------------------- ------- ---- ---------------- 2002 9.4% 5.5% 8.2% 2001 7.7% N/A N/A 2000 5.8% N/A N/A The allowance for doubtful accounts as of September 30, 2002 and September 30, 2001 was $11.3 million and $2.8 million, respectively. At September 30, 2002, $6.8 million and $4.5 million was attributable to AirGate and iPCS, respectively. If the allowance for doubtful accounts is not adequate, it could have a material adverse affect on our liquidity, financial position and results of operations. The Company also reviews current trends in the credit quality of its subscriber base and periodically changes its credit policies. As of September 30, 2002, 35% of the combined Company's, 36% of AirGate's and 35% of iPCS' subscriber base consisted of sub-prime credit quality subscribers. The NDASL and Clear Pay programs and their associated lack of deposit requirements increased the number of sub-prime credit subscribers. These programs are described herein at "Business Overview-Marketing Strategy - Pricing." The Clear Pay II program and its deposit requirements are currently in effect in most of AirGate's and iPCS' markets, which reinstates a deposit requirement of $125 for most sub-prime credit subscribers. Reserve for First Payment Default Subscribers The Company reserves a portion of its new subscribers and provides a reduction in revenues from those subscribers that it anticipates will never pay a bill. Using historical information of the percentage of subscribers whose service was cancelled for non-payment without ever making a payment, the Company estimates the number of new subscribers activated in the current period that will never pay a bill. For these subscribers, the Company provides a reduction of revenue and removes them from subscriber additions and churn. As a result, these subscribers are not included in the churn statistics or subscriber count. At September 30, 2002 and September 30, 2001, the Company had approximately 7,126 and 7,811 such subscribers, respectively. Revenue Recognition The Company recognizes revenues when persuasive evidence of an arrangement exists, services have been rendered or products have been delivered, the price to the buyer is fixed and determinable, and collectibility is reasonably assured. The Company's revenue recognition polices are consistent with the guidance in Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" promulgated by the Securities and Exchange Commission. The Company records equipment revenue from the sale of handsets and accessories to subscribers in its retail stores and to local distributors in its territories upon delivery. The Company does not record equipment revenue on handsets and accessories purchased from national third-party retailers such as Radio Shack, Best Buy and Circuit City, or directly from Sprint by subscribers in its territories. The Company believes the equipment revenue and related cost of equipment associated with the sale of wireless handsets and accessories is a separate earnings process from the sale of wireless services to subscribers. For industry competitive reasons, the Company sells wireless handsets at a loss. Because such arrangements do not require a customer to subscribe to the Company's wireless services and because the Company sells wireless handsets to existing customers at a loss, the Company accounts for these transactions separately from agreements to provide customers wireless service. The Company's subscribers pay an activation fee to the Company when they initiate service. The Company defers activation fee revenue over the average life of its subscribers, which is estimated to be 30 months. The Company recognizes service revenue from its subscribers as they use the service. The Company provides a reduction of recorded revenue for billing adjustments, first payment default customers, late payment fees, and early cancellation fees. The Company also reduces recorded revenue for rebates and discounts given to subscribers on wireless handset sales in accordance with Emerging Issues Task Force ("EITF") Issue No. 01-9 "Accounting for Consideration Given by a Vendor to a Subscriber (Including a Reseller of the Vendor's Products)." The Company participates in the Sprint national and regional distribution programs in which national retailers such as Radio Shack, Best Buy and Circuit City sell Sprint PCS products and services. In order to facilitate the sale of Sprint PCS products and services, national retailers purchase wireless handsets from Sprint for resale and receive compensation from Sprint for Sprint PCS products and services sold. For industry competitive reasons, Sprint subsidizes the price of these handsets by selling the handsets at a price below cost. Under the Company's Sprint agreements, when a national retailer sells a handset purchased from Sprint to a subscriber in the Company's territories, the Company is obligated to reimburse Sprint for the handset subsidy. The Company does not receive any revenues from the sale of handsets and accessories by national retailers. The Company classifies these handset subsidy charges as a selling and marketing expense for a new subscriber handset sale and classifies these subsidies as a cost of service and roaming for a handset upgrade to an existing subscriber. Handset subsidy charges included in selling and marketing for the years ended September 30, 2002, 2001, and 2000 were $19.1 million, $12.8 million, and $3.7 million, respectively. Excluding sales commissions, handset subsidy upgrade charges in cost of service and 42 roaming for the year ended September 30, 2002 were $4.8 million. The Company did not incur handset subsidy upgrade charges for the years ended September 30, 2001 and 2000. Sprint retains 8% of collected service revenues from subscribers based in the Company's markets and from non-Sprint subscribers who roam onto the Company's network. The amount of affiliation fees retained by Sprint is recorded as cost of service and roaming. Revenues derived from the sale of handsets and accessories by the Company and from certain roaming services (outbound roaming and roaming revenues from Sprint PCS and its PCS network partner subscribers) are not subject to the 8% affiliation fee from Sprint. The Company defers direct subscriber activation costs when incurred and amortizes these costs using the straight-line method over 30 months, which is the estimated average life of a subscriber. Direct subscriber activation costs also include credit check fees and loyalty welcome call fees charged to the Company by Sprint and costs incurred by the Company to operate a subscriber activation center. For the years ended September 30, 2002, 2001 and 2000 the Company recognized approximately $6.3, $3.4 and $0.1 million, respectively, of activation fee revenue. For the years ended September 30, 2002, 2001 and 2000 the Company recognized approximately $3.7, $2.8 and $0.1 million, respectively, of direct subscriber activation costs. As of September 30, 2002, the Company has deferred approximately $15.0 million of subscriber activation fee revenue and $8.4 million of direct subscriber activation costs to future periods. Impairment of Long-Lived Assets and Goodwill The Company accounts for long-lived assets and goodwill in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. SFAS No. 142 requires annual tests for impairment of goodwill and intangible assets that have indefinite useful lives and interim tests when an event has occurred that more likely than not has reduced the fair value of such assets. The Company recorded a goodwill impairment of $261.2 million and $199.7 million during the quarter ended March 31, 2002 and the quarter ended September 30, 2002, respectively, as a result of these fair value assessments. Purchase price accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets acquired and liabilities assumed. In recording the purchase of iPCS, the Company engaged a nationally recognized valuation expert to assist 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 subscriber base, non-compete agreements for certain former iPCS employees, and the right to be the exclusive provider of Sprint PCS products and services in the 37 markets in which iPCS operates. For the subscriber base, the non-compete agreements, and the right to provide Sprint PCS products and services in the iPCS territory, finite useful lives of 30 months, six months and 205 months, respectively, have been assigned. The Company evaluates its intangible assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying value may not be recoverable. During the quarter ended September 30, 2002, the Company recorded impairments of $312.0 million associated with iPCS' right to provide service under the Sprint agreements and the acquired subscriber base and an asset impairment of $44.5 million associated with property and equipment of iPCS. NEW ACCOUNTING PRONOUNCEMENTS In December 2002, the Financial Accounting Standards Boards ("FASB") issued SFAS No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting, and has adopted the disclosure requirements of SFAS No. 123. The Company currently does not anticipate adopting the provisions of SFAS No. 148. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides new guidance on the recognition of costs associated with exit or disposal activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of 43 commitment to an exit or disposal plan. SFAS No. 146 supercedes previous accounting guidance provided by EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." EITF Issue No. 94-3 required recognition of costs at the date of commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Early application is permitted. The adoption of SFAS No. 146 by the Company on October 1, 2002 is not expected to have a material impact on the Company's financial position, results of operations or cash flows as the Company has not recorded any significant restructurings in past periods, but the adoption may impact the timing of charges in future periods. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, this statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt" which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," will now be used to classify those gains and losses. The adoption of SFAS No. 145 by the Company on October 1, 2002 is not expected to have a material impact on the Company's financial position, results of operations or cash flows. In November 2001, the EITF of the FASB issued EITF 01-9 "Accounting for Consideration Given by a Vendor to a Subscriber (Including a Reseller of the Vendor's Products)." EITF 01-9 provides guidance on when a sales incentive or other consideration given should be a reduction of revenue or an expense and the timing of such recognition. The guidance provided in EITF 01-9 is effective for financial statements for interim or annual periods beginning after December 15, 2001. The Company occasionally offers rebates to subscribers that purchase wireless handsets in its retail stores. The Company's historical policy regarding the recognition of these rebates in the consolidated statement of operations is a reduction in the revenue recognized on the sale of the wireless handset by an estimate of the amount of rebates expected to be redeemed. The Company's policy is in accordance with the guidance set forth in EITF 01-9. Therefore, the adoption of EITF 01-9 by the Company on January 1, 2002 did not have a material impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets with definite lives to be held and used or to be disposed of and also issued the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company elected early adoption of SFAS No. 144 as of the beginning of its fiscal year on October 1, 2001. The Company's adoption of SFAS No. 144 did not have a material impact on the Company's financial position, results of operations or cash flows. However, as discussed in note 2 to the financial statements, the application of the provisions of SFAS No. 144 resulted in a $356.5 million impairment during the quarter ended September 30, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period that it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 by the Company on October 1, 2002 is not expected to have a material impact on the Company's financial position, results of operations or cash flows. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which provides for non-amortization of goodwill and intangible assets that have indefinite useful lives, annual tests of impairments of those assets and interim tests of impairment when an event occurs that more likely than not has reduced the fair value of such assets. The statement also provides specific guidance about how to determine and measure goodwill 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 the financial statements at that date. Goodwill and intangible assets acquired after June 30, 2001 will be subject to the non-amortization provisions of the statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements had not been issued previously. The Company met the criteria for early application and adopted SFAS No. 142 on October 1, 2001. The Company's adoption of the provisions of SFAS No. 142 did not have a material impact on the Company's financial position, results of operations or cash flows. However, as discussed in note 2 to the financial statements, the application of SFAS No. 142 resulted in an impairment charge of $460.9 million during the fiscal year ended September 30, 2002. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which is effective for all business combinations initiated after June 30, 2001. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting, recognize intangible assets if certain criteria are met, as well as provide additional disclosures regarding business combinations and allocation of purchase price. The Company adopted SFAS No. 141 as of July 1, 2001, prior to 44 AirGate recording any significant business acquisitions and such adoption did not have a material impact on the Company's financial position, results of operation or cash flows. Key Operating Metrics Terms such as subscriber net additions, average revenue per user, churn, cost per gross addition and cash cost per user are important operating metrics used in the wireless telecommunications industry. Terms such as EBITDA are financial measures used by many companies. None of these terms, including EBITDA, are measures of financial performance under accounting principles generally accepted in the United States ("GAAP"). As an indicator of the Company's operating performance or liquidity, EBITDA should not be considered an alternative to, or more meaningful than, net income, cash flow or operating loss as determined in accordance with GAAP. EBITDA and these other terms as used by the Company may not be comparable to a similarly titled measure of another company. The following terms used in this report have the following meanings: "EBITDA" means earnings before other income, interest, taxes, non-cash stock compensation expense, depreciation, amortization of intangibles, loss on disposal of property and equipment and impairment losses. The definition has changed over time as the Company has introduced new line items in its income statement that are excluded from EBITDA. "ARPU" summarizes the average monthly service revenue per user, 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 subscribers. "Churn" is the monthly rate of subscriber turnover that both voluntarily and involuntarily discontinued service during the month, expressed as a percentage of the total subscriber base. Churn is computed by dividing the number of subscribers that discontinued service during the month, net of 30 day returns and an adjustment for estimated first payment default subscribers, by the average total subscriber base for the period. "CPGA" summarizes the average cost to acquire new subscribers 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 subscribers acquired during the period, reduced by a provision for first payment default subscribers. "CCPU" is a measure of the cash costs to operate the business on a per user basis consisting of subscriber support, network operations, service delivery, roaming expense, bad debt expense, wireless handset upgrade subsidies and other general and administrative costs, divided by average subscribers for the period, which is net of an adjustment for first payment default subscribers. The table below sets forth below key metrics for the Company for the years ended September 30, 2000, 2001 and 2002. For the year ended September 30, 2002, these metrics are shown separately for each of AirGate, iPCS and the combined Company.
Fiscal Year Ended September 30, ------------------------------------------------------------------------------------------- 2000 2001 2002 ---- ---- --------------------------------------------------------- (AirGate) (AirGate) AirGate iPCS Combined Company --------- --------- ------- ---- ---------------- Subscriber Gross Additions 62,007 233,390 247,221 127,028 374,249 Subscriber Net Additions 56,689 178,336 104,116 66,072 170,188* Total Subscribers 56,689 235,025 339,139 215,694 554,833 ARPU $59 $62 $61 $55 $59 Churn 2.75% 2.76% 3.53% 2.98% 3.35% CPGA $501 $361 $386 $387 $386 CCPU $162 $76 $59 $61 $60 Capital Expenditures $152,397,000 $71,270,000 $41,338,000 $55,722,000 $97,060,000 EBITDA $(50,825,000) $(52,222,000) $(14,860,000) $(25,170,000) $(40,030,000)
- ----- *Includes net additions from iPCS on a pro forma basis. 45 The reconciliation of EBITDA to our reported operating loss, as determined in accordance with GAAP, is as follows (in thousands):
Fiscal Year Ended September 30, ------------------------------------------------------------------------------------------- 2000 2001 2002 ---- ---- --------------------------------------------------------- (AirGate) (AirGate) AirGate iPCS Combined Company --------- --------- ------- ---- ---------------- EBITDA $(50,825) $(52,222) $(14,860) $(25,170) $(40,030) Non-cash stock compensation expense (1,665) (1,665) (769) - (769) Depreciation (12,034) (30,621) (40,678) (29,519) (70,197) Amortization of intangible assets - (46) (35,803) (3,529) (39,332) Impairment of goodwill - - (452,860) (8,060) (460,920) Impairment of property and equipment - - - (44,450) (44,450) Impairment of intangible assets - - (312,043) - (312,043) Loss on disposal of property and equipment - - (1,074) - (1,074) -------- -------- --------- --------- --------- Operating Loss $(64,524) $(84,554) $(858,087) $(110,728) $(968,815) ======== ======== ========= ========= =========
The tables below also show quarterly key operating metrics for each of the four quarters in fiscal 2002 for each of AirGate, iPCS and the combined Company. This information is provided to show the most recent trends in these key operating metrics. The results for any quarter are not necessarily indicative of results for any future period. AirGate -------
Quarter Ended ------------------------------------------------------------------------------ 12/31/01 3/31/02 6/30/02 9/30/02 -------- ------- ------- -------- Subscriber Gross Additions 83,012 68,404 47,529 48,276 Subscriber Net Additions 54,820 36,055 11,404 1,836 Total Subscribers 289,844 325,899 337,303 339,139 ARPU $60 $63 $57 $63 Churn 3.19% 3.18% 3.33% 4.30% CPGA $345 $321 $432 $505 CCPU $64 $55 $56 $63 Bad Debt Expense 11.88% 10.35% 9.02% 7.11% Capital Expenditures $3,246,000 $17,793,000 $11,241,000 $9,058,000 EBIDTA $(14,637,000) $1,102,000 $3,237,000 $(4,562,000) Operating Loss $(28,350,000) $(282,447,000) $(16,955,000) $(530,335,000)
iPCS ----
Quarter Ended ------------------------------------------------------------------------------- 12/31/01 3/31/02 6/30/02 9/30/02 -------- ------- ------- -------- Subscriber Gross Additions 17,681 32,145 32,370 44,832 Subscriber Net Additions 13,892 16,954 14,675 20,551 Total Subscribers 163,514 180,468 195,143 215,694 ARPU $55 $56 $54 $55 Churn 2.13% 2.61% 2.92% 3.60% CPGA $365 $359 $443 $374 CCPU $77 $60 $60 $59 Bad Debt Expense 12.98% 6.66% 7.77% 0.65% Capital Expenditures $3,880,000 $23,604,000 $17,641,000 $10,597,000 EBIDTA $(6,051,000) $(7,887,000) $(6,886,000) $(4,346,000) Operating Loss $(8,374,000) $(16,409,000) $(17,637,000) $(68,308,000)
46 Combined Company ----------------
Quarter Ended ------------------------------------------------------------------------------- 12/31/01 3/31/02 6/30/02 9/30/02 -------- ------- ------- ------- Subscriber Gross Additions 100,693 100,549 79,899 93,108 Subscriber Net Additions* 68,712 53,009 26,079 22,387 Total Subscribers 453,358 506,367 532,446 554,833 ARPU $59 $60 $56 $60 Churn 2.30% 2.97% 3.19% 4.04% CPGA $349 $333 $437 $442 CCPU $66 $57 $57 $61 Bad Debt Expense 12.05% 9.12% 8.59% 4.89% Capital Expenditures $7,126,000 $41,397,000 $28,882,000 $19,655,000 EBITDA $(20,688,000) $(6,785,000) $(3,649,000) $(8,908,000) Operating Loss $(36,724,000) $(298,856,000) $(34,592,000) $(598,643,000)
- ----- *Includes net additions from iPCS on a pro forma basis. Results of Operations The following discussion of the results of operations includes the results of operations of iPCS subsequent to November 30, 2001. For the year ended September 30, 2002 compared to the year ended September 30, 2001: Subscriber Net Additions As of September 30, 2002, the Company provided personal communication services to 554,833 subscribers compared to 235,025 subscribers as of September 30, 2001, an increase of 319,808 subscribers. The increased net subscribers include 149,622 subscribers acquired from iPCS on November 30, 2001. For the year ended September 30, 2002, the Company added 104,115 net new AirGate subscribers and 66,072 net new iPCS subscribers. The increase in net subscribers is due primarily to subscribers attracted from other wireless carriers and demand for wireless services from new subscribers. The Company does not include in its subscriber base an estimate of first payment default subscribers. At September 30, 2002 and 2001, the estimated first payment default subscribers were 7,126 and 7,811, respectively. Estimated first payment default subscribers at September 30, 2002 for AirGate and iPCS were 3,717 and 3,409, respectively. Subscriber Gross Additions Subscriber gross additions for the years ended September 30, 2002 and 2001 were 374,249 and 233,390, respectively. For the year ended September 30, 2002, subscriber gross additions from AirGate and iPCS were 247,221 and 127,028, respectively. The increase in subscriber gross additions were attributable to the acquisition of iPCS and the removal of deposit requirements in the NDASL and certain Clear Pay programs, additional network build out and retail sales distribution from AirGate. Average Revenue Per User For the years ended September 30, 2002 and 2001, ARPU was $59 and $62, respectively. For the year ended September 30, 2002, iPCS had an ARPU of $55, compared to $61 for AirGate. The decrease in ARPU for the Company is primarily the result of the acquisition of iPCS, cessation of recognizing terminating access revenue and declines in the average monthly recurring revenue per user. Until March 2002, the Company recorded terminating long-distance access revenues billed by Sprint PCS to long distance carriers. Sprint PCS has made a claim to these historical revenues based upon its current litigation with AT&T and other long distance carriers. While we continue to examine rights we may have against Sprint PCS, the Company recorded a reserve to accrue for terminating access charges previously paid by Sprint on behalf of long distance carriers and for which Sprint PCS has made a claim. Churn Churn for the year ended September 30, 2002 was 3.4%, compared to 2.8% for the year ended September 30, 2001. For the year ended September 30, 2002, churn attributable to AirGate and iPCS was 3.5% and 3.0%, respectively. The increase in churn is primarily a result of an increase in the number of sub-prime credit quality subscribers whose service was involuntarily discontinued during the period. Without the subscriber reserve, churn for the year ended September 30, 2002 and 2001 would be 47 4.0% and 2.8%, respectively. Churn without the subscriber reserve for the year ended September 30, 2002 attributable to AirGate and iPCS would be 4.2% and 3.6%, respectively. Cost Per Gross Addition CPGA was $386 for the year ended September 30, 2002, compared to $361 for the year ended September 30, 2001. For the year ended September 30, 2002, CPGA for AirGate and iPCS was $386 and $387, respectively. The increase in CPGA is the result of greater handset sales incentives, rebates and marketing costs. Cash Cost Per User CCPU was $60 for the year ended September 30, 2002, compared to $76 for the year ended September 30, 2001. For the year ended September 30, 2002, CCPU for AirGate and iPCS was $59 and $61, respectively. The decrease in CCPU is the result of the fixed network and administrative support costs of CCPU being spread over a greater number of average subscribers, including those acquired in the merger with iPCS. Revenues We derive our revenue from the following sources: Service. We sell wireless personal communications services. The various types of service revenue associated with wireless communications services include monthly recurring access and feature charges and monthly non-recurring charges for local, wireless long distance and roaming airtime usage in excess of the subscribed usage plan. Equipment. We sell wireless personal communications handsets and accessories that are used by our subscribers in connection with our wireless services. Equipment revenue is derived from the sale of handsets and accessories from Company owned stores, net of sales incentives, rebates and an allowance for returns. The Company's handset return policy allows subscribers to return their handsets for a full refund within 14 days of purchase. When handsets are returned to the Company, the Company may be able to reissue the handsets to subscribers at little additional cost. However, when handsets are returned to Sprint for refurbishing, the Company receives a credit from Sprint, which is less than the amount originally paid for the handset. Roaming. The Company receives roaming revenue at a per-minute rate from Sprint and other Sprint PCS network partners when Sprint PCS subscribers from outside of the Company's territory use the Company's network, which accounted for 93% of the roaming revenue recorded for the year ended September 30, 2002. The Company pays the same reciprocal roaming rate when subscribers from our territories use the network of Sprint or its other PCS network partners. The Company also receives non-Sprint roaming revenue when subscribers of other wireless service providers who have roaming agreements with Sprint roam on the Company's network. Service revenue and equipment revenue was $327.4 million and $18.0 million, respectively, for the year ended September 30, 2002, compared to $106.0 million and $10.8 million, respectively, for the year ended September 30, 2001, an increase of $221.4 million and $7.2 million, respectively. For the year ended September 30, 2002, service revenue attributable to AirGate and iPCS was $226.5 million and $100.9 million, respectively. These increased revenues reflect the substantially higher average number of subscribers using the Company's network, including subscribers acquired in the iPCS acquisition. For the year ended September 30, 2002, the Company's service revenue was reduced because the Company did not record revenues from terminating long-distance access charges. In addition, the Company recorded a revenue adjustment for terminating long-distance access revenue previously paid to the Company by Sprint PCS on behalf of long distance carriers. Sprint PCS has made a claim to these historical revenues that were previously paid by Sprint PCS to Company for the period from January 2000 to March 2002. Terminating access revenue for which the Company provided a revenue adjustment was approximately $2.0 million for the period January 2000 to September 2001. Revenue adjustments for terminating access revenue attributable to AirGate and iPCS for the year ended September 30, 2002 was $4.3 million and $1.1 million, respectively. The Company recorded roaming revenue of $111.2 million during the year ended September 30, 2002 (see roaming expense in Cost of Service and Roaming below), compared to $55.3 million for the year ended September 30, 2001, an increase of $55.9 million. The increase is attributable to the larger wireless subscriber base for Sprint and other Sprint PCS network partners, the additional covered territory acquired with iPCS, increased roaming revenue to iPCS from Verizon Wireless and increased roaming revenue from other third-party carriers, PCS partially offset by a lower average roaming rate. For the year ended September 30, 2002, roaming revenue from Sprint and its PCS network partners was $103.1 million, or 93% of the roaming revenue recorded. For the year ended September 30, 2002, roaming revenue from Sprint and its PCS network partners attributable to AirGate and iPCS was $70.0 million and $33.1 million, respectively. 48 The reciprocal roaming rate among Sprint and its PCS network partners, including the Company, has declined over time, from $0.20 per minute of use prior to June 1, 2001, to $0.10 per minute of use in 2002. See "Sprint Relationship and Agreements -The Management Agreements--Service pricing, roaming and fees." Sprint has notified the Company that it intends to reduce the reciprocal roaming rate to $0.058 per minute of use in 2003. Based upon 2002 historical roaming data, a reduction in the reciprocal roaming rate for $0.058 per minute would have reduced roaming revenue by approximately $36 million ($23.0 million for AirGate and $13.0 million for iPCS) per year, and reduced roaming expense by approximately $26 million ($16.0 million for AirGate and $10.0 million for iPCS) per year. Cost of Service and Roaming Cost of service and roaming principally consists of costs to support the Company's subscriber base including: o Roaming expense, o network operating costs (including salaries, cell site lease payments, fees related to the connection of the Company's switches to the cell sites that they support, inter-connect fees and other expenses related to network operations), o back office services provided by Sprint such as customer care, billing and activation, o the 8% of collected service revenue representing the Sprint affiliation fee, o long distance expense relating to inbound roaming revenue and the Company's own subscriber's long distance usage and roaming expense when subscribers from the Company's territory place calls on Sprint's network, o bad debt related to estimated uncollectible accounts receivable, and o wireless handset subsidies on existing subscriber upgrades through national third-party retailers. The cost of service and roaming was $311.1 million for the year ended September 30, 2002, compared to $116.7 million for the year ended September 30, 2001, an increase of $194.4 million. For the year ended September 30, 2002, cost of service and roaming attributable to AirGate and iPCS was $203.2 million and $107.9 million, respectively. The increase in the cost of service and roaming is attributable to the increase in the number of subscribers due to the acquisition of iPCS and additional subscriber growth. Roaming expense included in the cost of service and roaming was $85.5 million for the year ended September 30, 2002, compared to $35.4 million for the year ended September 30, 2001, an increase of $50.6 million as a result of the substantial increase in the Company's subscriber base, the acquired iPCS subscriber base and an increase in the average roaming minutes per month for each subscriber, partially offset by a lower average rate per minute. 92% and 88% of the cost of roaming was attributable to Sprint and its network partners for the years ended September 30, 2002 and 2001, respectively. For the year ended September 30, 2002, roaming expense attributable to AirGate and iPCS was $57.3 million and $28.2 million, respectively. As discussed above, the per-minute rate the Company pays Sprint when subscribers from the Company's territory roam onto the Sprint network decreased beginning June 1, 2001 for AirGate and January 1, 2002 for iPCS. Bad debt included in the cost of service and roaming was $26.9 million for the year ended September 30, 2002, compared to $10.9 million for the year ended September 30, 2001, an increase of $16.0 million. This increase in bad debt expense is attributable to the acquisition of iPCS and the increase in payment defaults resulting from the increase in sub-prime credit quality customers. For the year ended September 30, 2002, the network operating costs were $85.8 million, compared to $37.5 million at September 30, 2001, an increase of $48.3 million. This increase resulted from the acquisition of iPCS and its subscriber base and network assets. The Company was supporting 554,833 subscribers at September 30, 2002, compared to 235,025 subscribers at September 30, 2001. At September 30, 2002, the Company's network, including the territory of iPCS, consisted of 1,435 active cell sites and seven switches compared to 719 active cell sites and four switches at September 30, 2001. There were approximately 144 employees performing network operations functions at September 30, 2002, compared to 79 employees at September 30, 2001. At September 30, 2002, the number of subscribers at AirGate and iPCS was 339,139 and 215,694, respectively. The number of active cell sites at September 30, 2002 for AirGate and iPCS was 802 and 633, respectively. The number of employees performing network operations functions at September 30, 2002 for AirGate and iPCS was 89 and 55, respectively. Excluding sales commissions, the Company experienced approximately $4.8 million associated with wireless handset upgrade costs for the year ended September 30, 2002. The Company did not experience wireless handset upgrade costs during the year ended September 30, 2001. 49 Cost of Equipment We purchase handsets and accessories to resell to our subscribers for use in connection with our services. Because we subsidize the sale of handsets to remain competitive in the marketplace, the cost of handsets is higher than the resale price to the subscriber. Cost of equipment was $43.6 million for the year ended September 30, 2002, and $20.2 million for year ended September 30, 2001, an increase of $23.4 million. This increase is attributable to the increase in the number of subscribers added during the period, including subscribers added as a result of the iPCS acquisition, as cost of equipment includes the cost of handsets and accessories sold to subscribers from the Company's stores. For the year ended September 30, 2002, cost of equipment attributable to AirGate and iPCS was $27.5 million and $16.1 million, respectively. Selling and Marketing Selling and marketing expenses 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 the Company does not record revenue. Under the management agreements with Sprint, when a national retailer sells a handset purchased from Sprint to a subscriber from the Company's territories, the Company is obligated to reimburse Sprint for the handset subsidy that Sprint originally incurred. The national retailers sell Sprint wireless services under the Sprint brands and marks. The Company incurred selling and marketing expenses of $116.5 million during the year ended September 30, 2002, compared to $71.6 million in the year ended September 30, 2001, an increase of $44.9 million. For the year ended September 30, 2002, selling and marketing expense attributable to AirGate and iPCS was $79.0 million and $37.5 million, respectively. For the year ended September 30, 2002, national third-party handset subsidy costs attributable to AirGate and iPCS was $11.7 million and $7.4 million, respectively. Handset subsidies on units sold by third parties totaled approximately $19.1 million for the year ended September 30, 2002, compared to $12.8 million for the year ended September 30, 2001, an increase of $6.3 million that is attributable to the acquisition of iPCS and increased subscriber additions. At September 30, 2002, there were approximately 710 employees performing sales and marketing functions, compared to 388 employees as of September 30, 2001. The majority of the increase in employees is a result of the acquisition of iPCS. At September 30, 2002, employees performing sales and marketing functions for AirGate and iPCS was approximately 480 and 230, respectively. Selling and marketing expenses 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 the Company does not record revenue. Under the management agreements with Sprint, when a national retailer sells a handset purchased from Sprint to a subscriber from the Company's territories, the Company is obligated to reimburse Sprint for the handset subsidy that Sprint originally incurred. The national retailers sell Sprint wireless services under the Sprint brands and marks. General and Administrative For the year ended September 30, 2002, the Company incurred general and administrative expenses of $25.3 million, compared to $15.7 million for the year ended September 30, 2001, an increase of $9.6 million. This increase resulted from the growth in the number of employees and service providers providing general and administrative services and the acquisition of iPCS. Of the 973 employees at September 30, 2002, approximately 126 employees were performing corporate support functions compared to 62 employees as of September 30, 2001. For the year ended September 30, 2002, general and administrative expense attributable to AirGate and iPCS was $17.6 million and $7.7 million, respectively. Non-Cash Stock Compensation Non-cash stock compensation expense was $0.8 million for the year ended September 30, 2002, and $1.7 million for the year ended September 30, 2001. The Company applies the provisions of APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Unearned stock compensation is recorded for the difference between the exercise price and the fair market value of the Company's common stock and restricted stock at the date of grant and is recognized as non-cash stock compensation expense in the period in which the related services are rendered. Depreciation We capitalize network development costs incurred to ready our network for use and costs to build-out our retail stores and office space. Depreciation of these costs begins when the equipment is ready for its intended use and is amortized over the estimated useful life of the asset. For the year ended September 30, 2002, depreciation increased to $70.2 million, compared to $30.7 million for the year ended September 30, 2001, an increase of $39.5 million. The increase in depreciation expense relates primarily to additional network assets placed in service in 2002 and 2001 and approximately $29.5 million of depreciation from the acquired iPCS property and equipment. During the fiscal fourth quarter of 2002, the Company placed into service the 1XRTT network hardware costs in association with the commercial launch of 1XRTT. For the year ended September 30, 2002, depreciation attributable to AirGate and iPCS was $40.7 million and $29.5 million, respectively. 50 The Company incurred capital expenditures of $97.1 million in the year ended September 30, 2002, which included approximately $7.1 million of capitalized interest, compared to capital expenditures of $71.3 million and capitalized interest of $2.9 million in the year ended September 30, 2001. Capital expenditures incurred by AirGate and iPCS were $41.4 million and $55.7 million, respectively, for the year ended September 30, 2002. Amortization of Intangible Assets Amortization of intangible assets relates to the amounts recorded from the iPCS acquisition for the acquired subscriber base, non-competition agreements, and the right to provide service under iPCS' Sprint agreements. Amortization for the year ended September 30, 2002, was approximately $39.3 million. Amortization of intangible assets for the year ended September 30, 2002 was attributable to AirGate as the Company did not elect pushdown accounting for the acquisition of iPCS. Loss on Disposal of Property and Equipment For the year ended September 30, 2002, the Company recognized a loss of $1.1 million on disposal of property and equipment. This loss is the result of the abandonment of eleven cell sites in AirGate's territory that were in process of being constructed. Goodwill Impairment The wireless telecommunications industry experienced significant declines in market capitalization throughout most of 2002. These significant declines in market capitalization resulted from concerns surrounding anticipated weakness in future subscriber growth, increased subscriber churn, anticipated future lower ARPU and liquidity concerns. As a result of these industry trends, the Company experienced significant declines in its market capitalization subsequent to its acquisition of iPCS. Additionally, there have been adverse changes to the strategic business plan for iPCS. These changes include lower new subscribers, lower ARPU, higher churn, increased service and pass through costs from Sprint and lower roaming margins from Sprint. Wireless industry acquisitions subsequent to the Company's acquisition of iPCS have been valued substantially lower on a price per population and price per subscriber basis. As a result of these transactions and industry trends, the Company believed that the fair value of iPCS and its assets had been reduced. Accordingly, the Company engaged a nationally recognized valuation expert on two occasions during 2002 to perform fair value assessments of iPCS. The Company recorded a goodwill impairment of approximately $261.2 million and $199.7 million during the quarter ended March 31, 2002 and the quarter ended September 30, 2002, respectively, as a result of these fair value assessments. The total goodwill impairment for the year ended September 30, 2002 was $460.9 million. Impairment of Fixed Assets During the quarter ended September 30, 2002, the Company recorded an asset impairment of $44.5 million associated with the fixed assets (principally wireless networking infrastructure) of iPCS. This impairment was recorded under the requirements of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." As discussed above, this impairment arose from significant adverse changes to the business plan for iPCS as well as a generally weak secondary market for telecommunications equipment. Accordingly, the Company engaged a nationally recognized valuation expert to determine the fair value of the assets which were valued at $185.4 million as of September 30, 2002. Impairment of Intangible Assets The Company recorded an intangible asset impairment of $305.4 million associated with iPCS' right to provide services under the Sprint agreements. The right to provide service under iPCS' Sprint agreements was recorded by the Company as a result of the purchase price allocation for the acquisition of iPCS. The original value and life assigned to this intangible was $323.3 million and 205 months, respectively. As discussed previously in the goodwill impairment section, this impairment arose from significant adverse changes to the business plan for iPCS. Accordingly, the Company adjusted the carrying value of the right to provide services under the Sprint agreements to its fair value at September 30, 2002. The Company engaged a nationally recognized valuation expert to determine the fair value of the right to provide services under the Sprint agreements. Interest Income For the year ended September 30, 2002, interest income was $0.6 million, compared to $2.5 million for the year ended September 30, 2001. The Company had higher average cash and cash equivalent balances and higher average interest rates on deposits for the year ended September 30, 2001, which resulted in higher interest income for year ended September 30, 2001, when compared to the year ended September 30, 2002. For the year ended September 30, 2002, interest income attributable to AirGate and iPCS was $0.2 million and $0.4 million, respectively. 51 Interest Expense For the year ended September 30, 2002, interest expense was $57.2 million, compared to $28.9 million for the year ended September 30, 2001, an increase of $28.3 million. The increase is primarily attributable to increased debt related to the iPCS notes, accreted interest on the AirGate notes and increased borrowings under the AirGate and iPCS credit facilities, partially offset by lower commitment fees on undrawn balances of the AirGate credit facility, and a lower interest rate on variable rate borrowings under the AirGate credit facility. The Company had borrowings of $709.8 million as of September 30, 2002, including debt of iPCS, compared to $266.3 million at September 30, 2001. For the year ended September 30, 2002, interest expense attributable to AirGate and iPCS was $34.3 million and $22.9 million, respectively. Income Tax Benefit Income tax benefits of $28.8 million were recognized for the year ended September 30, 2002. Income tax benefits will be recognized in the future only to the extent management believes recoverability of deferred tax assets is more likely than not. Net Loss For the year ended September 30, 2002, the net loss was $996.6 million, an increase of $802.7 million from a net loss of $193.9 million for the year ended September 30, 2001. The increase was attributable to the results of operations of iPCS, which had a reported net loss of $133.2 million, the goodwill impairment associated with AirGate's investment in iPCS of $460.9 million, the fixed asset impairment associated with AirGate's investment in iPCS of $44.5 million, and the intangibles impairment associated with AirGate's investment in iPCS of $312.0 million. For the year ended September 30, 2002, net loss attributable to AirGate and iPCS was $863.4 million and $133.2 million, respectively. For the year ended September 30, 2001 compared to the year ended September 30, 2000: Subscriber Gross Additions Subscriber gross additions for the years ended September 30, 2001 and 2000 were 233,390 and 62,007, respectively. The increase in subscriber gross additions was attributable to additional network build out and retail sales distribution from AirGate and the removal of the deposit for subscribers selecting the NDASL plan. Subscriber Net Additions As of September 30, 2001, the Company provided personal communication services to 235,025 subscribers compared to 56,689 subscribers as of September 30, 2000, an increase of 178,336 net subscribers. At September 30, 2001 and 2000 the estimated first payment default subscribers were 7,811 and 0, respectively. The increase in net subscribers acquired during the year ended September 30, 2001 was attributable to having all of the Company's 21 markets fully launched during fiscal 2001 and increased demand for wireless services in the United States. Average Revenue Per User For the year ended September 30, 2001, ARPU was $62. For the year ended September 30, 2000, ARPU was $59. The increase in ARPU primarily resulted from subscribers selecting rate plans with higher monthly recurring charges. Churn Churn for the year ended September 30, 2001 was 2.8%, the same as for the year ended September 30, 2000. Without the subscriber reserve, churn for each of the years ended September 30, 2001 and 2000 would have been 2.8%. Cost Per Gross Addition CPGA was $361 for the year ended September 30, 2001, compared to $501 for the year ended September 30, 2000. The decrease in CPGA was the result of greater gross subscriber additions covering the fixed cost components of CPGA such as advertising, salaries and store rents. Cash Cost Per User CCPU was $76 for the year ended September 30, 2001 compared to $162 for the year ended September 30, 2000. The decrease in CCPU was the result of the fixed network and administrative support costs of CCPU being spread over a greater number of average subscribers. 52 Revenues Service revenue, roaming revenue and equipment revenue were $106.0 million, $55.3 million and $10.8 million, respectively, for the year ended September 30, 2001, compared to $9.7 million, $12.3 million and $3.0 million, respectively, for the year ended September 30, 2000, an increase of $96.3 million, $43.0 million and $7.8 million, respectively. These increased revenues reflected all of the Company's markets being commercially operational in fiscal year 2001. In fiscal year 2000, our markets were being launched in phases and were not operational on a full fiscal year basis. Cost of Service and Roaming The cost of service and roaming was $116.7 million for the year ended September 30, 2001, compared to $27.8 million for the year ended September 30, 2000, an increase of $88.9 million. Roaming expense included in the cost of service and roaming was $35.4 million for the year ended September 30, 2001, compared to $2.5 million for the year ended September 30, 2000, an increase of $32.9 million resulting from the substantial increase in the Company's subscriber base. The Company was supporting 235,025 subscribers at September 30, 2001, compared to 56,689 subscribers at September 30, 2000. At September 30, 2001, the Company's network consisted of 719 active cell sites and four switches compared to 567 active cell sites and three switches at September 30, 2000. There were approximately 79 employees performing network operations functions at September 30, 2001, compared to 59 employees at September 30, 2000. The Sprint affiliation fee totaled $7.6 million in the year ended September 30, 2001, compared to $0.8 million for the year ended September 30, 2000, a $6.8 million increase related to the growth in service revenues. Fees paid to Sprint for customer support and retention totaled $15.5 million for the year ended September 30, 2001, compared to $1.5 million at September 30, 2000. Long distance fees paid to Sprint totaled $6.5 million for the year ended September 30, 2001, compared to $1.1 million at September 30, 2000. The increases for customer support and retention and long distance fees resulted from the increase in the Company's subscriber base. Cost of Equipment Cost of equipment was $20.2 million for the year ended September 30, 2001, and $5.7 million for the year ended September 30, 2000, an increase of $14.5 million. This increase was attributable to the increase in the number of subscribers. Selling and Marketing The Company incurred selling and marketing expenses of $71.6 million during the year ended September 30, 2001 compared to $28.4 million in the year ended September 30, 2000, an increase of $43.2 million. At September 30, 2001, there were approximately 388 employees performing sales and marketing functions, compared to 246 employees as of September 30, 2000. A net 178,336 subscribers were added in the year ended September 30, 2001 compared to 56,689 net subscribers added in the year ended September 30, 2000. Handsets subsidies on units sold by third parties totaled $12.8 million for the year ended September 30, 2001, compared to $3.7 million for the year ended September 30, 2000, an increase of $9.1 million. General and Administrative For the year ended September 30, 2001, the Company incurred expenses of $15.7 million, compared to $14.1 million for the year ended September 30, 2000, an increase of $1.6 million. Increased compensation and benefit amounts related to the growth in employees were partially offset by lower amounts earned under the retention bonus agreement with our chief executive officer. Of the 529 employees at September 30, 2001, approximately 62 employees were performing corporate support functions compared to 36 employees as of September 30, 2000. Non-Cash Stock Compensation Non-cash stock compensation expense was $1.7 million for each of the years ended September 30, 2001 and 2000. Depreciation For the year ended September 30, 2001, depreciation and amortization expense increased to $30.6 million, compared to $12.0 million for the year ended September 30, 2000, an increase of $18.6 million. The increase in depreciation and amortization expense related primarily to the completion of our network build-out during fiscal year 2000 to support the Company's commercial launch. The Company incurred capital expenditures of $56.1 million in the year ended September 30, 2001, which included approximately $2.9 million of capitalized interest compared to capital expenditures of $151.4 million and capitalized interest of $5.9 million in the year ended September 30, 2000. 53 Interest Income For the year ended September 30, 2001, interest income was $2.5 million compared to $9.3 million for the year ended September 30, 2000, a decrease of $6.8 million. The Company had higher cash and cash equivalent balances for the year ended September 30, 2000, resulting from the higher amount of proceeds that remained from our September 1999 equity and debt offerings. As capital expenditures were required to complete the build-out of the Company's PCS network, and as working capital and operating losses were funded, decreasing cash balances and a lower short-term interest rate environment resulted in lower levels of interest income. Interest Expense For the year ended September 30, 2001, interest expense was $28.9 million, compared to $26.1 million for the year ended September 30, 2000, an increase of $2.8 million. The increase was primarily attributable to increased debt related to accreted interest on the AirGate notes and increased borrowings under the AirGate credit facility, partially offset by lower commitment fees on undrawn balances of the AirGate credit facility, a lower interest rate on variable rate borrowings under the AirGate credit facility and lower capitalized interest. The Company had borrowings of $266.3 million as of September 30, 2001, compared to $180.7 million as of September 30, 2000. Net Loss For the year ended September 30, 2001, net loss was $111.0 million, an increase of $29.7 million over a net loss of $81.3 million for the year ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2002, the Company had $32.5 million in cash and cash equivalents, compared to $14.3 million in cash and cash equivalents at September 30, 2001. The Company's working capital deficit was $364.4 million at September 30, 2002, compared to a working capital deficit of $5.6 million at September 30, 2001. The majority of the Company's working capital deficit as of September 30, 2002 was attributable to the classification of the iPCS credit facility and notes totaling $352.9 million as current. As of December 31, 2002, iPCS was in default of certain covenants associated with the iPCS credit facility and notes. Because of iPCS' inability to cure such default, all amounts under the iPCS credit facility and notes have been classified as a current liability. As of September 30, 2002, cash and cash equivalents attributable to AirGate and iPCS was $4.9 million and $27.6 million, respectively. Working capital at September 30, 2002 attributable to AirGate and iPCS was $(58.0) million and ($306.4) million, respectively. Net Cash Used in Operating Activities The $45.2 million of cash used in operating activities in the year ended September 30, 2002 was the result of the Company's $996.6 million net loss offset by $978.8 million of goodwill impairment, fixed asset impairment, impairment of intangible assets, depreciation, amortization of note discounts, financing costs, amortization of intangibles, deferred tax benefit, provision for doubtful accounts and non-cash stock compensation, that was partially offset by negative net cash working capital changes of $27.4 million. The negative net working capital changes were primarily a result of timing of payments principally to Sprint, the increase in interest payable related to the increase in the balance of the AirGate and iPCS credit facilities, and the increase in the current maturities of long-term debt at September 30, 2002, compared to September 30, 2001, resulting from the acquisition of iPCS and growth in the Company's subscriber base. The $40.9 million of cash used in operating activities in the year ended September 30, 2001 was the result of the Company's $111.0 million net loss being partially offset by a net $4.6 million in cash provided by changes in net working capital and $65.5 million of depreciation, amortization of note discounts, provision for doubtful accounts, amortization of financing costs and non-cash stock option compensation. The $41.6 million of cash used in operating activities in the year ended September 30, 2000 was the result of the Company's $81.3 million net loss being partially offset by $38.5 million of depreciation, amortization of note discounts, provision for doubtful accounts, amortization of financing costs, non-cash stock compensation and positive working capital changes of $1.2 million. For the year ended September 30, 2002, cash used in operating activities attributable to AirGate and iPCS was $24.5 million and $20.9 million, respectively. Net Cash Used in Investing Activities The $78.7 million of cash used in investing activities during the year ended September 30, 2002 represents $97.1 million for purchases of property and equipment and $6.0 million of cash acquisition costs related to the acquisition of iPCS, partially offset by $24.4 million of cash acquired from iPCS. Purchases of property and equipment during the year ended September 30, 2002 related to investments to upgrade the Company's network to 1XRTT, expansion of switch capacity and expansion of service coverage in the Company's territories. For the year ended September 30, 2001, cash outlays of $71.8 million represented cash payments of $71.3 million made for purchases of equipment and $0.5 million to purchase certain assets of one of the Company's agents. For the year ended September 30, 2000, cash outlays of $152.4 million represented cash payments made for purchases of 54 property and equipment. For the year ended September 30, 2002, cash used in investing activities attributable to AirGate and iPCS was $23.0 million and $55.7 million, respectively. Net Cash Provided by Financing Activities The $142.1 million in cash provided by financing activities during the year ended September 30, 2002, consisted of $61.2 million in borrowings under the AirGate credit facility and $80.0 million under the iPCS credit facility, $0.7 million of proceeds received from the exercise of options and warrants and $0.6 million received from stock issued under the employee stock purchase plan, offset by $0.3 million for payments associated with the amendment to the iPCS credit facility. The $68.5 million of cash provided by financing activities in the year ended September 30, 2001 consisted of $61.8 million borrowed under the AirGate credit facility and $6.7 million of proceeds received from exercise of options and warrants. The $6.5 million of cash used in financing activities in the year ended September 30, 2000 consisted of the repayment of a $7.7 million unsecured promissory note partially offset by $1.2 million received from the exercise of options to purchase common stock by employees and the exercise of common stock purchase warrants. For the year ended September 30, 2002, cash provided by financing activities attributable to AirGate and iPCS was $62.5 million and $79.8 million, respectively. Liquidity Due to the factors described under "Business Overview - Current Operating Environment and its Impact on the Company," management has made changes to the assumptions underlying the long-range business plans for AirGate and iPCS. These changes included lower new subscribers, lower ARPU, higher subscriber churn, increased service and pass through costs from Sprint in the near-term and lower roaming margins from Sprint. Despite cost cutting and other measures, liquidity is an issue for iPCS in the near-term and we do not believe it has sufficient cash flow from operations to pay its operating costs, capital expenditures and debt service as it becomes due over the next year and beyond. We retained Houlihan Lokey Howard & Zukin Capital to review iPCS' revised long range business plan, the strategic alternatives available to iPCS and to assist iPCS in developing and implementing a plan to improve its capital structure. Because current conditions in the capital markets make additional financing unlikely, iPCS has undertaken efforts to restructure its relationship with its secured lenders, its public noteholders and Sprint, and we have begun restructuring discussions with informal committees of these creditors. While the lenders and noteholders have expressed willingness to work with iPCS, Sprint has informed us it is unwilling to restructure its agreements with iPCS. Because of its deteriorating financial condition, it is likely that iPCS will soon be required to seek protection under the federal bankruptcy laws in an effort to effect a court-administered reorganization. Even if a cooperative restructuring is possible, it is likely that a court-administered reorganization would be a part of that process. As of December 30, 2002, iPCS was in default under certain covenants contained in its credit facility and the indenture governing its notes. Because of these events of default, the senior lenders will have the ability to accelerate iPCS' payment obligations under the iPCS credit facility and the holders of the iPCS notes will have the ability to accelerate iPCS' payment obligations under iPCS' indenture, after giving notice and the expiration of applicable cure periods. iPCS does not anticipate being able to cure these defaults. iPCS is working with its lenders and noteholders on a forbearance agreement, however there is no assurance that these negotiations will be successful. In any event, we anticipate that iPCS will default on certain financial covenants as of March 31, 2003 and it is probable that iPCS will file for bankruptcy in the near term, and these events are also events of default under the iPCS credit facility. Because iPCS is an unrestricted subsidiary, AirGate is generally unable to provide capital or other financial support to iPCS. Further, iPCS lenders, noteholders and creditors do not have a lien on or encumbrance on assets of AirGate. We believe AirGate operations will continue independent of the outcome of the iPCS restructuring. While AirGate has also experienced a deterioration in its liquidity, it appears that it is in a better position to address the issues discussed above. It has a larger subscriber base than iPCS and, as a stand-alone operation, AirGate's business is more mature. Based upon its current business plan, which continues to be revised and evaluated in light of evolving circumstances, we expect that AirGate will have sufficient funds from operations and amounts available under its credit facility to satisfy our working capital requirements, capital expenditures and other liquidity requirements through fiscal 2003. Capital Resources At September 30, 2002, the Company had $32.5 million of cash and cash equivalents, consisting of $4.9 million for AirGate and $27.6 million for iPCS. Total availability under the AirGate credit facility was $17.0 million and total availability under the iPCS credit facility was $10.0 million. As of December 31, 2002, $12.0 million remained available for borrowing under the AirGate credit facility. The Company's obligations under the AirGate credit facility are secured by all of AirGate's assets, but not assets of iPCS and its subsidiaries. 55 As of December 31, 2002, there was no remaining availability under the iPCS credit facility, which was amended during November 2002 to reduce availability by $10.0 million to $130.0 million. As described above under "Liquidity," iPCS is currently in default of certain covenants under its credit facility. Upon giving the appropriate notice and passage of cure periods, the lenders will have the ability to accelerate iPCS' payment obligations under the iPCS credit facility and the holders of its notes will have the ability to accelerate iPCS' payment obligations to them under the indenture governing such notes. iPCS would not have sufficient resources to meet its payment obligations in the event of any such acceleration. iPCS' obligations under the iPCS credit facility are secured by all of iPCS' operating assets, but not other assets of AirGate and its restricted subsidiaries. Future Trends That May Affect Operating Results, Liquidity and Capital Resources Our business plan and estimated future operating results are based on estimates of key operating metrics, including subscriber growth, subscriber churn, capital expenditures, ARPU, losses on sales of handsets and other subscriber acquisitions costs, and other operating costs. The unsettled nature of the wireless market, the current economic slowdown, increased competition in the wireless telecommunications industry, new service offerings of increasingly large bundles of minutes of use at lower prices by some major carriers, and other issues facing the wireless telecommunications industry in general have created a level of uncertainty that may adversely affect our ability to predict future subscriber growth as well as other key operating metrics. Certain other factors that may affect our operating results, liquidity and capital resources include the following: AirGate has limited funding options and the ability to draw remaining funds under the AirGate credit facility may be terminated. AirGate had only $12 million remaining available under the AirGate credit facility as of December 31, 2002. AirGate currently has no additional sources of working capital other than EBITDA. AirGate's ability to borrow funds under the AirGate credit facility may be terminated due to its failure to maintain or comply with the restrictive financial and operating covenants contained in the agreements governing the AirGate credit facility. The AirGate credit facility contains covenants specifying the maintenance of certain financial ratios, reaching defined subscriber growth and network covered population goals, minimum service revenues, maximum capital expenditures, and beginning January 1, 2003, maintaining a ratio of total debt to annualized EBITDA, which ratio is 6.90 for 2003. The Company believes that it is currently in compliance in all material respects with all financial and operational covenants relating to the AirGate credit facility. If the Company is unable to operate the AirGate business within the covenants specified in the AirGate credit facility, the Company's ability to obtain future amendments to the covenants in AirGate's credit facility is not assured and the ability to make borrowings required to operate the AirGate business could be restricted or terminated. Such a restriction or termination would have a material adverse affect on AirGate's liquidity and capital resources. If our actual revenues are less than we expect or operating or capital costs are more than we expect, our financial condition and liquidity may be materially adversely affected. In such event, there is substantial risk that the Company could not access the credit or capital markets for additional capital. Variable interest rates may increase substantially. At September 30, 2002, the Company had borrowed $266.5 million under the AirGate and iPCS credit facilities. The rate of interest on those credit 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). For the year ended September 30, 2002, the weighted average interest rate under variable rate borrowings were 5.6% under the AirGate credit facility and 5.7% under the iPCS credit facility. The combined Company's weighted average borrowing rate on variable rate borrowings at September 30, 2002, was 5.63%. If interest rates increase, the Company may not have the ability to service the interest requirements on its credit facilities. Further, if AirGate or iPCS were to default under their respective credit facility, such Company's rate of interest would increase by an additional 2%. The Company operates with negative working capital because of amounts owed to Sprint. Each month the Company pays Sprint expenses described in greater detail under "Results of Operations" and "Related Party Transactions--Transactions with Sprint." A reduction in the amounts the Company owes Sprint may result in a greater use of cash for working capital purposes than the business plans currently project. Other factors. Other factors which could adversely affect our liquidity and capital resources are described in this report at Risk Factors, including the following: o our revenues may be less than we anticipate, o our costs may be higher than we anticipate, 56 o we may continue to experience a high rate of subscriber turnover, o our efforts to reduce costs may not succeed or may have adverse affects on our business, o our provision for doubtful accounts may not be sufficient to cover uncollectible accounts, o if AirGate does not meet all of the conditions required under its credit facility, it may not be able to draw down all of the funds it anticipates receiving from its senior lenders, o the restructuring of iPCS, o in the event of iPCS' bankruptcy or insolvency, AirGate may not be able to reduce its general and administrative costs in an amount sufficient to subsidize the portion of the combined Company's costs currently borne by iPCS, and o risks related to our relationship with Sprint. Contractual Obligations The Company is obligated to make future payments under various contracts it has entered into, including amounts pursuant to the AirGate and iPCS credit facilities, the AirGate notes, the iPCS notes, capital leases and non-cancelable 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 September 30, 2002, are as follows (dollars in thousands):
Payments Due By Period ---------------------- Years Ended September 30, ------------------------- Contractual Obligation Total 2003 2004 2005 2006 2007 Thereafter ---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- AirGate credit facility (1) $ 136,500 $ 2,024 $ 15,863 $ 21,150 $ 26,920 $ 35,400 $ 35,143 AirGate notes 300,000 -- -- -- -- -- 300,000 AirGate operating leases (2) 75,284 19,096 18,313 13,711 8,768 5,766 9,630 ---------- ---------- ---------- ---------- ---------- ---------- ---------- AirGate subtotal $ 511,784 $ 21,120 $ 34,176 $ 34,861 $ 35,688 $ 41,166 $ 344,773 ---------- ---------- ---------- ---------- ---------- ---------- ---------- iPCS credit facility (1)(3) $ 130,000 $ -- $ 9,750 $ 17,875 $ 29,250 $ 32,500 $ 40,625 iPCS notes (3) 300,000 -- -- -- -- -- 300,000 iPCS operating leases (2) 71,029 13,214 12,593 11,663 8,694 6,094 18,771 iPCS capital leases 1,285 4 74 77 81 84 965 ---------- ---------- ---------- ---------- ---------- ---------- ---------- iPCS subtotal $ 502,314 $ 13,218 $ 22,417 $ 29,615 $ 38,025 $ 38,678 $ 360,361 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $1,014,098 $ 34,338 $ 56,593 $ 64,476 $ 73,713 $ 79,844 $ 705,134 ========== ========== ========== ========== ========== ========== ========== Total after reclassification(3) $1,014,098 $ 464,338 $ 46,843 $ 46,601 $ 44,463 $ 47,344 $ 364,509 ========== ========== ========== ========== ========== ========== ==========
(1) Total repayments are based upon borrowings outstanding as of September 30, 2002, not projected borrowings under the respective credit facility. (2) Does not include payments due under renewals to the original lease term. (3) Amounts in this table do not reflect the current classification of the iPCS credit facility and iPCS notes as a result of the event of default discussed below. Total after reclassification reflects amounts due under the iPCS credit facility and notes in 2003 as a result of the event of default. The AirGate $153.5 million 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 AirGate credit agreement is for a $140.0 million senior secured term loan, which matures on September 30, 2008. The AirGate credit facility requires 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. The AirGate notes will require cash payments of interest beginning on April 1, 2005. The iPCS credit facility provides for a $80.0 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 iPCS credit facility is for a $50.0 million senior secured term loan, which also matures on December 31, 2008. The iPCS credit facility requires 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. The iPCS notes will require cash payments of interest beginning on January 15, 2006. As of December 31, 2002, two major credit rating agencies rate AirGate's and iPCS' unsecured debt. The ratings were as follows: 57 Type of facility Moody's S&P ---------------- ------- --- AirGate notes CAA2 CC iPCS notes CA CC On December 31, 2002, S&P downgraded AirGate's corporate rating from CCC+ to CCC- and its rating of the AirGate notes from CCC- to CC. In addition, S&P downgraded iPCS' corporate rating from CCC- to CC. AirGate has also been placed on credit watch with negative implications pending the cure of a default under its senior credit facility and its notes. There are provisions in each of the agreements governing the credit facilities, the AirGate notes and the iPCS notes providing for an acceleration of repayment upon an event of default, as defined in the respective agreements. As discussed previously, because of iPCS' default under its credit facility, iPCS' senior lenders and noteholders have the ability to accelerate its payment obligations, after giving notice and the expiration of applicable cure periods. iPCS is working with its lenders and noteholders on a forbearance agreement, however there is no assurance that these negotiations will be successful. The Company has no off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts. Seasonality The Company's 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 subscriber 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 available financial resources during this period. We expect, however, that fourth quarter seasonality will have less impact in the future. RELATED PARTY TRANSACTIONS AND TRANSACTIONS BETWEEN AIRGATE AND IPCS Transactions with Sprint Under the Sprint agreements, Sprint provides the Company significant support services such as customer service, billing, collections, long distance, national network operations support, inventory logistics support, use of the Sprint and Sprint PCS brand names, national advertising, national distribution and product development. Additionally, the Company derives substantial roaming revenue and incurs substantial roaming expenses when Sprint's and Sprint's network partners' PCS wireless subscribers incur minutes of use in the Company's territories and when the Company's subscribers incur minutes of use in Sprint's and Sprint's network partners' PCS territories. These transactions are recorded in the roaming revenue, cost of service and roaming, cost of equipment and selling and marketing expense captions in the statement of operations. Cost of service and roaming transactions relate to the affiliation fee, long distance charges, roaming expenses, and the costs of services such as billing, collections and customer service. Cost of equipment transactions relate to inventory purchased by the Company from Sprint under the Sprint agreements. Selling and marketing transactions relate to subsidized costs on handsets and commissions paid by the Company under Sprint's national distribution program. Amounts relating to the Sprint agreements for the years ended September 30, 2002, 2001 and 2000, are as follows (dollars in thousands):
For Years Ended September 30, ------------------------------ 2002 2001 2000 -------- -------- -------- Amounts included in the Consolidated Statement of Operations: AirGate roaming revenue ................................ $ 70,002 $ 53,863 $ 11,798 AirGate cost of service and roaming: Roaming ........................................... $ 52,746 $ 40,472 $ 3,171 Customer service .................................. 40,454 15,526 1,542 Affiliation fee ................................... 15,815 7,603 757 Long distance ..................................... 13,846 6,556 1,119 Other ............................................. 2,115 1,252 145 -------- -------- -------- AirGate cost of service and roaming: ................... $124,976 $ 71,409 $ 6,734 AirGate purchased inventory ............................ $ 23,662 $ 19,405 $ 7,571 AirGate selling and marketing .......................... $ 21,728 $ 20,827 $ 5,716 iPCS roaming revenue ................................... $ 33,137 -- -- iPCS cost of service and roaming Roaming ........................................... $ 25,723 -- -- Customer service .................................. 19,367 -- --
58
Affiliation fee ................................... 8,011 -- -- Long distance ..................................... 7,686 -- -- Other ............................................. 781 -- -- -------- -------- -------- iPCS cost of service and roaming ....................... $ 61,568 -- -- iPCS purchased inventory ............................... $ 17,097 -- -- iPCS selling and marketing ............................. $ 9,970 -- -- As of September 30, ------------------------------------- 2002 2001 ---- ---- Receivable from Sprint $ 44,953 $ 10,200 Payable to Sprint (88,360) (32,564)
Transactions between AirGate and iPCS The Company formed AirGate Service Company, Inc. ("ServiceCo") to provide management services to both AirGate and iPCS. ServiceCo is a wholly-owned restricted subsidiary of AirGate. Personnel who provide general management services to AirGate and iPCS have been leased to ServiceCo, which include 188 employees at September 30, 2002. Generally, the management personnel include the corporate staff in the Company's principal corporate offices in Atlanta and the accounting staff in Geneseo, Illinois. ServiceCo expenses are allocated between AirGate and iPCS based on the percentage of subscribers they contribute to the total number of Company subscribers (the "ServiceCo Allocation"), which is currently 60% AirGate and 40% iPCS. Expenses that are related to one company are allocated to that company. Expenses that are related to ServiceCo or both companies are allocated in accordance with the ServiceCo Allocation. For the year ended September 30, 2002, iPCS paid ServiceCo a net total of $1.7 million for ServiceCo expenses. We anticipate that the net ServiceCo allocation to iPCS in fiscal year 2003 will be approximately $4.6 million. AirGate has completed transactions at arms-length in the normal course of business with its unrestricted subsidiary iPCS. These transactions are comprised of roaming revenue and expenses, inventory sales and purchases and sales of network operating equipment as further described below. In the normal course of business under AirGate's and iPCS' Sprint agreements, AirGate's subscribers incur minutes of use in iPCS' territory causing AirGate to incur roaming expense (roaming revenue to iPCS). In addition, iPCS' subscribers incur minutes of use in AirGate's territory for which AirGate receives roaming revenue (roaming expense to iPCS). AirGate received $0.4 million of roaming revenue and incurred $0.4 million of roaming expense to iPCS during the year ended September 30, 2002. The reciprocal roaming rate charged and other terms are established under AirGate's and iPCS' agreements with Sprint. In order to optimize the most efficient use of certain models of wireless handset inventory in relation to regional demand, in fiscal 2002 AirGate sold approximately $0.1 million of wireless handset inventory to iPCS. Additionally AirGate purchased approximately $0.2 million of wireless handset inventory from iPCS. These transactions were completed at fair value. At September 30, 2002, neither AirGate nor iPCS were carrying any wireless handset inventory purchased from each other. AirGate sold approximately $0.2 million of network operating equipment to iPCS in fiscal 2002 at fair value. Additionally, iPCS sold to AirGate approximately $0.7 million of network operating equipment at fair value. The terms and conditions of each of the transactions described above are comparable to those that could have been obtained in transactions with unaffiliated entities. Transactions Involving Board Members AirGate purchases telecommunication services for its network from New South Communications. James Akerhielm, a member of AirGate's board of directors during the year ended September 30, 2002, is the president and chief executive officer and a member of the board of directors of New South Communications, Inc. Mr. Akerhielm was elected to the board of directors of the Company during May 2002. For the year ended September 30, 2002, AirGate purchased $0.7 million of telecommunication services from New South Communications, less than 1% of AirGate's revenues. The terms and conditions of such transactions are comparable to those that could have been obtained in transactions with unaffiliated entities. Pursuant to his employment agreement, iPCS purchases consulting services from Tim Yager who served on AirGate's board of directors during the year ended September 30, 2002. For the year ended September 30, 2002, iPCS purchased $0.3 million of consulting services from Tim Yager. Messrs. Akerhielm and Yager have both recently resigned from AirGate's board of directors. 59 Inflation Our management believes that inflation has not had, and will not have, a material adverse effect on our results of operation. ITEM 7A. Quantitative And Qualitative Disclosure About Market Risk In the normal course of business, the Company's operations are exposed to interest rate risk on its credit facilities and any future financing requirements. The Company's fixed rate debt consists primarily of the accreted carrying value of the 1999 AirGate notes ($220.2 million at September 30, 2002) and the 2000 iPCS notes ($223.1 million at September 30, 2002). Our variable rate debt consists of borrowings made under the AirGate credit facility ($136.5 million at September 30, 2002) and the iPCS credit facility ($130.0 million at September 30, 2002). For the year ended September 30, 2002, the weighted average interest rate under the AirGate credit facility was 5.6% and under the iPCS credit facility was 5.7%. Our primary interest rate risk exposures relate to (i) the interest rate on long-term borrowings; (ii) our ability to refinance the AirGate and iPCS 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. The Company manages the interest rate risk on its outstanding long-term debt through the use of fixed and variable rate debt and the use of an interest rate cap with regard to a portion of the iPCS debt. While the Company cannot predict its ability to refinance existing debt or the impact interest rate movements will have on existing debt, the Company continues to evaluate its 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 AirGate and iPCS notes and credit facilities based on projected levels of long-term indebtedness:
Years Ending September 30, ----------------------------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter ---- ---- ---- ---- ---- ---------- (Dollars in thousands) AirGate 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 AirGate credit facility $151,475 $133,700 $110,000 $ 79,893 $ 40,000 -- Variable interest rate (1) 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% Principal payments $ 2,025 $ 17,775 $ 23,700 $ 30,107 $ 39,893 $ 40,000 iPCS credit facility (2) $130,000 $120,250 $102,375 $ 73,125 $ 40,625 -- Variable interest rate (1) 5.75% 5.75% 5.75% 5.75% 5.75% 5.75% Principal payments -- $ 9,750 $ 17,875 $ 29,250 $ 32,500 $ 40,625 iPCS notes (2) $252,093 $285,118 $296,967 $297,165 $300,000 -- Fixed interest rate 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% Principal payments -- -- -- -- -- $300,000
(1) The interest rate on the credit facilities 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 $2.7 million increase (decrease) in the related interest expense on an annual basis. (2) Amounts in this table do not reflect the current classification of the iPCS credit facility and iPCS notes as a result of the event of default discussed elsewhere in this report. ITEM 8. Financial Statements Our financial statements are listed under Item 15(a) of this annual report and are filed as part of this report on the pages indicated. ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure None. 60 PART III ITEM 14. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) for the Company. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing date of this annual report, have concluded that our disclosure controls and procedures are adequate and effective in timely alerting them to material information relating to the Company required to be included in its periodic Securities and Exchange Commission filings. Under our agreements with Sprint, Sprint provides us with billing, collections, customer care and other back office services. As a result, Sprint remits approximately 96% of our revenues to us. In addition, approximately 60% of cost of service and roaming in our consolidated financial statements relate to charges from Sprint for its affiliation fee, charges for services provided under our agreements with Sprint such as billing, collections and customer care, roaming expense, long-distance, and pass-through and other fees and expenses. The Company, as a result, necessarily relies on Sprint to provide accurate, timely and sufficient data and information to properly record our revenues, expenses and accounts receivable which underlie a substantial portion of our periodic financial statements and other financial disclosures. The relationship with Sprint is established by our agreements and our flexibility to use a service provider other than Sprint is limited. Because of our reliance on Sprint for financial information, the Company must depend on Sprint to design adequate internal controls with respect to the processes established to provide this data and information to the Company and Sprint's other network partners. To address this issue, Sprint engages its independent auditors to perform a periodic evaluation of these controls and to provide a "Report on Controls Placed in Operation and Tests of Operating Effectiveness for Affiliates" under guidance provided in Statement of Auditing Standards No. 70. This report is provided annually to the Company and covers the Company's entire fiscal year. Information provided by Sprint includes reports regarding our subscriber accounts receivable. During the last quarter of fiscal 2002, Company personnel began inquiring about differences between various accounts receivable reports provided by Sprint. We continued to make inquiries and have discussions with Sprint regarding these differences until, in early December, Sprint informed us that certain accounts receivable reports provided to the Company could not be relied upon for financial reporting purposes. Since that time, Sprint and the Company have worked cooperatively to confirm the correct accounts receivable balances and to reconcile inconsistencies with reports previously relied on by the Company. In connection with this review of accounts receivable, the Company has reclassified approximately $10.0 million of subscriber accounts receivable for the fiscal year ended September 30, 2002 to a receivable from Sprint. We believe at least $10.0 million is payable from Sprint, but Sprint has acknowledged only $5.8 million is owed to Airgate. We are in discussions with Sprint regarding the differences and have provided for these discussions in our consolidated financial statements. Changes in Internal Controls As indicated above, it is inherent in our relationship with Sprint that we rely on Sprint to provide accurate, timely and sufficient data and information to properly record the revenues, expenses and accounts receivable which underlie a substantial portion of our periodic financial statements and other financial disclosures. We and our independent auditors believe that the accounts receivable issue resulted from a reportable condition in internal controls. We will focus additional resources on reviewing and analyzing information provided by Sprint and we are working with Sprint to identify other information and reports that would assist us in this review and analysis, particularly as it relates to accounts receivable and the application of cash. We continue to assess and explore, both internally and with Sprint, what other measures might be adopted to avoid this or similar reporting problems in the future. 61 PART IV ITEM 15. Financial Statements, Schedules, Reports On Form 8-K And Exhibits (a) Financial Statements 1. The following financial statements are filed with this report on the pages indicated:
Page ---- Independent Auditors' Report ........................................................................ F-1 Consolidated Balance Sheets as of September 30, 2002 and September 30, 2001 ......................... F-2 Consolidated Statements of Operations for the years ended September 30, 2002, 2001 and 2000 ......... F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended September 30, 2002, 2001 and 2000 ..................................................................................... F-4 Consolidated Statements of Cash Flows for the years ended September 30, 2002, 2001 and 2000 ......... F-5 Notes to the Consolidated Financial Statements ...................................................... F-6 (b) Financial Statement Schedule Financial Statement Schedule Report of Independent Auditors' on Financial Statement Schedule ................................. F-32 Schedule II--Valuation and Qualifying Accounts .................................................. F-33
1. Exhibits See Item 15(c) below (c) Reports on Form 8-K The following Current Reports on 8-K were filed by AirGate during the quarter ended September 30, 2002: On July 9, 2002, AirGate furnished a Current Report on Form 8-K with the Securities and Exchange Commission under Item 9 - Regulation FD Disclosure relating to its press release announcing its net subscriber additions for the third fiscal quarter and that iPCS had attained its minimum subscriber covenant under the iPCS senior secured credit facility. On August 8, 2002, AirGate furnished a Current Report on Form 8-K with the Securities and Exchange Commission under Item 9 - Regulation FD Disclosure relating to its press release announcing its financial and operating results for the third fiscal quarter and nine months ended June 30, 2002. 62 (d) Exhibits AirGate Exhibits Exhibit Number Number description ------ ------------------ 3.1 Restated Certificate of Incorporation of AirGate PCS, Inc. dated December 17, 2002. 3.2 Amended and Restated Bylaws of AirGate PCS, Inc. dated December 17, 2002. 4.1 Specimen of common stock certificate of AirGate PCS, Inc. (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 4.2 Form of warrant issued in units offering (included in Exhibit 10.20) 4.3 Form of Lucent Warrants (Incorporated by reference to Exhibit 4.4 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on September 17, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 4.4 Form of Indenture for senior subordinated discount notes (including form of pledge agreement) (Incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on September 23, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 4.5 Form of unit (included in Exhibit 10.20) 10.1 Sprint PCS Management Agreement and Addenda I-III thereto between SprintCom, Inc. and AirGate Wireless, L.L.C. (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.2 Assignment of Sprint PCS Management Agreement, Sprint Spectrum Services Agreement and Trademark and Service Mark Agreement from AirGate Wireless, L.L.C. to AirGate Wireless, Inc. dated November 20, 1998 (Incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on August 9, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.3 Addendum IV to Sprint PCS Management Agreement dated August 26, 1999 by and among SprintCom, Inc., Sprint Communications Company, L.P., Sprint Spectrum L.P. and AirGate PCS, Inc. (Incorporated by reference to Exhibit 10.1.2 to the annual report on Form 10-K filed by AirGate with the Commission on December 18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455)) 10.4 Addendum V to Sprint PCS Management Agreement dated May 12, 2000 by and among SprintCom, Inc., Sprint Communications Company, L.P. and AirGate PCS, Inc. (Incorporated by reference to Exhibit 10.1.3 to the annual report on Form 10-K filed by AirGate with the Commission on December 18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455)) 10.5 Addendum VI to Sprint PCS Management Agreement dated December 8, 2000 by and among SprintCom, Inc., Sprint Communications Company, L.P., Sprint Spectrum L.P. and AirGate PCS, Inc. (Incorporated by reference to Exhibit 10.1.4 to the quarterly report on Form 10-Q filed by AirGate with the Commission on February 14, 2001 for the quarter ended December 31, 2000 (SEC File No. 000-27455)) 10.6 Schedule of Definitions to Sprint PCS Management Agreement by and among SprintCom, Inc. and AirGate Wireless, L.L.C. (Incorporated by reference to Exhibit 10.33 to the quarterly report on Form 10-Q filed by AirGate with the Commission on May 15, 2002 for the quarter ended March 31, 2002 (SEC File No. 000-27455)) 63 Exhibit Number Number description ------ ------------------ 10.7 Sprint PCS Services Agreement between Sprint Spectrum L.P. and AirGate Wireless, L.L.C. (Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.8 Sprint Spectrum Trademark and Service Mark License Agreement (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.9 Sprint Trademark and Service Mark License Agreement (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.10 Sales Agency Agreement made as of May 1, 2001 between Sprint Communications Company L.P. and AirGate PCS, Inc. 10.11 Consent and Agreement (Incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on September 17, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.12 Master Site Agreement dated August 6, 1998 between AirGate and BellSouth Carolinas PCS, L.P. and BellSouth Personal Communications, Inc. (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.13 Notice to AirGate of an assignment of sublease dated September 20, 1999 between BellSouth Cellular Corp. and Crown Castle South Inc., given pursuant to Section 16(b) of the Master Site Agreement. (Incorporated by reference to Exhibit 10.5.1 to the annual report on Form 10-K filed by AirGate with the Commission on December 18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455)) 10.14 Master Tower Space Reservation and License Agreement dated February 19, 1999 between AGW Leasing Company, Inc. and American Tower, L.P. (Incorporated by reference to Exhibit 10.5.2 to the annual report on Form 10-K filed by AirGate with the Commission on December 18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455)) 10.15 Master Antenna Site Lease No. J50 dated July 20, 1999 between Pinnacle Towers Inc. and AGW Leasing Company (Incorporated by reference to Exhibit 10.5.3 to the annual report on Form 10-K filed by AirGate with the Commission on December 18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455)) 10.16 Commercial Real Estate Lease dated August 7, 1998 between AirGate and Perry Company of Columbia, Inc. to lease a warehouse facility (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on July 12, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.17 Lease Agreement dated August 25, 1999 between Robert W. Bruce, Camperdown Company, Inc. and AGW Leasing Company, Inc. to lease office/warehouse space in Greenville, South Carolina (Incorporated by reference to Exhibit 10.7.1 to the annual report on Form 10-K filed by AirGate with the Commission on December 18, 2000 for the year ended September 30, 2000 (SEC File No. 000-27455)) 64 Exhibit Number Number description ------ ------------------ 10.18 Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.19 Credit Agreement with Lucent (including form of pledge agreement and form of intercreditor agreement) (Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on September 17, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.20 Form of Warrant for units offering (including form of warrant in units offering and form of unit) (Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on September 23, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.21 Employment Agreement dated April 9, 1999 by and between AirGate PCS, Inc. and Thomas M. Dougherty (Incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1/A filed by AirGate with the Commission on June 15, 1999 (SEC File Nos. 333-79189-02 and 333-79189-01)) 10.22 First Amendment to Employment Agreement dated December 20, 1999 between AirGate PCS, Inc. and Thomas M. Dougherty (Incorporated by reference to Exhibit 10.16 to the quarterly report on Form 10-Q filed by AirGate with the Commission on May 15, 2000 for the quarter ended March 31, 2000 (SEC File No.000-27455)) 10.23 Retention Bonus Agreement dated May 4, 2000 between AirGate PCS, Inc. and Thomas M. Dougherty (Incorporated by reference to Exhibit 10.17 to the quarterly report on Form 10-Q filed by AirGate with the Commission on May 15, 2000 for the quarter ended March 31, 2000 (SEC File No. 000-27455)) 10.24 Employment Agreement dated as of September 27, 1999 by and between AirGate PCS, Inc. and David C. Roberts (Incorporated by reference to Exhibit 10.22 to the annual report on Form 10-K filed by AirGate with the Commission on November 30, 2001 for the year ended September 30, 2001 (SEC File No. 000-27445)) 10.25 Employment Agreement dated as of August 30, 2000 by and between AirGate PCS, Inc. and Barbara L. Blackford (Incorporated by reference to Exhibit 10.23 to the annual report on Form 10-K filed by AirGate with the Commission on November 30, 2001 for the year ended September 30,r 2001 (SEC File No. 000-27445)) 10.26 Separation Agreement and Release dated October 31, 2002, by and between AirGate PCS, Inc. and Alan Catherall 10.27 Offer Letter, effective October 24, 2002, by and between AirGate PCS, Inc. and William H. Seippel 10.28 AirGate PCS, Inc. 1999 Stock Option Plan (Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed by AirGate with the Commission on April 10, 2000 (SEC File No. 333-34416)) 10.29 Form of AirGate PCS, Inc. Option Agreement (Incorporated by reference to Exhibit 10.25 to the annual report on Form 10-K filed by AirGate with the Commission on November 30, 2001 for the year ended September 30, 2001 (SEC File No. 000-27455)) 10.30 AirGate PCS, Inc. 2001 Non-Executive Stock Option Plan (Incorporated by reference to Exhibit 10.11.2 to the quarterly report on Form 10-Q filed by AirGate with the Commission on February 14, 2001 for the quarter ended December 31, 2000 (SEC File No. 000-27455)) 65 Exhibit Number Number description ------ ------------------ 10.31 AirGate PCS, Inc. 2001 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.11.3 to the quarterly report on Form 10-Q filed by AirGate with the Commission on February 14, 2001 for the quarter ended December 31, 2000 (SEC File No. 000-27455)) 10.32 AirGate PCS, Inc. 2001 Non-Employee Director Compensation Plan (Incorporated by reference to Exhibit 10.30 to the annual report on Form 10-K filed by AirGate with the Commission on November 30, 2001 for the year ended September 30, 2001 (SEC File No. 000-27455)) 10.33 2002 AirGate PCS, Inc. Long-Term Incentive Plan (Incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed by AirGate with the Commission on March 29, 2002 (SEC File No. 333-85250) 10.34 Agreement and Plan of Merger, dated as of August 28, 2001, by and between AirGate PCS, Inc. and iPCS, Inc. (Incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by AirGate with the Commission on August 31, 2001 (SEC File No. 000-27455)) 10.35 Form of Registration Rights Agreement 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 Mezzanine 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 Telcom, Inc., Cass Communications, Inc., Technology Group, LLC, Montrose Mutual PCS, Inc., Gridley Enterprises, Inc., Timothy M. Yager and Kelly M. Yager (Incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by AirGate with the Commission on August 31, 2001 (SEC File No. 000-27455) 10.36 Services Agreement dated as of January 1, 2002 by and among AirGate PCS, Inc., AirGate Service Company, Inc., iPCS, Inc. and iPCS Wireless, Inc. (Incorporated by reference to Exhibit 10.34 to the quarterly report on Form 10-Q filed by AirGate with the Commission on May 15, 2002 for the quarter ended March 31, 2002 (SEC File No. 000-27455)). 10.37 Technology License Agreement dated as of January 1, 2002 by and among AirGate PCS, Inc., AGW Leasing Company, Inc., AirGate Service Company, Inc., AirGate Network Services, Inc., iPCS, Inc., iPCS Wireless, Inc. and iPCS Equipment, Inc. (Incorporated by reference to Exhibit 10.35 to the quarterly report on Form 10-Q filed by AirGate with the Commission on May 15, 2002 for the quarter ended March 31, 2002 (SEC File No. 000-27455)). 21 Subsidiaries of AirGate PCS, Inc. 23 Consent of KPMG LLP 24 Power of Attorney 99.1 Certification of Thomas M. Dougherty pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. ss. 1350. 99.2 Certification of William H. Seippel pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. ss. 1350. 66 iPCS Material Contracts Exhibit Number Number description ------ ------------------ 2.1 Asset Purchase Agreement, dated as of January 10, 2001, by and among Sprint Spectrum L.P. and its subsidiaries Sprint Spectrum Equipment Company, L.P. and Sprint Spectrum Realty Company, L.P., and iPCS Wireless, Inc. (Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K filed by iPCS with the Commission on March 15, 2001) 4.1 14% Senior Discount Notes due 2010 Indenture dated as of July 14,2000 by and among iPCS, Inc., as issuer, iPCS Equipment, Inc. and iPCS Wireless, Inc., as guarantors, and CTC Illinois Trust Company, as trustee (Incorporated by reference to Exhibit 4.2 to the registration statement on Form S-4 filed by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 10.1* Sprint PCS Management Agreement, as amended, dated as of January 22, 1999 by and among Sprint Spectrum L.P., SprintCom, Inc., WirelessCo, L.P. and Illinois PCS, LLC, as amended by Addendum I, Addendum II, Amended and Restated Addendum III, Addendum IV, and Addendum V thereto (Incorporated by reference to exhibits to the registration statement on Form S-4/A filed by iPCS with the Commission on January 8, 2001 (SEC File No. 333-47688)) 10.2* Addendum VI to Sprint PCS Management Agreement dated February 28, 2001 by and among SprintCom, Inc., Sprint Communications Company, L.P., Sprint Spectrum, L.P., WirelessCo, L.P. and iPCS Wireless, Inc. (incorporated by reference to Exhibit 10.40 to the annual report on Form 10-K405 filed by iPCS with the Commission on March 29, 2001) 10.3 Addendum VII to Sprint PCS Management Agreement dated August 26, 2002 by and among SprintCom, Inc., Sprint Communications Company, L.P., Sprint Spectrum L.P., WirelessCo, L.P. and iPCS Wireless, Inc. 10.4 Schedule of Definitions to Sprint PCS Management Agreement by and among Sprint Spectrum, L.P., SprintCom, Inc., WirelessCo, L.P. and Illinois PCS, LLC. 10.5 Sprint PCS Services Agreement dated as of January 22, 1999 by and between Sprint Spectrum L.P. and Illinois PCS, LLC (Incorporated by reference to Exhibit 10.2 to the registration statement on Form S-4/A filed by iPCS with the Commission on January 8, 2001 (SEC File No. 333-47688)) 10.6 Sprint Trademark and Service Mark License Agreement dated as of January 22, 1999 by and between Sprint Communications Company, LP and Illinois PCS, LLC (Incorporated by reference to Exhibit 10.3 to the registration statement on Form S-4/A filed by iPCS with the Commission on January 8, 2001 (SEC File No. 333-47688)) 10.7 Sprint Spectrum Trademark and Service Mark License Agreement dated as of January 22, 1999 by and between Sprint Spectrum L.P. and Illinois PCS, LLC (Incorporated by reference to Exhibit 10.4 to the registration statement on Form S-4/A filed by iPCS with the Commission on December 1, 2000 (SEC File No. 333-47688)) 10.8 Amended and Restated Consent and Agreement dated as of July 12, 2000 by and between Sprint Spectrum L.P., SprintCom, Inc., Sprint Communications Company, LP, WirelessCo, L.P., and Toronto Dominion (Texas), Inc. and the lenders party thereto (Incorporated by reference to Exhibit 10.5 to the registration statement on Form S-4/A filed by iPCS with the Commission on December 1, 2000 (SEC File No. 333-47688)) 10.9 Amended and Restated Credit Agreement dated as of July 12, 2000 by and among iPCS Wireless, Inc., as borrower, iPCS, Inc. and iPCS Equipment, Inc. as guarantors, the lenders named therein, Toronto Dominion (Texas), Inc., as administrative agent, and GE Capital Corporation, as syndication agent, for a $140.0 million credit facility (Incorporated by reference to Exhibit 10.6 to the registration statement on Form S-4 filed by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 67 Exhibit Number Number description ------ ------------------ 10.10 First Amendment to Amended and Restated Credit Agreement and Consent dated as of February 23, 2001, by and among iPCS Wireless, Inc., as borrower, iPCS, Inc. and iPCS Equipment, Inc. as guarantors, and lenders named therein and Toronto Dominion (Texas), Inc., as administrative agent (Incorporated by reference to Exhibit 10.37 to the annual report on Form 10-K405 filed by iPCS with the Commission on March 29, 2001) 10.11 Second Amendment to Amended and Restated Credit Agreement and Consent dated as of September 28, 2001, by and among iPCS Wireless, Inc., as borrower, iPCS, Inc. and iPCS Equipment, Inc. as guarantors, and lenders named therein and Toronto Dominion (Texas), Inc., as administrative agent (Incorporated by reference to Exhibit 10.40 to the quarterly report on Form 10-Q filed by iPCS with the Commission on November 14, 2001) 10.12 Third Amendment to Amended and Restated Credit Agreement dated December 19, 2001, by and among iPCS Wireless, Inc., as borrower, iPCS, Inc. and iPCS Equipment, Inc. as guarantors, and lenders named therein and Toronto Dominion (Texas), Inc., as administrative agent 10.13 Fourth Amendment to Amended and Restated Credit Agreement and Consent dated February 14, 2002, by and among iPCS Wireless, Inc., as borrower, iPCS, Inc. and iPCS Equipment, Inc. as guarantors, and lenders named therein and Toronto Dominion (Texas), Inc., as administrative agent (Incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by iPCS with the Commission on February 22, 2002) 10.14 Fifth Amendment to Amended and Restated Credit Agreement and Waiver dated November 1, 2002, by and among iPCS Wireless, Inc., as borrower, iPCS, Inc. and iPCS Equipment, Inc. as guarantors, and lenders named therein and Toronto Dominion (Texas), Inc., as administrative agent 10.15 Purchase Agreement dated as of July 12, 2000 for $300,000,000 of 300,000 units consisting of 14% Senior Discount Notes Due 2010 and warrants to purchase 2,982,699 shares of Common Stock (Incorporated by reference to Exhibit 10.18 to the registration statement on Form S-4 by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 10.16 A/B Exchange Registration Rights Agreement dated as of July 12, 2000 by and among iPCS Equipment, Inc., iPCS Wireless, Inc. and Donaldson Lufkin & Jenrette Securities Corporation and TD Securities (USA) Inc. (Incorporated by reference to Exhibit 10.24 to the registration statement on Form S-4 filed by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 10.17 Form of Global Notes (Incorporated by reference to Exhibit 10.25 to the registration statement on Form S-4 filed by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 10.18 Amended and Restated Employment Agreement effective as of January 1, 2001 by and between iPCS Wireless, Inc., Timothy M. Yager and iPCS, Inc. (Incorporated by reference to Exhibit 10.8 to the quarterly report on Form 10-Q filed by iPCS with the Commission on May 15, 2001) 10.19 Amended and Restated Employment Agreement effective as of July 1, 2000 by and between Illinois PCS, LLC, Patricia M. Greteman and iPCS, Inc. (Incorporated by reference to Exhibit 10.19 to the registration statement on Form S-4 filed by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 10.20 Lease dated as of June 1, 1999 by and between Gridley Enterprises, Inc. and Illinois PCS, LLC (Incorporated by reference to Exhibit 10.12 to the registration statement on Form S-1 filed by iPCS with the Commission on July 19, 2000 (SEC File No. 333-32064)) 10.21 Lease dated August 17, 2000 between Investment Lease Corporation and iPCS Wireless, Inc., as amended by the Lease Amendment dated October 4, 2000 and the Lease Amendment dated June 4, 2002. 68 Exhibit Number Number description ------ ------------------ 10.22 Lease dated May 5, 2000 between Barden Associates I, L.L.C. and Illinois PCS LLC, as amended by the Addendum dated August 30, 2000 and the Lease Addendum dated April 8, 2001. 10.23 Master Lease Agreement, dated as of August 31, 2000, by and between iPCS Wireless, Inc. and Trinity Wireless Towers, Inc. (Incorporated by reference to Exhibit 10.43 to the annual report on Form 10-K405 filed by iPCS with the Commission on March 29, 2001) 10.24 Agreement Regarding Construction, Sale and Leaseback of Towers dated as of May 28, 1999 between Illinois PCS, LLC and American Tower Corporation (Incorporated by reference to Exhibit 10.11 to the registration statement on Form S-4 filed by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 10.25 First Amendment to Agreement Regarding Construction, Sale and Leaseback of Towers dated as of November 2000 by and between America Tower Corporation and iPCS Wireless, Inc. (Incorporated by reference to Exhibit 10.44 to the annual report on Form 10-K405 filed by iPCS with the Commission on March 29, 2001) 10.26* CDMA 1900 SprintCom Additional Affiliate Supply Agreement dated as of May 24, 1999 between Illinois PCS, LLC and Nortel Networks, Inc. (Incorporated by reference to Exhibit 10.20 to the registration statement on Form S-4/A filed by iPCS with the Commission on January 8, 2001 (SEC File No. 333-47688)) 10.27* Amendment No. 1 to 1900 CDMA Additional Affiliate Supply Agreement dated as of July 11, 2000 between Illinois PCS, LLC and Nortel Networks, Inc. (Incorporated by reference to Exhibit 10.21 to the registration statement on Form S-4/A filed by iPCS with the Commission on January 8, 2001 (SEC File No. 333-47688)) 10.28* Amendment No. 2 to 1900 CDMA Additional Affiliate Supply Agreement by and among iPCS Wireless, Inc. and iPCS Equipment, Inc. and Nortel Networks Inc. (Incorporated by reference to Exhibit 10.38 to the annual report on Form 10-K405 filed by iPCS with the Commission on March 29, 2001) 10.29 Asset Purchase Agreement dated as of July 12, 2000 by and among Sprint Spectrum L.P., Sprint Spectrum Equipment Company, LP, Sprint Spectrum Realty Company, LP and iPCS Wireless, Inc. (Incorporated by reference to Exhibit 10.30 to the registration statement on Form S-4 filed by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 10.30 Interim Network Operating Agreement dated as of July 12, 2000 by and between Sprint Spectrum L.P. and iPCS Wireless, Inc. (Incorporated by reference to Exhibit 10.32 to the registration statement on Form S-4 filed by iPCS with the Commission on October 10, 2000 (SEC File No. 333-47688)) 10.31 Additional Affiliate Agreement dated as of July 12, 2000 by and between iPCS Wireless, Inc. and Lucent Technologies Inc. (Incorporated by reference to Exhibit 10.36 to the registration statement on Form S-4/A filed by iPCS with the Commission on December 1, 2000 (SEC File No. 333-47688)) 10.32 Amended and Restated Interim Network Operating Agreement, dated as of March 1, 2001 by and between Sprint Spectrum LP and iPCS Wireless, Inc. (Incorporated by reference to Exhibit 10.39 to the annual report on Form 10-K405 filed by iPCS with the Commission on March 29, 2001) - ---------- * Confidential treatment has been requested on portions of these documents 69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on January 16, 2003. AIRGATE PCS, INC. By: /S/ WILLIAM H. Sieppel ---------------------------------- William H. Sieppel Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /S/ THOMAS M. DOUGHERTY Chief Executive Officer and Director January 16, 2003 - --------------------------------------------------- (Principal Executive Officer) Thomas M. Dougherty /S/ WILLIAM H. SIEPPEL Chief Financial Officer (Principal January 16, 2003 - --------------------------------------------------- Financial and Accounting Officer) William H. Sieppel /S/ * Chairman of the Board of Directors January 16, 2003 - --------------------------------------------------- Barry Schiffman /S/ * Director January 16, 2003 - --------------------------------------------------- Robert A. Ferchat Vice President, General Counsel and January 16, 2003 By: /S/ BARBARA L. BLACKFORD Corporate Secretary - --------------------------------------------------- Barbara L. Blackford Attorney-in-fact
* Barbara L. Blackford, by signing her name hereto, does sign this document on behalf of the above noted individuals pursuant to powers of attorney duly executed by such individuals, which have been filed as an exhibit to this Report. 70 CERTIFICATIONS I, Thomas M. Dougherty, certify that: 1. I have reviewed this annual report on Form 10-K/A of AirGate PCS, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 16, 2003 /s/ Thomas M. Dougherty ------------------------- Thomas M. Dougherty Chief Executive Officer 71 I, William H. Sieppel, certify that: 1. I have reviewed this annual report on Form 10-K/A of AirGate PCS, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 16, 2003 s/ William H. Sieppel ------------------------ William H. Sieppel Chief Financial Officer 72 Independent Auditors' Report The Board of Directors AirGate PCS, Inc.: We have audited the accompanying consolidated balance sheets of AirGate PCS, Inc. and subsidiaries as of September 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended September 30, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AirGate PCS, Inc. and subsidiaries as of September 30, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in notes 1 and 6 to the consolidated financial statements, the Company's wholly-owned, unrestricted subsidiary, iPCS, Inc., is in default under provisions of its credit agreements, and substantially all of its debt is classified as a current liability. iPCS, Inc. has been unable to restructure its debt and secure additional financing necessary to fund its operations and, accordingly, iPCS, Inc. intends to file for reorganization and protection from its creditors under Chapter 11 of the United States Bankruptcy Code in early 2003 either as a part of a consensual restructuring or in an effort to effect a court administered reorganization. iPCS, Inc. represents approximately 32% of total consolidated revenues for the year ended September 30, 2002 and 50% of the total consolidated assets at September 30, 2002. AirGate PCS, Inc. and its restricted subsidiaries are generally precluded by its credit agreements from providing financial support to iPCS, Inc. Although the ultimate impact of the planned iPCS, Inc. bankruptcy filing is not presently determinable, management believes that the bankruptcy proceedings will not have a significant adverse effect on the liquidity of AirGate PCS, Inc. and its restricted subsidiaries through fiscal 2003. /S/ KPMG LLP Atlanta, Georgia January 10, 2003 F-1 AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share and per share amounts)
September 30, September 30, 2002 2001 ------------ ------------- Assets: Current assets: Cash and cash equivalents .................................................................... $ 32,475 $ 14,290 Accounts receivable, net of allowance for doubtful accounts of $11,256 and $2,759, respectively ............................................................................. 38,127 23,798 Receivable from Sprint (note 4) .............................................................. 44,953 10,200 Inventories .................................................................................. 6,733 4,639 Prepaid expenses ............................................................................. 7,159 3,428 Other current assets ......................................................................... 326 91 ------------ ------------- Total current assets ..................................................................... 129,773 56,446 Property and equipment, net of accumulated depreciation and amortization of $112,913 and $43,621, respectively (note 5) ................................................................ 399,155 209,326 Financing costs ................................................................................... 8,118 9,088 Direct subscriber activation costs ................................................................ 8,409 3,693 Intangible assets, net of accumulated amortization of $39,378 and $46, respectively (note 10) ..... 28,327 113 Other assets ...................................................................................... 512 2,344 ------------ ------------- $ 574,294 $ 281,010 ============ ============= Liabilities and Stockholders' Equity (Deficit): Current liabilities: Accounts payable ............................................................................. $ 18,152 $ 10,210 Accrued expenses ............................................................................. 20,950 13,840 Payable to Sprint (note 4) ................................................................... 88,360 32,564 Deferred revenue ............................................................................. 11,775 5,384 Current maturities of long-term debt and capital lease obligations (note 6) .................. 354,936 -- ------------ ------------- Total current liabilities ................................................................ 494,173 61,998 Deferred subscriber activation fee revenue ........................................................ 14,973 5,101 Other long-term liabilities ....................................................................... 3,267 309 Long-term debt and capital lease obligations, excluding current maturities (note 6) ............... 354,828 266,326 ------------ ------------- Total liabilities ........................................................................ 867,241 333,734 ------------ ------------- Commitments and contingencies (notes 1, 6, and 12) ..................................... -- -- Stockholders' equity (deficit) (notes 6 and 8): Preferred stock, par value, $.01 per share; 5,000,000 shares authorized; no shares issued and outstanding ............................ -- -- Common stock, par value, $.01 per share; 150,000,000 shares authorized; 25,806,520 and 13,364,980 shares issued and outstanding at September 30, 2002 and 2001, respectively .... 258 134 Additional paid-in-capital ................................................................... 924,008 168,255 Accumulated deficit .......................................................................... (1,216,184) (219,567) Unearned stock compensation .................................................................. (1,029) (1,546) ------------ ------------- Total stockholders' equity (deficit) ..................................................... (292,947) (52,724) ------------ ------------- $ 574,294 $ 281,010 ============ =============
See accompanying notes to the consolidated financial statements. F-2 AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share and per share amounts)
Years Ended September 30, -------------------------------------------------- 2002 2001 2000 --------------- --------------- --------------- Revenues (note 4): Service revenue ........................................................ $ 327,365 $ 105,976 $ 9,746 Roaming revenue ........................................................ 111,162 55,329 12,338 Equipment revenue ...................................................... 18,030 10,782 2,981 --------------- --------------- --------------- Total revenues ........................................... 456,557 172,087 25,065 --------------- --------------- --------------- Operating expenses (note 4): Cost of service and roaming (exclusive of depreciation and amortization, as shown separately below) ........................... (311,135) (116,732) (27,770) Cost of equipment ..................................................... (43,592) (20,218) (5,685) Selling and marketing ................................................. (116,521) (71,617) (28,357) General and administrative ............................................ (25,339) (15,742) (14,078) Non-cash stock compensation (In 2002, $512 related to general and administrative, $168 related to cost of service and roaming, and $89 related to selling and marketing. In 2001, $1,399 related to general and administrative, $177 related to cost of service and roaming, and $89 related to selling and marketing. In 2000, $1,260 related to general and administrative, $223 related to cost of service and roaming, and $182 related to selling and marketing.) ............... (769) (1,665) (1,665) Depreciation and amortization of property and equipment (note 5) ...... (70,197) (30,621) (12,034) Amortization of intangible assets (note 10) ........................... (39,332) (46) --- Loss on disposal of property and equipment ............................ (1,074) --- --- Impairment of goodwill (note 2) ....................................... (460,920) --- --- Impairment of property and equipment (note 2) ......................... (44,450) --- --- Impairment of intangible assets (note 2) .............................. (312,043) --- --- --------------- --------------- --------------- Total operating expenses ................................. (1,425,372) (256,641) (89,589) --------------- --------------- --------------- Operating loss ........................................... (968,815) (84,554) (64,524) Interest income .............................................................. 590 2,463 9,321 Interest expense ............................................................. (57,153) (28,899) (26,120) --------------- --------------- --------------- Loss before income tax benefit ........................... (1,025,378) (110,990) (81,323) Income tax benefit ....................................... 28,761 --- --- --------------- --------------- --------------- Net loss ................................................. $ (996,617) $ (110,990) $ (81,323) =============== =============== =============== Basic and diluted net loss per share of common stock ......................... $ (41.96) $ (8.48) $ (6.60) =============== =============== =============== Basic and diluted weighted-average outstanding common shares ................. 23,751,507 13,089,285 12,329,149 =============== =============== ===============
See accompanying notes to the consolidated financial statements. F-3 AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Dollars in thousands, except share amounts) Years ended September 30, 2002, 2001, and 2000
Total Common Stock Additional Unearned stockholders ------------------ paid-in Accumulated stock equity Shares Amount capital deficit compensation (deficit) ---------- ------- ---------- ------------ ------------ ------------ Balance at September 30, 1999 ........................... 11,957,201 $ 120 $157,880 $ (27,254) $ (2,900) $ 127,846 Conversion of notes payable to stockholders to common stock including beneficial conversion feature (note 8) ............................................ 12,533 -- 213 -- -- 213 Exercise of common stock purchase warrants (note 8) ... 762,444 8 (3) -- -- 5 Unearned compensation related to grant of compensatory stock options (note 8) .............................. -- -- 2,231 -- (2,231) -- Issuance of stock purchase warrants in connection with senior credit facility (note 8) ..................... -- -- 282 -- -- 282 Exercise of stock options (note 8) .................... 84,605 -- 1,185 -- -- 1,185 Forfeiture of compensatory stock options (note 8) ..... -- -- (213) -- 213 -- Stock option compensation (note 8) .................... -- -- -- 1,665 1,665 Net loss .............................................. -- -- (81,323) -- (81,323) ---------- ----- -------- ---------- --------- ---------- Balance at September 30, 2000 ........................... 12,816,783 128 161,575 (108,577) (3,253) 49,873 ---------- ----- -------- ---------- --------- ---------- Exercise of common stock purchase warrants (note 8) ... 80,641 1 -- -- -- 1 Exercise of stock options (note 8) .................... 467,556 5 6,722 -- -- 6,727 Forfeiture of compensatory stock options (note 8) ..... -- -- (81) -- 81 -- Stock compensation expense (note 8) ................... -- -- 39 -- 1,626 1,665 Net loss .............................................. -- -- -- (110,990) -- (110,990) ---------- ----- -------- ---------- --------- ---------- Balance at September 30, 2001 ........................... 13,364,980 134 168,255 (219,567) (1,546) (52,724) ---------- ----- -------- ---------- --------- ---------- Issuance of common stock in merger with iPCS, Inc. (note 11) ........................................... 12,362,571 124 706,521 -- -- 706,645 Stock options and warrants assumed in merger with iPCS, Inc. (notes 8 and 11) ......................... -- -- 47,727 -- -- 47,727 Exercise of stock options (note 8) .................... 33,558 -- 685 -- -- 685 Issuance of restricted common stock (note 8) .......... 12,067 -- 252 -- (252) -- Exercise of common stock purchase warrants (note 8) ... 15,001 -- -- -- -- -- Issuance of common stock to employee stock purchase plan (note 8) ...................................... 18,343 -- 568 -- -- 568 Stock compensation expense (note 8) ................... -- -- -- -- 769 769 Net loss .............................................. -- -- -- (996,617) -- (996,617) ---------- ----- -------- ---------- --------- ---------- Balance at September 30, 2002 ........................... 25,806,520 $ 258 $924,008 $(1,216,184) $ (1,029) $ (292,947) ========== ===== ======== =========== ========= ==========
See accompanying notes to the consolidated financial statements. F-4 AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years Ended September 30 -------------------------------------- 2002 2001 2000 ----------- ---------- ---------- Cash flows from operating activities: Net loss .................................................................... $ (996,617) $ (110,990) $ (81,323) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of goodwill ..................................................... 460,920 -- -- Impairment of property and equipment ....................................... 44,450 -- -- Impairment of intangible assets ............................................ 312,043 -- -- Loss on disposal of property and equipment ................................. 1,074 -- -- Depreciation and amortization of property and equipment .................... 70,197 30,621 12,034 Amortization of intangible assets .......................................... 39,332 46 -- Amortization of financing costs into interest expense ...................... 1,211 1,210 1,192 Provision for doubtful accounts ............................................ 26,933 8,125 563 Interest expense associated with accretion of discounts .................... 50,670 23,799 23,043 Non-cash stock compensation ................................................ 769 1,665 1,665 Deferred income tax benefit ................................................ (28,761) -- -- Changes in assets and liabilities: Accounts receivable .................................................... (29,669) (26,995) (5,491) Receivable from Sprint ................................................. (36,008) (6,432) (3,768) Inventories ............................................................ 2,985 (1,737) (2,902) Prepaid expenses, other current and non-current assets ................. (2,708) (4,470) (2,473) Accounts payable, accrued expenses and other long term liabilities ..... (15,777) 8,741 8,060 Payable to Sprint ...................................................... 45,397 27,272 5,292 Deferred revenue ....................................................... 8,317 8,295 2,499 ----------- ---------- ---------- Net cash used in operating activities ....................... (45,242) (40,850) (41,609) ----------- ---------- ---------- Cash flows from investing activities: Purchases of property and equipment ......................................... (97,060) (71,270) (152,397) Cash acquired from iPCS, Inc. ............................................... 24,402 -- -- Acquisition of iPCS, Inc. ................................................... (6,058) -- -- Purchase of business assets ................................................. -- (502) -- ----------- ---------- ---------- Net cash used in investing activities ....................... (78,716) (71,772) (152,397) ----------- ---------- ---------- Cash flows from financing activities: Proceeds from borrowings under senior credit facilities ..................... 141,200 61,800 -- Payments made under capital lease obligations ............................... (4) -- -- Proceeds from stock issued to employee stock purchase plan .................. 568 -- -- Payments of note payable to Sprint PCS ...................................... -- -- (7,700) Payments for iPCS credit facility amendment ................................. (306) -- -- Proceeds from exercise of common stock purchase warrants .................... -- 1 5 Proceeds from exercise of employee stock options ............................ 685 6,727 1,185 ----------- ---------- ---------- Net cash provided by (used in) financing activities ......... 142,143 68,528 (6,510) ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents ........ 18,185 (44,094) (200,516) Cash and cash equivalents at beginning of period ................................. 14,290 58,384 258,900 ----------- ---------- ---------- Cash and cash equivalents at end of period ....................................... $ 32,475 $ 14,290 $ 58,384 =========== ========== ========== Supplemental disclosure of cash flow information - cash paid for interest ........ $ 10,176 $ 3,846 $ 2,609 =========== ========== ========== Supplemental disclosure of non-cash investing and financing activities: Capitalized interest ........................................................ $ 7,118 $ 2,917 $ 5,938 Grant of common stock purchase warrants related to senior credit facility ... -- -- 282 Convertible notes payable to stockholders and accrued interest converted to equity ................................................................... -- -- 102 Beneficial conversion feature of convertible notes payable to stockholders .. -- -- 111 Grant of restricted common stock and compensatory stock options ............. 252 -- 2,231 Forfeiture of compensatory stock options .................................... -- (81) (213) Modification of stock options ............................................... -- 39 -- Purchases of property and equipment under capital leases .................... 191 -- -- iPCS acquisition (note 11): Fair value of stock issued ................................................ $ 706,645 $ -- $ -- Fair value of common stock options and warrants assumed ................... 47,727 -- -- Liabilities assumed ....................................................... 394,165 -- -- Fair value of tangible assets acquired .................................... 313,843 -- --
See accompanying notes to the consolidated financial statements. F-5 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (1) Business, Basis of Presentation and Liquidity (a) Business and Basis of Presentation AirGate PCS, Inc. and its restricted and unrestricted subsidiaries (the "Company") were created for the purpose of providing wireless Personal Communication Services ("PCS"). AirGate PCS, Inc. and its restricted subsidiaries ("AirGate") collectively are a network partner of Sprint with the exclusive right to market and provide Sprint PCS products and services in a defined network territory. AirGate is licensed to use the Sprint brand names in its original 21 markets located in the southeastern United States. On November 30, 2001, AirGate acquired iPCS, Inc. (together with its subsidiaries, "iPCS"), a network partner of Sprint with 37 markets in the midwestern United States. The accompanying consolidated financial statements include the accounts of AirGate PCS, Inc. and its wholly-owned restricted subsidiaries, AGW Leasing Company, Inc., AirGate Service Company, Inc., and AirGate Network Services, LLC for all periods presented. The accounts of iPCS are included as of September 30, 2002, and for the period from November 30, 2001 through September 30, 2002. These consolidated financial statements and related footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany accounts and transactions have been eliminated in consolidation. The PCS market is characterized by significant risks as a result of rapid changes in technology, intense competition and the costs associated with the build-out of a PCS network. The Company's operations are dependent upon Sprint's ability to perform its obligations under the agreements between the Company and Sprint (see note 4) under which the Company has agreed to construct and manage its Sprint PCS networks (the "Sprint Agreements"). Additionally, the Company's ability to attract and maintain a subscriber base of sufficient size and credit quality is critical to achieving sufficient positive cash flow to meet its financial covenants under its credit agreements. Changes in technology, increased competition, economic conditions or inability to achieve sufficient positive cash flow to meet its financial covenants under its credit agreements, among other factors, could have an adverse effect on the Company's financial position, results of operations, and liquidity. (b) Liquidity The Company has generated significant net losses since inception. For the year ended September 30, 2002, the Company's net loss amounted to $996.6 million, including goodwill and asset impairment charges of $817.4 million. As of September 30, 2002, the Company had a working capital deficit of $366.4 million. As of December 31, 2002, AirGate has available credit amounting to approximately $12.0 million under its senior credit facility. As described in Note 6, iPCS is not in compliance with certain provisions of its debt agreements and has no remaining credit availability under its senior credit facility. As a result of these covenant defaults, substantially all of iPCS' debt is classified as a current liability. iPCS also has incurred significant net losses during the year ended September 30, 2002, which are included in the accompanying consolidated financial statements (see note 16 for condensed consolidating financial information of the Company's restricted and unrestricted subsidiaries, which does not reflect push-down accounting with respect to the iPCS financial information). Because current conditions in the capital markets make additional financing unlikely, iPCS has undertaken efforts to restructure its relationship with its secured lenders, its public noteholders and Sprint, and we have begun restructuring discussions with informal committees of these creditors. While the lenders and noteholders have expressed willingness to work with iPCS, Sprint has informed us it is unwilling to restructure its agreements with iPCS. iPCS, Inc. has been unable to restructure its debt and secure additional financing necessary to fund its operations and, accordingly iPCS, Inc. intends to file for reorganization and protection from its creditors under Chapter 11 of the United States Bankruptcy Code in early 2003 either as part of a consensual restructuring or in an effort to effect a court administered reorganization. Because iPCS is an unrestricted subsidiary, AirGate is generally unable to provide capital or other financial support to iPCS. Further, iPCS lenders, noteholders and creditors do not have a lien on or encumbrance on assets of AirGate. We believe AirGate operations will continue independent of the outcome of the iPCS restructuring. However, it is likely that AirGate's ownership interest in iPCS will have no value after the restructuring is complete. The carrying value of iPCS' long-lived assets in these consolidated financial statements (principally property and equipment, goodwill and intangible assets) has been written down to reflect impairment charges as required by SFAS No. 144 and SFAS No. 142. See note 2 for a discussion of these impairment charges. While the ultimate and long-term affect on AirGate of iPCS' proposed bankruptcy proceedings cannot be determined, management believes that AirGate and its restricted subsidiaries will continue to operate and that iPCS' bankruptcy proceedings, and related outcomes, will not have a material adverse effect on the liquidity of AirGate. In addition to its capital needs to fund operating losses, the Company has invested large amounts to build-out its networks and for other capital assets. For the three years ended September 30, 2002, the Company invested $320.7 million to purchase property and equipment. While much of the Company's networks are now complete, and capital expenditures are expected to decrease significantly in the future, such expenditures will continue to be necessary. F-6 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AirGate has initiated a number of action steps to lower its operating costs and capital needs. The following are some of the more significant steps: o a plan to improve the credit quality of new subscribers and its subscriber base by restricting availability of programs for sub-prime subscribers; o a plan to reduce subscriber churn; o the elimination of certain personnel positions; o a significant reduction in capital expenditures; and o a reduction in spending for advertising and promotions. In addition to these steps, AirGate is initiating or investigating a number of other actions that could further reduce operating expenses and capital needs. These include additional reductions in staff; the outsourcing of certain functions now performed by AirGate; further deferrals or reductions in capital spending and seeking ways to lower fees and charges from services now provided by Sprint. AirGate management believes that existing cash, fiscal 2003 results of operations and cash flows, and credit available under its senior credit facility will provide sufficient resources to fund its activities through fiscal 2003. The following reflects condensed balance sheet information and statement of operations information of AirGate and its unrestricted subsidiary, separately identifying the investment in iPCS including the effects of purchase accounting as of September 30, 2002 and the historical equity basis loss of iPCS, the related effects of purchase accounting, and income tax benefit for the year ended September 30, 2002. Condensed Balance Sheet Information: Cash and cash equivalents $ 4,887 Other current assets 62,819 --------- Total current assets 67,706 Property and equipment, net 213,777 Investment in iPCS (141,543) Other noncurrent assets 13,732 --------- $ 153,672 ========= Current liabilities $ 82,175 Long-term debt 354,264 Other long-term liabilities 10,180 --------- Total liabilities 446,619 Stockholders' deficit (292,947) --------- $ 153,672 ========= Condensed Statement of Operations Information: Revenues $ 313,544 Costs of revenues (231,763) Selling and marketing expenses (79,010) General and administrative expenses (17,631) Depreciation and amortization (40,758) Other expense, net (37,162) --------- Total expenses (406,324) --------- Loss before equity in loss of iPCS and effects of purchase accounting, and income tax benefit (92,780) Historical equity basis loss of iPCS (133,192) Effects of purchase accounting (799,406) Income tax benefit 28,761 --------- Net loss $(996,617) ========= F-7 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (2) Goodwill and Asset Impairments On November 30 2001, the Company completed the acquisition of iPCS. Significant amounts of goodwill and other intangible assets were recorded as part of this acquisition (note 11). The original purchase price allocation of this acquisition was made in the quarter ended December 31, 2001. In the quarter ended March 31, 2002, the original purchase price allocation was adjusted, which resulted in a reclassification of amounts between goodwill, deferred income tax liabilities, the amount assigned to the right to provide service under the Sprint Agreements and other assets and liabilities. The Company recorded a goodwill impairment charge of $261.2 million during the quarter ended March 31, 2002, and $199.7 million during the quarter ended September 30, 2002. During the quarter ended September 30, 2002, the Company recorded an impairment of property and equipment totaling $44.5 million and intangible assets totaling $312.0 million. The purchase of iPCS and the accounting that resulted from this acquisition are described below and in notes 10 and 11. The wireless telecommunications industry has experienced significant declines in market capitalization throughout most of 2002. These significant declines in market capitalization resulted from concerns surrounding anticipated weakness in future subscriber growth, increased subscriber churn, anticipated future lower average revenue per unit (ARPU) and liquidity concerns. As a result of these industry trends, the Company experienced significant declines in its market capitalization subsequent to its acquisition of iPCS. Additionally, there have been significant adverse changes to the business plan for iPCS. These changes include lower new subscribers, lower ARPU, increased service and pass through costs from Sprint and lower roaming margins from Sprint. Wireless industry acquisitions subsequent to the Company's acquisition of iPCS have been valued substantially lower on a price per population and price per subscriber basis. As a result of these transactions and industry trends, the Company believed that the fair value of iPCS and its assets had been reduced. Accordingly, the Company engaged a nationally recognized valuation expert on two occasions during 2002 to perform fair value assessments of iPCS and its assets. The Company recorded goodwill impairments of approximately $261.2 million and $199.7 million during the quarter ended March 31, 2002 and the quarter ended September 30, 2002, respectively, as a result of these fair value assessments. During the quarter ended September 30, 2002, the Company recorded an intangible asset impairment of $312.0 million associated with iPCS' right to provide service under the Sprint Agreements and the acquired subscriber base. The right to provide service under iPCS' Sprint Agreements and the acquired subscriber base were recorded by the Company as a result of the purchase price allocation for the acquisition of iPCS . The values and lives assigned to these intangibles were $323.3 million and 205 months and $52.4 million and 30 months, respectively. As discussed above, these impairments arose from significant adverse changes to the business plan for iPCS. As a result, the Company adjusted the carrying value of the right to provide service under the Sprint Agreements and the acquired subscriber base to their fair values at September 30, 2002. The Company engaged a nationally recognized valuation expert to assist the Company in determining the fair value of the right to provide services under the Sprint Agreements. During the quarter ended September 30, 2002, the Company recorded an asset impairment of $44.5 million associated with property and equipment (principally network assets) of iPCS. As discussed above, this impairment arose from significant adverse changes to the business plan for iPCS as well as a generally weak secondary market for telecommunications equipment. The Company engaged a nationally recognized valuation expert to assist the Company in determining the fair value of iPCS' property and equipment. (3) Summary of Significant Accounting Policies (a) Revenue Recognition The Company recognizes revenues when persuasive evidence of an arrangement exists, services have been rendered or products have been delivered, the price to the buyer is fixed and determinable, and collectibility is reasonably assured. The Company's F-8 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) revenue recognition polices are consistent with the guidance in Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" promulgated by the Securities and Exchange Commission. The Company records equipment revenue from the sale of handsets and accessories to subscribers in its retail stores and to local distributors in its territories upon delivery. The Company does not record equipment revenue on handsets and accessories purchased from national third-party retailers such as Radio Shack, Best Buy and Circuit City, or directly from Sprint by subscribers in our territories. The Company believes the equipment revenue and related cost of equipment associated with the sale of wireless handsets and accessories is a separate earnings process from the sale of wireless services to subscribers. For industry competitive reasons, the Company sells wireless handsets at a loss. Because such arrangements do not require a customer to subscribe to the Company's wireless services and because the Company sells wireless handsets to existing customers at a loss, the Company accounts for these transactions separately from agreements to provide customers wireless service. The Company's subscribers pay an activation fee to the Company when they initiate service. The Company defers activation fee revenue over the average life of its subscribers, which is estimated to be 30 months. The Company recognizes service revenue from its subscribers as they use the service. The Company provides a reduction of recorded revenue for billing adjustments, first payment default customers, late payment fees, and early cancellation fees. The Company also reduces recorded revenue for rebates and discounts given to subscribers on wireless handset sales in accordance with Emerging Issues Task Force ("EITF") Issue No. 01-9 "Accounting for Consideration Given by a Vendor to a Subscriber (Including a Reseller of the Vendor's Products)." The Company participates in the Sprint national and regional distribution programs in which national retailers such as Radio Shack, Best Buy and Circuit City sell Sprint PCS products and services. In order to facilitate the sale of Sprint PCS products and services, national retailers purchase wireless handsets from Sprint for resale and receive compensation from Sprint for Sprint PCS products and services sold. For industry competitive reasons, Sprint subsidizes the price of these handsets by selling the handsets at a price below cost. Under the Company's Sprint Agreements, when a national retailer sells a handset purchased from Sprint to a subscriber in the Company's territories, the Company is obligated to reimburse Sprint for the handset subsidy. The Company does not receive any revenues from the sale of handsets and accessories by national retailers. The Company classifies these handset subsidy charges as a selling and marketing expense for a new subscriber handset sale and classifies these subsidies as a cost of service and roaming for a handset upgrade to an existing subscriber. Handset subsidy charges included in selling and marketing for the years ended September 30, 2002, 2001, and 2000 were $19.1 million, $12.8 million, and $3.7 million, respectively. Excluding sales commissions, handset subsidy upgrade charges in cost of service and roaming for the year ended September 30, 2002 were $4.8 million. The Company did not incur handset subsidy upgrade charges for the years ended September 30, 2001 and 2000. Sprint retains 8% of collected service revenues from subscribers based in the Company's markets and from non-Sprint subscribers who roam onto the Company's network. The amount of affiliation fees retained by Sprint is recorded as cost of service and roaming. Revenues derived from the sale of handsets and accessories by the Company and from certain roaming services (outbound roaming and roaming revenues from Sprint PCS and its PCS network partner subscribers) are not subject to the 8% affiliation fee from Sprint. The Company defers direct subscriber activation costs when incurred and amortizes these costs using the straight-line method over 30 months, which is the estimated average life of a subscriber. Direct subscriber activation costs also include credit check fees and loyalty welcome call fees charged to the Company by Sprint and costs incurred by the Company to operate a subscriber activation center. For the years ended September 30, 2002, 2001 and 2000 the Company recognized approximately $6.3, $3.4 and $0.1 million, respectively, of activation fee revenue. For the years ended September 30, 2002, 2001 and 2000 the Company recognized approximately $3.7, $2.8 and $0.1 million, respectively, of direct subscriber activation costs. As of September 30, 2002, the Company has deferred approximately $15.0 million of subscriber activation fee revenue and $8.4 million of direct subscriber activation costs to future periods. (b) Allowance for Doubtful Accounts Estimates are used in determining the allowance for doubtful accounts and are based on historical collection and write-off experience, current trends, credit policies and accounts receivable by aging category. In determining these estimates, the Company compares historical write-offs in relation to the estimated period in which the subscriber was originally billed. The Company also looks at the average length of time that elapses between the original billing date and the date of write-off in determining the adequacy of the allowance for doubtful accounts by aging category. From this information, the Company provides specific amounts to the aging categories. The Company provides an allowance for substantially all receivables over 90 days old. F-9 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The allowance for doubtful accounts as of September 30, 2002 and September 30, 2001 was $11.3 million and $2.8 million, respectively. At September 30, 2002, $6.8 million and $4.5 million was attributable to AirGate and iPCS, respectively. The Company also reviews current trends in the credit quality of its subscriber base and periodically changes its credit policies. As of September 30, 2002, 35% of the combined Company's, 36% of AirGate's and 35% of iPCS' subscriber base consisted of sub-prime credit quality subscribers. From May 2001 to February 2002, Sprint required AirGate and iPCS to remove the deposit requirement for most sub-prime credit quality subscribers under certain Sprint PCS programs. On February 24, 2002, Sprint allowed the Company to re-institute the deposit requirement across all new sub-prime credit quality subscribers. The Company removed the deposit requirement in iPCS' territory from all but the lowest sub-prime credit quality subscribers at certain times during the period between June 2002 and November 2002. During November 2002, the Company re-instituted the deposit requirement in iPCS' territory across all new sub-prime credit quality subscribers. The deposit requirement is currently in effect for most of AirGate's and iPCS' markets. (c) Reserve for First Payment Default Subscribers The Company reserves a portion of its new subscribers and provides a reduction in revenues from those subscribers that it anticipates will never pay a bill. Using historical information of the percentage of subscribers whose service was cancelled for non-payment without ever making a payment, the Company estimates the number of subscribers activated in the current period that will never pay a bill. For these subscribers, the Company provides a reduction of revenue and removes them from subscriber additions and churn. At September 30, 2002 and September 30, 2001, the Company had approximately 7,126 and 7,811 such subscribers, respectively. (d) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand deposits and money market accounts with original maturities of three months or less. (e) Inventories Inventories consist of wireless handsets and related accessories held for resale. Inventories are carried at the lower of cost or market determined using replacement costs. (f) Property and Equipment Property and equipment are stated at original cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Estimated useful lives used by the Company are as follows: Estimated Useful Life ----------- Network assets ..................................... 7 years Computer equipment ................................. 3 years Furniture, fixtures, and office equipment .......... 5 years Towers (included within network assets) ............ 15 years Assets held under capital lease obligations are amortized over their estimated useful life or the lease term, whichever is shorter. Amortization of assets held under capital lease obligations is included in depreciation and amortization of property and equipment. Construction in progress includes expenditures for the purchase of network assets. The Company capitalizes interest on its construction in progress activities. Interest capitalized for the years ended September 30, 2002, 2001 and 2000 totaled $7.1 million, $2.9 million and $5.9 million, respectively. When network assets are placed in service, the Company transfers the related assets from construction in progress to network assets and depreciates those assets over their estimated useful life. (g) Financing Costs Costs incurred in connection with both the AirGate and iPCS credit facilities and AirGate notes were deferred and are amortized into interest expense over the term of the respective financing using the straight-line method. F-10 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (h) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred income tax assets based upon the Company's assessment of whether it is more likely than not that the deferred income tax assets will be realized. (i) Basic and Diluted Net Loss Per Share Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. All potentially dilutive securities have been excluded from the computation of dilutive net loss per share for all periods presented because their effect would have been antidilutive. The effect of potentially dilutive common stock equivalents computed using the treasury stock method excluded from the dilutive net loss per share computations because they were antidilutive are as follows: Years ended September 30, ------------------------- 2002 2001 2000 ---- ---- ---- Common stock options ............ 222,671 510,620 777,758 Stock purchase warrants ......... 50,345 65,346 145,987 ------- ------- ------- Total .................. 273,016 575,966 923,745 ======= ======= ======= (j) Impairment of Long-Lived Assets and Goodwill The Company accounts for long-lived assets and goodwill in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. SFAS No. 142 requires annual tests for impairment of goodwill and intangible assets that have indefinite useful lives and interim tests when an event has occurred that more likely than not has reduced the fair value of such 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 acquired and liabilities assumed. In recording the purchase of iPCS, the Company engaged a nationally recognized valuation expert to assist 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 subscriber base, non-compete agreements for certain former iPCS employees, and the right to be the exclusive provider of Sprint PCS products and services in the 37 markets in which iPCS operates. For the subscriber base, the non-compete agreements, and the right to provide Sprint PCS products and services in the iPCS territory, finite useful lives of 30 months, six months and 205 months, respectively, have been assigned. The Company evaluates its intangible assets for potential impairment indicators whenever events or changes in circumstances indicate that the carrying value may not be recoverable. (k) New Accounting Pronouncements In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation from the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting, and has adopted the disclosure requirements of SFAS No. 123. The Company currently does not anticipate adopting the provisions of SFAS No. 148. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides new guidance on the recognition of costs associated with exit or disposal activities. The standard requires F-11 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. SFAS No. 146 supercedes previous accounting guidance provided by the EITF Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." EITF Issue No. 94-3 required recognition of costs at the date of commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Early application is permitted. The adoption of SFAS No. 146 by the Company on October 1, 2002 is not expected to have a material impact on the Company's financial position, results of operations, or cash flows as the Company has not recorded any significant restructurings in past periods, but the adoption may impact the timing of charges in future periods. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, this statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt" which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," will now be used to classify those gains and losses. The adoption of SFAS No. 145 by the Company on October 1, 2002 is not expected to have a material impact on the Company's financial position, results of operations, or cash flows. In November 2001, the EITF of the FASB issued EITF 01-9 "Accounting for Consideration Given by a Vendor to a Subscriber (Including a Reseller of the Vendor's Products)." EITF 01-9 provides guidance on when a sales incentive or other consideration given should be a reduction of revenue or an expense and the timing of such recognition. The guidance provided in EITF 01-9 is effective for financial statements for interim or annual periods beginning after December 15, 2001. The Company occasionally offers rebates to subscribers that purchase wireless handsets in its retail stores. The Company's historical policy regarding the recognition of these rebates in the consolidated statement of operations is a reduction in the revenue recognized on the sale of the wireless handset by an estimate of the amount of rebates expected to be redeemed. The Company's policy is in accordance with the guidance set forth in EITF 01-9. Therefore, the adoption of EITF 01-9 by the Company on January 1, 2002 did not have a material impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets with definite lives to be held and used or to be disposed of and also issued the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company elected early adoption of SFAS No. 144 as of the beginning of its fiscal year on October 1, 2001. The Company's adoption of SFAS No. 144 did not have a material impact on the Company's financial position, results of operations, or cash flows. However, as discussed in note 2, the application of the provisions of SFAS No. 144 resulted in a $356.5 million impairment during the quarter ended September 30, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period that it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 on October 1, 2002 is not expected to have a material impact on the Company's financial position, results of operations or cash flows. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which provides for non-amortization of goodwill and intangible assets that have indefinite useful lives, annual tests of impairments of those assets and interim tests of impairment when an event occurs that more likely than not has reduced the fair value of such assets. The statement also provides specific guidance about how to determine and measure goodwill 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 the financial statements at that date. Goodwill and intangible assets acquired after June 30, 2001 will be subject to the non-amortization provisions of the statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements had not been issued previously. The Company met the criteria for early application and adopted SFAS No. 142 on October 1, 2001. The Company's adoption of the provisions of SFAS No. 142 did not have a material impact on the Company's financial position, results of operations or cash flows. However, as discussed in note 2, the application of the provisions of SFAS No. 142 resulted in an impairment charge of $460.9 million during the fiscal year ended September 30, 2002. In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which is effective for all business combinations initiated after June 30, 2001. SFAS No. 141 requires companies to account for all business combinations using the purchase method of accounting, recognize intangible assets if certain criteria are met, as well as provide additional disclosures regarding F-12 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) business combinations and allocation of purchase price. The Company adopted SFAS No. 141 as of July 1, 2001, prior to AirGate recording any significant business acquisitions and such adoption did not have a material impact on the Company's financial position, results of operations or cash flows. (l) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the dates of the consolidated balance sheets and revenues and expenses during the reporting periods to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. (m) Concentration of Risk The Company's cell sites are located on towers which are leased from a limited number of tower companies, with one company owning approximately 20% of the Company's leased towers. Additionally, the Company derives substantial revenues and expenses from Sprint and Sprint PCS (see note 4). The Company maintains cash and cash equivalents in accounts with financial institutions in excess of the amount insured by the Federal Deposit Insurance Corporation. Management does not believe there is significant credit risk associated with deposits in excess of federally insured amounts. Further, the Company maintains accounts with nationally recognized investment managers. Such deposits are not insured by the Federal Deposit Insurance Corporation. Management does not believe there is significant credit risk associated with these uninsured deposits. A significant amount of the Company's financial transactions result from the Company's relationship with Sprint. Additionally, Sprint holds approximately four to eleven days of the Company's subscriber lockbox receipts prior to remitting those receipts to the Company weekly. Refer to note 4 for information on the Company's transactions with Sprint. Concentrations of credit risk with respect to accounts receivables are limited due to a large subscriber base. Initial credit evaluations of subscribers' financial condition are performed and security deposits are generally obtained for subscribers with a high credit risk profile. The Company maintains an allowance for doubtful accounts for potential credit losses. (n) Comprehensive Income (Loss) No statements of comprehensive income (loss) have been included in the accompanying consolidated financial statements since the Company does not have any elements of other comprehensive income (loss) to report. (o) Advertising Expenses The Company expenses advertising costs when the advertisement occurs. Total advertising expenses amounted to approximately $30.9 million in 2002, $13.0 million in 2001 and $7.5 million in 2000 and are included in selling and marketing expenses in the accompanying consolidated statements of operations. (p) Segments AirGate and its unrestricted subsidiary, iPCS, provide wireless PCS services as network partners of Sprint. Both AirGate and iPCS offer similar products and services through similar retail channels to a broad range of wireless customers in their respective markets. Consequently, these entities have been aggregated into a single operating segment in accordance with the provisions of SFAS No. 131 - "Disclosures about Segments of an Enterprise and Related Information." (q) Stock Compensation The Company applies the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25" issued in March 2000, to account for its fixed stock option grants. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. F-13 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (r) Reclassifications Certain reclassifications have been made to prior year amounts to conform to the current year presentation. (4) Sprint Agreements Under the Sprint Agreements, Sprint provides the Company significant support services such as billing, collections, long distance, customer care, network operations support, inventory logistics support, use of the Sprint and Sprint PCS brand names, national advertising, national distribution and product development. Additionally, the Company derives substantial roaming revenue and expenses when Sprint's and Sprint's network partners' PCS wireless subscribers incur minutes of use in the Company's territories and when the Company's subscribers incur minutes of use in Sprint and other Sprint network partners' PCS territories. These transactions are recorded in roaming revenue, cost of service and roaming, cost of equipment and selling and marketing expense captions in the accompanying consolidated statements of operations. Cost of service and roaming transactions include the 8% affiliation fee, long distance charges, roaming expense and the costs of services such as billing, collections, and customer service and other pass-through expenses. Cost of equipment transactions relate to inventory purchased by the Company from Sprint under the Sprint Agreements. Selling and marketing transactions relate to subsidized costs on handsets and commissions paid by the Company under Sprint's national distribution program. Amounts recorded relating to the Sprint Agreements for the years ended September 30, 2002, 2001 and 2000, are as follows (dollars in thousands):
Years Ended September 30, ---------------------------------------- 2002 2001 2000 ---- ---- ---- Amounts included in the Consolidated Statement of Operations: AirGate roaming revenue .................................................. $ 70,002 $ 53,863 $ 11,798 ========== ========= ========== AirGate cost of service and roaming: Roaming ............................................................. $ 52,746 $ 40,472 $ 3,171 Customer service .................................................... 40,454 15,526 1,542 Affiliation fees .................................................... 15,815 7,603 757 Long distance ....................................................... 13,846 6,556 1,119 Other ............................................................... 2,115 1,252 145 ----------- ---------- ----------- Total cost of service and roaming ........................................ $ 124,976 $ 71,409 $ 6,734 ========= ========= ========== AirGate purchased inventory .............................................. $ 23,662 $ 19,405 $ 7,571 ========== ========= ========== AirGate selling and marketing ............................................ $ 21,728 $ 20,827 $ 5,716 ========== ========= ========== iPCS roaming revenue ..................................................... $ 33,137 $ - $ - ========== ========= ========== iPCS cost of service and roaming: Roaming ............................................................. $ 25,723 $ - $ - Customer service .................................................... 19,367 - - Affiliation fees .................................................... 8,011 - - Long distance ....................................................... 7,686 - - Other ............................................................... 781 - - ---------- --------- ---------- Total cost of service and roaming ........................................ $ 61,568 $ - $ - ========== ========= ========== iPCS purchased inventory ................................................. $ 17,097 $ - $ - ========== ========= ========== iPCS selling and marketing ............................................... $ 9,970 $ - $ - ========== ========= ==========
Amounts included in the Consolidated Balance Sheet:
As of September 30, ----------------------------------- 2002 2001 ---- ---- Receivable from Sprint $ 44,953 $ 10,200 Payable to Sprint (88,360) (32,564)
The Sprint Agreements require the Company to maintain certain minimum network performance standards and to meet other performance requirements. The Company was in compliance in all material respects with these requirements at September 30, 2002. F-14 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company has reclassified approximately $10.0 million of subscriber accounts receivable for the fiscal year ended September 30, 2002 to a receivable from Sprint. The Company believes at least $10.0 million is payable from Sprint, but Sprint has acknowledged only $5.8 million is owed to AirGate. The Company is in discussions with Sprint regarding the differences and has provided for these discussions in our consolidated financial statements. (5) Property and Equipment Property and equipment consists of the following at September 30 (dollars in thousands):
2002 2001 ---- ---- Network assets ................................................................. $ 461,806 $ 217,788 Computer equipment ............................................................. 10,723 3,684 Furniture, fixtures, and office equipment ...................................... 14,985 11,592 Vehicles ....................................................................... 891 -- Construction in progress ....................................................... 23,663 19,883 ------------ ----------- Total property and equipment ............................................. 512,068 252,947 Less accumulated depreciation and amortization ................................. (112,913) (43,621) ------------ ----------- Total property and equipment, net ........................................ $ 399,155 $ 209,326 ============ ===========
Depreciation and amortization of property and equipment for the years ended September 30, 2002, 2001, and 2000 was $70,197, $30,621, and $12,034, respectively. Costs and accumulated amortization associated with assets held under capital lease obligations as of September 30, 2002 are as follows: Cost $ 571 Accumulated amortization (28) ------------- $ 543 ============= (6) Long Term Debt and Capital Lease Obligations Long-term debt includes the assumption of the iPCS long term debt on November 30, 2001 and consists of the following at September 30 (dollars in thousands):
2002 2001 ---- ---- AirGate credit facility, net of unaccreted original issue discounts of $376 and $574, respectively ................................................................ $ 136,124 $ 74,726 AirGate notes, $300,000 due at maturity: Accreted carrying value ........................................................ 228,813 201,124 Unaccreted original issue discount ............................................. (8,649) (9,524) ------------ ------------ Net AirGate notes ......................................................... 220,164 191,600 iPCS credit facility ................................................................. 130,000 -- iPCS notes, $300,000 due at maturity, at accreted carrying value, net of unamortized premium of $38,060 .................................................... 222,908 -- iPCS capital lease obligations ....................................................... 568 -- ------------ ------------ Total long-term debt and capital lease obligations ............................. 709,764 266,326 Current maturities of long-term debt and capital lease obligations ............. 354,936 -- ------------ ------------ Long-term debt and capital lease obligations, excluding current maturities ..... $ 354,828 $ 266,326 ============ ============
As of September 30, 2002, future scheduled principal payments under indebtedness and future minimum capital lease payments for the next five years and thereafter are as follows (in thousands):
Years Ending September 30, AirGate credit AirGate iPCS credit iPCS Capital facility notes facility notes leases Total -------- ----- -------- ----- ------ ----- 2003 ..................................... $ 2,024 $ - $ - $ - $ 4 $ 2,028 2004 ..................................... 15,863 - 9,750 - 74 25,687 2005 ..................................... 21,150 - 17,875 - 77 39,102 2006 ..................................... 26,920 - 29,250 - 81 56,251 2007 ..................................... 35,400 - 32,500 - 84 67,984 Thereafter ............................... 35,143 300,000 40,625 300,000 965 676,733 ----------- ------------- ------------- ------------ ----------- -----------
F-15 AIRGTAE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total future principal payments on long-term debt and future minimum lease payments on capital leases .... $136,500 $ 300,000 $ 130,000 $ 300,000 $ 1,285 $ 867,785 Less amount representing interest and unaccreted discounts ................ (376) (79,836) - (77,092) (717) (158,021) ------------ ------------ ----------- ------------- ----------- ----------- Total future principal payments on long-term debt, net of unaccreted discounts, and present value of future lease payments on capital leases ....... 136,124 220,164 130,000 222,908 568 709,764 Less current maturities* ................. (2,024) - (130,000) (222,908) (4) (354,936) ----------- ------------ ----------- ------------- ---------- ----------- Long-term debt and capital lease obligations, excluding current maturities ............................. $ 134,100 $ 220,164 $ - $ - $ 564 $ 354,828 ========== ========= =========== ============= =========== ===========
*Amounts in this table do not reflect the current classifiation of the iPCS credit facility and iPCS notes as discussed below, except in the classification of current maturities. AirGate Credit Facility On August 16, 1999, AirGate entered into a $153.5 million senior credit facility. The AirGate credit facility provides for (i) a $13.5 million senior secured term loan (the "Tranche I Term Loan") which matures on June 6, 2007, and (ii) a $140.0 million senior secured term loan (the "Tranche II Term Loan") which matures on September 30, 2008. Mandatory quarterly payments of principal are required beginning December 31, 2002 for the Tranche I Term Loan and March 31, 2004 for the Tranche II Term Loan initially in the amount of 3.75% of the loan balance then outstanding and increasing thereafter. A commitment fee of 1.50% on unused borrowings under the AirGate credit facility is payable quarterly and included in interest expense. For the years ended September 30, 2002, 2001 and 2000, commitment fees totaled $0.6 million, $1.5 million and $6.0 million, respectively. $17.0 million remained available for borrowing under the AirGate credit facility as of September 30, 2002 and $12.0 million as of December 31, 2002. The AirGate credit facility is secured by all the assets of AirGate, other than assets of its unrestricted subsidiary, iPCS. In connection with this financing, AirGate issued to Lucent Technologies, in its capacity as administrative agent and arranger, warrants to purchase 139,035 shares of common stock that were exercisable upon issuance. Additionally, AirGate incurred origination fees and expenses of $5.0 million, which have been recorded as financing costs and are amortized to interest expense using the straight-line method, over the life of the agreement. The interest rate for the AirGate credit facility is determined on a margin above either the prime lending rate in the United States or the London Interbank Offer Rate. At September 30, 2002 and 2001, the weighted average interest rate on outstanding borrowings was 5.6% and 7.3%, respectively. The AirGate credit facility contains ongoing financial covenants, including reaching defined subscriber growth and covered population targets, maximum annual spending on capital expenditures, attaining minimum subscriber revenues, and maintaining certain leverage and other ratios such as debt to total capitalization, debt to EBITDA and EBITDA to fixed charges. The AirGate credit facility restricts the ability of AirGate and its subsidiaries, other than iPCS to: create liens; incur indebtedness; make certain payments, including payments of dividends and distributions in respect of capital stock; consolidate, merge and sell assets; engage in certain transactions with affiliates; and fundamentally change its business. As of September 30, 2002, AirGate was in compliance with all operational and financial covenants governing the AirGate credit facility. As discussed in Note 15, however, AirGate was in default as of December 30, 2002, which is cured with the filing of these consolidated financial statements. AirGate Notes On September 30, 1999, the Company received proceeds of $156.1 million from the issuance of 300,000 units, each unit consisting of $1,000 principal amount at maturity of 13.5% senior subordinated discount notes due 2009 (the "AirGate notes") and one warrant to purchase 2.148 shares of common stock at a price of $0.01 per share (see Note 8). The accreted value outstanding as of September 30, 2002 of the AirGate notes was $220.2 million. The Company incurred expenses, underwriting discounts and commissions of $6.6 million related to the notes, which have been recorded as financing costs and are amortized to interest expense using the straight-line method, over the life of the agreement. The notes contain certain covenants relating to limitations on AirGate's ability to, among other acts, sell assets, incur additional indebtedness, and make certain payments. The AirGate notes restrict the ability of AirGate and its subsidiaries, other than iPCS to: create liens; incur indebtedness; make certain payments, including payments of dividends and distributions in respect of capital stock; consolidate, merge and sell assets; engage in certain transactions with affiliates; and fundamentally change its business. As of September 30, 2002, AirGate was in compliance with all covenants governing the AirGate notes. As discussed in Note 15, however, AirGate was in default as of December 30, 2002, which is cured with the filing of these consolidated financial statements. F-16 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) iPCS Credit Facility The iPCS credit facility provides for a $80.0 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 iPCS credit facility is for a $50.0 million senior secured term loan, which also matures on December 31, 2008. The iPCS credit facility requires 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 borrowing ranges from 1.00% to 1.50%, payable quarterly and is included in interest expense. For the ten months ended September 30, 2002 commitment fees totaled $0.5 million. iPCS' obligations under the iPCS credit facility are secured by all of iPCS' operating assets, but not any assets of AirGate. The interest rate for the iPCS credit facility is determined on a margin above either the prime lending rate in the United States or the London Interbank Offer Rate. At September 30, 2002 and 2001, the weighted average interest rate on outstanding borrowings was 5.7% and 6.8%, respectively. Following the merger with iPCS, the Company proposed a new business plan for iPCS for fiscal year 2002 which would have violated the EBITDA loss covenants of the iPCS credit facility in the second half of the fiscal year 2002. On February 14, 2002, iPCS entered into an amendment, which provided relief under the EBITDA covenant and modified certain other requirements. The iPCS credit facility was also amended during November 2002, reducing the availability of the iPCS credit facility by $10.0 million to $130.0 million. In exchange, iPCS' liquidity covenant was waived, as well as the minimum subscriber covenant at December 31, 2002. The iPCS credit facility contains ongoing financial covenants, including reaching defined subscriber levels, maximum annual spending on capital expenditures, attaining minimum subscriber revenues and certain levels of EBITDA, and maintaining certain leverage and other ratios such as debt to total capitalization, debt to EBITDA and EBITDA to fixed charges. The iPCS credit facility restricts the ability of iPCS and its subsidiaries to: create liens; incur indebtedness; make certain payments, including payments of dividends and distributions in respect of capital stock; consolidate, merge and sell assets; engage in certain transactions with affiliates; and fundamentally change its business. As of September 30, 2002, iPCS was in compliance in all material respects with all operational and financial covenants governing the iPCS credit facility. As discussed in Note 15, however, as of December 30, 2002, iPCS was in default of certain of these covenants. Because of iPCS' inability to cure such default, all amounts under the iPCS credit facility have been classified as current liabilities in the accompanying consolidated balance sheet. iPCS Notes On July 12, 2000, iPCS received proceeds of $152.3 million from the issuance of 300,000 units, each unit consisting of $1,000 principal amount at maturity of 14.0% senior subordinated discount notes due 2010 (the "iPCS notes") and warrants to purchase 2,982,699 shares of common stock at $5.50 per share. These warrants were subsequently exchanged for warrants on approximately 475,351 shares of the Company's common stock (see note 8(b)). The accreted value outstanding as of September 30, 2002 of the iPCS notes was $222.9 million. The iPCS notes contain certain covenants relating to limitations on iPCS's ability to, among other acts, sell assets, incur additional indebtedness, and make certain payments. The iPCS notes restrict the ability of iPCS and its subsidiaries to: create liens; incur indebtedness; make certain payments, including payments of dividends and distributions in respect of capital stock; consolidate, merge and sell assets; engage in certain transactions with affiliates; and fundamentally change its business. As of September 30, 2002, iPCS was in compliance in all material respects with all covenants governing the iPCS notes. As discussed in Note 15, however, as of December 30, 2002, iPCS was in default of certain of these covenants. Because of iPCS' inability to cure such default, all amounts under the iPCS notes have been classified as a current liability in the accompanying consolidated balance sheet. (7) Fair Value of Financial Instruments Fair value estimates and assumptions and methods used to estimate the fair value of the Company's financial instruments are made in accordance with the requirements of SFAS No. 107, "Disclosure about Fair Value of Financial Instruments." The Company has used available information to derive its estimates. However, because these estimates are made as of a specific point in time, they are not necessarily indicative of amounts the Company could realize currently. The use of different assumptions or estimating methods may have a material effect on the estimated fair value amounts (dollars in thousands).
September 30, 2002 September 30, 2001 ------------------------- ------------------------ Carrying Estimated Carrying Estimated amount fair value amount fair value ------------ ------------- ---------- ----------- Cash and cash equivalents .... $ 32,475 $ 32,475 $ 14,290 $ 14,290 Accounts receivable, net ..... 38,127 38,127 23,798 23,798
F-17 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Receivable from Sprint PCS ........ 44,953 44,953 10,200 10,200 Accounts payable .................. 18,152 18,152 10,210 10,210 Accrued expenses .................. 20,950 20,950 13,840 13,840 Payable to Sprint PCS ............. 88,360 88,360 32,564 32,564 AirGate credit facility ........... 136,124 112,302 74,726 74,726 iPCS credit facility .............. 130,000 81,250 - - AirGate notes ..................... 220,164 25,125 191,600 192,574 iPCS notes ........................ 222,908 13,500 - - (a) Cash and cash equivalents, accounts receivable net, receivable from Sprint PCS, accounts payable, accrued expenses and payable to Sprint PCS. Management believes that the carrying amounts of these items are a reasonable estimate of their fair value due to the short-term nature of the instruments. (b) Long-term debt Long-term debt is comprised of the AirGate credit facility, AirGate notes, iPCS credit facility and iPCS notes. The fair value of the AirGate notes and the iPCS notes are stated at quoted market prices as of September 30, 2002 and 2001. As there is no active market for the AirGate and iPCS credit facilities, management has estimated the fair values of the AirGate and iPCS credit facilities based upon the Company's analysis and discussions with individuals knowledgeable about such matters. (8) Stockholders' Equity (Deficit) (a) Common stock On May 26, 2000, at a Special Meeting of the stockholders of AirGate, the stockholders voted to amend AirGate's Amended and Restated Certificate of Incorporation to increase the number of authorized shares of its common stock, par value $0.01 per share, from 25,000,000 to 150,000,000 shares. In October 1999, the Company's Board of Directors authorized the issuance of 12,533 additional shares of common stock to the affiliates of Weiss, Peck & Greer Venture Partners and the affiliates of JAFCO America Ventures, Inc. pursuant to a previously authorized promissory note issued by the Company. The shares were authorized for issuance in consideration of $0.1 million of interest that accrued from the period June 30, 1999 to September 28, 1999 on promissory notes issued to the affiliates of Weiss, Peck & Greer Venture Partners and the affiliates of JAFCO America Ventures, Inc. The promissory notes and related accrued interest were converted into shares of common stock at a price 48% less than the price of a share of common stock sold in the Company's initial public offering of common stock in accordance with their original terms. The amount related to the fair value of the beneficial conversion feature of $0.1 million has been recorded as additional paid-in-capital and recognized as interest expense in the year ended September 30, 2000. (b) Common Stock Purchase Warrants In August 1998, the Company issued stock purchase warrants to stockholders in consideration for: (1) loans made by the stockholders to the Company which have been converted to common stock, (2) guarantees of certain bank loans provided by the stockholders, and (3) in connection with $4.8 million in convertible notes provided by the stockholders. In connection with a refinancing of the convertible notes payable to stockholders in May 1999, the Company cancelled the August 1998 warrants and issued new warrants to Weiss, Peck & Greer Venture Partners Affiliated Funds to purchase shares of common stock for an aggregate amount up to $2.7 million at an exercise price 25% less than the price of a share of common stock sold in the initial public offering, or $12.75 per share. The warrants for 214,413 shares were exercisable upon issuance. The Company allocated $1.7 million of the proceeds (calculated using the Black-Scholes option pricing model) from this refinancing to the fair value of the warrants and recorded a discount on the related debt, which was recognized as interest expense from the date of issuance (May 1999) to the expected date of conversion (August 1999). In July 2000, all of such warrants were exercised. On August 16, 1999, AirGate issued stock purchase warrants to Lucent Technologies in consideration of the AirGate credit facility. The exercise price of the warrants equals 120% of the price of one share of common stock at the closing of the initial public offering, or $20.40 per share, and the warrants were exercisable for an aggregate of 128,860 shares of AirGate's common stock. AirGate allocated $0.7 million of the proceeds from the AirGate credit facility to the fair value of the warrants calculated using the Black-Scholes option pricing model and recorded an original issue discount on the AirGate credit facility, which is recognized as interest expense over the period from the date of issuance to the maturity date using the effective interest method. In September 2000, all of such warrants were exercised. F-18 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June 2000, AirGate issued stock purchase warrants to Lucent Technologies to acquire 10,175 shares of common stock on terms identical to those discussed in the previous paragraph, all of which were outstanding as of September 30, 2002. These warrants expire on August 15, 2004. The Company recorded a discount on the AirGate credit facility of $0.3 million, which represents the fair value of the warrants on the date of grant using a Black-Scholes option pricing model. The discount is recognized as interest expense over the period from the date of issuance to maturity using the effective interest method. Interest expense relating to both grants of Lucent Technologies warrants for the year ended September 30, 2002 was $0.2 million and for each of the years ended September 30, 2001 and 2000 was $0.2 million. On September 30, 1999, as part of offering the AirGate notes, the Company issued warrants to purchase 2.148 shares of common stock for each unit at a price of $0.01 per share. In January 2000, the Company's registration statement on Form S-1 relating to warrants to purchase 644,400 shares of common stock issued together, as units, with AirGate's $300 million of 13.5% senior subordinated discount notes due 2009, was declared effective by the Securities and Exchange Commission. The Company allocated $10.9 million of the proceeds from the units offering to the fair value of the warrants and recorded an original issue discount on the notes, which is recognized as interest expense over the period from issuance to the maturity date using the effective interest method. For the years ended September 30, 2002, 2001 and 2000, accretion of the discount from the warrants totaling $0.9 million, $0.8 million and $0.7 million, respectively, was recorded as interest expense. The warrants became exercisable beginning upon the effective date of the registration statement registering such warrants, for an aggregate of 644,400 shares of common stock. The warrants expire October 1, 2009. As of September 30, 2002, warrants representing 604,230 shares of common stock had been exercised (15,001 in 2002, 80,641 in 2001 and 508,588 in 2000), and warrants representing 40,170 shares of common stock remain outstanding. As part of the acquisition of iPCS by AirGate, AirGate assumed warrants previously issued by iPCS in connection with the iPCS notes in exchange for warrants on 475,351 shares of Company common stock with an exercise price of $34.51 per share, all of which were outstanding on September 30, 2002. Additionally, the Company assumed warrants on 183,584 shares of the Company's common stock previously issued by iPCS in connection with iPCS' amendment of its management agreement with Sprint with an exercise price of $31.06 per share. The warrants related to the iPCS notes became exercisable on July 15, 2001 for a period of ten years after the date of issuance. The warrants related to the Sprint Agreements were issued as part of an amendment to the management agreement iPCS had with Sprint in connection with iPCS' purchase of Sprint owned PCS territories in Michigan, Iowa and Nebraska and became exercisable by Sprint on July 15, 2001 and expire on July 15, 2007. The following is a summary of activity in the Company's warrants from date of issuance through September 30, 2002: Warrants as of September 30, 2002
Outstanding as of Issued Exercised September 30 --------- ----------- ----------------- AirGate Weiss, Peck & Greer - May 1999 ............. 214,413 (214,413) - AirGate Lucent Warrants - August 1999 .............. 128,860 (128,860) - AirGate Lucent Warrants - June 2000 ................ 10,175 - 10,175 AirGate note warrants - September 1999 ............. 644,400 (604,230) 40,170 iPCS note warrants - July 2000 ..................... 475,351 - 475,351 iPCS Sprint Warrants - July 2000 ................... 183,584 - 183,584 --------- ---------- ------- Total warrants outstanding ................ 1,656,783 (947,503) 709,280 ========= ========= =======
(c) Stock Compensation Plans In July 1999, the Board of Directors approved the 1999 Stock Option Plan, an incentive stock option plan whereby 2,000,000 shares of common stock were reserved for issuance to current and future employees. Options issued under the plan vest at various terms up to a five-year period beginning at the grant date and expire ten years from the date of grant. During the year ended September 30, 2000, unearned stock compensation of $2.2 million was recorded for grants of common stock options made during that period representing the difference between the exercise price at the date of grant and the fair value at the date of grant. Non-cash stock compensation is recognized over the period in which the related services are rendered. The Company issued 12,067 shares of restricted stock to employees of the Company during fiscal year 2002. The shares vest at various rates over a 5-year period. The Company has recorded the fair value of the shares issued of $252,000 as unearned stock compensation and is amortizing such amount to non-cash stock compensation over the vesting period. F-19 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On January 31, 2001, the Board of Directors approved the 2001 Non-Executive Stock Option Plan, whereby 150,000 shares of common stock were reserved for issuance to current and future employees who were not eligible for grants under the 1999 Stock Option Plan. Options issued under the plan vest ratably over a four-year period beginning at the grant date and expire ten years from the date of grant. On July 31, 2001, the Board of Directors approved the AirGate PCS, Inc. 2001 Non-Employee Director Compensation Plan. Pursuant to the plan, non-employee directors receive an annual retainer, which may be comprised of cash, restricted stock or options to purchase shares of Company common stock. For each plan year, each non-employee director of the Company that chairs one or more committees of the board of directors receives an annual retainer of $12,000 and all other non-employee directors receive an annual retainer of $10,000. The recipient may elect to receive up to 50% of such amount in the form of restricted stock or options to purchase shares of Company common stock. Each non-employee director that joins the Company's Board of Directors also receives an initial grant of options to acquire 5,000 shares of Company common stock. The options vest in three equal annual installments beginning on the first day of the plan year following the year of grant. In addition, each participant receives an annual grant of options to acquire 5,000 shares of Company common stock. In lieu of this annual grant, the recipient may elect to receive three year's worth of annual option grants in a single upfront grant of options to acquire 15,000 shares of Company common stock that vest in three equal annual installments. All options are issued at an exercise price equal to the fair market value of the Company's common stock on the date of grant. The Company also reimburses each of the non-employee directors for reasonable travel expenses to board and committee meetings. On December 18, 2001, the Board of Directors approved the AirGate PCS, Inc. 2002 Long-Term Incentive Plan (the "2002 Plan"), whereby 1,500,000 shares of Company common stock were reserved for issuance as incentive awards to select employees and officers, directors and consultants of the Company, on such vesting terms as the Company's compensation committee determines. The 2002 Plan was approved by shareholders and became effective on February 26, 2002. Upon approval of the 2002 Plan by the Company's shareholders, no future issuances of options under the 1999 Stock Option Plan or 2001 Non-Executive Stock Option Plan were permitted, and shares issued under the Non-Employee Director Plan are reserved under the authority of the 2002 Plan. On January 31, 2001, the Board of Directors approved the 2001 Employee Stock Purchase Plan, which made available for issuance 200,000 shares of common stock. The 2001 Employee Stock Purchase Plan allows employees to make voluntary payroll contributions towards the purchase of Company common stock. At the end of the offering period, initially the calendar year, the employee will be able to purchase common stock at a 15% discount to the market price of the Company's common stock at the beginning or end of the offering period, whichever is lower. For the year ended September 30, 2002, 18,343 shares of common stock were issued to the 2001 Employee Stock Purchase Plan in exchange for $568,000 in cash, and 181,657 shares remain reserved for future issuance. The Company applies the provisions of APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Had compensation costs for the Company's stock option plans been determined in accordance with SFAS No. 123, the Company's net loss and basic and diluted net loss per share of common stock for the year ended September 30, 2002, 2001 and 2000 would have increased to the pro forma amounts indicated below (dollars in thousands, except for per share amounts):
Years Ended September 30, 2002 2001 2000 ---- ---- ---- Net loss: As reported ........................................... $ (996,617) $ (110,990) $(81,323) Pro forma ............................................. $(1,005,755) $ (117,017) $(84,521) Basic and diluted net loss per share of common stock: As reported ........................................... $ (41.96) $ (8.48) $ (6.60) Pro forma ............................................. $ (42.34) $ (8.94) $ (6.86)
The fair value of stock option grants for the years ended September 30, 2002, 2001, and 2000 was $26.29, $31.10, and $20.02, respectively. The fair value of stock options granted was estimated as of the date of the grant using the Black-Scholes option pricing model with the following assumptions:
Years Ended September 30, ------------------------- 2002 2001 2000 ---- ---- ---- Risk-free interest return ................................. 2.3% 3.5% 6.5% Volatility ................................................ 180.0% 100.0% 120.0%
F-20 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Dividend yield ........................... 0% 0% 0% Expected life in years ................... 4 4 5 The following table summarizes activity under the Company's stock option plans: Weighted- Number of average options exercise price ----------- -------------- Options outstanding as of September 30, 1999 ...... 1,075,000 $ 14.00 Granted ........................................ 600,500 51.63 Exercised ...................................... (84,605) 14.00 Forfeited ...................................... (86,250) 19.15 ---------- -------- Options outstanding as of September 30, 2000 ...... 1,504,645 28.72 Granted ........................................ 502,587 41.35 Exercised ...................................... (467,556) 14.39 Forfeited ...................................... (82,741) 36.66 ---------- -------- Options outstanding as of September 30, 2001 ...... 1,456,935 37.23 Options assumed in acquisition of iPCS ........ 478,069 31.99 Granted ....................................... 637,689 27.45 Exercised ..................................... (33,558) 26.86 Forfeited ..................................... (279,372) 35.30 ---------- -------- Options outstanding as of September 30, 2002 ...... 2,259,763 $33.95 ========== ======== As previously discussed, the Company maintains several stock option plans with total reserved shares of approximately 3,500,000. Shares of the Company's common stock available for future grant under the Company's stock option plans were 1,268,961 at September 30, 2002. The following table summarizes information for stock options outstanding and exercisable at September 30, 2002:
Options outstanding Options exercisable ---------------------------------------------- ------------------------- Weighted average remaining Weighted Weighted Range of Number contractual life average Number average exercise prices outstanding (in years) exercise price exercisable exercise price ---------------- ----------- ----------------- -------------- ----------- -------------- $0.88 - 14.00 734,937 7.91 $11.48 239,320 $ 14.00 15.95 - 34.52 379,249 6.99 31.57 266,617 32.02 35.63 - 36.75 231,266 8.12 36.65 62,527 36.61 39.22 - 46.62 230,912 7.83 42.86 102,788 42.94 46.66 - 46.88 256,577 9.01 46.71 16,275 46.88 47.50 - 65.13 266,822 8.09 55.94 94,069 54.20 66.94 150,000 7.92 66.94 67,499 66.94 98.50 10,000 7.44 98.50 5,750 98.50 ---------- ----- ------ -------- ------- $0.88 - $98.50 2,259,763 7.91 $33.95 854,845 $ 34.59 ========== ===== ====== ======== =======
At September 30, 2001, 406,445 options were exercisable and the weighted average exercise price was $30.05. At September 30, 2000, 285,395 options were exercisable and the weighted average exercise price was $14.00. (d) Preferred Stock The Company's articles of incorporation authorize the Company's Board of Directors to issue up to 5 million shares of preferred stock without stockholder approval. The Company has not issued any preferred stock as of September 30, 2002. (9) Income Taxes The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future and any increase or decrease in the valuation allowance for deferred income tax assets. F-21 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Income tax benefit for the years ended September 30, 2002, 2001 and 2000, differed from the amounts computed by applying the statutory U.S. Federal income tax rate of 34% to loss before income tax benefit as a result of the following (dollars in thousands):
Years ended September 30, 2002 2001 2000 ---- ---- ---- Computed "expected" income tax benefit ......................................... $(348,629) $(37,737) $(27,650) (Increase) decrease in income tax benefit resulting from: Stock option deductions ........................................................ (1,585) (2,224) -- State income tax benefits, net of Federal effect ............................... (23,466) (6,120) (5,116) Increase in the valuation allowance for deferred income tax assets ............. 184,197 44,697 31,000 Nondeductible interest expense ................................................. 4,244 1,308 1,224 Asset impairments .............................................................. 154,015 -- -- Other, net ..................................................................... 2,463 76 542 -------- -------- -------- Total income tax benefit ........................................... $ (28,761) $ -- $ -- ========= ======== ========
Differences between financial accounting and tax bases of assets and liabilities giving rise to deferred income tax assets and liabilities are as follows at September 30 (in thousands):
2002 2001 ---- ---- Deferred income tax assets: Net operating loss carryforwards ......................................................... $56,544 $67,818 Capitalized start-up costs ............................................................... 2,576 3,942 Accrued expenses ......................................................................... 14,145 409 Deferred interest expense ................................................................ 36,133 15,735 -------- -------- Gross deferred income tax assets ......................................................... 209,398 87,904 Less valuation allowance for deferred income tax assets .................................. (184,197) (81,459) -------- -------- Net deferred income tax assets ........................................................... 25,201 6,445 Deferred income tax liabilities, principally due to differences in depreciation and amortization ............................................................................. (25,201) (6,445) -------- -------- Net deferred income tax assets ........................................................... (25,201) (6,445) $ -- $ -- ======== ========
Deferred income tax assets and liabilities are recognized for differences between the financial statement carrying amounts and the tax basis of assets and liabilities which result in future deductible or taxable amounts and for net operating loss and tax credit carryforwards. In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management has provided a valuation allowance against all of its deferred income tax assets because the realization of those deferred tax assets is uncertain. The valuation allowance for deferred income tax assets as of September 30, 2002 and 2001 was $184.2 million and $81.5 million, respectively. The net change in the total valuation allowance for the years ended September 30, 2002, 2001 and 2000 was an increase of $184.2 million, $44.7 million and $31.0 million, respectively. The increase in valuation allowance is offset by $81.5 million of valuation allowance associated with the acquisition of iPCS. At September 30, 2002, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $445 million, which will expire in various amounts beginning in the year 2019. The net operating loss carryforwards that the Company may use to offset taxable income in future years is limited as a result of an ownership change, as defined under Internal Revenue Code Section 382, which occurred effective with the Company's acquisition of iPCS on November 30, 2001. The amount of this annual limitation is approximately $74.3 million per year. At September 30, 2002, the Company also has a South Carolina general business credit carryforward of approximately $0.5 million available to offset income tax expense from this state that will expire in the year 2009. The net operating loss carryforward of $445 million includes deductions of approximately $8.6 million related to the exercise of stock options, which will be credited to additional paid in capital if recognized. F-22 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (10) Goodwill and intangible assets The changes in the carrying amount of goodwill between September 30, 2001 and September 30, 2002 are as follows (dollars in thousands):
Balance of goodwill as of September 30, 2001 .................................................................... $ - Goodwill acquired on November 30, 2001 (preliminary purchase price allocation) ............................... 387,392 Adjustments to preliminary purchase price allocation during period ended March 31, 2002 ...................... 73,528 Goodwill impairments ......................................................................................... (460,920) -------- Balance as of September 30, 2002 ................................................................................ $ - ========
The amortization of intangible assets for the years ended September 30, 2002 and 2001 was $39,332 and $46 (dollars in thousands), respectively. The adjustment to the preliminary purchase price resulted from the receipt of the final purchase price allocation report from the Company's valuation expert. These adjustments reduced the intangible assigned to the right to provide service under the Sprint Agreements by $94 million, increased goodwill by $73.5 million, adjusted other assets and liabilities by $6.9 million, and reduced the deferred income tax liability by $27.4 million. The amortization period, gross carrying amount, impairments, accumulated amortization, and net carrying amount of intangible assets at September 30, 2002, are as follows (dollars in thousands):
Gross Net Amortization carrying Accumulated carrying period amount Impairments amortization amount ------------ ------- ----------- ------------ --------- Non-competition agreements - iPCS acquisition ............................... 6 months $ 3,900 $ - $ (3,900) $ - Non-competition agreements - AirGate store acquisitions ................ 24 months 159 - (127) 32 Acquired subscriber base - iPCS acquisition ... 30 months 52,400 (6,640) (17,465) 28,295 Right to provide service under the Sprint agreements - iPCS acquisition ............ 205 months 323,289 (305,403) (17,886) - -------- --------- -------- ------- Total .................................. $379,748 $(312,043) $(39,378) $28,327 ======== ========= ======== =======
The weighted average estimated useful lives of intangibles assets was approximately 178.7 months or 14.9 years for the year ended September 30, 2002 with remaining useful lives of 20 months or 1.7 years for future periods as a result of the impairments described in note 2. Estimated future amortization expense on intangible assets for the fiscal years ended September 30, 2003 ............................................................ $ 17,009 ====== 2004 ............................................................ $ 11,318 ====== (11) Merger with iPCS, Inc. On November 30, 2001, the Company completed the acquisition of iPCS. In light of consolidation in the wireless communications industry in general and among Sprint PCS network partners in particular, the Company's Board of Directors believed that the merger represented a strategic opportunity to significantly expand the size and scope of the Company's operations. The Company's Board of Directors believed that, following the merger, the Company would have greater financial flexibility, operational efficiencies and growth potential than the Company would have on its own. In connection with the iPCS acquisition, the Company issued 12.4 million shares of Company common stock valued at $57.16 per share on November 30, 2001, which totaled $706.6 million. The Company reserved an additional 1.1 million shares for issuance upon exercise 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. Accordingly, the Company engaged a nationally recognized valuation expert to assist in the allocation of purchase price to the fair value of identifiable assets and liabilities. Subsequently, certain F-23 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) former shareholders of iPCS sold 4.0 million shares of Company common stock in an underwritten offering on December 18, 2001. The accounts of iPCS are included in the Company's consolidated financial statements as of September 30, 2002 and the results of operations subsequent to November 30, 2001. The Company considers itself the acquiring entity for the following reasons. The Company was the issuer of the equity shares in the merger, Company stockholders, subsequent to the merger, held 53 percent of the combined entity, senior management of the combined entity subsequent to the merger is comprised of former senior management of the Company, Company stockholders, subsequent to the merger, have the majority voting rights to elect the governing body of the combined company, and the Company was the larger of the two entities prior to the merger. The total purchase price and the fair values of identifiable assets and liabilities as of November 30, 2001 are summarized below (dollars in thousands). Stock issued ................................................. $ 706,645 Value of options and warrants converted ...................... 47,727 Costs associated with acquisition ............................ 7,730 Liabilities assumed .......................................... 394,165 ---------- Total purchase price ................................ $1,156,267 ========== Tangible assets .............................................. $ 313,843 Intangible assets ............................................ 379,589 Goodwill ..................................................... 462,835 ---------- Total ............................................... $1,156,267 ========== As a result of the acquisition of iPCS, the Company recorded goodwill of $462,835 and intangible assets of $379,589 (dollars in thousands):
Value Amortization Assigned Period -------- ------------ Acquired subscriber base ............................................ $52,400 30 months Non-competition agreements .......................................... 3,900 6 months Right to provide service under the Sprint Agreements ................ 323,289 205 months -------- $379,589 ========
The weighted average estimated useful lives of intangibles assets was approximately 178.7 months or 14.9 years for the year ended September 30, 2002 and approximately 20 months or 1.6 years for future periods as a result of the impairments described in note 2. All of the goodwill and the majority of the intangibles were subsequently impaired (see Note 2). The unaudited pro forma condensed consolidated statements of operations for the years ended September 30, 2002 and 2001, 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 each period (dollars in thousands).
Years Ended September 30, ---------------------------------- 2002 2001 ---- ---- Total revenues ............................................................. $ 483,612 $ 259,214 =========== ========= Net loss ................................................................... $(1,045,361) $(246,032) =========== ========= Basic and diluted net loss per share ....................................... $ (40.57) $ (9.67) =========== =========
F-24 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (12) Commitments and Contingencies (a) Operating Leases The Company is obligated under non-cancelable operating lease agreements for office space, cell sites, vehicles and office equipment. Future minimum annual lease payments under non-cancelable operating lease agreements with remaining terms greater than one year for the next five years and in the aggregate at September 30, 2002, are as follows (dollars in thousands): Years ending September 30, -------------------------- 2003 .............................................. $ 32,310 2004 .............................................. 30,906 2005 .............................................. 25,374 2006 .............................................. 17,462 2007 .............................................. 11,860 Thereafter ........................................ 28,401 -------- Total future minimum annual lease payments ..... $146,313 ======== Rental expense for all operating leases was $30.0 million, $15.2 million and $9.8 million for the years ended September 30, 2002, 2001 and 2000, respectively. (b) Employment Agreements The Company has entered into employment agreements with certain employees that define employment terms including salary, bonus and benefits to be provided to the respective employees. In May 2000, the Company entered into a retention bonus agreement with Thomas M. Dougherty, its Chief Executive Officer. So long as Mr. Dougherty is not terminated for cause or does not voluntarily terminate employment, the Company must make on specified payment dates, generally quarterly, extending to January 15, 2004, periodic retention bonuses totaling $3.6 million. For the years ended September 30, 2002, 2001 and 2000, the Company has recorded compensation expense of $0.7 million, $0.7 million and $1.2 million, respectively, related to amounts earned under the retention bonus agreement. Under the terms of the agreement, partial acceleration of the future payments would occur upon a change in control of the Company. The Company's commitment with respect to future payments at September 30, 2002 was $1 million. (c) Litigation On July 3, 2002 the Federal Communications Commission (the "FCC") issued an order in Sprint PCS v. AT&T for declaratory judgment holding that PCS wireless carriers could not unilaterally impose terminating long distance access charges pursuant to FCC rules. This FCC order did not preclude a finding of a contractual basis for these charges, nor did it rule whether or not Sprint PCS had such a contract with carriers such as AT&T. AirGate and iPCS have previously received $3.9 and $1.0 million, respectively. This is comprised of $4.3 and $1.1 million, respectively, of terminating long distance access revenues, less $0.4 and $0.1 million, respectively, of associated affiliation fees held by Sprint PCS and Sprint PCS has asserted its right to recover these revenues net of the affiliation fees. As a result of this ruling, and our assessment of this contingency under SFAS No. 5, "Accounting for Contingencies", the Company recorded a charge to revenues during the quarter ended June 30, 2002 to fully accrue for these amounts. However, we will continue to assess the ability of Sprint, Sprint PCS or other carriers to recover these charges and the Company is continuing to review the availability of defenses it may have against Sprint PCS' claim to recover these revenues. In May 2002, putative class action complaints were filed in the United States District Court for the Northern District of Georgia against AirGate PCS, Inc., Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit Suisse First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company, Thomas Wiesel Partners LLC and TD Securities. The complaints do not specify an amount or range of damages that the plaintiffs are seeking. The complaints seek class certification and allege that the prospectus used in connection with the secondary offering of Company stock by certain former iPCS shareholders on December 18, 2001 contained materially false and misleading statements and omitted material information necessary to make the statements in the prospectus not false and misleading. The alleged omissions included (i) failure to disclose that in order to complete an effective integration of iPCS, drastic changes would have to be made to the Company's distribution channels, (ii) failure to disclose that the sales force in the acquired iPCS markets would require extensive restructuring and (iii) failure to disclose that the "churn" or "turnover" rate for subscribers would increase as a result of an increase in the amount of sub-prime credit quality subscribers the Company added from its merger with iPCS. On July 15, 2002, certain plaintiffs and their counsel F-25 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) filed a motion seeking appointment as lead plaintiffs and lead counsel. On November 26, 2002, the Court entered an Order requiring the Plaintiffs to provide additional information in connection with their Motion for Appointment as Lead Plaintiff and in December 2002, Plaintiffs submitted Declarations in Support of Motion for Appointment of Lead Plaintiff. The Company believes the plaintiffs' claims are without merit and intends to vigorously defend against these claims. However, no assurance can be given as to the outcome of the litigation. (d) 401(k) Plan Employer contributions under the Company's 401(k) plans for the years ended September 30, 2002, 2001 and 2000 were $0.7, $0.6, and $0.2 million, respectively. (e) Other The Company is committed to make expenditures for certain outdoor advertising and marketing sponsorships subsequent to September 30, 2002 totaling $1.1 million and $250,000, respectively. Additionally, the Company is committed to making a future payment under a consulting contract of $580,000. (13) Related Party Transactions and Transactions between AirGate and iPCS See Note 4 for a discussion of transactions with Sprint. Transactions between AirGate and iPCS The Company formed AirGate Service Company, Inc. ("ServiceCo") to provide management services to both AirGate and iPCS. ServiceCo is a wholly-owned restricted subsidiary of AirGate. Personnel who provide general management services to AirGate and iPCS have been leased to ServiceCo, which includes 190 employees at September 30, 2002. Generally, the management personnel include the corporate staff in the Company's principal corporate offices in Atlanta and the accounting staff in Geneseo, Illinois. ServiceCo expenses are allocated between AirGate and iPCS based on the percentage of subscribers they contribute to the total number of Company subscribers (the "ServiceCo Allocation"), which is currently 60% AirGate and 40% iPCS. Expenses that are related to one company are allocated to that company. Expenses that are related to ServiceCo or both companies are allocated in accordance with the ServiceCo Allocation. For the year ended September 30, 2002, iPCS paid ServiceCo a net total of $1.7 million for ServiceCo expenses. AirGate has completed transactions at arms-length in the normal course of business with its unrestricted subsidiary iPCS. These transactions are comprised of roaming revenue and expenses, inventory sales and purchases and sales of network operating equipment as further described below. In the normal course of business under AirGate's and iPCS' Sprint agreements, AirGate's subscribers incur minutes of use in iPCS' territory causing AirGate to incur roaming expense. In addition, iPCS' subscribers incur minutes of use in AirGate's territory for which AirGate receives roaming revenue. AirGate received $0.4 million of roaming revenue from iPCS and incurred $0.4 million of roaming expense to iPCS during the year ended September 30, 2002. The reciprocal roaming rate charged and other terms are established under AirGate's and iPCS' Sprint agreements. In order to optimize the most efficient use of certain models of handset inventories in relation to regional demand, AirGate sold approximately $0.1 million of wireless handset inventories to iPCS. Additionally AirGate purchased approximately $0.2 million of wireless handset inventories from iPCS. These transactions were completed at fair value. At September 30, 2002, neither AirGate nor iPCS were carrying any wireless handset inventory purchased from each other. AirGate sold approximately $0.2 million of network operating equipment to iPCS in fiscal 2002 at fair value. Additionally, iPCS sold to AirGate approximately $0.7 million of network operating equipment at fair value. All of these transactions are eliminated in consolidation. The terms and conditions of each of the transactions described above are comparable to those that could have been obtained in transactions with unaffiliated entities. Transactions Involving Board Members AirGate purchases certain telecommunication services for its network from New South Communications. James Akerhielm, a member of AirGate's board of directors during the year ended September 30, 2002, is the president and chief executive officer and a member of the board of directors of New South Communications, Inc. Mr. Akerhielm was elected to the board of directors of AirGate during May 2002. For the year ended September 30, 2002, AirGate purchased $0.7 million of telecommunication F-26 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) services from New South Communications, less than 1% of AirGate's revenues. The terms and conditions of such transactions are comparable to those that could have been obtained in transactions with unaffiliated entities. Pursuant to his employment agreement, iPCS purchases consulting services from Tim Yager who served on AirGate's Board of Directors during the year ended September 30, 2002. For the year ended September 30, 2002, iPCS purchased $0.3 million of consulting services from Tim Yager. Messrs. Akerhielm and Yager have both recently resigned from the Company's Board of Directors. (14) Selected Quarterly Financial Data (Unaudited):
First Second Third Fourth Quarter(a) Quarter(b) Quarter Quarter(c) Total ------- ------- ------- ------- ----- Year ended September 30, 2002: Total revenue ............................ $ 81,699 $ 114,897 $ 122,809 $ 137,152 $ 456,557 Operating loss ........................... (36,724) (298,856) (34,592) (598,643) (968,815) Net loss ................................. (29,644) (301,910) (50,079) (614,984) (996,617) Net loss per share--basic and diluted ....... (1.68) (11.71) (1.94) (23.83) (41.96) Year ended September 30, 2001: Total revenue ............................ $ 23,019 $ 37,078 $ 49,738 $ 62,252 $ 172,087 Operating loss ........................... (27,404) (21,338) (16,295) (19,517) (84,554) Net loss ................................. (33,863) (28,372) (23,743) (25,012) (110,990) Net loss per share--basic and diluted ....... (2.64) (2.18) (1.80) (1.88) (8.48)
(a) Includes the acquisition of iPCS (see note 11) (b) Includes a $261.2 million goodwill impairment charge (see note 2) (c) Includes impairment charges of $312.0 million related to intangible assets, $199.7 million related to goodwill and $44.5 million related to property and equipment (see notes 2 and 11) (15) Subsequent Events During November 2002, the Company completed an amendment to the iPCS credit facility that waived the minimum subscriber covenant for December 31, 2002 and eliminated the $10.0 million liquidity requirement. The amount of the credit facility was reduced by the same amount to $130.0 million and eliminated any further availability under the iPCS credit facility. On October 8, 2002 iPCS retained Houlihan Lokey Howard & Zukin Capital to review iPCS' revised long range business plan, the strategic alternatives available to iPCS and to assist iPCS in developing and implementing a plan to improve its capital structure. Because current conditions in the capital markets make additional financing unlikely, iPCS has undertaken efforts to restructure its relationship with its secured lenders, its public noteholders and Sprint, and we have begun restructuring discussions with informal committees of these creditors. While the lenders and noteholders have expressed willingness to work with iPCS, Sprint has informed us it is unwilling to restructure its agreements with iPCS. Because of its deteriorating financial condition, iPCS expects to seek protection under the federal bankruptcy laws in an effort to effect a court-administered reorganization. iPCS failed to deliver on December 30, 2002 the audited financial statements and audit opinion required by the iPCS credit facility and the indenture under which its notes are issued. Because of these events of default, the senior lenders will have the ability to accelerate iPCS' payment obligations under the iPCS credit facility and the holders of the iPCS notes will have the ability to accelerate iPCS' payment obligations under iPCS' indenture, after giving notice and the expiration of applicable cure periods. iPCS is working with its lenders and noteholders on a forbearance agreement, however there is no assurance that these negotiations will be successful. In any event, we anticipate that iPCS will default on certain financial covenants as of March 31, 2003 and it is probable that iPCS will file for bankruptcy in the near term. Such events are also events of default under the iPCS credit facility. On November 4, 2002, the Company was notified by Sprint that it intends to reduce the reciprocal roaming rate from its current $0.10 per minute to $0.058 per minute in 2003. Currently the roaming revenue that the Company receives from Sprint for Sprint and its network partners PCS subscribers using the Company's network exceed those that the Company pays to Sprint and its PCS network partners for the Company's subscribers using their networks. The change in the roaming rate will decrease the Company's revenues, expenses and the Company's net roaming margin, which is the difference between roaming revenue and roaming expense, increase the Company's net loss and decrease cash flow from operations. AirGate's credit facility requires that AirGate deliver audited financial statements accompanied by an unqualified opinion of its independent auditors by December 30, 2002, along with certain related documents. Similarly, AirGate's notes require that F-27 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AirGate deliver an audit opinion of its independent auditors, along with certain related documents, by December 30, 2002. Because AirGate did not deliver the required information on December 30, 2002, AirGate was in default under its credit facility and the indenture governing its notes. Under the AirGate credit facility and indenture, the default did not constitute an event of default until the giving of notice and expiration of the applicable cure period. AirGate is curing any defaults under the AirGate credit facility and indenture with the filing of these consolidated financial statements. On December 31, 2002, Standard & Poor's ("S&P") downgraded AirGate's corporate rating from CCC+ to CCC- and its rating of the AirGate notes from CCC- to CC. In addition, S&P downgraded iPCS' corporate rating from CCC- to CC and has placed AirGate on credit watch with negative implications pending the cure of a default under its credit facility and its notes. In October 2002, the Company entered into a separation agreement and release with its former Chief Financial Officer, who resigned as an officer of the Company effective October 21, 2002, and as an employee of the Company effective October 31, 2002. Pursuant to the separation agreement, the Company will pay to the former Chief Financial Officer a severance payment in the amount equal to $300,000, half of which will be paid bi-weekly for the first six months of fiscal 2003. The remainder will be paid in a lump sum payment at the end of the six-month period. In addition, in connection with a reduction in workforce in October and December 2002, the Company became obligated in the three month period ended December 31, 2002 to pay a total of $1.1 million in severance payments. (16) Condensed Consolidating Financial Information AGW Leasing Company, Inc. ("AGW") is a wholly-owned restricted subsidiary of AirGate. AGW has fully and unconditionally guaranteed the AirGate notes and the AirGate credit facility. AGW was formed to hold the real estate interests for the Company's PCS network and retail operations. 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 restricted subsidiary of AirGate. ANS has fully and unconditionally guaranteed the AirGate notes and AirGate 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. AirGate Service Company, Inc. ("Service Co") is a wholly-owned restricted subsidiary of AirGate. Service Co has fully and unconditionally guaranteed the AirGate notes and the AirGate credit facility. Service Co was formed to provide management services to AirGate and iPCS. Service Co jointly and severably guarantees AirGate's long-term debt. iPCS is a wholly-owned unrestricted subsidiary of AirGate and operates as a separate business. As an unrestricted subsidiary, iPCS provides no guarantee to either the AirGate notes or the AirGate credit facility and AirGate and its restricted subsidiaries provide no guarantee to the iPCS notes or the iPCS credit facility. F-28 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AGW, ANS, Service Co and iPCS are 100% owned by AirGate and no other persons have equity interests in such entities. The condensed consolidating financial information for AirGate, AGW, ANS, Service Co and iPCS as of September 30, 2002 and for the year ended September 30, 2002 is as follows (dollars in thousands):
AGW AirGate AirGate iPCS Leasing Network Service AirGate Non- Combined AirGate Company, Services, Company, Elimi- Consol- Guarantor Elimi- Company PCS, Inc. Inc. LLC Inc. nation idated(1) Subsidiary nations Consolidated ---------- --------- --------- -------- --------- ----------- ----------- -------- ------------ Cash and cash equivalents ......... $ 4,769 $ -- $ 118 $ -- $ -- $ 4,887 $ 27,588 $ -- $ 32,475 Other current assets .. 122,869 -- 529 -- (60,579) 62,819 35,593 (1,114) 97,298 ----------- -------- -------- -------- -------- ----------- --------- -------- ----------- Total current assets .. 127,638 -- 647 -- (60,579) 67,706 63,181 (1,114) 129,773 Property and equipment, net ...... 168,163 -- 45,614 -- -- 213,777 185,378 -- 399,155 Intangible assets, net ................. 1,428 -- -- -- -- 1,428 26,899 -- 28,327 Investment in subsidiaries ........ (183,778) -- -- -- 84,506 (99,212) -- 99,212 -- Other noncurrent assets .............. 4,924 -- -- -- -- 4,924 12,115 -- 17,039 ----------- -------- -------- -------- -------- ----------- --------- -------- ----------- Total assets .......... $ 118,435 $ -- $ 46,261 $ -- $ 23,927 $ 188,623 $ 287,573 $ 98,098 $ 574,294 =========== ======== ======== ======== ======== =========== ========= ======== =========== Current liabilities ... $ 55,535 $ 44,859 $ 60,579 $ 25,329 $(60,579) $ 125,723 369,564 $ (1,114) $ 494,173 Long-term debt ........ 354,264 -- -- -- -- 354,264 $ 564 -- 354,828 Other long-term liabilities ......... 1,583 -- -- -- -- 1,583 16,657 -- 18,240 ----------- -------- -------- -------- -------- ---------- --------- -------- ----------- Total liabilities ..... 411,382 44,859 60,579 25,329 (60,579) 481,570 386,785 (1,114) 867,241 ----------- -------- -------- -------- -------- ----------- --------- -------- ----------- Stockholders' equity .. (292,947) (44,859) (14,318) (25,329) 84,506 (292,947) (99,212) 99,212 (292,947) ----------- -------- -------- -------- -------- ----------- --------- -------- ----------- Total liabilities and stockholders' equity (deficit) ........... $ 118,435 $ -- $ 46,261 $ -- $ 23,927 $ 188,623 $ 287,573 $ 98,098 $ 574,294 =========== ======== ======== ======== ======== =========== ========= ======== =========== Total revenues ........ $ 313,544 $ -- $ -- $ -- $ -- $ 313,544 $ 144,080 $ (1,067) $ 456,557 Cost of revenues ...... (214,546) (15,219) -- (3,140) 1,142 (231,763) (124,031) 1,067 (354,727) Selling and marketing . (73,603) (2,754) -- (4,169) 1,516 (79,010) (37,511) -- (116,521) General and administrative ...... (5,580) (585) -- (18,020) 6,554 (17,631) (7,708) -- (25,339) Depreciation and amortization ........ (68,124) -- (8,357) -- -- (76,481) (33,048) -- (109,529) Other, net ............ (36,759) -- 1,891 -- -- (34,868) (22,464) -- (57,332) Loss on disposal of property and equipment ........... (717) -- (357) -- -- (1,074) -- -- (1,074) Impairment of goodwill (452,860) -- -- -- -- (452,860) (8,060) -- (460,920) Impairment of property and equipment ........... -- -- -- -- -- -- (44,450) -- (44,450) Impairment of intangible assets ... (312,043) -- -- -- -- (312,043) -- -- (312,043) ----------- -------- -------- -------- ------- ----------- --------- -------- ----------- Total expenses ........ (1,164,232) (18,558) (6,823) (25,329) 9,212 (1,205,730) (277,272) 1,067 (1,481,935) ----------- -------- -------- -------- -------- ----------- --------- -------- ----------- Loss in subsidiaries .. (174,690) -- -- -- 41,498 (133,192) -- 133,192 -- Loss before income tax benefit ......... (1,025,378) (18,558) (6,823) (25,329) 50,710 (1,025,378) (133,192) 133,192 (1,025,378) Income tax benefit .... 28,761 -- -- -- -- 28,761 -- -- 28,761 ----------- -------- -------- -------- ------- ----------- --------- -------- ----------- Net loss .............. $ (996,617) $(18,558) $ (6,823) $(25,329) $ 50,710 $ (996,617) $(133,192) $133,192 $ (996,617) =========== ======== ======== ======== ======== =========== ========= ======== =========== Operating activities .. (24,735) -- 275 -- -- (24,460) (20,782) -- (45,242) Investing activities .. (22,993) -- -- -- -- (22,993) (55,722) -- (78,716) Financing activities .. 62,452 -- -- -- -- 62,452 79,691 -- 142,143 ----------- -------- -------- -------- ------- ----------- --------- ------- ----------- Increase in cash or cash equivalents .... 14,724 -- 275 -- -- 14,999 3,186 -- 18,185 Cash and cash equivalents at beginning of year ... (9,955) $ -- (157) -- -- (10,112) 24,402 -- 14,290 ----------- -------- -------- -------- ------- ----------- --------- ------- ----------- Cash and cash equivalents at end of year ............. $ 4,769 $ -- $ 118 $ -- $ -- $ 4,887 $ 27,588 $ -- $ 32,475 =========== ======== ======== ======== ======== ========== ========= ======== ===========
(1) Amounts in the column for AirGate consolidated include the effects of purchase accounting related to the iPCS acquisition. F-29 AIRGATE PCS, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The condensed consolidating financial information for the Company as of September 30, 2001 and for the year ended September 30, 2001 is as follows (dollars in thousands):
AGW AirGate Leasing Network AirGate Company, Services, PCS, Inc. Inc. LLC Eliminations Consolidation ---------- -------- --------- ------------ ------------- Cash and cash equivalents ........................ $ 14,447 $ -- $ (157) $ -- $ 14,290 Other current assets ............................. Property and equipment, net ...................... 160,203 -- 49,123 -- 209,326 Investment in subsidiaries ....................... 37,540 -- -- (37,540) -- Other assets ..................................... 142,738 -- 501 (85,845) 57,394 ------------ ------------ ------------ -------------- --------------- Total assets ............................... $ 354,928 $ -- $ 49,467 $ (123,385) $ 281,010 ============ ============ ============ ============== =============== Current liabilities .............................. $ 64,580 $ 26,301 $ 56,962 $ (85,845) $ 61,998 Long-term debt ................................... 266,326 -- -- -- 266,326 Other long-term liabilities ...................... 5,410 -- -- -- 5,410 ------------ ------------ ------------ -------------- --------------- Total liabilities .......................... 336,316 26,301 56,962 (85,845) 333,734 ----------- ----------- ----------- ------------- -------------- Stockholders' equity (deficit) ................... 18,612 (26,301) (7,495) (37,540) (52,724) ------------ ------------ ------------ -------------- --------------- Total liabilities and stockholders' equity (deficit) ........................ $ 354,928 $ -- $ 49,467 $ (123,385) $ 281,010 ============ ============ ============ ============== ===============
AGW AirGate Leasing Network AirGate Company, Services, PCS, Inc. Inc. LLC Eliminations Consolidation ---------- -------- --------- ------------ ------------- Total revenues ................................... $ 172,087 $ -- $ -- $ -- $ 172,087 Cost of revenues ................................. (124,022) (12,928) -- -- (136,950) Selling and marketing ............................ (69,833) (1,784) -- -- (71,617) General and administrative ....................... (14,563) (866) (313) -- (15,742) Depreciation and amortization .................... (23,354) -- (7,313) -- (30,667) Other, net ....................................... (30,092) -- 1,991 -- (28,101) ------------ ------------ ------------ ------------- --------------- Total expenses ............................. (261,864) (15,578) (5,635) -- (283,077) ------------ ------------ ------------ ------------- --------------- Loss in subsidiaries ............................. (21,213) -- -- 21,213 -- ------------ ------------ ------------ ------------- --------------- Net loss ......................................... $ (110,990) $ (15,578) $ (5,635) $ -- $ (110,990) ============ ============ ============ ============= =============== Operating activities ............................. $ (53,024) -- $ 12,174 -- $ (40,850) Investing activities ............................. (59,693) -- (12,079) -- (71,772) Financing activities ............................. 68,528 -- -- -- 68,528 ------------ ------------ ------------ ------------- --------------- Decrease in cash or cash equivalents ............. (44,189) -- 95 -- (44,094) Cash and cash equivalents at beginning of year ... 58,636 -- (252) -- 58,384 ------------ ------------ ------------ ------------- --------------- Cash and cash equivalents at end of year ......... $ 14,447 $ -- $ (157) $ -- $ 14,290 ============ ============ ============ ============= ===============
The condensed consolidating financial information for the Company for the year ended September 30, 2000 is as follows (dollars in thousands):
AGW AirGate Leasing Network AirGate Company, Services, PCS, Inc. Inc. LLC Eliminations Consolidation ---------- -------- --------- ------------ ------------- Total revenues ................................... $ 25,065 $ -- $ -- $ -- $ 25,065 Cost of revenues ................................. (24,598) (8,857) -- -- (33,455) Selling and marketing ............................ (27,832) (525) -- -- (28,357) General and administrative ....................... (12,108) (1,440) (530) -- (14,078) Depreciation and amortization .................... (8,583) -- (3,451) -- (12,034 Other, net ....................................... (18,464) -- -- -- (18,464) ------------ ------------ ------------ ------------- --------------- Total expenses ............................. (91,585) (10,822) (3,981) -- (106,388) ------------ ------------ ------------ ------------- --------------- Loss in subsidiaries ............................. (14,803) -- -- 14,803 -- ------------ ------------ ------------ ------------- --------------- Net loss ......................................... $ (81,323) $ (10,822) $ (3,981) $ 14,803 $ (81,323) =========== ============ ============ ============= =============== Operating activities ............................. $ (89,165) -- $ 47,556 -- $ (41,609) Investing activities ............................. (104,589) -- (47,808) -- (152,397) Financing activities ............................. (6,510) -- -- -- (6,510) ------------ ------------ ------------ ------------- --------------- Decrease in cash or cash equivalents ............. (200,264) -- (252) -- (200,516) Cash and cash equivalents at beginning of year ... 258,900 -- -- -- 258,900 ------------ ------------ ------------ ------------- --------------- Cash and cash equivalents at end of year ......... $ 58,636 $ -- $ (252) -- $ 58,384 =========== ============ ============ ============= ===============
F-30 Independent Auditors' Report The Board of Directors AirGate PCS, Inc.: Under date of January 10, 2003, we reported on the consolidated balance sheets of AirGate PCS, Inc. and subsidiaries as of September 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended September 30, 2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule included in the annual report on Form 10-K/A, as listed in the index under Item 15(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in notes 1 and 6 to the consolidated financial statements, the Company's wholly-owned, unrestricted subsidiary, iPCS, Inc., is in default under provisions of its credit agreements, and substantially all of its debt is classified as a current liability. iPCS, Inc. has been unable to restructure its debt and secure additional financing necessary to fund its operations and, accordingly, iPCS, Inc. intends to file for reorganization and protection from its creditors under Chapter 11 of the United States Bankruptcy Code in early 2003 either as a part of a consensual restructuring or in an effort to effect a court administered reorganization. iPCS, Inc. represents approximately 32% of total consolidated revenues for the year ended September 30, 2002 and 50% of the total consolidated assets at September 30, 2002. AirGate PCS, Inc. and its restricted subsidiaries are generally precluded by its credit agreements from providing financial support to iPCS, Inc. Although the ultimate impact of the planned iPCS, Inc. bankruptcy filing is not presently determinable, management believes that the bankruptcy proceedings will not have a significant adverse effect on the liquidity of AirGate PCS, Inc. and its restricted subsidiaries through fiscal 2003. /s/ KPMG LLP Atlanta, Georgia January 10, 2003 F-31 AIRGATE PCS, INC. AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS For the Years Ended September 30, 2002, 2001 and 2000 (in thousands)
Additions ------------------------ Balance at Charges to Balance Beginning of Costs and at End of Classification Period Expenses Other Deductions a Period ---------------- ------------- ------------- --------- ------------ ----------- September 30, 2002 Allowance for Doubtful Accounts .... $ 2,759 26,933(1) 23,406(2) (45,888)(3) $ 11,256 4,046(4) Income Tax Valuation Allowance ..... $ 81,459 184,197(6) -- (81,459)(5) $ 184,197 September 30, 2001 Allowance for Doubtful Accounts .... $ 563 8,125(1) 2,874(2) (8,803)(3) $ 2,759 Income Tax Valuation Allowance ..... $ 36,762 44,697(6) -- -- $ 81,459 September 30, 2000 Allowance for Doubtful Accounts .... $ -- 563(1) -- -- $ 563 Income Tax Valuation Allowance ..... $ 5,762 31,000(6) -- -- $ 36,762
(1) Amounts represent provisions for doubtful accounts charged to cost of service and roaming. (2) Amounts represent provisions for late payment fees, early cancellation fees, first payment default customers, and other billing adjustments charged to subscriber revenues. (3) Amounts represent write-offs of uncollectible customer accounts. (4) Amount represents the allowance for doubtful accounts of iPCS, Inc. as of November 30, 2001, the date of acquisition. (5) Amount represents a decrease in the valuation allowance associated with acquisition of iPCS, Inc. on November 30, 2001. (6) Amounts represent increases in the valuation allowance for deferred income tax assets to reduce them to the amount believed to be realizable. F-32 EX-3.1 3 dex31.txt CERTIFICATE OF INCORPORATION Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF AIRGATE PCS, INC. The present name of the corporation is AirGate PCS, Inc. The corporation was incorporated under the name "AirGate Wireless, Inc." by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on October 14, 1998. This Restated Certificate of Incorporation of the corporation only restates and integrates and does not further amend the provisions of the corporation's Amended and Restated Certificate of Incorporation as theretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of the Restated Certificate of Incorporation. This Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware. The Amended and Restated Certificate of Incorporation of the corporation is hereby restated to read in its entirety as follows: ARTICLE I The name of the Corporation is: AirGate PCS, Inc. (formerly AirGate Wireless, Inc.). ARTICLE II The address of the Corporation's registered office in the State of Delaware is The Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the registered agent at that address is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is one-hundred fifty-five million (155,000,000) of stock consisting of: 1. One-hundred fifty million (150,000,000) shares of Common Stock, par value one cent ($.01) per share. 2. Five million (5,000,000) shares of Preferred Stock, par value one cent ($.01) per share. B. The Board of Directors is authorized, subject to any limitations prescribed by law to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware (such certificate being hereinafter referred to as a "preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any Preferred Stock Designation. ARTICLE V The Following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its Directors and stockholders: A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Amended and Restated Certificate of Incorporation or the By-Laws of the Corporation, the Directors hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The Directors of the Corporation need not be elected by written ballot unless the By-Laws so provide. C. So long as there is more than one shareholder of the Corporation, no action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, and the power of the stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. D. Special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board or as otherwise provided in the By-Laws. The term "Whole Board" shall mean the total number of authorized directorships (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). E. The holders of the Common Stock shall have no preemptive rights to subscribe for any shares of any class of stock of the Corporation whether now or hereafter authorized. F. The Corporation and the holders of its Common Stock shall be bound to (i) any and all provisions of Section 11 of the Sprint PCS Management Agreement dated July 22, 1998 (the "Agreement") between AirGate Wireless, LLC, Sprint Spectrum L.P., Sprint Communications Company, L.P. and SprintCom, Inc. assigned to the Corporation in November of 1998, which provide for the sale of the operating assets of the Corporation to SprintCom, Inc. upon non-renewal (as defined under the Agreement) and/or an event of termination (as set forth under Section 11 of the Agreement), said Agreement (including Section 11) having been duly approved and ratified by the Board of Directors of the Corporation and ratified by the sole stockholder of the Corporation; and (ii) the sale of the Operating Assets of the Corporation pursuant to the consent and agreement to be entered into by Sprint Spectrum L.P., Sprint Communications Company, L.P., SprintCom, Inc., and the Corporation's Senior Lenders, said sale of the Operating Assets having been duly approved and ratified by the Board of Directors of the Corporation and ratified by the sole stockholder of the Corporation. The purchase price for such Operating Assets will be based on a formula set forth in Section 11 of the Agreement as modified by the consent and agreement with the Corporation's Senior Lenders. ARTICLE VI A. The number of Directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board. The Directors shall be divided into three classes, as nearly equal in numbers as the then total number of directors constituting the entire Board permits with the term of office of one class expiring each year. At the annual meeting of stockholders in 1999 directors of the first class shall be elected to hold officer for a term expiring at the next succeeding annual meeting, director of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting, and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire at the next succeeding annual meeting of stockholders. At each annual meeting of stockholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election with each Director to hold office until his or her successor shall have been duly elected and qualified. B. Subject to the rights of holders of any series of Preferred Stock outstanding, the newly created directorships resulting from any increase in the authorized number of Directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the Directors then in office, though less than a quorum, and Directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been chosen expires. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. C. Advance notice of stockholder nominations for the election of Directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws of the Corporation. D. Notwithstanding any other provisions of this Amended and Restated Certificate of Incorporation or the Bylaws of the Corporation, any Director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors, voting together as a single class. Notwithstanding the foregoing, and except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the provisions of section D of this Article shall not apply with respect to the Director or Directors elected by such holders of Preferred Stock. ARTICLE VII The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of the Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the Whole Board. The term "Whole Board" shall mean the total number of authorized directorships (whether or not there exist any vacancies in previously authorized directorships at the time such resolution is presented to the Board of Directors for adoption). The stockholders shall also have power to adopt, amend or repeal the Bylaws of the Corporation provided, however, that, in addition to any vote of the holders of any class or series of stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of Directors, voting together as a single class, shall be required to adopt, amend or repeal any provisions of the Bylaws of the Corporation. ARTICLE VIII A. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in this Article VIII: 1. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with: (i) any Interested Stockholder (as hereinafter defined); or (ii) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or 2. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, or any Affiliate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) equaling or exceeding 25% or more of the combined assets of the Corporation and its Subsidiaries; or 3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value (as hereinafter defined) equaling or exceeding 25% of the combined Fair Market Value of the outstanding common stock of the Corporation and its Subsidiaries, except for any issuance or transfer pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof; or 4. of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or 5. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; 6. shall require the affirmative vote of the holders of at least 80% of the voting power of the then-outstanding shares of stock of the Corporation entitled to vote in the election of Directors (the "Voting Stock") (after giving effect to the provisions of Article IV), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by any other provisions of this Certificate of Incorporation or any Preferred Stock Designation or in any agreement with any national securities exchange or otherwise. The term "Business Combination" as used in this Article VIII shall mean any transaction which is referred to in any one or more of paragraphs 1 through 5 of Section A of this Article VIII. B. The provisions of Section A of this Article VIII shall not be applicable to any particular Business Combination, and such Business Combination shall require only the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote after giving effect to the provisions of Article IV, or such vote (if any), as is required by law or by this Certificate of Incorporation, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following paragraph 1 is met or, in the case of any other Business Combination, all of the conditions specified in either of the following paragraphs 1 or 2 are met: 1. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). 2. All of the following conditions shall have been met: a. The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of Common Stock in such Business Combination shall at least be equal to the higher of the following: (1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder or any of its Affiliates for any shares of Common Stock acquired by it: (i) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"); or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; or (2) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article VIII as the "Determination Date"), whichever is higher. b. The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it: (i) within the two-year period immediately prior to the Announcement Date; or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; or (2) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (3) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. c. The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. The price determined in accordance with subparagraph B.2 of this Article VIII shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. d. After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (1) except as approved by a majority of the Disinterested Directors (as hereinafter defined), there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or liquidation; (2) there shall have been: (i) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors; and (ii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure to so increase such annual rate is approved by a majority of the Disinterested Directors, and(3) neither such Interested Stockholder or any of its Affiliates shall have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. e. After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided, directly or indirectly, by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. f. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such Act, and the rules or regulations thereunder) shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). C. For the purposes of this Article VIII: 1. A "Person" shall include an individual, a firm, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities or any other entity. 2. "Interested Stockholder" shall mean any person (other than the Corporation or any Holding Company or Subsidiary thereof) who or which: a. is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or b. is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or c. is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended. 3. For purposes of this Article VIII, "beneficial ownership" shall be determined in the manner provided in Section C of Article IV hereof. 4. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on the date of filing of this Certificate of Incorporation. 5. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph 2 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 6. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any Director who is thereafter chosen to fill any vacancy of the Board of Directors or who is elected and who, in either event, is unaffiliated with the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Disinterested Directors then on the Board of Directors. 7. "Fair Market Value" means: a. in the case of stock, the highest closing sales price of the stock during the 30-day period immediately preceding the date in question of a share of such stock on the National Association of Securities Dealers Automated Quotation System or any system then in use, or, if such stock is admitted to trading on a principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, Fair Market Value shall be the highest sale price reported during the 30-day period preceding the date in question, or, if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by the Board of Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and b. in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by the Board of Directors in good faith. 8. Reference to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. 9. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Subparagraphs (a) and (b) of Paragraph 2 of Section B of this Article VIII shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. D. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine for the purposes of this Article VIII, on the basis of information known to them after reasonable inquiry: (a) whether a person is an Interested Stockholder; (b) the number of shares of Voting Stock beneficially owned by any person; (c) whether a person is an Affiliate or Associate of another; and (d) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has an aggregate Fair Market Value equaling or exceeding 25% of the combined Fair Market Value of the Common Stock of the Corporation and its Subsidiaries. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article VIII. E. Nothing contained in this Article VIII shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of the Voting Stock (after giving effect to the provisions of Article IV), voting together as a single class, shall be required to alter, amend or repeal this Article VIII. ARTICLE IX The Board of Directors of the Corporation, when evaluating any offer of another person to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with another corporation or entity or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, may, in connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, those factors that Directors of any subsidiary of the Corporation may consider in evaluating any action that may result in a change or potential change in the control of the subsidiary, and the social and economic effect of acceptance of such offer on the Corporation's present and future customers and employees and on the communities in which the Corporation operates or is located and the ability of the Corporation to fulfill its corporate objective under applicable laws and regulations. ARTICLE X A. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a Director or an Officer of the Corporation or is or was serving at the request of the Corporation as a Director, Officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a Director, Officer, employee or agent or in any other capacity while serving as a Director, Officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section C hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. B. The right to indemnification conferred in Section A of this Article X shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a Director or Officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, services to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article X shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a Director, Officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. C. If a claim under Section A or B of this Article X is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expenses of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article X or otherwise shall be on the Corporation. D. The rights to indemnification and to the advancement of expenses conferred in this Article X shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, Bylaws, agreement, vote of stockholders or Directors or otherwise. E. The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer, employee or agent of the Corporation or subsidiary or Affiliate or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. F. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article X with respect to the indemnification and advancement of expenses of Directors and Officers of the Corporation. ARTICLE XI A Director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the Director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification. ARTICLE XII The provisions set forth in this Article and in Articles 5(C), 5(D), 5(E), 5(F), 6, 7, 8, 10 and 11 herein may not be repealed or amended in any respect, and no article imposing cumulative voting in the election of directors may be added, unless such action is approved by the affirmative vote of the holders of not less than eighty percent (80%) of the outstanding shares of Common Stock of this Corporation, subject to the provisions of any series of Preferred Stock which may at the time be outstanding; provided, however, that if there is a related person (as defined in Article 8) such amendment shall also require the affirmative vote of at least 50% of the outstanding shares of Common Stock held by stockholders other than the related person. IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate of Incorporation this 17th day of December, 2002. AirGate PCS, Inc. By: ______________________________ Name: Barbara L. Blackford Title: Vice President and Secretary EX-3.2 4 dex32.txt BYLAWS Exhibit 3.2 AIRGATE PCS, INC. AMENDED AND RESTATED BYLAWS ARTICLE I STOCKHOLDERS Section 1.1 Annual Meeting. -------------- An annual meeting of the stockholders of the Corporation shall be held for the election of Directors and for any other business as may properly come before the meeting, on such date and at such time as may be designated by resolution of the Board of Directors (the "Board"). Section 1.2 Special Meetings. ---------------- Except as otherwise required by law, special meetings of stockholders of the Corporation may be called only by (i) the Board pursuant to a resolution adopted by a majority of the total number of Directors which the Corporation would have if there were no vacancies on the Board (hereinafter the "Whole Board"), (ii) the Chairman of the Board, or (iii) the Chief Executive Officer. Section 1.3 Place of Meeting. ---------------- The Board, the Chairman of the Board or the Chief Executive Officer, as the case may be, may designate the place of meeting for any annual meeting or for any special meeting of the stockholders. If no such designation is made, the place of meeting shall be the principal office of the Corporation. Section 1.4 Notice of Meetings. ------------------ Notice of the place, date, and hour of all meetings of the stockholders, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered by the Corporation not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held to each stockholder of record entitled to vote at such meeting, except as otherwise provided herein, the Certificate of Incorporation, or required from time to time by the General Corporation Law of the State of Delaware (the "DGCL"). If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at such person's address as it appears on the stock transfer books of the Corporation. Any previously scheduled meeting of the stockholders may be postponed, and any special meeting of the stockholders may be canceled, by resolution of the Board, the Chairman of the Board, or the Chief Executive Officer, as the case may be, upon public notice given prior to the date previously scheduled for such meeting of stockholders. Section 1.5 Adjournment. ----------- Any meeting of the stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given as provided in Section 1.4. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 1.6 Quorum. ------ At any meeting of the stockholders, the holders of a majority of the voting power of all outstanding shares of the Corporation entitled to vote generally in the election of Directors, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by DGCL or the Certificate of Incorporation. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date, or time in the manner provided in Section 1.5 of these Bylaws. Section 1.7 Conduct of Meeting. ------------------ The Board may designate a person or, in the absence of such Board designation, the Chief Executive Officer, to call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be the person as the Chief Executive Officer appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting by the chairman. Section 1.8 Notice of Stockholder Business and Nominations. ---------------------------------------------- (A) Annual Meetings of Stockholders. ------------------------------- (1) Nominations of persons for election to the Board of the Corporation and the proposal of business to be considered by the stockholders may be made at any annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting pursuant to Section 1.4 of the Bylaws, (ii) by or at the direction of the Board or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving notice provided for in Section 1.8(A)(2) of these Bylaws, who is entitled to vote at the time of the meeting and who complies with the notice procedures set forth in Section 1.8(A)(2). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to Section 1.8(A)(1), the business must relate to a proper subject matter for stockholder action and the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered and received by the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than seventy (70) days after such anniversary date, notice by the stockholder to be timely must be so delivered no earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to bring before the annual meeting: (i) as to each person whom such stockholder proposes to nominate for election or re-election as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the annual meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the annual meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose the behalf the nomination or proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (w) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, (x) the class and number of shares of capital stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (y) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (z) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (I) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation's outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (II) otherwise to solicit proxies from stockholders in support of such proposal or nomination. The foregoing notice requirements shall be deemed satisfied by a stockholder if the stockholder has notified the Corporation of his or her intention to present a proposal at an annual meeting in compliance with Rule 14a-8 (or any successor thereof) promulgated under the Exchange Act and such stockholder's proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a Director of the Corporation. (B) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of ----------------------------------- stockholders as shall have been brought before the meeting as provided in Section 1.2 of these Bylaws and pursuant to the Corporation's notice of meeting under Section 1.4 of these Bylaws. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which Directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board, or (ii) provided that the Board has determined that Directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 1.8(B), who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 1.8(B). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more Directors to the Board, any stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by Section 1.8(A)(2) shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. (C) General. ------- (1) Notwithstanding anything in these Bylaws to the contrary, only such persons who are nominated in accordance with the procedures set forth in this Section 1.8 or Section 2.2 of these Bylaws shall be eligible to serve as Directors and only such business shall be brought before or conducted at an annual meeting in accordance with the provisions of this Section 1.8. The Officer of the Corporation or other person presiding over the annual meeting shall have the power to determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 1.8 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder's nominee or proposal in compliance with such stockholder's representation as required by Section 1.8 (A)(2)) and, if he/she should so determine, he/she shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. (2) For purposes of this Section 1.8, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Section 1.9 Proxies and Voting. ------------------ At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing (or in such manner prescribed by DGCL) filed in accordance with the procedure established for the meeting. Any facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. The Board by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities including, without limitation, as Officers, employees, agent or representatives, to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability as required by DGCL. All elections of Directors shall be determined by a plurality of the votes cast, and except as otherwise required by law, the rules and regulations of any stock exchange applicable to the Corporation, or the Certificate of Incorporation or these Bylaws, all other matters shall be determined by a majority of the voting power present in person or represented by proxy at the meeting and entitled to vote on the subject matter. Section 1.10 Stock List. ---------- The Secretary shall prepare and make, or cause to be prepared and made, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, as required by applicable law. Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 1.11 Consent of Stockholders in Lieu of Meeting. ------------------------------------------ Any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. ARTICLE II BOARD OF DIRECTORS Section 2.1 General Powers, Number and Term of Office. ----------------------------------------- The business and affairs of the Corporation shall be under the direction of its Board. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws required to be exercised or done by the stockholders. The number of Directors who shall constitute the Whole Board shall be established by resolution of the Board. The Board shall annually elect a Chairman of the Board from among its members who shall, when present, preside at its meetings. The Directors, other than those who may be elected by the holders of any class or series of Preferred Stock, shall be divided, as nearly equal in number as possible, with respect to the time for which they severally hold office, into three classes. At the annual meeting of stockholders in 1999 Directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, Directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting, and Directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Each Director shall hold office until the earlier of his or her death, resignation, removal, or the date on which his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, Directors elected to succeed those Directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Section 2.2 Vacancies and Newly Created Directorships. ----------------------------------------- Unless otherwise provided in the Certificate of Incorporation, newly created directorships resulting from any increase in the authorized number of Directors or any vacancies in the Board resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by the affirmative vote of a majority of the remaining Directors then in office, though less than a quorum of the Board. Any Director so chosen shall hold office for the unexpired term of the Director creating such vacancy or until the earlier of his or her death, resignation, removal or the date his or her successor is elected and qualified. No decrease in the number of authorized Directors constituting the Board shall shorten the term of any incumbent Director. Section 2.3 Regular Meetings. ---------------- Regular meetings of the Board shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board and publicized among all Directors. A notice of each regular meeting shall not be required. Section 2.4 Special Meetings. ---------------- Special meetings of the Board may be called by one-third (1/3) of the Directors then in office (rounded up to the nearest whole number), by the Chairman of the Board or the Chief Executive Officer and shall be held at such place, on such date, and at such time as they, or he or she, shall fix. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 2.5 Notice. ------ Notice of any special meeting of Directors shall be given to each Director at such person's business or residence in writing or by telephone, facsimile or other form of electronic communication. If mailed, such notice shall be deemed delivered when deposited in the United States mails so addressed, postage prepaid, at least five days before such meeting. If by telephone or by facsimile transmission or other form of electronic communication, such notice shall be transmitted at least twenty-four hours before such meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board need be specified in the notice of such meeting, except for amendments to these Bylaws as provided under Article VIII of these Bylaws. A meeting may be held at any time without notice if all the Directors are present and participating or if those not present waive notice of the meeting either before or after such meeting. Section 2.6 Quorum. ------ At any meeting of the Board, a majority of the Whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board, except as otherwise provided herein, in the Certificate of Incorporation or required by law. Section 2.7 Participation in Meetings By Conference Telephone. ------------------------------------------------- Members of the Board, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 2.8 Conduct of Business; Action by Consent. -------------------------------------- At any meeting of the Board, business shall be transacted in such order and manner as the Board may from time to time determine. Action may be taken by the Board without a meeting if all members thereof consent thereto in accordance with DGCL. Section 2.9 Removal. ------- Subject to the rights of any class or series of stock having the right to elect Directors under specified circumstances, any Director may be removed from office only as provided in the Certificate of Incorporation. Section 2.10 Compensation of Directors. ------------------------- Directors, as such, may receive, pursuant to resolution of the Board, fixed fees and other compensation for their services as Directors, including, without limitation, their services as members of committees of the Board. ARTICLE III COMMITTEES Section 3.1 Committees of the Board. ----------------------- The Board may establish one or more committees, each committee to consist of one or more Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by DGCL and to the extent provided in the committee's charter or a resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not Directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority of the Board. Section 3.2 Conduct of Business. ------------------- Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided in the Certificate of Incorporation, in these Bylaws, or required by DGCL. A majority of the members shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in accordance with DGCL. Section 3.3 Notice. ------ A notice of regular meetings shall not be required. Notice of any special meeting of a committee shall be given to each member of the committee at such person's business or residence in writing or by telephone, facsimile or other form of electronic communication. If mailed, such notice shall be deemed delivered when deposited in the United States mails so addressed, postage prepaid, at least five days before such meeting. If by telephone or by facsimile transmission or other form of electronic communication, such notice shall be transmitted at least twenty-four hours before such meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of a committee need be specified in the notice of such meeting. A meeting may be held at any time without notice if all the members are present and participating or if those not present waive notice of the meeting either before or after such meeting. ARTICLE IV OFFICERS Section 4.1 Generally. --------- (a) The Officers of the Corporation shall be a Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer. The Board may also elect one or more Vice Chairmen of the Board, a Treasurer, a Controller, one or more Assistant Secretaries, Assistant Treasurers and such Officers as it shall deem necessary. The Chairman of the Board shall be chosen from among the Directors. Any number of offices may be held by the same person. (b) At least annually, the Board shall elect the Officers of the Corporation and at any time thereafter the Board may elect additional Officers of the Corporation. Each Officer shall hold office until the Officer's successor is duly elected and qualified or until the Officer's earlier death, resignation or termination of employment; provided that any Officer may be removed from office at any time by the affirmative vote of the Whole Board. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board. (c) All Officers chosen by the Board shall have such powers and duties as generally pertain to their respective offices, except as provided in this Article IV or in any resolution of the Board. Such Officers shall also have such powers and duties as from time to time may be conferred by the Board or by any committee thereof. Section 4.2 Chairman of the Board. --------------------- The Chairman of the Board shall, subject to the provisions of these Bylaws and to the direction of the Board, unless the Board has designated another person, when present, preside at all meetings of the stockholders of the Corporation. The Chairman of the Board shall perform all duties and have all powers which are commonly incident to the office of Chairman of the Board or which are delegated to him or her by the Board. Section 4.3 Chief Executive Officer. ----------------------- The Chief Executive Officer (the "Chief Executive Officer") shall have general and active management and supervision of the business of the Corporation. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect. The Chief Executive Officer, if a member of the Board, shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board. The Chief Executive Officer shall also perform such other duties as may be assigned to the Chief Executive Officer by these Bylaws or the Board. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized. Section 4.4 President. --------- The President shall perform such duties as may be assigned to the President by these Bylaws, the Board or the Chief Executive Officer. Section 4.5 Vice Chairman. ------------- The Vice Chairman of the Board shall perform such duties as may be assigned to him or her by these Bylaws, the Board or the Chairman. Section 4.6 Chief Financial Officer. ----------------------- The Chief Financial Officer shall act in an executive financial capacity. The Chief Financial Officer shall assist the Chairman of the Board and the Chief Executive Officer in the general supervision of the Corporation's financial policies and affairs. The Chief Financial Officer shall perform such other duties as may be assigned to him or her by these Bylaws, the Board or the Chief Executive Officer. Section 4.7 Vice President. -------------- The Vice President or Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them by the Board, the Chairman of the Board, the Chief Executive Officer or the President. A Vice President or Vice Presidents may be designated as Executive Vice President or Senior Vice President. Section 4.8 Secretary. --------- The Secretary or Assistant Secretary shall issue notices of meetings, shall keep their minutes, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such office and/or such other duties and powers as are properly assigned thereto by the Board, the Chairman of the Board or the President. Subject to the direction of the Board, the Secretary shall have the power to sign all stock certificates. Section 4.9 Assistant Secretaries and Other Officers. ---------------------------------------- The Board may appoint one or more Assistant Secretaries and such other Officers who shall have such powers and shall perform such duties as are provided in these Bylaws or as may be assigned to them by the Chief Executive Officer, the President or the Secretary. Subject to the direction of the Board, an Assistant Secretary shall have the power to sign all stock certificates. Section 4.10 Treasurer. --------- The Treasurer shall have the custody of the funds and securities of the Corporation and shall deposit them in the name and to the credit of the Corporation in such depositories as may be designated by the Board or by any Officer or Officers authorized by the Board to designate such depositories; disburse funds of the Corporation when properly authorized by vouchers prepared and approved by the Controller; and invest funds of the Corporation when authorized by the Board or a committee thereof. The Treasurer shall render to the Board, the Chief Executive Officer or the Chief Financial Officer, whenever requested, an account of all transactions as Treasurer and shall also perform such other duties as may be assigned to the Treasurer by these Bylaws, the Chief Executive Officer or the Chief Financial Officer. Subject to the direction of the Board, the Treasurer shall have the power to sign all stock certificates. Section 4.11 Controller. ---------- The Controller shall serve as the principal accounting Officer of the Corporation and shall keep full and accurate account of receipts and disbursements in books of the Corporation and render to the Board, the Chief Executive Officer or the Chief Financial Officer, whenever requested, an account of all transactions as Controller and of the financial condition of the Corporation. The Controller shall also perform such other duties as may be assigned to the Controller by these Bylaws, the Board, the Chief Executive Officer or the Chief Financial Officer. Section 4.12 Other Officers. -------------- The Board may appoint such other Officers as it shall deem necessary, who shall hold their offices for such terms and shall exercise such power as shall be determined from time to time by the Board. Section 4.13 Action with Respect to Securities of Other Corporations. ------------------------------------------------------- Unless otherwise directed by the Board, the Chief Executive Officer or any Officer of the Corporation authorized by the Chief Executive Officer shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. Section 4.14 Personal Liability. ------------------- An Officer of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as an Officer, except for liability (i) for any breach of the Officer's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the Officer derived an improper personal benefit. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of Officers, then the liability of an Officer of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders or Board of the Corporation shall not adversely affect any right or protection of the Officer of the Corporation existing at the time of such repeal or modification. ARTICLE V STOCK Section 5.1 Certificates of Stock. --------------------- Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the Chairman of the Board or the President and by the Secretary, or an Assistant Secretary, or any Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. The Board may in its discretion appoint responsible banks or trust companies from time to time to act as transfer agents and registrars of the stock of the Corporation, and, when such appointments shall have been made, no stock certificate shall be valid until countersigned by one of such transfer agents and registered by one of such registrars. In case any Officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such Officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such Officer, transfer agent or registrar at the date of issue. Section 5.2 Transfers of Stock. ------------------ Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 5.4 of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. Section 5.3 Record Date. ----------- In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment or rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. Section 5.4 Lost, Stolen or Destroyed Certificates. -------------------------------------- The Corporation may issue a new certificate of stock alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VI NOTICES Section 6.1 Notices. ------- Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, Director, Officer, employee or agent may in every instance be effectively given by hand delivery to the recipient thereof or mailed. Any such notice shall be addressed to such stockholder, Director, Officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. Notice to Directors may be given by telecopier, telephone or other means of electronic transmission. Section 6.2 Waivers. ------- A waiver of any notice, given by a stockholder, Director, Officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, Director, Officer, employee or agent. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII MISCELLANEOUS Section 7.1 Corporate Seal. -------------- The Board may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board or a committee thereof, duplicates of the seal may be kept and used by the Secretary or Assistant Secretary. Section 7.2 Reliance Upon Books, Reports and Records. ---------------------------------------- Each Director, each member of any committee designated by the Board, and each Officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its Officers or employees, or committees of the Board so designated, or by any other person as to matters which such Director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 7.3 Fiscal Year. ----------- The fiscal year of the Corporation shall be as fixed by a resolution of the Board. Section 7.4 Time Periods. ------------ In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, the day of the doing of the act shall be excluded, and the day of the event shall be included. ARTICLE VIII AMENDMENTS A majority of the Whole Board may amend, alter or repeal these Bylaws at any meeting of the Board. Without limiting the foregoing, the stockholders shall also have power to amend, alter or repeal these Bylaws at any meeting of stockholders provided notice of the proposed change was given in the notice of the meeting provided, however, that, notwithstanding any other provisions of the Bylaws or any provision of DGCL which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by DGCL, the Certificate of Incorporation, any Preferred Stock Designation or these Bylaws, the affirmative vote of the holders of at least 80% of the voting power of all the then-outstanding shares of the capital stock entitled to vote generally in the election of Directors, voting together as a single class, shall be required to alter, amend or repeal any provisions of these Bylaws. These Amended and Restated Bylaws are effective as of December 17, 2002, the date of adoption by the Board of AirGate. EX-10.3 5 dex103.txt ADDENDUM VII TO SPRINT PCS MANAGEMENT Exhibit 10.3 ADDENDUM VII TO SPRINT PCS MANAGEMENT AGREEMENT Manager: iPCS WIRELESS, INC. (f/k/a Illinois PCS, L.L.C.) Service Area BTAs: Bloomington, IL BTA # 46 Champaign-Urbana, IL BTA # 71 Clinton, IA-Sterling, IL BTA # 86 Danville, IL BTA # 103 Davenport, IA-Moline, IL BTA # 105 Decatur-Effingham, IL BTA # 109 Galesburg, IL BTA # 161 Jacksonville, IL BTA # 213 Kankakee, IL BTA # 225 LaSalle-Peru-Ottawa-Streator, IL BTA # 243 Mattoon, IL BTA # 286 Mt. Vernon-Centralia, IL BTA # 308 Peoria, IL BTA # 344 St. Louis, MO (partial) BTA # 394 Springfield, IL BTA # 426 Grand Island-Kearney, NE BTA # 167 Hastings, NE BTA # 185 Lincoln, NE (partial) BTA # 256 Norfolk, NE BTA # 323 Omaha, NE (partial) BTA # 332 Burlington, IA BTA # 61 Des Moines, IA (partial) BTA # 111 Dubuque, IA BTA # 118 Fort Dodge, IA BTA # 150 Marshalltown, IA BTA # 283 Mason City, IA BTA # 285 Ottumwa, IA BTA # 337 Waterloo-Cedar Falls, IA BTA # 462 Battle Creek, MI (partial) BTA # 33 Grand Rapids, MI BTA # 169 Lansing, MI (partial) BTA # 241 Mount Pleasant, MI BTA # 307 Muskegon, MI BTA # 310 Saginaw-Bay City, MI BTA # 390 Traverse City, MI BTA # 446 Cedar Rapids, IA BTA # 70 Iowa City, IA BTA # 205 This Addendum VII (this "Addendum"), dated as of August 26, 2002, contains certain additional and supplemental terms and provisions of that certain Sprint PCS Management Agreement entered into as of January 22, 1999, by the same parties as this Addendum, which Management Agreement, as amended by various addenda to date (the Sprint PCS Management Agreement, as amended to date, the "Management Agreement"). The terms and provisions of this Addendum control, supersede and amend any conflicting terms and provisions contained in the Management Agreement. Except for express modifications made in this Addendum, the Management Agreement continues in full force and effect. Capitalized terms used and not otherwise defined in this Addendum have the meanings ascribed to them in the Management Agreement. Section and Exhibit references are to Sections and Exhibits of the Management Agreement unless otherwise noted. The Management Agreement is modified as follows: 1. Change in Spectrum Range. WirelessCo and SprintCom are negotiating with AT&T Wireless PCS, LLC ("AWE") regarding a licensed spectrum swap (the "Proposed Transaction"), a portion of which includes WirelessCo giving 10 MHz (the 1880 to 1885 to 1960 to 1965 frequency ranges) in the Waterloo-Cedar Falls, Iowa BTA (BTA No. 462) (the "Waterloo Spectrum") to AWE in exchange for AWE giving 10 MHz (the 1860 to 1865 and 1940 to 1945 frequency ranges) in the Champaign-Urbana, Illinois (BTA No. 71) (the "Champaign Spectrum") to WirelessCo. If Sprint PCS provides written notice to Manager that the Proposed Transaction has been consummated, then (i) Manager will no longer have the right to use the Waterloo Spectrum, (ii) Manager may use the Champaign Spectrum, and (iii) all Sections of this Addendum will be in full force and effect without further action on the part of any party to this Addendum. 2. Build-out Schedule. Manager's network build-out for the Champaign Spectrum must comply with the Federal Communications Commission's build-out requirements set forth in 47 C.F.R. 24.203 and 24.714(f), as in effect on the required date for compliance with such requirements. 3. Microwave Relocation. Manager will reimburse Sprint PCS for all costs associated with Sprint PCS' clearing of interfering microwave sources in the Champaign Spectrum. 4. Disaggregation. Manager will complete the retuning and disaggregation (the "Disaggregation") of its Service Area Network in the Waterloo-Cedar Falls, Iowa BTA from 30 MHz to 20 MHz within 90 days after the FCC approves the Proposed Transaction (the "Completion Period"). If Manager does not complete the Disaggregation within the Completion Period, the indemnification obligations of Manager to Sprint PCS and Sprint set forth in Article 13 of the Management Agreement will apply for any and all claims resulting from Manager's failure to complete the Disaggregation by the end of the Completion Period. 5. Consideration. Each of Sprint PCS, WirelessCo and Manager believe that the Proposed Transaction will further their respective business interests and no other consideration is required to consummate the agreements set forth in this Addendum. 6. Expenses. Each of Sprint PCS, WirelessCo, and Manager will bear its own costs and expenses incurred in connection with the Proposed Transaction (other than microwave relocation costs incurred by Sprint PCS, which will be borne as described in paragraph 3 of this Addendum), including, without limitation, the negotiation and preparation of this Addendum and the definitive addendum evidencing the change in licensed spectrum. 7. Right to Terminate. If the Proposed Transaction has not been consummated by the close of business on June 30, 2003, Manager may give written notice to Sprint PCS of Manager's termination of this Addendum. Such termination will be effective upon receipt by Sprint PCS. 8. Counterparts. This Addendum may be signed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed by their respective authorized officers as of the date and year first above written. Sprint Spectrum L.P. By:/s/ Thomas M. Mateer -------------------- Thomas E. Mateer Vice President - Affiliations WirelessCo, L.P. By:/s/ Thomas M. Mateer -------------------- Thomas E. Mateer Vice President - Affiliations SprintCom, Inc. By:/s/ Thomas M. Mateer --------------------- Thomas E. Mateer Vice President - Affiliations Sprint Communications Company L.P. By:/s/ Mike Goff --------------------------- Name: Mike Goff Title: VP-Corporate Brand Management iPCS Wireless, Inc. By: /s/ Thomas M. Dougherty -------------------------- Name: Thomas M. Dougherty Title: President & CEO EX-10.4 6 dex104.txt SCHEDULE OF DEFINITIONS Exhibit 10.4 Schedule of Definitions This Schedule of Definitions is the "Schedule of Definition" referred to in and incorporated by reference under the Management Agreement, Services Agreement, and Trademark License Agreements (as such agreements are defined below). Whenever the phrase "this agreement" is used below, such phrase refers to the particular agreement under whose terms this Schedule of Definitions is being applied in that instance. If citations to sections or exhibits of different agreements are included in a definition, the citation to the particular agreement under whose terms this Schedule of Definitions is being applied controls to the exclusion of the citations to different agreements. The following words and phrases used in this agreement have the following meanings: "Addendum" means any addendum attached to this agreement that contains the amendments to this agreement; such Addendum is expressly incorporated as a part of this agreement. "Affiliation Agreement" means any and all of the agreements, known as Sprint PCS Affiliation Agreements, whereby an affiliate and Sprint PCS and/or one or more of Sprint PCS' Related Parties agree to the terms and conditions under which such affiliate will manage the Service Area Network identified in such agreement, using such Affiliate's own PCS license issued by the FCC and any documents incorporated by reference in such agreement. "Agent" has the meaning set forth in Section 3.1 of the Sprint Spectrum and Trademark and Service Mark License Agreement or Section 3.1 of the Sprint Trademark and Service Mark License Agreement. "Arbiter" has the meaning set forth in Section 12.1.3 of the Management Agreement or Section 5.1.3 of the Services Agreement. "Available Services" means those categories of services listed on Exhibit 2.1.1 to the Services Agreement (as the same may be amended from time to time by Sprint Spectrum and made available to Manager under the terms of the Services Agreement). "Available Services and Fees Schedule" means that schedule set forth on Exhibit 2.1.1 to the Services Agreement, which sets forth the Available Services offered from time to time and the fees charged for such Available Services. "Bankruptcy" means, for the purposes of the Trademark License Agreements, either a Voluntary Bankruptcy or an Involuntary Bankruptcy. "Brands" means the Sprint PCS Brands and the Sprint Brands. "BTA" means a Basic Trading Area for which a Basic Trading Area (BTA) license is issued by the FCC. "Build-out Plan" means the plan agreed upon by Manager and Sprint PCS, along with any modifications and updates to the plan, respecting the construction and design of the Service Area Network, a copy of which is attached as Exhibit 2.1 to the Management Agreement. "Business Day" means a day of the year that banks are not required or authorized to close in the State of New York. "Cancelled Service" has the meaning set forth in Section 3.2 of the Services Agreement. "CDMA" means code division multiple access. "Change of Control" has the meaning set forth in Section 17.15.3 of the Management Agreement. "Collected Revenues" has the meaning set forth in Section 10.4 of the Management Agreement. "Confidential Information" means all Program Requirements, guidelines, standards, and programs, the technical, marketing, financial, strategic and other information provided by each party under the Management Agreement, Services Agreement, and Trademark License Agreements, and any other information disclosed by one party to the other party pursuant to the Management Agreement, Services Agreement, and Trademark License Agreements that is not specifically excluded by Section 12.2 of the Management Agreement. In addition to the preceding sentence, "Confidential Information" has the meaning set forth in Section 3.1 of the Sprint Spectrum Trademark and Service Mark License Agreement or Section 3.1 of the Sprint Trademark and Service Mark License Agreement. "Controlled Related Party" means the Parent of any Person and each Subsidiary of such Parent. As used in Section 1.2 and Article 3 of the Sprint Spectrum Trademark and Service Mark License Agreement or Section 1.2 and Article 3 of the Sprint Trademark and Service Mark License Agreement, the term "Controlled Related Party" will also include any Related Party of a Person that such Person or its Parent can directly or indirectly unilaterally cause to take or refrain from taking any of the actions required, prohibited or otherwise restricted by such Section, whether through ownership of voting securities, contractually or otherwise. "Default Rate" means the rate per annum (computed on the basis of the actual number of days elapsed in a year of 365 or 366 days, as applicable), compounded monthly, equal to the Prime Rate (adjusted as and when changes in the Prime Rate occur) plus five percent (5 %). "Disaggregated License" means that portion of the License that Manager may or is required to purchase under Section 11 of the Management Agreement from Sprint PCS under certain circumstances, after Sprint PCS' receipt of FCC approval of the necessary disaggregation and partition, which portion comprises no less than the amount of spectrum sufficient to operate one duplex CDMA carrier (including the required guard bands) within the PCS Spectrum, and no more than 10 MHz of the Spectrum (at Manager's designation) covering the Service Area, and which includes the frequencies then in use in the Service Area Network and, if applicable, adjacent frequencies, so long as such frequencies in the aggregate do not exceed 10 MHz. "Dispute Notice" has the meaning set forth in Section 12.1.3 of the Management Agreement or Section 5.1.3 of the Services Agreement. "Dispute Notice Date" has the meaning set forth in Section 12.1.3 of the Management Agreement or Section 5.1.3 of the Services Agreement. "Encumbrances" has the meaning set forth in Section 5.1(a) of the Sprint Spectrum Trademark and Service Mark License Agreement or Section 5.1 (a) of the Sprint Trademark and Service Mark License Agreement. "Entire Business Value" has the meaning set forth in Section 11.7.3 of the Management Agreement. "Event of Termination" means any of the events described in Section 11.3 of the Management Agreement. For the purposes of the Sprint Spectrum Trademark and Service Mark License Agreement only, "Event of Termination" has the meaning set forth in Section 13.2 of that agreement. For the purposes of the Sprint Trademark and Service Mark License Agreement only, "Event of Termination" has the meaning set forth in Section 13.2 of that agreement. "FAA" means the Federal Aviation Administration. "FCC" means the Federal Communications Commission. "Financial Lender" means any and all of those commercial and financial institutions that provide material credit to Manager for the purpose of assisting Manager with the fulfillment of its obligations and duties under this agreement. "fixed wireless local loop" has the meaning set forth in Section 2.4 of the Management Agreement. "home service area" means the geographic area within which a customer can make a local call on the customer's PCS phone (i.e., the customer does not incur an extra charge). "Inbound Roaming" means calls placed by a non-Sprint PCS Network customer on the Sprint PCS Network. "Indemnitee" and "Indemnitor" have the meanings set forth in Section 13.3.1 of the Management Agreement or Section 6.3.1 of the Services Agreement. "Initial Term" has the meaning set forth in Section 11.1 of the Management Agreement. "Involuntary Bankruptcy" has the meaning set forth in Section 11.3.7 of the Management Agreement. "Law" means all laws (statutory or otherwise), ordinances, rules, regulations, bylaws, Orders and codes of all governmental and regulatory authorities, whether United States Federal, state or local, which are applicable to the Sprint PCS Products and Services. "License" means the PCS license(s) issued by the FCC described on the Service Area Exhibit to the Management Agreement. "Licensed Marks" means the trademarks and service marks referred to in the Recitals section of the Trademark License Agreement under whose terms this definition is being applied, and such other marks as may be adopted and established under said agreement from time to time. "Licensee" has the meaning set forth in the introductory paragraph to the particular agreement under whose terms this definition is being applied. "Licensor" has the meaning set forth in the introductory paragraph to the particular agreement under whose terms this definition is being applied. "local calling area" means the geographic area within which a customer can make a local call on the customer's PCS handset without incurring a long distance "Loss" means any and all damage, loss, liability, claim, out-of-pocket cost and expense, including reasonable expenses of investigation and reasonable attorneys' fees and expenses, but excluding consequential or special damages. "Management Agreement" means that certain Sprint PCS Management Agreement executed by Manager and Sprint PCS and any documents incorporated by reference in said agreement. "Manager" means the party to this agreement as indicated in the introductory paragraph of this agreement. "Manager Management Report" has the meaning set forth in Section 12.1.2 of the Management Agreement. "Manager's Products and Services" means all types and categories of wireless communications services and associated products that are offered by Manager in the Service Area under Section 3.2 of the Management Agreement. "Marketing Communications Guidelines" means the guidelines issued by Sprint or Sprint PCS in accordance with Section 5.2 of the Management Agreement with respect to the marketing, promotion, advertising, distribution, lease and sale of Sprint PCS Products and Services, as they may be amended from time to time by Sprint or Sprint PCS In accordance with the terms of the Trademark License Agreements. "Master Signature Page" means the document that the parties to the Management Agreement, Services Agreement and/or one or more of the Trademark License Agreements sign to evidence their agreement to execute, become a party to and be bound by each of the agreements, or parts thereof, listed above the particular party's signature on such Master Signature Page. "MFN price" or "Most Favored Nation price" means, with respect to resale, the best local market price offered to any third party for the purchase of air time on Manager's network including but not limited to any third party who may use the air time for its own wireless communications services or resell the air time, and, with respect to roaming, the lowest roaming charge of Manager to other wireless carriers when their customers roam on the Service Area Network. "MIN" means the 24-bit mobile identification number corresponding to the 7-digit telephone number assigned to the handset, used for both billing and receiving calls. "MTA" means a Major Trading Area for which a MTA license is issued by the FCC. "New Coverage" means the build-out in the Service Area that is in addition to the build-out required under the then-existing Build-out Plan, which build-out Sprint PCS or Manager decides should be built-out. "Notice Address Schedule" means the schedule attached to the Master Signature Page that provides the mailing and courier delivery addresses, and the facsimile number, for giving notices to each of the parties signing the Master Signature Page. The Notice Address Schedule may include supplemental addresses that serve as additional or alternate notice addresses for use by the parties in specifically prescribed situations. "NPA-NXX" means as follows: "NPA" means numbering plan area, which is the area code for a telephone number. "NXX" refers to the first three digits of a telephone number, which identify the specific telephone company central office that serves that number. "Offer" means an offer received by Manager to sell substantially all of the assets comprising or used in connection with the operation and management of the Service Area Network or any portion of the Service Area Network. "Offer Notice" means a written notice given by Manager to Sprint PCS that sets forth in detail the terms and conditions of an Offer and the name and address of the person or entity making the Offer. "Offered Interest" means the assets that Manager proposes to sell pursuant to an Offer. "Operating Assets" means the assets Manager or its Related Parties owns and uses in connection with the operation of the Service Area Network, at the time of termination, to provide the Sprint PCS Products and Services. Operating Assets does not include items such as furniture, fixtures and buildings that Manager or its Related Parties use in connection with other businesses. Examples of Operating Assets include without limitation: switches, towers, cell sites, systems, records and retail stores. "Operational Level of Sprint PCS" means the average operational level of all the service area networks operated by Sprint PCS and its Related Parties without the use of a manager or affiliate, as measured by Sprint PCS, unless the operational level, as measured by Sprint PCS, of all of the service area networks operated by Sprint PCS and its Related Parties without the use of a manager or affiliate that are contiguous to the Service Area are below the national average, in which case "Operational Level of Sprint PCS" means the average operational level of those contiguous service area networks. "Order" means any order, writ, injunction, decree, judgment, award or determination of any court or governmental or regulatory authority. "Other Managers" means any person or entity with which Sprint PCS has entered into an agreement similar to this agreement or an Affiliation Agreement, including without limitation an affiliate under an Affiliation Agreement or a manager under another Management Agreement, under which the person or entity designs, constructs and manages a service area network and offers and promotes Sprint PCS Products or Services. "Outbound Roaming" means calls placed by a Sprint PCS Network customer on a non-Sprint PCS network. "Parent" means, with respect to any Person, the ultimate parent entity (as determined in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated thereunder) of such Person; except that if such ultimate parent entity is an individual, the Parent will be the highest entity in the ownership chain from the ultimate parent entity to and including such Person that is not an individual. "parties" means, with respect to the Management Agreement, Sprint PCS and Manager. For the purpose of the services Agreement only, "parties" means Sprint Spectrum and Manager. Sprint is not a party to the Management Agreement, except to the limited extent described on the signature page executed on behalf of Sprint. For the purpose of the Trademark License Agreements only, "parties" means Licensor and Licensee. "PCS" means a radio communication system authorized under the rules for broadband personal communications services designated as Subpart E of Part 24 of the FCC's rules, including the network, marketing, distribution, sales, customer interface and operations functions relating thereto. "PCS Spectrum" means the range of frequencies that Sprint PCS is authorized to use under the License. "Permitted Assignee" means any assignee of the rights and obligations of Licensee pursuant to an assignment consented to in writing by Licensor, in its sole discretion, in accordance with Section 14.1 of the Sprint Spectrum Trademark and Service Mark License Agreement or Section 14.1 of the Sprint Trademark and Service Mark License Agreement, or any subsequent permitted assignee of any such permitted assignee. "Person" means any individual, partnership, limited partnership, limited liability company, corporation, trust, other business association or business entity, estate, or other entity. "pops" means the population covered by a license or group of licenses. Unless otherwise noted, as used in the Management Agreement, pops means the most recent Rand-McNally Population Survey estimate of the population of a geographic area. "Premium and Promotional Items" means all items, including clothing, memorabilia and novelties, used to display the Licensed Marks for the purpose of promoting the awareness, sale or image of the Sprint PCS Products and Services; provided, however, that Premium and Promotional Items does not include marketing and advertising materials prepared by Licensee that are subject to the Marketing Communications Guidelines (e.g. printed materials such as bill stuffers, brochures and similar materials). "Prime Rate" means the rate announced from time to time by The Chase Manhattan Bank, or its successor(s), as its prime rate. "Program Requirements" means the standards, guidelines, plans, policies and programs established by Sprint PCS from time to time regarding the operation and management of the Service Area Network and the Sprint PCS business operated using the Service Area Network, including the Program Requirements set forth in Sections 4.1, 4.2, 4.3, 7.2 and 8.1 of the Management Agreement. Sprint PCS may also implement Program Requirements respecting a voluntary resale program, as defined in Section 3.5.2 of the Management Agreement. "Purchase Notice" has the meaning set forth in Section 1.2 of Exhibit 11.8 to the Management Agreement. "Quality Standards" has the meaning set forth in Section 2.1(a) of the Sprint Spectrum Trademark and Service Mark License Agreement or Section 2.1(a) of the Sprint Trademark and Service Mark License Agreement. "Rand-McNally Population Survey" means the most recent population survey published by Rand-McNally or, if Rand-McNally no longer publishes the surveys, then the most recent population survey published by any successor organization to Rand-McNally or, if no such organization exists, an organization selected by Sprint PCS that provides surveys similar to the Rand-McNally surveys. "Receiving Party" has the meaning set forth in Section 3.1 of the Sprint Spectrum Trademark and Service Mark License Agreement or Section 3.1 of the Sprint Trademark and Service Mark License Agreement. "Related Equipment" means customer-controlled equipment for use in connection with the Sprint PCS Products and Services including telephones, wireless handsets and related accessories, PCMCIA cards, "smart" cards, PDA's, PBX's, set-top boxes and data terminals. "Related Party" means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with the Person. For purposes of the Management Agreement, Sprint Spectrum, SprintCom, American PCS Communications, LLC, PhillieCo Partners I, L.P., and Cox Communications PCS, L.P, will be deemed to be Related Parties. For purposes of this definition, the term "controls" (including its correlative meanings "controlled by" and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Restricted Party" has the meaning set forth in Section 3.1 of the Sprint Spectrum Trademark and Service Mark License Agreement or Section 3.1 of the Sprint Trademark and Service Mark License Agreement. "Selected Services" means those Available Services selected by Manager to be provided by Sprint Spectrum under Section 2.1 of the Services Agreement. An Available Service will not be treated as a Selected Service until Sprint Spectrum begins providing that service. "Service Area" means the geographic area described on the Service Area Exhibit to the Management Agreement. "Service Area Network" means the network and business activities managed by Manager under the Management Agreement m the Service Area under the License. "Services Agreement" means that certain Sprint PCS Services Agreements executed by Manager and Sprint Spectrum and any documents incorporated by reference in said agreement, whereby Manager may delegate the performance of certain services to Sprint PCS for fees that represent an adjustment of the fees paid by Sprint PCS to Manager under Section 10 of the Management Agreement. "Siting Regulations" means: (1) FCC regulations governing tower siting, lighting, marking, monitoring, and reporting of lighting malfunctions as set forth in 47 CFR ss.ss.17.1 through 17.58, and as may be amended; (2) FAA regulations governing tower siting, lighting, marking, monitoring, and reporting of lighting malfunctions as set forth in 14 CFR ss.ss.77.1 through 77.75, and as may be amended; (3) FCC land use regulations as set forth in 47 CFRss.ss.1.1301 through 1.1319, and as may be amended; and (4) FCC radio frequency exposure regulations as set forth in 47 CFRss.ss.1.1301 through 1.1319, and as may be amended. "spectrum" has the same meaning as PCS Spectrum. "Sprint" means Sprint Communications Company, L.P., a Delaware limited partnership. "Sprint Brands" means the "Licensed Marks" as that term is defined under the Sprint Trademark and Service Mark License Agreement. "Sprint PCS" means any or all of the following Related Parties who are License holders and signatories to the Management Agreement: Sprint Spectrum L.P., a Delaware limited partnership, SprintCom, Inc., a Kansas corporation, PhillieCo Partners I, L.P., a Delaware limited partnership, Cox Communications PCS, L.P., a Delaware limited partnership, and American PCS Communications, LLC, a Delaware limited liability company. Each entity listed above is a Related Party to each of the other listed entities. "Sprint PCS Affiliation Agreement" has the same meaning as Affiliation Agreement. "Sprint PCS Brands" means the "Licensed Marks" as that term is defined under the Sprint Spectrum Trademark and Service Mark License Agreement. "Sprint PCS Communications Policies" means the policies established in accordance with Section 6.4 of the Management Agreement with respect to public relations development, maintenance and management, as they may be amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement. "Sprint PCS Customer Service Program Requirements" means the program and requirements established in accordance with Section 8.1 of the Management Agreement with respect to customer service development, maintenance and management, as it may be amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement. "Sprint PCS Customer Service Standards" means those customer service standards developed by Sprint PCS with respect to customer service and maintenance as described in Section 8.1 of the Management Agreement, as it may be amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement. "Sprint PCS Insurance Requirements" means the insurance requirements developed by Sprint PCS as described in Section 12.3 of the Management Agreement, as they may be amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement. "Sprint PCS Management Agreement" has the same meaning as Management Agreement. "Sprint PCS National Accounts Program Requirements" means the program and requirements established in accordance with Section 4.2 of the Management Agreement with respect to national accounts development, maintenance and management, as it may be amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement. "Sprint PCS National or Regional Distribution Program Requirements" means any distribution program and requirements established in accordance with Section 4.1 of the Management Agreement, as it may be amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement, and entered into by Sprint PCS or its Related Parties and a third-party distributor (for example, a national chain of retail electronics stores) from time to time, under which the third party will distribute, lease or sell Sprint PCS Products and Services on a national or regional basis. The term "distributor" means a reseller of Sprint PCS Products and Services, or an agent of Sprint PCS authorized to sell Sprint PCS Products and Services on behalf of Sprint PCS, or a person engaged in any other means of wholesale or retail distribution of Sprint PCS Products and Services. "Sprint PCS Network" means the national wireless network and business activities to be developed by Sprint PCS, Manager and Other Managers in the United States and certain of its territories and possessions, which network includes the Service Area Network. "Sprint PCS Products and Services" means all types and categories of wireless communications services and associated products that are designated by Sprint PCS (whether now existing or developed and implemented in the future) as products and services to be offered by Sprint PCS, Manager and all Other Managers as the products and services of the Sprint PCS Network for fixed and mobile voice, short message and other data services under the FCC's rules for broadband personal communications services, including all local area service plans. Sprint PCS Products and Services do not include wireline products or services, including local exchange service, wireline long distance service, and wireline based Internet access. "Sprint PCS Roaming and Inter Service Area Program Requirements" means: (i) the roaming program and requirements established in accordance with Section 4.3 of the Management Agreement, as amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement, to provide for customers from a carrier not associated with the Sprint PCS Network to operate the customer's handset on the Sprint PCS Network and for customers from the Sprint PCS Network (whether customers of Sprint PCS, Manager or an Other Manager) to operate the customer's handset on a network of a carrier not associated with the Sprint PCS Network, and (ii) the program established in accordance with Section 4.3 of the Management Agreement, as amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement, to provide for customers from one Service Area on the Sprint PCS Network, whether managed by Sprint PCS, Manager, or an Other Manager, to operate the customer's handsets and otherwise receive seamless service regardless of whether the customer makes its call to or from the Sprint PCS Network and regardless of whether the customer is a customer of Sprint PCS, Manager or an Other Manager. "Sprint PCS Technical Program Requirements" means the operating and technical performance standards established by Sprint PCS, in accordance with Section 7.2 of the Management Agreement, as amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement, for the Sprint PCS Network as the may be amended from time to time by Sprint PCS in accordance with the terms of the Management Agreement. "Sprint Spectrum" means Sprint Spectrum L.P., a Delaware limited partnership. "Sprint Spectrum Brands" means the "Licensed Marks" as that term is defined under the Sprint Spectrum Trademark and Service Mark License Agreement. "Sprint Spectrum Trademark and Service Mark License Agreement" means that certain Sprint Spectrum Trademark and Service Mark License Agreement executed by Manager and Sprint Spectrum and any documents incorporated by reference in said agreement. "Sprint Trademark and Service Mark License Agreement" means that certain Sprint Trademark and Service Mark License Agreement executed by Manager and Sprint and any documents incorporated by reference in said agreement. "SprintCom" means SprintCom, Inc., a Kansas corporation. "Subsidiary" of any Person as of any relevant date means a corporation, company or other entity (i) more than 50% of whose outstanding shares or equity securities are, as of such date, owned or controlled, directly or indirectly through one or more Subsidiaries, by such Person, and the shares or securities so owned entitle such Person and/or Subsidiaries to elect at least a majority of the members of the board of directors or other managing authority of such corporation, company or other entity notwithstanding the vote of the holders of the remaining shares or equity securities so entitled to vote or (ii) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but more than 50% of whose ownership interest is, as of such date, owned or controlled, directly or indirectly through one or more Subsidiaries, by such Person, and in which the ownership interest so owned entitles such Person and/or Subsidiaries to make the decisions for such corporation, company or other entity. "Successor Notice" has the meaning set forth in Section 17.15.2(e) of the Management Agreement. "Term" means during the tern of the Management Agreement, including the Initial Tern and any renewal terms. "Trademark and Service Mark Usage Guidelines" means the rules governing the depiction and presentation of the Licensed Marks then generally in use by Licensor, to be furnished by Licensor to Licensee, as the same may be amended and updated from time to time by Licensor. "Trademark License Agreements" means the Sprint Trademark and Service Mark License Agreement and the Sprint Spectrum Trademark and Service Mark License Agreement. "Type II Report" has the meaning set forth in Section 12.1.2 of the Management Agreement. "Voluntary Bankruptcy" has the meaning set forth in Section 11.3.7 of the Management Agreement. "wireless mobility communications network" means a radio communications system operating in the 1900 MHz spectrum range under the rules designated as Subpart E of Part 24 of the FCC's rules. EX-10.10 7 dex1010.txt SALES AGENCY AGREEMENT Exhibit 10.10 SALES AGENCY AGREEMENT BETWEEN SPRINT COMMUNICATIONS COMPANY L.P. AND AIRGATE PCS, INC. This Sales Agency Agreement (as amended from time to time, "Agreement") made as of May 1, 2001 ("Effective Date"), is between Sprint Communications Company L.P., a Delaware limited partnership ("Sprint") and AirGate PCS, Inc., ("Sales Agent"). RECITALS A. Sales Agent desires to act as Sprint's agent for the marketing and sale of Sprint's residential wireline voice long distance telecommunications services ("Sprint Services") to Customers through Sales Agent's retail stores in the United States. B. Sprint desires to appoint Sales Agent as its limited agent to promote, distribute and sell Sprint Services as described in this Agreement and any Exhibits, Attachments or Addenda hereto. TERMS In consideration of the covenants, terms and conditions of this Agreement the parties agree as follows: 1. Defined Terms 1.1. "A-Status Sale" or "A-Status" means a sale of Sprint Services to a Customer who passes all Sprint's screening processes and whose Sprint Service is activated by Sprint. 1.2. "Customer" means a person who purchases Sprint Services as a result of a sale by Sales Agent under this Agreement. 1.3. "Commission" means the commission payable to Sales Agent by Sprint pursuant to this Agreement. 1.4. "Market" means a market defined by Sprint for its internal marketing purposes, which market generally corresponds to a metropolitan area rather than to an individual city or other governing unit. 1.5. "Net Collectible Monthly Revenue" means the total amount billed to the customer for monthly recurring charges and monthly usage charges for Sprint Services. Net Collectible Monthly Revenue excludes taxes and surcharges, special access charges, directory assistance charges, charges for non-voice telecommunications services, charges which are subsequently credited, volume and other promotional discounts, fraudulently charged amounts, bad debt and uncollectibles, write-offs, and amounts Sprint is required by governmental or quasi-governmental authorities to collect on behalf of or pay to others in support of statutory or regulatory programs. Examples of such programs include, but are not limited to, the Universal Service Fund, the Primary Interexchange Carrier Charge, and compensation to payphone service providers for use of their payphones to access Sprint's service. 1.6. "Rate Schedules" means Sprint's schedules of rates, terms and conditions for Sprint Services. 1.7. "Retail Sales Force" means Sales Agent's employees that are engaged in direct sales activities at Sales Agent's retail stores. 1.8. "Sprint Marks" are the trade names, logo, service marks, brands and other trademarks of Sprint. 1.9. "Sprint Services" means Sprint's residential wireline voice long distance telecommunications services. "Sprint Services" does not include other services offered by Sprint, such as data services. 1.10."Tariff' means those tariffs filed by either Party with state regulatory commissions for intrastate Service. 1.11."Terms and Conditions of Service" means the terms and conditions that govern either Party's interstate Service. 2. Appointment 2.1. Agency. Subject to this Agreement, Sprint appoints Sales Agent as its agent for the limited purposes of selling Sprint Services to Customers through Sales Agent's Retail Sales Force in the United States. Sales Agent accepts the appointment. 2.2. Restriction on Sales Agent Authority. Sales Agent is a limited agent of Sprint only for the purposes expressly set out in this Agreement. Sales Agent is not authorized to sign any offer, proposal or agreement on behalf of Sprint. Sales Agent is authorized to use only its Retail Sales Force for the sale of Sprint Services. Sales made by Sales Agent of Sprint Services may be made only via a one-on-one consultative basis with the Customer. Sales Agent is must use commercially reasonable efforts to perform its sales obligations under this Agreement. Sales Agent may not set up a multi-level marketing, pyramid promotional scheme or any similar structure to sell Sprint Services. 2.3. Compliance. Sales Agent must comply with all procedures, policies and operating guidelines on the marketing and sale of Sprint Services that are established by Sprint, including procedures required by law or contract or policies adopted by Sprint (e.g., advising Customers of the terms and conditions of the Sprint Services or pre-approval of marketing packets). Sprint will notify Sales Agent in writing a commercially reasonable time, but not less than 30 days, in advance of the effective date of any new or revised procedures and/or operating guidelines, unless a shorter time period is required by law or specified in this Agreement. 2.4. No Contractual Relationship with Retail Sales Force. 2.4.1. General. Notwithstanding Sales Agent's right to use its Retail Sales Force to sell Sprint Services, Sprint will deal only with Sales Agent and will not deal directly with or have any obligations to any member of Sales Agent's Retail Sales Force. Without limiting the generality of the foregoing, Sales Agent: (1) must place all orders for Sprint Services; (2) coordinate all advertisements and promotional activity under Sections 4.5 and 4.6; and (3) is liable for payment of all amounts due Sprint under this Agreement. 2.4.2. Independent Contractor. Sales Agent is an independent contractor with no authority to act for or on behalf of Sprint, except as expressly granted herein. Sales Agent may not use agents or third party vendors or representatives to solicit Customers for Sprint without Sprint's prior consent. Sales Agent has no authority to bind Sprint in any manner whatsoever except as authorized by Sprint. Sprint has no obligation to employees or agents utilized by Sales Agent to attract Customers to Sprint. Such individuals are at all times employees or agents of Sales Agent. Sales Agent is solely responsible for all expenses and obligations incurred by it as a result of its efforts to solicit Customers for Sprint, unless otherwise agreed to in advance by the Parties. Sales Agent agrees to comply with laws, regulations and orders relating to equal employment opportunity, workers' compensation, unemployment compensation and FICA. 2.4.3. Methods of Operations. Sales Agent, its subcontractors, employees and agents, are independent contractors for all purposes and at all times. Sales Agent is responsible for control over the methods and details of performing the services described in this Agreement, subject to Sprint's inspection. Sales Agent is also solely responsible for providing all tools, material, training, hiring, supervision, hours of work, employment policies and procedures, work rules, compensation, discipline, and termination of employment for Sales Agent's employees. 2.4.4. Wages and Payroll Taxes. Sales Agent is solely responsible for payment of wages, salaries, fringe benefits and other compensation of, or claimed by, its employees including, without limitation, contributions to any employee benefit, medical or savings plan and is responsible for all payroll taxes including, without limitation, the withholding and payment of all federal, state and local income taxes, FICA, unemployment taxes and all other payroll taxes. 2.4.5. Sprint's Right to Reject. Sprint has the right, in its sole discretion, to reject any individual as a member of Sales Agent's Retail Sales Force. If Sprint rejects an individual as a member of the Sales Agent's Retail Sales Force, Sales Agent must insure that that individual does not sell Sprint Services. Sprint has the further right to notify Sales Agent in writing and require that Sales Agent insure that that individual is no longer selling Sprint Services from and after the date of notice. Sprint does not have to pay Commissions to Sales Agent for sales of Sprint Services made by any (i) individual whom Sprint has rejected as a member of the Retail Sales Force, or (ii) individual whom Sprint has notified Sales agent can no longer sell Sprint Services. 2.4.6. Sales Agent Representations, Warranties and Covenants with Respect to Retail Sales Force. Sales Agent represents, warrants and covenants to Sprint as follows: (1) Sales Agent is responsible for the acts or omissions of each member of the Retail Sales Force; (2) no one other than the members of the Retail Sales Force may sell Sprint Services; (3) each member of the Retail Sales Force will comply with the applicable provisions of this Agreement, including the confidentiality provisions (Section 7) and the sales and marketing provisions (Section 4); and (4) each member of the Retail Sales Force has a confidentiality obligation to Sales Agent at least as restrictive as Sales Agent's confidentiality obligations to Sprint under this Agreement. 2.5. No Sale to Resellers. Sales Agent will require that the Retail Sales Force sell Sprint Services to Customers only. Sales Agent acknowledges that one of Sprint' primary reasons for selecting Sales Agent as a sales agent for the Sprint Services is to assure a broad distribution of Sprint Services to Customers. Sales Agent agrees that it will not knowingly, directly or indirectly, sell, or permit the Retail Sales Force to sell, Sprint Services to a reseller of telecommunications services or to anyone that is purchasing the Sprint Services for the purpose of reselling them. Sales Agent will take and require its Retail Sales Force to take reasonable efforts to determine if a volume purchaser is a reseller of telecommunications services. 3. Term The term of this Agreement is 1 year from the Effective Date, unless sooner terminated as permitted in this Agreement. This Agreement automatically renews for consecutive 1 year periods on each anniversary date of the Effective Date, unless either party gives the other party written notice of non-renewal at least 30 days before the anniversary date. 4. Sale of Sprint Services 4.1. Commissions. Except as otherwise provided in Exhibit A attached to this Agreement, Sprint will pay Sales Agent a Commission as described in Exhibit A (Commissions) on or before the last day of the month following the month in which a sale of Sprint Services by Sales Agent becomes A-Status. Any Commission paid is subject to charge back as provided in Exhibit A. Sprint will pay Sales Agent Commissions only for sales of Sprint Services made while this Agreement is in effect. Sales Agent must not rebate, split or otherwise share any Commissions Sales Agent is paid with respect to the sale of Sprint Services with any Customer obtaining a Sprint Service without Sprint's prior written consent. 4.2. Sales Activity. 4.2.1. Authorization to Sell Sprint Services. Sprint authorizes Sales Agent to sell Sprint Services in the retail stores described in Exhibit B and any other mutually agreed-upon Sales Agent retail stores. Sales Agent may not modify, amend, waive, cancel or otherwise change any Sprint Services offering. Sprint reserves the right, in its sole discretion, to: (a) add or delete individual service offerings or Sprint Services from those that the Sales Agent is authorized to sell; or (b) change the Rate Schedules, Terms and Conditions of Service or Tariffs for any Sprint Services or individual service offerings that Sales Agent is authorized to sell. Any changes to the Sprint Services that Sales Agent may sell are effective as soon as Sprint gives notice of the change to Sales Agent, except that non- material changes to Sprint's Rate Schedules, Terms and Conditions of Service or Tariffs are effective immediately when made. Sprint is not obligated to make all of its service offerings available for sale by Sales Agent; rather, Sprint can make as limited a set of service offerings as Sprint may choose, in its sole discretion, available to Sales Agent. 4.2.2. Marketing and Sale of Sprint Services. (1) Sales Agent must provide a one-on-one, consultative sales experience for the Customer to ensure the Customer's understanding of the nature of the Sprint Service purchased and the terms of the Sprint Service selected by the Customer. (2) Sales Agent must complete and deliver to Sprint all orders for Sprint Services obtained by the Sales Agent. Sprint will conduct its standard credit check on the proposed Customer. (a) If the Customer qualifies for the Sprint Service for which the credit check was run, is otherwise a Customer to whom Sprint is willing to provide the Sprint Service, and the order is complete, legible and accurate, Sprint will provide Sprint Service to the Customer. (b) If the Customer does not qualify for the Sprint Service for which the credit check was run, Sales Agent or Sprint will notify the Customer directly and Sales Agent or Sprint may offer the Customer an alternative Sprint Service for which the Customer qualifies. If Sprint provides the Customer an alternative Sprint Service, Sales Agent will earn Commission for that Sprint Service when the sale of that Sprint Service becomes A-Status if the requirements of Section 4.1 and Exhibit A are met. 4.2.3. Order Acceptance and Cancellation. Orders for Sprint Services submitted by Sales Agent are not binding until accepted by Sprint. Sprint may, in its sole discretion, reject any order solicited or taken by Sales Agent if the order fails to pass any of Sprint's screening processes. 4.2.4. Customers. All Customers purchasing Sprint Services through the efforts of Sales Agent are Customers of Sprint. Sales Agent must comply with all Sprint procedures regarding activation, care and dealing with Sprint's Customers. Sales Agent will not impose any activation or other fees, standards, sales conditions, or contracts not written by Sprint on any Customer. Sales Agent is not authorized to bill or collect any moneys from Customers on behalf of Sprint. 4.3. Training. Sprint will provide all training (trainers and training materials, initial and continuing) for the Retail Sales Force trainers regarding the features and functionality of Sprint Services. Sales Agent must provide the place for this training and make the trainers of the Retail Sales Force available. Sales Agent and Sprint will use commercially reasonable efforts to coordinate and plan all training sessions. Sales Agent must have each member of the Retail Sales Force receive a sufficient amount of training from Sprint in order to provide a professional, one-on-one consultative sales experience to Customers. If Sprint establishes a training program designed to provide a Sprint certification of Sales Agent as a trainer, Sales Agent will obtain the appropriate certification, as determined by Sprint, within 90 days of Sprint notifying Sales Agent of the establishment of the certification program. 4.4. Liability for Sprint Services Procured by Fraud or Misrepresentation. Sales Agent is liable to Sprint for all uncollected amounts billed to any Customer purchasing a Sprint Service through Sales Agent's efforts for Sprint Services that are procured by or through fraud or fraudulent means of Sales Agent or its Retail Sales Force or if Sales Agent or any member of its Retail Sales Forces fails to follow Sprint procedures, policies and operating guidelines on the marketing and sale of Sprint Services in any material respect in accordance with Section 2.3. 4.5. Advertising and Marketing. Sales Agent will actively promote and market the Sprint Services in accordance with the standards set from time to time by Sprint. Sprint will develop and design all advertising, marketing and promotional plans and sales collateral (collectively, "Marketing Materials") to be used in Sales Agent's retail stores and will pay for such development and design costs. Sales Agent may not use any Marketing Materials not provided by Sprint, and may not modify any Sprint-provided Marketing Materials, without Sprint's prior written consent. Sales Agent will pay for the inventory of Marketing Materials that are used in its retail stores. 4.6. Internet Advertising; No Internet Sales. Sales Agent may advertise the Sprint Services or tell Customers how to reach Sales Agent on Sales Agent's Internet website. Any Internet advertising must receive Sprint's prior written approval. Sales Agent may not use unsolicited commercial electronic or "spam" messages to advertise or sell the Sprint Services. Sales Agent may not sell Sprint Services via the Internet. 5. Limitation of Liability NEITHER PARTY IS LIABLE TO THE OTHER FOR SPECIAL, INDIRECT, INCIDENTAL, EXEMPLARY, CONSEQUENTIAL OR PUNITIVE DAMAGES, OR LOSS OF PROFITS, ARISING FROM THE RELATIONSHIP OF THE PARTIES OR THE CONDUCT OF BUSINESS UNDER, OR BREACH OF THIS AGREEMENT, EXCEPT WHERE SUCH DAMAGES OR LOSS OF PROFITS ARE CLAIMED BY OR AWARDED TO A THIRD PARTY IN A CLAIM OR ACTION AGAINST WHICH ONE PARTY TO THIS AGREEMENT HAS A SPECIFIC OBLIGATION TO INDEMNIFY THE OTHER. 6. Termination of Agreement 6.1. Events of Termination 6.1.1. Either party may terminate this Agreement for its convenience upon 30 days written notice to the other party. 6.1.2. Sprint may terminate this Agreement immediately if: (1) Sales Agent fails to pay any amount due to Sprint under this Agreement when due; (2) Sales Agent resells (directly or indirectly) the Sprint Service; (3) Sales Agent actively seeks or has a high percentage of terminations and re-activations of Customers purchasing Sprint Services through Sales Agent's efforts; (4) Sales Agent institutes or becomes the subject of proceedings under any bankruptcy act, insolvency law or any law for the relief of debtors; (5) a receiver is appointed for, or applied for by, Sales Agent; (6) Sales Agent makes any assignment for the benefit of its creditors; or (7) Sales Agent materially breaches this Agreement (other than as provided in (1) through (6) of this subparagraph 6.1.2.), Sprint gives notice of breach to Sales Agent and Sales Agent fails to cure the breach within 30 days of the date of the notice. 6.1.3. Sales Agent may terminate this Agreement immediately (except for termination under Section 6.1.3(2)) if: (1) Sprint fails to pay when due any amount due to Sales Agent under this Agreement; (2) Sprint materially breaches this Agreement, Sales Agent gives notice of breach to Sprint, and Sprint fails to cure the breach within 30 days of the date of the notice; (3) Sprint institutes or becomes the subject of proceedings under any bankruptcy act, insolvency law or any law for the relief of debtors; (4) Sprint makes an application for the appointment of a receiver for Sprint; or (5) Sprint makes an assignment for the benefit of its creditors. 6.1.4. Sprint may immediately terminate Sales Agent's right to sell Sprint Services through a particular member of the Retail Sales Force without in any way affecting the rights and obligations of Sales Agent and Sprint under this Agreement. 6.1.5. Sprint may immediately terminate Sales Agent's right to sell Sprint Services in any Market without terminating this Agreement and without in any way affecting Sales Agent's rights and obligations to sell Sprint Services in any other Market. If Sales Agent sells or attempts to sell Sprint Services in any Market which Sprint has not approved, Sales Agent will immediately terminate all sales activity in that Market upon notice from Sprint. If Sales Agent fails to immediately terminate all such sales activity in that Market, Sprint may immediately terminate this Agreement. 6.2. Method of Termination. A party having the right to terminate this Agreement (in whole or in part) may exercise the right by giving the other party written notice stating the Agreement (in whole or in part) is terminated as of the later of the date of the notice or the permitted termination date. 6.3. Duties upon Expiration or Termination. Upon the expiration or termination of this Agreement by either party: 6.3.1. Sales Agent must use all commercially reasonable efforts to immediately (a) cease all of its efforts to promote the sale of the Sprint Services and (b) stop using Sprint's Marks in connection with the sale of Sprint Services under this Agreement; 6.3.2. Sales Agent must notify each member of the Retail Sales Force that this Agreement is terminated and they are to immediately (a) cease all efforts to promote the sale of the Sprint Services and (b) stop using Sprint's Marks; 6.3.3. both parties will immediately refrain from making any statements or taking any actions that might cause third parties to infer that any sales agency relationship continues to exist between the parties pursuant to this Agreement, and where necessary or advisable, immediately inform third parties that the parties no longer have a sales agency relationship pursuant to this Agreement; 6.3.4. Sprint is not obligated to accept and process any further orders received from Sales Agent after the date of termination or expiration; 6.3.5. if Sprint terminates Sales Agent's right to sell Sprint Services through a particular member of the Retail Sales Force, Sales Agent must use all commercially reasonable efforts to ensure that member of the Retail Sales Force immediately ceases all efforts to promote the sale of the Sprint Services, including notifying that member of the Retail Sales Force that he or she is to immediately (a) cease all efforts to promote the sale of the Sprint Services, and (b) stop using Sprint's Marks. 6.4. Effect of Termination. Termination of this Agreement is without prejudice to any other rights or remedies of the parties and is without liability for any loss or damage occasioned by the termination. Termination of this Agreement for any cause does not release either party from any liability which, at the time of termination, has accrued to the other party, or which may accrue in respect of any act or omission before termination or from any obligation which is expressly stated to survive the termination. Sales Agent is not entitled to the payment of any Commissions that was not already earned on the termination date (other than Monthly Residual Commissions payable after the Termination of this Agreement with respect to sales occurring prior to Termination of this Agreement). 7. Confidentiality; Trade Secrets 7.1. Neither Party, nor its directors, officers, employees or agents, may disclose the terms of this Agreement to any unaffiliated third party without the written consent of the other Party, except as otherwise required by law. 7.2. All information, including without limitation all oral, visual and written information, including all information disclosed prior to the date of this Agreement pursuant to the negotiations of the parties, disclosed to the other party and marked "Confidential" or "Proprietary" is deemed to be confidential, restricted and proprietary to the disclosing party (the "Confidential Information"). Written materials must be conspicuously labeled "Confidential" or "Proprietary" at the time disclosed or as soon as practicable thereafter, but not more than 15 days after the disclosure. Oral and visual information must be confirmed in writing as "Confidential" or "Proprietary" within 15 days of the date disclosed. 7.3. Each party will maintain the confidentiality of the other party's Confidential Information. The party receiving Confidential Information will use it only to further the relationship between the parties. Confidential Information may not be disclosed to any third party without the written consent of the disclosing party. Each party agrees that the other may disclose Confidential Information it receives to its employees, directors, officers, accountants, lawyers or other agents who have a need to know, subject to the terms of this Agreement. The party receiving Confidential Information must provide at least the same reasonable care to avoid disclosure in breach of this Agreement or unauthorized use of the disclosing party's Confidential Information as it provides to protect its own similar Confidential Information. All Confidential Information remains the property of the disclosing party, and no rights, licenses, trademarks, inventions, copyrights, patents, or other intellectual property rights are implied or granted under this Agreement, except to use the Confidential Information as provided in this Agreement. The receiving party will not reproduce Confidential Information except to accomplish the purpose of this Agreement. 7.4. The receiving party does not have an obligation to protect Confidential Information that is: (a) in the public domain through no fault of the receiving party; (b) within the legitimate possession of the receiving party, with no confidentiality obligations to a third party; (c) lawfully received from a third party having rights in the information without restriction, and without notice of any restriction against its further disclosure; (d) independently developed by the receiving party without breaching this Agreement or by parties who have not had, either directly or indirectly, access to or knowledge of the Confidential Information; or (e) disclosed with the prior written consent of the disclosing party. If in the opinion of counsel for the receiving party, Confidential Information is required to be produced by law, court order, or governmental authority, the receiving party must immediately notify the disclosing party of that obligation. The disclosing party may move the ordering court or authority for a protective order or other appropriate relief. 7.5. All information (including but not limited to name, address, telephone number, usage and billing information, income and feature preference) of individuals solicited by Sales Agent to become Sprint Customers and/or sold Sprint Services by Sales Agent is Sprint Confidential Information under this Section 7 and is trade secret information belonging to Sprint. Sales Agent has no rights to information that Sprint has regarding a Customer who has purchased Sprint Services through Sales Agent's efforts. Sales Agent will not sell or otherwise disclose that a Customer is a Sprint Customer, or any other trade secrets of Sprint to any third party at any time. 8. Indemnification. 8.1. Indemnification by Sprint. Sprint agrees to indemnify, defend and hold harmless Sales Agent, its directors, managers, officers and employees from and against any and all claims, demands, causes of action, losses, actions, damages, liability and expense, including costs and reasonable attorneys' fees, against Sales Agent, its directors, managers, officers and employees arising from or relating to Sprint's provision of the Sprint Services, or by Sprint, or its directors', officers', employees', contractors', subcontractors', agents' or representatives' breach of any representation, warranty or covenant contained in this Agreement, except where and to the extent the claim, demand, cause of action, loss, action, damage, liability and expense results from the negligence or willful misconduct of Sales Agent, its directors, managers, officers, employees, agents or representatives. Sprint's indemnification obligations under this Section do not apply to any third party vendors that provide services directly to Sales Agent under a separate agreement. 8.2. Indemnification of Sales Agent. Sales Agent agrees to indemnify, defend and hold harmless Sprint, its directors, officers and employees from and against any and all claims, demands, causes of action, losses, actions, damages, liability and expense, including costs and reasonable attorneys' fees, against Sprint, its directors, officers and employees arising from or relating to Sales Agent's sale of Sprint Services, or its directors', managers' officers', employees', contractors', subcontractors', agents' or representatives' violation of any law, regulation or ordinance applicable to Sales Agent, or by Sales Agent's, or its directors', managers' officers', employees', contractors', subcontractors', agents' or representatives' breach of any representation, warranty or covenant contained in this Agreement, except where and to the extent the claim, demand, cause of action, loss, action, damage, liability and expense results from the negligence or willful misconduct of Sprint, its directors, officers, employees, contractors, subcontractors, agents or representatives. 8.3. Procedure. 8.3.1. Notice. Any party being indemnified ("Indemnitee") will give the party making the indemnification ("Indemnitor") written notice as soon as practicable but not later than 5 business days after the party becomes aware of the facts, conditions or events that give rise to the claim for indemnification if: (1) any claim or demand is made or liability is asserted against Indemnitee; or (2) any suit, action, or administrative or legal proceeding is instituted or commenced in which Indemnitee is involved or is named as a defendant either individually or with others. Failure to give notice as described in this Section does not modify the indemnification obligations of this provision, except if Indemnitor is harmed by failure to provide timely notice to Indemnitor, then Indemnitor does not have to indemnify Indemnitee for the harm caused by the failure to give the timely notice. 8.3.2. Defense by Indemnitor. If within 30 days after giving notice Indemnitee receives written notice from Indemnitor stating that Indemnitor disputes or intends to defend against the claim, demand, liability, suit, action or proceeding, then Indemnitor will have the right to select counsel of its choice and to dispute or defend against the claim, demand, liability, suit, action or proceeding, at its expense. Indemnitee will fully cooperate with Indemnitor in the dispute or defense so long as Indemnitor is conducting the dispute or defense diligently and in good faith. Indemnitor is not permitted to settle the dispute or claim without the prior written approval of Indemnitee, which approval will not be unreasonably withheld. Even though Indemnitor selects counsel of its choice, Indemnitee has the right to retain additional representation by counsel of its choice to participate in the defense at Indemnitee's sole cost and expense. 8.3.3. Defense by Indemnitee. If no notice of intent to dispute or defend is received by Indemnitee within the 30-day period, or if a diligent and good faith defense is not being or ceases to be conducted, Indemnitee has the right to dispute and defend against the claim, demand or other liability at the sole cost and expense of Indemnitor and to settle the claim, demand or other liability, and in either event to be indemnified as provided in this Section. Indemnitee is not permitted to settle the dispute or claim without the prior written approval of Indemnitor, which approval will not be unreasonably withheld. 8.3.4. Costs. Indemnitor's indemnity obligation includes reasonable attorneys' fees, investigation costs, and all other reasonable costs and expenses incurred by Indemnitee from the first notice that any claim or demand has been made or may be made, and is not limited in any way by any limitation on the amount or type of damages, compensation, or benefits payable under applicable workers' compensation acts, disability benefit acts, or other employee benefit acts. 9. Disputes Concerning Commission Payments/Books and Records/Audit. 9.1. Disputes Concerning Commission Payments. If any dispute arises concerning any Commission payment due hereunder, the disputing party must give the other party written notice of the nature and amount of the dispute within 120 days of receipt of payment and adequate supporting documentation to verify such Commission. If a party does not receive such written notice within that 120 days period, all Commission payments made will be final and the other party may not thereafter dispute the nature or amount of the Commission payment. If, however, the complaining party did not have knowledge of the Commission due it because of fraud, failure to disclose, breach of this Agreement or any other act or omission of the other party, this provision shall not apply and the complaining party has two years from the date of discovery of the relevant facts in which to make a claim. The limitations provided in this Section 9.1 shall not apply to Commission errors, issues and disputes arising in connection with, or discovered in, an audit under Section 9.2, even though such audit is conducted more than 120 days after receipt of payment and adequate supporting documentation. 9.2. Audit. Each party will maintain complete and accurate accounting records during the term of this Agreement and for 12 months following conclusion or expiration of all post-agreement payment obligations of the parties in a consistent form to substantiate the direct monetary payments and reporting obligations of one party to any other party under this Agreement. Each party may, upon reasonable advanced written notice, conduct during the other party's regular business hours, and in accordance with applicable law and reasonable security requirements, audits of such direct monetary payment and reporting obligation accounts and records, in accordance with the following guidelines and restriction: (a) the audit may be conducted by members of the internal audit department who are employees of the auditing party or by an independent auditor, provided that the auditor has signed a confidentiality agreement acceptable to the audited party, (b) the audited party may require audit on the premises of the audited party, (c) the audited party will have the right to have an employee or representative present at all times during the audit, (d) the auditing party will not have direct unrestricted access to the audited party's computer database without the consent of the audited party, and will be entitled to review only those specific records of the audited party directly related to the monetary obligations of the audited part hereunder or the applicable Addendum, specifically limited to customer activations, deactivations, customer billing records, and any other records directly related to the monetary obligations of such party hereunder; and (e) the auditing party's audit of activation, deactivation and Customer billing records will be limited to a reasonable random sampling audit of these records. Subject to the restrictions set forth above, the audited party shall cooperate fully with the auditing party. All reasonable fees and costs incurred (including a reasonable charge for the services of any employee of the audited party directly involved in the audit) by either party in connection with such audits shall be paid by the auditing party. The audited party will have the right to have the results of any such audit reviewed by the audited party's internal auditing staff or by the audited party's independent accountants who then audit the financial statements of the audited party ("Independent Auditors"). The cost of such internal or Independent Auditors review shall be borne by the audited party. The audited party shall use its commercially reasonable efforts to immediately correct any deficiencies related to performance uncovered by such audit. 10. General Provisions 10.1.Notices. All notices required or permitted to be given by any provision of this Agreement must be in writing and mailed (certified or registered mail, postage prepaid, return receipt requested) or delivered by hand, or overnight courier marked next day morning delivery, or by confirmed facsimile, charges prepaid and addressed as follows: If to Sales Agent: If to Sprint: ----------------- ------------ AirGate PCS, Inc. Sprint 233 Peachtree St., Ste. 1700 6360 Sprint Parkway Harris Tower Mailstop KSOPHE0406-4B753 Atlanta, GA 30303 Overland Park, KS 66251 Attn: Mark Allen Attn: Director, Partnership Marketing -NCO With a copy to: With a copy to: AirGate PCS, Inc. Sprint 233 Peachtree St., Ste. 1700 8140 Ward Parkway Harris Tower Kansas City; MO 64114 Atlanta, GA 30303 Attn: Barbara L. Blackford Attn: Vice President -Law, Marketing & Sales Any party may from time to time specify a different address by notice to the other party. Any notice sent registered mail or certified mail will be deemed delivered 3 days after the notice is mailed. Any notice delivered by hand will be deemed effective when delivered to or refused by the party to receive the notice. Any notice sent by overnight courier, marked next day morning delivery, will be deemed delivered the day after it is deposited with the overnight courier. A notice sent via facsimile is deemed delivered upon receipt of confirmation that the facsimile was transmitted to the other party's facsimile number. 10.2.Governing Law. The terms of this Agreement will be construed and interpreted under the laws of the State of Kansas without regard to its choice of law principles. 10.3.Jury Trial Waiver. THE PARTIES HEREBY EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY FOR ANY DISPUTE ARISING OUT OF OR RELATED TO THIS AGREEMENT. 10.4.Counterpart Execution. This Agreement may be executed in any number of counterparts with the same effect as if each party signed the same document. All counterparts are construed together and constitute one Agreement. 10.5.Entire Agreement. The provisions of this Agreement, including the Exhibits hereto, set out the entire agreement and understanding between the parties as to the subject matter of this Agreement and supersede all prior agreements, oral or written, and other communications between the parties relating to the subject matter of this Agreement. 10.6.Waivers; Amendments. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce the term, but any waiver is effective only if in a writing signed by the party against which the waiver is to be asserted. Except as otherwise provided in this Agreement, no failure or delay of any party in exercising any power or right under this Agreement operates as a waiver thereof, nor will any single or partial exercise of the right or power, or any abandonment or discontinuance of steps to enforce the right or power, preclude any other or further exercise thereof or the exercise of any other right or power. This Agreement may only be amended in writing. 10.7.Disclosure. Neither party may make any media release, public announcement or other disclosures relating to this Agreement, its subject matter or the purpose of this Agreement without the prior written consent of the other party. If such disclosure is required by law or the rules of any exchange on which such party's securities are listed, the disclosing party will attempt to obtain the other party's consent prior to making the disclosure, but the disclosing party will not be in breach of this provision if the time required by law or the exchange's rules for making the disclosure makes it impossible or impracticable to obtain such prior consent. 10.8.Compliance with Laws. The parties must comply with all applicable federal, state, county and local laws, rules, regulations and orders that apply to the performance of their obligations under this Agreement. SPRINT COMMUNICATIONS COMPANY L.P. AIRGATE PCS, INC. By: By: /s/ Thomas M. Dougherty Its: Its: President and CEO Name: Name: Thomas M. Dougherty A-2 EXHIBIT A COMMISSIONS 1. Commissions Sprint agrees to pay Sales Agent the following Commissions for the sale of Sprint Services to Customers. Sprint may, in its sole discretion, amend this Exhibit, except that the Monthly Residual Commission may not be reduced with respect to Customers who purchased Sprint Services prior to the date of such amendment as a result of Sales Agent's efforts under this Agreement. Any amendment that affects the amount of Commissions or the timing of earning or payment of Commissions is effective 30 days after Sales Agent is notified of the amendment. 1.1. Standard Commission. Subject to any charge backs described in this Exhibit, Sales Agent earns a Standard Commission of $10 for each A-Status Sale by Sales Agent. 1.2. Monthly Residual Commission. In addition to the Standard Commission, Sprint will pay to Sales Agent a Monthly Residual Commission of 4.5% of the Customer's Net Collectible Monthly Revenue for each consecutive month that the Customer remains a Sprint Customer. Sales Agent will continue to earn Monthly Residual Commission on any A-Status Sales that became A-Status prior to the date of expiration or termination of this Agreement for as long as the Customer continuously remains a Sprint Customer. If the Customer switches to a new Sprint Service or service offering without first canceling, terminating, disconnecting or deactivating his Sprint Service that was purchased through Sales Agent, Sales Agent's Monthly Residual Commission will be based on Customer's Net Collectible Monthly Revenue for the new Sprint Service or service offering. If the Customer cancels, terminates, disconnects or discontinues his Sprint Service for any reason, Sprint will not pay Sales Agent any further Monthly Residual Commission for that Customer. 2. Charge Backs A "charge back" is an amount Sprint may charge against any amounts due to Sales Agent for Commissions earned under the specific terms of this Agreement and for no other reason. During the term of this Agreement and upon its termination, if charge backs exceed Commissions and other amounts, if any, due to Sales Agent, then Sales Agent must pay the excess to Sprint immediately upon notice by Sprint to Sales Agent of the amount of the excess. Without limiting the generality of this Section, the following items are charge backs: 2.1. If Sprint must adjust the account of a Customer because of misrepresentations made by Sales Agent to the Customer in violation of Sprint procedures, policies and operating guidelines established under Section 2.3 hereof (e.g., promising free calling); or 2.2. If Sales Agent accepts payment from a Customer for a Sprint Service and the payment is not immediately delivered to the person at Sprint authorized to receive the payments in violation of Sprint procedures, policies and operating guidelines established under Section 2.3 hereof. No chargebacks are made with respect to an A-Status Sale even though the Customer deactivates following such sale. 3. Errors If Sprint determines that an error was made in any Commission paid to Sales Agent, Sprint may adjust the next payment of Commission to Sales Agent to correct the error. If no additional amounts are due Sales Agent, Sales Agent must immediately upon receipt of notice of the error from Sprint pay the amount of the error to Sprint. EX-10.12 8 dex1012.txt CREDIT AGREEMENT Exhibit 10.12 EXECUTION COPY THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT THIS THIRD AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Agreement") dated as of the 19th day of December, 2001 (the "Agreement"), by and among iPCS WIRELESS, INC. (the "Borrower"), a Delaware corporation, iPCS, INC., ("Holdings"), a Delaware corporation, iPCS EQUIPMENT, INC. ("Equipmentco"), a Delaware corporation (collectively with the Borrower and Holdings, the "Loan Parties"), the Lenders (as defined in the Credit Agreement defined below), and TORONTO DOMINION (TEXAS), INC., as administrative agent (the "Administrative Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Loan Parties, the Lenders and the Administrative Agent are parties to that certain Amended and Restated Credit Agreement dated as of July 12, 2000, as amended by that certain First Amendment to Amended and Restated Credit Agreement and Consent dated as of February 23, 2001, and as further amended by that certain Second Amendment to Amended and Restated Credit Agreement and Consent dated as of September 28, 2001 (the "Credit Agreement"); WHEREAS, the Borrower has requested that the Lenders, and the Lenders have agreed to, subject to the terms hereof, amend the Credit Agreement as more fully set forth herein; and NOW, THEREFORE, in consideration of the premises set forth above, the covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that all capitalized terms used and not defined herein shall have the meanings ascribed thereto in the Credit Agreement, and further agree as follows: 1. Amendment to Section 1.3. Section 1.3, Accounting Terms and Determinations, of the Credit Agreement, is hereby amended by deleting subsection (c) in its entirety and by substituting in lieu thereof the following: "(c) To enable the ready and consistent determination of compliance with the covenants set forth in this Agreement, neither the Borrower nor Holdings will change the last day of its fiscal year from September 30 or the last days of its first three fiscal quarters in each of its fiscal years from December 31, March 31 and June 30, respectively." 2. No Other Amendment or Waiver. Notwithstanding the agreement of the Lenders to the terms and provisions of this Agreement, the Loan Parties acknowledge and expressly agree that this Agreement is limited to the extent expressly set forth herein and shall not constitute a modification of the Credit Agreement or any other Loan Documents or a course of dealing at variance with the terms of the Credit Agreement or any other Loan Documents (other than as expressly set forth above) so as to require further notice by the Administrative Agent or the Lenders, or any of them, of its or their intent to require strict adherence to the terms of the Credit Agreement and the other Loan Documents in the future. All of the terms, conditions, provisions and covenants of the Credit Agreement and the other Loan Documents shall remain unaltered and in full force and effect except as expressly modified by this Agreement. The Credit Agreement and each other Loan Document shall be deemed modified hereby solely to the extent necessary to effect the waivers and amendments contemplated hereby. 3. Representations and Warranties. The Loan Parties hereby represent and warrant in favor of the Administrative Agent and each Lender as follows: (a) Each of the Loan Parties has the corporate power and authority (i) to enter into this Agreement and (ii) to do all other acts and things as are required or contemplated hereunder to be done, observed and performed by them; (b) This Agreement has been duly and validly executed and delivered by each of the Loan Parties that is a party thereto, and such Agreement constitutes the legal, valid and binding obligations of such Persons, enforceable against each such Person in accordance with their respective terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors' rights and general principles of equity. (c) The execution and delivery of this Agreement and the performance by the Loan Parties under the Credit Agreement and the other Loan Documents to which each is a party, as amended hereby, do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over the Loan Parties or any of their Subsidiaries which has not already been obtained, nor is in contravention of or in conflict with the articles of incorporation, by-laws or partnership agreements of the Loan Parties or any of their Subsidiaries, or any provision of any statute, judgment, order, or material indenture, instrument, agreement, or undertaking to which Loan Parties or any of their Subsidiaries is a party or by which any of their respective assets or properties is or may become bound; and (d) The representations and warranties contained in Article 7 of the Credit Agreement and contained in the other Loan Documents remain true and correct as of the date hereof, both before and after giving effect to this Agreement, except to the extent previously fulfilled in accordance with the terms of the Credit Agreement or such other Loan Document, as applicable, or to the extent relating specifically to the earlier date. No Default now exists or will be caused hereby. 4. Conditions Precedent: Effective Date. This Agreement shall be effective as of the Agreement Date subject to satisfaction of each of the following conditions precedent: (a) all of the representations and warranties of the Borrower under Section 3 hereof which are made as of the date hereof, being true and correct in all material respects; and (b) receipt by the Administrative Agent of counterparts hereof executed by the Required Lenders and each of the Loan Parties. 5. Guarantor Acknowledgment. (a) Each of Holdings and Equipmentco has guarantied the Obligations. Holdings and Equipmentco are collectively referred to herein as the "Guarantors", and the Guaranty executed by each Guarantor are collectively referred to herein as the "Guaranties". (b) Each Guarantor hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Agreement. Each Guarantor hereby confirms that the Guaranty to which it is a party or otherwise bound will continue to guarantee, as the case may be, to the fullest extent possible in accordance with such Guaranty the payment and performance of all "Obligations" under each of the Guaranties, as the case may be (in each case as such terms are defined in the applicable Guaranty), including without limitation the payment and performance of all such "Obligations" under each of the Guaranties, as the case may be, in respect of the Obligations of the Borrower now or hereafter existing under or in respect of the Credit Agreement and the Notes defined therein. (c) Each Guarantor acknowledges and agrees that any of the Guaranties to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Agreement. Each Guarantor represents and warrants that all representations and warranties contained in the Credit Agreement, this Agreement and the Guaranty to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. (d) Each Guarantor acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Agreement, such Guarantor is not required by the terms of the Credit Agreement or any other Loan Document to consent to the amendments of the Credit Agreement effected pursuant to this Agreement and (ii) nothing in the Credit Agreement, this Agreement or any other Loan Document shall be deemed to require the consent of such Guarantor to any future amendments to the Credit Agreement. 6. Counterparts. This Agreement maybe executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute one and the same instrument. 7. Loan Documents. Each reference in the Credit Agreement or any other Loan Document to the term "Credit Agreement" shall hereafter mean and refer to the Credit Agreement as amended hereby and as the same may hereafter be amended. 8. Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the State of New York, applicable to agreements made and to be performed in New York. 9. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof in that jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused it to be executed under seal by their duly authorized officers, all as of the day and year first above written. BORROWER: iPCS WIRELESS, INC., a Delaware corporation By: /s/ Alan B. Catherall ---------------------------------------------- Name: Alan B. Catherall -------------------------------------------- Title: Chief Financial Officer ------------------------------------------- HOLDINGS: iPCS, INC., a Delaware corporation By: /s/ Alan B. Catherall ---------------------------------------------- Name: Alan B. Catherall -------------------------------------------- Title: Chief Financial Officer ------------------------------------------- EQUIPMENTCO: iPCS EQUIPMENT, INC., a Delaware corporation By: /s/ Alan B. Catherall ---------------------------------------------- Name: Alan B. Catherall -------------------------------------------- Title: Chief Financial Officer ------------------------------------------- ADMINISTRATIVE AGENT AND LENDERS: TORONTO DOMINION (TEXAS), INC., as Administrative Agent and as a Lender By: /s/ Jeffrey R. Lents ---------------------------------------------- Name: Jeffrey R. Lents -------------------------------------------- Title: Vice President ------------------------------------------- GE CAPITAL CORPORATION, as a Lender By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- THE BANK OF NOVA SOCTIA, as a Lender By: /s/ Stephen C. Levi ---------------------------------------------- Name: Steven C. Levi -------------------------------------------- Title: Authorized Signatory ------------------------------------------- BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as a Lender By: /s/ Michael J. Wiskind ---------------------------------------------- Name: Michael J. Wiskind -------------------------------------------- Title: Vice President ------------------------------------------- CITY NATIONAL BANK, as a Lender By: /s/ Aaron Cohen ---------------------------------------------- Name: Aaron Cohen -------------------------------------------- Title: Vice President ------------------------------------------- FORTIS CAPITAL CORP., as a Lender By: /s/ Alan E. McLintock ---------------------------------------------- Name: Alan E. McLintock -------------------------------------------- Title: Managing Director ------------------------------------------- By: /s/ Colm Kelly ---------------------------------------------- Name: Colm Kelly -------------------------------------------- Title: Assistant Vice President ------------------------------------------- IBM CREDIT CORPORATION, as a Lender By: /s/ Thomas S. Curcio ---------------------------------------------- Name: Thomas S. Curcio -------------------------------------------- Title: Manager of Credit ------------------------------------------- NATIONAL CITY BANK, as a Lender By: /s/ Chris Kalmbach ---------------------------------------------- Name: Chris Kalmbach -------------------------------------------- Title: SVP ------------------------------------------- PNC BANK, NATIONAL ASSOCIATION, as a Lender By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- EX-10.14 9 dex1014.txt CREDIT AGREEMENT Exhibit 10.14 EXECUTION VERSION FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT AND WAIVER THIS FIFTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT AND WAIVER (this "Amendment") is entered into as of November 1, 2002, by and among iPCS WIRELESS, INC., a Delaware corporation (the "Borrower"), iPCS, INC., a Delaware corporation ("Holdings"), iPCS EQUIPMENT, INC., a Delaware corporation ("Equipmentco" and collectively with the Borrower and Holdings, the "Loan Parties"), the LENDERS (as defined in the Credit Agreement defined below) and TORONTO DOMINION (TEXAS), INC., as administrative agent (the "Administrative Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Loan Parties, the Lenders and the Administrative Agent are parties to that certain Amended and Restated Credit Agreement dated as of July 12, 2000, as amended by that certain First Amendment to Amended and Restated Credit Agreement and Consent dated as of February 23, 2001, as amended by that certain Second Amendment to Amended and Restated Credit Agreement and Consent dated as of September 28, 2001, as amended by that certain Third Amendment to Amended and Restated Credit Agreement dated as of December 19, 2001, and as further amended by that certain Fourth Amendment to Amended and Restated Credit Agreement and Consent dated as of February 14, 2002 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"); and WHEREAS, the parties have agreed to, subject to the terms hereof, amend the Credit Agreement as fully set forth herein; NOW THEREFORE, in consideration of the premises set forth above, the covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that all capitalized terms used and not defined herein shall have the meanings ascribed thereto in the Credit Agreement, as amended hereby, and further agree, subject to the conditions precedent to this Amendment hereinafter set forth, as follows: 1. Amendments to Section 1.1. (a) Section 1.1 of the Credit Agreement, Definitions, is hereby amended by adding the following new definition of Fifth Amendment Date, in appropriate alphabetical order: "`Fifth Amendment Date' shall mean November 1, 2002." (b) Section 1.1 of the Credit Agreement, Definitions, is hereby further amended by deleting the last sentence of the definition of "Tranche A Commitment" and by substituting "As of the Fifth Amendment Date, the aggregate principal amount of the Tranche A Commitments is $80,000,000." in lieu thereof. 2. Amendment to Section 10.12. Section 10.12 of the Credit Agreement, Minimum Cash Balance/Availability, is hereby deleted in its entirety. 3. Amendment to Section 13.13. Section 13.13 of the Credit Agreement, Notices, is hereby amended by deleting subsections (a) and (b) in their entirety and by substituting the following in lieu thereof: "(a) If to the Borrower, Holdings or Equipmentco, to it at: "iPCS Wireless, Inc./iPCS, Inc./iPCS Equipment, Inc. c/o AirGate PCS, Inc. Harris Tower, Suite 1700 233 Peachtree Street, N.E. Atlanta, GA 30303 Attn: William H. Seippel Telecopy No.: (404) 832-2237 "with a copy to: "AirGate PCS, Inc. Harris Tower, Suite 1700 233 Peachtree Street, N.E. Atlanta, GA 30303 Attn: Barbara L. Blackford, Esq. Telecopy No.: (404) 832-2237 "(b) If to the Administrative Agent, to it at: "Toronto Dominion (Texas), Inc. 909 Fannin Street, Suite 1700 Houston, TX 77010 Attn: Warren Finlay and Diane Bailey Telecopy No.: (713) 951-9921 "with a copy to: "Paul, Hastings, Janofsky & Walker LLP 600 Peachtree Street, N.E., Suite 2400 Atlanta, GA 30308 Attn: Jesse H. Austin, III, Esq. Telecopy No.: (404) 815-2424" 4. Reduction of Tranche A Commitments. The Borrower and the Lenders hereby agree that the aggregate principal amount of the Tranche A Commitments shall be permanently reduced by the aggregate amount of $10,000,000 to be effective as of the Fifth Amendment Date. This reduction of the aggregate principal amount of the Tranche A Commitments is reflected in the amendments to the Credit Agreement set forth above. The Borrower and the Lenders hereby agree that (a) the aggregate principal amount of the Tranche A Commitments shall be permanently reduced to $80,000,000 as of the Fifth Amendment Date and (b) such reduction shall be applied to reduce the Tranche A Commitments of the Lenders on a pro rata basis. 5. Waiver. The Agents and the Lenders hereby waive (a) any Default or Event of Default that may occur as a result of the Borrower's failure to have at least the minimum number of Wireless Subscribers required by Section 10.5 of the Credit Agreement as of the last day of the calendar quarter ended December 31, 2002 (the "Minimum Subscriber Default"), and (b) their rights and remedies under the Credit Agreement and the other Loan Documents which may arise as a result of the Minimum Subscriber Default. The waivers contained in the foregoing sentence shall not waive any other requirement or hinder, restrict or otherwise modify the rights and remedies of the Agents and the Lenders following the occurrence of any other present or future Default or Event of Default (whether or not related to the Minimum Subscriber Default) under the Credit Agreement or any other Loan Document. 6. Confirmation of Guaranties and Security Documents. After giving effect to this Amendment, (a) Holdings hereby acknowledges and agrees that the terms and conditions of its Guaranty Agreement shall remain in full force and effect; (b) Equipmentco hereby acknowledges and agrees that the terms and conditions of its Guaranty Agreement shall remain in full force and effect; and (c) the Loan Parties hereby acknowledge and agree that the terms and conditions of each of the Security Documents shall remain in full force and effect. 7. No Other Amendments or Waivers. Notwithstanding the agreement of the Lenders to the terms and provisions of this Amendment, the Loan Parties acknowledge and expressly agree that this Amendment is limited to the extent expressly set forth herein and shall not constitute a modification of the Credit Agreement or any other Loan Documents or a course of dealing at variance with the terms of the Credit Agreement or any other Loan Documents (other than as expressly set forth above) so as to require further notice by the Administrative Agent or the Lenders, or any of them, of its or their intent to require strict adherence to the terms of the Credit Agreement and the other Loan Documents in the future. All of the terms, conditions, provisions and covenants of the Credit Agreement and the other Loan Documents shall remain unaltered and in full force and effect except as expressly modified by this Amendment. The Credit Agreement and each other Loan Document shall be deemed modified hereby solely to the extent necessary to effect the waivers and amendments contemplated hereby. 8. Representations and Warranties. The Loan Parties hereby represent and warrant in favor of the Administrative Agent and each Lender that: (a) Each of the Loan Parties has the corporate power and authority (i) to enter into this Amendment and (ii) to do all other acts and things as are required or contemplated hereunder to be done, observed and performed by them; (b) This Amendment has been duly and validly executed and delivered by each of the Loan Parties, and this Amendment constitutes the legal, valid and binding obligations of the Loan Parties party thereto, enforceable against each of the Loan Parties in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and by the application of general equitable principles; (c) The execution and delivery of this Amendment and the performance by the Loan Parties under the Credit Agreement and the other Loan Documents to which each is a party, as amended hereby, do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over the Loan Parties or any of their Subsidiaries which has not already been obtained, nor is in contravention of or in conflict with the articles of incorporation, by-laws or partnership agreements of the Loan Parties or any of their Subsidiaries, or any provision of any statute, judgment, order, or material indenture, instrument, agreement, or undertaking to which Loan Parties or any of their Subsidiaries is a party or by which any of their respective assets or properties is or may become bound; (d) The representations and warranties contained in Article 7 of the Credit Agreement and contained in the other Loan Documents remain true and correct as of the date hereof, both before and after giving effect to this Amendment, except to the extent previously fulfilled in accordance with the terms of the Credit Agreement or such other Loan Document, as applicable, or to the extent relating specifically to the earlier date; and (e) After giving effect to this Amendment, no Default or Event of Default shall have occurred and be continuing. 9. Conditions to Effectiveness. This Amendment shall be effective as of the Fifth Amendment Date subject to satisfaction of each of the following conditions precedent: (a) All of the representations and warranties of the Loan Parties under Section 8 hereof, which are made as of the date hereof, being true and correct in all material respects; and (b) Receipt by the Administrative Agent of counterparts hereof duly executed by the Required Lenders and each of the Loan Parties. 10. Counterparts. This Amendment may be executed in any number of separate counterparts and by the different parties hereto on separate counterparts, each of which shall be deemed an original and all of which, taken together, shall be deemed to constitute one and the same instrument. In proving this Amendment in any judicial proceedings, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom such enforcement is sought. Any signatures delivered by a party by facsimile transmission shall be deemed an original signature hereto. 11. Loan Documents. Each reference in the Credit Agreement or any other Loan Document to the term "Credit Agreement" shall hereafter mean and refer to the Credit Agreement as amended hereby and as the same may hereafter be amended. This Amendment shall be deemed to be a Loan Document for all purposes. 12. Governing Law. This Amendment shall be construed in accordance with and governed by the internal laws of the State of New York, applicable to agreements made and to be performed in New York. 13. Severability. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof in that jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have executed this Amendment or caused it to be executed under seal by their duly authorized officers, all as of the day and year first above written. BORROWER: iPCS WIRELESS, INC., a Delaware corporation By:/s/ Thomas M. Dougherty ---------------------------------------- Name: Thomas M. Dougherty -------------------------------------- Title: President & CEO ------------------------------------- HOLDINGS: iPCS, INC., a Delaware corporation By:/s/ Thomas M. Dougherty ---------------------------------------- Name: Thomas M. Dougherty -------------------------------------- Title: President & CEO ------------------------------------- EQUIPMENTCO: iPCS EQUIPMENT, INC., a Delaware corporation By: /s/ Thomas M. Dougherty ---------------------------------------- Name: Thomas M. Dougherty -------------------------------------- Title: President & CEO ------------------------------------- ADMINISTRATIVE AGENT AND LENDERS: TORONTO DOMINION (TEXAS), INC., as Administrative Agent and as a Lender By: /s/ Diane Bailey ---------------------------------------- Name: Diane Bailey -------------------------------------- Title: VP ------------------------------------- GE CAPITAL CORPORATION, as a Lender By: /s/ Irena Butarich ---------------------------------------- Name: Irena Butarich -------------------------------------- Title: SVP - Special Assets ------------------------------------- THE BANK OF NOVA SCOTIA, as a Lender By: /s/ P.A. Weissenberger ---------------------------------------- Name: P.A. Weissenberger -------------------------------------- Title: Authorized Signatory ------------------------------------- BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as a Lender By: /s/ Robert Moraver ---------------------------------------- Name: Robert Moraver -------------------------------------- Title: Vice President ------------------------------------- CITY NATIONAL BANK, as a Lender By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- FORTIS CAPITAL CORP., as a Lender By: /s/ Alan E. McLintock ---------------------------------------- Name: Alan E. McLintock -------------------------------------- Title: Managing Director ------------------------------------- By: /s/ Anthony Ciraulo ---------------------------------------- Name: Anthony Ciraulo -------------------------------------- Title: Assistant Vice President ------------------------------------- IBM CREDIT CORPORATION, as a Lender By:/s/ Thomas C. Curcio ---------------------------------------- Name: Thomas C. Curcio -------------------------------------- Title: Manager of Credit ------------------------------------- NATIONAL CITY BANK, as a Lender By: /s/ Chris Kalmbach ---------------------------------------- Name: Chris Kalmbach -------------------------------------- Title: Senior Vice President ------------------------------------- High Income Portfolio, Boston Management & Research as investment advisor By: /s/ Michael Weilheimer ----------------------------------------- Name: Michael Weilheimer --------------------------------------- Title: Vice President -------------------------------------- Boston Income Portfolio, Boston Management & Research as investment advisor By: /s/ Michael Weilheimer ----------------------------------------- Name: Michael Weilheimer --------------------------------------- Title: Vice President -------------------------------------- Diversified Investors High Yield Bond Fund Boston Management & Research as investment advisor By: /s/ Michael Weilheimer ----------------------------------------- Name: Michael Weilheimer --------------------------------------- Title: Vice President -------------------------------------- EX-10.21 10 dex1021.txt LEASE DATED AUGUST 17, 2000 Exhibit 10.21 TENANT LEASE SUMMARY PROPERTY LEASED: 5000 TREMONT AVENUE BUILDING 300, SUITES 302 and 303 Consisting of 8,652 Square Feet TENANT: iPCS Wireless, Inc. 11 Hawkeye Lane Geneseo, IL 61254 LANDLORD: Investment Lease Corporation (ILC) Mailing Address: 5000 Tremont Avenue, Suite 400B ILC Davenport, IA 52807 5000 Tremont Avenue, Suite 400B Davenport, Iowa 52807 Period From October 1, 2000 To September 30, 2015 Option From ________ To ______________ 1st Year's Rent $51,912.00 Common Area Percentage 50% of Building 300 Tenant Lease: This Lease consists of page 1 to page 12 all inclusive. INDEX (continued) -ii- INDEX Page -i- 1. PREMISES AND TERM.....................................................3 2. RENTAL................................................................3 3. RENEWAL OPTION........................................................4 4. POSSESSION............................................................4 5. USE OF PREMISES.......................................................4 6. QUIET ENJOYMENT.......................................................4 7. UTILITIES AND OTHER SERVICES..........................................4 8. REPAIR AND MAINTENANCE................................................4 9. TENANT'S PROPORTIONATE SHARE OF COSTS OF COMMON AREAS AND FACILITIES..5 10. COMMON AREA EXPENSE...................................................5 11. USE OF PARKING Facilities.............................................5 12. CHARGES FOR UTILITIES.................................................5 13. CONDITIONS OF PREMISES................................................5 14. RESTRICTIONS ON ASSIGNMENT, SUBLETTING AND USE........................5 15. COMPLIANCE WITH LAW...................................................6 16. HAZARDOUS MATERIALS...................................................6 17. TERMINATION PRIVILEGES UPON DAMAGE BY FIRE OR OTHER CASUALTY..........6 18. PERSONAL PROPERTY AT RISK OF TENANT...................................6 19. INSURANCE PROVIDED BY TENANT..........................................7 20. DENIAL OF SUBROGATION RIGHTS..........................................7 21. CONDEMNATION OF PREMISES..............................................7 22. PAYMENT OF PORTION OF INCREASE IN TAXES AND INSURANCE.................7 23. RIGHT OF LANDLORD TO ENTER FOR REPAIRS AND OTHER PURPOSES.............8 24A. DEFAULT...............................................................8 24B. INSOLVENCY............................................................8 25. ADDITIONAL PAYMENTS...................................................8 26. RULES AND REGULATIONS.................................................8 27. SIGNS AND OTHER IDENTIFICATION........................................9 28. SUBORDINATION OF LEASE TO MORTGAGES...................................9 29. SURRENDER INVALID UNLESS WRITTEN......................................9 30. HOLDING OVER..........................................................9 31. WAIVER OF LANDLORD'S LIEN............................................10 32. WAIVER...............................................................11 33. NOTICES..............................................................11 34. NO OTHER AGREEMENTS..................................................11 35. INDEMNIFICATION......................................................11 36. APPICABLE LAW........................................................12 37. EXPLANATORY PROVISIONS...............................................12 LEASE BUSINESS PROPERTY THIS LEASE AGREEMENT, executed in duplicate, made and entered into this 17 day of August, 2000, by and between Investment Lease Corporation ("ILC" hereinafter called "Landlord"), whose address for the purpose of this lease is 5000 Tremont Avenue, Suite 400B, Davenport, IA 52807 and iPCS Wireless, Inc., a Delaware corporation (hereinafter called "Tenant"), whose address for the purpose of this lease is 11 Hawkeye Lane, Geneseo, IL 61254. WITNESSETH THAT: 1. PREMISES AND TERM. Landlord, in consideration of the rents herein reserved and of the agreements and conditions herein contained, on the part of Tenant to be kept and performed, leases unto Tenant and Tenant hereby rents and leases from Landlord, according to the terms and provisions herein, the following described real estate, situated in Scott County, Iowa, to wit: 5000 BUSINESS PARK (referred to as "Business Park"), 5000 Tremont, Davenport, Iowa, Suites 302 and 303, containing approximately 8,652 square feet and representing 50% of Building 300 in the Business Park, with the improvements thereon and all rights, easements and appurtenances thereto belonging, if and as may be attached hereto, for a term of (15) fifteen years, commencing at midnight on the first day of the lease term, which shall be on the 1 day of October, 2000, and ending at midnight on the last day of the lease term, which shall be on the 30 day of September, 2015, upon the condition that Tenant pays rent therefore, and otherwise performs as in this lease provided. This lease will automatically terminate at the end of its natural term, unless renewal option is exercised. The use and occupation by Tenant of the leased premises shall include the use in common with others entitled thereto of such common additional areas, including without limitation, the parking facilities, as may be designated from time to time by Landlord, subject however to the terms and conditions of this agreement and to reasonable rules and regulations for the use thereof as prescribed from time to time by Landlord. Said common additional areas are hereinafter referred to as the "Common Areas". 2. RENTAL. Tenant agrees to pay to Landlord as rental for said term as follows: TO: ILC 5000 Tremont Avenue, Suite 400 Davenport, IA 52807 BASE RENTAL RATE Monthly installment of rent is due in advance of the first day of each month. (Plus Common Area maintenance cost, taxes, and insurance on the property, which are not included in below calculations.) YEARS ANNUAL RENT MONTHLY RENT PER SQ FT 1-2-3 $51,912.00 $4,326.00 $6.00 4-5-6 $56,670.60 $4,722.55 $6.55 7-8-9 $62,294.40 $5,191.20 $7.20 10-11-12 $67,918.20 $5,659.85 $7.85 13-14-15 $73,974.60 $6,164.55 $8.55 In addition to the above monthly rental, Tenant will also pay an amount equal to 50% per month of the Common Area expense charges set out in paragraph 10, paragraph 11, paragraph 13, and paragraph 22 below. Charges projected for year 2000 are $1,333.85 per month, $l.85 per square foot, in addition to the base rent. Rent adjustment in these costs are made annually with the anniversary date being the first of January. All sums shall be paid at the address of Landlord, as above designated, or at such other place in Iowa, or elsewhere, as Landlord may, from time to time, designate in writing. Delinquent payments shall draw interest at one and one half percent (1.5%) per month from the delinquent due date until paid. Rent shall be considered delinquent five (5) business days after the due date and shall draw interest at that time. 3. RENEWAL OPTION. Notice to Landlord of intent to exercise said option to renew shall be given by written notice 120 days prior to expiration of original term. All other terms and provisions of the lease, particularly including the payment of a proportional share of expenses, will apply during said option period. BASE RENT RATE FOR OPTION PERIOD, SHALL BE AGREED TO AT TIME OF RENEWAL. DATE ANNUAL RENT MONTHLY RENT PER SQ FT - ------------- $------------ $----------- $------------- 4. POSSESSION. Tenant shall be entitled to possession on the first day of the term of this lease and shall yield possession to Landlord at the time and date of the close of this lease term, except as herein otherwise expressly provided. Should Landlord be unable to give possession on said date, Tenant's only damages shall be a rebating of the pro rata rental. 5. USE OF PREMISES. Tenant covenants and agrees during the term of this lease to use and to occupy the leased premises only for telecommunications switch center, general office use, warehouse storage and distribution. 6. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that so long as Tenant pays the Rent and all other obligations such as Common Area maintenance, taxes, and insurance and observes and performs all the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises subject, nevertheless, to the terms and conditions of this Lease, and Tenant's possession will not be disturbed by anyone claiming by, through or under Landlord. 7. UTILITIES AND OTHER SERVICES. The Landlord shall not be required to furnish to the Tenant any utilities or services of any kind, except as specifically set forth in this lease. 8. REPAIR AND MAINTENANCE. The Tenant shall, at his sole expense, keep the interior of the leased premises, including all windows, doors, and glass, in as good order and repair as it was upon the commencement of this lease, reasonable wear and tear expected. Tenant shall also maintain the premises in a clean and orderly condition, and shall not cause the exterior of the leased premises or any part of the real property upon which the leased premises is situated to become littered, disorderly, or unsightly in any manner. The Landlord shall keep the structural supports, external walls and roof of the building and leased premises in good order and repair and shall be responsible for the operation and maintenance of all Common Areas and facilities as hereinafter provided. Landlord shall further be responsible for all major repair or replacement of plumbing, air conditioning, compressor and heat exchanger facilities. Tenant shall be responsible for the first $300 of expense for each incident of repair or replacement, and Landlord shall be responsible for and shall pay any amount in excess of $300 per incident. The Tenant shall also maintain in good order all ordinary and necessary repairs to all equipment installed and used for the purpose of heating and air conditioning of the leased premises wherever such equipment may be located. On default of Tenant in making such repairs or maintaining a clean and orderly condition, Landlord may, but shall not be required to, make such repairs or clean up or shall take other necessary action for Tenant's account, and the expense thereof shall be payable by Tenant to Landlord within ten business days of written notice thereof. Any damage caused or repairs necessitated with respect to the leased premises or the building and real property of which the leased premises are a part, by excessive wear and tear resulting from the operation of the business of Tenant, or from willful or negligent acts on the part of Tenant, its employees, agents, invitees or contractors, shall be the responsibility of Tenant and Tenant shall reimburse Landlord for any expense in connection therewith. 9. TENANT'S PROPORTIONATE SHARE OF COSTS OF COMMON AREAS AND FACILITIES. In addition to the rental payment pursuant to paragraph 2 hereof, the Tenant shall pay to the Landlord upon demand a proportionate share of the cost of operating and maintaining all Common Areas and facilities, including without limitation all parking areas, access roads, sidewalks, landscaped space and other space, in common or available for use in common by the Tenant or his customers, employees, agents or other invitees. Operating and maintaining all areas and facilities shall include, without limitation, furnishing exterior and parking area lighting, parking lot repairs, cleaning, snow removal, line painting, care of grass, shrubs and plants, payment of water and sewerage charges, maintenance, repair and replacement of utility systems, exterior painting, pest control, general roof repair, billing cost, and general maintenance of the Business Park and of all areas and facilities provided by the Landlord for the common use of the occupants of the Business Park. The term "proportionate share" as used in this paragraph or elsewhere in this lease shall mean such proportionate part of the total costs to which said share applies as the square feet of floor area occupied by the Tenant bears to the total square feet of rentable floor area in the Business Park. 10. COMMON AREA EXPENSE. (a) Tenant agrees that the monthly Common Area expense will include taxes, insurance, and all expenses relating to said center and the Common Areas contained therein and parking lots adjacent thereto as defined in Paragraph 22. Tenant understands that the Common Area expenses will be adjusted at the end of the year based on actual expenses. If Common Area expenses are not paid, they will bear interest at one and one half percent (1.5%) per month. 11. USE OF PARKING Facilities. Tenant and its employees and customers shall have the non-exclusive right, in common with the Landlord and other tenants of said Business Park, to park automobiles in the parking area provided by the Landlord, subject to such reasonable rules and regulations as the Landlord may from time to time impose, including the designation of specific areas in which automobiles of the Tenant and its employees must be parked. Upon written notice from the Landlord, the Tenant will furnish the Landlord with the license numbers assigned to its automobiles and the automobiles of its employees. 12. CHARGES FOR UTILITIES. Tenant shall pay all charges for gas, electricity, light, heat, power and telephone used or supplied upon or in connection with the leased premises and shall indemnify the Landlord against any liability on account thereof. It is the intention that Tenant pay for all utilities for the leased premises of any kind and, accordingly, Tenant shall pay its proportionate share of any utility charge relating to or used in or at the leased premises, but which is not separately metered thereto. 13. CONDITIONS OF PREMISES. The Tenant has examined the leased premises and is satisfied with the condition thereof, including all equipment and appurtenances, and its taking possession thereof shall be conclusive evidence of its receipt thereof in good and satisfactory order and repair. The occupancy by Tenant of the leased premises shall constitute an acknowledgment by Tenant that the leased premises are in the condition called for by this lease. 14. RESTRICTIONS ON ASSIGNMENT, SUBLETTING AND USE. (a) Assignment and Subletting. Tenant agrees not to assign or in any manner transfer this lease or any estate or interest therein without the previous written consent of Landlord which consent should not be unreasonably withheld or delayed; and, not to sublet the leased premises or any part or parts thereof or allow anyone to come in with, through or under him without like consent. Consent by the Landlord to one assignment of this lease or to one subletting or to any other occupancy of said leased premises shall not operate to exhaust the Landlord's right hereunder. Notwithstanding anything contained herein to the contrary, Tenant may, with notice to but without the consent of Landlord, assign this lease to any entity which is the surviving entity of a merger or reorganization involving Tenant or to any entity which acquires all or substantially all of Tenant's assets, so long as such entity's creditworthiness is satisfactory to Landlord. (b) Use. Tenant shall not use or permit the leased premises to be used for any purpose other than as above stated, nor keep or store in or about the premises anything which will increase the rate of insurance on the leased premises, nor make any alterations, additions or improvements, without the written consent of the Landlord. Tenant will not invalidate any policies of insurance now or hereafter in force with respect to the leased premises and will pay all extra insurance premiums if any, required solely or directly on account of extra risk caused by the Tenant's use of the leased premises. Any construction, remodeling, additions, improvements or fixtures, except movable office furniture and trade fixtures, shall be made or installed by the Tenant at Tenant's sole expense, upon the leased premises only after the Landlord has given written consent thereto, shall be the property of the Landlord, and shall remain and be surrendered in good condition with the leased premises as a part thereof at the termination of this lease, by lapse of time or otherwise. If Landlord is required by any city, county, state, or federal codes or laws, in its sole discretion to make alterations or improvements to the premises as a result of the nature of Tenant's business, whether to comply with the provisions of paragraph 16 or otherwise. Tenant shall bear the cost thereof. Tenant agrees to pay promptly for any work done or material furnished to or at the request of Tenant in or about the leased premises and not to suffer or permit any lien to attach to the leased premises and Tenant further agrees to cause any such lien or any claims therefore to be released promptly; provided, however, that in the event Tenant contests any such claim, Tenant agrees to indemnify and secure Landlord to Landlord's satisfaction. Notice is hereby given that no mechanic's or material men's or other liens sought to be taken or vested on the leased premises or the building of which the leased premises is a part shall in any manner affect the right, title or interest of the Landlord therein, and Tenant shall have no authority from Landlord to permit or create such lien. No items of any kind shall be stored or left for any period of time outside the confines of the leased premises without the prior written consent of Landlord. Tenant shall maintain a constant temperature of no less than 38 degrees Fahrenheit in the leased premises. Landlord has the option to have Tenant restore the leased premises to same manner before Lease, except for normal wear and tear including any improvements or alterations made by Tenant. 15. COMPLIANCE WITH LAW. The Tenant shall accomplish any construction or remodeling with respect to the leased premises (including any plans relating hereto), and shall keep the leased premises and operate his business therein, in a manner which shall be in compliance with all applicable laws, ordinances, rules and regulations of the city, county, state and federal government and any department thereof, will not permit the leased premises to be used for any unlawful purpose, and will protect the Landlord and save Landlord and the leased premises harmless from any and all fines and penalties that may result from or be due to any infractions of or noncompliance with such laws, ordinances, rules and regulations by Tenant. 16. HAZARDOUS MATERIALS. Tenant shall indemnify Landlord and hold Landlord harmless from and against any and all losses, costs or damages, however characterized, including reasonable attorneys fees, incurred by or asserted against Landlord as a result of the release or disposal of any asbestos, pollutant, toxic or hazardous waste or substance, or any other material the release or disposal of which is regulated by any law, regulation, ordinance or code (collectively, "Hazardous Material") in, on or about the Real Property, or any part thereof, by Tenant during the Lease Term, or any extension or renewal thereof. 17. TERMINATION PRIVILEGES UPON DAMAGE BY FIRE OR OTHER CASUALTY. In case the leased premises, or any part thereof, shall at any time be destroyed by fire or other casualty, without the fault of the Tenant, so that the same shall be unfit for use or occupancy, then the rent hereby reserved, or a fair and just proportion thereof, according to the nature and extent of the damage sustained in loss of use or occupancy, shall be suspended, cease to be payable and so continue until the leased premises shall be rebuilt or made fit for use and occupancy. If such damage to the premises or to the building in which the leased premises are situated is to the extent of fifty percent (50%) or more, or, if in the judgment of Landlord the leased premises have been damaged to the extent that they can no longer be utilized as an integrated whole, then this lease may be terminated at the election of the Landlord, notice of which election, if exercised, shall be given in writing within forty-five (45) days from the date of casualty. In the event that the building containing the leased premises is totally destroyed or work to put the leased premises in tenantable condition is not commenced within forty-five (45) days from the time of such damage and continued thereafter, with reasonable diligence, all things being considered, then this lease may be terminated at the election of the Tenant, notice of which election, if exercised, must be given in writing within sixty (60) days from the date of casualty or at any time thereafter during the period of repair if the work to put the leased premises in tenantable condition is not being pursued with reasonable diligence or completed within the time period specified above. 18. PERSONAL PROPERTY AT RISK OF TENANT. All personal property in the premises shall be at the risk of Tenant only. The Landlord shall not be or become liable for any damage to such personal property, to the leased premises or to Tenant or any other persons or property as a result of water leakage, sewerage, electric failure, gas or odors or for any damage whatsoever done or occasioned by or from any plumbing, gas, water or other pipes or any fixtures, equipment, wiring or appurtenances whatsoever, for any damage caused by water, snow or ice being or coming upon the leased premises, or for any damage arising from any act of neglect of other tenants, occupants or employees of the building in which the leased premises are situated or arising by reason of the use of, or any defect in, said building or any of the fixtures, equipment, wiring or appurtenances therein, or by the act or neglect of any other person or caused in any other manner whatsoever. 19. INSURANCE PROVIDED BY TENANT. During the term of this lease, the Tenant shall, at his own expense and with a company satisfactory to Landlord, provide and maintain in full force and effect an insurance policy or policies protecting the Landlord and Tenant and their officers and employees against any loss, liability or expense from personal injury, death, property damage or otherwise arising or occurring upon or in connection with the leased premises or by reason of the Tenant's operations upon or occupancy of the premises, whether the same occurs or the cause arises on or off the leased premises. The Landlord shall be an additional insured under such policy or policies. Such insurance shall be written by responsible insurance companies satisfactory to the Landlord and shall be in an amount not less than $500,000 for injuries to any one person, not less than $1,000,000 for injuries to more than one person arising out of any one accident or occurrence, and not less than $100,000 for damage to property. Certificates of insurance showing compliance with the foregoing requirements shall be furnished by the Tenant to the Landlord or his designated agent. Such certificates shall state that policies will not be canceled nor altered with at least ten (10) days prior written notice to the Landlord. 20. DENIAL OF SUBROGATION RIGHTS. Neither the Landlord nor the Tenant shall be liable to the other for any business interruption or any loss or damage to property or injury to or death of persons occurring on the leased premises or the adjoining property, or in any manner growing out of or connected with the Tenant's use and occupancy of the leased premises, or the condition thereof, or of the adjoining property, whether or not caused by the negligence or other fault of the Landlord or the Tenant or of their respective agents, employees, subtenants licenses or assignees. This release shall apply only to the extent that such business interruption, loss or damage to property or injury to of death of persons is covered by insurance, regardless of whether such insurance is payable to or protects Landlord or Tenant or both. Nothing in this paragraph shall be construed to impose any other or greater liability upon either the Landlord or Tenant than would have existed in the absence of this paragraph. 21. CONDEMNATION OF PREMISES. In the event that the whole of the leased premises shall be condemned or taken in any manner for any public or any quasi public use, this lease shall terminate as of the date of vesting of title. In the event that either a portion of the leased premises or the building of which the leased premises are a part is condemned or taken by eminent domain proceedings so as to render the leased premises substantially unusable, then in such event, Tenant shall have the right to cancel and terminate this agreement as of the date of such taking upon giving to Landlord notice in writing of such election within thirty (30) days after the receipt by Tenant from Landlord of written notice of such appropriation or taking. In which case, this lease shall terminate and rent shall abate as of the date of such termination. In the event that only a part of the leased premises shall be so condemned or taken and such taking shall not render the leased premises substantially unusable for Tenant business, as reasonably determined by Tenant, then, effective as of the date of vesting of title, the rent hereunder for such part shall be equitably abated and this lease shall continue as to such part not so taken. In the event that only a part of the leased premises shall be so condemned or taken, then if substantial structural alteration or reconstruction of the building shall, in the reasonable opinion of Landlord be necessary or appropriate as a result of such condemnation or taking (whether or not the demised leased premises be affected), Landlord may, at its option, terminate this lease and the term herein granted as of the date of such vesting of title by notifying Tenant in writing within sixty (60) days following the vesting of title. Any termination hereunder shall be without prejudice to the rights of either the Landlord or the Tenant to recover compensation from such public authority for any loss or damages caused by such taking. Neither Landlord nor Tenant shall have any right in or to any award made to the other by such public authority. 22. PAYMENT OF PORTION OF INCREASE IN TAXES AND INSURANCE. During the term of this lease and any extension of renewal thereof, Tenant shall pay monthly, as an additional obligation hereunder, this proportionate share (as hereinbefore defined) of any of the regular real estate taxes becoming due and payable during each year with respect to the land and building of which the leased premises form a part. A tax bill shall be sufficient evidence of the amount of any such taxes. If this lease or any extension or renewal thereof shall terminate on a date other than the last day of the calendar year, then such tax payment shall be computed as above provided on a prorata basis for that portion of the calendar year which shall have elapsed up to and including such termination date. Landlord shall maintain at all times during the term of this lease, fire and extended coverage insurance on the building and improvements of which the premises are a part in an amount adequate to cover the cost of replacement in the event of loss. Tenant shall pay his proportionate share. Such additional payment shall be made monthly. A copy of an invoice from the insurance company shall be sufficient evidence of the amount of any such increase. If this Lease or any extension of renewal thereof shall terminate on a date other than the last day of the calendar year, then such insurance payment shall be computed as above provided on a prorata basis for the portion of the calendar year which shall have elapsed up to and including such termination date. 23. RIGHT OF LANDLORD TO ENTER FOR REPAIRS AND OTHER PURPOSES. Landlord, its agents or representatives, shall have the right to enter the leased premises at all reasonable times, upon reasonable prior notice, to examine or exhibit the same, or to make such repairs, additions, or alterations Landlord may see fit to make for the safety, improvement or preservation thereof, or of the building of which the leased premises are a part or for any other reasonable purpose. The Landlord may display "for rent" signs on or about the premises and in the windows thereof for ninety (90) days prior to the termination of this lease. 24.A DEFAULT. This lease is made upon the express condition that if Tenant fails to pay the rental reserved hereunder, or any part thereof, after the same shall become due, and such failure shall continue for a period of fifteen (15) days after written notice thereof from Landlord to Tenant, or if Tenant fails or neglects to perform, meet or observe any of Tenant's other obligations hereunder and such failure or neglect shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant, then Landlord, at any time thereafter, by written notice to Tenant, may lawfully declare the termination hereof and re-enter the leased premises, and by due process of law, expel, remove and put our Tenant or any person or persons occupying the leased premises without prejudice to any remedies which might otherwise be used for the collection of arrears for rent or for any other preceding breach of any covenant or condition by Tenant. Notwithstanding any other provisions of this lease, where the curing of an alleged default requires more than payment of money, and the work of curing said default cannot reasonably be accomplished within the time otherwise permitted herein, and where Tenant has commenced upon the work of curing said default and is diligently pursuing same, then Tenant shall be entitled to reasonable time extensions to permit the completion of the work of during said default, as a condition precedent to any reentry of termination, and any defect so cured shall not thereafter be grounds for default. The subsequent acceptance of rent hereunder by Landlord shall not be deemed a waiver of any preceding breach of any obligation hereunder by Tenant other than the failure to pay the particular rental so accepted, until said breach has been cured by Tenant and the waiver of any breach of any covenant or condition by Landlord shall not constitute a waiver of any other breach regardless of knowledge thereof. The payment of rent by Tenant at a time when Tenant is allowed to offset or withhold rental payments under the terms of this lease shall not constitute a waiver of such right to offset or withhold rent at any time. 24.B INSOLVENCY. If any proceedings in bankruptcy or insolvency be filed against Tenant or if any writ of attachment or writ of execution be levied upon the interest herein of Tenant, and such proceedings or levy shall not be released or dismissed within thirty (30) days thereafter, or if any sale of the leasehold interest hereby created or any part thereof should be made under any execution or other judicial process, or if Tenant shall make any assignment for the benefit of creditors or shall voluntarily institute bankruptcy or insolvency proceedings, Landlord, at Landlord's sole election, may reenter and take possession of said premises and remove all persons therefrom and may, at Landlord's option, terminate this Lease, 25. ADDITIONAL PAYMENTS. All taxes, insurance premiums, costs and expenses, or common area cost which the Tenant assumes or agrees to pay hereunder shall constitute contractual obligations of Tenant hereunder, and in the event of nonpayment the Landlord shall have all the rights and remedies herein provided for in the case of nonpayment of rent or breach of condition, and may consolidate such obligations or pursue remedies individually. 26. RULES AND REGULATIONS. The Tenant shall comply with all such reasonable rules and regulations as do not conflict with the provisions of this lease and as Landlord may establish uniformly for the Business Park from time to time provided that Tenant is notified in writing thereof. 27. SIGNS AND OTHER IDENTIFICATION. Tenant shall not place or erect any signs or identifying marks, insignia or advertising on, or about the leased premises or the Business Park except in conformity with rules and regulations established in that regard under Paragraph 26, or in the absence of such rules and regulations, in conformity with the sign or identification currently being provided by Landlord for other tenants in the Business Park. Tenant shall provide and install at its expense a sign on said property in conformity with the signs currently being provided for the other tenants in the Business Park within thirty (30) days after the commencement of the lease term. In the event Tenant shall place or cause to be placed any sign, identifying marks, trade mark, insignia or advertising on or about the leased premises or the building or real property of which the leased premises are a part, and if the same do not comply with the terms and provisions of this Paragraph, Landlord shall have the right and power to remove the same at Tenant's expense. Any damage caused to the leased premises or the building as a result of the installation of such non-conforming item, or the subsequent removal thereof by Landlord, shall be the responsibility and obligation of Tenant and Tenant shall immediately reimburse Landlord in an amount sufficient to repair such damage. In the event Tenant shall desire to use any sign or identification other than the sign or identification currently being provided by the Landlord or not in conformity with said rules and regulations, Tenant shall first receive written consent from Landlord before placing or erecting any signs or other identification or advertising and the same shall be purchased from and installed by Landlord at Tenant's expense. Tenant shall pay, for signage at Landlord's cost. 28. SUBORDINATION OF LEASE TO MORTGAGES. This lease shall be subject and subordinate at all times to the lien of existing mortgages and of mortgages which hereafter may be made a lien on the premises. Although no instrument or act on the part of Tenant shall be necessary to effectuate such subordination, Tenant will nevertheless execute and deliver such further instruments subordinating this lease to the lien of any such mortgages as may be desired by the mortgagee. The Tenant hereby irrevocably appoints the Landlord his attorney fact to execute and deliver any such instrument for the Tenant. Provided, however, and notwithstanding the foregoing provisions hereof, upon foreclosure of the mortgage with the mortgagee succeeding to the rights of the Landlord, Tenant shall, at the option of said mortgagee, attorn to the mortgagee as follows: (a) Tenant shall be bound to the mortgagee under all of the terms of the lease for the balance of the term hereof remaining with the same force and effect as if the mortgagee were the Landlord under the lease, and Tenant hereby attorns to the mortgagee as its landlord, such attornment to be effective and self operative, without the execution of further instrument on the part of either of the parties hereto, and immediately upon the mortgagee succeeding to the interest of Landlord under this lease and having given written notice of the same to Tenant. The respective rights and obligations of Tenant and of the mortgagee upon such attornment shall to the extent of the remaining term of the lease be the same as now set forth herein. (b) The mortgagee shall be bound to the Tenant under all of the terms of this lease, and the Tenant shall, from and after such event, have the same remedies against the mortgagee for the breach of an agreement contained in this lease that the Tenant might have had under the lease against the Landlord hereunder. In no event, however, shall the mortgagee be liable for any act or omission of any prior Landlord, be subject to any offsets or defense which Tenant might have against any prior Landlord, or be bound by any rent or additional rent which the Tenant might have paid to any prior Landlord for more than one month in advance. 29. SURRENDER INVALID UNLESS WRITTEN. No surrender of the leased premises for the remainder of the term hereunder shall be binding upon the Landlord unless accepted by the Landlord in writing. Without limiting the generality of the foregoing, it is agreed that the receipt or acceptance of the keys to the leased premises by the Landlord shall not constitute an acceptance of a surrender of the leased premises. 30. HOLDING OVER. If the Tenant shall remain in possession of the leased premises after the expiration of either the original term of this lease or any extended term, such possession shall be as a month month tenant only. During such month to month tenancy, unless otherwise agreed in writing by Landlord, rent shall be payable at one and one-half times the rate as that in effect during the last month of the preceding term, and the provisions of this lease shall otherwise be applicable. 31. WAIVER OF LANDLORD'S LIEN. (a) Landlord waives any lien rights it may have concerning the Tenant's property and Tenant has the right to remove the same by giving Landlord ten (10) days' written notice of its intent to remove any part of its property so Landlord may properly coordinate the removal of said property. (b) Landlord acknowledges that Tenant has entered into a financing arrangement including promissory notes and financial and security agreements for the financing of the property (the "Collateral") with a third party financing entity (and may in the future enter into additional financing arrangements with other financing entities). In connection therewith, Landlord (i) consents to the installation of the Collateral; (ii) disclaims and/or waives any interest or lien rights in the Collateral, as fixtures or otherwise; and (iii) agrees that the Collateral shall be exempt from execution, foreclosure, seizure, sale, levy, attachment, or garnishment for any rent due or to become due to satisfy any judgment in favor of Landlord against Tenant and that such Collateral may be removed at any time without recourse to legal proceedings. (c) Landlord acknowledges and agrees that, notwithstanding anything to the contrary contained in this Lease: (1) Tenant shall be permitted to pledge, mortgage, hypothecate or otherwise grant a lien, security interest or collateral assignment (whether pursuant to a security agreement, deed or trust, collateral assignment, mortgage or other instrument) (a "Lien") in and to all right, title and interest of Tenant in and to this lease, including, without limitation, the right to occupy the leased premises pursuant to the terms hereof, to a financial institution (individually and/or as administrative agent for itself and other lenders) and its successors and assigns or any refinancing or replacement lender (hereinafter collectively called "Lenders") in connection with certain debt financing to Tenant or to any of its affiliates as security for such debt financing. (2) Lender shall be permitted to foreclose upon any such Lien (or accept an assignment in lieu of foreclosure) and transfer and assign all right, title and interest of Tenant in and to this Lease pursuant to or subsequent to such foreclosure and, in the event of any such foreclosure, transfer or assignment, and provided Lender or its successor-in-interest expressly assumes in writing and agrees to perform each of Tenant's covenants, duties and obligations which will arise and accrue from and after the date of such foreclosure, transfer or assignment, Landlord agrees that it will recognize Lender or its successor-in-interest as the successor-in-interest to Tenant under this Lease as if Lender or its successor-in-interest (as applicable) where Tenant under this Lease. (3) Within ten (10) business days after written request by Tenant, Landlord will execute and deliver in favor of Lender an estoppel certificate or other instrument in form reasonably acceptable to Landlord and such Lender pursuant to which Landlord will (i) confirm the existence, validity and binding effect of this Lease, (ii) confirm that Landlord is the owner and holder of this Lease, (iii) confirm that, to Landlord's current, actual knowledge, no monetary default and no other default has occurred under the terms of this Lease (or specifying any defaults which have occurred, which are continuing and of which Landlord is currently, actually aware), (iv) agree to provide Lender a copy of any notice of default delivered to Tenant hereunder, and (v) agree that, prior to any termination of this Lease as a result of a default of Tenant hereunder, Landlord will provide written notice of such default to Lender at its principal office as the same may be provided by such Lenders, or such other address as the Lenders may provide, and afford Lender a period not less than 30 days within which to cure such default. (4) Landlord hereby agrees that all property of Tenant now or hereafter located on the leased premises shall be and remain personal property of Tenant notwithstanding the manner in which such property shall be attached or affixed to the leased premises. Landlord hereby further agrees that, notwithstanding the order of perfection or priority of any security interest or lien under applicable law, any security interest or lien for rent or similar charges or other indebtedness, liabilities or obligations owing to Landlord under or in connection with the lease, whether arising by operation of law or otherwise, whether now existing or hereafter arising, and each and every right which Landlord now has or hereafter may have, either to levy or distrain upon any property of Tenant or any interest therein ("Lender's Collateral") or to claim or assert title to Lender's Collateral, or make any other claim against Lender's Collateral, whether under the lease or the laws of the state in which the lease premises are located or under any deed of trust, mortgage or other lien document now in effect whether by reason of a default under the lease or otherwise, expressly is hereby made and shall be subject and subordinate in every respect to any security interest or lien or other right, title or interest of Lender in Lender's Collateral, no matter when acquired, and shall further be subject and subordinated to all of the terms, provisions and conditions of any loan or security document in favor of Lender. Lender and its agents and legal representatives, without any liability or accountability whatsoever to Landlord (except for damages, if any, to the leased premises caused thereby and the obligation to pay rental, both as provided hereinbelow), (a) may remove any or all of Lender's Collateral located at the leased premises from the leased premises (i) whenever Lender, in its sole discretion, believes such removal is necessary to protect Lender's interest in Lender's Collateral or (ii) whenever Lender shall seek to sell or foreclose upon Lender's Collateral; and (b) shall have access to the leased premises and Lender's Collateral at all times. Landlord grants to Lender a license to enter onto the leased premises and consents and agrees that Lender and/or its representatives or agents may at any time enter onto the leased premises to inspect Lender's Collateral, to take possession of Lender's Collateral and to remove any or all of Lender's Collateral from the leased premises or exhibit for sale and/or conduct one or more sales of Lender's Collateral on the leased premises, and Landlord will not in any manner hinder, interfere with or prevent any of the foregoing. Lender agrees to repair any damage caused by Lender or its agents or representatives as a direct result of any such removal of Lender's Collateral from the leased premises by Lender or its agents or representatives. During any possession and occupancy of the leased premises by Lender, Lender's obligation to Landlord shall include only the obligation to pay the rental that accrues during such period of possession and occupancy if and to the extent that Tenant has not paid such rental. Lender shall have no obligation to cure any defaults of Tenant under the lease. If at any time, from time to time, Landlord ever comes into possession or control of any proceeds of any of Lender's Collateral, such proceeds shall be held by Landlord in trust for the benefit of Lender, to the extent of its interest therein, and the same shall forthwith be paid and delivered to Lender. (5) All terms and provisions of clauses (1), (2), (3), and (4) preceding shall enure to the benefit of Lender. Landlord shall, upon request by Tenant, deliver to Lender a subordination agreement executed by Landlord consistent with clause (4) and otherwise in a form reasonably acceptable to Lender pursuant to which Landlord subordinates any security interest or lien held by Landlord in any personal property of Tenant located on the leased premises to any security interest or lien then held by Lender. (6) In the event any other provision of this lease shall be in conflict with the provisions of this Section 31, the provisions of this Section shall control. 32. WAIVER. One or more waivers of any provision of this lease by Landlord shall not be construed as a waiver of a subsequent breach of the same provision, and the Landlord's consent or approval to or of any act by the Tenant requiring such consent or approval shall not be deemed to waive or render unnecessary the Landlord's consent or approval to or of any subsequent similar act by the Tenant. 33. NOTICES. Any and all notices or demands required or permitted to be given hereunder shall be deemed to be properly served if sent by registered or certified mail, postage prepaid, addressed to the Landlord at ILC at 5000 Tremont Avenue, Suite 400B, Davenport, LA 52807, or at such other address or addresses as either party may hereafter designate in writing to the other. Any notice or demand so mailed shall be effective for all purposes at the time of deposit thereof in the United States mail. 34. NO OTHER AGREEMENTS. This lease contains the entire understanding and agreement of the parties, supersedes all prior understandings and agreements and cannot be revised, adjusted or modified unless in writing signed by the party against whom the same is to be enforced. 35. INDEMNIFICATION. Except for claims arising out of acts caused by the affirmative negligence of Landlord or its representatives, Tenant shall indemnify and defend Landlord and the leased premises, at Tenant's expense, against all claims, expenses and liabilities, including but not limited to reasonable attorney's fees incurred in successfully pursuing any of Landlord's legal remedies hereunder or in defending itself in legal proceedings of any kind, arising from (a) failure of Tenant to perform any covenant required to be performed by Tenant hereunder; (b) any accident, injury or damage which shall happen in or about the leased premises, or resulting from the condition, maintenance or operation by Tenant of the leased premises; (c) failure to comply with any requirements of any governmental authority; (d) any mechanics lien or security agreement filed against the leased premises or any equipment or material therein; and (e) any act or negligence of Tenant, or its assigns, contractors, employees or licensees. 36. APPLICABLE LAW. This Agreement shall be governed by, construed, and interpreted in accordance with the laws of the State of Iowa. 37. EXPLANATORY PROVISIONS. The provisions of this lease shall be binding upon, inure to the benefit of any apply to the respective heirs, executors, administrators, successors and assigns of the parties hereto. The masculine pronoun, whenever used, shall include the feminine and neuter, and the singular shall include the plural. Headings are given to the paragraphs of this lease solely as a convenience to facilitate reference and shall not be deemed material or relevant to the construction of the lease or any provision thereof. IN WITNESS WHEREOF, the parties hereto have executed this lease on the date first above written. LANDLORD: Investment Lease Corporation By: -------------------------------------------------- David L. McAnally (Title) President Date ------------------------------------------------- TENANT: iPCS Wireless, Inc. By: -------------------------------------------------- (Title) ---------------------------------------------- Date ------------------------------------------------- LEASE AMENDMENT iPCS/ILC 5000 Business Park 5000 Tremont Building 300 Suites 302 and 303 THIS LEASE AMENDMENT ("Agreement") is made and entered into this 4th day of October, 2000, (the "Effective Date") by and between Investment Lease Corporation ("ILC" hereinafter called "Landlord") and iPCS Wireless, Inc., a Delaware corporation (hereinafter called "Tenant") (hereinafter collectively referred to as "Parties"), with reference to the following facts: WHEREAS, on August 17, 2000, a certain Lease Agreement (hereinafter referred to as the "Existing Lease") was entered into by and between Landlord and Tenant, covering the suites at 5000 Business Park, 5000 Tremont Building 300, suites 302 & 303 to be occupied by Tenant upon completion of construction of (the "Leased Premises"), the Leased Premises also being fully described in the Existing Lease, reference to which is here made for all purposes; and WHEREAS, the Parties wish to amend the Existing Lease in order to evidence certain additional agreements between Landlord and Tenant: THEREFORE, in consideration of the mutual covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which is acknowledged, Landlord and Tenant hereby agree as follows: 1. The term the Lease is hereby to begin on October 5, 2000, or upon signature of said Amendment. Rent shall be prorated. 2. Landlord hereby grants to Tenant the opportunity to begin construction of suite interiors upon completion of signatures on this Amendment. Tenant shall complete all interior construction as per Tenants specifications with the approval of Landlord. Said approval shall not be unreasonably withheld. 3. Tenant shall also return space to shell/vanilla box (white walls, all equipment removed, concrete floor exposed any carpet and parameter offices left per approval with Landlord) finish upon expiration of Lease Agreement upon moving from suite. Landlord shall approve said finish prior to expiration of Lease Agreement. 4. Contractor for Tenant shall abide by all Rules and Regulations established by the Business Park for the operation of a contractor. 5. Landlord requires of Tenants Contractor a damage/security deposit of $10,000.00, which shall be held in escrow until contractor has completed the construction of Suites 302 & 303 and has removed all of his equipment and left the Business Park in the same condition as the Contractor entered the Business Park and provided nothing has been destroyed. Payment is due prior to Contractors entrance into the facility. 6. Landlord shall provide to Tenant a check in the amount of $31,000.00 upon occupancy and completion of construction as a construction credit for Tenant. This amount represents the Landlord's budgeted contribution for the completion of the space. This Agreement is intended to amend the provisions of the Existing Lease only to the extent expressly set forth above. All of the terms, covenants, provisions, and conditions set forth in the Existing Lease are ratified and confirmed except as expressly modified by this Agreement. This Agreement shall be binding upon and shall inure to the benefit of the respective successors and assigns of Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Lease Amendment as of the Effective Date. LANDLORD: Investment Lease Corporation By: -------------------------------------------------- (Title) ---------------------------------------------- Date ------------------------------------------------- TENANT: iPCS Wireless, Inc. By: -------------------------------------------------- (Title) ---------------------------------------------- Date ------------------------------------------------- LEASE AMENDMENT FOR iLPCS LEASE AGREEMENT DATED AUGUST 17, 2000 LANDLORD: INVESTMENT LEASE CORPORATION (ILC) TENANT: IPCS WIRELESS, INC. EXTENSION OF LEASE AMENDMENT, effective as of the 4th day of June, 2002, between INVESTMENT LEASE CORPORATION (ILC) (hereafter referred to as "LANDLORD"), and ILPCS WIRELESS, INC. (hereinafter referred to as "TENANT"). WHEREAS, the original Lease Agreement dated August 17, 2000, by and between Landlord and Tenant, shall, by this Extension between Landlord and Tenant, continue to be in full force and effect; and, WHEREAS, Landlord and Tenant desire to amend the terms of the original Lease Agreement dated August 17, 2000: NOW, THEREFORE, Landlord and Tenant agree as follows: 1. INCORPORATION OF ORIGINAL LEASE AMENDMENT. Attached hereto, and marked "Exhibit A", is a true copy of the original Lease - ------------------------------------------- Agreement dated August 17, 2000. Said Lease Agreement remains in full force and effect, except for the following amendments and revisions: Tenant agrees to Lease Suite 301 (the "Additional Space") consisting of 4,189 square feet, in addition to the space already committed to in the attached Lease Agreement. The terms and conditions of the Lease Agreement are amended to and the following provisions relating to, and only to, the "Additional Space". Lease Term: The Initial Term for the "Additional Space" shall be 5 years, to begin July 15, 2002 and end on May 31, 2007. Renewals shall run consecutive to the Attached Lease Agreement dated August 17, 2000. LEASE RATE: For the "Additional Space", (4,189 sq. ft.) "RENT", will reflect the rental, due as follows: YEARS ANNUAL RENT MONTHY PER SQ FT. ----------------------------------------------------------------------------- Year 1 $34,559.28 $2,879.94 $8.25 Year 2 $36,653.76 $3,054.48 $8.75 Year 3 $38,748.24 $3,229.02 $9.25 Year 4 $40,842.72 $3,403.56 $9.75 Year 5 $41,890.00 $3,490.84 $10.00 Tenant shall be given the Certificate of Occupancy issued upon the original completion of said Additional Space upon signature of this document. Tenant shall begin Rental Payment on July 1, 2002. CAM (common area maintenance charges) current budget estimate is $2.00 per square foot. The terms and conditions of payment of this additional charge are part of the Original Lease Agreement attached as Exhibit "A". All other terms and conditions of the original Lease Agreement dated August 17, 2000, shall remain as originally stated. OPTION: Tenant shall have an option to extend this lease from 2007-2012 and from 2012-2015 when the master Lease Agreement expires. OPTION RENTS: Tenant shall have the option to renew this lease under the following terms and conditions: YEARS ANNUAL RENT MONTHY PER SQ. FT. ------------------------------------------------------------------------------- 6, 7, 8 $42,937.32 $3,578.11 $10.25 9, 10, 11 $46,791.12 $3,899.26 $11.17 12, 13, 14, 15 $50,268.00 $4,189.00 $12.17 Tenant agrees that is renting the Additional Space on an "as is" basis; providing however that the Landlord represents and warrants that the existing HVAC and plumbing system shall be in good working order for twelve (12) months from the date on which Tenant begins occupancy of the "Additional Space". Provided Tenant does not make any modifications to existing systems during its remodeling process. (other than changes in the distribution, supplies and returns) Landlord acknowledges and agrees that Tenant may make modifications to the premises leased un the Lease Agreement and the Additional Space as described in Exhibit A attached herein. This Amendment is agreed to and accepted as of the date above. As previously provided on the attached Lease Agreement a copy of the corporate resolution shall be included to verify the signature of Tenants representative on the signature line. TENANT: LANDLORD: IPCS INVESTMENT LEASE CORPORATION By: ---------------------------------- By:--------------------------------- It's:--------------------------------- It's:------------------------------- Exhibit 1 Floor Plan Exhibit 2 Construction Plan EX-10.22 11 dex1022.txt LEASE DATED MAY 5, 2000 Exhibit 10.22 LEASE THIS LEASE is made and executed this 5th day of May, 2000, between BARDEN ASSOCIATES I, L.L.C., a Michigan limited liability company, of 4380 Brockton Dr., Grand Rapids, Michigan 49512, as "Landlord", and ILLINOIS PCS LLC, an Illinois limited liability company, of 373 Prarie Knoll Drive, Naperville, Illinois, 60565 ("Tenant"). 1. Leased Premises. Landlord is the owner of the real property located at 4717 Broadmoor, SE, in the City of Kentwood, Kent County, Michigan and more particularly described on attached Exhibit A (the "Property") on which Landlord has constructed a single story building (containing approximately 51,000 square feet of floor area) (the "Building") and other related improvements (the "Improvements"). Landlord LETS AND LEASES to Tenant, and Tenant HIRES AND LEASES from Landlord, that portion of the Building, containing approximately 5,100 square feet of floor area, more particularly described on attached Exhibit B (the "Leased Premises"), at the rents and under the terms and conditions set forth in this Lease. 2. Purpose of Occupancy. Tenant shall occupy and use the Leased Premises for office and warehousing purposes in connection with its telecommunications business and for any related purpose, but for no other purpose without the written consent of Landlord, which consent shall not be unreasonably withheld. The Leased Premises shall not be used for any purpose which would violate any law, ordinance, rule or regulation applicable to the Building, nor in any way to create any nuisance or trespass, nor in any way to violate the terms of a standard form policy of insurance or increase the rate of insurance under any such policy of insurance on the Building or the Leased Premises. 3. Term of Lease; Renewal Term. The term of this Lease shall commence on May 15, 2000, and shall continue for ten (10) years thereafter unless sooner terminated as provided in this Lease. Tenant's taking possession of the Leased Premises shall constitute Tenant's acceptance of the Leased Premises in their "as is" condition, subject only to the other terms and conditions of this Lease. At the request of Landlord, Tenant shall execute and deliver to Landlord the Acceptance of Premises form attached to this Lease as Exhibit D. Provided Tenant is not then in default in the performance of any of its covenants and agreements under this Lease, Tenant may renew this Lease for two (2) additional five (5) year terms, upon the same terms and conditions as provided in this Lease except as to rent which shall be adjusted as provided in Paragraph 4, below. In order to exercise such renewal rights, Tenant shall serve Landlord with written notice of Tenant's election to renew not less than six (6) months prior to the end of the term of this Lease or each renewal term, as the case may be. 4. Rent. Tenant covenants and agrees to pay Landlord as rent for the lease premises during the term of this Lease and any ---- renewal term as follows: (a) Base Rent. As Base Rent, Tenant shall pay an amount equal to Thirty Five Thousand Seven Hundred Sixty and 00/Dollars ($35,760.00) per year, payable in equal monthly installments of Two Thousand Nine Hundred Eighty 00/Dollars ($2,980), subject, however, to adjustment as provided under Paragraph 4(b), below. Base Rent shall be paid in advance on the first day of each month during the term and any renewal term of this Lease; provided, however, that Base Rent for the first full month of the term of this Lease shall be paid upon the execution of this Lease. Moreover, in the event the Commencement Date is any day other than the first day of a month, Tenant shall pay to Landlord on the Commencement Date a prorated portion of the monthly Base Rent for the period from the Commencement Date to the first day of the following month. (b) CPI Adjustments. The Rent paid by Tenant shall be adjusted upward, but never downward, effective as of the first ---------------- anniversary of the Commencement Date (or the first day of the thirteenth month after the Commencement Date in the event the Commencement Date is a date other than the first day of a calendar month) and on the same day of each year thereafter during the term and any renewal term of this Lease to reflect the increase, if any, in the Consumer Price Index (All Cities, All Urban Consumers, All Items, 1982-1984=100) (subsequently referred to as "CPI-U") or its successor Consumer Price Index, as published by the United States Bureau of Labor Statistics. This adjustment shall be computed by adding to the Base Rent an amount determined as follows: (i) the CPI-U index number for second month preceding the Commencement Date ("Initial Index Number") shall be subtracted from the CPI-U index number for the second month immediately preceding the effective date of increase; (ii) the resulting amount shall be divided by the Initial Index Number and reduced to a decimal equivalent; (iii) the resulting decimal shall be multiplied by the Base Rent. In no event, however, shall the Rent increase by more than four percent (4%) per year on a cumulative basis. The Rent, as adjusted, shall be paid in equal monthly installments as provided in Paragraph 4(a), above. If the CPI-U is changed so that the base year differs from that used for the Initial Index Number, the CPI-U shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the CPI-U is discontinued or revised during the term of this Lease or any renewal term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same results as would be obtained if the CPI-U had not been discontinued or revised. (c) Landlord Improvement Rent. In addition to Rent, Tenant shall pay to Landlord as Landlord Improvement Rent an amount determined as follows: The amount by which the total cost to Landlord for all Landlord Improvements to the Leased Premises exceeds $__________ shall be amortized on a monthly basis over the initial ten (10) year term of the Lease at the rate of __________ percent (__) per annum and paid monthly on the first day of each month during the initial term of this Lease. (d) Payment. The monthly installments of rent and all other sums payable under this Lease by Tenant shall be paid to Landlord at Landlord's address set forth above, or at such other address as Landlord may direct by written notice, without setoff, counter claim, recoupment, abatement, suspension or deduction. 5. Taxes and Special Assessments. Landlord shall pay and discharge all real property taxes and special assessments which may be levied against all or any portion of the Property, Building and Improvements during the term of this Lease. Tenant shall pay and discharge all personal property taxes which may be levied against its furniture, equipment and other personal property located on the Leased Premises. 6. Insurance and Indemnity. Landlord shall keep the Property, Building and Improvements insured against the following: ----------------------- (a) loss or damage by fire and those risks covered by "extended coverage" as provided in a Michigan standard fire insurance policy in the amount of the full replacement cost of the Building and Improvements. (b) public liability and property damage insurance with coverage of at least One Million Dollars ($1,000,000.00) on a combined single limit basis. All such policies of insurance shall be payable to Landlord or as Landlord specifies. Tenant shall indemnify Landlord against and save Landlord harmless from any liability or claim for damages which may be asserted against Landlord by reason of any accident or casualty occurring in, on or about the Leased Premises or otherwise arising from Tenant's use and occupancy of the Leased Premises except such as arise from the negligence of Landlord, its agents or employees. Tenant, at its expense, shall keep all of its furnishings, equipment and other personal property located on the Leased Premises fully insured against loss or damage by fire and those risks covered by "extended coverage" as provided in a Michigan standard fire insurance policy. Such policy of insurance shall be payable to Tenant or as Tenant specifies. Tenant hereby releases Landlord from any and all liability for any damage to or loss of such personal property from any cause whatsoever except to the extent such loss or damage is the result of the negligence of Landlord, its agents or employees and is not otherwise covered by insurance required to be carried by Tenant under this Lease. 7. Waiver of Subrogation. Each policy of insurance authorized or required of either party under this Lease shall contain a clause or endorsement under which the insurer waives all right of subrogation against the other party, its agents and employees with respect to losses payable under such policy, and each party hereby waives all right of recovery it might otherwise have against the other party, its agents and employees for any loss or injury which is covered by such a policy of insurance, notwithstanding that such loss or injury may result from the negligence or fault of such other party, its agents and employees. 8. Utilities. Tenant shall pay all charges for utility services provided to the Leased Premises, which are separately metered. Landlord shall pay all charges for all other utility services necessary for the reasonable use and operation of the Leased Premises and the Building and Improvements. Landlord shall not be liable in damages or otherwise for any interruptions or failure in the supply of any utilities or utility service to the Leased Premises except such failure or interruption which results from the negligence of Landlord, its agents or employees. 9. Maintenance and Condition of Leased Premises. Tenant, at its expense, shall keep the interior of the Leased Premises in good maintenance, condition, and repair, reasonable wear and tear excepted, including, without limitation, the maintenance, repair and replacement of all HVAC, plumbing and electrical systems serving the Leased Premises, and perform all other maintenance, repair and replacement upon the Leased Premises, the Property, Building and Improvements necessitated by the acts or neglects of Tenant, its agents, employees or invitees. All other necessary maintenance, repair and replacement of the structural components of the Property, Building and Improvements, including the roof, exterior walls and foundation, and the Common Areas (as defined in Paragraph 16, below) shall be performed by Landlord. Tenant shall promptly notify Landlord in writing of any defective condition known to it which Landlord is required to repair or replace and failure to so report such defect shall make Tenant responsible to Landlord for any additional loss or aggravation of loss incurred by Landlord by reason of Tenant's failure to notify Landlord. Tenant shall keep the Leased Premises in a neat and clean condition, shall not allow refuse to accumulate, and shall conduct its business in such a manner that the risk of fire to the Leased Premises shall not be increased beyond the hazard normal and usual for its type of business. 10. Alterations. Tenant shall not make or permit to be made any alterations, additions or improvements in, upon or to the Leased Premises, or any part of the Leased Premises, without the prior written consent of Landlord. In the event such consent is obtained, all such alterations, additions or improvements shall be performed at the expense of Tenant in a good, workmanlike manner and in accordance with all applicable laws and building codes and plans and specifications approved by Landlord. Tenant shall not allow any construction liens to attach to the Leased Premises or the Property, Building or Improvements in connection with any such alteration, and the failure of Tenant to have any such lien released within ten (10) days after written notice from Landlord shall constitute a default under this Lease. In addition, Tenant shall indemnify, defend and hold Landlord harmless from any and all costs and expenses incurred by Landlord in connection with such construction liens, including, without limitation, attorneys fees and costs of litigation. All alterations, additions or improvements (except trade fixtures) so made and installed by Tenant shall become part of the realty, shall become the property of Landlord and shall remain for the benefit of Landlord at the end of the term or other expiration of this Lease in as good condition as they were when installed, reasonable wear and tear excepted; provided, however, that any such alteration, addition or improvement remaining at the end of the term or other expiration of this Lease, shall upon demand made by Landlord, be removed by Tenant, at Tenant's expense, and Tenant shall repair any damage caused by such removal, restoring the Leased Premises to their condition prior to the making of such alteration, addition or improvement. 11. Performance by Landlord. In the event Tenant fails to perform any of its covenants and agreements as set forth in this Lease and such failure continues for a period of ten (10) days after written notice from Landlord (except that no such notice shall be required in emergency situations), Landlord shall have the option to undertake such performance for Tenant, and the costs and expenses reasonably incurred by Landlord by reason of such undertaking shall be due and payable forthwith by Tenant to Landlord as additional rent under this Lease. 12. Compliance with Public Authority Requirements. Tenant agrees, at its own expense, to promptly comply with all requirements of any legally constituted public authority made necessary by reason of Tenant's occupancy of the Leased Premises, including, without limitation, the Americans with Disabilities Act. Landlord shall deliver space as of the Commencement Date in full compliance with all requirements legally constituted public authority, including without limitation, the Americans with Disability Act. 13. Hazardous Materials. (a) Definitions. For purposes of this Lease, the terms "Hazardous Materials" and "Relevant Environmental Laws" shall be defined as follows: (i) "Hazardous Materials" shall mean all solids, liquids and gasses, including but not limited to solid waste, asbestos, crude petroleum and petroleum fractions, toxic chemicals, polychlorinated biphenyl's, paint containing lead, volatile organic chemicals, chlorinated organic compounds, and urea formaldehyde foam insulation, which are governed or regulated by Relevant Environmental Laws. (ii) "Relevant Environmental Laws" shall include but not be limited to all federal, state or local laws, rules, regulations, orders or determinations established or issued by any judicial, legislative or executive body, of any governmental or quasi-governmental entity which govern or regulate the existence, storage, use, disposal, or release of any solid, liquid or gas on, in or under the Leased Premises, or which govern or regulate the environmental effect of any activity currently or previously conducted on the Leased Premises. (b) Tenant's Obligations; Indemnification. Tenant shall not, nor shall it permit its employees, business invitees, contractors or subcontractors (collectively "Tenant's Agents"), to bring upon, keep, store, use, or dispose of any Hazardous Materials on, in, under, or about the Leased Premises, the Property, Building or Improvements or any adjacent property, except for the following: (i) gas, diesel fuel, oil, and other petroleum products and petroleum by-products which drip in normal amounts from motor vehicles on parking and maneuvering areas surrounding the Building; (ii) Hazardous Materials contained within Tenant's products, equipment, or inventory (including, but not limited to oxygen, hydrogen and hydrochloric acid) and which do not pose any significant threat of being released into the environment; or (iii) general office supplies (including, without limitation, ordinary cleaning chemicals and solutions) used for their intended purpose and not posing any significant threat of contamination of the Leased Premises, the Building, the Improvements or any adjacent property. Tenant shall cause the presence, use, storage, and/or disposal of any Hazardous Materials on, in, under, or about the Leased Premises, the Property, Building or Improvements or any adjacent property by Tenant or Tenant's Agents to be in complete compliance with all applicable laws, rules, regulations, orders, and the like (the "Environmental Laws"). Tenant shall defend, indemnify, protect, and hold Landlord harmless from and against all claims, costs, fines, judgments, and liabilities, including attorneys' fees and costs, arising out of or in connection with the presence, storage, use, or disposal of Hazardous Materials in, on, under, or about the Leased Premises, the Property, Building or Improvements or any adjacent property caused by the acts, omissions, or negligence of Tenant and/or Tenant's Agents. Tenant's obligations hereunder shall survive the termination of this Lease. (c) Landlord's Obligations; Indemnification. Neither Landlord nor Landlord's employees, business invitees, agents, contractors, or subcontractors (collectively "Landlord's Agents") shall bring upon, keep, store, use, or dispose of any Hazardous Materials in, on, under, or about the Leased Premises, the Property, Building or Improvements or any adjacent property except in complete compliance with all Environmental Laws. Landlord shall indemnify, defend, protect, and hold Tenant and Tenant's Agents harmless from and against any and all claims, costs, fines, judgments, and liabilities, including attorney fees and costs, arising out of or in connection with the presence of Hazardous Materials in, on, under, or about the Leased Premises, the Property, Building or Improvements or any adjacent property upon the date this Lease commences or introduced in, on, under, or about the Leased Premises, the Property, Building or Improvements or any adjacent property subsequent to commencement of this Lease due to the acts, omissions, or negligence of Landlord or Landlord's Agents. Landlord's obligations hereunder shall survive the termination of this Lease. 14. Damage to Leased Premises. In the event the Leased Premises are damaged by fire, the elements, act of God, or other cause to such extent that they are rendered untenantable by Tenant, and in the event Landlord elects not to rebuild the Leased Premises as they existed prior to the damage or in some other manner satisfactory to Tenant, then Landlord, within thirty (30) days of the date the damage occurred, shall notify Tenant in writing of such election, and this Lease shall be canceled as of the date the damage occurred, and Landlord and Tenant shall have no further obligations by reason of its provisions. In the event Landlord elects to rebuild the Leased Premises as they existed prior to the damage or in some other manner satisfactory to Tenant, then Landlord shall commence such rebuilding within thirty (30) days of the date of such damage and shall continue and complete such rebuilding as promptly as possible. Upon completion of such rebuilding, this Lease shall be reinstated in all of its terms; provided, however, the rent shall abate in full during the period of such rebuilding. In the event the Leased Premises are not damaged to such extent that they are rendered wholly untenantable by Tenant, then Tenant shall continue to occupy that portion of the Leased Premises which are tenantable, the rent shall abate proportionately to the portion occupied, and Landlord shall promptly commence and complete repairs to the portion damaged. In no event and under no circumstances shall Landlord be liable to Tenant for any loss occasioned by damage to the Leased Premises, other than for the abatement of rent as provided in this Paragraph 14, except to the extent of property damage resulting from the negligence of Landlord, its agents or employees which is not otherwise covered by insurance required to be carried by Tenant under this Lease. Under no circumstances shall there be any abatement of rent under this Paragraph 14 if the damage to the Leased Premises is caused by the acts or negligence of Tenant, its agents, employees or invitees. 15. Eminent Domain. In the event that the whole of the Leased Premises shall be taken or condemned for any public or quasipublic use or purpose by any competent authority in appropriation proceedings or by any right of eminent domain, then this Lease shall terminate as of the date title vests in the condemnor, all rents and other payments shall be paid up to that date, and Landlord and Tenant shall have no further obligations by reason of the provisions of this Lease. In the event that less than the whole of the Leased Premises is so taken or condemned, then Landlord shall have the right to terminate this Lease upon written notice to Tenant given at least thirty (30) days prior to the date title vests in the condemnor, and this Lease shall terminate as of the date title vests in the condemnor, all rents and other payments shall be paid up to date, and Landlord and Tenant shall have no further obligations by reason of the provisions of this Lease. In the event that Landlord does not elect to so terminate this Lease, Landlord, to the extent of the condemnation award, shall repair and restore the portion not affected by the taking so as to constitute the remaining premises a complete architectural unit. Thereafter, the rent to be paid by Tenant shall be adjusted proportionately according to the ratio that the floor area remaining in the Leased Premises bears to the former floor area in the Leased Premises, and all of the other terms of this Lease shall remain in full force and effect. Tenant shall have no interest in any award resulting from any condemnation or eminent domain or similar proceedings whether such award be for diminution in value to the leasehold or to the fee of the Leased Premises, except that Tenant shall be entitled to claim, prove and receive in such proceedings such award as may be allowed it for loss of business, relocation, and for Tenant's trade fixtures and personal property which are removable by Tenant at the end of the term of this Lease, provided such award shall be in addition to the award for land, buildings and other improvements. 16. Parking and Common Areas. Tenant shall have the right to use the driveways, walkways and parking areas located adjacent to the Building (collectively "Common Areas") in common with other occupants of the Building. Landlord reserves the right in its absolute discretion to modify, change or alter any Common Area provided such change or alteration does not materially alter the amount of available parking space or the accessibility of the Leased Premises. 17. Defaults of Tenant. The following occurrences shall be deemed defaults by Tenant: (a) Tenant shall fail to pay when due any rent or other sum payable under this Lease and such failure continues for five (5) days after written notice from Landlord. (b) Tenant shall abandon or vacate the Leased Premises before the end of the term or before the end of any renewal term of this Lease; or Tenant shall make a general assignment for the benefit of creditors or become bankrupt or insolvent, or file or have filed against it in any court a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee. (c) Tenant shall be in breach of any other obligation under this Lease, and such breach shall continue for thirty (30) days after written notice from Landlord. 18. Remedies of Landlord. In the event of default by Tenant, Landlord shall have the following rights and remedies in addition to all other rights and remedies otherwise available to Landlord: (a) Landlord shall be entitled to immediately accelerate upon written notice to Tenant the full balance of the rent payable for the remainder of the term, or renewal term, of this Lease; provided, however, such amount shall be reduced to present value as of the date of payment based on interest rate of seven percent (7%) per annum. (b) Landlord shall have the right to terminate this Lease upon written notice to Tenant without prejudice to any claim for rents or other sums due or to become due under this Lease. (c) Landlord shall have the immediate right of re-entry and may remove all persons and property from the Leased Premises. Such property may be removed and stored at the cost of Tenant. Should Landlord elect to re-enter as herein provided, or should Landlord take possession pursuant to legal proceedings, Landlord may either terminate this Lease or, from time to time, without terminating this Lease, relet the Leased Premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and conditions as Landlord, in the exercise of its sole discretion, deems advisable, with the right to make alterations and repairs to the Leased Premises. Upon each such reletting, (i) Tenant shall be immediately liable to pay to Landlord, in addition to any indebtedness other than rent due hereunder, the cost and expense of such reletting and of any such alterations and repairs incurred by Landlord, and the amount, if any, by which the rent reserved in this Lease for the period of the reletting as accelerated under Subparagraph (a) of this Paragraph, exceeds the amount agreed to be paid for rent for the Leased Premises by the reletting Tenant; or (ii) at the option of Landlord, rents received by Landlord from such reletting shall be applied first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting and of such alterations and repairs; third, to the payment of rent unpaid hereunder; and the residue, if any, held by Landlord and applied in payment of future unaccelerated rent as the same may become due and payable hereunder. (d) Landlord may immediately sue to recover from Tenant all damages Landlord may incur by reason of Tenant's default, including the cost of recovering the Leased Premises, and including the rent reserved and charged in this Lease for the remainder of the stated term as accelerated under Subparagraph (a) of this Paragraph, all of which shall be immediately due and payable along with attorneys' fees and Landlord shall have no obligation to relet. 19. Late Charge and Interest for Past Due Payments. All installments of rent payable to Landlord under this Lease if not paid within five (5) days after they become due shall be subject to a late charge equal to five percent (5%) of the installment amount. In addition, any payment rent or other amount due from Tenant to Landlord which is not made when due under this Lease shall bear interest at the rate of eleven percent (11%) per annum from the date of nonpayment to the date of payment. 20. Legal Expenses. In case suit shall be brought by either party to enforce the provisions of this Lease, the prevailing party in such action shall be entitled to recover all expenses so incurred, including reasonable attorneys' fees. 21. Right of Access. Tenant agrees to permit Landlord, and Landlord's agents, to inspect or examine the Leased Premises at any reasonable time in a reasonable manner, at any time for any emergency reason and to permit Landlord to make such repairs, decorations, alterations, improvements or additions in the Leased Premises, as Landlord may deem desirable or necessary or which Tenant has covenanted in this Lease to do but has failed to do, without the same being construed as an eviction of Tenant, in whole or in part, by reason of loss or interruption of the business of Tenant because of the prosecution of such work, and the rent due under this Lease shall in no way abate while such decorations, repairs, alterations, improvements or additions are being made. Tenant shall have the right to accompany Landlord on any such inspections and examinations, which shall be scheduled to suit the reasonable convenience of both parties. Landlord shall have the right to enter upon the Leased Premises at any reasonable time during the term, or any renewal term, of this Lease for the purpose of exhibiting the leased premise to prospective tenants or purchasers, provided advance notice is given to Tenant, and provided such exhibitions are scheduled to suit the reasonable convenience of both parties. For a period commencing six (6) months prior to the termination of this Lease and any renewals, Landlord may also place signs in, or upon the Leased Premises to indicate that the same are for rent, which signs shall not be altered, removed, obliterated or hidden by Tenant. Signs indicating the Leased Premises are for sale may be placed on the Leased Premises at any time. Notwithstanding the foregoing, the parties acknowledge and agree that, because of the nature of Tenant's business, Landlord shall not have a key to the Leased Premises and that Landlord shall in all cases, other than emergency situations, provide Tenant with reasonable prior notice of any exercise by Landlord of Landlord's access rights under this Paragraph. 22. Surrender of Leased Premises. Tenant covenants and agrees to surrender possession of the Leased Premises to Landlord upon the expiration of the term of this Lease or any renewals or extensions of this Lease, or upon earlier termination of this Lease, in as good condition and repair as the same shall be at the commencement of the term of this Lease, or as the same may have been put by Landlord and Tenant during the continuance of this Lease and any renewals, or extensions, ordinary wear and tear excepted. In addition, Tenant shall remove all of its property from the Leased Premises and shall repair any damage to the Leased Premises caused by such removal. Any personal property of Tenant or of anyone claiming under Tenant which shall remain on the Leased Premises after the expiration or termination of this Lease shall be deemed to have been abandoned by Tenant, and either may be removed by Landlord as its property or may be disposed of in such manner as Landlord may see fit, and Landlord shall not be in any way responsible for such property. 23. Holding Over. In the event Tenant shall continue to occupy all or any part of the Leased Premises after the expiration of the term, or any renewal term of this Lease with the consent of Landlord, such holding over shall be deemed to constitute a tenancy from month to month, upon the same terms and conditions as are contained in this Lease, except as to term; provided, however, if such holding over is without Landlord's written consent, Tenant shall pay to Landlord as rent for each month, or part of a month, that Tenant remains in possession of the Leased Premises, one and one-half times the monthly rental rate in effect immediately prior to the date of termination. 24. Subordination. This Lease is and shall be subject and subordinate to any mortgage or mortgages now in force, or which shall at any time be placed upon the Leased Premises or the Building or any part thereof, and to each and every advance made pursuant to any such mortgage. Tenant agrees that it will upon demand execute and deliver such instruments as shall be required by any mortgagee or proposed mortgagee, to confirm or to effect more fully such subordination of this Lease to the lien of any such mortgage or mortgages, and, in the event of the failure of Tenant to execute or deliver any such instrument, Tenant hereby irrevocably nominates and appoints Landlord as Tenant's attorney-in-fact for the purpose of executing and delivering any such instrument or instruments of subordination. Tenant's refusal to execute or deliver such instrument shall also entitle Landlord, its successors and assigns, to elect that this Lease terminate upon the giving of a written notice as provided for in Paragraph 17(c). 25. Attornment. In the event any proceedings are brought for the foreclosure of any mortgage covering the Leased Premises, or in the event of the conveyance by deed in lieu of foreclosure, or in the event of exercise of the power of sale under any such mortgage, or in the event of the sale or transfer of the Leased Premises by Landlord, Tenant hereby attorns to the new owner and covenants and agrees to execute an instrument in writing reasonably satisfactory to the new owner whereby Tenant attorns to such successor in interest and recognizes such successor as Landlord under this Lease. 26. Sale or Transfer by Landlord. If Landlord shall sell or transfer the Leased Premises, Landlord shall be automatically and entirely released of all covenants and obligations under this Lease from and after the date of such conveyance or transfer, provided the purchaser on such sale has assumed and agreed to carry out all covenants and obligations of Landlord under this Lease. 27. Quiet Enjoyment. On paying the rent and on performing all of the covenants and agreements on its part to be performed under the provisions of this Lease, Tenant shall peacefully and quietly have, hold and enjoy the Leased Premises for the term, and for any renewal term, of this Lease without hindrance by Landlord or anyone claiming by or through Landlord. 28. Benefit and Obligation. The benefits of this Lease shall accrue to, and the burdens of this Lease shall be the liabilities of, the heirs, personal representatives, successors and assigns of Landlord and Tenant. 29. Notices. All notices required under any provision of this Lease shall be deemed to be properly served if delivered in writing personally, or sent by registered or certified mail to each party at their address as stated above or at such other address as each party shall designate in writing delivered to the other party. All mailed notices shall be effective upon mailing. 30. Waiver. The failure of either party to enforce any covenant or condition of this Lease shall not be deemed a waiver thereof or of the right of either party to enforce each and every covenant and condition of this Lease, and no provision of this Lease shall be deemed to have been waived unless such waiver is in writing. One or more waivers of any covenant or condition by Landlord or Tenant shall not be construed as a waiver of a subsequent breach of the same covenant or condition nor shall the acceptance of rent or other payment by Landlord at any time when Tenant is in default under any term, covenant or condition of this Lease constitute a waiver of such default, nor shall any waiver or indulgence granted by either party be taken as an estoppel against the party granting the indulgence or waiver. 31. Unenforceability. In the event any covenant, term, provision, obligation, agreement or condition of this Lease is held to be unenforceable, it is mutually agreed and understood, by and between the parties hereto, that the other covenants, terms, provisions, obligations, agreements and conditions herein contained shall remain in full force and effect. 32. Captions. All headings contained in this Lease are intended for convenience only and are not to be deemed or taken as a summary of the provisions to which they pertain or as a construction thereof. 33. Governing Law. This Lease shall be governed by the laws of the State of Michigan. 34. Landlord Improvements. Prior to the Commencement Date, Landlord shall complete the Landlord Improvement as shown on attached Exhibit D in accordance with plans and specifications to be approved by Tenant, which approval shall not be unreasonably withheld or delayed. In the event Tenant fails to approve of such plans and specifications within _________ (__) days after the date of this Lease, Landlord shall have the right to terminate this Lease upon written notice to Tenant. 35. Additional Covenants of Tenant. Tenant shall not perform or permit any of the following acts to be performed by Tenant or its agents, employees, or invitees without the written consent of the Landlord: (a) Occupy the Leased Premises in any other manner or for any other purpose than as set forth in this Lease. (b) Use or operate any machinery that, in Landlord's reasonable opinion, is harmful to the Building or disturbing to tenants occupying other parts thereof. (c) Use or allow to be used on the Leased Premises any article or substance having an offensive odor, such as, but not limited to ether, naphtha, phosphorus, benzyl, gasoline, benzene, petroleum or any product thereof, crude or refined earth or coal oils, flashlight powder, or other explosives, kerosene, camphene, burning fluid or any dangerous, explosive or rapidly burning matter or material of any kind. (d) Use electricity in the Leased Premises in excess of the capacity of any of the electrical conductors and equipment in or otherwise serving the demised premises nor connect any additional fixtures, appliances or equipment other than lamps, typewriters, PC type desktop computers and similar small offices machines to the Building electric distribution system or make any alteration of addition to the electric system of the Leased Premises. 36. Signs. Landlord shall have no obligation to provide any signs for Tenant or the Leased Premises. All signs placed on the Leased Premises by Tenant shall conform to the same style, type, size and quality of other signs in or on the Building and shall be subject to the approval of Landlord, which approval shall not be unreasonably withheld. All signs approved by Landlord shall be erected at Tenant's sole cost and expense, and in compliance with all applicable laws, ordinances, codes and regulations. In addition, all such signs shall be removed by Tenant upon the termination of this Lease and all damages repaired at Tenant's cost and expense. 37. Security Deposit. As security for the payment and performance of its obligations under this Lease, Tenant has deposited with Landlord the sum of $2,980.00 (the "Deposit"). The Deposit shall be held by Landlord, and, at Landlord's discretion, applied to the payment of any amount due Landlord from Tenant which comes due under the terms of this Lease. Any such use of the Deposit by Landlord shall not serve to cure or waive Tenant's default, and such default shall not be deemed cured until the full amount of the Deposit has been restored to Landlord by Tenant. Any unexpended portion of the Deposit shall be paid over to Tenant within thirty (30) days after the expiration or termination of this Lease and the performance by Tenant of all of its obligations under this Lease. 38. Entire Agreement; Amendment. This Lease contains all of the terms and conditions of the agreement of the parties concerning the Leased Premises. This Lease may be amended only by a written agreement signed by both Landlord and Tenant. 39. Successors and Assigns. Upon written notice, Landlord and Tenant shall each be entitled to assign, sublease or otherwise transfer all or any part of their interest in this Agreement, the Property, the Parcel and the Easements from time to time, without the other party's consent. This Agreement shall insure to the benefit of and be binding upon the heirs, successors and assigns of the parties. In the event Tenant shall assign this Agreement and shall at any time thereafter be a tenant or subtenant ("Subtenant") on the Parcel, whether in relation to Tenant's assignee or any successor thereto, Landlord, and any successors in interest to Landlord, agree they shall continue to be bound to Tenant as such Subtenant with respect to any provisions of this Agreement intended to benefit Tenant's operations of its Tower Facilities and the provisions of Section 41 hereof shall continue to apply with respect to Tenant even as such Subtenant, and Landlord and any such successor shall provide such written documents and assurances thereof as Subtenant or its Lenders shall required from time to time. Location of Tower shall be approved by Landlord and Tower shall be constructed within the guidelines of the local ordinances. Approval of location shall not be unreasonably withheld. 40. Waiver of Landlord's Lien. (a) Landlord waives any lien rights it may have concerning the Tenant's Tower Facilities which are deemed Tenant's personal property and not fixtures, and Tenant has the right to remove the same by giving Landlord ten (10) days written notice of its intent to remove any part of its Tower Facilities so Landlord may properly coordinate the removal of the Towers. Tenant shall bring the Tower area back to its original condition with reasonable wear and tear accepted. (b) landlord acknowledges that Tenant has entered into a financing arrangements including promissory notes and financial and security agreements for the financing of the Tenant's Tower Facilities (the "Collateral) with a third party financing entity (and may in the future enter into additional financing arrangements with other financing entities). In connection therewith, Landlord (i) consents to the installation of the Collateral; (ii) disclaims any interest in the collateral, as fixtures or otherwise; and (iii) agrees that the Collateral shall be exempt from execution, foreclosures, sale, levy, attachment, or distress for any Rent due or to become due and such Collateral may be removed at any time without recourse to legal proceedings. (c) Landlord acknowledges and agrees that, notwithstanding anything to the contrary contained in this Lease: Tenant shall be permitted to pledge, mortgage, hypothecate or otherwise grant a lien, security interest or collateral assignment (whether pursuant to a security agreement, deed or trust, collateral assignment, mortgage or other instrument) (a "Lien") in and to all right, title and interest of Tenant in and to this Lease, including, without limitation, the right to occupy the Parcel pursuant to the terms hereof, to Nortel Networks Inc. (individually and/or as administrative agent for itself and other lenders) and its successors and assigns or any refinancing or replacement lender (hereinafter collectively called "Lenders".) in connection with certain debt financing to Tenant or to any of its affiliates as security for such debt financing. Lender shall be permitted to foreclose upon any such Lien (or accept an assignment in lieu of foreclosure) and transfer and assign all right, title and interest of Tenant in and to this Lease pursuant to or subsequent to such foreclosure and, in the event of any such foreclosure, transfer of assignment, and provided Lender or its successor-in-interest expressly assumes in writing and agrees to perform each of Tenant's covenants, duties and obligations which will arise and accrue from and after the date of such foreclosure, transfer or assignment, Landlord agrees that it will recognize Lender or its successor-in-interest as the successor-in-interest to Tenant under this Lease as if Lender or its successor-in-interest (as applicable) where Tenant under this Lease. Within ten (10) business days after written request by Tenant, Landlord will execute and deliver in favor of Lender an estoppel certificate or other instrument in form reasonable acceptable to Landlord and such Lender pursuant to which Landlord will (i) confirm the existence, validity and binding effect of this Lease, (ii) confirm that Landlord is the owner and holder of this Lease, (iii) confirm that, to Landlord's current, actual knowledge, no monetary default and no other default has occurred under the terms of this Lease (or specifying any defaults which have occurred, which are continuing and of which Landlord is currently, actually aware), (iv) agree to provide Lender a copy of any notice of default delivered to Tenant hereunder, and (v) agree that, prior to any termination of this Lease as a result of a default of Tenant hereunder, Landlord will provide written notice of such default to Lender at its principal office in Richardson, Texas to the attention of Charles M. Helm and afford Lender a period not less than 30 days within which to cure such default. Landlord hereby agrees that all property of Tenant now or hereafter located on the Parcel shall be and remain personal property of Tenant notwithstanding the manner in which such property shall be attached of affixed to the Parcel. Landlord hereby further agrees that, notwithstanding the order of perfection or priority of any security interest or lien under applicable law, any security interest or lien for rent or similar charges or other indebtedness, liabilities or obligations owing to Landlord under or in connection with the Lease, whether arising by operation of law or otherwise, whether now existing or hereafter arising, and each and every right which Landlord now has or hereafter may have, either to levy or distrain upon any property of Tenant or any interest therein ("Lender's Collateral") or to claim or assert title to Lender's Collateral, or make any other claim against Lender's Collateral, whether under the Lease or the laws of the State in which the Parcel are located or under any deed of trust, mortgage or other lien document now in effect whether by reason of a default under the Lease or otherwise, expressly is hereby made and shall be subject and subordinate inevery respect to any security interest or lien or other right, title or interest of Lender in Lender's Collateral, no matter when acquired, and shall further be subject and subordinated to all of the terms, provisions and conditions of any loan or security document in favor of Lender. Lender and its agents and legal representatives, without any liability or accountability whatsoever to Landlord (except for damages, if any, to the Parcel caused thereby and the obligation to pay rental, both as provided hereinbelow), (a) may remove any or all of Lender's Collateral located at the Parcel from the Parcel (i) whenever Lender, in its sole discretion, believes such removal is necessary to protect Lender's interest in Lender's Collateral or (ii) whenever Lender shall seek to sell or foreclose upon Lender's Collateral; and (b) shall have access to the parcel and Lender's Collateral at all times. Landlord grants to Lender a license access to the Parcel and Lender's Collateral at all times. Landlord grants to Lender a license to enter onto the Parcel and consents and agrees that Lender and/or its representatives or agents may at any time enter onto the Parcel to inspect Lender's Collateral, to take possession of Lender's Collateral and to remove any or all of Lender's Collateral from the parcel or exhibit for sale and/or conduct one or more sales of Lender's Collateral on the Parcel, and Landlord will not in any manner hinder, interfere or prevent any of the foregoing. Lender agrees to repair any damage caused by Lender or its agents or representatives as a direct result of any such removal of Lender's Collateral from the parcel by Lender or its agents or representatives. During any possession and occupancy of the Parcel by Lender, Lender's obligation to Landlord shall include only the obligation to pay the rental that accrues during such period of possession and occupancy if and to the extent that Tenant has not paid such rental. Lender shall have no obligation to cure any defaults of Tenant under the Lease. If at any time, from time to time, Landlord ever comes into possession or control of any proceeds of any of Lender's Collateral. Such proceeds shall be held by Landlord for the benefit of Lender, to the extent of its interest therein, and the same shall forthwith be paid and delivered to Lender. (1) All terms and provision of clause (1), (2), (3), and (4) preceding shall endure to the benefit of Lender. Landlord shall, upon request by Tenant, deliver to Lender a subordination agreement executed by Landlord consistent with clause (4) and otherwise in a form reasonably acceptable to Lender pursuant to which Landlord subordinates any security interest or lien held by Landlord in any personal property of Tenant located on the Parcel to any security interest or lien then held by Lender. (2) In the even any other provision of this lease shall be in conflict with the provisions of the Section 40, the provisions of the Section shall control. IN WITNESS OF WHICH, Landlord and Tenant have executed this Lease at Grand Rapids, Michigan. WITNESSES: BARDEN ASSOCIATES I, L.L.C., By: - ------------------------------------ -------------------------------------- Its Member LANDLORD WITNESSES: ILLINOIS PCS, LLC, By: - ------------------------------------ -------------------------------------- Its Member TENANT EXHIBIT A Building Floor Plan EXHIBIT B Leased Premises Diagram ADDENDUM This addendum to be an integral part of the lease between BARDEN ASSOCIATES, L.L.C., of 4380 Brockton Drive, Grand Rapids, Michigan (Lessor) and ILLINOIS PCS, LLC (Lessee). Lessor agrees to Lease 4717 Broadmoor Ave., Suite H to Tenant as of May 15, 2000, on a ten (10) year basis, subject to Lessor being able to construct the switch site per Tenant's specification. If Lessor is unable to construct, Tenant shall have the option to terminate May 15, 2001. All other terms and conditions to remain the same of lease dated May 5, 2000. Dated: BARDEN ASSOCIATES I, L.L.C. ----------------------------- (Lessor) By: -------------------------------- ILLINOIS PCS, LLC (Tenant) By: -------------------------------- LEASE ADDENDUM #3 This addendum is to be an integral part of the lease dated May 5, 2000 and Addendum dated August 30, 2000 between Barden Associates, L.L.C., of 4380 Brockton Dr., SE, Suite 1, Grand Rapids, MI 49512 (Landlord) and Illinois PCS, L.L.C., of 373 Prarie Knoll Drive, Naperville, IL 60565 (Tenant). 1. Landlord agrees to lease 4717 Broadmoor SE, Suite G for additional rent of $5,506.25 per month beginning approximately May 1, 2001. Tenant agrees to return the space to the original condition if Tenant vacates, which includes the offices square footage per attached exhibit. 2. The lease with Ritsba Land Development Company, LLC dated April 5, 2000 for 4513 Broadmoor, SE (existing engineering group) shall terminate approximately April 30, 2001 or upon occupancy of Suite G above. The lease for 4505 Broadmoor, SE (existing sales office) shall have the rent set at $3,100 per month beginning May 1, 2001. 3. The lease term for 4717 Broadmoor Ave., & 4505 Broadmoor Ave., shall expire April 30, 2011. All other terms and conditions to remain the same as the lease dated May 5, 2000, April 5, 2000, and signed addendum's. Dated: April 8, 2001 WITNESSES BARDEN ASSOCIATES I, L.L.C. LANDLORD By: - --------------------------------- ------------------------------- ILLINOIS PCS, L.L.C. TENANT By: - --------------------------------- ------------------------------- EX-10.26 12 dex1026.txt SEPARATION AGREEMENT AND RELEASE Exhibit 10.26 SEPARATION AGREEMENT AND RELEASE This Separation Agreement and Release ("Agreement") dated as of December 13, 2002, is between AIRGATE PCS, INC., a Delaware corporation (which, with its affiliates, is herein called "the Company"), and ALAN CATHERALL, an individual resident of Fulton County, Georgia (the "Executive"). WHEREAS, Executive has been employed by the Company as Chief Financial Officer; and WHEREAS, the parties desire to memorialize the terms of Executive's separation from employment with the Company. NOW, THEREFORE, in consideration of the promises set forth below, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Termination of Employment. (a) Effective as of October 31, 2002 (the "Separation Date"), Executive will cease to be an employee of the Company. Further, effective as of October 21, 2002, the Executive hereby resigns as an officer, fiduciary or member of the board of directors of the Company or its subsidiaries or any plan or trust sponsored by the Company. (b) Notwithstanding the foregoing, for purposes of the AirGate Incentive Stock Option Plan (the "Plan"), Executive's "Continuous Status as an Employee" (as defined in the Plan) shall terminate on October 31, 2005. 2. Severance Benefits. The Company shall provide Executive the following severance benefits: (a) Severance Payment. The Company shall pay Executive Three Hundred Thousand and No/100 Dollars ($300,000.00), less all applicable local, state and federal taxes and withholdings, to be paid in biweekly amounts of Eleven Thousand Five Hundred Thirty-Eight and 46/100 Dollars ($11,538.46)commencing on the first regular pay date of the Company after the Separation Date and continuing for six (6) months, and at the end of such six-month period, the remainder shall be payable in a lump sum payment. These payments shall be in lieu of any other severance payments to which Executive may be entitled. (b) Bonus for FY2002. The Company shall pay to Executive a bonus with respect to fiscal year 2002 in the same percentage of base salary equal to the average percentage of base salary paid to all senior management who report directly to the Chief Executive Officer as bonus with respect to fiscal year 2002. Said bonus shall be paid to Executive in full within two (2) weeks following the approval of bonuses for senior management by the Company's Board of Directors. (c) Welfare and Other Benefits. Unless otherwise specified below, upon the Separation Date, Executive shall cease to participate in the Company's employee benefit plans, pursuant to the terms and conditions of the plan documents. (i) Group Health Insurance Plans. As of the Separation Date, as required by law, the Company shall offer Executive and his covered dependents continuation of their coverage under the Company's group health plans for a period of up to eighteen (18) months following the Separation Date. If Executive and/or his covered dependents elect such continuation coverage, the Company agrees to pay the COBRA premium on the Executive's behalf for twelve (12) months following the Separation Date; provided, however, that if Executive obtains comparable health benefits from another source during such twelve (12) month period, the Company shall cease payment of COBRA premiums on Executive's behalf. At the end of the initial 12-month period of COBRA continuation coverage, the Executive shall be responsible for the entire premium under the Company's normal COBRA rates and procedures for the remaining six (6) months of the COBRA period. (ii) Stock Options. As of the Separation Date, Executive held stock options under the Option Agreement to acquire shares of AirGate PCS, Inc.'s common stock granted on July 28, 1999 (the "1999 Options"). The 1999 Options shall continue to become exercisable in accordance with its terms. Notwithstanding the provisions of Section 1(b) of this Agreement, any unexercised incentive stock option held by the Executive on January 30, 2003 shall automatically convert to a nonqualified stock option as of that date. (iii) Vested Benefits. Executive shall be entitled to any vested benefits he may have under the AirGate PCS 401(k) Retirement Plan as are applicable to him on the Separation Date. Such benefits will be payable in accordance with and subject to the applicable terms and conditions of such plans or agreements. (iv) Unused Earned Vacation. By no later than three (3) weeks following the date of execution of this Agreement, the Company shall pay Executive, in a lump sum, an amount equal to his accrued but unused 2002 vacation entitlement. (v) Club Memberships. As of the Separation Date, any club, association, or organization dues or expenses previously paid by the Company on behalf of Executive shall cease. (vi) Outplacement Services. The Company agrees to provide the Executive with certain career transition services for a period of up to 12 months through an outplacement service provider selected by the Company. The outplacement services shall cease at the earlier of the end of the 12-month period or the date the Executive accepts new employment. (vii) Other Benefits. Executive may retain his laptop computer, attachments and PCS phone after the Separation Date; provided, that the Executive shall return the laptop to the Company for the removal of all licensed software and confidential information within ten (10) days after the Separation Date. (d) Acknowledgement. The parties hereto acknowledge and agree that the payments and benefits described above may be taxable income, and each hereby covenants to comply with all federal and state income and employment tax requirements, including all reporting and withholding requirements, relating thereto. Executive further acknowledges that the payments and benefits described above are in exchange for his signing this Agreement. 3. Cooperation. Executive agrees that he will cooperate with and provide assistance to the Company in the future regarding: (i) transition of any ongoing matters relating to the business of Company, as may be reasonably requested by Company from time to time; (ii) any litigation or criminal, civil or administrative proceeding, whether currently pending or filed in the future, arising out of or relating to matters about which Executive has knowledge or in which Executive may be identified or called as a witness by any party; and (iii) such other services as Company may reasonably request, as long as said services to be rendered by Executive shall not materially impede his ability to meet any obligations or duties he may have with his then current employer or company. Such cooperation and assistance includes, without limitation, meeting with Company representatives or the Company's legal counsel (or both) upon reasonable notice and at mutually convenient times and places, providing complete and truthful information in response to any inquiries of the Company and/or its counsel, full disclosure and production of all documents and things that may be relevant to any such matters (regardless of an express inquiry by the Company or its counsel), and attendance as a witness at depositions, trials or similar proceedings upon reasonable advance notice. (a) Until October 31, 2003, Executive agrees to cooperate and perform these services without additional compensation, other than actual out-of-pocket costs incurred in connection with providing such services. Thereafter, the Company agrees to pay the Executive an hourly rate of compensation commensurate with his base salary with the Company as of the Separation Date for any services performed by Executive on behalf of the Company pursuant to the terms of this Agreement, except that no such payment shall be made with regard to services of the Executive reasonably requested by the Company related to any litigation filed prior to the Separation Date. In addition and notwithstanding the foregoing, the Company agrees to reimburse Executive for all reasonable related expenses, including, but not limited to, transportation, lodging, meals, telephone expenses, etc., including the same related to any litigation filed prior to the Separation Date. (b) Executive agrees that he will immediately notify Company of any formal or informal inquiry or request for information directed to Executive by any third-party that in any way relates to Executive's employment by Company or any aspect of Company's business operation. (c) Executive acknowledges and agrees that any and all complaints or concerns about the Company's accounting, internal accounting controls or auditing matters or other financial or strategic matters of which he is aware have been disclosed to the General Counsel or the Vice President of Human Resources as of the execution date of this Agreement. Executive is neither aware of, nor suspects, any violation of any law, regulation, statute, or ordinance of any kind resulting from his own conduct as an employee of the Company or from the conduct of other employees or operations of the Company. Executive further represents and affirms that he has reported to the General Counsel or the Vice President of Human Resources, any and all actual complaints communicated to him by anyone regarding any alleged unlawful actions or omissions under the Company's policies or law, regulation, statute or ordinance. (d) Executive further represents and warrants that he will within 10 days of any written request therefor, provide to the Company complete, accurate, and truthful responses to all requests made by the Company to him for information relating to pending or future allegations against the Company or its directors, officers and employees arising out of Lori McBride vs. AirGate PCS, Inc., et al and Wesley Ruggles vs. AirGate PCS, Inc. et al, and any related actions. In this regard, Executive acknowledges his duty to provide only truthful information and to fully disclose all of his knowledge of information responsive to the aforesaid requests, even if he is not certain as to its accuracy or truth, provided that he so qualifies the information. (e) Company will not oppose Executive's efforts to obtain unemployment compensation. 4. Restrictive Covenants. For and in consideration for the payment and benefits provided to Executive under this Agreement, Executive agrees to the terms of the following: (a) Covenant Not to Compete. Executive covenants and agrees that, during the period beginning on the Separation Date and ending one (1) year thereafter, Executive will not, directly or indirectly (whether as owner, partner, consultant, employee or otherwise) engage in the wireless telecommunications business ("Business") in a senior management capacity anywhere within the Service Area, as it is defined in the Sprint PCS Management Agreement between SprintCom, Inc. and AirGate Wireless, L.L.C., dated July 22, 1998 and the Sprint PCS Management Agreement among WirelessCo, L.P., Sprint Spectrum L.P., SprintCom, Inc. and Illinois PCS, LLC, dated January 22, 1999 (the "Territory"); provided that employment by a provider of wireless telecommunications services shall not be a violation of this Section 4(a) so long as 80% or more of the licensed POPs of the provider in the territory in which Executive works or has responsibility are outside the Territory. This paragraph 4(a) supersedes any other covenants not to compete with the Company to which Executive may be a party. (b) Nondisclosure and Confidentiality. Executive acknowledges and agrees that during the term of his employment, he has had access to trade secrets and other confidential information unique to the business of the Company and that the disclosure or unauthorized use of such trade secrets or confidential information by Executive would injure the Company's business. Therefore, Executive agrees that he will not, for a period of two (2) years following the Separation Date, use, reveal or divulge any trade secrets or any other confidential information which, while not trade secrets or information unique to the Company's business, is highly confidential and constitutes a valuable asset of the Company by reason of the material investment of the Company's time and money in the production of such information. Executive agrees that he will not use, reveal or divulge any general confidential or customer-related information. Executive acknowledges that he may have additional obligations with respect to the Company's trade secrets pursuant to the Georgia Trade Secrets Act or other applicable law. (c) Nonsolicitation. Due to Executive's extensive knowledge of the specifics of the Company's business, and its customers and clients, Executive agrees that, in consideration of the payments and benefits he is receiving hereunder, for a period of two (2) years following the Separation Date, he will not, without the prior written consent of the Company, either directly or indirectly, on his own behalf or in the service or on behalf of others, solicit or contact any Restricted Customer for the purpose of offering any product or service similar to or competitive with any product or service sold by the Company during Executive's employment. For purposes of this paragraph, "Restricted Customer" shall mean any person or entity who transacted business with the Company during the year preceding the Separation Date with whom Executive has (i) had direct contact during his employment, (ii) been a party to marketing or sales strategies with regard to, or (iii) been privy to marketing or sales strategies with regard to such persons or entities. Executive agrees that in consideration for the payments and benefits he is receiving hereunder, for a period of two (2) years following the Separation Date, he will not, either directly or indirectly, on his own behalf or in the service or on behalf of others solicit, divert or hire away, or attempt to solicit, divert or hire away any person employed by the Company. 5. Confidentiality of Agreement. Executive and the Company understand and agree that, due to the sensitive nature of this matter, the terms of this Agreement are to be kept private and confidential and that the terms of this Agreement shall not be disclosed, unless the party(ies) is (are) required by law to do so. While not limiting the generality of the foregoing, disclosure includes any statement, written or oral, to any person, including, but not limited to, any current or former employees of the Company. The parties to this Agreement acknowledge that there will be circumstances under which some or all of the terms of this Agreement will have to be made known to some individuals in the regular course of conducting business and personal affairs. In keeping with that understanding, the Company agrees that Executive may discuss the terms of this agreement with his attorneys, accountants, tax advisors and his immediate family. Executive agrees to advise such individuals of the confidentiality provisions of this Agreement and will advise anyone so named of the requirement to keep the terms of this Agreement confidential. Should Executive disclose any of the terms of this Agreement to persons (whether entities or individuals) other than those specified in this section, then such actions shall constitute a breach on the part of Executive. 6. Nondisparagement. Executive agrees that he shall not make any untrue statement or criticism, written or oral, nor take any action which is adverse to the interests of the Company or that would cause the Company, its affiliates, subsidiaries, divisions or its current and former officers, directors, employees, agents, or shareholders embarrassment or humiliation or otherwise cause or contribute to such persons being held in disrepute by the public or the Company's clients, customers, or employees. From and after the date of execution of this Agreement, Executive shall refrain from discussing the terms and conditions of the termination of the Executive's employment with any employee, agent, client or customer of the Company, and except as required by any court or any applicable law or regulation, the Company shall refrain from discussing the terms and conditions of the termination of the Executive's employment with any third party. The Company agrees that it shall not make any untrue statement or criticism, written or oral, nor take any action which is adverse to the interests of Executive or that would cause Executive embarrassment or humiliation or otherwise cause or contribute to his being held in disrepute by the public or the Company's clients, customers or employees. The obligations under this Section shall survive the termination of this Agreement. 7. Return of Company Documents and Property. Executive hereby represents and warrants that, as of the Separation Date, he has returned to the Company all documents (including copies and computer records thereof) of any nature which relate to or contain information concerning Company, its customers, or employees, and any and all property of the Company which has been in his possession, including, except as otherwise herein provided, any computers, computer programs or limited use software licenses in his possession. Executive confirms that all confidential information is and shall remain the exclusive property of the Company. All business records, papers and documents kept or made by Executive relating to the business of the Company shall be and remain the property of the Company, except for such papers customarily deemed to be the personal copies of Executive. Information in the public domain or information that is commonly known by or available to the public through the Company's press releases, public documents, annual reports, SEC filings or other public filings shall not be considered proprietary or confidential information. 8. Remedies. Executive acknowledges and agrees that his breach of any of the covenants contained in Sections 4, 5, 6 or 7 of this Agreement will cause irreparable injury to the Company and that remedies at law available to the Company for any actual or threatened breach by Executive of such covenants will be inadequate and that the Company shall be entitled to specific performance of the covenants or injunctive relief against activities in violation of Sections 4, 5, 6 or 7 by temporary or permanent injunction or other appropriate judicial remedy, writ or order, without the necessity of proving actual damages. This provision with respect to injunctive relief shall not diminish the right of the Company to claim and recover monetary damages against Executive for any breach of this Agreement, in addition to injunctive relief. Moreover, in the event of a breach by Executive of one or more of the covenants contained in Sections 4, 5, 6 or 7, the Company shall have no obligation to make any further payments specified in Section 2(a), 2(b) and 2(c)(i) hereof. The Company stipulates and agrees that in the event that it fails to timely and fully pay to Executive all amounts owed to Executive or fulfill and timely discharge all of the duties of the Company pursuant to the terms of Section 2 hereinabove, then Executive shall have no further remaining obligations or duties whatsoever to the Company pursuant to Sections 3 and 4 of this Agreement. The Company further agrees that in the event that a bankruptcy case is commenced by or against the Company under the bankruptcy laws of the United States, then the Company shall forthwith file with the bankruptcy court a motion to assume this Agreement, and all costs related to such motion shall be borne solely by the Company. The parties acknowledge and agree that the covenants contained herein shall be construed as agreements independent of any other provision of this or any other contract between the parties hereto, and that the existence of any claim or cause of action by either party against the other, whether predicated upon this or any other contract, shall not constitute a defense to the enforcement by either party of said covenant. 9. Release Of All Claims And Potential Claims Against the Company and Covenant Not To Sue. In consideration of the payments made to him by the Company and the promises contained in this Agreement, Executive, on behalf of himself and his agents, heirs and assigns, hereby unconditionally releases and discharges the Company, and its past and present successors, subsidiaries, parent corporations, members, managers, owners, partners, lenders, advisors, assigns, affiliated companies, agents, legal representatives, attorneys, employees, officers, trustees and directors (the "Releasees") from all claims, liabilities, contracts, contractual obligations, attorneys' fees, demands and causes of action, whether known or unknown, fixed or contingent, that he may have or claim to have against the Company or any of the Releasees for any reason as of the date of execution of this Agreement, and hereby agrees not to file a lawsuit or other legal claim or charge to assert any claim against any of the Releasees except as may be required to enforce this Agreement and Release; provided, however, that (i) nothing contained in this Agreement and Release shall in any way diminish or impair any rights to indemnification that may exist from time to time under the Indemnification Agreement dated May 14, 1999 (the "Indemnification Agreement") and under the Certificate of Incorporation of the Company and (ii) nothing contained in this Agreement and Release shall in any way diminish or impair Executive's ability to raise an affirmative defense in connection with any lawsuit or other legal claim or charge instituted or asserted by the Company against Executive. This release and covenant not to sue includes, but is not limited to, claims for infliction of emotional distress, claims for defamation, claims for personal injury of any kind, claims for breach of contract, claims for harassment, claims for attorneys' fees, claims arising under federal, state or local laws prohibiting employment discrimination and claims growing out of any legal restrictions on the Company's rights to terminate its employees or to take any other employment action, whether statutory, contractual or arising under common law or case law. Executive specifically acknowledges and agrees that he is releasing, in addition to all other claims, any and all rights under federal and state employment laws including without limitation the Age Discrimination in Employment Act of 1967 ("ADEA"), as amended, 29 U.S.C.ss. 621, et seq., the Civil Rights Act of 1964 ("Title VII"), as amended (including amendments made through the Civil Rights Act of 1991), 42 U.S.C. ss. 2000e, et seq., 42 U.S.C.ss. 1981, as amended, the Americans With Disabilities Act ("ADA"), as amended, 42 U.S.C. ss. 12101, et seq., the Rehabilitation Act of 1973, as amended, 29 U.S.C.ss. 701, et seq., Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C.ss. 301, et seq., the Worker Adjustment and Retraining Notification Act, 29 U.S.C.ss. 2101, et seq., the Family and Medical Leave Act of 1993 ("FMLA"), as amended, 29 U.S.C.ss. 2601 et seq., the Fair Labor Standards Act ("FLSA"), as amended, 29 U.S.C.ss. 201 et seq. the Employee Polygraph Protection Act of 1988, 29 U.S.C.ss. 2001, et seq., all Georgia Code provisions and the state and federal workers' compensation laws. This provision specifically shall not release any claims arising under or by virtue of this Agreement. 10. Indemnification of Executive. The Executive shall be indemnified by the Company as provided under the terms and conditions of that certain Indemnification Agreement dated May 14, 1999, and the Certificate of Incorporation of the Company. 11. Acknowledgment. The Company hereby advises Executive to consult with an attorney prior to executing this Agreement. Executive expressly acknowledges and agrees that he has read this Agreement and Release carefully, that he has had ample time and opportunity to consult with an attorney or other advisor of his choosing concerning his execution of this Agreement, that he fully understands that this Agreement is final and binding, that it contains a release of potentially valuable claims, and that the only promises or representations he has relied upon in signing this Agreement are those specifically contained in this Agreement itself. Executive also acknowledges and agrees that he has been offered at least twenty-one (21) days to consider this Agreement before signing and that he is signing this Agreement voluntarily, after having the opportunity to consult with his attorney, with the full intent of releasing the Company from all claims. Executive further acknowledges and agrees that he may revoke this Agreement within seven (7) days after signing it, by delivering written notice of revocation to the General Counsel of the Company. Accordingly, this Agreement shall not become effective until the expiration of the seven-day revocation period. 12. Assignment and Successors. (a) This Agreement is personal to Executive and, without the prior written consent of the Company, shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. 13. Miscellaneous. (a) No Admission of Wrongdoing. This Agreement does not constitute an admission of wrongdoing or liability by either party. (b) Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver. (c) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect. (d) Governing Law. Except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of Georgia shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. Any legal action regarding this Agreement or the provisions hereof shall be brought in a court of competent jurisdiction in or including Fulton County, Georgia. (e) Entire Agreement. The parties agree that this document is their entire agreement regarding Executive's employment, separation from employment and Executive's release of claims. This Agreement supersedes all other agreements between Executive and any Releasee, including the Company; provided, however, that this Agreement does not supersede the Indemnification Agreement. (f) Notices. All notices, requests, demands and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or three days after mailing if mailed, first class, certified mail (return receipt requested), postage prepaid: To Company: AirGate PCS, Inc. Harris Tower 233 Peachtree Street NE, Suite 1700 Atlanta, Georgia 30303 Attention: General Counsel To Executive: Mr. Alan Catherall 2636 Winslow Drive Atlanta, GA 30305 Either party may change the address to which notices, requests, demands and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein. (g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement. (h) Construction. Each party and his or its counsel have reviewed this Agreement and have been provided the opportunity to revise this Agreement and accordingly, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. Instead, the language of all parts of this Agreement shall be construed as a whole, and according to its fair meaning, and not strictly for or against either party. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Separation and Release Agreement as of the date first above written. AIRGATE PCS, INC. By: /s/ Thomas M. Dougherty -------------------------------------- Thomas M. Dougherty, President and CEO EXECUTIVE: /s/ Alan B. Catherall --------------------- Alan B. Catherall [THIS DOCUMENT HAS BEEN EXECUTED IN DUPLICATE.] EX-10.27 13 dex1027.txt OFFER LETTER Exhibit 10.27 October 25, 2002 William H. Seippel 11388 Seneca Knoll Drive Great Falls, VA 22066 Dear Will: Please accept this letter as formal confirmation of the offer of employment that I have earlier extended to you. In the sections of this letter that follow, I have outlined the terms of our offer and certain conditions pertaining thereto should you accept this opportunity to join AirGate PCS, Inc. Position: Position title - Vice President and Chief Financial Officer Salary: Your annual base salary will be $250,000.00 and will be paid to you in 26 bi-weekly installments of approximately $9,615.38. If your employment is terminated during the first year of employment, you will be entitled to an amount equal to your base salary until October 31, 2003 payable bi-weekly as described in the previous sentence. Your performance will be evaluated during the first six months of your employment and, assuming you have successfully achieved or made satisfactory progress towards the achievement of agreed upon performance objectives and expectations during this period, your annual base salary will be increased to $275,000.00 (bi-weekly equivalent of approximately $10,576.92). Short-Term Incentive: You will be a designated participant in the AirGate PCS short-term incentive program -"Development, Performance, and Rewards" (DPR). The Plan Year for this incentive program runs concurrently with AirGate's fiscal year, which begins October 1st of each calendar year and ends on September 30th of the following calendar year. Your target incentive award opportunity for this plan is 50% of your base salary. The actual amount of the award payment for any Plan Year will be expressed as a percentage of your base salary and will be based on a combination of the company's achievement of specified financial results and your personal achievement of individual goals, objectives and performance expectations. You will begin participation in the DPR program for Plan Year 2003 (October 1, 2002 through September 30, 2003) on the date of your employment. However, for the 2003 Plan Year, you will be guaranteed an annual incentive award payment of 50% of the base earnings paid to you during the Plan Year that shall be paid to you on November 30, 2003, even if the Company terminates your employment prior to October 1, 2003. If you terminate employment with the Company prior to October 1, 2003, you will not be eligible for any bonus for Plan Year 2003. An outline of the DPR program will be provided to you and I will further discuss the details of the program and establish individual goals, objectives and performance expectations with you. Date of Hire: Thursday October 24, 2002. Long-Term Incentive Plan (LTIP): You will be designated as a participant in the AirGate PCS, Inc. Long Term Incentive Plan. Subject to Board approval, you will receive a grant of 70,000 non-qualified stock option shares and an award of 30,000 time based restricted stock shares. Your stock option shares will vest in four equal annual installments with the initial 25% annual installment vesting on the first anniversary of the grant date and each subsequent 25% annual installment vesting on each grant date anniversary thereafter. The time restrictions on your restricted stock award will lapse over a four-year period such that 25% of the shares will be transferred to you on the first anniversary of the award date and the remaining shares will be transferred to you in 25% annual installments on each award date anniversary thereafter. You will be eligible for continued participation in this plan that will provide you the opportunity to receive future grants and/or awards subject to the approval of the Board of Directors or a designated Committee thereof. It is not currently contemplated that you would receive any additional grants and/or awards during fiscal year 2003. Temporary Living and Relocation Assistance: You will be provided relocation assistance to include the transportation of your household goods and personal belongings from your current to your new place of residence and assistance in the sale of your house in Great Falls, VA at such point in time that you relocate to Atlanta. You will also be entitled to temporary living arrangements in the Atlanta area. The Temporary Living and Relocation Assistance is more fully outlined in Addendum 1 that is attached hereto. Severance: If you continue to remain employed with the Company after May 1, 2003 and you and the CEO agree that your employment will continue and you will relocate to Atlanta, you will be entitled to severance payments if you are terminated without cause by the Company in an amount equal to six months of the then current base pay and pro-rated bonus at target. "Cause" means any of the following acts by you, as determined by the CEO or the Board: (A) continued neglect in the performance of duties assigned to you (other than for a reason beyond your control) or repeated unauthorized absences during scheduled work hours; (B) egregious and willful misconduct, including dishonesty, fraud or continued intentional violation of Company policies and procedures which is reasonably determined to be detrimental to the Company or an affiliate; (C) conviction of a felonious crime; or (D) repeated material failure to meet reasonable performance criteria established by the CEO or the Board and communicated to you in writing. It shall be a condition to a payment of severance that you sign a general release of the Company of all claims you may have against the Company in substantially the form previously executed by other officers of the Company, other than claims arising under your indemnification agreement with the Company. It shall also be a condition to receipt of severance payments that you enter into a non-compete agreement for a period of six months and a non-solicit agreement for a period of one year in substantially the following form: Non-compete: Executive covenants and agrees that, during the period beginning on the Separation Date and ending six months thereafter, Executive will not, directly or indirectly (whether as owner, partner, consultant, employee or otherwise) engage in the wireless telecommunications business ("Business") in a senior management capacity anywhere within the Service Area, as it is defined in the Sprint PCS Management Agreement between SprintCom, Inc. and AirGate Wireless, L.L.C., dated July 22, 1998 and the Sprint PCS Management Agreement among WirelessCo, L.P., Sprint Spectrum L.P., SprintCom, Inc. and Illinois PCS, L.L.C., dated January 22, 1999 (the "Territory"); provided that employment by a provider of wireless telecommunications services shall not be a violation of this paragraph so long as 80% or more of the licensed POPs of the provider in the territory in which Executive works or has responsibility are outside the "Territory". Non-solicit: Due to the Executive's extensive knowledge of the specifics of the Company's business and its customers and clients, Executive agrees that, in consideration of the payments and benefits that he is receiving hereunder, for a period of one year following the Separation Date, he will not, without the prior written consent of the Company, either directly or indirectly, on his own behalf or in the service or on behalf of others, solicit or contact any Restricted Customer for the purpose of offering any product or service sold by the Company during the Executive's employment. For purposes of this paragraph, "Restricted Customer" shall mean any person or entity who transacted business with the Company during the year preceding the Separation Date with whom Executive has (i) had direct contact during his employment, (ii) been a party to marketing or sales strategies with regard to, or (iii) been privy to marketing or sales strategies with regard to such persons or entities. Executive agrees that in consideration for the payments and benefits he is receiving hereunder, for a period of one year following the Separation Date, he will not, either directly or indirectly, on his own behalf or in the service of or on behalf of others solicit, divert or hire away, or attempt to solicit, divert or hire away any person employed by the Company. Change of Control Agreement: If you remain employed by the Company on May 1, 2003 and you and the CEO agree your employment will continue and you will relocate to Atlanta, you will be provided with a Change of Control Agreement that will provide you with certain compensation and benefits continuance should there be a change of control of AirGate PCS, Inc., as defined in the Agreement, and your employment is terminated for specified reasons, other than for cause, as a result thereof. A summary of the terms and conditions of this agreement are set forth in Addendum 2 that is attached hereto. Contingent nature of offer: This offer and all of its terms are contingent upon the successful completion of a drug screen. Benefits: You will be eligible for participation in AirGate PCS's Health and Welfare programs, including medical, dental, vision, life insurance, disability insurance, 401K, stock purchase, and time pool on the first day of the month following 30 days of employment. Participation in the benefit program is voluntary. Your costs will depend on the specific plans and level of coverage(s) that you elect. Your benefits package with associated costs will be mailed to your home within 5 days of your effective start date. These documents are time sensitive and will require your immediate attention. Should you not receive your package please contact Dennis Lee at (404) 832-6193. A benefit summary overview has been included for your review. Other: This position will be located in Atlanta, GA. Payroll is paid bi-weekly, one week in arrears. You will have the option for Direct Deposit of your payroll. Your effective system service date will be Thursday October 24, 2002 or such mutually agreed upon date thereafter. All vesting and service requirements for benefit eligibility will be based on this date. All other provisions and policies adopted by Airgate PCS, Inc. will apply to you according to the effective date indicated by Airgate PCS. For additional policies, procedures and guidelines please refer to the Employee Handbook and Standards of Business Conduct that are included in this package. This offer of employment is being extended to you based on your representation that as of your effective date of employment with AirGate PCS, Inc., you are not subject to any agreement, including but not limited to, a non-compete agreement, restrictive covenant, or disclosure agreement, with a former employer that would limit your ability to perform your job responsibilities at AirGate PCS, Inc. The purpose of this letter is to provide guidelines for an employee's terms of employment. This letter is not intended to create or constitute an employment agreement with any candidate. Employment at AirGate PCS, Inc. is at will, and may be terminated by either party for any reason. The at-will status can only be modified by written agreement between the parties. Again, it gives me great pleasure to offer this opportunity to you and I am excited with the prospect of your joining our team. Should you accept, please sign where indicated and return this letter to Dennis Lee, Vice President Human Resources, in the pre-addressed envelope provided herein. Sincerely, /s/Thomas M. Dougherty _______________________ Thomas W. Dougherty President and Chief Executive Officer Acknowledgement I have reviewed and agree to the terms and conditions of this offer of employment as outlined above. I acknowledge that my employment with AirGate PCS is at-will and may be terminated by either party for any reason. I further acknowledge that the above guidelines, policies & procedures are subject to change. /s/ William H. Seippel 10/25/02 ------------------------- ---------- William H. Seippel Date ----------------------------------------- Date Verification of Effective Start Date Addendum 1 Temporary Living Arrangement and Relocation Assistance o Prior to August 1, 2003, we will pay for the expenses that you incur for commuting to and working in your Atlanta office. This will include roundtrip airfare and providing you with reasonably suitable temporary living quarters of up to two bedrooms. Airfare shall be coach with the lowest reasonable airfare available with advance purchase, unless circumstances warrant higher priced fares. o At such time that it is decided that you and your family will relocate to Atlanta, we will pay for the transportation of your household belongings from your house in Great Falls, VA to your new residence in Atlanta. o You will be eligible for our home purchase protection program. This program will provide that if your house is not sold within ninety days of your listing it on the market, we will offer to purchase the house from you. We will request an independent appraisal on the property that we will use to determine the price that we will offer you for the purchase of the house. o Should you incur duplicate mortgage payments during the ninety-day period that your house in Great Falls, VA is listed on the market, we will provide you relief from duplicate mortgage payments by reimbursing you for the monthly mortgage payment on your Atlanta, GA house. Addendum II PROPOSED CHANGE OF CONTROL TERMS I. Term of Agreement a. 3 years, with an "evergreen" provision II. Triggering Events a. In order to trigger severance benefit, there must be both a COC AND the executive must be terminated or voluntarily terminate for "good reason" following the COC b. Approach is designed to give protection where truly needed, rather than create a windfall upon a COC III. COC is defined in 2002 LTIP as the occurrence of any of the following events: a. "Continuing" members of the Board of Directors cease to constitute at least a majority of the Board b. A person becomes a beneficial owner of 35% or more of the then-outstanding shares of the Company (subject to expressly defined limitations) c. Consummation of a reorganization, merger, consolidation, share exchange, sale of assets or acquisition of another corporation unless, immediately following the transaction, prior shareholders of the Company continue to own at least 55% of the outstanding shares and voting power of the resulting corporation d. Approval by shareholders of a complete liquidation or dissolution of Company e. We would propose a carve-out if any of these events occur as a result of the current review of strategic alternatives IV. Good Reason defined as: a. Diminution of duties/status/position (i.e., demotion, change in reporting relationship, etc.) b. Change in primary job function c. Reduction in pay/bonus opportunity d. Relocation e. Breach of agreement or failure of acquirer to assume agreement V. Payments/Benefits a. Multiple of base pay and bonus i. Actual annual salary rate prior to COC ii. Annual bonus at target bonus opportunity iii. During the first year, two times multiple, less the amounts already paid since employment iv. After first year, one times multiple b. Amounts already earned but not paid c. Unpaid salary and accrued and unpaid annual bonus for the year in which termination occurs d. Continuation of benefits for period equal to severance multiple (i.e., 2X = 2 years continuation), for such benefits as: i. Medical ii. Dental iii. Disability iv. Life e. Outplacement services for up to one year EX-21 14 dex21.txt SUBSIDIARIES OF AIRGATE PCS, INC. Exhibit 21 Subsidiaries Of AirGate PCS, Inc. Name State of Organization AGW Leasing Company, Inc. Delaware AirGate Network Services, LLC Delaware AirGate Service Company, Inc. Delaware iPCS, Inc. Delaware Subsidiaries Of iPCS, Inc. Name State of Organization iPCS Wireless, Inc. Delaware iPCS Equipment, Inc. Delaware EX-23 15 dex23.txt CONSENT OF KPMG LLP EXHIBIT 23 Independent Auditors' Consent The Board of Directors AirGate PCS, Inc. We consent to the incorporation by reference in the Registration Statements (No. 333-34416, No. 333-56352, No. 333-75024, and No. 333-85250) on Form S-8 and (No. 333-56928, No. 333-73254, No. 333-73270 and No. 333-69866) on Form S-3 of AirGate PCS, Inc. and subsidiaries of our reports dated January 10, 2003, with respect to the consolidated balance sheets of AirGate PCS, Inc. and subsidiaries as of September 30, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended September 30, 2002 and the related financial statement schedule, which reports appear in the September 30, 2002 annual report on Form 10-K/A of AirGate PCS, Inc. and subsidiaries. /s/ KPMG LLP Atlanta, Georgia January 16, 2003 EX-24 16 dex24.txt POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Thomas M. Dougherty, William H. Seippel and Barbara L. Blackford his true and lawful attorneys-in-fact, each acting alone, with full powers of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to execute and sign the annual report on Form 10-K of AirGate PCS, Inc. ("Airgate") and any or all amendments, including any post-effective amendments, to the 10-K and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby ratify and confirm that said attorneys-in-fact or their substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof. Signature Title Date /s/ Thomas M.Dougherty _________________________ President, Chief Executive January 14, 2003 Thomas M. Dougherty Officer and Director (Principal Executive Officer) /s/ Robert A. Ferchat _________________________ Director January 14, 2003 Robert A. Ferchat /s/ Barry J. Schiffman _________________________ Director January 14, 2003 Barry J. Schiffman EX-99.1 17 dex991.txt CERTIFICATION OF THOMAS M. DOUGHERTY Exhibit 99.1--906 CERTIFICATION OF PERIODIC REPORT I, Thomas M. Dougherty of AirGate PCS, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K/A of the Company for the annual period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) to the best of my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: January 16, 2003 /s/ Thomas M. Dougherty ----------------------------- Thomas M. Dougherty Chief Executive Officer EX-99.2 18 dex992.txt CERTIFICATION OF WILLIAM H. SEIPPEL Exhibit 99.2--906 CERTIFICATION OF PERIODIC REPORT I, William H. Sieppel, Chief Financial Officer of AirGate PCS, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K/A of the Company for the annual period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) to the best of my knowledge, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: January 16, 2003 /s/ William H. Sieppel -------------------------- William H. Sieppel Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----