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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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
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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
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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.
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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
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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
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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,
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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
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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
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Total ............................................. 7,135,500
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(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.
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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.
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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.
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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
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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.
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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;