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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, 2001.
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 (Zip code)
offices)
(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 Each 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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based upon the closing sale price on the Nasdaq Stock Market on
November 29, 2001) is approximately $1,145,350,000. (For purposes of
determination of the foregoing amount, only our directors and executive
officers have been deemed affiliates). As of November 30, 2001, there were
25,745,622 shares of common stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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AIRGATE PCS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
ITEM NO. NO.
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PART I............................................................................. 1
ITEM 1. Business.................................................................. 1
ITEM 2. Properties................................................................ 35
ITEM 3. Legal proceedings......................................................... 35
ITEM 4. Submission of Matters to a Vote of Security Holders....................... 35
PART II............................................................................ 37
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters..... 37
ITEM 6. Selected Financial Data................................................... 38
ITEM 7. Management's Discussion And Analysis Of Financial Condition And Results Of
Operations.............................................................. 39
ITEM 7A. Quantitative And Qualitative Disclosure About Market Risk................. 46
ITEM 8. Financial Statements...................................................... 46
ITEM 9. Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure.............................................................. 46
PART III........................................................................... 47
ITEM 10. Directors And Executive Officers Of The Registrant........................ 47
ITEM 11. Executive Compensation.................................................... 50
ITEM 12. Security Ownership Of Certain Beneficial Owners And Management............ 58
ITEM 13. Certain Relationships And Related Transactions............................ 59
PART IV............................................................................ 60
ITEM 14. Exhibits, Financial Statements, Schedules, And Reports On Form 8-K........ 60
PART I
ITEM 1. Business
Special Caution Regarding Forward-Looking Statements
We believe that it is important to communicate our future expectations to
our stockholders and to the public. This report, therefore, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and 21E of the Securities and Exchange Act of 1934, including the
statements about our plans, objectives, expectations and prospects under the
headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations." You can identify these
statements by forward-looking words such as "anticipate," "believe,"
"estimate," "expect," intend," "plan," "seek," and similar expressions.
Although we believe that the plans, objectives, expectations and prospects
reflected in or suggested by our forward-looking statements are reasonable,
those statements involve uncertainties and risks, and we can give no assurance
that our plans, objectives, expectations and prospects will be achieved.
Important factors that could cause our actual results to differ materially
from the results contemplated by the forward-looking statements are contained
in the "Investment Considerations" 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. All written or oral forward-looking
statements attributable to us are expressly qualified in their entirety by
these cautionary statements.
BUSINESS OVERVIEW
We market and provide digital personal communication services, or PCS. We
are a network partner of Sprint PCS, the personal communications services group
of Sprint Corporation. Sprint PCS, directly and indirectly through network
partners such as us, provides wireless services in more than 4,000 cities and
communities across the country. Through our management agreement with Sprint
PCS, we have the exclusive right to provide Sprint PCS products and services
under the Sprint and Sprint PCS brand names 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. Our Sprint PCS territory encompasses 21
contiguous markets and approximately 7.1 million residents.
As of September 30, 2001, we had 235,025 subscribers and total network
coverage of approximately 6.0 million residents, representing approximately 84%
of the 7.1 million residents in our Sprint PCS territory. For the year ended
September 30, 2001, we generated revenue of approximately $172.1 million.
Merger with iPCS, Inc.
On November 30, 2001, we acquired iPCS, Inc. by merging a wholly owned
subsidiary of ours with and into iPCS. As a result of the merger, we are the
largest Sprint PCS network partner in terms of covered population. In
connection with the merger, we issued to the former stockholders of iPCS
approximately 12.4 million shares of our common stock and assumed options and
warrants to purchase approximately 1.1 million shares of our common stock.
Assuming the exercise of all outstanding options and warrants of each company,
AirGate's stockholders immediately prior to the merger own approximately 52.5
percent of the combined company, and the former iPCS stockholders own
approximately 47.5 percent. The combination will be accounted for using the
purchase method of accounting. As required by the terms of our outstanding
indebtedness, we will conduct our business operations through two separate
entities: AirGate PCS, Inc. and its wholly owned subsidiary, iPCS, Inc.
Similar to AirGate, iPCS markets and provides digital personal
communications services as a network partner of Sprint PCS. Through iPCS'
management agreement with Sprint PCS, iPCS has the exclusive right to provide
Sprint PCS products and services under the Sprint and Sprint PCS brand names in
a territory that covers mid-sized cities and rural areas in Illinois, Michigan,
Iowa and eastern Nebraska. iPCS' Sprint PCS territory encompasses 37 markets
with approximately 7.4 million residents.
iPCS launched Sprint PCS service in select markets in December 1999 and as
of September 30, 2001 offered service in 29 of its Sprint PCS markets. iPCS
plans to have nearly completed its network build-out by December 31, 2001. As
of September 30, 2001, iPCS had 134,927 subscribers and total network coverage
of approximately 5.0 million residents, representing approximately 67% of the
7.4 million residents in iPCS' Sprint PCS territory. For the nine months ended
September 30, 2001, iPCS generated revenue of approximately $77.5 million.
Our History
AirGate PCS, Inc. and its subsidiaries and predecessors were formed for the
purpose of becoming a leading provider of wireless PCS. In July 1998, we
entered into a series of agreements with Sprint and Sprint PCS under which we
agreed to construct and manage a PCS network using Sprint PCS' licensed
spectrum and supporting Sprint PCS' services within a specified territory in
the southeastern United States.
Our predecessors formed our corporation, AirGate PCS, Inc., a Delaware
corporation, in October 1998 to assume its responsibilities under the
agreements with Sprint and Sprint PCS. In the course of our operations, we have
formed two wholly-owned subsidiaries, AGW Leasing Company, Inc. and AirGate
Network Services, LLC.
Relationship with Sprint PCS
Sprint PCS is a wholly owned subsidiary of Sprint Corporation, a diversified
telecommunications service provider. Sprint PCS operates a 100% digital PCS
wireless network in the United States and holds the licenses to provide PCS
nationwide using a single frequency band and a single technology. Sprint PCS
directly operates its PCS network in major metropolitan markets throughout the
United States. Sprint PCS has also entered into independent agreements with
various network partners, such as us, under which the network partners have
agreed to construct and manage PCS networks in smaller metropolitan areas and
along major highways. "Sprint PCS" refers to Sprint Communications Company,
L.P., Sprint Spectrum L.P. and WirelessCo, L.P. "Sprint" refers to Sprint
Corporation and its affiliates other than Sprint PCS. Statements in this report
regarding Sprint or Sprint PCS are derived from information contained in our
agreements with Sprint PCS, periodic reports and other documents filed by
Sprint and Sprint Spectrum L.P. with the Securities and Exchange Commission or
press releases issued by Sprint or Sprint PCS.
Markets
Our Sprint PCS markets consist of almost the entire state of South Carolina
including Charleston, Columbia and Greenville-Spartanburg; portions of North
Carolina including Asheville, Wilmington and Hickory; and the eastern Georgia
cities of Augusta and Savannah. We believe that connecting Sprint PCS' existing
markets with our markets is an important part of Sprint PCS' on-going strategy
to provide seamless, nationwide PCS service to its subscribers.
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The following table sets forth the location, estimated population and date
on which we began providing commercial Sprint PCS service in each of the
markets that comprise our Sprint PCS territory:
Market Launch
AirGate Basic Trading Areas(1) Population(2) Date
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Greenville-Spartanburg, SC..... 897,700 January 2000
Savannah, GA................... 737,100 May 2000
Charleston, SC................. 686,800 April 2000
Columbia, SC................... 657,000 June 2000
Asheville-Hendersonville, NC... 588,700 January 2000
Augusta, GA.................... 579,400 June 2000
Anderson, SC................... 346,600 January 2000
Hickory-Lenoir-Morganton, NC... 331,100 January 2000
Wilmington, NC................. 327,600 February 2000
Florence, SC................... 260,200 June 2000
Greenville-Washington, NC...... 245,100 July 2000
Goldsboro-Kinston, NC.......... 232,000 March 2000
Rocky Mount-Wilson, NC......... 217,200 March 2000
Myrtle Beach, SC............... 186,400 February 2000
New Bern, NC................... 174,700 June 2000
Sumter, SC..................... 156,700 July 2000
Jacksonville, NC................ 148,400 May 2000
Orangeburg, SC................. 119,600 June 2000
The Outer Banks, NC(3)......... 92,000 July 2000
Roanoke Rapids, NC............. 76,800 May 2000
Greenwood, SC.................. 74,400 August 2000
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Total....................... 7,135,500
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(1) Each of our 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.
Our Sprint PCS agreements require us to provide PCS coverage to certain
percentages of the residents in each of the markets granted to us by those
agreements. We are fully compliant with these build-out requirements.
We believe our Sprint PCS territory, with 7.1 million residents, has
attractive demographic characteristics. Our Sprint PCS territory has many
vacation destinations, covers substantial highway mileage and includes a large
student population, with at least 27 colleges and universities.
Products and Services
We offer PCS products and services throughout our Sprint PCS territory.
These products and services are designed to mirror the services offered by
Sprint PCS and provide seamless integration with the Sprint PCS nationwide
network.
100% Digital Wireless Network with Service Across the Country. Our primary
service is wireless mobility coverage. As a Sprint PCS network partner, our
existing PCS network is part of the largest 100% digital wireless PCS network
in the United States. Sprint PCS customers in our territory may use Sprint PCS
services throughout our contiguous markets and seamlessly throughout the Sprint
PCS network.
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Access to the Sprint PCS Wireless Web. We support and market the Sprint
Wireless Web throughout our territory. The Sprint Wireless Web allows
subscribers with data-capable handsets to connect their portable computers or
personal digital assistants to the Internet. Sprint PCS subscribers with
web-browser enabled handsets also have the ability to receive periodic
information updates such as stock prices, airline schedules, sports scores and
weather reports directly on their handsets by connecting to and browsing
specially designed text-based Internet sites such as Yahoo!, Amazon.com,
Bloomberg.com, CNN.com, MapQuest.com, Fox Sports, Ameritrade, InfoSpace.com,
ABC News.com, AOL.com, ESPN.com, E*Trade, USA Today.com and Weather.com. Sprint
PCS offers various pricing options including a fixed number of updates or a
bundle of data minutes as add-ons to existing Sprint PCS Free and Clear pricing
plans or a bundle of minutes for a set price that can be used for either data
or voice.
CDMA and Dual-Band/Dual-Mode Handsets. We offer code division multiple
access, or CDMA, digital technology handsets weighing approximately five to
seven ounces and offering up to three to five days of standby time and
approximately two to four hours of talk time. We also offer dual-band/dual-mode
handsets that allow customers to make and receive calls on both PCS and
cellular frequency bands and both digital or analog technology. All handsets
are equipped with preprogrammed features, and are sold under the Sprint and
Sprint PCS brand names.
Sprint PCS and Non-Sprint PCS Roaming. We provide roaming services to Sprint
PCS subscribers that use a portion of our Sprint PCS network, and to non-Sprint
subscribers when they use a portion of our Sprint PCS network pursuant to
roaming agreements between Sprint PCS and other wireless service providers.
Sprint PCS and other wireless service providers supply similar services to our
subscribers when our subscribers use a portion of their networks.
Marketing Strategy
Our marketing and sales strategy uses the advertising and marketing programs
that have been developed by Sprint PCS. We enhance Sprint PCS' marketing with
strategies we have tailored to our specific markets.
Use Sprint PCS' brand equity and marketing. We feature exclusively and
prominently the nationally recognized Sprint and Sprint PCS brand names in our
marketing effort. From our customers' point of view, they use our network and
the Sprint PCS national network seamlessly as a unified nationwide network.
Pricing. Our use of the Sprint PCS national pricing strategy offers our
customers simple, easy-to-understand service plans. Sprint PCS' pricing plans
are typically structured with monthly recurring charges, large local calling
areas, bundles of minutes and service features such as voicemail, caller ID,
call waiting, call forwarding and three-way calling. We also feature Sprint PCS
Free and Clear plans, which offer simple, affordable plans for every consumer
and business customer, include long distance calling from anywhere on its
nationwide network. In addition, under the Sprint PCS service plans, customers
who do not meet certain credit criteria can qualify for our digital wireless
services under the Clear Pay Program. The Clear Pay Program replaced the No
Deposit Account Spending Limit ("NDASL") program and is substantially similar
but with an increased emphasis on payments of outstanding amounts. Under the
Clear Pay Program, customers who do not meet certain credit criteria can select
any plan offered, subject to an account spending limit.
Local focus. Our local focus enables us to supplement Sprint PCS' marketing
strategies with our own strategies tailored to each of our specific markets.
These include attracting local businesses as agents to enhance our sales and
distribution channels and drawing on our management team's experience in the
southeastern United States. We use local radio, television and newspaper
advertising to sell our products and services in each of our markets. We have
established a local sales force to execute our marketing strategy through our
Sprint PCS stores. We also employ a direct sales force dedicated to business
sales.
Advertising and promotions. Sprint PCS uses national as well as regional
television, radio, print, outdoor and other advertising campaigns to promote
its products. We benefit from this national advertising in our territory at no
additional cost to us. Sprint PCS also runs numerous promotional campaigns
which provide customers with benefits such as additional features at the same
rate, free minutes of use for limited time periods or special prices on
handsets and other accessories. We are able to purchase promotional materials
related to these programs from Sprint PCS at their cost.
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Sponsorships. Sprint PCS sponsors numerous national, regional and local
events. These sponsorships provide Sprint PCS with brand name and product
recognition in high profile events, create a forum for sales and promotional
events and enhance our promotional efforts in our territory. Additionally, we
sponsor other local events in our territory to increase customer awareness of
the Sprint PCS network.
Sales and Distribution
Our sales and distribution plan mirrors Sprint PCS' proven multiple channel
sales and distribution plan. Key elements of our sales and distribution plan
consist of the following:
Sprint PCS stores. We currently operate 36 Sprint PCS stores within our
territory. These stores are located in metropolitan markets within our
territory, providing us with a strong local presence and a high degree of
visibility. We train our sales representatives to be informed and persuasive
advocates for Sprint PCS' services. Following the Sprint PCS model, these
stores have been designed to facilitate retail sales, bill collection and
customer service.
Sprint store within a RadioShack store. Sprint has an arrangement with
RadioShack to install a "store within a store." Currently, RadioShack has 98
stores in our territory that are available to offer Sprint PCS products and
services to our customers.
Other national third-party retail stores. In addition to RadioShack, we
benefit from the sales and distribution agreements established by Sprint PCS
with other national retailers, which currently include Best Buy, Circuit City,
Staples, Target, Office Max, Office Depot and Ritz Camera. These retailers and
others have approximately 187 retail stores in our 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 more than 50 local
stores in our territory.
National accounts and direct selling. We participate in Sprint PCS' national
accounts program. Sprint PCS has a national accounts team which focuses on the
corporate headquarters of large companies. Our direct sales force will target
the employees of these companies in our territories and cultivate other local
business customers. In addition, once a Sprint PCS national account manager
reaches an agreement with any company headquartered outside of our territory,
we service the offices and subscribers of that company located in our territory.
Inbound telemarketing. Sprint PCS provides inbound telemarketing sales to
answer our prospective customers' calls. As the exclusive provider of Sprint
PCS products and services in our territory, we use the national Sprint
1-800-480-4PCS number campaigns that generate call-in leads. Sprint PCS'
inbound telemarketing group handles these leads and the new subscriber will be
assigned to our territory.
Electronic commerce. Sprint PCS maintains an Internet site at
www.sprintpcs.com, which contains information on Sprint PCS products and
services. A visitor to the Sprint PCS Internet site can order, pay for a
handset, and activate their phone. Subscribers visiting the site also can
review the status of their account, including the number of minutes used in the
current billing cycle. Site visitors in our territory who purchase products and
services over the Sprint PCS Internet site will be assigned to our territory.
Suppliers and Equipment Vendors
We do not manufacture any of the handsets or network equipment we use in our
operations. We purchase our network equipment and handsets pursuant to various
Sprint PCS vendor arrangements that provide us with volume discounts. These
discounts have significantly reduced the overall capital required to build our
network and the costs of handsets to us.
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Under such arrangements, we currently purchase our network equipment from
Lucent Technologies, Inc., our handsets directly from Sprint PCS and our
accessories from certain other third party vendors.
Seasonality
Our business is subject to seasonality because the wireless industry is
heavily dependent on fourth calendar quarter results. Among other things, the
industry relies on higher customer additions and handset sales in the fourth
calendar quarter when compared to the other three calendar quarters. A number
of factors contribute to this trend, including: the increasing use of retail
distribution, which is heavily dependent upon the year-end holiday shopping
season; the timing of new product and service announcements and introductions;
competitive pricing pressures; and aggressive marketing and promotions. The
increased level of activity requires a greater use of our available financial
resources during this period.
Employees and Labor Relations
As of September 30, 2001, we employed 529 full-time employees. None of our
employees are represented by a labor union. We believe that we have good
relations with our employees.
OUR NETWORK OPERATIONS
General
The effective operation of our portion of the Sprint PCS network requires:
. public switched and long distance interconnection;
. the implementation of roaming arrangements; and
. the development of network monitoring systems.
We utilize Sprint PCS' Network Operations Control Center for
around-the-clock monitoring as well as our own switching centers' capabilities
for our network base stations and switches.
Sprint PCS developed the initial plan for the build-out of our Sprint PCS
network. We have further enhanced this plan to provide better coverage for our
Sprint PCS territory. Pursuant to our network operations strategy, we have
provided PCS to the largest communities in our markets and have covered
interstates and primary roads connecting these communities to each other and to
the adjacent major markets owned and operated by Sprint PCS.
As of September 30, 2001, our network consisted of four switches at two
switch centers and approximately 719 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. Ninety-nine percent of our operating cell sites are co-located.
Co-location describes the strategy of leasing available space on a tower or
cell site owned by another company rather than building and owning the tower or
cell site directly.
Our network connects to the public telephone network through local exchange
carriers, which facilitate the origination and termination of traffic between
our network and both local exchange and long distance carriers. Through our
Sprint PCS management agreements, we have the benefit of Sprint PCS-negotiated
interconnection agreements with local exchange carriers.
We use Sprint and other third party providers for long distance services and
for backhaul services. Under our management agreements with Sprint PCS, we are
required to use Sprint for long distance services and Sprint
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provides us with preferred rates for long distance services. Backhaul services
are the telecommunications services which other carriers provide to carry our
voice traffic from our cell sites to our switching facilities. When we use
Sprint for back haul services, we receive the same preferred rates made
available to Sprint PCS.
TECHNOLOGY
General
In 1993, the FCC allocated the 1900 MHz frequency block of the radio
spectrum for wireless PCS. Wireless PCS operates at a higher frequency and
employs more advanced digital technology than traditional analog cellular
telephone service. The enhanced capacity of digital systems, along with
enhancements in digital protocols, allows digital-based wireless technologies,
whether using wireless PCS or cellular frequencies, to offer new and enhanced
services, including greater call privacy and more robust data transmission,
such as facsimile, electronic mail and connecting notebook computers with
computer/data networks.
Presently, wireless PCS systems operate under one of three principal air
interface protocols: CDMA, time division multiple access (TDMA) or global
system for mobile communications (GSM). Wireless PCS operators in the United
States now have dual-mode or tri-mode handsets available so that their
customers can operate on different networks that employ different protocols.
CDMA Technology
Sprint PCS' network and its affiliates' networks all use CDMA technology.
CDMA technology is fundamental to accomplishing our business objective of
providing high volume, high quality airtime at a low cost. We believe that CDMA
provides important system performance benefits. CDMA systems offer more
powerful error correction, less susceptibility to fading and reduced
interference than analog systems. Using enhanced voice coding techniques, CDMA
systems achieve voice quality that is comparable to that of the typical
wireline telephone. This CDMA vocoder technology also employs adaptive
equalization which filters out annoying background noise more effectively than
existing wireline, analog cellular or other digital PCS phones. CDMA technology
also allows a greater number of calls within one allocated frequency and reuses
the entire frequency spectrum in each cell. In addition, CDMA technology
combines a constantly changing coding scheme with a low power signal to enhance
security and privacy. Vendors are currently developing additional encryption
capabilities which will further enhance overall network security. CDMA
technology is designed to provide flexible or "soft" capacity that permits a
system operator to temporarily increase the number of telephone calls that can
be handled within a cell. As a subscriber travels from one cell site to another
cell site, the call must be "handed off" to the second cell site. CDMA systems
transfer calls throughout the network using a technique referred to as a soft
hand-off, which connects a mobile customer's call with a new cell site while
maintaining a connection with the cell site currently in use.
CDMA offers a cost effective migration to the next generation of wireless
services. CDMA standards and products currently in place will allow existing
CDMA networks to be upgraded in a cost efficient manner to the next generation
of wireless technology. We anticipate that this next generation of technology
will offer data speeds of up to 144 kilobits per second, voice capacity
improvements of over 50% and improved battery life in the handset. It is
expected that these services will be deployed in CDMA networks no later than
mid-2002. Further standards are being developed for CDMA that will offer data
speeds in excess of 2,000 kilo bits per second and additional improvements in
voice capacity.
Research and Development
We currently do not conduct our own research and development. Instead we
benefit from Sprint PCS' and our vendors' extensive research and development
effort, which provides us with access to new technological products and
enhanced service features without significant research and development
expenditures of our own.
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We have been provided prompt access to any developments produced by Sprint PCS
for use in our network. We believe that new features and services will be
developed on the Sprint PCS network to take advantage of code division multiple
CDMA technology. We may incur additional expenses in modifying our network to
provide these additional features and services.
Intellectual Property
Other than our corporate name, we do not own any intellectual property that
is material to our business. "Sprint," the Sprint diamond design logo, "Sprint
PCS," "Sprint Personal Communication Services," "The Clear Alternative to
Cellular" and "Experience the Clear Alternative to Cellular Today" are service
marks registered with the United States Patent and Trademark Office and owned
by Sprint, Sprint PCS or their affiliates. Pursuant to our Sprint PCS
management agreements, we have the right to use, royalty-free, the Sprint and
Sprint PCS brand names and the Sprint diamond design logo and certain other
service marks of Sprint in connection with marketing, offering and providing
licensed services to end-users and resellers, solely within our Sprint PCS
territory.
Except in certain instances, Sprint PCS has agreed not to grant to any other
person a right or license to provide or resell, or act as agent for any person
offering, licensed services under the licensed marks in our Sprint PCS
territory except as to Sprint PCS' marketing to national accounts and the
limited right of resellers of Sprint PCS to inform their customers of handset
operation on the Sprint PCS network. In all other instances, Sprint PCS has
reserved for itself and its network partners the right to use the licensed
marks in providing its services, subject to its exclusivity obligations
described above, whether within or without our Sprint PCS territory.
Our Sprint PCS agreements contain numerous restrictions with respect to the
use and modification of any of the licensed marks.
Competition
Competition in the wireless communications industry is intense. We operate
in highly competitive markets. In our Sprint PCS territories, we compete with
national and regional cellular, PCS and other wireless providers. We believe
that our primary competition is with Verizon Wireless, Cingular, Alltel and
AT&T Wireless and its affiliate Triton PCS. These wireless service providers
offer services that are generally comparable to our PCS service. Many of our
competitors have financial resources and customer bases greater than ours.
Our ability to compete effectively with these other providers will depend on
a number of factors, including:
. the continued success of CDMA technology in providing better call clarity
and quality as compared to analog and cellular systems;
. our ability to upgrade our networks to accommodate new technologies,
including the upgrade to 1XRTT;
. Sprint PCS' competitive pricing with various options suiting individual
customer's calling needs;
. the continued expansion and improvement of the Sprint PCS nationwide
network;
. our extensive direct and indirect sales channels;
. our centralized Sprint PCS customer care systems; and
. our selection of handset options.
Many of our competitors have access to more licensed spectrum than the 10
MHz licensed to Sprint PCS in our southeast territory. Cellular service
providers have licenses covering at least 25 MHz of spectrum, and two competing
PCS providers have licenses to use at least 30 MHz in our territory. In
addition, certain of our competitors may be able to offer coverage in areas not
served by our Sprint PCS network, or, because of their
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calling volumes or their affiliations with, or ownership of, wireless
providers, may be able to offer roaming rates that are lower than those we
offer. PCS providers compete with us in providing some or all of the services
available through the Sprint PCS network and may provide services that we do
not. Additionally, we expect that existing cellular providers, some of whom
have been operational for a number of years and have significantly greater
financial and technical resources and customer bases than us, will continue to
upgrade their systems to provide digital wireless communication services
competitive with Sprint PCS.
We also compete with paging, dispatch and other mobile telecommunications
companies in our markets. Potential users of PCS systems may find their
communication needs satisfied by other current and developing technologies. One
or two-way paging or beeper services that feature voice messaging and data
display as well as tone-only service may be adequate for potential customers
who do not need immediate two-way voice communications.
In the future, we expect to face increased competition from entities
providing similar services using other communications technologies, including
satellite-based telecommunications and wireless cable systems. While some of
these technologies and services are currently operational, others are being
developed or may be developed in the future.
Over the past several years the FCC has auctioned and will continue to
auction large amounts of wireless spectrum that could be used to compete with
Sprint PCS. Based upon increased competition, we anticipate that market prices
for two-way wireless voice and data services generally will decline in the
future. Our ability to attract and retain customers will depend primarily on:
. the strength of the Sprint and Sprint PCS brand name, services and
features;
. our ability to upgrade our network to accommodate new technologies,
including the upgrade to 1XRTT;
. pricing;
. the location of our Sprint PCS markets;
. the size of our Sprint PCS territory;
. national network coverage and reliability; and
. customer care.
Our ability to compete successfully also will depend, in part, on the
ability of Sprint, Sprint PCS and us to anticipate and respond to various
competitive factors affecting the industry, including:
. new services that may be introduced;
. changes in consumer preferences;
. demographic trends;
. economic conditions; and
. discount pricing strategies by competitors.
9
SPRINT PCS AGREEMENTS
The following is a summary of the material terms and provisions of our
Sprint PCS agreements and the consent and agreement modifying the Sprint PCS
management agreement. The Sprint PCS agreements and consent and agreement have
been filed by us as exhibits to certain of our filings with the SEC. We urge
you to carefully review the Sprint PCS agreements and the consent and agreement.
Overview of Sprint PCS Relationship and Agreements
Under our long-term agreements with Sprint PCS, we have the right to
exclusively market PCS products and services under the Sprint and Sprint PCS
brand names in our territory. The agreements with Sprint PCS require us to
interface with the Sprint PCS wireless network by building our PCS network to
operate on the 10 MHz of PCS frequencies licensed to Sprint PCS in the 1900 MHz
range. The Sprint PCS agreements also give us access to Sprint PCS' equipment
discounts, roaming revenue from Sprint PCS customers traveling into our
territory, and various other back office services. Our relationship and
agreements with Sprint PCS provide strategic advantages, including avoiding the
need to fund up-front spectrum acquisition costs and the costs of establishing
billing and other customer services infrastructure. The Sprint PCS 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. Our Sprint PCS agreements will
automatically renew for the first 10-year renewal period unless we are in
material default on our obligations under the agreements. The Sprint PCS
agreements will automatically renew for two additional 10-year terms unless we
or Sprint PCS provide the other with two years prior written notice to
terminate the agreements.
We have four major agreements with Sprint and Sprint PCS:
. the management agreement;
. the services agreement;
. the trademark and service mark license agreement with Sprint; and
. the trademark and service mark license agreement with Sprint PCS.
In addition, Sprint PCS has entered into a consent and agreement with us
that modifies our management agreement for the benefit of the lenders under our
senior credit facility.
Management Agreement
Under our management agreement with Sprint PCS, we have agreed to:
. construct and manage a network in our territory in compliance with Sprint
PCS' PCS licenses and the terms of the management agreement;
. distribute during the term of the management agreement, Sprint PCS
products and services;
. use Sprint PCS' and our own distribution channels in our territory;
. conduct advertising and promotion activities in our territory; and
. manage that portion of Sprint PCS' customer base assigned to its territory.
Sprint PCS will supervise our PCS network operations and has the right to
unconditional access to our PCS network.
Exclusivity. We are designated as the only person or entity that can manage
or operate a PCS network for Sprint PCS in our territory. Sprint PCS and
related persons are prohibited from owning, operating, building or
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managing another wireless mobility communications network in our territory
while our management agreement is in place and no event has occurred that would
permit the agreement to be terminated. Sprint PCS is permitted under the
agreement 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 agreement specifies the requirements for
our network build-out plan. We agreed to cover a specified percentage of the
population within each of our 21 Sprint PCS markets by specified dates. We have
satisfied these initial network build-out requirements. We have agreed to
operate our PCS network, if technically feasible and commercially reasonable,
to provide for a seamless handoff of a call initiated in our territory to a
neighboring Sprint PCS network. If Sprint PCS decides to expand coverage within
our territory, Sprint PCS must provide us with written notice of the proposed
expansion. We have 90 days to determine whether we will build out the proposed
area. If we do not exercise this right, Sprint PCS can build out the territory
or permit another third party to do so. Any new area that Sprint PCS or a third
party builds out is removed from our territory.
Products and services. Our management agreement identifies the products and
services that we can offer in our territory. These products and services
include, but are not limited to, Sprint PCS consumer and business products and
services available as of the date of the agreement, or as modified by Sprint
PCS. We may offer non-Sprint PCS products and services in our territory under
limited circumstances and with Sprint PCS' concurrence. We may not offer
products and services that are confusingly similar to Sprint PCS products and
services. We may cross-sell services such as Internet access, customer premises
equipment, handsets, and prepaid phone cards with Sprint, Sprint PCS and other
Sprint PCS network partners. If we decide to use third parties to provide these
services, we must give Sprint PCS an opportunity to provide the services on the
same terms and conditions. We 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 PCS' consent, unless we
name the Sprint-owned local exchange carrier as the exclusive distributor.
We will participate in the Sprint PCS sales programs for national sales to
customers, and will pay the expenses and receive the compensation from national
accounts located in our territory. We must use Sprint's long distance service
which we 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. We must offer Sprint PCS subscriber
pricing plans designated for regional or national offerings. We will receive
92% of collected revenues received by Sprint PCS for Sprint PCS products and
services from customers in our territory. This amount excludes roaming
revenues, 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, we will retain 100% of these revenues. Although many
Sprint PCS subscribers will purchase a bundled pricing plan that allows roaming
anywhere on the Sprint PCS and network partners' networks without incremental
roaming charges, we earn roaming revenues from every minute that a Sprint PCS
subscriber from outside our territory is carried on our PCS network. These
revenues are based on an established per minute rate for Sprint PCS'
subscribers roaming in our territory. Similarly, we will pay for every minute
subscribers from our territory use the Sprint PCS nationwide network outside
our territory. Pursuant to an agreement in principle announced in April 2001,
Sprint PCS provided notice of a reduction of the roaming rate to $0.15 per
minute of use on June 1, 2001, and to $0.12 per minute of use on October 1,
2001. The details of the agreement in principle with respect to periods after
December 31, 2001 have not yet been finalized, but will be not less than $0.10
per minute until after December 31, 2002. The analog roaming rate for
subscribers roaming onto a non-Sprint PCS provider's network is set under
Sprint PCS' third party roaming agreements.
Advertising and promotions. Sprint PCS is responsible for all national
advertising and promotion of Sprint PCS products and services. We are
responsible for advertising and promotion in our territory, including a portion
of the cost of any promotion or advertising done by any third party retailers
in our territory pursuant to a national
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cooperative advertising agreement with Sprint PCS. Sprint PCS' service area
includes the urban markets around our territory. Sprint PCS will pay for
advertising in these markets. Given the proximity of those markets to our
markets, we expect considerable spill-over from Sprint PCS' advertising in
surrounding urban markets.
Program requirements. We are required to comply with Sprint PCS' program
requirements for technical standards, customer service standards, national and
regional distribution and national accounts programs. Sprint PCS can adjust the
program requirements from time to time under the conditions provided in the
management agreement. We have the right to appeal to Sprint PCS' management
adjustments in the program requirements, if the adjustment: (1) causes us to
spend more than 5% of the sum of our equity and long term debt, or (2) causes
our operating expenses to increase by more than 10% on a net present value
basis. If Sprint PCS denies our appeal, we have 10 days after the denial to
submit the matter to arbitration. If we do not submit the matter to arbitration
within the 10-day period or comply with the program adjustment, Sprint PCS has
the termination rights described below.
Non-competition. We may not offer Sprint PCS products and services outside
our territory without the prior written approval of Sprint PCS. Within our
territory, we may offer, market or promote telecommunications products and
services only under the Sprint PCS brands, our own brands, brands of related
parties or other products and services approved under the management agreement,
except that no brand of a significant competitor of Sprint PCS or its related
parties may be used for those products and services. To the extent we obtain
licenses to provide PCS services outside our territory, we may not use the
spectrum to offer Sprint PCS products and services without prior written
consent from Sprint PCS.
Inability to use non-Sprint PCS brand. We 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 PCS brand, except for sales to resellers
approved by Sprint PCS or required by law or as otherwise permitted under the
trademark and service mark license agreements.
Rights of first refusal. Sprint PCS has certain rights of first refusal to
buy our assets upon a proposed sale of all or substantially all of our assets.
Termination of management agreement. Our management agreement can be
terminated as a result of:
. termination of Sprint PCS' PCS licenses in our territory;
. we or our related parties fail to make any payment due under the Sprint
PCS agreements;
. any other uncured breach under the management agreement;
. our bankruptcy;
. subject to the limitations in the management agreement, the management
agreement does not comply with any applicable law in any material respect;
or
. the termination of a trademark and service mark license agreement.
The termination or non-renewal of the management agreement triggers certain
of our rights and those of Sprint PCS.
If we have the right to terminate our management agreement because of an
event of termination caused by Sprint PCS, generally we may:
. require Sprint PCS to purchase all of our operating assets used in
connection with our Sprint PCS network for an amount equal to at least 88%
of our entire business value as defined below (unless Sprint PCS becomes
the licensee for 20 MHz of spectrum in our territory, in which case, 80%
of our entire business value);
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. if Sprint PCS is the licensee for 20 MHz or more of the spectrum on the
date we terminate the management agreement, require Sprint PCS to sell to
us, 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 PCS
of the license plus any microwave relocation costs paid by Sprint PCS or
(2) 9% of our entire business value; or
. sue Sprint PCS for damages or submit the matter to arbitration and thereby
not terminate the related management agreement.
If Sprint PCS has the right to terminate our management agreement because of
an event of termination caused by us, generally Sprint PCS may:
. require us to sell our operating assets to Sprint PCS for an amount equal
to 72% of our entire business value;
. require us to purchase, subject to governmental approval, the licensed
spectrum in our territory for an amount equal to the greater of (1) the
original cost to Sprint PCS of the license plus any microwave relocation
costs paid by Sprint PCS or (2) 10% of our entire business value;
. take any action as Sprint PCS deems necessary to cure our breach of our
management agreement, including assuming responsibility for, and
operating, our Sprint PCS network; or
. sue us for damages or submit the matter to arbitration and thereby not
terminate our management agreement.
Non-renewal. If Sprint PCS gives us timely notice that it does not intend to
renew our management agreement, we may:
. require Sprint PCS to purchase all of our operating assets used in
connection with our PCS network for an amount equal to at least 88% of our
entire business value (unless Sprint PCS becomes the licensee for 20 MHz
of spectrum in our territory, in which case, 80% of our entire business
value); or
. if Sprint PCS is the licensee for 20 MHz or more of the spectrum on the
date the management agreement is terminated, require Sprint PCS to assign
to us, 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 PCS
of the license plus any microwave relocation costs paid by Sprint PCS or
(2) 10% of our entire business value.
If we give Sprint PCS timely notice of non-renewal of our management
agreement, or both we and Sprint PCS give notice of non-renewal, or our
management agreement can be terminated for failure to comply with legal
requirements or regulatory considerations, Sprint PCS may:
. purchase all of our operating assets for an amount equal to 80% of our
entire business value; or
. require us to purchase, subject to governmental approval, the licensed
spectrum for an amount equal to the greater of (1) the original cost to
Sprint PCS of the license plus any microwave relocation costs paid by
Sprint PCS or (2) 10% of our entire business value.
Determination of Entire Business Value. If the entire business value is to
be determined, we and Sprint PCS 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:
. the entire business value is based on the price a willing buyer would pay
a willing seller for the entire on-going business;
. then-current customary means of valuing a wireless telecommunications
business will be used;
. the business is conducted under the Sprint and Sprint PCS brands and the
related Sprint PCS agreements;
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. that we own the spectrum and frequencies presently owned by Sprint PCS and
subject to our Sprint PCS agreements; and
. 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.
The rights and remedies of Sprint PCS outlined in our management agreement
resulting from an event of termination of the management agreement have been
materially amended by the consent and agreement as discussed below. However, at
such time that there is no outstanding debt under the consent and agreement,
such amendments to the rights and remedies of Sprint PCS reflected in the
consent and agreement will not be in effect.
Insurance. We are required to obtain and maintain with financially reputable
insurers, who are licensed to do business in all jurisdictions where any work
is performed under our management agreement and who are reasonably acceptable
to Sprint PCS, workers' compensation insurance, commercial general liability
insurance, business automobile insurance, umbrella excess liability insurance
and "all risk" property insurance.
Indemnification. We have agreed to indemnify Sprint PCS and its directors,
employees and agents and related parties of Sprint PCS and their directors,
employees and agents against any and all claims against any of the foregoing
arising from our violation of any law, a breach by us of any representation,
warranty or covenant contained in our management agreement or any other
agreement between us or our related parties and Sprint PCS, our ownership of
the operating assets or the actions or the failure to act of anyone employed or
hired by us in the performance of any work under our management agreement,
except we will not indemnify Sprint PCS for any claims arising solely from the
negligence or willful misconduct of Sprint PCS. Sprint PCS has agreed to
indemnify our directors, employees and agents against all claims against any of
the foregoing arising from Sprint PCS' violation of any law and from Sprint
PCS' breach of any representation, warranty or covenant contained in our
management agreement or any other agreement between Sprint PCS and its related
parties and us or our related parties, except Sprint PCS will not indemnify us
for any claims arising solely from our negligence or willful misconduct.
Services Agreement
The services agreement outlines various back office services provided by
Sprint PCS and available to us at established rates. Sprint PCS can change any
or all of the service rates one time in each 12-month period. Available
services include: billing, customer 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 PCS may contract with
third parties to provide expertise and services identical or similar to those
to be made available or provided to us. We have agreed not to use the services
received under our services agreement in connection with any other business or
outside our territory. We may discontinue use of selected services upon three
months' prior written notice, provided that certain services many be terminated
only with a group of other selected services. Sprint PCS may discontinue a
service upon nine months' prior written notice. The services agreement
automatically terminates upon termination of the management agreement. The
services agreement may not be terminated for any reason other than the
termination of the management agreement.
We and Sprint PCS 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.
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Trademark and Service Mark License Agreements
We have non-transferable, royalty-free licenses to use the Sprint and Sprint
PCS brand names and "diamond" symbol, and several other U.S. trademarks and
service marks such as "The Clear Alternative to Cellular" and "Clear Across the
Nation" on Sprint PCS products and services. Our use of the licensed marks is
subject to our adherence to quality standards determined by Sprint and Sprint
PCS and use of the licensed marks in a manner which would not reflect adversely
on the image of quality symbolized by the licensed marks. We have agreed to
promptly notify Sprint and Sprint PCS of any infringement of any of the
licensed marks within our territory of which we become aware and to provide
assistance to Sprint and Sprint PCS in connection with Sprint's and Sprint PCS'
enforcement of their respective rights. We have agreed with Sprint and Sprint
PCS to indemnify each other for losses incurred in connection with a material
breach of the trademark license agreements. In addition, we have agreed to
indemnify Sprint and Sprint PCS from any loss suffered by reason of our use of
the licensed marks or marketing, promotion, advertisement, distribution, lease
or sale of any Sprint or Sprint PCS products and services other than losses
arising solely out of our use of the licensed marks in compliance with certain
guidelines.
Sprint and Sprint PCS can terminate the trademark and service mark license
agreements if we file for bankruptcy, materially breach the agreement or our
management agreement is terminated. We can terminate our trademark and service
mark license agreements upon Sprint's or Sprint PCS' abandonment of the
licensed marks or if Sprint or Sprint PCS files for bankruptcy, or our
management agreement is terminated.
Consent and Agreement in Connection with our Senior Credit Facility
Sprint PCS has entered into a consent and agreement with the administrative
agent under our senior credit facility, which we have acknowledged, that
modifies Sprint PCS' rights and remedies under our management agreement for the
benefit of the senior lenders and any refinancing of our senior credit
facility. Lehman Brothers Commercial Paper, Inc., a subsidiary of Lehman
Brothers, Inc., is the administrative agent under our senior credit facility.
The consent generally provides, among other things, the following:
. Sprint PCS' consent to the pledge of our subsidiary stock and the grant of
a security interest in all of our assets including our Sprint PCS
agreements;
. that our Sprint PCS agreements may not be terminated by Sprint PCS until
our senior credit facility is satisfied in full pursuant to the terms of
the consent, unless our stock or assets are sold to a purchaser who does
not continue to operate our business as a Sprint PCS network, which sale
requires the approval of the administrative agent;
. a prohibition on competing Sprint PCS networks in our territory;
. for Sprint PCS to maintain 10 MHz of PCS spectrum in all of our markets;
. for redirection of payments from Sprint PCS to the administrative agent
under specified circumstances;
. for Sprint PCS and the administrative agent to provide to each other
notices of default;
. the ability to appoint an interim replacement, including Sprint PCS, to
operate our PCS network under our Sprint PCS agreements after an
acceleration of our senior credit facility or an event of termination
under our Sprint PCS agreements;
. the ability of the administrative agent or Sprint PCS to assign the Sprint
PCS agreements and sell our assets to a qualified purchaser other than a
major competitor of Sprint PCS or Sprint;
. the ability to purchase spectrum from Sprint PCS and sell our assets to
any qualified purchaser; and
. the ability of Sprint PCS to purchase our assets or debt.
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Consent to security interest and pledge of stock. Sprint PCS has consented
to the grant of the following:
. a first priority security interest in all of our assets including our
Sprint PCS agreements;
. a lien upon all of our assets and property including our rights under our
Sprint PCS agreements; and
. a first priority security interest in the capital stock and equity
interests of our subsidiaries and future subsidiaries.
Sprint PCS has agreed to acknowledge the grant of these security interests
and to waive its right to challenge or contest the validity of the interests.
Agreement not to terminate Sprint PCS agreements until the obligations under
financings are repaid. Sprint PCS has agreed not to exercise its rights or
remedies under the Sprint PCS agreements, except its right to cure certain
defaults, including its right to terminate the Sprint PCS agreements and
withhold payments, other than rights of setoff, until the senior credit
facility is satisfied in full pursuant to the terms of the consent. Sprint PCS
has agreed that until our senior credit facility is satisfied in full, the
failure of a party related to us to pay any amount under any agreement with
Sprint PCS, other than the Sprint PCS agreements, or its related parties will
not constitute a breach of our Sprint PCS agreements.
No competition until obligations under the senior credit facility is repaid.
Sprint PCS has agreed that it will not permit any person other than us, or a
successor manager to be a manager or operator for Sprint PCS in our territory,
until our senior credit facility is satisfied in full pursuant to the terms of
our consent. Consistent with the management agreement, while the senior credit
facility is outstanding, Sprint PCS can sell PCS services through its national
accounts, permit resellers (for which we have chosen not to exercise our rights
of first refusal) and build new geographical areas within our territory.
Similarly, Sprint PCS has agreed that it will not own, operate, build or manage
another wireless mobility communications network in our territory unless it is
permitted under the management agreement or the management agreement is
terminated in accordance with the consent, and the senior credit facility is
satisfied in full pursuant to the terms of the consent.
Maintain 10 MHz of spectrum. Sprint PCS has agreed to own at least 10 MHz of
PCS spectrum in our territory until the first of the following events occurs:
. our obligations under the senior credit facility are satisfied in full
pursuant to the terms of our consent;
. the sale of spectrum is completed under the consent, as discussed below;
. the sale of operating assets is completed under the consent, as discussed
below; or
. the termination of our management agreement.
Restrictions on assignment and change of control do not apply to lenders and
the administrative agent. Sprint PCS has agreed not to apply the restrictions
on assignment of the Sprint PCS agreements and changes in control of our
ownership to the lenders under the senior credit facility or the administrative
agent. The assignment and change of control provisions in the Sprint PCS
agreements will apply if the assignment or change of control is to someone
other than the administrative agent or a lender under the senior credit
facility, or is not permitted under the consent.
Redirection of payments from Sprint PCS to the administrative agent. Sprint
PCS has agreed to make all payments due from Sprint PCS to us under the Sprint
PCS agreements directly to the administrative agent if the administrative agent
provides Sprint PCS with notice that an event of default has occurred and is
continuing under the senior credit facility. Payments to the administrative
agent would cease upon the cure of the event of default.
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Notice of defaults. Sprint PCS has agreed to provide to the administrative
agent a copy of any written notice it sends to us regarding an event of
termination or an event that if not cured, or if notice is provided, would be
an event of termination under our Sprint PCS agreements. Sprint PCS also has
acknowledged that notice of an event of termination under the Sprint PCS
agreements constitutes an event of default under the senior credit facility.
The administrative agent is required to provide Sprint PCS a copy of any
written notice sent to us regarding an event of default or default under the
senior credit facility instruments.
Right to cure. Sprint PCS and the administrative agent have the right, but
not the obligation, to cure a default under the Sprint PCS agreements. During
the first six months as interim managers Sprint PCS' 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 consent, of the obligations
under the senior credit facility.
Modification of termination rights. The consent modifies the rights and
remedies under the management agreement provided in an event of termination and
grants the provider of the senior credit facility certain rights in the event
of a default under the instruments governing the senior credit facility. The
rights and remedies of the administrative agent under the senior credit
facility vary based on whether we have:
. defaulted under our debt obligations but no event of termination has
occurred under our management agreement; or
. breached our management agreement.
The consent generally permits the appointment of a person to run our
business under our Sprint PCS agreements on an interim basis and establish a
process for sale of our business. The person designated to operate our business
on an interim basis is permitted to collect a reasonable management fee. If
Sprint PCS 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 our
business plus out-of-pocket expenses. Sprint PCS will collect its fee by setoff
against the amounts owed to us under our Sprint PCS agreements with them. In
the event of an acceleration of obligations under the senior credit facility
and for up to two years thereafter, Sprint PCS shall retain only one-half of
the 8% of collected revenues that it would otherwise be entitled to retain
under our Sprint PCS agreements. Sprint PCS may retain the full 8% after the
second anniversary of the date of acceleration if Sprint PCS has not been
appointed to run our business on an interim basis or earlier if our business is
sold to a third party. We or the administrative agent will be entitled to
receive the remaining one-half of the collected revenues that Sprint PCS would
otherwise have retained. The amount advanced to us or the administrative agent
is to be evidenced by an interest-bearing promissory note. The promissory note
will mature on the earlier of (1) the date a successor manager is qualified and
assumes our rights and obligations under our Sprint PCS agreements or (2) the
date on which our operating assets or equity are purchased by a third party.
Default under the senior credit facility without a management agreement
breach. If we default on our obligations under our senior credit facility and
there is no default under our management agreement with Sprint PCS, Sprint PCS
has agreed to permit the administrative agent to elect to take any of the
following actions:
. allow us to continue to operate our business under our Sprint PCS
agreements;
. appoint Sprint PCS to operate our business on an interim basis; or
. appoint a person other than Sprint PCS to operate our business on an
interim basis.
Appointment of Sprint PCS or third party designee by administrative agent to
operate business. If the administrative agent appoints Sprint PCS to operate
our business, Sprint PCS must accept the appointment within 14 days or
designate another person to operate our business who also is an affiliate of
Sprint PCS or is acceptable to the administrative agent. Sprint PCS 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 the administrative
agent for an additional
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six months or an additional 12 months if the aggregate population served by all
of Sprint PCS' affiliates is less than 40 million. If the term is extended
beyond the initial six-month period, the administrative agent will be required
to reimburse Sprint PCS or its designated person 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 our stockholders' equity
value plus the outstanding amount of our long term debt. Sprint PCS 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 administrative agent has the
right to appoint our successor subject to the requirements described below.
Appointment of third party by administrative agent to operate business. If
the administrative agent appoints a person other than Sprint PCS to operate our
business on an interim basis, the third party must:
. agree to serve for six months unless terminated by Sprint PCS or the
administrative agent for cause;
. meet the requirements for a successor to an affiliate and not be
challenged by Sprint PCS for failing to meet these requirements within 20
days after the administrative agent provides Sprint PCS with information
on the third party; and
. agree to comply with the terms of the Sprint PCS agreements.
The third party is required to operate the Sprint PCS network in our
territory but is not required to assume our existing liabilities. If the third
party materially breaches our Sprint PCS agreements, this breach will be
treated as an event of default under our management agreement with Sprint PCS.
Management agreement breach. If we breach our Sprint PCS agreements and such
breach causes a default under our senior credit facility, Sprint PCS has the
right to designate who will operate our business on an interim basis. Sprint
PCS has the right to:
. allow us to continue to operate our business under our Sprint PCS
agreements if approved by the administrative agent;
. operate our business on an interim basis; or
. appoint a person other than Sprint PCS that is acceptable to the
administrative agent, which acceptance cannot be unreasonably withheld and
must be given for another Sprint PCS affiliate, to operate our business on
an interim basis.
When a debt default is caused by a breach of our management agreement with
Sprint PCS, the administrative agent only has a right to designate who will
operate our business on an interim basis if Sprint PCS elects not to operate
such business or designate a third party to operate our business on an interim
basis.
Election of Sprint PCS to serve as interim manager or designate a third
party to operate business. If Sprint PCS elects to operate our business on an
interim basis or designate a third party to operate our business on an interim
basis, Sprint PCS or the third party may operate our business for up to six
months at the discretion of Sprint PCS. 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 us and all other affiliates of Sprint PCS
is less than 40 million. If the term is extended beyond the initial six-month
period, the administrative agent will be required to reimburse Sprint PCS or
its third party designee 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 our stockholder's equity value plus the outstanding amount of our
long term debt. Sprint PCS 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 PCS, subject to the approval of the administrative agent, has the
right to appoint a successor interim manager to operate our business.
Appointment of third party by administrative agent to operate business. If
Sprint PCS gives the administrative agent notice of a breach of our management
agreement, the debt repayment is accelerated, and
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Sprint PCS does not agree to operate our business or is unable to find a
designee, the administrative agent may designate a third party to operate our
business. The administrative agent has this same right if Sprint PCS or the
third party designated by Sprint PCS resigns and is not replaced within 30
days. The third party selected by the administrative agent must:
. agree to serve for six months unless terminated earlier by Sprint PCS for
cause by the administrative agent in its discretion;
. meet the requirements for a successor to an affiliate and not be
challenged by Sprint PCS for failing to meet the requirements within 20
days after the administrative agent provides Sprint PCS with information
on the third party; and
. agree to comply with the terms of our Sprint PCS agreements.
The third party may continue to operate the business after the six month
period at the administrative agent's discretion, so long as the third party
continues to satisfy the requirements to be a successor to an affiliate. The
third party is required to operate the Sprint PCS network in our territory, but
is not required to assume our existing liabilities.
Purchase and sale of operating assets. The consent establishes a process for
the sale of our operating assets in the event of a default and acceleration
under the senior credit facility. Our stockholders have approved the sale of
our operating assets pursuant to the terms of our consent.
Sprint PCS' right to purchase on acceleration of amounts outstanding under
the senior credit facility. Subject to the requirements of applicable law,
Sprint PCS has the right to purchase our operating assets upon notice of an
acceleration of the senior credit facility under the following terms:
. in addition to the purchase price requirements of the management
agreement, the purchase price must include the payment or assumption in
full, pursuant to the terms of the consent, of the senior credit facility;
. Sprint PCS must notify the administrative agent of its intention to
exercise the purchase right within 60 days of receipt of the notice of
acceleration;
. the administrative agent is prohibited for a period of at least 120 days
after the acceleration or until Sprint PCS rescinds its intention to
purchase from enforcing its security interest if Sprint PCS has given
notice of its intention to exercise the purchase right;
. if we receive a written offer that is acceptable to us to purchase our
operating assets within a specified period after the acceleration, Sprint
PCS has the right to purchase our operating assets on terms and conditions
at least as favorable to us as the offer we receive. Sprint PCS 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 us; and
. upon completion of the sale to Sprint PCS, the administrative agent must
release the security interests upon satisfaction in full pursuant to the
terms of the consent of the obligations under the senior credit facility.
If the administrative agent acquires our operating assets, Sprint PCS has
the right for 60 days to notify the administrative agent that it wants to
purchase our operating assets for an amount not less than the sum of the
aggregate amount paid by the lenders under the senior credit facility for the
operating assets plus an aggregate amount sufficient to satisfy in full the
obligations under the senior credit facility pursuant to the terms of our
consent. If Sprint PCS purchases our operating assets under these provisions,
the administrative agent must release the security interests securing the
senior credit facility.
If the administrative agent receives an offer to purchase our operating
assets, Sprint PCS has the right to purchase our operating assets on terms and
conditions at least as favorable as the terms and conditions in the
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proposed offer within 14 days of Sprint PCS' receipt of notice of the offer,
and so long as the conditions of Sprint PCS' 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 PCS does not purchase
the operating assets following an acceleration of the obligations under the
senior credit facility, the administrative agent may sell our operating assets.
Subject to the requirements of applicable law, the administrative agent has two
options:
. to sell the assets to an entity that meets the requirements to be a
successor under our Sprint PCS agreements; or
. 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 administrative agent may sell our operating assets and
assign the agreements to entities that meet the following requirements to
succeed us:
. the person has not materially breached a material agreement with Sprint
PCS 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;
. the person is not named by Sprint PCS as a prohibited successor;
. the person has reasonably demonstrated its credit worthiness and can
demonstrate the ability to service the indebtedness and meet the
requirements of the build-out plan; and
. the person agrees to be bound by our Sprint PCS agreements.
The administrative agent is required to provide Sprint PCS with information
necessary to determine if a buyer meets the requirements to succeed us. Sprint
PCS has 20 days after its receipt of this information to object to the
qualifications of the buyer to succeed us. If Sprint PCS 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
our Sprint PCS agreements. The consent 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 Sprint PCS agreements.
Sale of assets to non-successor. Subject to the requirements of applicable
law, the administrative agent may sell our assets to a party that does not meet
the requirements to succeed us. If such a sale is made:
. Sprint PCS may terminate our Sprint PCS agreements;
. the buyer may purchase from Sprint PCS 5, 7.5 or 10 MHz of the PCS
spectrum licensed to Sprint PCS in our territory under specified terms;
. 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 PCS, the buyer may only buy 5MHz of
spectrum;
. the price to purchase the spectrum is equal to the sum of the original
cost of the license to Sprint PCS pro rated on a population and a spectrum
basis, plus the cost paid by Sprint PCS for microwave clearing in the
spectrum ultimately acquired by the buyer of our assets and the amount of
carrying costs attributable to the license and microwave clearing costs
from the date of the consent until the closing of the sale, based on a
rate of 12% per annum;
. the buyer will receive from Sprint PCS the customers with the Mobile
Identification Number ("MIN") assigned to the market area covered by the
purchased spectrum except for customers of national accounts and resellers;
. with limited exceptions, Sprint PCS will not solicit for six months the
customers transferred to the buyer with the MIN assigned to the market
area;
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. the buyer and Sprint PCS will enter into a mutual roaming agreement with
prices equal to the lesser of the most favored pricing provided by buyer
to third parties roaming in the geographic area and the national average
paid by Sprint PCS to third parties; and
. Sprint PCS will have the right to resell the buyer's wireless services at
most favored nations pricing.
Right to purchase debt obligations. Following an acceleration under the
senior credit facility and until the 60-day anniversary of the filing of a
petition of bankruptcy, Sprint PCS has the right to purchase our obligations
under the senior credit facility at a purchase price equal to the amount of the
obligations other than interest accrued and fees and expenses that are deemed
to be unreasonable.
Modification and amendment of consent. If Sprint PCS modifies or amends the
form of consent and agreement it enters into with a lender to another Sprint
PCS affiliate that serves an area with population exceeding 5.0 million, then
Sprint PCS agrees to give the administrative agent written notice of the
amendments and to amend the consent in the same manner at the administrative
agent's request; provided, however, that Sprint PCS is not required to amend
the consent to:
. incorporate selected changes designated by the administrative agent unless
Sprint PCS consents to making only the selected changes; or
. incorporate changes made for the benefit of a lender because of
circumstances related to a particular Sprint PCS affiliate other than us.
The following circumstances would not be considered related to a particular
Sprint PCS affiliate and, subject to the provisions described in the preceding
sentence, could result in amendment of the consent (if the 5.0 million
population threshold is met as described above):
. any form of recourse to Sprint PCS or similar form of credit enhancement;
. any change in Sprint PCS's right to purchase our operating assets or
capital stock under the management agreement or Sprint PCS's right to
purchase the obligations under the senior credit facility;
. any change to our right or the right of the administrative agent or the
lenders under the senior credit facility to sell the collateral or
purchase spectrum from Sprint PCS;
. any change in the ownership status, terms of usage or the amount of
spectrum that we may purchase from Sprint PCS;
. any material change in the flow of certain revenues between Sprint PCS and
us;
. any changes to the obligations required to be assumed by, or
qualifications for, or appointment of, anyone other than us who can be
appointed to operate our business on an interim basis under our management
agreement or purchase our business and continue to operate under our
management agreement;
. any changes to the consent and agreement terms on confidentiality,
non-compete or eligible buyers of the business;
. any clarifications of FCC compliance issues;
. any issuance of legal opinions; and
. any changes to the requirements described in this section.
Termination of consent. The consent will terminate upon the first to occur
of:
. repayment in full of all obligations under the senior credit facility and
termination of the senior credit facility; and
. termination of our Sprint PCS agreements.
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REGULATION OF THE WIRELESS TELECOMMUNICATIONS INDUSTRY
Federal Regulation
Federal Communications Commission Regulation. The FCC regulates the
licensing, construction, operation, acquisition and interconnection
arrangements of wireless telecommunications systems in the United States.
Specifically, we are subject to radio license regulation under Title III of the
Communications Act, as amended, as well as common carrier regulation under
Title II of the Communications Act, as amended. In addition, our operations are
subject to regulation as commercial mobile radio services, commonly referred to
as CMRS, and to service-specific personal communications service regulations.
The FCC has promulgated, and is in the process of promulgating and revising,
a series of rules, regulations and policies that affect our operations.
Penalties for violating the FCC's rules and policies can range from monetary
forfeitures to license revocation or nonrenewal of licenses. The FCC Title II
regulations applicable to our wireless operations include, among other things:
. requirements and standards, discussed further below, for the
interconnection of PCS networks with other wireless and wireline carriers;
. requirements to provide service upon reasonable request and prohibitions
on unjust or unreasonable discrimination by carriers between similarly
situated customers and the charging of unreasonable or unjust rates; and
. requirements to pay access charges, universal service funding (as
discussed below), and other regulatory and non-regulatory fees and charges.
We do not hold any radio licenses, but rather operate using spectrum
licensed to Sprint PCS under the Sprint PCS management agreements. Nonetheless,
we are subject to, or impacted by, a number of additional regulations and
requirements under Title III of the Communications Act, as amended. These
requirements include, among other things:
. requirements in most cases to obtain prior consent before the assignment
and/or transfer of control of a PCS license, as discussed below;
. limitations on the extent of non-U.S. ownership of radio licenses and the
qualifications of holders of radio licenses; and
. requirements for compliance of antenna sites with the National
Environmental Policy Act of 1969, including restrictions on emissions of
radio frequency radiation, as well as requirements on the marking and
lighting of antenna structures, and related notifications to the Federal
Aviation Administration, for certain antenna sites.
Furthermore, our operations are also subject to CMRS and service specific
regulation by the FCC. CMRS regulations include, among other things:
. limitations on having attributable interests (usually 20% or greater) in
broadband PCS, cellular and specialized mobile radio service, or SMR,
spectrum totaling more than 55 MHz in a given market (these limitations
will expire on January 1, 2003);
. requirements for carriers to provide access to 9-1-1 services from mobile
handsets, including handsets of users who are not subscribers of such
carrier, and for the network to provide enhanced location and other mobile
identification information to public safety answering points, as discussed
below;
. requirements to comply with the Communications Assistance to Law
Enforcement Act, commonly known as CALEA, including the dedication of
capacity and provision of access points for law enforcement agencies to
facilitate wiretaps and intercepts with valid authority; and
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. rules requiring implementation by November 24, 2002 of local number
portability, including the ability to deliver calls from the company's
networks to ported numbers anywhere in the country, and to contribute to
the Local Number Portability Fund.
The FCC has divided the 120 MHz of spectrum allocated to broadband PCS into
six frequency blocks, A through F. Through Sprint PCS, we operate under blocks
B, D and E. PCS specific regulations that affect our operations include, among
other things:
. presumptions regarding the grant or denial of PCS license renewals, as
discussed below;
. rules governing the height, power and physical emissions characteristics
of PCS transmitters;
. rules, discussed further below, requiring service providers to meet
specific coverage benchmarks by the end of the fifth year from being
licensed;
. rules to allow broadband PCS licensees to partition their market areas
and/or to disaggregate their assigned spectrum and to transfer partial
market areas or spectrum assignments to eligible third parties;
. prohibitions on a provider's restriction of resale, which will expire
November 24, 2002 unless the FCC extends them, although these prohibitions
apply to services and not to equipment such as handsets, whether alone or
in bundled packages; and
. rules requiring PCS providers to relocate, or otherwise compensate,
incumbent microwave users (or share in the relocation costs, if the
microwave user has already relocated) in the band if the deployment of PCS
would interfere with the microwave user's system.
Interconnection
The FCC has the authority to order interconnection between CMRS providers
(which includes us) and any other common carrier. The FCC has ordered local
exchange carriers to provide reciprocal compensation to CMRS providers for the
termination of traffic. Under these new rules, we benefit from interconnection
agreements negotiated by Sprint PCS for our network with Qwest, SBC, GTE and
several smaller independent local exchange carriers. Interconnection agreements
are negotiated on a statewide basis. If an agreement cannot be reached, parties
to interconnection negotiations can submit outstanding disputes to state
authorities for arbitration. Negotiated interconnection agreements are subject
to state approval.
Universal Service Requirements
The FCC and the states are required to establish a universal service program
to ensure that affordable, quality telecommunications services are available to
all residents of the United States of America. Sprint PCS is required to
contribute to the federal universal service program as well as existing state
programs. The FCC has determined that the contribution to the federal universal
service program is a variable percentage of interstate end-user
telecommunications revenues and was approximately 6.9% for the third and fourth
quarters of 2001. Although many states are likely to adopt a similar assessment
methodology for intrastate revenues, the states are free to calculate
telecommunications service provider contributions in any manner they choose as
long as the process is not inconsistent with the FCC's rules. At the present
time it is not possible to predict the extent of the our total federal and
state universal service assessments or our ability to recover costs associated
with the universal service fund.
Transfers, Assignments and Control of PCS Licenses
The FCC must give prior approval to the assignment of, or transfers
involving, substantial changes in ownership or control of a PCS license.
Non-controlling interests in an entity that holds a PCS license or operates PCS
networks generally may be bought or sold without prior FCC approval. In
addition, the FCC requires only post-consummation notification of certain pro
forma assignments or transfers of control.
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An integral element of these rules is that the FCC also requires licensees
to maintain a certain degree of control over their licenses. The Sprint PCS
agreements reflect an alliance that the parties believe meets the FCC
requirements for licensee control of licensed spectrum. If the FCC were to
determine that the Sprint PCS agreements need to be modified to increase the
level of licensee control, we have agreed with Sprint PCS under the terms of
our Sprint PCS agreements to use our best efforts to modify the agreements as
necessary to cause the agreements to comply with applicable law and to preserve
to the extent possible the economic arrangements set forth in the agreements.
If the agreements cannot be modified, the agreements may be terminated pursuant
to their terms. In addition to revoking the licenses, the FCC could also impose
monetary penalties on us.
Enhanced 911
In June 1996, the FCC adopted rules requiring broadband PCS and other CMRS
providers to implement enhanced emergency 911 capabilities by October 1, 2001
to requesting public safety answering points. Sprint PCS has obtained a waiver
of the enhanced emergency 911 capability requirements on a modified deployment
plan that would provide for completing emergency 911 deployment by 2005.
Communications Assistance for Law Enforcement Act
CALEA was enacted in 1994 to preserve electronic surveillance capabilities
by law enforcement officials in the face of rapidly changing telecommunications
technology. CALEA requires telecommunications carriers, including us, to modify
their equipment, facilities, and services to allow for authorized electronic
surveillance based on either industry or FCC standards. In 1997, industry
standard-setting organizations developed interim standards for wireline,
cellular, and broadband PCS carriers to comply with CALEA. In August 1999, the
FCC supplemented the interim industry standards with additional standards. For
interim industry standards, the deadline for compliance was June 30, 2000, and
for the additional standards established by the FCC, the deadline was September
30, 2001. In a recent Order, the FCC extended the September 30, 2001 compliance
date for wireline, cellular and broadband PCS carriers for implementation of a
packet-mode communications electronic surveillance capability; pursuant to this
decision, these carriers were given until November 19, 2001 to come into
compliance or to seek an individual extension from the FCC. The FCC also
suspended the September 30, 2001 compliance date for these carriers with
respect to implementation of Department of Justice/Federal Bureau of
Investigation "punch-list" electronic surveillance capabilities and will
establish a new compliance deadline in the near future.
Due to required hardware changes that have not yet been developed and
implemented by switch manufacturers, we joined with Sprint PCS to request an
extension of time for compliance with CALEA requirements. We may be granted
extensions for compliance, or we may be subject to penalties if we fail to
comply, including being assessed fines or having conditions imposed on the
licenses in our markets.
PCS License Renewal
PCS licensees can renew their licenses for additional 10 year terms. PCS
renewal applications are not subject to auctions. However, under the FCC's
rules, third parties may oppose renewal applications and/or file competing
applications. If one or more competing applications are filed, a renewal
application will be subject to a comparative renewal hearing. The FCC's rules
afford PCS renewal applicants involved in comparative renewal hearings with a
"renewal expectancy." The renewal expectancy is the most important comparative
factor in a comparative renewal hearing and is applicable if the PCS renewal
applicant has:
. provided "substantial service" during its license term; and
. substantially complied with all applicable laws and FCC rules and policies.
The FCC's rules define "substantial service" in this context as service that
is sound, favorable and substantially above the level of mediocre service that
might minimally warrant renewal.
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Build-Out Conditions of PCS Licenses
All PCS licenses are granted for 10-year terms conditioned upon timely
compliance with the FCC's build-out requirements. Pursuant to the FCC's
build-out requirements, all 30 MHz broadband PCS licensees must construct
facilities that offer coverage to one-third of the population within 5 years
and to two-thirds of the population within 10 years, and all 10 MHz broadband
PCS licensees must construct facilities that offer coverage to at least
one-quarter of the population within 5 years or make a showing of "substantial
service" within that 5 year period. Rule violations could result in license
cancellation or revocation.
Other Federal Regulations
Wireless systems, which we use in the provision of services, must comply
with certain FCC and FAA regulations regarding the siting, lighting and
construction of transmitter towers and antennas. The FCC also requires that
aggregate radio wave emissions from every site location meet certain standards.
Although we believe that our existing network meets these standards, a site
audit may reveal the need to reduce or modify emissions at one or more sites.
This would increase our costs and could have a material adverse affect on our
operations. In addition, these regulations will also affect site selection for
new network build-outs and may increase the costs of improving our network. The
increased costs and delays from these regulations may have a material adverse
affect on our operations. In addition, the FCC's decision to license a proposed
tower may be subject to environmental review pursuant to the National
Environmental Policy Act of 1969, or NEPA, which requires federal agencies to
evaluate the environmental impacts of their decisions under certain
circumstances. FCC regulations implementing NEPA place responsibility on each
applicant to investigate any potential environmental effects, including health
effects relating to radio frequency emissions, of a proposed operation and to
disclose any significant effects on the environment to the agency prior to
commencing construction. In the event that the FCC determines that a proposed
tower would have a significant environmental impact, the FCC would require
preparation of an environmental impact statement. This process could
significantly delay or prevent the registration or construction of a particular
tower or make tower construction more costly. In certain jurisdictions, local
laws or regulations may impose similar requirements.
Wireless Facilities Siting
States and localities are not permitted to regulate the placement of
wireless facilities so as to prohibit the provision of wireless services or to
discriminate among providers of such services. In addition, as long as a
wireless system complies with the FCC's rules, states and localities are
prohibited from using radio frequency health effects as a basis to regulate the
placement, construction or operation of wireless facilities. The FCC is
considering numerous requests for preemption of local actions affecting
wireless facilities siting.
Equal Access
Wireless providers are not required to provide equal access to common
carriers for toll services. However, the FCC is authorized to require unblocked
access to toll carriers subject to certain conditions.
State Regulation of Wireless Service
Section 332 of the Communications Act preempts states from regulating the
rates and entry of CMRS providers. However, states may petition the FCC to
regulate such providers and the FCC may grant such petition if the state
demonstrates that:
. market conditions fail to protect subscribers from unjust and unreasonable
rates or rates that are unjustly or unreasonably discriminatory; or
. when CMRS is a replacement for landline telephone service within the state.
To date, the FCC has granted no such petition. To the extent we provide
fixed wireless service in the future, we may be subject to additional state
regulation.
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INVESTMENT CONSIDERATIONS
VARIOUS PROVISIONS OF THIS ANNUAL REPORT ON FORM 10-K CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN RISK FACTORS, INCLUDING THOSE SET FORTH BELOW
AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. UNLESS THE CONTEXT OTHERWISE
REQUIRES, THE USE OF "WE", "OUR", "US" AND "THE COMBINED COMPANY" REFERS TO THE
COMBINED COMPANY OF AIRGATE AND iPCS AFTER GIVING EFFECT TO THE MERGER THAT WAS
COMPLETED ON NOVEMBER 30, 2001.
Risks Related to Our Business, Strategy and Operations
We have a limited operating history and we may not achieve or sustain
operating profitability or positive cash flows, which may result in a
decrease in our stock price
AirGate and iPCS have limited operating histories. Our ability to achieve
and sustain operating profitability will depend upon many factors, including
our ability to market Sprint PCS services and manage customer turnover rates.
In addition, a key factor in our operational performance after the merger
depends upon our ability to manage the growth of iPCS through the completion of
its network build-out and through implementing the combined company's best
practices to increase market penetration in iPCS' and AirGate's current and
future markets. iPCS will require significant funds for the continued
development, construction, testing, deployment and operation of its network.
These activities are expected to place demands on our managerial, operational
and financial resources. If we do not achieve and maintain positive cash flows
from operations when projected, our stock price may decrease.
Our stock price may be volatile and you may not be able to sell your shares
at or above the price you paid for them
The market price of our common stock could be subject to wide fluctuations
in response to factors such as the following, some of which are beyond our
control:
. quarterly variations in our operating results;
. operating results that vary from the expectations of securities analysts
and investors;
. changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors;
. changes in our relationship with Sprint PCS;
. announcements by Sprint PCS concerning developments or changes in its
business, financial condition or results of operations, or in its
expectations as to future financial performance;
. announcements of technological innovations or changes to, or new products
and services by Sprint PCS or our competitors;
. changes in results of operations and market valuations of other companies
in the telecommunications industry in general and the wireless industry in
particular, including Sprint PCS and its network partners and our
competitors;
. changes in laws and regulations;
. announcements by third parties of significant claims or proceedings
against us;
26
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
. general economic and competitive conditions.
The integration of AirGate and iPCS following the merger will present
significant challenges that could adversely affect our results of operations
AirGate acquired iPCS with the expectation that it would result in expanding
AirGate's existing network and customer base and leveraging the best operating
practices of both organizations. Achieving the benefits of the merger will
depend in part on integrating the operations of the two businesses in an
efficient manner. We cannot assure you that this will occur. To realize the
anticipated benefits of this combination, our management team must develop
strategies and implement a business plan that will successfully:
. manage our networks and markets;
. maintain adequate focus on existing business and operations while working
to integrate the two companies;
. combine two companies with limited operating histories;
. manage each company's cash and available credit lines for use in financing
future growth and working capital needs of such company;
. manage our marketing and sales;
. manage the transition of iPCS' senior management expertise to the combined
company; and
. retain and attract key employees of the combined company during a period
of transition.
We cannot assure you that combining the businesses of AirGate and iPCS, even
if achieved in an efficient, effective and timely manner, will result in
combined results of operations and financial conditions superior to those that
AirGate and iPCS could have achieved independently. The diversion of
management's attention from ongoing operations and any difficulties encountered
in the transition and integration process could have a material adverse effect
on our financial condition and results of operations.
Future sales of shares of our common stock, including sales of shares in the
proposed underwritten public offering or following the expiration of
"lock-up" arrangements, may negatively affect our stock price
As a result of the merger, the former iPCS securityholders received
approximately 12.4 million shares of our common stock and options and warrants
to purchase approximately 1.1 million shares of our common stock. The shares of
common stock issued in the merger represented approximately 47.5% of our common
stock, assuming the exercise of all outstanding warrants and options.
In connection with the merger, holders of substantially all of the
outstanding shares of iPCS common and preferred stock entered into "lock-up"
agreements with AirGate. The lock-up agreements impose restrictions on the
ability of such stockholders to sell or otherwise dispose of the shares of our
common stock that they received in the merger. The lock-up period commenced on
November 30, 2001 and extends for a minimum of 120 days and a maximum of 300
days after the effective time of the merger.
We have on file an effective registration statement on Form S-4 in order to
allow the former iPCS stockholders to freely resell the shares of our common
stock that they received in the merger. In addition, we entered into a
registration rights agreement at the effective time of the merger with some of
the former iPCS stockholders. The registration rights agreement requires us, at
the request of The Blackstone Group, referred to as
27
Blackstone, to use our best efforts to complete, within 120 days after the
effective time of the merger, an underwritten public offering of certain shares
of our common stock received in the merger by the former iPCS stockholders. We
have filed a registration statement on Form S-3 pursuant to which we intend to
effect, upon the request of Blackstone, an underwritten public offering of a
portion of the shares of our common stock held by certain of the former iPCS
stockholders. In addition, these former iPCS stockholders have an additional
demand registration right exercisable at any time after the first anniversary
of the effective time of the merger.
Sales of substantial amounts of shares of our common stock, or even the
potential for such sales, could lower the market price of our common stock and
impair our ability to raise capital through the sale of equity securities.
Parts of our territories have limited amounts of licensed spectrum, which may
adversely affect the quality of our service and our results of operations
Sprint PCS has licenses covering 10 MHz of spectrum in our southeast
territory. While Sprint PCS has licenses covering 30 MHz of spectrum throughout
most of our midwest territory, it has licenses covering only 10 MHz or 20 MHz
in parts of Illinois. As the number of customers in our territories increase,
this limited amount of licensed spectrum may not be able to accommodate
increases in call volume, may lead to increased dropped calls and may limit our
ability to offer enhanced services, all of which could result in increased
customer turnover and adversely affect our results of operations.
If we lose the right to install our equipment on certain wireless towers or
are unable to renew expiring leases or locate new sites for wireless towers
on favorable terms, our business and results of operations could be adversely
impacted
Substantially all of our cell sites are co-located on leased tower
facilities shared with one or more wireless providers. In addition, a large
portion of these leased tower sites are owned by a few tower companies. If a
master co-location agreement with one of these tower companies were to
terminate, or if one of these tower companies were unable to support our use of
its tower sites, we would have to find new sites or we may be required to
rebuild that portion of our network. In addition, the concentration of our cell
sites with a few tower companies could adversely affect our results of
operations if we are unable to renew expiring leases with such tower companies
on favorable terms.
The loss of the officers and skilled employees who we depend upon to operate
our business could adversely affect our results of operations
Our business is managed by a small number of executive officers. We believe
that our future success depends in part on our continued ability to attract and
retain highly qualified technical and management personnel. We may not be
successful in retaining our key personnel or in attracting and retaining other
highly qualified technical and management personnel. We currently have "key
man" life insurance for our chief executive officer. We do not have long-term
employment agreements with any of our executive officers.
Expanding our territory includes numerous risks and our failure to overcome
these risks and any other problems encountered may have a material adverse
effect on our business and reduce the market value of our securities
As part of our continuing operating strategy, we may expand our territory
through the grant of additional markets from Sprint PCS or through acquisitions
of other Sprint network partners. These transactions may require the approval
of Sprint PCS and commonly involve a number of risks, including the:
. difficulty of assimilating acquired operations and personnel;
. diversion of management's attention;
28
. disruption of ongoing business;
. impact on our cash and available credit lines for use in financing future
growth and working capital needs;
. inability to retain key personnel;
. inability to successfully incorporate acquired assets and rights into our
service offerings;
. inability to maintain uniform standards, controls, procedures and
policies; and
. impairment of relationships with employees, customers or vendors.
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business. In
connection with these transactions, we also may issue additional equity
securities, incur additional debt or incur significant amortization expenses
related to intangible assets.
Because the former iPCS stockholders did not provide AirGate with any
indemnification following the merger, iPCS will be responsible for any
undisclosed prior liabilities of iPCS
iPCS made certain representations and warranties to AirGate in the merger
agreement concerning iPCS' business and operations. The merger agreement did
not provide AirGate with any contractual indemnification from the iPCS
stockholders for any breaches of the representations and warranties of iPCS or
any failure of iPCS to comply with its obligations under the merger agreement.
As a result, iPCS will be responsible for any undisclosed prior liabilities of
iPCS. Such liabilities could materially impact our future consolidated results
of operations.
Risks Particular to Our Indebtedness
Both AirGate and iPCS have substantial debt that neither company may be able
to service; a failure to service such debt may result in the lenders under
such debt controlling AirGate's or iPCS' assets
The substantial debt of AirGate and iPCS has a number of important
consequences for the combined company's operations and our investors, including
the following:
. each company has to dedicate a substantial portion of any cash flow from
its operations to the payment of interest on, and principal of, its debt,
which will reduce funds available for other purposes;
. each company has a fully-financed business plan, but neither may be able
to obtain additional financing for unanticipated capital requirements,
capital expenditures, working capital requirements or other corporate
purposes;
. some of each company's debt, including financing under each company's
senior credit facility, will be at variable rates of interest, which could
result in higher interest expense in the event of increases in market
interest rates; and
. due to the liens on substantially all of each company's assets and the
pledges of stock of each company's existing and future subsidiaries that
secure AirGate's and iPCS' respective senior debt and senior subordinated
discount notes, lenders or holders of such senior subordinated discount
notes may control AirGate's or iPCS' assets or the assets of the
subsidiaries of either company in the event of a default.
The ability of both AirGate and iPCS to make payments on their respective
debt will depend upon each company's future operating performance which is
subject to general economic and competitive conditions and to financial,
business and other factors, many of which neither company can control. If the
cash flow from either company's operating activities is insufficient, we may
take actions, such as delaying or reducing capital expenditures, attempting to
restructure or refinance our debt, selling assets or operations, or seeking
additional equity capital. Any or all of these actions may not be sufficient to
allow us to service our debt obligations.
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Further, we may be unable to take any of these actions on satisfactory terms,
in a timely manner or at all. The credit facilities and indentures governing
AirGate's and iPCS' respective debt will limit our ability to take several of
these actions. The failure of AirGate or iPCS to generate sufficient funds to
pay its debts or to successfully undertake any of these actions could, among
other things, materially adversely affect the market value of our common stock.
If either AirGate or iPCS does not meet all of the conditions required under
its respective credit facility, such company may not be able to draw down all
of the funds it anticipates receiving from its senior lenders and we may not
be able to fund operating losses and working capital needs
As of November 30, 2001, AirGate had borrowed $95.3 million under its senior
credit facility and iPCS had borrowed $50.0 million under its senior credit
facility. The remaining $58.2 million available under AirGate's senior credit
facility and the remaining $90.0 million available under iPCS' senior credit
facility, a portion of which each company expects to borrow in the future, is
subject to the applicable company meeting all of the conditions specified in
its respective financing documents. In addition, additional borrowings are
subject to specific conditions on each funding date, including the following:
. that the representations and warranties in such company's loan documents
are true and correct;
. that certain of such company's financial covenant