SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No.1
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Commission File Number: 027455
AirGate PCS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-2422929
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Harris Tower, 233 Peachtree St. NE, Suite 1700,
Atlanta, Georgia 30303
(Address of principal executive offices) (Zip code)
(404) 525-7272
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
25,939,836 shares of common stock, $0.01 par value per share, were
outstanding as of May 7, 2003.
EXPLANATORY NOTE
This Form 10-Q/A is being amended solely for the purpose of amending and
restating in its entirety Part I Item 4 of this Form 10-Q/A, to delete all
references to Cash Cost Per User (or CCPU), and to update the signature page and
the certifications required by the Sarbanes-Oxley Act of 2002 in Item 15 and
Exhibits 99.1 and 99.2. This Form 10-Q/A does not reflect events occurring after
the filing of the original Form 10-Q, or modify or update the disclosures
therein in any way other than as required to reflect these changes.
AIRGATE PCS, INC.
SECOND QUARTER REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Consolidated Balance Sheets at March 31, 2003 (unaudited) and
September 30, 2002............................................. 3
Consolidated Statements of Operations for the three months
and six months ended March 31, 2003 and 2002
(unaudited)....................................................... 4
Consolidated Statements of Cash Flows for the six months
ended March 31, 2003 and 2002 (unaudited)...................... 5
Notes to the Consolidated Financial Statements (unaudited)........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 38
Item 4. Controls and Procedures........................................... 38
PART II OTHER INFORMATION................................................. 40
Item 1. Legal Proceedings................................................. 40
Item 2. Changes in Securities and Use of Proceeds......................... 40
Item 3. Defaults Upon Senior Securities................................... 40
Item 4. Submission of Matters to a Vote of Security Holders............... 40
Item 5. Other Information................................................. 40
Item 6. Exhibits and Reports on Form 8-K.................................. 54
PART I. FINANCIAL INFORMATION
Item 1. -- FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
March 31, September 30,
2003 2002
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents.................................................................. $ 20,905 $ 32,475
Accounts receivable, net of allowance for doubtful accounts of $4,469 and $11,256, 21,943 38,127
respectively...............................................................................
Receivable from Sprint..................................................................... 11,615 44,953
Receivable from iPCS....................................................................... 336 --
Inventories................................................................................ 2,162 6,733
Prepaid expenses........................................................................... 5,769 7,159
Other current assets....................................................................... 1,582 326
-------- ------
Total current assets.................................................................. 64,312 129,773
Property and equipment, net of accumulated depreciation of $106,821 and $112,913, respectively.. 192,363 399,155
Financing costs................................................................................. 7,287 8,118
Intangible assets, net of accumulated amortization of $0 and $39,378, respectively.............. -- 28,327
Direct subscriber activation costs.............................................................. 4,941 8,409
Other assets.................................................................................... 1,444 512
-------- --------
Total assets............................................................................. $ 270,347 $ 574,294
========= ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable........................................................................... $ 1,661 $ 18,152
Accrued expenses........................................................................... 8,241 20,950
Payable to Sprint.......................................................................... 40,570 88,360
Deferred revenue........................................................................... 7,671 11,775
Current maturities of long-term debt and capital lease obligations......................... 2,024 354,936
-------- --------
Total current liabilities.............................................................. 60,167 494,173
Deferred subscriber activation fee revenue...................................................... 8,654 14,973
Other long-term liabilities..................................................................... 1,453 3,267
Long-term debt and capital lease obligations, excluding current maturities...................... 377,192 354,828
Investment in iPCS.............................................................................. 184,115 --
------- --------
Total liabilities...................................................................... 631,581 867,241
Stockholders' deficit:
Preferred stock, par value, $.01 per share;
5,000,000 shares authorized; no shares issued and outstanding.......................... -- --
Common stock, par value, $.01 per share; 150,000,000 shares authorized; 25,939,836 and
25,806,520 shares issued and outstanding at March 31, 2003 and September 30, 2002,
respectively................................................................................... 260 258
Additional paid-in-capital.................................................................. 924,086 924,008
Unearned stock compensation................................................................. (700) (1,029)
Accumulated deficit......................................................................... (1,284,880) (1,216,184)
---------- -----------
Total stockholders' deficit............................................................ (361,234) (292,947)
---------- -----------
Total liabilities and stockholders' deficit........................................ $270,347 $ 574,294
========== ===========
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except share and per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- -----------------------------
--------- ----------- ---------- -----------
2003 2002 2003 2002
--------- ----------- ---------- -----------
Revenues:
Service revenues.......................................... $ 81,664 $ 87,354 $ 177,993 $ 143,203
Roaming revenues.......................................... 19,264 21,951 51,256 43,254
Equipment revenues........................................ 3,505 5,388 8,286 9,933
----- ----------- ---------- -----------
Total revenues............................... 104,433 114,693 237,535 196,390
Operating Expenses:
Cost of services and roaming (exclusive of depreciation and
amortization as shown separately below).................. (59,910) (76,336) (147,917) (134,093)
Cost of equipment......................................... (5,304) (10,681) (17,431) (20,264)
Selling and marketing..................................... (15,674) (27,592) (44,576) (57,437)
General and administrative expenses....................... (9,278) (6,869) (16,687) (12,069)
Non-cash stock compensation expense....................... (177) (183) (353) (414)
Depreciation and amortization of property and equipment.... (16,754) (17,098) (37,380) (28,364)
Amortization of intangible assets......................... (2,591) (13,578) (18,117)
(6,855)
Goodwill impairment....................................... -- (261,212) -- (261,212)
------------ --------- ------------ ---------
Total operating expenses............................ (109,688) (413,549) (271,199) (531,970)
--------- --------- ------------ ---------
Operating loss...................................... (5,255) (298,856) (33,664) (335,580)
Interest income................................................ 27 117 67 216
Interest expense............................................... (15,794) (14,648) (35,099) (24,931)
Other.......................................................... -- 75 -- (20)
----------- --------- ------------- ----------
Loss before income tax benefit...................... (21,022) (313,312) (68,696) (360,315)
-------- --------- ------------ ----------
Income tax benefit.................................. -- 11,402 -- 28,761
Net loss............................................ $ (21,022) $(301,910) $(68,696) $ (331,554)
========== ========== ========== ===========
Basic and diluted net loss per share of common stock........... $ (0.81) $ (11.71) $ (2.65) $ (15.29)
Basic and diluted weighted-average outstanding common shares... 25,929,437 25,790,151 25,876,204 21,688,158
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six Months Ended
March 31,
-----------------------
2003 2002
---- ----
Net loss...................................................................................... $ (68,696) $ (331,554)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Goodwill impairment.......................................................................... -- 261,212
Depreciation and amortization of property and equipment...................................... 37,380 28,364
Amortization of intangible assets............................................................ 6,855 18,117
Amortization of financing costs into interest expense........................................ 605 849
Provision for doubtful accounts.............................................................. 3,848 14,849
Interest expense associated with accretion of discounts...................................... 27,207 22,476
Non-cash stock compensation.................................................................. 353 414
Deferred income tax benefit.................................................................. -- (28,761)
Changes in assets and liabilities:
Accounts receivable...................................................................... (62) (22,490)
Receivable from Sprint................................................................... 18,871 862
Inventories.............................................................................. 3,338 3,897
Prepaid expenses, other current and non-current assets................................... (4,459) (2,919)
Accounts payable, accrued expenses and other long term liabilities....................... (7,209) (13,376)
Payable to Sprint........................................................................ (12,346) 2,956
Deferred revenue......................................................................... 856 7,229
------------ -----------
Net cash provided by (used in) operating activities........................... 6,541 (37,875)
------------ -----------
Cash flows from investing activities:
Capital expenditures.......................................................................... (15,123) (48,523)
Cash acquired from iPCS....................................................................... -- 24,402
Deconsolidation of iPCS....................................................................... (10,031) --
Acquisition of iPCS........................................................................... -- (5,955)
------------ -----------
Net cash used in investing activities......................................... (25,154) (30,076)
------------ -----------
Cash flows from financing activities:
Proceeds from borrowings under senior credit facilities....................................... 8,000 78,200
Payments for credit facility borrowings....................................................... (1,012) --
Payments for capital lease borrowings......................................................... (2) (3)
Stock issued to employee stock purchase plan.................................................. 57 567
Proceeds from exercise of employee stock options.............................................. -- 685
------------ -----------
Net cash provided by financing activities..................................... 7,043 79,449
------------ -----------
Net (decrease) increase in cash and cash equivalents.......................... (11,570) 11,498
Cash and cash equivalents at beginning of period................................................... 32,475 14,290
------------ -----------
Cash and cash equivalents at end of period......................................................... $ 20,905 $ 25,788
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest........................................................................ $ 5,151 $ 4,052
Supplemental disclosure for non-cash investing activities:
Capitalized interest.......................................................................... $ 366 $ 3,831
iPCS acquisition:
Stock issued............................................................................ -- (706,645)
Value of common stock options and warrants assumed...................................... -- (47,727)
Liabilities assumed.................................................................... -- (282,714)
Assets acquired........................................................................ -- 315,029
Capital lease obligation...................................................................... -- 191
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(unaudited)
(1) Business, Basis of Presentation and Liquidity
(a) Business and Basis of Presentation
The accompanying unaudited quarterly financial statements of AirGate PCS, Inc.
(the "Company") are presented in accordance with the rules and regulations of
the Securities and Exchange Commission ("SEC") and do not include all of the
disclosures normally required by accounting principles generally accepted in the
United States of America. In the opinion of management, these statements reflect
all adjustments, including recurring adjustments, which are necessary for a fair
presentation of the consolidated financial statements for the interim periods.
The consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K/A for the fiscal year ended September 30,
2002, which is filed with the SEC and may be accessed via EDGAR on the SEC's
website at http://www.sec.gov. The results of operations for the quarter and six
months ended March 31, 2003 are not necessarily indicative of the results that
can be expected for the entire fiscal year ending September 30, 2003. Certain
prior year amounts have been reclassified to conform to the current year's
presentation. Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities at the dates of the consolidated balance
sheets and revenues and expenses during the reporting periods to prepare these
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
significantly from those estimates.
AirGate PCS, Inc. and its restricted and unrestricted subsidiaries were created
for the purpose of providing wireless Personal Communication Services ("PCS").
AirGate PCS, Inc. and its restricted subsidiaries ("AirGate") collectively are a
network partner of Sprint with the exclusive right to market and provide Sprint
PCS products and services in a defined network territory. AirGate is licensed to
use the Sprint brand names in its original 21 markets located in the
southeastern United States.
On November 30, 2001, AirGate acquired iPCS, Inc. (together with its
subsidiaries, "iPCS"), a network partner of Sprint with 37 markets in the
midwestern United States. The accompanying consolidated financial statements
include the accounts of AirGate PCS, Inc. and its wholly-owned restricted
subsidiaries, AGW Leasing Company, Inc., AirGate Service Company, Inc., and
AirGate Network Services, LLC, and its unrestricted subsidiary iPCS since its
acquisition through the date it filed for bankruptcy. On February 23, 2003, iPCS
filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for
the Northern District of Georgia for the purpose of effecting a
court-administered reorganization. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 94 "Consolidation of All Majority-Owned
Subsidiaries" and Accounting Research Bulletin (ARB) No. 51 "Consolidated
Financial Statements," when control of a majority-owned subsidiary does not rest
with the majority owners (as, for instance, where the subsidiary is in legal
reorganization or in bankruptcy), ARB No. 51 precludes consolidation of the
majority-owned subsidiary. As a result, subsequent to February 23, 2003, AirGate
no longer consolidates the accounts and results of operations of iPCS and the
accounts of iPCS are recorded as an investment using the cost method of
accounting. Accordingly, the accompanying consolidated balance sheet as of March
31, 2003 does not include the consolidated accounts of iPCS; it does however,
include the Company's investment at cost in iPCS as of February 23, 2003. The
accompanying consolidated statement of operations for the period ended March 31,
2003 includes the consolidated results of operations of iPCS through February
23, 2003. When AirGate no longer has an ownership interest in iPCS, which may
occur upon emergence of iPCS from bankruptcy, the investment in iPCS will be
reduced proportionately to the remaining ownership percentage, if any, retained
by AirGate.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, intense competition and the costs associated with the
build-out of a PCS network. The Company's operations are dependent upon Sprint's
ability to perform its obligations under the agreements between the Company and
Sprint (see Note 3) under which the Company has agreed to construct and manage
its Sprint PCS networks (the "Sprint Agreements"). Additionally, the Company's
ability to attract and maintain a subscriber base of sufficient size and credit
quality is critical to achieving sufficient positive cash flow to meet its
financial covenants under its credit agreements. Changes in technology,
increased competition, economic conditions or inability to achieve sufficient
positive cash flow to meet its financial covenants under its credit agreements,
among other factors, could have an adverse effect on the Company's financial
position, results of operations, and liquidity.
(b) Liquidity
The Company has generated significant net losses since inception. For the six
months ended March 31, 2003 and the year ended September 30, 2002, the Company's
net loss amounted to $68.7 million and $996.6 million (including goodwill and
asset impairment charges of $817.4 million), respectively. As of March 31, 2003,
AirGate had working capital of $4.1 million and available credit of $9.0 million
under its $153.5 million senior secured credit facility (the "AirGate credit
facility").
On February 23, 2003 iPCS, Inc. and its subsidiaries, iPCS Wireless, Inc. and
iPCS Equipment, Inc., filed a Chapter 11 bankruptcy petition in the United
States Bankruptcy Court for the Northern District of Georgia for the purpose of
effecting a court-administered reorganization. Immediately prior to iPCS'
bankruptcy filing, the lenders under the iPCS credit facility accelerated iPCS'
payment obligations as a result of existing defaults under that facility.
Concurrent with its bankruptcy filing, iPCS brought an adversarial action
against Sprint alleging, among other things, that Sprint had failed to remit
certain amounts owed to iPCS under its agreements with Sprint and seeking to
exercise its put rights under its agreements with Sprint. As an unrestricted
subsidiary, iPCS is a separate corporate entity from AirGate with its own
independent financing sources, debt obligations and sources of revenue.
Furthermore, iPCS lenders, noteholders and creditors do not have a lien or
encumbrance on assets of AirGate, and AirGate cannot provide capital or other
financial support to iPCS. The Company believes AirGate operations will continue
independent of the outcome of the iPCS bankruptcy. However, it is likely that
AirGate's ownership interest in iPCS will have no value after the restructuring
is complete.
While the ultimate and long-term effect on AirGate of iPCS' bankruptcy
proceedings cannot be determined, management believes that AirGate and its
restricted subsidiaries will continue to operate and that iPCS' bankruptcy
proceedings, and related outcomes, will not have a material adverse effect on
the liquidity of AirGate.
In addition to its capital needs to fund operating losses, AirGate has
historically invested large amounts to build-out its networks and for other
capital assets. For the six months ended March 31, 2003 and the three years
ended September 30, 2002, AirGate invested $6.7 million and $265.1 million
respectively to purchase property and equipment. While much of AirGate's network
is now complete, such expenditures will continue to be necessary.
AirGate had only $9.0 million remaining available under the AirGate credit
facility as of March 31, 2003. AirGate currently has no additional sources of
working capital other than cash on hand and operating cash flow. If AirGate's
actual revenues are less than expected or operating or capital costs are more
than expected, AirGate's financial condition and liquidity may be materially
adversely affected. In such event, there is substantial risk that the Company
could not access the credit or capital markets for additional capital.
AirGate's ability to borrow funds under the AirGate credit facility may be
terminated and its payment obligations may be accelerated if it is unable to
maintain or comply with the financial and operating covenants contained in the
AirGate credit facility. The AirGate credit facility contains covenants
specifying the maintenance of certain financial ratios, reaching defined
subscriber growth and network covered population goals, minimum service
revenues, maximum capital expenditures, and the maintenance of a ratio of total
debt and senior debt to annualized EBITDA, as defined in the AirGate credit
facility.
If the Company is unable to operate the AirGate business within the covenants
specified in the AirGate credit facility, and is unable to obtain future
amendments to such covenants, AirGate's ability to make borrowings required to
operate the AirGate business could be restricted or terminated and its payment
obligations accelerated. Such a restriction, termination or acceleration would
have a material adverse affect on AirGate's liquidity and capital resources.
AirGate has initiated a number of action steps to lower its operating costs and
capital needs. The following are some of the more significant steps:
* a plan to improve the credit quality of new subscribers and its
subscriber base and reduce churn by restricting availability of
programs for sub-prime subscribers;
* the elimination of certain personnel positions;
* a significant reduction in capital expenditures; and
* a reduction in spending for advertising and promotions.
In addition to these steps, AirGate continues to review potential actions that
could further reduce AirGate operating expenses and capital needs. These include
changes to employee benefit plans, seeking to reduce lease expenses and, over
the long-term, seeking ways to lower fees and charges from services now provided
by Sprint. Although there can be no assurances, AirGate management believes that
existing cash, expected results of operations and cash flows, and amounts
available under the AirGate credit facility will provide sufficient resources to
fund AirGate's activities through at least March 31, 2004.
The following reflects condensed balance sheet information for AirGate and
statement of operations information for AirGate and its unrestricted subsidiary,
iPCS, separately identifying the investment in iPCS including the effects of
purchase accounting as of March 31, 2003 and September 30, 2002 and the
historical equity basis loss of iPCS through February 23, 2003, the related
effects of purchase accounting, and income tax benefit for the three months and
six months ended March 31, 2003 and 2002 (dollar amounts in thousands):
As of
March 31, September 30,
2003 2002
---- ----
Condensed Balance Sheet Information:
Cash and cash equivalents.................................. $ 20,905 $ 4,887
Other current assets....................................... 43,407 62,819
------ --------
Total current assets............................... 64,312 67,706
Property and equipment, net................................ 192,363 213,777
Other noncurrent assets.................................... 13,672 13,732
------- --------
$ 270,347 $ 295,215
========= =========
Current liabilities........................................ $ 60,167 $ 82,175
Long-term debt............................................. 377,192 354,264
Other long-term liabilities................................ 10,107 10,180
Investment in iPCS ........................................ 184,115 141,543
------- --------
Total liabilities.................................... 631,581 588,162
Stockholders' deficit...................................... (361,234) (292,947)
--------- ----------
$ 270,347 $ 295,215
=========== =========
For the Three Months Ended For the Six Months Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Condensed Statement of Operations Information:
Revenues................................................... $76,980 $ 76,439 $158,845 $ 144,110
Costs of revenues.......................................... (44,423) (53,502) (102,701) (106,745)
Selling and marketing expenses............................. (11,362) (18,199) (28,159) (43,288)
General and administrative expenses........................ (5,728) (3,636) (9,806) (7,612)
Depreciation and amortization.............................. (11,627) (9,308) (23,246) (18,333)
Other expense, net (principally interest).................. (10,537) (9,433) (21,058) (18,368)
----------- ---------- ----------- -----------
Total expenses....................................... (83,677) (94,078) (184,970) (194,346)
----------- ---------- ----------- -----------
Loss before equity in loss of iPCS and effects of purchase
accounting, and income tax benefit..................... (6,697) (17,639) (26,125) (50,236)
Historical equity basis loss of iPCS....................... (11,221) (22,353) (36,984) (32,672)
Effects of purchase accounting............................. (3,104) (273,320) (5,587) (277,407)
Income tax benefit......................................... -- 11,402 -- 28,761
----------- ----------- ----------- ----------
Net loss................................................... $ (21,022) $ (301,910) $ (68,696) $ (331,554)
=========== =========== =========== ===========
(c) Basic and Diluted Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period.
Potentially dilutive securities of 57,323, 56,927, 45,953 and 52,195 for the
quarters and six months ended March 31, 2003 and 2002, respectively have been
excluded from the computation of dilutive net loss per share for the periods
presented because the Company had a net loss and their effect would have been
antidilutive.
(d) Stock-based Compensation Plans
We have elected to continue to account for our stock-based compensation plans
under APB Opinion No. 25, Accounting for Stock Issued to Employees, and disclose
pro forma effects of the plans on net income and earnings per share as provided
by SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, because
the fair market value on the date of grant was equal to the exercise price, we
did not recognize any compensation cost. Had compensation cost for these plans
been determined based on the fair value at the grant dates during the three and
six months ended March 31, 2003 and 2002 under the plan consistent with the
method of SFAS No. 123, the pro forma net loss and loss per share would have
been as follows (in thousands, except per share data):
Three Months Ended March 31, Six Months Ended March 31,
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported $(21,022) $(301,910) $(68,696) $(331,554)
Add: stock based 177 183 353 414
compensation expense included
in determination of net loss
Less: stock-based (2,426) (2,284) (4,852) (4,569)
compensation expense
determined under the fair
value based method
Pro forma net loss (23,271) (304,011) (73,195) (335,709)
Basic and diluted loss per share:
As reported $(0.81) $(11.71) $(2.65) $(15.29)
Pro forma $(0.90) $(11.79) $(2.83) $(15.48)
(2) New Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity", which is effective at the beginning of the first
interim period beginning after March 15, 2003. SFAS No. 149 establishes
standards for the Company's classification of liabilities in the financial
statements that have characteristics of both liabilities and equity. We are
currently evaluating the impact of this statement on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, and interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. This interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material adverse effect on the Company's financial
statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation from the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting, and has adopted the
disclosure requirements of SFAS No. 123.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which addresses the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees. This interpretation also requires the recognition of a
liability by a guarantor at the inception of certain guarantees.
Interpretation No. 45 requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, which is the obligation to stand
ready to perform in the event that specified triggering events or conditions
occur. The initial measurement of this liability is the fair value of the
guarantee at inception. The recognition of the liability is required even if it
is not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements.
The Company guarantees certain lease commitments of its restricted subsidiaries.
The maximum amount of these guarantees is included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended September 30, 2002. Also, the
handsets sold by the Company are under a one-year warranty from Sprint. If a
customer returns a handset for warranty, the Company generally provides the
customer with a refurbished handset and sends the warranty handset to Sprint for
repair. Sprint provides a credit to the Company equal to the retail price of the
refurbished handset. The Company will apply the recognition and measurement
provisions for all guarantees entered into or modified after December 31, 2002.
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Element Deliverables". This guidance addresses how to account for arrangements
that may involve multiple revenue-generating activities, i.e., the delivery or
performance of multiple products, services, and/or rights to use assets. In
applying this guidance, separate contracts with the same party, entered into at
or near the same time, will be presumed to be a package, and the consideration
will be measured and allocated to the separate units based on their relative
fair values. This consensus guidance will be applicable to agreements entered
into in quarters beginning after June 15, 2003. AirGate will adopt this new
accounting effective July 1, 2003. The Company is currently evaluating the
impact of this change.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 provides new guidance on the
recognition of costs associated with exit or disposal activities. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. SFAS No. 146 supercedes previous accounting guidance
provided by the EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." EITF Issue No. 94-3 required recognition of
costs at the date of commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. Early application is permitted. The Company adopted SFAS No. 146 on
October 1, 2002. As discussed in Note 5, during the six months ended March 31,
2003 the Company recorded $1.1 million and $0.2 million, respectively, of costs
related to staff reductions and retail store closings.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," will now be used to
classify those gains and losses. The adoption of SFAS No. 145 by the Company on
October 1, 2002 did not have a material impact on the Company's financial
position, results of operations, or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 by the
Company on October 1, 2002 did not have a material impact on the Company's
financial position, results of operations or cash flows.
(3) Sprint Agreements
Under the Sprint Agreements, Sprint is obligated to provide the Company
significant support services such as billing, collections, long distance,
customer care, network operations support, inventory logistics support, use of
Sprint brand names, national advertising, national distribution and product
development. Additionally, the Company derives substantial roaming revenue and
expenses when Sprint's and Sprint's network partners' wireless subscribers incur
minutes of use in the Company's territories and when the Company's subscribers
incur minutes of use in Sprint and other Sprint network partners' PCS
territories. These transactions are recorded in roaming revenue, cost of service
and roaming, cost of equipment, and selling and marketing expense captions in
the accompanying consolidated statements of operations. Cost of service and
roaming transactions include the 8% affiliation fee, long distance charges,
roaming expense and the costs of services such as billing, collections, customer
service and pass-through expenses. Cost of equipment transactions relate to
inventory purchased by the Company from Sprint under the Sprint agreements.
Selling and marketing transactions relate to subsidized costs on handsets and
commissions paid by the Company under Sprint's national distribution programs.
Amounts recorded relating to the Sprint agreements for the three and six months
ended March 31, 2003 and 2002 are as follows (dollar amounts in thousands):
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Amounts included in the Consolidated Statement of Operations:
AirGate roaming revenue............................................ $ 12,972 $ 13,838 $ 30,801 $ 30,047
AirGate cost of service and roaming:
Roaming....................................................... $ 10,777 $ 11,730 $ 25,462 $ 24,888
Customer service.............................................. 9,927 8,947 21,727 16,761
Affiliation fee............................................... 4,708 3,886 9,545 7,274
Long distance................................................. 3,259 3,750 6,044 7,059
Other......................................................... 514 720 990 1,217
--------- --------- --------- ---------
--------- --------- --------- ---------
AirGate cost of service and roaming................................ $ 29,185 $ 29,033 $ 63,768 $ 57,199
AirGate purchased inventory........................................ $ 2,695 $ 3,924 $ 8,221 $ 9,441
AirGate selling and marketing...................................... $ 2,412 $ 5,964 $ 6,111 $ 14,301
iPCS roaming revenue............................................... $ 4,061 $ 7,327 $ 14,724 $ 11,867
iPCS cost of service and roaming:
Roaming....................................................... $ 3,796 $ 6,308 $ 12,158 $ 9,955
Customer service.............................................. 3,853 4,507 11,760 6,042
Affiliation fee............................................... 1,805 2,223 4,911 2,941
Long distance................................................. 1,153 2,693 3,281 3,554
Other......................................................... 168 215 461 260
--------- --------- --------- ---------
--------- --------- --------- ---------
iPCS cost of service and roaming:.................................. $ 10,775 $ 15,946 $ 32,571 $ 22,752
iPCS purchased inventory........................................... $ 108 $ 1,813 $ 6,124 $ 4,111
iPCS selling and marketing......................................... $ 1,240 $ 3,289 $ 3,138 $ 4,645
Amounts included in the Consolidated Balance Sheets:
As of
March 31, September 30,
2003 2002
---- ----
Receivable from Sprint $ 11,615 $ 44,953
Payable to Sprint (40,570) (88,360)
Because approximately 97% of our revenues are collected by Sprint and 65% of
costs of service and roaming in our financial statements are derived from fees
and charges, including pass-through charges, from Sprint, we have a variety of
settlement issues and other contract disputes open and outstanding from time to
time. The amounts Sprint has asserted we owe is approximately $4.7 million.
These include, but are not limited to, the following items, all of which for
accounting purposes have been reserved or otherwise provided for:
* In fiscal year 2003, Sprint PCS asserted it has the right to recoup up to
$3.9 million in long-distance access revenues previously paid by Sprint PCS
to AirGate, for which Sprint PCS has invoiced $1.2 million. We have
disputed these amounts.
* Sprint invoiced AirGate approximately $0.8 million with respect to calendar
year 2002 to reimburse Sprint for certain 3G related development expenses.
We are disputing Sprint's right to charge 3G fees in 2002 and beyond, and
we estimate such fees will be $2.5 million in fiscal year 2003.
* We continue to discuss with Sprint whether AirGate owes software
maintenance fees to Sprint of approximately $1.7 million for 2002 and $1.8
million for calendar year 2003. Our position is that Sprint is not
authorized to charge these fees to AirGate under the terms of our
agreements.
* Sprint billed AirGate $0.6 million for information technology (IT) expenses
including the reimbursement of amortization of IT projects completed by
Sprint. The Company has disputed Sprint's right to collect these fees.
The approximately $4.7 million Sprint has asserted we owe does not include
ongoing 3G service fees for future periods or $2.7 million in long distance
access revenues Sprint has not invoiced.
In addition to these disputes, we have other outstanding issues with Sprint
which could result in set-offs to the items described above or in payments due
from Sprint. For example, we believe Sprint has failed to calculate, pay and
report on collected revenues in accordance with our agreements with Sprint,
which, together with other cash remittance issues, resulted in a shortfall in
cash payments to AirGate of at least $10 million. As a result of these issues
and in connection with our review of accounts receivable at September 30, 2002,
we reclassified approximately $10.0 million of AirGate subscriber accounts
receivable for the fiscal year ended September 30, 2002 to a receivable from
Sprint. During this fiscal year, Sprint has acknowledged and paid only $8.7
million of this receivable for amounts that were previously not properly
remitted to AirGate. The $8.7 million paid by Sprint included $4.1 million of
previously unapplied customer deposits, $4.0 million of revenue for AirGate
subscribers whose bills are paid through national accounts, and $0.6 million of
subscriber payments resulting from a change in the method of calculating
collected revenues. We are reviewing additional information received from Sprint
and have retained a consultant to verify the accuracy of this information to
determine whether additional amounts are due to AirGate. We continue to discuss
with Sprint the proper method for calculating, paying and reporting on collected
revenues and other matters. During the three months ended March 31, 2003,
AirGate recorded $3.6 million in credits from Sprint as a reduction in cost of
services.
On January 23, 2003, Sprint notified us that service fees, excluding historical
3G expenses, were increased from $7.27 per subscriber per month to $7.77 per
subscriber per month.
Monthly Sprint service charges are set by Sprint at the beginning of each
calendar year. Sprint takes the position that at the end of each year, it can
determine its actual costs to provide these services to its network partners and
require a final settlement against the charges actually paid. If the cost to
provide these services are less than the amounts paid by Sprint's network
partners, Sprint will issue a credit for these amounts. If the costs to provide
the services are more that the amounts paid by Sprint's network partners, Sprint
will debit the network partners for these amounts. Sprint credited to the
Company a net amount of $2.0 million ($1.3 million for AirGate and $0.7 million
for iPCS). These credits were recorded as a reduction of cost of service in the
quarter ended December 31, 2002.
The Sprint Agreements require the Company to maintain certain minimum network
performance standards and to meet other performance requirements. AirGate was in
compliance in all material respects with these requirements at March 31, 2003.
(4) Litigation
In May, 2002, putative class action complaints were filed in the United States
District Court for the Northern District of Georgia against AirGate PCS, Inc.,
Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit Suisse
First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company, Thomas
Wiesel Partners LLC and TD Securities. The complaints do not specify an amount
or range of damages that the plaintiffs are seeking. The complaints seek class
certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former iPCS shareholders on
December 18, 2001 contained materially false and misleading statements and
omitted material information necessary to make the statements in the prospectus
not false and misleading. The alleged omissions included (i) failure to disclose
that in order to complete an effective integration of iPCS, drastic changes
would have to be made to the Company's distribution channels, (ii) failure to
disclose that the sales force in the acquired iPCS markets would require
extensive restructuring and (iii) failure to disclose that the "churn" or
"turnover" rate for subscribers would increase as a result of an increase in the
amount of sub-prime credit quality subscribers the Company added from its merger
with iPCS. On July 15, 2002, certain plaintiffs and their counsel filed a motion
seeking appointment as lead plaintiffs and lead counsel. Subsequently, the Court
denied that motion without prejudice and two of the plaintiffs have filed a
renewed motion. The Defendants responded to the renewed motion, but the Court
has not yet entered a ruling. The Company believes the plaintiffs' claims are
without merit and intends to vigorously defend against these claims. However, no
assurance can be given as to the outcome of the litigation.
(5) Staff Reduction and Retail Store Closings
As discussed in Note 1, AirGate has identified additional opportunities to
reduce its cost structure and streamline its operations. The Company adopted a
restructuring plan in accordance with SFAS No. 146, "Accounting for Cost
Associated with Exit or Disposal Activities" to reduce its workforce and to
close a number of retail stores which resulted in restructuring charges of $0.7
million and $0.7 million during the three months ended December 31, 2002 and
March 31, 2003, respectively. Collectively, these actions are expected to
continue through the quarter that will end on June 30, 2003 and are referred to
as the 2003 Plan.
During the quarter ended December 31, 2002, the restructuring charge included
provisions for severance of approximately 65 management and operating staff
($0.6 million) as well as 3 retail store closures ($0.05 million). During the
quarter ended March 31, 2003, the restructuring charge included provisions for
severance of approximately 154 management and operating staff ($0.5 million) as
well as 16 retail store closures and 10 administrative offices ($0.2 million),
primarily for iPCS. In the quarter that will end June 30, 2003, AirGate expects
charges for additional severance and store closings to be at least $0.6 million
and $0.1 million, respectively. Further charges may be necessary as AirGate
services are terminated under the services agreement with iPCS described in Note
7.
The following summarizes the activity and balances through March 31, 2003
(dollar amounts in thousands):
Facilities
Severance Closure Total
-------------- -------------- ---------------
Balance - October 1, 2002 $ 0 $ 0 $ 0
Restructuring charges 1,081 229 1,310
Payments (763) (23) (786)
-------------- -------------- ---------------
Balance - March 31, 2003 $ 318 $ 206 $ 524
============== ============== ===============
(6) Income Taxes
The Company realized an income tax benefit of $11.4 million and $28.8 million
during the quarter and six months ended March 31, 2002, respectively. No such
amounts were realized in the quarter and six months ended March 31, 2003, nor
will amounts be realized in the future unless management believes the
recoverability of deferred tax assets is more likely than not.
(7) Transactions Between AirGate and iPCS
The Company formed AirGate Service Company, Inc. ("ServiceCo") to provide
management services to both AirGate and iPCS. ServiceCo is a wholly-owned
restricted subsidiary of AirGate. Personnel who provide general management
services to AirGate and iPCS have been leased to ServiceCo, which includes 148
employees at March 31, 2003. Generally, the management personnel include AirGate
staff in the Company's principal corporate offices in Atlanta and the iPCS
accounting staff in Geneseo, Illinois. ServiceCo expenses are allocated between
AirGate and iPCS based on the percentage of subscribers they contribute as
compared to the total number of Company subscribers (the "ServiceCo
Allocation"), which is currently 60% AirGate and 40% iPCS. Expenses that relate
to one company are allocated to that company. Expenses that relate to ServiceCo
or both companies are allocated in accordance with the ServiceCo Allocation. For
the quarter and six months ended March 31, 2003, iPCS recorded a net total for
ServiceCo expenses of $0.8 million and $1.8 million, respectively.
On January 27, 2003, iPCS retained Timothy M. Yager, former CEO of iPCS prior to
the merger of AirGate and a former director of AirGate following the merger, as
chief restructuring officer to oversee the restructuring of iPCS and manage the
day-to-day operations of iPCS. To facilitate the orderly transition of
management services to Mr. Yager, AirGate and iPCS have executed an amendment to
the Services Agreement that would allow individual services to be terminated by
either party upon 30 days prior notice, subject to exceptions for certain
services for which longer notice is required.
The amendment also terminated certain services provided by AirGate, and
effective May 1, 2003, iPCS terminated certain other services. As a result of
the termination of services by iPCS, AirGate received $0.3 million less payments
from iPCS for the quarter ended March 31, 2003. We anticipate that prior to
September 1, 2003, substantially all management services provided by ServiceCo
to iPCS will be terminated.
AirGate has completed transactions at arms-length in the normal course of
business with its unrestricted subsidiary iPCS. These transactions are comprised
of roaming revenue and expenses, inventory sales and purchases and sales of
network operating equipment.
(8) Condensed Consolidating Financial Statements
AGW Leasing Company, Inc. ("AGW") is a wholly-owned restricted subsidiary of
AirGate. AGW has fully and unconditionally guaranteed the AirGate notes and the
AirGate credit facility. AGW was formed to hold the real estate interests for
the Company's PCS network and retail operations. AGW also was a registrant under
the Company's registration statement declared effective by the Securities and
Exchange Commission on September 27, 1999.
AirGate Network Services LLC ("ANS") was created as a wholly-owned restricted
subsidiary of AirGate. ANS has fully and unconditionally guaranteed the AirGate
notes and AirGate credit facility. ANS was formed to provide construction
management services for AirGate's PCS network.
AirGate Service Company, Inc. is a wholly-owned restricted subsidiary of
AirGate. Service Co has fully and unconditionally guaranteed the AirGate notes
and the AirGate credit facility. Service Co was formed to provide management
services to AirGate and iPCS.
iPCS is a wholly-owned unrestricted subsidiary of AirGate and operates as a
separate business. As an unrestricted subsidiary, iPCS provides no guarantee to
either the AirGate notes or the AirGate credit facility and AirGate and its
restricted subsidiaries provide no guarantee with respect to iPCS debt
obligations. On February 23, 2003, iPCS filed a Chapter 11 bankruptcy petition
in the United States Bankruptcy Court for the Northern District of Georgia for
the purpose of effecting a court-administered reorganization. The results of
iPCS have been included in the consolidated results of AirGate through February
23, 2003. Subsequent to February 23, 2003, AirGate PCS no longer consolidates
the accounts and results of operations of its unrestricted subsidiary iPCS. The
accounts of iPCS are recorded as an investment using the cost method of
accounting.
The following shows the unaudited condensed consolidation financial statements
for AirGate and its subsidiaries as of March 31, 2003 and September 30, 2002 and
for the three months and six months ended March 31, 2003 and 2002 (dollar
amounts in thousands):
Unaudited Condensed Consolidating Balance Sheets
As of March 31, 2003
AirGate
Guarantor
AirGate PCS, Subsidiaries Eliminations AirGate
Inc. Consolidated
------------------------------------------------------------
Cash and cash $ 20,920 $ (15) $ -- $ 20,905
equivalents...........
Other current assets.... 104,126 529 (61,248) 43,407
------------------------------ ----------------------------
Total current assets.... 125,046 514 (61,248) 64,312
Property and equipment,
net................... 150,891 41,472 -- 192,363
Other noncurrent assets.. 13,672 -- -- 13,672
------------------------------ ----------------------------
Total assets............ $ 289,609 $ 41,986 $ (61,248) $ 270,347
============================== ============================
Current liabilities..... $ (21,844) $ 143,259 $ (61,248) $ 60,167
Long-term debt.......... 377,192 -- -- 377,192
Other long-term
liabilities........... 10,107 -- -- 10,107
Investment in
subsidiaries............ 285,388 -- (101,273) 184,115
------------------------------ ----------------------------
Total liabilities....... $ 650,843 $ 143,259 $ (162,521) $ 631,581
------------------------------ ----------------------------
Stockholders' equity
(deficit).............. (361,234) (101,273) 101,273 (361,234)
------------------------------ ----------------------------
Total liabilities and
stockholders' equity
(deficit).............. $ 289,609 $ 41,986 $ (61,248) $ 270,347
============================== ============================
Condensed Consolidating Balance Sheets
As of September 30, 2002
AirGate
Guarantor iPCS
AirGate PCS, Subsidiaries Eliminations AirGate Non-Guarantor AirGate
Inc. Consolidated(1) Subsidiary Eliminations Consolidated
------------------------------ -----------------------------------------------------------------------
Cash and cash $ 4,769 $ 118 $ -- $ 4,887 $ 27,588 $ -- $ 32,475
equivalents...........
Other current assets.... 122,869 529 (60,579) 62,819 35,593 (1,114) 97,298
------------------------------ -----------------------------------------------------------------------
Total current assets.... 127,638 647 (60,579) 67,706 63,181 (1,114) 129,773
Property and equipment,
net................... 168,163 45,614 -- 213,777 185,378 -- 399,155
Intangible assets, net.. 1,428 -- -- 1,428 26,899 -- 28,327
Other noncurrent assets. 4,924 -- -- 4,924 12,115 -- 17,039
------------------------------ -----------------------------------------------------------------------
Total assets............ $ 302,153 $ 46,261 $ (60,579) $ 287,835 $ 287,573 $ (1,114) $ 574,294
============================== =======================================================================
Current liabilities..... $ 55,535 $ 130,767 $ (60,579) $ 125,723 $ 369,564 $ (1,114) $ 494,173
Long-term debt.......... 354,264 -- -- 354,264 564 -- 354,828
Other long-term
liabilities........... 1,583 -- -- 1,583 16,657 -- 18,240
Investment in 183,718 -- (84,506) 99,212 -- (99,212) --
subsidiaries..........
------------------------------ -----------------------------------------------------------------------
Total liabilities....... $ 595,100 $ 130,767 $(145,085) $580,782 $ 386,785 $ (100,326) $ 867,241
------------------------------ -----------------------------------------------------------------------
Stockholders' equity
(deficit)............. (292,947) (84,506) 84,506 (292,947) (99,212) 99,212 (292,947)
------------------------------ -----------------------------------------------------------------------
Total liabilities and
stockholders' equity
(deficit)............. $ 302,153 $ 46,261 $ (60,579) $287,835 $ 287,573 $ (1,114) $ 574,294
============================== =======================================================================
(1) Amounts in the column for AirGate consolidated include the effects of
purchase accounting related to the iPCS acquisition. Balance sheet information
includes $44 million of debt and $1 million of net assets as of September 30,
2002. The net loss of AirGate includes expenses related to the effects of
purchase accounting for iPCS of $3.1 million, $273.3 million, $5.6 million and
$277.4 million for the three and six months ended March 31, 2003 and 2002,
respectively. The three months and six months ended March 31, 2002 include a tax
benefit related to the iPCS acquisition of $11.4 million and $28.8 million,
respectively. Subsequent to February 23, 2003 AirGate PCS no longer consolidates
the accounts and results of operations of its unrestricted subsidiary iPCS. The
accounts of iPCS are recorded as an investment using the cost method of
accounting.
Unaudited Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2003
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
------------------------------ -----------------------------------------------------------------------
Total revenues.......... $ 76,980 $ -- $ -- $ 76,980 $ 27,829 $ (376) $ 104,433
------------------------------ -----------------------------------------------------------------------
Cost of revenues........ (39,819) (4,604) -- (44,423) (21,167) 376 (65,214)
Selling and marketing... (10,173) (1,189) -- 11,362) (4,312) -- (15,674)
General and
administrative........ (5,219) (509) -- (5,728) (3,550) -- (9,278)
Depreciation and
amortization.......... (12,721) (2,353) -- (15,074) (4,271) -- (19,345)
Other, net (principally
interest)............. (10,233) 39 -- (10,194) (5,750) -- (15,944)
------------------------------ -----------------------------------------------------------------------
Total expenses.......... (78,165) (8,616) -- (86,781) (39,050) 376 (125,455)
Loss in subsidiaries.... (19,837) -- 8,616 (11,221) -- 11,221 --
Loss before income tax
benefit............... (21,022) (8,616) 8,616 (21,022) (11,221) 11,221 (21,022)
Income tax benefit...... -- -- -- -- -- -- --
------------------------------ -----------------------------------------------------------------------
Net loss................ $ (21,022) $ (8,616) $ 8,616 $ (21,022) $ (11,221) $ 11,221 $ (21,022)
============================== =======================================================================
Unaudited Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2002
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
---------------- -------------- ------------ -------------- -------------- ------------- -------------
Total revenues.......... $ 76,439 $ -- $ 76,439 $ 38,458 $ (204) $ 114,693
---------------- -------------- ------------ -------------- -------------- ------------- -------------
Cost of revenues........ (49,737) (3,765) -- (53,502) (33,719) 204 (87,017)
Selling and marketing... (17,168) (1,031) -- (18,199) (9,393) -- (27,592)
General and
administrative........ (3,614) (22) -- (3,636) (3,233) -- (6,869)
Depreciation and
amortization.......... (19,532) (2,622) -- (22,154) (8,522) -- (30,676)
Other, net (principally --
interest)............. (9,963) 1,268 (8,695) (5,944) -- (14,639)
Goodwill impairment..... (261,212) -- -- (261,212) -- -- (261,212)
---------------- -------------- ------------ -------------- -------------- ------------- -------------
Total expenses.......... (361,226) (6,172) -- (367,398) (60,811) 204 (428,005)
Loss in subsidiaries (28,525) -- 6,172 (22,353) -- 22,353 --
Loss before income tax
benefit............... (313,312) (6,172) 6,172 (313,312) (22,353) 22,353 (313,312)
Income tax benefit...... 11,402 -- -- 11,402 -- -- 11,402
---------------- -------------- ------------ -------------- -------------- ------------- -------------
Net loss................ $(301,910) $ (6,172) $ 6,172 $(301,910) $ (22,353) $ 22,353 $ (301,910)
================ ============== ============ ============== ============== ============= =============
Unaudited Condensed Consolidating Statement of Operations
For the Six Months Ended March 31, 2003
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
------------------------------------------- -------------- -------------- ------------- -------------
Total revenues........... $ 158,845 $ -- $ -- $ 158,845 $ 79,364 $ (674) $ 237,535
------------------------------------------- -------------- -------------- ------------- -------------
Cost of revenues......... (93,764) (8,937) -- (102,701) (63,321) 674 (165,348)
Selling and marketing.... (26,212) (1,947) -- (28,159) (16,417) -- (44,576)
General and
administrative......... (8,567) (1,239) -- (9,806) (6,881) -- (16,687)
Depreciation and
amortization........... (24,762) (4,796) -- (29,558) (14,677) -- (44,235)
Other, net (principally
interest).............. (20,486) 153 -- (20,333) (15,052) -- (35,385)
------------------------------------------- -------------- -------------- ------------- -------------
Total expenses........... (173,791) (16,766) -- (190,557) (116,348) 674 (306,231)
Loss in subsidiaries..... ( 53,750) -- 16,766 (36,984) -- 36,984 --
Loss before income tax
benefit................ (68,696) (16,766) 16,766 (68,696) 36,984 (68,696) (36,984)
Income tax benefit....... -- -- -- -- -- -- --
------------------------------------------- -------------- -------------- ------------- -------------
Net loss................. $ (68,696) $ (16,766) $ 16,766 $ (68,696) $ (36,984) $ 36,984 $ (68,696)
=========================================== ============== ============== ============= =============
Unaudited Condensed Consolidating Statement of Operations
For the Six Months Ended March 31, 2002
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
--------------- -------------- ------------ -------------- -------------- ------------- -------------
Total revenues........... $ 144,110 $ -- $ -- $ 144,110 $ 52,484 $ (204) $ 196,390
--------------- -------------- ------------ -------------- -------------- ------------- -------------
Cost of revenues......... (99,235) (7,510) -- (106,745) (47,816) 204 (154,357)
Selling and marketing.... (41,789) (1,499) -- (43,288) (14,149) -- (57,437)
General and
administrative......... (7,291) (321) -- (7,612) (4,457) -- (12,069)
Depreciation and
amortization........... (31,473) (4,163) -- (35,636) (10,845) -- (46,481)
Other, net (principally
interest).............. (18,528) 1,268 -- (17,260) (7,889) -- (25,149)
Goodwill impairment...... (261,212) -- -- (261,212) -- -- (261,212)
--------------- -------------- ------------ -------------- -------------- ------------- -------------
Total expenses........... (459,528) (12,225) -- (471,753) (85,156) -- (556,705)
Loss in subsidiaries (44,897) -- 12,225 (32,672) -- 32,672 --
Loss before income tax
benefit................ (360,315) (12,225) 12,225 (360,315) 32,672 (32,672) (360,315)
Income tax benefit....... 28,761 -- -- 28,761 -- -- 28,761
--------------- -------------- ------------ -------------- -------------- ------------- -------------
Net loss................. $(331,554) $ (12,225) $ 12,225 $ (331,554) $ (32,672) $32,672 $(331,554)
=============== ============== ============ ============== ============== ============= =============
Unaudited Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2003
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
---------------- ------------- -----------------------------------------------------------------------
Operating activities,
net................... $ 15,760 $ (133) $ -- $ 15,627 $ (9,086) $ -- $ 6,541
Investing activities,
net................... (6,654) -- -- (6,654) (18,500) -- (25,154)
Financing activities,
net................... 7,045 -- -- 7,045 (2) -- 7,043
---------------- ------------- -----------------------------------------------------------------------
---------------- ------------- -----------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalent............ 16,151 (133) -- 16,018 (27,588) -- (11,570)
Cash at beginning of
period................ 4,769 118 -- 4,887 27,588 -- 32,475
---------------- ------------- -----------------------------------------------------------------------
Cash at end of period... $ 20,920 $(15) $ -- $ 20,905 $ -- $ -- $ 20,905
================ ============= =======================================================================
Unaudited Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2002
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
---------------- ------------- -------------------------------------------------------------------------
Operating activities,
net................... $ (21,012) $ 2,891 $ -- $ (18,121) $ (19,754) $ -- $ (37,875)
Investing activities,
net................... 151 (2,743) -- (2,592) (27,484) -- (30,076)
Financing activities,
net................... 49,452 -- -- 49,452 29,997 -- 79,449
---------------- ------------- -------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalent............ 28,591 148 -- 28,739 (17,241) -- 11,498
Cash at beginning of
period................ (9,954) (157) -- (10,111) 24,401 -- 14,290
---------------- ------------- -------------------------------------------------------------------------
Cash at end of period... $ 18,637 $ (9) $ -- $ 18,628 $ 7,160 $ -- $ 25,788
================ ============= =========================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Results of Operations and Financial
Condition ("MD&A") contains forward looking statements that are based on current
expectations, estimates, forecasts and projections about us, our future
performance, our liquidity, the wireless industry, our beliefs and management's
assumptions. In addition, other written and oral statements that constitute
forward-looking statements may be made by us or on our behalf. Such forward
looking statements include statements regarding expected financial results and
other planned events, including but not limited to, anticipated liquidity, churn
rates, ARPU and CPGA (all as defined in the Key Operating Metrics), roaming
rates, EBITDA (as defined in the Key Operating Metrics), and capital
expenditures. Words such as "anticipate," "assume," "believe," "estimate,"
"expect," "intend," "plan," "seek", "project," "target," "goal," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual future events or results may differ materially from
these statements. These risks and uncertainties include:
* the impact and outcome of the iPCS bankruptcy filing and related proceedings;
* the competitiveness and impact of Sprint's pricing plans and PCS products and
services;
* subscriber credit quality;
* the potential to experience a continued high rate of subscriber turnover;
* the ability of Sprint to provide back office billing, subscriber care and
other services and the quality and costs of such services;
* inaccuracies in financial information provided by Sprint;
* new charges and fees, or increased charges and fees, charged by Sprint;
* the impact and outcome of disputes with Sprint;
* rates of penetration in the wireless industry;
* our significant level of indebtedness;
* adequacy of bad debt and other allowances;
* the potential need for additional sources of liquidity;
* anticipated future losses;
* subscriber purchasing patterns;
* potential fluctuations in quarterly results;
* an adequate supply of subscriber equipment;
* risks related to future growth and expansion; and
* the volatility of the market price of AirGate's common stock.
These and other applicable risks and uncertainties are summarized under the
captions "Future Trends That May Affect Operating Results, Liquidity and Capital
Resources" included in this "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this quarterly report on Form
10-Q and "Risk Factors" included in Part II under "Item 5 - Other Information"
of this quarterly report on Form 10-Q and elsewhere in this report.
For a further list of and description of such risks and uncertainties, see the
reports filed by us with the SEC. Except as required under federal securities
law and the rules and regulations of the SEC, we do not have any intention or
obligation to update publicly any forward looking statements after distribution
of this report, whether as a result of new information, future events, changes
in assumptions or otherwise.
Overview
On July 22, 1998, AirGate entered into management and related agreements with
Sprint whereby it became the network partner of Sprint with the right to provide
100% digital PCS products and services under the Sprint brand names in AirGate's
original territory in the southeastern United States. In January 2000, AirGate
began commercial operations with the launch of four markets covering 2.2 million
residents in AirGate's territory. By September 30, 2000, AirGate had launched
commercial PCS service in all of the 21 basic trading areas, referred to as
markets, which comprise AirGate's original territory. On November 30, 2001,
AirGate acquired iPCS, a network partner of Sprint with 37 markets in the
midwestern states of Michigan, Illinois, Iowa and Nebraska. The acquisition of
iPCS increased the total resident population in the Company's markets from
approximately 7.1 million to approximately 14.5 million. At March 31, 2003,
AirGate had total network coverage of approximately 5.9 million residents and
iPCS had total network coverage of approximately 5.7 million residents, of the
7.1 million and 7.4 million residents in its respective territory.
Under AirGate's and iPCS' long-term agreements with Sprint, we manage our
networks on Sprint's licensed spectrum and have the right to use the Sprint
brand names royalty-free during the respective company's PCS affiliation with
Sprint. We also have access to Sprint's national marketing support and
distribution programs and are generally required to buy network equipment and
subscriber handsets from vendors approved by Sprint or from Sprint directly. The
agreements with Sprint generally provide that these purchases are to be made at
the same discounted rates offered by vendors to Sprint based on its large volume
purchases. AirGate and iPCS each pay an affiliation fee of 8% of collected
revenues to Sprint. We are entitled to 100% of revenues collected from the sale
of handsets and accessories and on roaming revenues received when customers of
Sprint and Sprint's other network partners make a wireless call on our PCS
network.
iPCS is a wholly-owned, unrestricted subsidiary of AirGate. As required by the
terms of AirGate's and iPCS' respective outstanding indebtedness, AirGate and
iPCS conduct its business as separate corporate entities from the other.
AirGate's notes require subsidiaries of AirGate to be classified as either
"restricted subsidiaries" or "unrestricted subsidiaries". A restricted
subsidiary is defined generally as any subsidiary that is not an unrestricted
subsidiary. An unrestricted subsidiary includes any subsidiary which:
* has been designated an unrestricted subsidiary by the AirGate board of
directors,
* has no indebtedness which provides recourse to AirGate or any of its
restricted subsidiaries,
* is not party to any agreement with AirGate or any of its restricted
subsidiaries, unless the terms of the agreement are no less favorable to
AirGate or such restricted subsidiary than those that might be obtained
from persons unaffiliated with AirGate,
* is a subsidiary with respect to which neither AirGate nor any of its
restricted subsidiaries has any obligation to subscribe for additional
equity interests, maintain or preserve such subsidiary's financial
condition or cause such subsidiary to achieve certain operating results,
* has not guaranteed or otherwise provided credit support for any
indebtedness of AirGate or any of its restricted subsidiaries, and
* has at least one director and one executive officer that are not directors
or executive officers of AirGate or any of its restricted subsidiaries.
On February 23, 2003, iPCS filed a Chapter 11 bankruptcy petition in the United
States Bankruptcy Court for the Northern District of Georgia for the purpose of
effecting a court-administered reorganization. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 94 "Consolidation of All
Majority-Owned Subsidiaries" and Accounting Research Bulletin (ARB) No. 51
"Consolidated Financial Statements," when control of a majority-owned subsidiary
does not rest with the majority owners (as, for instance, where the subsidiary
is in legal reorganization or in bankruptcy), ARB No. 51 precludes consolidation
of the majority-owned subsidiary. As a result, subsequent to February 23, 2003,
AirGate no longer consolidates the accounts and results of operations of iPCS
and the accounts of iPCS are recorded as an investment using the cost method of
accounting.
AirGate's notes impose certain affirmative and restrictive covenants on AirGate
and its restricted subsidiaries and also include as events of default certain
events, circumstances or conditions involving AirGate or its restricted
subsidiaries. Because iPCS is an unrestricted subsidiary, the covenants and
events of default under AirGate's notes do not apply to iPCS.
AirGate's credit facility also imposes certain restrictions on, and applies
certain events of default to events, circumstances or conditions involving,
AirGate and its subsidiaries. AirGate's senior credit facility, however,
expressly excludes iPCS from the definition of "subsidiary." Therefore, these
restrictions and events of default applicable to AirGate and its subsidiaries do
not generally apply to iPCS.
CRITICAL ACCOUNTING POLICIES
The Company relies on the use of estimates and makes assumptions that impact its
financial condition and results. These estimates and assumptions are based on
historical results and trends as well as the Company's forecasts as to how these
might change in the future. Several of the most critical accounting policies
that materially impact the Company's results of operations include:
Allowance for Doubtful Accounts
Estimates are used in determining the allowance for doubtful accounts and are
based on historical collection and write-off experience, current trends, credit
policies and accounts receivable by aging category. In determining these
estimates, the Company compares historical write-offs in relation to the
estimated period in which the subscriber was originally billed. The Company also
looks at the average length of time that elapses between the original billing
date and the date of write-off in determining the adequacy of the allowance for
doubtful accounts by aging category. From this information, the Company provides
specific amounts to the aging categories. The Company provides an allowance for
substantially all receivables over 90 days old. The provision for doubtful
accounts as a percentage of service revenues for the six months ended March 31
was as follows:
Provision for Doubtful
Accounts
Year As % of Service Revenue
---- --------------------------
2003 2.2%
2002 10.4%
The allowance for doubtful accounts was $4.5 million (AirGate only) as of March
31, 2003, and $11.3 million ($6.8 million for AirGate and $4.5 million for
iPCS), respectively, as of September 30, 2002. If the allowance for doubtful
accounts is not adequate, it could have a material adverse affect on our
liquidity, financial position and results of operations.
The Company also reviews current trends in the credit quality of its subscriber
base. As of March 31, 2003, 33% of AirGate's subscriber base consisted of
sub-prime credit quality subscribers. Sprint has a program in which subscribers
with lower quality credit or limited credit history may nonetheless sign up for
service subject to certain account spending limits, if the subscriber makes a
deposit ranging from $125 to $250. In May 2001, Sprint introduced the no-deposit
account spending limit program, in which the deposit requirement was waived
except in very limited circumstances (the "NDASL program"). The NDASL program
was replaced in late 2001 with the Clear Pay program. The Clear Pay program
re-instituted the deposit for the lowest credit quality subscribers. The NDASL
and Clear Pay programs and their associated lack of deposit requirements
increased the number of the Company's sub-prime credit subscribers. At the end
of February 2002, Sprint allowed its network partners to re-institute deposits
in a program called the Clear Pay II program. The Clear Pay II program and its
deposit requirements are currently in effect in most of AirGate's markets, which
reinstates a deposit requirement of $125 for most sub-prime credit subscribers.
In early February 2003, management began implementing a higher deposit threshold
of $250 for sub-prime customers in our markets.
Reserve for Late Payment Fees, Early Cancellation Fees and First Payment Default
Subscribers
The Company provides a reduction in revenues for those subscribers that it
anticipates will not pay late payment fees and early cancellation fees using
historical information. The reserve for late payment fees and early cancellation
fees are included in the allowance for doubtful accounts balance.
The Company had previously reserved for subscribers that it anticipated would
never pay a bill. During the three months ended March 31, 2003, the Company
experienced a significant improvement in customer payment behavior for these
customers as well as a significant improvement in the credit quality of new
subscribers to the Company. As a result, the Company has determined that the
first payment default reserve was no longer necessary. At March 31, 2003, first
payment default reserve was $0. This resulted in the addition of 4,187 and 2,252
net subscriber additions for AirGate and iPCS at March 31, 2003.
Revenue Recognition
The Company recognizes revenues when persuasive evidence of an arrangement
exists, services have been rendered or products have been delivered, the price
to the buyer is fixed and determinable, and collectibility is reasonably
assured. The Company's revenue recognition polices are consistent with the
guidance in Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" promulgated by the Securities and Exchange Commission.
The Company records equipment revenue from the sale of handsets and accessories
to subscribers in its retail stores and to local distributors in its territories
upon delivery. The Company does not record equipment revenue on handsets and
accessories purchased by subscribers from national third-party retailers such as
Radio Shack, Best Buy and Circuit City, or directly from Sprint by subscribers
in its territories. The Company believes the equipment revenue and related cost
of equipment associated with the sale of wireless handsets and accessories is a
separate earnings process from the sale of wireless services to subscribers.
Because such arrangements do not require a customer to subscribe to the
Company's wireless services and because the Company sells wireless handsets to
existing customers at a loss, the Company currently accounts for these
transactions separately from agreements to provide customers wireless service.
The Company's subscribers pay an activation fee to the Company when they
initiate service. The Company defers activation fee revenue over the average
life of its subscribers, which is estimated to be 30 months. The Company
recognizes service revenue from its subscribers as they use the service. The
Company provides a reduction of recorded revenue for billing adjustments, late
payment fees, and early cancellation fees. The Company also reduces recorded
revenue for rebates and discounts given to subscribers on wireless handset sales
in accordance with Emerging Issues Task Force ("EITF") Issue No. 01-9
"Accounting for Consideration Given by a Vendor to a Subscriber (Including a
Reseller of the Vendor's Products)." For industry competitive reasons, the
Company sells wireless handsets at a loss. The Company participates in the
Sprint national and regional distribution programs in which national retailers
such as Radio Shack, Best Buy and Circuit City sell Sprint PCS products and
services. In order to facilitate the sale of Sprint PCS products and services,
national retailers purchase wireless handsets from Sprint for resale and receive
compensation from Sprint for Sprint PCS products and services sold. For industry
competitive reasons, Sprint subsidizes the price of these handsets by selling
the handsets at a price below cost. Under the Company's Sprint agreements, when
a national retailer sells a handset purchased from Sprint to a subscriber in the
Company's territories, the Company is obligated to reimburse Sprint for the
handset subsidy. The Company does not receive any revenues from the sale of
handsets and accessories by such national retailers. The Company classifies
these handset subsidy charges as a selling and marketing expense for a new
subscriber handset sale and classifies these subsidies as a cost of service and
roaming for a handset upgrade to an existing subscriber.
Sprint retains 8% of collected service revenues from subscribers based in the
Company's markets and from non-Sprint subscribers who roam onto the Company's
network. The amount of affiliation fees retained by Sprint is recorded as cost
of service and roaming. Revenues derived from the sale of handsets and
accessories by the Company and from certain roaming services (outbound roaming
and roaming revenues from Sprint PCS and its PCS network partner subscribers)
are not subject to the 8% affiliation fee from Sprint.
The Company defers direct subscriber activation costs when incurred and
amortizes these costs using the straight-line method over 30 months, which is
the estimated average life of a subscriber. Direct subscriber activation costs
also include credit check fees and loyalty welcome call fees charged to the
Company by Sprint and costs incurred by the Company to operate a subscriber
activation center.
Impairment of Long-Lived Assets and Goodwill
The Company accounts for long-lived assets and goodwill in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 144 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. SFAS No. 142 requires annual tests for
impairment of goodwill and intangible assets that have indefinite useful lives
and interim tests when an event has occurred that more likely than not has
reduced the fair value of such assets. As of September 30, 2002, the Company
recorded substantial write-offs of long lived assets and goodwill. Management
does not believe that any additional write-offs are required since year-end.
Management will continue to monitor any triggering events and perform
re-evaluations, as necessary.
NEW ACCOUNTING PRONOUNCEMENTS
In February 2003, the FASB issued SFAS No. 149, "Accounting for Certain
Financial Instruments with Characteristics of Liabilities and Equity", which is
effective at the beginning of the first interim period beginning after March 15,
2003. SFAS No. 149 establishes standards for the Company's classification of
liabilities in the financial statements that have characteristics of both
liabilities and equity. We are currently evaluating the impact of this statement
on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, and interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material adverse effect on the Company's financial
statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation from the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting, and has adopted the
disclosure requirements of SFAS No. 123.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which addresses the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees. This interpretation also requires the recognition of a
liability by a guarantor at the inception of certain guarantees.
Interpretation No. 45 requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, which is the obligation to stand
ready to perform in the event that specified triggering events or conditions
occur. The initial measurement of this liability is the fair value of the
guarantee at inception. The recognition of the liability is required even if it
is not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements.
The Company guarantees certain lease commitments of its restricted subsidiaries.
The maximum amount of these guarantees is included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended September 30, 2002. Also, the
handsets sold by the Company are under a one-year warranty from Sprint. If a
customer returns a handset for warranty, the Company generally provides the
customer with a refurbished handset and sends the warranty handset to Sprint for
repair. Sprint provides a credit to the Company equal to the retail price of the
refurbished handset. The Company will apply the recognition and measurement
provisions for all guarantees entered into or modified after December 31, 2002.
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Element Deliverables". This guidance addresses how to account for arrangements
that may involve multiple revenue-generating activities, i.e., the delivery or
performance of multiple products, services, and/or rights to use assets. In
applying this guidance, separate contracts with the same party, entered into at
or near the same time, will be presumed to be a package, and the consideration
will be measured and allocated to the separate units based on their relative
fair values. This consensus guidance will be applicable to agreements entered
into in quarters beginning after June 15, 2003. AirGate will adopt this new
accounting effective July 1, 2003. The Company is currently evaluating the
impact of this change.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 provides new guidance on the
recognition of costs associated with exit or disposal activities. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. SFAS No. 146 supercedes previous accounting guidance
provided by the EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." EITF Issue No. 94-3 required recognition of
costs at the date of commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. Early application is permitted. The Company adopted SFAS No. 146 on
October 1, 2002. As discussed in Note 5, during the six months ended March 31,
2003 the Company recorded $1.1 million and $0.2 million, respectively, of costs
related to staff reductions and retail store closings.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," will now be used to
classify those gains and losses. The adoption of SFAS No. 145 by the Company on
October 1, 2002 did not have a material impact on the Company's financial
position, results of operations, or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 by the
Company on October 1, 2002 did not have a material impact on the Company's
financial position, results of operations or cash flows.
RESULTS OF OPERATIONS
The following discussion of the results of operations includes the results of
operations of iPCS subsequent to November 30, 2001, its date of acquisition, but
as a result of iPCS' Chapter 11 bankruptcy filing, does not include the results
of operations of iPCS subsequent to February 23, 2003. iPCS filed for Chapter 11
bankruptcy on February 23, 2003. In accordance with SFAS No. 94 and ARB No. 51,
iPCS' results of operations are not consolidated with AirGate's results
subsequent to February 23, 2003 and the accounts of iPCS are recorded as an
investment using the cost method of accounting. AirGate stand-a-lone results
includes the effects of purchase accounting related to the iPCS acquisition and
the results do not include the historical equity basis loss of iPCS.
Financial Measures and Key Operating Metrics
We use certain operating and financial measures that are not calculated in
accordance with accounting principles generally accepted in the United States,
or GAAP. A non-GAAP financial measure is defined as a numerical measure of a
company's financial performance that (i) excludes amounts, or is subject to
adjustments that have the effect of excluding amounts, that are included in the
comparable measure calculated and presented in accordance with GAAP in the
statement of income or statement of cash flows; or (ii) includes amounts, or is
subject to adjustments that have the effect of including amounts, that are
excluded from the comparable measure so calculated and presented.
Terms such as subscriber net additions, average revenue per user, churn and cost
per gross addition are important operating metrics used in the wireless
telecommunications industry. These metrics are important to compare us to other
wireless service providers. ARPU also assists management in forecasting future
service revenue and CPGA assists management in quantifying the incremental costs
to acquire a new subscriber. Except for churn and net subscriber additions we
have included a reconciliation of these metrics to the most directly comparable
GAAP financial measure. Churn and subscriber net additions are operating
statistics with no comparable GAAP financial measure. ARPU and CPGA are
supplements to GAAP financial information and should not be considered an
alternative to, or more meaningful than, revenues, expenses or net loss as
determined in accordance with GAAP.
EBITDA is a performance metric we use and which is used by other companies.
Management believes that EBITDA is a useful adjunct to net loss and other
measurements under GAAP because it is a meaningful measure of a company's
performance, as interest, taxes, depreciation and amortization can vary
significantly between companies due in part to differences in accounting
policies, tax strategies, levels of indebtedness, and interest rates. We have
included below a presentation of the GAAP financial measure most directly
comparable to EBITDA, which is net loss, as well as a reconciliation of EBITDA
to net loss. We have also provided a reconciliation to net cash provided by
(used in) operating activities as supplemental information. EBITDA is a
supplement to GAAP financial information and should not be considered an
alternative to, or more meaningful than, net loss, cash flow or operating loss
as determined in accordance with GAAP.
EBITDA, ARPU, churn and CPGA as used by the Company may not be comparable
to a similarly titled measure of another company.
The following terms used in this report have the following meanings:
"EBITDA" means earnings before interest, taxes, depreciation and amortization.
"ARPU" summarizes the average monthly service revenue per user, excluding
roaming revenue. ARPU is computed by dividing service revenue for the period by
the average subscribers for the period.
"Churn" is the monthly rate of subscriber turnover that both voluntarily and
involuntarily discontinued service during the month, expressed as a percentage
of the total subscriber base. Churn is computed by dividing the number of
subscribers that discontinued service during the month, net of 30-day returns,
by the average total subscriber base for the period.
"CPGA" summarizes the average cost to acquire new subscribers during the period.
CPGA is computed by adding the income statement components of selling and
marketing, cost of equipment and activation costs (which are included as a
component of cost of service) and reducing that amount by the equipment revenue
recorded. That net amount is then divided by the total new subscribers acquired
during the period.
For the three months ended March 31, 2003 compared to the three months ended
March 31, 2002:
The table below sets forth key operating metrics for the Company for the
quarters ended March 31, 2003 and 2002.
Quarter Ended March 31,
-----------------------
2003 2002
----------------------------------------- ----------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Subscriber Gross Additions 43,003 14,105 57,108 68,404 32,145 100,549
Subscriber Net Additions 5,755 (6,732) (977) 36,055 16,954 53,009
Total Subscribers 358,564 229,893 588,457 325,899 180,468 506,367
ARPU $56.40 $51.21 $54.93 $63.11 $55.78 $60.48
Churn (with subscriber reserve) 3.30% 4.74% 3.70% 3.18% 2.61% 2.97%
Churn (without subscriber reserve) 3.69% 5.28% 4.14% 3.86% 3.29% 3.65%
CPGA $298 $405 $324 $321 $367 $336
Capital Expenditures (cash) $1,028,000 $45,000 $1,073,000 $14,890,000 $23,604,000 $41,397,000
EBITDA $15,290,000 $(1,200,000) $14,090,000 $(260,293,000) $(7,812,000) $(268,105,000)
The reconciliation of EBITDA to net cash provided by (used in) operating
activities, as determined in accordance with GAAP, is as follows (dollar amounts
in thousands):
Quarter Ended March 31,
2003 2002
------------------------------------------ -----------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
Net cash provided by (used in)
operating activities $ 18,439 $ 8,011 $ 26,450 $ 2,423 $ (9,177) $ (6,754)
Change in operating assets and
liabilites (5,121) (9,461) (14,582) 3,476 3,876 7,352
Interest expense 10,042 5,752 15,794 8,573 6,075 14,648
Accretion of interest (7,810) (4,534) (12,344) (6,963) (6,444) (13,407)
Goodwill impairment -- -- -- (261,212) -- (261,212)
Interest and other income (25) (2) (27) -- (192) (192)
Provision for doubtful accounts 31 (753) (722) (6,044) (1,926) (7,970)
Other expense (266) (213) (479) (546) (24) (570)
----- -------- ------- ---------- --------- ----------
EBITDA $ 15,290 $ (1,200) $ 14,090 $(260,293) $ (7,812) $(268,105)
======== ========= ======== ========== ========= ==========
The reconciliation of EBITDA to our reported net loss, as determined in
accordance with GAAP, is as follows (dollar amounts in thousands):
Quarter Ended March 31,
-----------------------
2003 2002
--------------------------------------- -------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Net Loss $ (9,801) $(11,221) $(21,022) $(279,557) $ (22,353) $ (301,910)
Depreciation and amortization 15,074 4,271 19,345 22,154 8,522 30,676
Interest income (25) (2) (27) (61) (56) (117)
Interest expense 10,042 5,752 15,794 8,573 6,075 14,648
Income tax benefit -- -- -- (11,402) -- (11,402)
------- ---------- -------- ---------- --------- -----------
EBITDA $15,290 $ (1,200) $ 14,090 $(260,293) $ (7,812) $ (268,105)
======= ========= ======== ========== ========= ===========
The reconciliation of ARPU to service revenue, as determined in accordance with
GAAP, is as follows (dollar amounts in thousands):
Quarter Ended March 31,
-----------------------
2003 2002
--------------------------------------- -------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Average Revenue per User (ARPU):
Service revenue $ 60,163 $ 21,501 $81,664 $58,425 $28,929 $87,354
Average subscribers 355,589 233,259 495,544 308,581 172,868 481,449
ARPU $56.40 $51.21 $54.93 $63.11 $55.78 $60.48
Notes: For 2003, iPCS average subscribers is for the period between January 1,
2003 and February 23, 2003. For 2003, average subscribers for combined entity is
a weighted average.
The reconciliation of CPGA to selling and marketing expense as determined in
accordance with GAAP, is calculated as follows (dollar amounts in thousands):
Quarter Ended March 31,
-----------------------
2003 2002
--------------------------------------- -------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Cost per Gross Add (CPGA):
Sales and marketing expense $11,362 $4,312 $15,674 $18,199 $9,393 $27,592
Plus: Activation expense $668 $372 $1,040 $565 $312 $877
Plus: Cost of equipment $3,687* $1,849* $5,304 $6,835 $3,847 $10,682
Less: Equipment revenue $(2,923)* $(814)* $(3,505) $(3,640) $(1,748) $(5,388)
Total acquisition costs $12,794 $5,719 $18,513 $21,959 $11,804 $33,763
Gross Additions 43,003 14,105 57,108 68,404 32,145 100,549
CPGA $298 $405 $324 $321 $367 $336
*Amounts are reflected prior to the elimination of intercompany transactions
Subscriber Net Additions
For AirGate and iPCS, subscriber net additions decreased for the quarter ended
March 31, 2003, compared to the same quarter in 2002. This decline is due to the
decrease in subscriber gross additions, re-institution of and increase in the
deposit for sub-prime credit quality customers and actions taken to reduce
acquisition costs. For iPCS, subscriber net additions subsequent to February 23,
2003 are no longer consolidated with the results of AirGate. Reported net
additions during the three months ended March 31, 2003 were positively impacted
by the Company's elimination of its subscriber reserve. The impact of this
change for the quarter ended March 31, 2003 is an increase in net additions of
4,187 and 2,252 for AirGate and iPCS, respectively.
Subscriber Gross Additions
For AirGate and iPCS, subscriber gross additions decreased for the quarter ended
March 31, 2003 compared to the same quarter in 2002. This decline is due to the
re-institution of and increase in the deposit for sub-prime credit quality
customers and actions taken to reduce acquisition costs. For iPCS, subscriber
gross additions subsequent to February 23, 2003 are no longer consolidated with
the results of AirGate.
EBITDA
EBITDA for the quarter ended March 31, 2003 has increased from the same period
in 2002. This increase is a result of an overall decrease in spending,
particularly in cost of services and selling and marketing. EBITDA for the
quarter ended March 31, 2002 included $261.2 million for Goodwill impairment.
EBITDA for AirGate was favorably impacted by $3.6 million in credits provided by
Sprint as described in Note 3 of the consolidated financial statements. Average
Revenue Per User
The decrease in ARPU for the Company for the quarter ended March 31, 2003
compared to the same quarter for 2002 is primarily a result of an overall
reduction in revenue from customers using minutes in excess of their subscribed
usage plan. The Company is currently evaluating this decrease and determining
the extent this trend may or may not continue. This decrease also reflects the
cessation of recognizing terminating long-distance access revenue. Until March
31, 2002, the Company recorded terminating long-distance access revenues billed
by Sprint PCS to long distance carriers.
Churn
For the Company, churn increased for the quarter ended March 31, 2003 compared
to the same quarter in 2002 primarily from the effects of adding a greater
number of sub-prime credit quality subscribers during certain periods of 2002.
Cost Per Gross Addition
For AirGate, CPGA decreased for the quarter ended March 31, 2003 compared to the
same quarter in 2002. The decrease is due primarily to reduced promotional and
advertising spending. For iPCS, CPGA increased for the quarter ended March 31,
2003, compared to the same quarter in 2002. This increase is primarily
attributable to fixed costs being spread over a smaller number of subscriber
gross additions as well as restructuring costs resulting from cost cutting
programs including store closures and reductions in force.
Revenues
Quarter Ended March 31,
-----------------------
2003 2002
--------------------------------------------- --------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Service Revenue $ 60,163 $ 21,501 $ 81,664 $58,425 $ 28,929 $ 87,354
Roaming Revenue 13,895* 5,514* 19,264 14,374* 7,781* 21,951
Equipment Revenue 2,922* 814* 3,505 3,640 1,748 5,388
-------- -------- --------- ------- --------- --------
Total $ 76,980* $ 27,829* $ 104,433 $76,439* $ 38,458* $114,693
* Amounts are reflected prior to the elimination of intercompany transactions
We derive our revenue from the following sources:
Service. We sell wireless personal communications services. The
various types of service revenue associated with wireless
communications services include monthly recurring access and feature
charges and monthly non-recurring charges for local, wireless long
distance and roaming airtime usage in excess of the subscribed usage
plan.
Roaming. The Company receives roaming revenue at a per-minute rate
from Sprint and other Sprint PCS network partners when Sprint PCS
subscribers from outside of the Company's territory use the Company's
network, which accounted for $17.1 million or 89% of the roaming
revenue recorded for the quarter ended March 31, 2003. The Company
pays the same reciprocal roaming rate when subscribers from our
territories use the network of Sprint or its other PCS network
partners. The Company also receives non-Sprint roaming revenue when
subscribers of other wireless service providers who have roaming
agreements with Sprint and roam on the Company's network.
Equipment. We sell wireless personal communications handsets and
accessories that are used by our subscribers in connection with our
wireless services. Equipment revenue is derived from the sale of
handsets and accessories from Company owned stores, net of sales
incentives, rebates and an allowance for returns. The Company's
handset return policy allows subscribers to return their handsets for
a full refund within 14 days of purchase. When handsets are returned
to the Company, the Company may be able to reissue the handsets to
subscribers at little additional cost. When handsets are returned to
Sprint for refurbishing, the Company receives a credit from Sprint,
which is approximately equal to the retail price of the refurbished
handset.
For AirGate, service revenue for the quarter ended March 31, 2003 increased over
the same period in the prior year. The increase in service revenue for AirGate
reflects the higher average number of subscribers using its network. This
increase is partially offset by an overall reduction in revenue from customers
using minutes in excess of their subscribed usage plan. For iPCS, the decrease
reflects the fact that subsequent to February 23, 2003 the results of iPCS are
no longer consolidated with the results of AirGate, which is partially offset by
the higher revenues related to its increased subscriber base.
For both AirGate and iPCS, roaming revenue for the quarter ended March 31, 2003
decreased over the same period in the prior year. The decrease is attributable
to the lower reciprocal roaming rate charged among Sprint and its PCS network
partners, partially offset by increased volume in inbound roaming traffic. The
reciprocal roaming rate among Sprint and its PCS network partners, including the
Company, has declined over time, from $0.20 per minute of use (prior to June 1,
2001 for AirGate or January 1, 2002 for iPCS), to $0.10 per minute of use in
calendar year 2002. Sprint has reduced the reciprocal roaming rate to $0.058 per
minute of use in calendar year 2003. The Company believes that this reduction is
in violation of our agreements with Sprint. For iPCS, the decrease reflects the
fact that subsequent to February 23, 2003 the results of iPCS are no longer
consolidated with the results of AirGate. For the quarter ended March 31, 2003,
roaming revenue from Sprint and its PCS network partners was $17.1 million, or
89% of the roaming revenue recorded (see above table). For the quarter ended
March 31, 2003, roaming revenue from Sprint and its PCS network partners
attributable to AirGate and iPCS was $13.0 million and $4.1 million,
respectively.
For both AirGate and iPCS, equipment revenue for the quarter ended March 31,
2003 decreased over the same period in the prior year. This decrease is
primarily due to the lower number of gross additions as compared to the prior
year for both companies.
Cost of Service and Roaming
Quarter Ended March 31,
-----------------------
2003 2002
-------------------------------------------- ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Roaming expense $ 11,468* $ 4,243* $ 15,566 $ 12,996* $ 7,084* $ 19,876
Network operating costs 10,270 5,707 15,977 10,639 10,884 21,523
Bad debt expense (31) 754 723 6,045 1,925 7,970
Wireless handset upgrades 736 741 1,477 -- -- --
Total cost of service and
roaming $ 40,737* $ 19,318* $ 59,910 $ 46,668* $ 29,872* $ 76,336
*Amounts are reflected prior to the elimination of intercompany transactions
Cost of service and roaming principally consists of costs to support the
Company's subscriber base including:
* roaming expense;
* network operating costs (including salaries, cell site lease payments, fees
related to the connection of the Company's switches to the cell sites that
they support, inter-connect fees and other expenses related to network
operations);
* back office services provided by Sprint such as customer care, billing and
activation; 41 the 8% of collected service revenue representing the Sprint
affiliation fee;
* long distance expense relating to inbound roaming revenue and the Company's
own subscriber's long distance usage and roaming expense when subscribers
from the Company's territory place calls on Sprint's or its network
partners' network;
* bad debt related to estimated uncollectible accounts receivable; and
* wireless handset subsidies on existing subscriber upgrades through national
third-party retailers.
Roaming expense decreased for the quarter ended March 31, 2003 compared to the
same period in 2002 as a result of the decrease in the reciprocal roaming rate
charged among Sprint and its network partners. 94% and 91% of the cost of
roaming was attributable to Sprint and its network partners for the quarter
ended March 31, 2003 and 2002, respectively, prior to the elimination of
intercompany transactions. As discussed above, the per-minute rate the Company
pays Sprint when subscribers from the Company's territory roam onto the Sprint
network has decreased over time beginning June 1, 2001 for AirGate and January
1, 2002 for iPCS. For iPCS the decrease also reflects the fact that subsequent
to February 23, 2003, the results of iPCS are no longer consolidated with the
results of AirGate.
Bad debt expense decreased by $7.2 million ($6.0 million for AirGate and $1.2
million for iPCS) in the quarter ended March 31, 2003 as compared to the same
period in 2002. This decrease in bad debt expense for AirGate is primarily
attributable to improvements in the credit quality and payment profile of our
subscriber base since we re-imposed deposits in early 2002 and increased them in
February 2003. This resulted in a significant improvement in accounts receivable
write-offs and corresponding bad debt expense for the quarter. For the quarter
ended March 31, 2003, the decrease also reflects the fact that subsequent to
February 23, 2003 the results of iPCS are no longer consolidated with the
results of AirGate.
Cost of Equipment
We are currently required to purchase handsets and accessories to resell to our
subscribers for use in connection with our services. To remain competitive in
the marketplace, we must subsidize handset sales so that the cost of handsets is
higher than the resale price to the subscriber. Cost of equipment was $5.3
million for the quarter ended March 31, 2003, and $10.7 million for the quarter
ended March 31, 2002, a decrease of $5.4 million. This decrease in cost of
equipment is primarily attributable to the decrease in the number of subscriber
gross additions. For the quarter ended March 31, 2003, the decrease also
reflects the fact that subsequent to February 23, 2003 the results of iPCS are
no longer consolidated with the results of AirGate. For the three months ended
March 31, 2003, cost of equipment attributable to AirGate and iPCS was $3.5
million and $1.8 million, respectively.
Selling and Marketing
Selling and marketing expenses include retail store costs such as salaries and
rent in addition to promotion, advertising and commission costs, and handset
subsidies on units sold by national third-party retailers for which the Company
does not record revenue. Under the management agreements with Sprint, when a
national retailer sells a handset purchased from Sprint to a subscriber from the
Company's territories, the Company is obligated to reimburse Sprint for the
handset subsidy and commissions that Sprint originally incurred. The national
retailers sell Sprint wireless services under the Sprint brands and trademarks.
The Company incurred selling and marketing expenses of $15.7 million during the
quarter ended March 31, 2003 as compared to $27.6 million in the quarter ended
March 31, 2002, a decrease of $11.9 million. The decrease reflects the effect of
reduced gross additions, staff reductions and store closings, reduced
advertising and promotion, and the fact that subsequent to February 23, 2003 the
results of iPCS are no longer consolidated with the results of AirGate. For the
three months ended March 31, 2003, selling and marketing expense attributable to
AirGate and iPCS was $11.4 million and $4.3 million, respectively.
General and Administrative
For the quarter ended March 31, 2003, the Company incurred general and
administrative expenses of $9.3 million, compared to $6.9 million for the
quarter ended March 31, 2002, an increase of $2.4 million. For AirGate this
increase from $3.6 million to $5.7 million reflects increased relocation costs
and increased spending for outside consultants providing services to AirGate to
identify cost saving opportunities. For iPCS, general and administrative costs
increased from $3.2 million to $3.6 million, primarily related to losses on sale
of assets for store closures during the quarter ended March 31, 2003 and costs
related to its bankruptcy filing, partially offset by the fact that subsequent
to February 23, 2003 the results of iPCS are no longer consolidated with the
results of AirGate and the termination of certain management services from
AirGate. Approximately 78 employees were performing corporate support functions
at March 31, 2003 compared to 88 employees at March 31, 2002. For the quarter
ended March 31, 2003, general and administrative expense attributable to AirGate
and iPCS was $5.7 million and $3.6 million, respectively.
Non-Cash Stock Compensation
Non-cash stock compensation expense was $0.2 million for the quarter ended March
31, 2003, and $0.2 million for the quarter ended March 31, 2002. The Company
applies the provisions of APB Opinion No. 25 "Accounting for Stock Issued to
Employees" in accounting for its stock option plans. Unearned stock compensation
is recorded for the difference between the exercise price and the fair market
value of the Company's common stock and restricted stock at the date of grant
and is recognized as non-cash stock compensation expense in the period for which
the related services are rendered.
Depreciation
We capitalize network development costs incurred to ready our network for use
and costs to build-out our retail stores and office space. Depreciation of these
costs begins when the equipment is ready for its intended use and is amortized
over the estimated useful life of the asset. For the quarter ended March 31,
2003, depreciation decreased to $16.8 million as compared to $17.1 million for
the quarter ended March 31, 2002, a decrease of $0.3 million. The decrease in
depreciation expense relates primarily to impairment charges taken in fiscal
year 2002 with respect to iPCS. For iPCS the decrease also reflects the fact
that subsequent to February 23, 2003 the results of iPCS are no longer
consolidated with the results of AirGate, partially offset by additional network
assets placed in service in 2002. For the quarter ended March 31, 2003,
depreciation attributable to AirGate and iPCS was $11.7 million and $5.1
million, respectively.
The Company incurred capital expenditures of $1.1 million in the quarter ended
March 31, 2003, which included approximately $0.04 million of capitalized
interest, compared to capital expenditures of $41.4 million and capitalized
interest of $2.5 million in the quarter ended March 31, 2002. Capital
expenditures incurred by AirGate and iPCS were $1.0 million and $0.1 million,
respectively, for the quarter ended March 31, 2003.
Amortization of Intangible Assets
Amortization of intangible assets relates to the amounts recorded from the iPCS
acquisition for the acquired subscriber base, non-competition agreements, and
the right to provide service under iPCS' Sprint agreements. Amortization for the
quarter ended March 31, 2003 and 2002 was approximately $2.6 million and $13.6
million, respectively. The Company recorded an impairment charge of $312 million
in fiscal year 2002 to write-down intangible assets in accordance with SFAS No.
144 and 142. Subsequent to February 23, 2003 the intangible assets attributed to
the AirGate purchase of iPCS are no longer consolidated with the accounts of
AirGate and amortization expense of iPCS' intangible assets subsequent to
February 23, 2003 is not included in the results of AirGate.
Goodwill Impairment
The wireless telecommunications industry has experienced significant declines in
market capitalization. These significant declines in market capitalization were
the result of concerns surrounding anticipated weakness in future customer
growth, anticipated future lower average revenue per customer and liquidity
concerns. As a result of this industry trend, the Company experienced
significant declines in its market capitalization. Recent wireless industry
acquisitions subsequent to the acquisition of iPCS were valued substantially
lower on a price per population and price per customer basis. As a result of
these recent transactions and industry trends, the Company believed it was more
likely than not that the value of iPCS and the carrying value of the associated
goodwill had been reduced. Accordingly, the Company engaged a nationally
recognized valuation expert to perform a fair value assessment of the recently
acquired iPCS reporting unit of the Company. The valuation expert used a
combination of the market value approach and the discounted cash flow approach
for determining the fair value of iPCS. The market value approach used a sample
of recent wireless service provider transactions on a price per population and
price per customer basis. The discounted cash flow method used the projected
discounted cash flows and residual value to be generated by the assets of iPCS.
From this valuation, it was determined the fair value of iPCS was less than its
recorded carrying value at March 31, 2002. The valuation expert performed a
purchase price allocation based on this implied fair value at March 31, 2002.
Based on the purchase price allocation of the implied fair value at March 31,
2002, the Company recorded a goodwill impairment of $261.2 million.
Interest Expense
For the quarter ended March 31, 2003, interest expense was $15.8 million,
compared to $14.6 million for the quarter ended March 31, 2002, an increase of
$1.2 million. The increase is primarily attributable to increased debt related
to accreted interest on the AirGate notes and the iPCS notes and increased
borrowings under the AirGate and iPCS credit facilities. The increase was
partially offset by the fact that subsequent to February 23, 2003 iPCS interest
expense is no longer consolidated with AirGate, lower commitment fees on undrawn
balances of the credit facilities, and a lower interest rate on variable rate
borrowings under the credit facilities. AirGate had borrowings of $379.2 million
as of March 31, 2003, compared to $328.4 million at March 31, 2002. For the
quarter ended March 31, 2003, interest expense attributable to AirGate and iPCS
was $10.0 million and $5.8 million, respectively.
Income Tax Benefit
No income tax benefit was realized for the quarter ended March 31, 2003. Income
tax benefits of $11.4 million were realized for the quarter ended March 31,
2002. Income tax benefits will be realized in the future only to the extent
management believes recoverability of deferred tax assets is more likely than
not.
Net Loss
For the quarter ended March 31, 2003, the net loss was $21.0 million as compared
to a net loss of $301.9 million for the quarter ended March 31, 2002. For the
quarter ended March 31, 2003, net loss attributable to AirGate and iPCS was $9.8
million and $11.2 million, respectively. The quarter ended March 31, 2002
included $261.2 million related to goodwill impairment. The net loss of AirGate
included $3.1 million of expenses for purchase accounting basis adjustments
related to its investment in iPCS.
For the six months ended March 31, 2003 compared to the six months ended March
31, 2002:
The table below sets forth key operating metrics for the Company for the six
months ended March 31, 2003 and 2002.
Six Months Ended March 31,
--------------------------
2003 2002
------------------------------------------ ------------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Subscriber Gross Additions 98,624 59,403 158,027 151,416 49,826 201,242
Subscriber Net Additions 19,425 14,199 33,624 90,876 30,846 121,722
Total Subscribers 358,564 229,893 588,457 325,899 180,468 506,367
ARPU $57.17 $53.40 $56.10 $61.80 $56.39 $60.47
Churn (with subscriber reserve) 3.53% 4.03% 3.72% 3.18% 2.50% 3.00%
Churn (without subscriber reserve) 3.89% 4.56% 4.15% 4.06% 3.48% 3.90%
CPGA $338 $359 $344 $334 $371 $343
Capital Expenditures (cash) $6,654,000 $8,469,000 $15,123,000 $21,039,000 $27,484,000 $48,523,000
EBITDA $17,826,000 ($7,255,000) $10,571,000 ($275,161,000) ($13,958,000) ($289,119,000)
The reconciliation of EBITDA to net cash provided by (used in) operating
activities, as determined in accordance with GAAP, is as follows (dollar amounts
in thousands):
Six Months Ended March 31,
--------------------------
2003 2002
--------------------------------------- ------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
operating activities $15,627 $ (9,086) $6,541 $ (18,121) $($19,754) $ (37,875)
Change in operating assets and
liabilites 469 541 1,010 13,839 9,856 23,695
Interest expense 20,005 15,094 35,099 16,979 7,952 24,931
Accretion of interest (15,618) (11,589) (27,207) (13,788) (8,688) (22,476)
Goodwill impairment -- -- -- (261,212) -- (261,212)
Interest and other income (65) (2) (67) (132) (84) (216)
Provision for doubtful accounts (2,155) (1,693) (3,848) (11,659) (3,044) (14,703)
Other expense (437) (520) (957) (1,067) (196) (1,263)
EBITDA $17,826 $(7,255) $10,571 $ (275,161) $ (13,958) $ (289,119)
The reconciliation of EBITDA to our reported net loss, as determined in
accordance with GAAP, is as follows (dollar amounts in thousands):
Six Months Ended March 31,
--------------------------
2003 2002
-------------------------------------- ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Net Loss $ (31,712) $ (36,984) $(68,696) $ (298,882) $ (32,672) $ (331,554)
Depreciation and amortization 29,558 14,677 44,235 35,636 10,845 46,481
Interest income (25) (42) (67) (133) (83) (216)
Interest expense 20,005 15,094 35,099 16,979 7,952 24,931
Income tax benefit -- -- -- (28,761) -- (28,761)
-------- -------- --------- ----------- --------- ------------
EBITDA $ 17,826 $(7,255) $ 10,571 $ (275,161) $ (13,958) $ (289,119)
======== ========= ========= ============ ========== ===========
The reconciliation of ARPU to service revenue, as determined in accordance with
GAAP, is as follows (dollar amounts in thousands):
Six Months Ended March 31,
--------------------------
2003 2002
--------------------------------------- -------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Average Revenue per User (ARPU):
Service revenue $120,097 $57,896 $177,993 $105,665 $37,538 $143,203
Average subscribers 350,102 222,793 528,826 284,965 165,045 394,693
ARPU $57.17 $53.40 $56.10 $61.80 $56.39 $60.47
Notes: For 2003, iPCS average subscribers represents the period between October
1, 2002 and February 23, 2003. For 2003, average subscribers for combined entity
is a weighted average. For 2002, iPCS average subscribers represents the period
between December 1, 2002 and March 31, 2002. For 2002, average subscribers for
combined entity is a weighted average.
The reconciliation of CPGA to selling and marketing expense as determined in
accordance with GAAP, is calculated as follows (dollar amounts in thousands):
Six Months Ended March 31,
--------------------------
2003 2002
--------------------------------------- -------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Cost per Gross Add (CPGA):
Sales and marketing expense $28,159 $16,417 $44,576 $43,288 $14,149 $57,437
Plus: Activation expense $414 $194 $608 $923 $380 $1,303
Plus: Cost of equipment $10,533* $7,130* $17,663 $13,840 $6,424 $20,264
Less: Equipment revenue $(5,943)* $(2,575)* $(8,518) $(7,453) $(2,480) $(9,933)
Total acquisition costs $33,163 $21,166 $54,329 $50,598 $18,473 $69,071
Gross Additions 98,624 59,403 158,027 151,416 49,826 201,242
CPGA $336 $356 $344 $334 $371 $343
Subscriber Net Additions
For AirGate and iPCS, subscriber net additions decreased for the six months
ended March 31, 2003, compared to the same period in 2002. This decline is due
to the decrease in subscriber gross additions, re-institution of and increase in
the deposit for sub-prime credit quality customers, actions taken to reduce
acquisition costs and the increased number of subscribers who churn. For iPCS,
the decrease also reflects the fact that subsequent to February 23, 2003 the
results of iPCS are no longer consolidated with the results of AirGate. Reported
net additions during the six months ended March 31, 2003 were positively
impacted by the Company's elimination of its subscriber reserve. The net impact
of this change for the six months ending March 31, 2003 is an increase in net
additions of 3,717 and 2,251 for AirGate and iPCS, respectively.
Subscriber Gross Additions
For AirGate, subscriber gross additions decreased for the six months ended March
31, 2003 compared to the same period in 2002. This decline is due to the
re-institution of and increase in the deposit for sub-prime credit quality
customers and actions taken to reduce acquisition costs. For iPCS, subscriber
gross additions increased for the six months ended March 31, 2003 compared to
the same period in 2002. The increase reflects the effect of not including
October and November 2001 iPCS results (iPCS acquisition date was November 30,
2001), partially offset by the fact that subsequent to February 23, 2003 the
results of iPCS are no longer consolidated with the results of AirGate.
EBITDA
EBITDA for the six months ended March 31, 2003 increased from the same period in
2002. This increase is a result of an overall decrease in spending, particularly
in cost of services and selling and marketing. EBITDA for AirGate was favorably
impacted by $4.9 million in credits provided by Sprint.
Average Revenue Per User
The decrease in ARPU for the Company for the six months ended March 31, 2003
compared to the same period in 2002 is primarily the result of the acquisition
of iPCS and an overall reduction in revenue from customers using minutes in
excess of their subscriber usage plans. The decrease also reflects the cessation
of recognizing terminating long-distance access revenue. Until March 31, 2002,
the Company recorded terminating long-distance access revenues billed by Sprint
PCS to long distance carriers.
Churn
Churn increased for the six months ended March 31, 2003 compared to the same
period in 2002 as a result of an improved customer base resulting from the
re-institution of the deposit for sub-prime credit quality customers.
Cost Per Gross Addition
For AirGate, CPGA increased for the six months ended March 31, 2003 compared to
the same period in 2002. The increase is due to fewer subscriber gross
additions, partially offset by reduced acquisition costs. For iPCS, CPGA
decreased for the six months ended March 31, 2003, compared to the same period
in 2002 due to leveraging fixed acquisition costs over and a large number of
subscriber gross additions.
Revenues
Six Months Ended March 31,
--------------------------
2003 2002
------------------------------------------------ ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Service Revenue $ 120,097 $57,896 $ 177,993 $ 105,665 $37,538 $ 143,203
Roaming Revenue 32,805* 18,893* 51,256 30,992* 12,466* 43,254
Equipment Revenue 5,943* 2,575* 8,286 7,453 2,480 9,933
---------- -------- --------- ---------- -------- ---------
Total $ 158,845* $79,364* $ 237,535 $ 144,110* $52,484* $ 196,390
*Amounts are reflected prior to the elimination of intercompany transactions.
For AirGate and iPCS, service revenue for the six months ended March 31, 2003
increased over the same period in the prior year. The increase in service
revenue reflects the substantially higher average number of subscribers using
the Company's network. This increase is partially offset by an overall reduction
in revenue from customers using minutes in excess of their subscribed usage
plans. For iPCS, the increase is also partially offset by the fact that
subsequent to February 23, 2003 the results of iPCS are no longer consolidated
with the results of AirGate.
Roaming revenue for the six months ended March 31, 2003 increased over the same
period in the prior year. The increase is attributable to higher volume
partially offset by the lower reciprocal roaming rate charged among Sprint and
its PCS network partners. For the six months ended March 31, 2003, roaming
revenue from Sprint and its PCS network partners was $46 million, or 89% of the
roaming revenue recorded. For the six months ended March 31, 2003, roaming
revenue from Sprint and its PCS network partners attributable to AirGate and
iPCS was $31.0 million and $15.0 million or 94% and 79%, respectively.
For AirGate, equipment revenue for the six months ended March 31, 2003 decreased
over the same period in the prior year. This decrease is primarily due to the
lower number of gross additions as compared to the prior year. For iPCS,
equipment revenue for the six months ended March 31, 2003 increased over the
same period in the prior year. This increase is primarily due to the higher
number of gross additions as compared to the prior year.
Cost of Service and Roaming
Six Months Ended March 31,
--------------------------
2003 2002
----------------------------------------- -----------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Roaming expense $27,136* $13,673* $40,366 $27,410* $10,982* $38,188
Network operating costs 21,821 16,170 37,991 21,644 14,059 35,703
Bad debt expense 2,154 1,694 3,848 11,658 3,191 14,849
Wireless handset upgrades 2,319 1,788 4,107 -- -- --
Total cost of service and roaming $92,168* $ 56,191* $ 147,917 $92,906* $41,391* $ 134,093
*Amounts are reflected prior to the elimination of intercompany transactions.
AirGate roaming expense was relatively flat for the six months ended March 31,
2003 compared to the same period in 2002 primarily as a result of increased
roaming usage by our subscribers, which was largely offset by the decrease in
the reciprocal roaming rate charged among Sprint and its network partners. For
iPCS, roaming expense increased by $2.7 million for the six month period ending
March 31, 2003 compared to the same period in 2002. This increase is primarily a
result of not including October and November 2001 results in the prior period,
partially offset by the decrease in the reciprocal roaming rate and the fact
that subsequent to February 23, 2003 the results of iPCS are no longer
consolidated with the results of AirGate. 93% and 91% of the cost of roaming was
attributable to Sprint and its network partners for the six months ended March
31, 2003 and 2002, respectively, prior to the elimination of intercompany
transactions.
Bad debt expense decreased by $11.1 million ($9.5 million for AirGate and $1.6
million for iPCS) in the six months ended March 31, 2003 as compared to the same
period in 2002. This decrease in bad debt expense is attributable primarily to
improvements in the credit quality and payment profile of our subscriber base
since we re-imposed deposits in early 2002 and increased them in February 2003.
This resulted in a significant improvement in accounts receivable write-offs and
corresponding bad debt expense for the six months ended March 31, 2003. For
iPCS, the decrease also reflects the fact that subsequent to February 23, 2003
the results of iPCS are no longer consolidated with the results of AirGate.
Cost of Equipment
Cost of equipment was $17.4 million for the six months ended March 31, 2003,
compared to $20.3 million for the six months ended March 31, 2002, a decrease of
$2.9 million. This decrease in cost of equipment is attributable primarily to
the decrease in the number of subscriber gross additions. For the six months
ended March 31, 2003, for iPCS the decrease reflects the fact that subsequent to
February 23, 2003 the results of iPCS are no longer consolidated with the
results of AirGate. For the six months ended March 31, 2003, cost of equipment
attributable to AirGate and iPCS was $10.3 million and $7.1 million,
respectively.
Selling and Marketing
The Company incurred selling and marketing expenses of $44.6 million during the
six months ended March 31, 2003, compared to $57.4 million in the six months
ended March 31, 2002, a decrease of $12.8 million. The decrease reflects the
effect of reduced gross additions, staff reductions and store closings, reduced
advertising and promotions during the six months ended March 31, 2003, and for
iPCS, the decrease also reflects the fact that subsequent to February 23, 2003
the results of iPCS are no longer consolidated with the results of AirGate. For
the six months ended March 31, 2003, selling and marketing expense attributable
to AirGate and iPCS was $28.2 million and $16.4 million, respectively.
General and Administrative
For the six months ended March 31, 2003, the Company incurred general and
administrative expenses of $16.7 million, compared to $12.1 million for the same
period ended March 31, 2002, an increase of $4.6 million. For AirGate the
increase from $7.6 million for the six months ended March 31, 2002 to $9.8
million in the same period on 2003 reflects increased spending for relocation
costs and spending for outside consultants providing services to AirGate as it
relates to identifying cost saving opportunities. For iPCS, general and
administrative increased from $4.5 million for the six months ended March 31,
2002 to $6.9 million for the same period in 2003. This increase reflects costs
incurred related to the bankruptcy filing and the effect of not including
October and November 2001 offset by the fact that subsequent to February 23,
2003 the results of iPCS are no longer consolidated with the results of AirGate
and termination of certain management services from AirGate. For the six months
ended March 31, 2003, general and administrative expense attributable to AirGate
and iPCS was $9.8 million and $6.9 million, respectively.
Non-Cash Stock Compensation
Non-cash stock compensation expense was $0.4 million for the six months ended
March 31, 2003, and $0.4 million for the same period ended March 31, 2002.
Depreciation
For the six months ended March 31, 2003, depreciation increased to $37.4
million, compared to $28.4 million for the six months ended March 31, 2002, an
increase of $9.0 million. The increase in depreciation expense relates primarily
to additional network assets placed in service in fiscal year 2002, partially
offset by decreased property values as a result of the impairment charge in
fiscal year 2002. For the six months ended March 31, 2003, depreciation
attributable to AirGate and iPCS was $23.2 million and $14.2 million,
respectively.
The Company incurred capital expenditures of $15.1 million in the six months
ended March 31, 2003, which included approximately $0.4 million of capitalized
interest, compared to capital expenditures of $48.5 million and capitalized
interest of $3.8 million in the six months ended March 31, 2002. Capital
expenditures incurred by AirGate and iPCS were $6.6 million and $8.5 million,
respectively, for the six months ended March 31, 2003.
Amortization of Intangible Assets
Amortization of intangible assets for the six months ended March 31, 2003 and
2002 was approximately $6.9 million and $18.1 million, respectively. The Company
recorded an impairment charge of $312 million in fiscal year 2002 to write-down
intangible assets in accordance with SFAS No. 144 and 142. Subsequent to
February 23, 2003 the intangible assets attributed to iPCS are no longer
consolidated with the accounts of AirGate and as a result amortization expense
of intangible assets subsequent to February 23, 2003 is not included in the
results of AirGate.
Goodwill Impairment
As previously discussed, the Company recorded a goodwill impairment of $261.2
million at March 31, 2002.
Interest Expense
For the six months ended March 31, 2003, interest expense was $35.1 million,
compared to $24.9 million for the six months ended March 31, 2002, an increase
of $10.2 million. The increase is primarily attributable to increased debt
related to accreted interest on the AirGate notes and the iPCS notes and
increased borrowings under the AirGate and iPCS credit facilities. This increase
is partially offset by the fact that iPCS interest expense is no longer
consolidated with AirGate subsequent to February 23, 2003, lower commitment fees
on undrawn balances of the credit facilities, and a lower interest rate on
variable rate borrowings under the credit facilities. For the six months ended
March 31, 2003, interest expense attributable to AirGate and iPCS was $20.0
million and $15.1 million, respectively.
Income Tax Benefit
No income tax benefit was realized for the six months ended March 31, 2003.
Income tax benefits of $28.8 million were realized for the six months ended
March 31, 2002.
Net Loss
For the six months ended March 31, 2003, the net loss was $68.7 million,
compared to a net loss of $331.6 million for the same period in 2002. For the
six months ended March 31, 2003, net loss attributable to AirGate and iPCS was
$31.7 million and $37.0 million, respectively. The six months ended March 31,
2002 included $261.2 million related to goodwill impairment. The net loss of
AirGate included $5.6 million of expenses for purchase accounting basis
adjustments related to the investment in iPCS.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, the Company had $20.9 million in cash and cash
equivalents, compared to $32.5 million in cash and cash equivalents at September
30, 2002. The Company's working capital balance was $4.1 million at March 31,
2003, compared to a working capital deficit of $364.4 million at September 30,
2002. The majority of this improvement in the Company's working capital position
was due to the deconsolidation of iPCS' working capital components subsequent to
February 23, 2003.
Net Cash Provided By (Used In) Operating Activities
The $6.5 million of cash provided by operating activities in the six months
ended March 31, 2003 was the result of the Company's $68.7 million net loss
offset by non-cash items including depreciation, amortization of note discounts,
financing costs, amortization of intangibles, provision for doubtful accounts,
and non-cash stock compensation totaling $76.2 million. These non-cash items
were partially offset by net cash working capital changes of $1.0 million. The
net working capital changes were driven primarily by an increase in prepaid
expenses along with decreases in payables due to Sprint, trade accounts payable
and accrued expenses. The $37.9 million of cash used in operating activities in
the six months ended March 31, 2002 was the result of the Company's $331.6
million net loss offset by $317.5 million of goodwill impairment, depreciation,
amortization of note discounts, financing costs, amortization of intangibles,
deferred tax benefit, provision for doubtful accounts and non-cash stock option
compensation, that was partially offset by negative net cash working capital
changes of $23.8 million.
Net Cash Used in Investing Activities
The $25.2 million of cash used in investing activities during the six months
ended March 31, 2003 represents $15.1 million for purchases of property and
equipment. Purchases of property and equipment during the six months ended March
31, 2003 related to investments for the expansion of switch capacity and
expansion of service coverage. In addition, $10 million of cash was
deconsolidated subsequent to February 23, 2003 relating to the iPCS bankruptcy.
For the six months ended March 31, 2002, cash outlays of $30.1 million
represented cash payments of $48.5 million made for purchases of equipment and
$6.0 million of cash acquisition costs related to the merger with iPCS, offset
by $24.4 million of cash acquired from iPCS. For the six months ended March 31,
2003, cash used in investing activities attributable to AirGate and iPCS was
$6.7 million and $18.5 million, respectively.
Net Cash Provided by Financing Activities
The $7.0 million in cash provided by financing activities during the six months
ended March 31, 2003, consisted of $8.0 million in borrowings under the AirGate
credit facility offset by $1.0 million for principal payments associated with
the AirGate credit facility. The $79.4 million of cash provided by financing
activities in the six months ended March 31, 2002 consisted of $48.2 million
borrowed under the AirGate credit facility and $30.0 million under the iPCS
senior credit facility, and $0.7 million of proceeds received from exercise of
options and warrants and $0.6 million received from stock issued to the employee
stock purchase plan. For the six months ended March 31, 2003, the $7.0 million
in cash provided by financing activities was attributable solely to AirGate.
Liquidity
Due to the factors described in the Company's Annual Report on Form 10-K/A for
the year ended September 30, 2002, management has made changes to the
assumptions underlying the long-range business plans for AirGate and iPCS. These
changes included fewer new subscribers, lower ARPU, higher subscriber churn,
increased service and pass through costs from Sprint in the near-term and lower
roaming margins from Sprint.
On February 23, 2003 iPCS, Inc. and its subsidiaries, iPCS Wireless, Inc. and
iPCS Equipment, Inc., filed a Chapter 11 bankruptcy petition in the United
States Bankruptcy Court for the Northern District of Georgia for the purpose of
effecting a court-administered reorganization. Immediately prior to iPCS'
bankruptcy filing, the lenders under the iPCS credit facility accelerated iPCS'
payment obligations as a result of existing defaults under that facility.
While AirGate has also experienced a deterioration in its liquidity, it appears
that it is in a better position to address the deterioration in anticipated
operating results. It has a larger subscriber base than iPCS and, as a
stand-alone operation, AirGate's business is more mature. Although no assurances
can be made, based upon its current business plan, which continues to be revised
and evaluated in light of evolving circumstances, we expect that AirGate will
have sufficient funds from operations and amounts available under its credit
facility to satisfy its working capital requirements, capital expenditures and
other liquidity requirements through at least March 31, 2004.
AirGate Capital Resources
At March 31, 2003, AirGate had $20.9 million of cash and cash equivalents. As of
March 31, 2003, $9.0 million remained available for borrowing under the AirGate
credit facility. The Company's obligations under the AirGate credit facility are
secured by all of AirGate's assets, but not the assets of iPCS and its
subsidiaries.
Future Trends That May Affect Operating Results, Liquidity and Capital Resources
Our business plan and estimated future operating results are based on estimates
of key operating metrics, including subscriber growth, subscriber churn, capital
expenditures, ARPU, losses on sales of handsets and other subscriber
acquisitions costs, and other operating costs. The unsettled nature of the
wireless market, the current economic slowdown, increased competition in the
wireless telecommunications industry, the problems in our relationship with
Sprint, new service offerings of increasingly large bundles of minutes of use at
lower prices by some major carriers, and other issues facing the wireless
telecommunications industry in general have created a level of uncertainty that
may adversely affect our ability to predict key operating metrics.
Certain other factors that may affect our operating results, liquidity and
capital resources include the following:
AirGate has limited funding options and the ability to draw remaining funds
under the AirGate credit facility may be terminated.
AirGate had only $9.0 million remaining available under the AirGate credit
facility as of March 31, 2003. AirGate currently has no additional sources of
working capital other than cash on hand and operating cash flow. If our actual
revenues are less than we expect or operating or capital costs are more than we
expect, our financial condition and liquidity may be materially adversely
affected. In such event, there is substantial risk that the Company could not
access the capital or credit markets for additional capital.
AirGate's ability to borrow funds under the AirGate credit facility may be
terminated and its payment obligations may be accelerated if it is unable to
maintain or comply with the financial and operating covenants contained in the
AirGate credit facility. The AirGate credit facility contains covenants
specifying the maintenance of certain financial ratios, reaching defined
subscriber growth and network covered population goals, minimum service
revenues, maximum capital expenditures, and the maintenance of a ratio of total
and senior debt to annualized EBITDA, as defined in the credit facility ("Credit
Facility EBITDA"). The covenant related to debt to annualized Credit Facility
EBITDA requires that for the six months ending March 31, 2004, AirGate must have
Credit Facility EBITDA of at least $20.6 million (based upon borrowings
outstanding as of March 31, 2003) and $22.0 million (assuming remaining
available funds are drawn by September 30, 2003). The definition of Credit
Facility EBITDA is not the same as EBITDA used by the Company in this report.
If the Company is unable to operate the AirGate business within the covenants
specified in the AirGate credit facility, AirGate's ability to make borrowings
required to operate the AirGate business could be restricted or terminated and
its payment obligations may be accelerated. Such a restriction, termination or
acceleration would have a material adverse affect on AirGate's liquidity and
capital resources. There can be no assurance that AirGate could obtain
amendments to such covenants if necessary. The Company believes that it is
currently in compliance in all-material respects with all financial and
operational covenants relating to the AirGate credit facility.
Risks Related to Sprint.
Sprint has sought to collect charges that were unanticipated. Further, Sprint
continues to seek to increase service fees charged to its network partners and
has imposed other requirements that adversely effect our financial performance.
Increased fees and charges from Sprint and unanticipated fees and charges can
adversely affect our operating results, liquidity and capital resources. We have
disputed all of the approximately $4.7 million of amounts Sprint has asserted we
owe. Additionally, although we have adequately reserved for disputed amounts
with Sprint, if we lose all of these disputes, payment of such amounts can
adversely affect our operating results, liquidity and capital resources.
Variable interest rates may increase substantially.
At March 31, 2003, the Company had borrowed $143.5 million under the AirGate
credit facility. The rate of interest on the credit facility is based on a
margin above either the alternate bank rate (the prime lending rate in the
United States) or the London Interbank Offer Rate (LIBOR). For the quarter ended
March 31, 2003, the weighted average interest rate under variable rate
borrowings was 5.37% under the AirGate credit facility. If interest rates
increase, the Company may not have the ability to service the interest
requirements on the AirGate credit facility. Further, if AirGate were to default
in its payments under its credit facility, its rate of interest would increase
by 2.5% over the alternate bank rate.
AirGate operates with little working capital because of amounts owed to Sprint.
Each month AirGate pays Sprint expenses described in greater detail under
"Related Party Transactions and Transactions between AirGate and iPCS." A
reduction in the amounts the Company owes Sprint may result in a greater use of
cash for working capital purposes than the business plans currently project. A
reduction in such amounts may reduce cash available to the Company and decrease
the amount of cash available for working capital purposes than the business
plans currently project. Sprint has notified us that it intends to set-off all
undisputed amounts when due beginning May 14, 2003, which reflects a change from
the current policy not to set-off unpaid, undisputed amounts for at least 30
days after the invoice date.
Effect of iPCS Bankruptcy.
As an unrestricted subsidiary, iPCS is a separate corporate entity from AirGate
with its own independent financing sources, debt obligations and sources of
revenue. Furthermore, iPCS lenders, noteholders and creditors do not have a lien
or encumbrance on assets of AirGate, and AirGate cannot provide capital or other
financial support to iPCS. The Company believes AirGate operations will continue
independent of the outcome of the iPCS bankruptcy. However, it is likely that
AirGate's ownership interest in iPCS will have no value after the restructuring
is complete. On April 22, 2003, the trustee for the AirGate notes gave notice to
the AirGate noteholders of the iPCS bankruptcy filing and that in the opinion of
the Company and its outside counsel, such filing is not a default under the
AirGate notes. If the Company were determined by a court of competent
jurisdiction to be in default under the AirGate notes and the notes were
accelerated, the Company would have insufficient funds to pay the AirGate notes.
Other factors.
Other factors which could adversely affect AirGate's liquidity and capital
resources are described in this report as Item 5, Risk Factors, including the
following:
* our revenues may be less than we anticipate;
* our costs may be higher than we anticipate;
* ARPU may continue to decline;
* we may continue to experience a high rate of subscriber turnover;
* our efforts to reduce costs may not succeed or may have adverse affects on
our business; and
* our provision for doubtful accounts may not be sufficient to cover
uncollectible accounts.
Contractual Obligations
The Company is obligated to make future payments under various contracts it has
entered into, including amounts pursuant to the AirGate credit facility, the
AirGate notes, capital leases and non-cancelable operating lease agreements for
office space, cell sites, vehicles and office equipment. Future expected minimum
contractual cash obligations for the next five years and in the aggregate at
March 31, 2003 are as follows (dollar amounts in thousands):
Payments Due By Period
Year Ending September 30,
Contractual Obligation Total 2003 2004 2005 2006 2007 Thereafter
---------------------- ----- ---- ---- ---- ---- ---- ----------
AirGate credit facility (1) $ 143,488 $ 1,012 $16,763 $22,350 $28,420 $ 37,515 $37,428
AirGate notes 300,000 -- -- -- -- -- 300,000
AirGate operating leases (2) 75,284 19,096 18,313 13,711 8,768 5,766 9,630
--------- ------- -------- ------- ------- ------- --------
Total $ 518,772 $20,108 $ 35,076 $36,061 $37,188 $43,281 $347,058
--------- ------- -------- ------- ------- ------- --------
(1) Total repayments are based upon borrowings outstanding as of March 31,
2003, not projected borrowings under the AirGate credit facility.
(2) Does not include payments due under renewals to the original lease term.
The AirGate credit facility is comprised of two senior secured loan commitments
("tranches") totaling $153.5 million. Tranche 1 provides for a $13.5 million
senior secured term loan commitment (of which $12.5 million is outstanding as of
March 31, 2003), which matures on June 6, 2007. Tranche II provides for a $140.0
million senior secured term loan commitment (of which $131.0 million is
outstanding as of March 31, 2003), which matures on September 30, 2008. The
AirGate credit facility requires quarterly payments of principal beginning
December 31, 2002, for tranche I, and March 31, 2004, for tranche II, initially
in the amount of 3.75% of the loan balance then outstanding and increasing
thereafter. As of March 31, 2003, AirGate has had cumulative borrowings under
the credit facility totaling $144.5 million and has made cumulative quarterly
principal repayments in the amount of $1.0 million. The commitment fee on unused
borrowings is 1.50%, payable quarterly. The AirGate notes will require cash
payments of interest beginning on April 1, 2005.
There are provisions in the agreements governing the AirGate credit facility and
the AirGate notes providing for an acceleration of repayment upon an event of
default, as defined in the respective agreements. AirGate is currently in
material compliance with its obligations under these agreements.
As of April 30, 2003, two major credit rating agencies rate AirGate's unsecured
debt. The ratings were as follows:
Type of facility Moody's S&P
---------------- ------- ---
AirGate notes Caa2 CC
The Company has no off-balance sheet arrangements and has not entered into any
transactions involving unconsolidated, limited purpose entities or commodity
contracts.
Seasonality
The Company's business is subject to seasonality because the wireless industry
historically has been heavily dependent on fourth calendar quarter results.
Among other things, the industry relies on significantly higher subscriber
additions and handset sales in the fourth calendar quarter as compared to the
other three calendar quarters. A number of factors contribute to this trend,
including: the increasing use of retail distribution, which is heavily dependent
upon the year-end holiday shopping season; the timing of new product and service
announcements and introductions; competitive pricing pressures; and aggressive
marketing and promotions. The increased level of activity requires a greater use
of available financial resources during this period. We expect, however, that
fourth quarter seasonality will have less impact in the future.
RELATED PARTY TRANSACTIONS AND TRANSACTIONS BETWEEN AIRGATE AND IPCS
Transactions with Sprint
Under the Sprint Agreements, Sprint is obligated to provide the Company
significant support services such as billing, collections, long distance,
customer care, network operations support, inventory logistics support, use of
Sprint brand names, national advertising, national distribution and product
development. Additionally, the Company derives substantial roaming revenue and
expenses when Sprint's and Sprint's network partners' wireless subscribers incur
minutes of use in the Company's territories and when the Company's subscribers
incur minutes of use in Sprint and other Sprint network partners' PCS
territories. These transactions are recorded in roaming revenue, cost of service
and roaming, cost of equipment and selling and marketing expense captions in the
accompanying consolidated statements of operations. Cost of service and roaming
transactions include the 8% affiliation fee, long distance charges, roaming
expense and the costs of services such as billing, collections, customer service
and pass-through expenses. Cost of equipment transactions relate to inventory
purchased by the Company from Sprint under the Sprint agreements. Selling and
marketing transactions relate to subsidized costs on handsets and commissions
paid by the Company under Sprint's national distribution programs. Amounts
recorded relating to the Sprint agreements for the three and six months ended
March 31, 2003 and 2002 are as follows (dollar amounts in thousands):
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------------- ---------------------
2003 2002 2003 2002
Amounts included in the Consolidated Statement of Operations:
AirGate roaming revenue............................................ $ 12,972 $ 13,838 $ 30,801 $ 30,047
AirGate cost of service and roaming:
Roaming....................................................... $ 10,777 $ 11,730 $ 25,462 $ 24,888
Customer service.............................................. 9,927 8,947 21,727 16,761
Affiliation fee............................................... 4,708 3,886 9,545 7,274
Long distance................................................. 3,259 3,750 6,044 7,059
Other......................................................... 514 720 990 1,217
--------- --------- --------- ---------
AirGate cost of service and roaming:............................... $ 29,185 $ 29,033 $ 63,768 $ 57,199
AirGate purchased inventory........................................ $ 2,695 $ 3,924 $ 8,221 $ 9,441
AirGate selling and marketing...................................... $ 2,412 $ 5,964 $ 6,111 $ 14,301
iPCS roaming revenue............................................... $ 4,061 $ 7,327 $ 14,724 $ 11,867
iPCS cost of service and roaming
Roaming....................................................... $ 3,796 $ 6,308 $ 12,158 $ 9,955
Customer service.............................................. 3,853 4,507 11,760 6,042
Affiliation fee............................................... 1,805 2,223 4,911 2,941
Long distance................................................. 1,153 2,693 3,281 3,554
Other......................................................... 168 215 461 260
--------- --------- --------- ---------
iPCS cost of service and roaming................................... $ 10,775 $ 15,946 $ 32,571 $ 22,752
iPCS purchased inventory........................................... $ 108 $ 1,813 $ 6,124 $ 4,111
iPCS selling and marketing......................................... $ 1,240 $ 3,289 $ 3,138 $ 4,645
Amounts included in the Consolidated Balance Sheets:
As of
March 31, September 30,
2003 2002
---- ----
Receivable from Sprint $ 11,615 $ 44,953
Payable to Sprint (40,570) (88,360)
Because approximately 97% of our revenues are collected by Sprint and 65% of
costs of service and roaming in our financial statements are derived from fees
and charges, including pass-through charges, from Sprint, we have a variety of
settlement issues and other contract disputes open and outstanding from time to
time. The amounts Sprint has asserted we owe is approximately $4.7 million.
These include, but are not limited to the following items all of which for
accounting purposes have been reserved or otherwise provided for:
* In fiscal year 2003, Sprint PCS asserted it has the right to recoup up to
$3.9 million in long-distance access revenues previously paid by Sprint PCS
to AirGate, for which Sprint PCS has invoiced $1.2 million. We have
disputed these amounts.
* Sprint invoiced AirGate approximately $0.8 million with respect to calendar
year 2002 to reimburse Sprint for certain 3G related development expenses.
We are disputing Sprint's right to charge 3G fees in 2002 and beyond, and
we estimate such fees will be $2.5 million in calendar year 2003.
* We continue to discuss with Sprint whether AirGate owes software
maintenance fees to Sprint of approximately $1.7 million for 2002, and $1.8
million for calendar year 2003. Our position is that Sprint is not
authorized to charge these fees to AirGate under the terms of our
agreements.
* Sprint billed AirGate $0.6 million for information technology (IT) expenses
including the reimbursement of amortization of IT projects completed by
Sprint. The Company has disputed Sprint's right to collect these fees.
The approximately $4.7 million Sprint has asserted we owe does not include
ongoing 3G service fees for future periods or $2.7 million in long distance
access revenues Sprint has not invoiced.
In addition to these disputes, we have other outstanding issues with Sprint
which could result in set-offs to the items described above or in payments due
from Sprint. For example, we believe Sprint has failed to calculate, pay and
report on collected revenues in accordance with our agreements with Sprint,
which, together with other cash remittance issues, resulted in a shortfall in
cash payments to AirGate of at least $10 million. As a result of these issues
and in connection with our review of accounts receivable at September 30, 2002,
we reclassified approximately $10.0 million of AirGate subscriber accounts
receivable for the fiscal year ended September 30, 2002 to a receivable from
Sprint. During this fiscal year, Sprint has acknowledged and paid only $8.7
million of this receivable for amounts that were previously not properly
remitted to AirGate. The $8.7 million paid by Sprint included $4.1 million of
previously unapplied customer deposits, $4.0 million of revenue for AirGate
subscribers whose bills are paid through national accounts, and $0.6 million of
subscriber payments resulting from a change in the method of calculating
collected revenues. We are reviewing additional information received from Sprint
and have retained a consultant to verify the accuracy of this information to
determine whether additional amounts are due to AirGate. We continue to discuss
with Sprint the proper method for calculating, paying and reporting on collected
revenues and other matters.
On January 23, 2003, Sprint notified us that service fees, excluding historical
3G expenses, were increased from $7.27 per subscriber per month to $7.77 per
subscriber per month.
Monthly Sprint service charges are set by Sprint at the beginning of each
calendar year. Sprint takes the position that at the end of each year, it can
determine its actual costs to provide these services to its network partners and
require a final settlement against the charges actually paid. If the cost to
provide these services are less than the amounts paid by Sprint's network
partners, Sprint will issue a credit for these amounts. If the costs to provide
the services are more that the amounts paid by Sprint's network partners, Sprint
will debit the network partners for these amounts. Sprint credited to the
Company in a net amount of $2.0 million ($1.3 million for AirGate and $0.7
million for iPCS). These credits were recorded as a reduction of cost of service
in the quarter ended December 31, 2002.
The Sprint Agreements require the Company to maintain certain minimum network
performance standards and to meet other performance requirements. AirGate was in
compliance in all material respects with these requirements at March 31, 2003.
Transactions between AirGate and iPCS
The Company formed AirGate Service Company, Inc. ("ServiceCo") to provide
management services to both AirGate and iPCS. ServiceCo is a wholly-owned
restricted subsidiary of AirGate. Personnel who provide general management
services to AirGate and iPCS have been leased to ServiceCo, which includes 148
employees at March 31, 2003. Generally, the management personnel include AirGate
staff in the Company's principal corporate offices in Atlanta and the iPCS
accounting staff in Geneseo, Illinois. ServiceCo expenses are allocated between
AirGate and iPCS based on the percentage of subscribers they contribute to the
total number of Company subscribers (the "ServiceCo Allocation"), which is
currently 60% AirGate and 40% iPCS. Expenses that are related to one company are
allocated to that company. Expenses that are related to ServiceCo or both
companies are allocated in accordance with the ServiceCo Allocation. For the
quarter and six months ended March 31, 2003, iPCS recorded a net total of $0.8
million and $1.8 million, respectively.
On January 27, 2003, iPCS retained Timothy M. Yager, former CEO of iPCS prior to
the merger of AirGate and a former director of AirGate following the merger, as
chief restructuring officer to oversee the restructuring of iPCS and manage the
day-to-day operations of iPCS. To facilitate the orderly transition of
management services to Mr. Yager, AirGate and iPCS have executed an amendment to
the Services Agreement that would allow individual services to be terminated by
either party upon 30 days prior notice, subject to certain exceptions for
services for which longer notice is required.
The amendment also terminated certain services provided by AirGate, and
effective May 1, 2003, iPCS terminated certain other services. As a result of
the termination of services by iPCS, AirGate received $0.3 million less payments
from iPCS for the quarter ended March 31, 2003. We anticipate that prior to
September 1, 2003, substantially all management services provided by ServiceCo
to iPCS will be terminated.
AirGate has completed transactions at arms-length in the normal course of
business with its unrestricted subsidiary iPCS. These transactions are comprised
of roaming revenue and expenses, inventory sales and purchases and sales of
network operating equipment.
Item 3. Quantitative And Qualitative Disclosure About Market Risk
In the normal course of business, the Company's operations are exposed to
interest rate risk on its credit facilities and any future financing
requirements. AirGate's fixed rate debt consists primarily of the accreted
carrying value of the 1999 AirGate notes ($236 million at March 31, 2003).
AirGate's variable rate debt consists of borrowings made under the AirGate
credit facility ($143.5 million at March 31, 2003). For the three months ended
March 31, 2003, the weighted average interest rate under the AirGate credit
facility was 5.37%. Our primary interest rate risk exposures relate to (i) the
interest rate on long-term borrowings; (ii) our ability to refinance the AirGate
notes at maturity at market rates; and (iii) the impact of interest rate
movements on our ability to meet interest expense requirements and financial
covenants under our debt instruments.
The following table presents the estimated future balances of outstanding
long-term debt projected at the end of each period and future required annual
principal payments for each period then ended associated with the AirGate notes
and credit facility based on projected levels of long-term indebtedness:
Years Ending September 30,
------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
(Dollars in thousands)
AirGate notes (1) $260,630 $297,191 $297,289 $297,587 $298,115 --
Fixed interest rate 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Principal payments -- -- -- -- -- $300,000
AirGate credit facility $151,475 $133,700 $110,000 $79,893 $40,000 --
Variable interest rate (2) 5.06% 5.06% 5.06% 5.06% 5.06% 5.06%
Principal payments $ 2,025 $17,775 $23,700 $ 30,107 $39,893 $40,000
(1) The information in this table was also provided in our Annual Report on
Form 10-K (Item 7a) for the fiscal year ended September 30, 2002 and in our
Quarterly Report on Form 10-Q (Item 3) for the quarter ended December 31,
2002. The table included in these reports displayed estimated future
balances under the incorrect year, which had the effect of understating the
accreted value of the notes in 2004 and thereafter.
(2) The interest rate on the AirGate credit facility equals the London
Interbank Offered Rate ("LIBOR") +3.75%. LIBOR is assumed to equal 1.31%
for all periods presented, which is the LIBOR rate as of April 28, 2003. A
1% increase (decrease) in the variable interest rate would result in a $1.4
million increase (decrease) in the related interest expense on an annual
basis (based upon borrowings outstanding as of March 31, 2003).
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As of the end of the period covered by this report, March 31, 2003 (the
"Evaluation Date"), we carried out an evaluation, under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon this evaluation,
the President and Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
Evaluation Date.
Our Relationship with Sprint
Under our long-term (up to 50 year) agreements with Sprint, we market PCS
products and services under the Sprint brand names in our territory and our
business currently consists solely of Sprint wireless products and services.
Under our agreements, Sprint exercises extensive control over our business and
our relationship with Sprint is unique in many ways. For example:
o Our network must interface seamlessly with the national Sprint
wireless network.
o Our network must be built, maintained and upgraded to include Sprint's
most current technology in accordance with Sprint-approved plans and
using Sprint-approved equipment.
o Under our management agreement with Sprint, we are required to provide
services such as customer care, billing and collections in accordance
with program requirements established by Sprint in accordance with the
management agreement. Any third party vendor must receive Sprint
approval, comply with Sprint's program requirements with respect to
these services and interface with Sprint's systems.
o Sprint must approve our marketing and sales materials.
o Sprint develops products and services that we are required to offer in
our territory and it must approve all products and services we offer
in our territory, subject to certain limitations.
o Our stores must conform to Sprint's requirements for retail stores and
are identical to Sprint retail stores in Sprint's markets.
o Sprint develops and implements pricing and credit plans that we are
required to offer in our territory.
o We are required to absorb the cost of promotional plans developed by
Sprint, which we must offer in our territory (e.g., rebates or
discounts to customers for handset purchases).
o Our subscribers call Sprint customer care.
o Our subscribers receive bills from, and make payments to, Sprint.
Under our agreements with Sprint, Sprint provides us with billing, collections,
customer care and other back office services. As a result, approximately 95% of
our revenues are paid through Sprint. In addition, approximately 65% of cost of
service and roaming in our consolidated financial statements relate to charges
by or through Sprint for its affiliation fee, charges for services provided
under our agreements with Sprint such as billing, collections and customer care,
roaming expense, long-distance, and pass-through and other fees and expenses.
Under our agreements, Sprint is responsible to keep and maintain books and
records to support and document any fees, costs or other charges due in
connection with the agreements and to provide a monthly true-up report of
amounts required to be remitted to the Company with respect to collected
revenues. Due to this relationship, the Company necessarily relies on Sprint to
provide accurate, timely and sufficient data and information to properly record
our revenues, expenses and accounts receivable, which underlie a substantial
portion of our periodic financial statements and other financial disclosures.
Nevertheless, the Company continues to dedicate significant Company resources to
ensure its disclosure controls and procedures, as integrated with Sprint, are
effective.
Information provided by Sprint includes reports regarding our subscriber
accounts receivable. Sprint provides us monthly accounts receivable, billing and
cash receipts, expense detail and settlements information. Under our agreements
with Sprint, we are entitled to only a portion of the cash receipts, net of
items such as taxes, government surcharges and the 8% Sprint affiliation fee.
Sprint has developed and used a tool called the "revenue profile" to estimate
the payments due to us. We regularly review and reconcile these various reports
to identify discrepancies or errors and address those issues with Sprint.
Our Disclosure Controls and Procedures - Fiscal 2002
Because of our reliance on Sprint for financial information, we depend on Sprint
to design adequate internal controls with respect to the processes established
to provide this data and information to the Company and Sprint's other network
partners. As part of this control process, Sprint engages its independent
auditors to perform a periodic evaluation of these controls and to provide a
"Report on Controls Placed in Operation and Tests of Operating Effectiveness for
Affiliates" under guidance provided in Statement of Auditing Standards No. 70
("Type II SAS 70 reports"). The Type II SAS 70 report is provided to us annually
and covers our entire fiscal year.
In addition, at least annually, we review the prior year's Type II SAS 70 report
in light of events that have occurred during the year. We also provide comments
to Sprint and its independent auditors regarding issues and information the
report should address that may not have been addressed in the prior year's
report.
During the fourth quarter of fiscal 2002, it became apparent that discrepancies
between various accounts receivable reports provided by Sprint had become
significant. To address these issues, we conducted a lengthy inquiry into the
causes of the discrepancies. Among other things, we had numerous discussions and
meetings with Sprint's accounting staff, requested and received additional and
more detailed reports and demanded reconciliations with our records.
In connection with our review of the accounts receivable issue at September 30,
2002 for purposes of finalizing our financial statements, we reclassified
approximately $10.0 million of AirGate subscriber accounts receivable for the
fiscal year ended September 30, 2002 to a receivable from Sprint. We provided an
allowance to reflect the receivable at its net realizable value, which we
collected from Sprint subsequent to September 30, 2002.
At September 30, 2002, we and our independent auditors believed that the
accounts receivable issue resulted from a reportable condition in our internal
controls. Reportable conditions are significant deficiencies in the design or
operation of internal controls which could adversely affect an organization's
ability to record, process, summarize and report financial data consistent with
the assertions of management in the consolidated financial statements.
Nonetheless, we concluded that our disclosure controls and procedures were
effective as of September 30, 2002. We came to this conclusion for the following
reasons:
o The controls and procedures in place during fiscal year 2002 were
effective in detecting the accounts receivable issue.
o Even with the accounts receivable issue, we believed it was reasonable
to rely on the reports and information we received from Sprint. Sprint
is a public reporting company that certifies its financial information
and its controls and procedures. In addition, compared to any single
Sprint affiliate, Sprint has significantly greater resources and
efficiencies, both financially and with respect to personnel, with
which to gather, analyze and control its information.
o We relied on the Type II SAS 70 report discussed above and the
controls discussed in the report.
o During the entire fiscal year 2002, the Company used a program to
automate a portion of the process utilized to record the Company's
revenues and accounts receivable from the files received from Sprint.
The program summarizes the files received from Sprint to mirror the
Company's general ledger accounts. The Company performs a
reasonableness check prior to recording the amounts in the Company's
general ledger. The Company relies on the program and the inherent
system controls and the reasonableness checks to ensure the
consistency of the information downloaded from Sprint with the
information reflected in the Company's general ledger.
o During the entire fiscal year 2002, Company personnel reviewed
financial information and data provided by Sprint. The Company has
performed and continues to perform reasonableness checks regarding
information provided by Sprint on a monthly basis by evaluating trends
in key performance indicators to detect trending anomalies. The
Company's finance and operations groups evaluate these trends and the
Company relies on this process as a compensating control to detect
errors in the data provided by Sprint. The Company's finance and
operations groups work closely with the Company's accounting group to
reconcile differences and make necessary corrections and follow up
with Sprint as necessary.
o During the entire fiscal year 2002, the Company reviewed and
reconciled certain information provided by Sprint to detect
inconsistencies in the data.
o In July 2002, we established a disclosure control committee made up of
senior members of management and key employees. The committee assists
the Company's senior officers in fulfilling their responsibility for
oversight of the accuracy and timeliness of the disclosures made by
the Company. The committee, among other things, designs and
establishes controls and procedures regarding the accuracy and
dissemination of information, monitors the integrity and effectiveness
of the Company's disclosure controls, reviews and supervises the
preparation of filings and announcements made by the Company and
evaluates the effectiveness of the Company's disclosure controls. The
committee includes members who have information pertaining to Sprint
to ensure that appropriate disclosures are made pertaining to Sprint.
o During December 2002, prior to the issuance of our annual report, the
Company worked with Sprint to identify the sources of the
discrepancies. The Company then developed a reconciliation process of
the accounts receivable aging report provided by Sprint with the
Company's accounts receivable account. The reconciliation was
developed to identify the nature of the differences and quantify the
amount of the error in the Company's accounts receivable account. The
Company continues to use and refine this reconciliation process to
detect errors on a timely basis.
Given the controls described above, and the discrete nature of the accounts
receivable issue, we concluded, at the time our certifications of disclosure
controls were made, that our disclosure controls and procedures were effective.
Our Disclosure Controls and Procedures - Fiscal 2003
Although we concluded that our disclosure controls and procedures were effective
at the end of fiscal 2002 and in each interim period of fiscal 2003, we
recognized that further improvements were necessary to better address
information provided by Sprint. During fiscal 2003, we focused additional
resources on reviewing and analyzing information provided by Sprint and worked
with Sprint to identify other information and reports that would assist us in
this review and analysis, particularly as it relates to accounts receivable and
the application of cash.
During 2003, in order to more timely and better monitor, verify and analyze
information provided by Sprint, we took the following actions to further enhance
our disclosure controls and procedures. While we believe that, in the aggregate,
these actions improved our overall internal controls, we do not believe that any
individual action was a material change to our internal controls.
o We reconcile accounts receivable aging reports from Sprint to our
general ledger on a quarterly basis.
o In January, 2003, the Company engaged a consultant with
telecommunications settlement experience to develop a plan for a
Sprint settlements department, to analyze and interface with Sprint to
resolve financial disputes with Sprint, to review the method of
calculating the revenue profile and to review the Sprint settlements
processes and facilitate the transition of Sprint settlements and
review processes from the accounting department in Geneseo, Illinois
to the new settlements department in Atlanta, Georgia. In May 2003, we
internally staffed and broadened role of the settlements department.
The department has two full-time employees (hired in May and August
2003) and one contract person (hired in June 2003). The manager of the
settlements group serves as the primary interface with Sprint
regarding all issues related to the Sprint settlements process. The
settlements group reviews and analyzes financial data provided by
Sprint, including the components of the revenue profile that Sprint
uses to determine the amount of collected revenues paid to us. The
settlements group assists us in verifying amounts charged by Sprint as
well as revenues and other amounts settled with Sprint.
o During the fourth quarter of fiscal 2003, we completed an in-depth
review of the procedures undertaken in prior Type II SAS 70 reports
and we requested and Sprint agreed to provide and include additional
procedures in 2003 and future Type II SAS 70 Reports.
o In September 2003, we requested additional "agreed upon procedures"
pertaining to accounts receivable from Sprint's independent
accountants. Sprint's independent accountants performed such
procedures during October 2003.
o Beginning in the fourth quarter of fiscal 2003, we analyzed,
documented and implemented file audit and assurance processes for
certain Sprint files used in recording financial information.
o We obtained for the first time from Sprint an account level detail of
subscriber accounts receivable as of September 30, 2003. In September
2003, we requested this detail on at least a quarterly basis in the
future.
o In September 2003, Sprint agreed to provide semi-annual SAS 70 reports
beginning in 2004.
o In September 2003, Sprint informed us that it will request SAS 70
reports from key service providers, including the third-party provider
of its billing systems and services.
Although we refined and improved our internal controls in 2002, we and our
independent auditors believe that a reportable condition (as defined above) in
internal controls relating to accounts receivable continued during 2003 because
most of the procedures described above were not in place until the end of the
fiscal year. As a result of the improved processes and procedures described
above, the Company believes no reportable condition in internal controls existed
by the end of the fiscal year, September 30, 2003 but our independent auditors
have not made that finding.
Because the procedures outlined under "Our Disclosure Controls and Procedures -
Fiscal 2002" continued during 2003, we believe our disclosure controls and
procedures were effective throughout 2003, including as of September 30, 2003.
In order to avoid a reportable condition in the future, the Company will need to
continue the processes described above and continue to obtain or perform the
following:
o Obtain from Sprint access to a detailed listing of subscriber
receivables at the account level on a quarterly basis and validate its
integrity.
o Perform a full reconciliation of the subscriber receivables detail to
the general ledger balance, including a complete understanding of all
reconciling items.
o Perform a rollforward of the accounts receivable information to be
provided by Sprint and compare these amounts to our general ledger
accounts.
The Company will continue to monitor and evaluate the effectiveness of its
improvements in controls related to information provided by Sprint and continue
to improve these processes.
In preparation for the requirements imposed under Section 404 of the Sarbanes
Oxley Act of 2002, we are retaining an outside accounting firm to assist us in
reviewing and improving our internal control processes, including the processes
to verify data provided by Sprint.
Changes in Internal Control over Financial Reporting
We refer you to the information discussed above in Evaluation of Disclosure
Controls and Procedures.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In May, 2002, putative class action complaints were filed in the United States
District Court for the Northern District of Georgia against AirGate PCS, Inc.,
Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit Suisse
First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company, Thomas
Wiesel Partners LLC and TD Securities. The complaints do not specify an amount
or range of damages that the plaintiffs are seeking. The complaints seek class
certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former iPCS shareholders on
December 18, 2001 contained materially false and misleading statements and
omitted material information necessary to make the statements in the prospectus
not false and misleading. The alleged omissions included (i) failure to disclose
that in order to complete an effective integration of iPCS, drastic changes
would have to be made to the Company's distribution channels, (ii) failure to
disclose that the sales force in the acquired iPCS markets would require
extensive restructuring and (iii) failure to disclose that the "churn" or
"turnover" rate for subscribers would increase as a result of an increase in the
amount of sub-prime credit quality subscribers the Company added from its merger
with iPCS. On July 15, 2002, certain plaintiffs and their counsel filed a motion
seeking appointment as lead plaintiffs and lead counsel. Subsequently, the Court
denied that motion without prejudice and two of the plaintiffs have filed a
renewed motion. The Defendants responded to the renewed motion, but the Court
has not yet entered a ruling. The Company believes the plaintiffs' claims are
without merit and intends to vigorously defend against these claims. However, no
assurance can be given as to the outcome of the litigation.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
On February 23, 2003, iPCS and its subsidiaries filed a petition under Chapter
11 of the Bankruptcy Code, in the United States Bankruptcy Court for the
Northern District of Georgia. Immediately prior to iPCS' bankruptcy filing, the
lenders under the iPCS credit facility accelerated iPCS' payment obligations as
a result of existing defaults under that facility. This filing for Chapter 11
represented an event of default under iPCS' credit facility and the iPCS notes.
Under bankruptcy law, iPCS is not permitted to make scheduled principal and
interest payments unless specifically ordered by the Court. Additional
information regarding iPCS' Chapter 11 filing is set forth elsewhere in this
Form 10-Q, including Note 1 to the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted to a vote of its stockholders of record as of January 13,
2003, through a solicitation by proxy, the election of two directors. The
matters were submitted for a vote at our Annual Meeting of Shareowners on March
4, 2003. A total of 18,384,158 shares were represented by proxy at the meeting,
representing 70.86% of the 25,944,863 shares eligible to vote. With respect to
the election of two directors, of the shares represented, 15,517,135 shares were
voted in favor of the election of Barry J. Schiffman to serve as director for a
new three year term, with 2,867,023 shares withheld, and 18,186,436 shares were
voted in favor of the election of Stephen R. Stetz to serve as director for a
three year term, with 186,541 shares withheld.
Item 5. OTHER INFORMATION
Subsequent Events
Barry J. Schiffman resigned as a director and chairman of the Board effective
May 2, 2003.
Risk Factors
Our business and our prospects are subject to many risks. The following items
are representative of the risks, uncertainties and assumptions that could affect
our business, our future performance, our liquidity and the outcome of the
forward-looking statements we make. In addition, our business, our future
performance, our liquidity and forward-looking statements could be affected by
general industry and market conditions and growth rates, general economic and
political conditions, including the global economy and other future events,
including those described BELOW AND elsewhere in this QUARTERLY report on Form
10-Q.
Risks Related to Our Business, Strategy and Operations
The unsettled nature of the wireless market may limit the visibility of key
operating metrics
Our business plan and estimated future operating results are based on estimates
of key operating metrics, including subscriber growth, subscriber churn, average
monthly revenue per subscriber, losses on sales of handsets and other subscriber
acquisitions costs and other operating costs. The unsettled nature of the
wireless market, our relationship with Sprint, the current economic slowdown,
increased competition in the wireless telecommunications industry, new service
offerings of increasingly large bundles of minutes of use at lower prices by
some major carriers, and other issues facing the wireless telecommunications
industry in general have created a level of uncertainty that may adversely
affect our ability to predict these key operating metrics.
Our revenues may be less than we anticipate which could materially adversely
affect our liquidity, financial condition and results of operations
Revenue growth is primarily dependent on the size of our subscriber base,
average monthly revenues per user and roaming revenue. During the year ended
September 30, 2002, we experienced slower net subscriber growth rates than
planned, which we believe is due in large part to increased churn, declining
rates of wireless subscriber growth in general, the re-imposition of deposits
for most sub-prime credit subscribers during the last half of the year, the
current economic slowdown and increased competition. Other carriers also have
reported slower subscriber growth rates compared to prior periods. We have seen
a continuation of competitive pressures in the wireless telecommunications
market causing some major carriers to offer plans with increasingly large
bundles of minutes of use at lower prices which may compete with the calling
plans we offer, including the Sprint calling plans we support. While our
business plan anticipates lower subscriber growth, it assumes average monthly
revenues per user will remain relatively stable after factoring in recent
declines. Increased price competition may lead to lower average monthly revenues
per user than we anticipate. In addition, the lower reciprocal roaming rate that
Sprint has implemented will reduce our roaming revenue, which may not be offset
by the reduction in our roaming expense. If our revenues are less than we
anticipate, it could materially adversely affect our liquidity, financial
condition and results of operation.
Our costs may be higher than we anticipate which could materially adversely
affect our liquidity, financial condition and results of operations
Our business plan anticipates that we will be able to lower our operating and
capital costs, including costs per gross addition.
Increased competition may lead to higher promotional costs, losses on sales of
handset and other costs to acquire subscribers. Further, as described below
under "Risks Related to Our Relationship With Sprint," a substantial portion of
costs of service and roaming are attributable to fees and charges we pay Sprint
for billing and collections, customer care and other back-office support. Our
ability to manage costs charged by Sprint is limited. If our costs are more than
we anticipate, the actual amount of funds to implement our strategy and business
plan may exceed our estimates, which could have a material adverse affect on our
liquidity, financial condition and results of operations.
We may continue to experience a high rate of subscriber turnover, which would
adversely affect our financial performance
The wireless personal communications services industry in general, and Sprint
and its network partners in particular, have experienced a higher rate of
subscriber turnover, commonly known as churn, as compared to cellular industry
averages. This churn rate was driven higher in 2002 due to the NDASL and Clear
Pay programs required by Sprint and the removal of deposit requirements as
described elsewhere in this report. Our business plan assumes that churn will be
relatively constant over the remainder of fiscal 2003. Due to significant
competition in our industry and general economic conditions, among other things,
this decline may not occur and our future rate of subscriber turnover may be
higher than our historical rate. Factors that may contribute to higher churn
include:
* inability or unwillingness of subscribers to pay which results in
involuntary deactivations, which accounted for 63% of our deactivations in
the six months ended March 31, 2003;
* subscriber mix and credit class, particularly sub-prime credit subscribers
which accounted for approximately 50% of our gross subscriber additions
since May 2001 and account for approximately 33% of our subscriber base as
of March 31, 2003;
* Sprint's announced billing system conversion;
* the mandate by the FCC that wireless carriers provide for local number
portability by November 24, 2003, which would allow subscribers to keep
their wireless phone number when switching to a different service provider;
* the attractiveness of our competitors' products, services and pricing;
* network performance and coverage relative to our competitors;
* quality of customer service;
* increased prices; and
* any future changes by us in the products and services we offer, especially
to the Clear Pay Program.
A high rate of subscriber turnover could adversely affect our competitive
position, liquidity, financial position, results of operations and our costs of,
or losses incurred in, obtaining new subscribers, especially because we
subsidize some of the costs of initial purchases of handsets by subscribers.
Our allowance for doubtful accounts may not be sufficient to cover uncollectible
accounts
On an ongoing basis, we estimate the amount of subscriber receivables that we
will not collect to reflect the expected loss on such accounts in the current
period. Our business plan assumed that bad debt as a percentage of service
revenue would decline significantly during fiscal 2003, which is consistent with
current results. Our allowance for doubtful accounts may underestimate actual
unpaid receivables for various reasons, including:
* our churn rate may exceed our estimates;
* bad debt as a percentage of service revenues may not decline as we assume
in our business plan;
* adverse changes in the economy; or
* unanticipated changes in Sprint's PCS products and services.
If our allowance for doubtful accounts is insufficient to cover losses on our
receivables, it could materially adversely affect our liquidity, financial
condition and results of operations.
Roaming revenue could be less than anticipated, which could adversely affect our
liquidity, financial condition and results of operations
Sprint has reduced the reciprocal roaming rate from $0.10 per minute to $0.058
per minute beginning January 1, 2003. Based upon 2002 historical roaming data, a
reduction in the roaming rate to $0.058 per minute would have reduced roaming
revenue by approximately $36 million ($23 million for AirGate and $13 million
for iPCS) and would have reduced roaming expense by approximately $26 million
($16 million for AirGate and $10 million for iPCS). The ratio of roaming revenue
to expense for AirGate for the quarter ended March 31, 2003 was 1.3 to one.
The amount of roaming revenue we receive also depends on the minutes of use of
our network by PCS subscribers of Sprint and Sprint PCS network partners. If
actual usage is less than we anticipate, our roaming revenue would be less and
our liquidity, financial condition and results of operations could be materially
adversely affected.
Our efforts to reduce costs may have adverse affects on our business
As a result of the current business environment, AirGate has revised its
business plan and is seeking to manage expenses to improve its liquidity
position. AirGate has significantly reduced projected capital expenditures,
advertising and promotion costs and other operating costs. Reduced capital
expenditures could, among other things, force us to delay improvements to our
network, which could adversely affect the quality of service to our subscribers.
These actions could reduce our subscriber growth and increase churn, which could
materially adversely affect our financial condition and results of operation.
The Company may incur significantly higher wireless handset subsidy costs than
we anticipate for existing subscribers who upgrade to a new handset
As the Company's subscriber base matures, and technological innovations occur,
more existing subscribers will upgrade to new wireless handsets. The Company
subsidizes a portion of the price of wireless handsets and incurs sales
commissions, even for handset upgrades. Excluding sales commissions, the Company
experienced approximately $4.8 million associated with wireless handset upgrade
costs for the year ended September 30, 2002 and $4.1 million for the six months
ended March 31, 2003. The Company has limited historical experience regarding
the adoption rate for wireless handset upgrades. If more subscribers upgrade to
new wireless handsets than the Company projects, our results of operations would
be adversely affected.
The loss of the officers and skilled employees who we depend upon to operate our
business could materially adversely affect our results of operations
Our business is managed by a small number of executive officers. We believe that
our future success depends in part on our continued ability to attract and
retain highly qualified technical and management personnel. We may not be
successful in retaining our key personnel or in attracting and retaining other
highly qualified technical and management personnel. Our ability to attract and
retain such persons may be negatively impacted if our liquidity position does
not improve. In addition, we grant stock options as a method of attracting and
retaining employees, to motivate performance and to align the interests of
management with those of our stockholders. Due to the decline in the trading
price of our common stock, a substantial majority of the stock options held by
employees have an exercise price that is higher than the current trading price
of our common stock, and therefore these stock options may not be effective in
helping us to retain valuable employees. We currently have "key man" life
insurance for our Chief Executive Officer. The loss of our officers and skilled
employees could materially adversely affect our results of operation.
Parts of our territories have limited amounts of licensed spectrum, which may
adversely affect the quality of our service and our results of operations
Sprint has licenses covering 10 MHz of spectrum in AirGate's territory. While
Sprint has licenses covering 30 MHz of spectrum throughout most of iPCS'
territory, it has licenses covering only 10 MHz or 20 MHz in parts of Illinois.
As the number of subscribers in our territories increase, this limited amount of
licensed spectrum may not be able to accommodate increases in call volume, may
lead to increased dropped and blocked calls and may limit our ability to offer
enhanced services, all of which could result in increased subscriber turnover
and adversely affect our financial condition and results of operations.
Further, in January 2003, the FCC rules imposing limits on the amount of
spectrum that can be held by one provider in a specific market was lifted.
Competition may increase to the extent that licenses are transferred from
smaller stand-alone operators to larger, better capitalized, and more
experienced wireless communications operators. These larger wireless
communications operators may be able to offer customers network features not
offered by AirGate. The actions of these larger wireless communications
operators could negatively affect our churn, ability to attract new subscribers,
ARPU, cost to acquire subscribers and operating costs per subscriber.
There is a high concentration of ownership of the wireless towers we lease and
if we lose the right to install our equipment on certain wireless towers or are
unable to renew expiring leases, our financial condition and results of
operations could be adversely impacted
Many of our cell sites are co-located on leased tower facilities shared with one
or more wireless providers. A large portion of these leased tower sites are
owned by a few tower companies. Approximately 75% of the towers leased by
AirGate are owned by four tower companies (and their affiliates). Approximately
60% of the towers leased by iPCS are owned by four tower companies (and their
affiliates), with one company owning approximately 29% of the combined Company's
leased towers. If a master co-location agreement with one of these tower
companies were to terminate, or if one of these tower companies were unable to
support our use of its tower sites, we would have to find new sites or we may be
required to rebuild that portion of our network. In addition, because of this
concentration of ownership of our cell sites, our financial condition and
results of operations could be materially and adversely affected if we are
unable to renew expiring leases with such tower companies on favorable terms, or
in the event of a disruption in any of their business operations.
Certain wireless providers are seeking to reduce access to their networks
The Company relies on Sprint's roaming agreements with its competitors to
provide automatic roaming capabilities to the Company's subscribers in many of
the areas of the United States not covered by Sprint's PCS network. Certain
competitors may be able to offer coverage in areas not served by Sprint's PCS
network or may be able to offer roaming rates that are lower than those offered
by Sprint. Certain of these competitors are seeking to reduce access to their
networks through actions pending with the FCC. Moreover, AT&T Wireless has
sought reconsideration of an FCC ruling in order to expedite elimination of the
engineering standard (AMPS) for the dominant air interface on which Sprint's
subscribers roam. If AT&T Wireless is successful and the FCC eliminated this
standard before Sprint can transition its handsets to different standards,
customers of Sprint could be unable to roam in those markets where cellular
operators cease to offer their AMPS network for roaming.
Risks Particular to AirGate's Indebtedness
AirGate has substantial debt that it may not be able to service; a failure to
service such debt may result in the lenders under such debt controlling
AirGate's assets
The substantial debt of AirGate has a number of important consequences for our
operations and our investors, including the following:
* AirGate will have to dedicate a substantial portion of any cash flow from
its operations to the payment of interest on, and principal of, its debt,
which will reduce funds available for other purposes;
* AirGate may not be able to obtain additional financing if the assumptions
underlying the business plan are not correct and existing sources of funds,
together with cash flow, are insufficient for capital requirements, working
capital requirements and other corporate purposes;
* increased vulnerability to adverse economic conditions or increases in
prevailing interest rates, as some of AirGate's debt, including financing
under AirGate's credit facility, is at variable rates of interest, which
could result in higher interest expense in the event of increases in market
interest rates;
* AirGate may be more highly leveraged than our competitors, which could
potentially decrease our ability to compete in our industry; and
* due to the liens on substantially all of AirGate's assets and the pledges
of stock of AirGate's existing and future restricted subsidiaries that
secure AirGate's credit facility and notes, lenders or holders of such
notes may exercise remedies giving them the right to control AirGate's
assets or the assets of the subsidiaries of AirGate, other than iPCS, in
the event of a default.
The ability of AirGate to make payments on its debt will depend upon its future
operating performance which is subject to general economic and competitive
conditions and to financial, business and other factors, many of which AirGate
cannot control. If the cash flow from AirGate's operating activities is
insufficient, it may take actions, such as further delaying or reducing capital
expenditures, attempting to restructure or refinance its debt, selling assets or
operations or seeking additional equity capital. Any or all of these actions may
not be sufficient to allow AirGate to service its debt obligations. Further,
AirGate may be unable to take any of these actions on satisfactory terms, in a
timely manner or at all. The AirGate credit facility and indenture governing
AirGate's notes limit our ability to take several of these actions.
If AirGate does not meet all of the conditions required under its credit
facility, it may not be able to draw down all of the funds it anticipates
receiving from its senior lenders and AirGate may not be able to fund operating
losses and working capital needs
As of March 31, 2003, AirGate had outstanding $143.5 million under its credit
facility. The remaining $9 million available under AirGate's credit facility is
subject to AirGate meeting all of the conditions specified in its financing
documents. Additional borrowings are subject to specific conditions on each
funding date, including the following:
* that the representations and warranties in the loan documents are true and
correct;
* that certain financial covenant tests are satisfied, including leverage,
debt coverage and operating performance covenants, minimum subscriber
revenues, maximum capital expenditures, and covenants relating to earnings
before interest, taxes, depreciation and amortization; and
* the absence of a default under the loan documents and agreements with
Sprint.
See "Liquidity and Capital Resources". If AirGate does not meet these conditions
at each funding date, its senior lenders may not lend some or all of the
remaining amounts under its credit facility. If other sources of funds are not
available, AirGate may not be in a position to meet its operating and other cash
needs.
The AirGate indenture and credit facility contain provisions and requirements
that could limit AirGate's ability to pursue borrowing opportunities
The restrictions contained in the indenture governing the AirGate notes and the
restrictions contained in AirGate's credit facility, may limit AirGate's ability
to implement its business plans, finance future operations, respond to changing
business and economic conditions, secure additional financing, if needed, and
engage in opportunistic transactions. The AirGate credit facility and notes also
restricts the ability of AirGate and the ability of AirGate's subsidiaries,
other than iPCS, and its future subsidiaries to do the following:
* create liens;
* make certain payments, including payments of dividends and distributions in
respect of capital stock;
* consolidate, merge and sell assets;
* engage in certain transactions with affiliates; and
* fundamentally change its business.
If AirGate fails to pay the debt under its credit facility, Sprint has the
option of purchasing AirGate's loans, giving Sprint certain rights of a creditor
to foreclose on AirGate's assets
Sprint has contractual rights, triggered by an acceleration of the maturity of
the debt under AirGate's credit facility, pursuant to which Sprint may purchase
AirGate's obligations to its senior lenders and obtain the rights of a senior
lender. To the extent Sprint purchases these obligations, Sprint's interests as
a creditor could conflict with AirGate's interests. Sprint's rights as a senior
lender would enable it to exercise rights with respect to AirGate's assets and
continuing relationship with Sprint in a manner not otherwise permitted under
its Sprint agreements.
Risks Related to iPCS
iPCS has declared bankruptcy, which may cause the value of AirGate's ownership
interest in iPCS to be worthless
There is a substantial risk that AirGate will lose all of the value of its
investment in iPCS in connection with the bankruptcy of iPCS. Because the amount
of iPCS' obligations under its credit facility and its notes are greater than
its existing cash and other assets when its payment obligations were accelerated
by the iPCS lenders, there will likely be no assets available for distribution
to AirGate as iPCS' sole stockholder. While AirGate may request an equity
participation in a restructuring of iPCS, it is likely that AirGate will lose
all of the value of its investment in iPCS in connection with iPCS' bankruptcy.
AirGate cannot provide funding to iPCS
In order to assure continued compliance with the indenture governing AirGate's
notes, AirGate has designated iPCS as an "unrestricted subsidiary." As a result,
for purposes of their respective public debt indentures, AirGate and iPCS
operate as separate business entities. Due to restrictions in AirGate's
indenture, AirGate is generally unable to provide funding, or direct or indirect
credit or financial support to iPCS and may not maintain or preserve iPCS'
financial condition or cause iPCS to achieve a specified level of operating
results.
If iPCS fails to pay the debt under its credit facility, Sprint has the option
of purchasing iPCS' loans, giving Sprint certain rights of a creditor to
foreclose on iPCS' assets
Sprint has contractual rights, triggered by an acceleration of the maturity of
the debt under iPCS' credit facility, pursuant to which Sprint may purchase
iPCS' obligations to its senior lenders and obtain the rights of a senior
lender. To the extent Sprint purchases these obligations, Sprint's interests as
a creditor could conflict with the interests of iPCS. Sprint's rights as a
senior lender would enable it to exercise rights with respect to iPCS' assets
and its continuing relationship with iPCS in a manner not otherwise permitted
under its Sprint agreements.
The bankruptcy of iPCS may have adverse affects on AirGate
AirGate has agreements and relationships with third parties, including
suppliers, subscribers and vendors, that are integral to conducting its
day-to-day operations. iPCS' bankruptcy could have a material adverse affect on
the perception of AirGate and the AirGate business and its prospects in the eyes
of subscribers, employees, suppliers, creditors and vendors. These persons may
perceive that there is increased risk in doing business with AirGate as a result
of iPCS' bankruptcy. Some of these persons may terminate their relationships
with AirGate which would make it more difficult for AirGate to conduct its
business.
As a result of iPCS' bankruptcy, AirGate may not be able to reduce its general
and administrative costs in an amount sufficient to subsidize the portion of the
combined Company's costs currently borne by iPCS
On a net basis, we budgeted that iPCS would pay approximately $4.6 million of
the combined Company's general and administrative costs in fiscal 2003. To
facilitate the orderly transition of management services, AirGate and iPCS
entered into an amendment to the Services Agreement that would allow individual
services to be terminated by either party upon 30 days prior notice, subject to
certain exceptions. iPCS has terminated services and we anticipate that most
services provided by AirGate will be terminated by September 1, 2003. As
services are terminated, AirGate will be required to reduce its costs and
expenses to meet its business plan. A failure to reduce these expenses in a
timely manner could adversely affect AirGate's liquidity, financial condition
and results of operations.
iPCS' net operating loss and credit carryforwards may be significantly reduced
in the event of a restructuring
If there is a significant elimination or reduction of iPCS' outstanding
indebtedness in connection with iPCS' bankruptcy, iPCS' net operating loss and
credit carry forwards and the tax bases of its assets may be significantly
reduced.
Risks Related to Our Relationship with Sprint
The termination of AirGate's or iPCS' affiliation with Sprint would severely
restrict our ability to conduct our business
Neither AirGate nor iPCS own the licenses to operate their wireless network. The
ability of AirGate and iPCS to offer Sprint PCS products and services and
operate a PCS network is dependent on their Sprint agreements remaining in
effect and not being terminated. All of our subscribers have purchased Sprint
PCS products and services to date, and we do not anticipate any change in the
future. The management agreements between Sprint and each of AirGate and iPCS
are not perpetual. Sprint can choose not to renew iPCS' management agreement at
the expiration of the 20-year initial term or any ten-year renewal term.
AirGate's management agreement automatically renews at the expiration of the
20-year initial term for an additional 10-year period unless AirGate is in
material default. Sprint can choose not to renew AirGate's management agreement
at the expiration of the ten-year renewal term or any subsequent ten-year
renewal term. In any event, AirGate's and iPCS' management agreements terminate
in 50 years.
In addition, each of these agreements can be terminated for breach of any
material term, including, among others, failure to pay, marketing, build-out and
network operational requirements. Many of these requirements are extremely
technical and detailed in nature. In addition, many of these requirements can be
changed by Sprint with little notice. As a result, we may not always be in
compliance with all requirements of the Sprint agreements. For example, Sprint
conducts periodic audits of compliance with various aspects of its program
guidelines and identifies issues it believes needs to be addressed. There may be
substantial costs associated with remedying any non-compliance, and such costs
may adversely affect our liquidity, financial condition and results of
operations.
AirGate and iPCS also are dependent on Sprint's ability to perform its
obligations under the Sprint agreements. The non-renewal or termination of any
of the Sprint agreements or the failure of Sprint to perform its obligations
under the Sprint agreements would severely restrict our ability to conduct
business.
Sprint may make business decisions that are not in our best interests, which may
adversely affect our relationships with subscribers in our territory, increase
our expenses and/or decrease our revenues
Sprint, under the Sprint agreements, has a substantial amount of control over
the conduct of our business. Accordingly, Sprint has made and, in the future may
make, decisions that adversely affect our business, such as the following:
* Sprint could price its national plans based on its own objectives and could
set price levels or other terms that may not be economically sufficient for
our business;
* Sprint could develop products and services, such as a one-rate plan where
subscribers are not required to pay roaming charges, or establish credit
policies, such as the NDASL program, which could adversely affect our
results of operations;
* Sprint introduced a payment method for subscribers to pay the cost of
service with us. This payment method initially may not have had adequate
controls or limitations, and we may discover that some fraudulent payments
were made to accounts using this payment method. The controls and
limitations have now been strengthened. If the other types of fraud become
widespread, it could have a material adverse impact on our results of
operations and financial condition;
* Sprint has raised and could continue to raise the costs to perform back
office services or maintain the costs above those expected, reduce levels
of services or expenses or otherwise seek to increase expenses and other
amounts charged;
* Sprint may elect with little or no notification, to upgrade or convert its
financial reporting, billing or inventory software or change third party
service organizations that can adversely affect our ability to determine or
report our operating results, adversely affect our ability to obtain
handsets or adversely affect our subscriber relationships; * Sprint can
seek to further reduce the reciprocal roaming rate charged when Sprint's or
other Sprint network partners' PCS subscribers use our network; * Sprint
could limit our ability to develop local and other promotional plans to
enable us to attract sufficient subscribers;
* Sprint could, subject to limitations under our Sprint agreements, alter its
network and technical requirements;
* Sprint could make decisions which could adversely affect the Sprint brand
names, products or services; and
* Sprint could decide not to renew the Sprint agreements or to no longer
perform its obligations, which would severely restrict our ability to
conduct business.
The occurrence of any of the foregoing could adversely affect our relationship
with subscribers in our territories, increase our expenses and/or decrease our
revenues and have a material adverse affect on our liquidity, financial
condition and results of operation.
Our dependence on Sprint for services may limit our ability to reduce costs,
which could materially adversely affect our financial condition and results of
operation
Approximately 65% of cost of service and roaming in our financial statements
relate to charges from Sprint. As a result, a substantial portion of our cost of
service and roaming is outside our control. There can be no assurance that
Sprint will lower its operating costs, or, if these costs are lowered, that
Sprint will pass along savings to its PCS network partners. If these costs are
more than we anticipate in our business plan, it could materially adversely
affect our liquidity, financial condition and results of operations and as noted
below, our ability to replace Sprint with lower cost providers may be limited.
Our dependence on Sprint may adversely affect our ability to predict our results
of operations
In 2002, our dependence on Sprint interjected a greater degree of uncertainty to
our business and financial planning. During this time:
* we agreed to a new $4 logistics fee for each 3G enabled handset to avoid a
prolonged dispute over certain charges for which Sprint sought
reimbursement;
* Sprint PCS sought to recoup $3.9 million in long-distance access revenues
previously paid by Sprint PCS to AirGate and has invoiced AirGate $1.2
million of this amount;
* Sprint has charged us $0.8 million to reimburse Sprint for certain 3G
related development expenses with respect to calendar year 2002;
* Sprint informed the Company on December 23, 2002 that it had miscalculated
software maintenance fees for 2002 and future years, which would result in
an annualized increase of $2.0 million if owed by the Company;
* Sprint notified the Company that it intends to reduce the reciprocal
roaming rate charged by Sprint and its network partners for use of our
respective networks from $0.10 per minute of use to $0.058 per minute of
use in 2003.
The amount Sprint has asserted we owe is approximately $4.7 million. We have
questioned whether certain of these charges and actions are appropriate and
authorized under our Sprint agreements. We expect that it will take time to
resolve these issues, the ultimate outcome is uncertain and litigation may be
required to resolve these issues. Unanticipated expenses and reductions in
revenue have had and, if they occur in the future, will have a negative impact
on our liquidity and make it more difficult to predict with reliability our
future performance.
Inaccuracies in data provided by Sprint could understate our expenses or
overstate our revenues and result in out-of-period adjustments that may
materially adversely affect our financial results
Approximately 65% of cost of service and roaming in our financial statements
relate to charges from Sprint. In addition, because Sprint provides billing and
collection services for the Company, Sprint remits approximately 97% of our
revenues to us. The data provided by Sprint is the primary source for our
recognition of service revenue and a significant portion of our selling and
marketing and cost of service and operating expenses. In certain cases, the data
is provided at a level of detail that is not adequate for us to verify for
accuracy back to the originating source. As a result, we rely on Sprint to
provide accurate, timely and sufficient data and information to properly record
our revenues, expenses and accounts receivables which underlie a substantial
portion of our periodic financial statements and other financial disclosures.
The Company and Sprint have discovered billing and other errors or inaccuracies,
which, while not material to Sprint, could be material to the Company. If the
Company is required in the future to make additional adjustments or charges as a
result of errors or inaccuracies in data provided to us by Sprint, such
adjustments or charges may have a material adverse affect on our financial
results in the period that the adjustments or charges are made, on our ability
to satisfy covenants contained in AirGate's credit facility, and on our ability
to make fully informed business decisions.
The inability of Sprint to provide high quality back office services, or our
inability to use Sprint's back office services and third-party vendors' back
office systems, could lead to subscriber dissatisfaction, increased churn or
otherwise increase our costs
We rely on Sprint's internal support systems, including customer care, billing
and back office support. Our operations could be disrupted if Sprint is unable
to provide internal support systems in a high quality manner, or to efficiently
outsource those services and systems through third-party vendors. Cost pressures
are expected to continue to pose a significant challenge to Sprint's internal
support systems. Additionally, Sprint has made reductions in its customer
service support structure and may continue to do so in the future, which may
have an adverse effect on our churn rate. Further, Sprint has relied on
third-party vendors for a significant number of important functions and
components of its internal support systems and may continue to rely on these
vendors in the future. We depend on Sprint's willingness to continue to offer
these services and to provide these services effectively and at competitive
costs. These costs were approximately $24.4 million for AirGate and $16.0
million for iPCS for the six months ended March 31, 2003. Our Sprint agreements
provide that, upon nine months prior written notice, Sprint may elect to
terminate any of these services. The inability of Sprint to provide high quality
back office services, or our inability to use Sprint back office services and
third-party vendors' back office systems, could lead to subscriber
dissatisfaction, increase churn or otherwise increase our costs.
Sprint has become aware of customer dissatisfaction with its customer service
and in that regard has recently announced that it is undertaking initiatives to
improve customer service. If Sprint elects to significantly increase the amount
it charges us for any of these services, our operating expenses will increase,
and our operating income and available cash would be reduced. Further, our
ability to replace Sprint in providing back office services may be limited.
While the services agreements allow the Company to use third-party vendors to
provide certain of these services instead of Sprint, the high startup costs and
necessary cooperation associated with interfacing with Sprint's system may
significantly limit our ability to use back office services provided by anyone
other than Sprint. This could limit our ability to lower our operating costs.
Changes in Sprint PCS products and services may reduce subscriber additions,
increase subscriber turnover and decrease subscriber credit quality
The competitiveness of Sprint PCS products and services is a key factor in our
ability to attract and retain subscribers, and we believe was a factor in the
slowing subscriber growth in the last two quarters of fiscal 2002.
Certain Sprint pricing plans, promotions and programs may result in higher
levels of subscriber turnover and reduce the credit quality of our subscriber
base. For example, we believe that the NDASL and Clear Pay Program resulted in
increased churn and an increase in sub-prime credit subscribers.
AirGate's disputes with Sprint may adversely affect its relationship with Sprint
AirGate's disputes with Sprint may have a material adverse affect on AirGate's
relationship with Sprint, which could materially and adversely affect AirGate's
business.
Sprint's roaming arrangements may not be competitive with other wireless service
providers, which may restrict our ability to attract and retain subscribers and
create other risks for us
We rely on Sprint's roaming arrangements with other wireless service providers
for coverage in some areas where Sprint service is not yet available. The risks
related to these arrangements include:
* the roaming arrangements are negotiated by Sprint and may not benefit us in
the same manner that they benefit Sprint;
* the quality of the service provided by another provider during a roaming
call may not approximate the quality of the service provided by the Sprint
PCS network;
* the price of a roaming call off our network may not be competitive with
prices of other wireless companies for roaming calls;
* customers may have to use a more expensive dual-band/dual mode handset with
diminished standby and talk time capacities;
* subscribers must end a call in progress and initiate a new call when
leaving the Sprint PCS network and entering another wireless network;
* Sprint customers may not be able to use Sprint's advanced features, such as
voicemail notification, while roaming; and
* Sprint or the carriers providing the service may not be able to provide us
with accurate billing information on a timely basis.
If Sprint customers are not able to roam instantaneously or efficiently onto
other wireless networks, we may lose current Sprint subscribers and our Sprint
PCS services will be less attractive to new subscribers.
Certain provisions of the Sprint agreements may diminish the value of AirGate's
common stock and restrict the sale of our business
Under limited circumstances and without further stockholder approval, Sprint may
purchase the operating assets of AirGate or iPCS at a discount. In addition,
Sprint must approve any change of control of the ownership of AirGate or iPCS
and must consent to any assignment of their Sprint agreements. Sprint also has a
right of first refusal if AirGate or iPCS decide to sell its operating assets to
a third-party. Each of AirGate and iPCS are also subject to a number of
restrictions on the transfer of its business, including a prohibition on the
sale of AirGate or iPCS or their operating assets to competitors of Sprint.
These restrictions and other restrictions contained in the Sprint agreements
could adversely affect the value of AirGate's common stock, may limit our
ability to sell our business, may reduce the value a buyer would be willing to
pay for our business, may reduce the "entire business value," as described in
our Sprint agreements, and may limit our ability to obtain new investment or
support from any source.
We may have difficulty in obtaining an adequate supply of certain handsets from
Sprint, which could adversely affect our results of operations
We depend on our relationship with Sprint to obtain handsets, and we have agreed
to purchase all of our 3G capable handsets from Sprint or a Sprint authorized
distributor through the earlier of December 31, 2004 or the date on which the
cumulative 3G handset fees received by Sprint from all Sprint network partners
equal $25,000,000. Sprint orders handsets from various manufacturers. We could
have difficulty obtaining specific types of handsets in a timely manner if:
* Sprint does not adequately project the need for handsets for itself, its
network partners and its other third-party distribution channels,
particularly in transition to new technologies, such as "one time radio
transmission technology," or "1XRTT;"
* Sprint gives preference to other distribution channels, which it does
periodically;
* we do not adequately project our need for handsets;
* Sprint modifies its handset logistics and delivery plan in a manner that
restricts or delays our access to handsets; or
* there is an adverse development in the relationship between Sprint and its
suppliers or vendors.
The occurrence of any of the foregoing could disrupt our subscriber service
and/or result in a decrease in our subscribers, which could adversely affect our
results of operations.
If Sprint does not complete the construction of its nationwide PCS network, we
may not be able to attract and retain subscribers
Sprint currently intends to cover a significant portion of the population of the
United States, Puerto Rico and the U.S. Virgin Islands by creating a nationwide
PCS network through its own construction efforts and those of its network
partners. Sprint is still constructing its nationwide network and does not offer
PCS services, either on its own network or through its roaming agreements, in
every city in the United States. Sprint has entered into management agreements
similar to ours with companies in other markets under its nationwide PCS
build-out strategy. Our results of operations are dependent on Sprint's national
network and, to a lesser extent, on the networks of Sprint's other network
partners. Sprint's PCS network may not provide nationwide coverage to the same
extent as its competitors, which could adversely affect our ability to attract
and retain subscribers.
If other Sprint network partners have financial difficulties, the Sprint PCS
network could be disrupted
Sprint's national network is a combination of networks. The large metropolitan
areas are owned and operated by Sprint, and the areas in between them are owned
and operated by Sprint network partners, all of which are independent companies
like we are. We believe that most, if not all, of these companies have incurred
substantial debt to pay the large cost of building out their networks.
If other network partners experience financial difficulties, Sprint's PCS
network could be disrupted. If Sprint's agreements with those network partners
are like ours, Sprint would have the right to step in and operate the network in
the affected territory, subject to the rights of their lenders. In such event,
there can be no assurance that Sprint could transition in a timely and seamless
manner or that lenders would permit Sprint to do so.
If Sprint does not succeed our business may not succeed
If Sprint has a significant disruption to its business plan or network, fails to
operate its business in an efficient manner, or suffers a weakening of its brand
name, our operations and profitability would likely be negatively impacted.
If Sprint were to file for bankruptcy, Sprint may be able to reject its
agreements with us under Section 365 of the federal bankruptcy code. The
agreements provide us remedies, including purchase and put rights, though we
cannot predict if or to what extent our remedies would be enforceable.
Non-renewal or revocation by the Federal Communications Commission of Sprint's
PCS licenses would significantly harm our business
PCS licenses are subject to renewal and revocation by the Federal Communications
Commission referred to as the FCC. Sprint licenses in our territories will begin
to expire in 2007 but may be renewed for additional ten-year terms. There may be
opposition to renewal of Sprint's PCS licenses upon their expiration, and
Sprint's PCS licenses may not be renewed. The FCC has adopted specific standards
to apply to PCS license renewals. Any failure by Sprint or us to comply with
these standards could cause revocation or forfeiture of Sprint's PCS licenses
for our territories. If Sprint loses any of its licenses in our territory, we
would be severely restricted in our ability to conduct business.
If Sprint does not maintain control over its licensed spectrum, the Sprint
agreements may be terminated, which would result in our inability to provide
service
The FCC requires that licensees like Sprint maintain control of their licensed
spectrum and not delegate control to third-party operators or managers. Although
the Sprint agreements with AirGate and iPCS reflect an arrangement that the
parties believe meets the FCC requirements for licensee control of licensed
spectrum, we cannot assure you that the FCC will agree. If the FCC were to
determine that the Sprint agreements need to be modified to increase the level
of licensee control, AirGate and iPCS have agreed with Sprint to use their best
efforts to modify the Sprint agreements to comply with applicable law. If we
cannot agree with Sprint to modify the Sprint agreements, they may be
terminated. If the Sprint agreements are terminated, we would no longer be a
part of the Sprint PCS network and would be severely restricted in our ability
to conduct business.
If AirGate loses its right to use the Sprint brand and logo under its trademark
and service mark license agreements, AirGate would lose the advantages
associated with marketing efforts conducted by Sprint.
The Sprint brand and logo is highly recognizable. If AirGate loses the rights to
use this brand and logo or the value of the brand and logo decreases, customers
may not recognize its brand readily and AirGate may have to spend significantly
more money on advertising to create brand recognition.
Risks Particular to Our Industry
Significant competition in the wireless communications services industry may
result in our competitors offering new or better products and services or lower
prices, which could prevent us from operating profitably
Competition in the wireless communications industry is intense. According to
information it has filed with the SEC, Sprint believes that the traditional
dividing lines between long distance, local, wireless, and Internet services are
increasingly becoming blurred. Through mergers and various service integration
strategies, major providers, including Sprint, are striving to provide
integrated solutions both within and across all geographical markets. We do not
offer services other than wireless services and may not be able to effectively
compete against competitors with integrated solutions.
Competition has caused, and we anticipate that competition will continue to
cause, the market prices for two-way wireless products and services to decline
in the future. Our ability to compete will depend, in part, on our ability to
anticipate and respond to various competitive factors affecting the
telecommunications industry. Our dependence on Sprint to develop competitive
products and services and the requirement that we obtain Sprint's consent to
sell local pricing plans and non-Sprint approved equipment may limit our ability
to keep pace with competitors on the introduction of new products, services and
equipment. Many of our competitors are larger than us, possess greater financial
and technical resources and may market other services, such as landline
telephone service, cable television and Internet access, with their wireless
communications services. Some of our competitors also have well-established
infrastructures, marketing programs and brand names. In addition, some of our
competitors may be able to offer regional coverage in areas not served by the
Sprint network or, because of their calling volumes or relationships with other
wireless providers, may be able to offer regional roaming rates that are lower
than those we offer. Additionally, we expect that existing cellular providers
will continue to upgrade their systems to provide digital wireless communication
services competitive with Sprint. Our success, therefore, is, to a large extent,
dependent on Sprint's ability to distinguish itself from competitors by
marketing and anticipating and responding to various competitive factors
affecting the wireless industry, including new services that may be introduced,
changes in consumer preferences, demographic trends, economic conditions and
discount pricing strategies by competitors. To the extent that Sprint is not
able to keep pace with technological advances or fails to respond timely to
changes in competitive factors in the wireless industry, it could cause us to
lose market share or experience a decline in revenue.
There has been a recent trend in the wireless communications industry towards
consolidation of wireless service providers through joint ventures,
reorganizations and acquisitions. We expect this consolidation to lead to larger
competitors over time. We may be unable to compete successfully with larger
companies that have substantially greater resources or that offer more services
than we do. In addition, we may be at a competitive disadvantage since we may be
more highly leveraged than many of our competitors.
If the demand for wireless data services does not grow, or if AirGate fails to
capitalize on such demand, it could have an adverse effect on our growth
potential
AirGate has committed significant resources to wireless data services and our
business plan assumes increasing uptake in such services. That demand may not
materialize. Even if such demand does develop, AirGate's ability to deploy and
deliver wireless data services relies, in many instances, on new and unproven
technology. Existing technology may not perform as expected. We may not be able
to obtain new technology to effectively and economically deliver these services.
The success of wireless data services is substantially dependent on the ability
of Sprint and others to develop applications for wireless data devices and to
develop and manufacture devices that support wireless applications. These
applications or devices may not be developed or developed in sufficient
quantities to support the deployment of wireless data services. These services
may not be widely introduced and fully implemented at all or in a timely
fashion. These services may not be successful when they are in place, and
customers may not purchase the services offered. Consumer needs for wireless
data services may be met by technologies such as 802.11, known as wi-fi, which
does not rely on FCC regulated spectrum. The lack of standardization across
wireless data handsets may contribute to customer confusion, which could slow
acceptance of wireless data services, or increase customer care costs. Either
could adversely affect our ability to provide these services profitably. If
these services are not successful or costs associated with implementation and
completion of the rollout of these services materially exceed our current
estimates, our financial condition and prospects cold be materially adversely
affected.
Market saturation could limit or decrease our rate of new subscriber additions
Intense competition in the wireless communications industry could cause prices
for wireless products and services to continue to decline. If prices drop, then
our rate of net subscriber additions will take on greater significance in
improving our financial condition and results of operations. However, as our and
our competitor's penetration rates in our markets increase over time, our rate
of adding net subscribers could decrease. If this decrease were to happen, it
could materially adversely affect our liquidity, financial condition and results
of operations.
Alternative technologies and current uncertainties in the wireless market may
reduce demand for PCS
The wireless communications industry is experiencing significant technological
change, as evidenced by the increasing pace of digital upgrades in existing
analog wireless systems, evolving industry standards, ongoing improvements in
the capacity and quality of digital technology, shorter development cycles for
new products and enhancements and changes in end-user requirements and
preferences. Technological advances and industry changes could cause the
technology used on our network to become obsolete. We rely on Sprint for
research and development efforts with respect to the products and services of
Sprint and with respect to the technology used on our network. Sprint may not be
able to respond to such changes and implement new technology on a timely basis,
or at an acceptable cost.
If Sprint is unable to keep pace with these technological changes or changes in
the wireless communications market based on the effects of consolidation from
the Telecommunications Act of 1996 or from the uncertainty of future government
regulation, the technology used on our network or our business strategy may
become obsolete.
We are a consumer business and a recession in the United States involving
significantly lowered spending could negatively affect our results of operations
Our subscriber base is primarily individual consumers and our accounts
receivable represent unsecured credit. We believe the economic downturn has had
an adverse affect on our operations. In the event that the economic downturn
that the United States and our territories have recently experienced becomes
more pronounced or lasts longer than currently expected and spending by
individual consumers drops significantly, our business may be further negatively
affected.
According to Sprint, a number of its suppliers have recently experienced
financial challenges. If these suppliers cannot meet their commitments, Sprint
states that it would have to use different vendors and this could result in
delays, interruptions, or additional expenses associated with the upgrade and
expansion of Sprint's networks and the offering of its products and services.
Regulation by government and taxing agencies may increase our costs of providing
service or require us to change our services, either of which could impair our
financial performance
Our operations and those of Sprint may be subject to varying degrees of
regulation by the FCC, the Federal Trade Commission, the Federal Aviation
Administration, the Environmental Protection Agency, the Occupational Safety and
Health Administration and state and local regulatory agencies and legislative
bodies. Adverse decisions or regulation of these regulatory bodies could
negatively impact our operations and our costs of doing business. For example,
changes in tax laws or the interpretation of existing tax laws by state and
local authorities could subject us to increased income, sales, gross receipts or
other tax costs or require us to alter the structure of our current relationship
with Sprint.
Use of hand-held phones may pose health risks, which could result in the reduced
use of wireless services or liability for personal injury claims
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health problems, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may discourage use
of wireless handsets or expose us to potential litigation. Any resulting
decrease in demand for wireless services, or costs of litigation and damage
awards, could impair our ability to achieve and sustain profitability.
Regulation by government or potential litigation relating to the use of wireless
phones while driving could adversely affect our results of operations
Some studies have indicated that some aspects of using wireless phones while
driving may impair drivers' attention in certain circumstances, making accidents
more likely. These concerns could lead to litigation relating to accidents,
deaths or serious bodily injuries, or to new restrictions or regulations on
wireless phone use, any of which also could have material adverse effects on our
results of operations. A number of U.S. states and local governments are
considering or have recently enacted legislation that would restrict or prohibit
the use of a wireless handset while driving a vehicle or, alternatively, require
the use of a hands-free telephone. Legislation of this sort, if enacted, would
require wireless service providers to provide hands-free enhanced services, such
as voice activated dialing and hands-free speaker phones and headsets, so that
they can keep generating revenue from their subscribers, who make many of their
calls while on the road. If we are unable to provide hands-free services and
products to our subscribers in a timely and adequate fashion, the volume of
wireless phone usage would likely decrease, and our ability to generate revenues
would suffer.
Unauthorized use of, or interference with, the PCS network of Sprint could
disrupt our service and increase our costs
We may incur costs associated with the unauthorized use of the PCS network of
Sprint, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraudulent use of the PCS
network of Sprint may impact interconnection costs, capacity costs,
administrative costs, fraud prevention costs and payments to other carriers for
fraudulent roaming.
Equipment failure and natural disasters or terrorist acts may adversely affect
our operations
A major equipment failure or a natural disaster or terrorist act that affects
our mobile telephone switching offices, microwave links, third-party owned local
and long distance networks on which we rely, our cell sites or other equipment
or the networks of other providers on which our subscribers roam could have a
material adverse effect on our operations. While we have insurance coverage for
some of these events, our inability to operate our wireless system even for a
limited time period may result in a loss of subscribers or impair our ability to
attract new subscribers, which would have a material adverse effect on our
business, results of operations and financial condition.
Risks Related to Our Common Stock
We may not achieve or sustain operating profitability or positive cash flows,
which may adversely affect AirGate's stock price
AirGate and iPCS have limited operating histories. Our ability to achieve and
sustain operating profitability will depend upon many factors, including our
ability to market Sprint PCS products and services, manage churn, sustain
monthly average revenues per user, and reduce capital expenditures and operating
expenses. We have experienced slowing net subscriber growth, increased churn and
increased costs to acquire new subscribers and as a result, have had to revise
our business plans. If AirGate does not achieve and maintain positive cash flows
from operations when projected, AirGate's stock price may be materially
adversely affected. In addition, as a result of the bankruptcy of iPCS,
AirGate's investment in iPCS is likely to be worthless, and such bankruptcy may
materially adversely affect AirGate's stock price.
Our stock price has suffered significant declines, remains volatile and you may
not be able to sell your shares at the price you paid for them
The market price of AirGate common stock has been and may continue to be subject
to wide fluctuations in response to factors such as the following, some of which
are beyond our control:
* quarterly variations in our operating results;
* concerns about liquidity;
* the de-listing of our common stock;
* 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 the market perception about the prospects and results of
operations and market valuations of other companies in the
telecommunications industry in general and the wireless industry in
particular, including Sprint and its PCS network partners and our
competitors;
* changes in the Company's relationship with Sprint;
* announcements by Sprint concerning developments or changes in its business,
financial condition or results of operations, or in its expectations as to
future financial performance;
* actual or potential defaults by us under any of our agreements;
* actual or potential defaults in bank covenants by Sprint or Sprint PCS
network partners, which may result in a perception that AirGate is unable
to comply with its bank covenants;
* announcements by Sprint or our competitors of technological innovations,
new products and services or changes to existing products and services;
* changes in law and regulation;
* announcements by third parties of significant claims or proceedings against
us;
* announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and * general economic and competitive conditions.
AirGate's common stock was delisted from Nasdaq. Accordingly, our stockholders'
ability to sell our common stock may be adversely effected. Additionally, the
market for so-called "penny stocks" has suffered in recent years from patterns
of fraud and abuse.
AirGate was notified by the Nasdaq Stock Market, Inc. that because it had failed
to regain compliance with the minimum $1.00 bid price per share requirement and
also failed to comply with the minimum stockholders' equity, market value of
publicly held shares and minimum bid requirements for continued listing on the
Nasdaq National Market, the Nasdaq Stock Market, Inc. was delisting AirGate's
stock from the Nasdaq National Market. This delisting occurred on April 8, 2003.
In addition, AirGate did not meet the listing requirements to be transferred to
the Nasdaq Small Cap Market. AirGate's common stock currently trades on the
OTCBB maintained by The Nasdaq Stock Market, Inc., under the symbol "PCSA", and
is subject to a Securities and Exchange Commission rule that imposes special
sales practice requirements upon broker-dealers who sell such OTCBB securities
to persons other than established customers or accredited investors. For
purposes of the rule, the phrase "accredited investors" means, in general terms,
institutions with assets in excess of $5,000,000, or individuals having a net
worth in excess of $1,000,000 or having an annual income that exceeds $200,000
(or that, when combined with a spouse's income, exceeds $300,000). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell AirGate's common stock and also may
affect the ability of our current stockholders to sell their securities in any
market that might develop. In addition, the Securities and Exchange Commission
has adopted a number of rules to regulate "penny stocks." Such rules include
Rules 3a51-1, 15-g1, 15-g2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under
the Securities Exchange Act of 1934 as amended. AirGate's common stock may
constitute "penny stocks" within the meaning of the rules. These rules may
further affect the ability of owners of AirGate common stock to sell our
securities in any market that might develop for them.
Shareholders should also be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. We are aware of the abuses that have occurred
historically in the penny stock market. Although we do not expect to be in a
position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to AirGate's securities.
Future sales of shares of our common stock, including sales of shares following
the expiration of `lock-up" arrangements, may negatively affect our stock price
As a result of the acquisition of iPCS, the former iPCS security holders
received approximately 12.4 million shares of our common stock and options and
warrants to purchase approximately 1.1 million shares of our common stock. The
shares of common stock issued in connection with the acquisition represented
approximately 47.5% of our common stock, assuming the exercise of all
outstanding warrants and options.
In connection with the merger, holders of substantially all of the outstanding
shares of iPCS common and preferred stock entered into "lock-up" agreements with
the Company. The lock-up agreements imposed restrictions on the ability of such
stockholders to sell or otherwise dispose of the shares of our common stock that
they received in the merger. As of September 26, 2002, all of such shares were
released from the lock-up.
We entered into a registration rights agreement at the effective time of the
merger with some of the former iPCS stockholders. Under the terms of the
registration rights agreement, Blackstone Communications Partners I L.P. and
certain of its affiliates ("Blackstone") has a demand registration right, which
became exercisable after November 30, 2002, subject to the requirement that the
offering exceed size requirements. In addition, the former iPCS stockholders,
including Blackstone, have incidental registration rights pursuant to which they
can, in general, include their shares of our common stock in any public
registration we initiate, whether or not for sale for our own account.
Sales of substantial amounts of shares of our common stock, or even the
potential for such sales, could lower the market price of our common stock and
impair its ability to raise capital through the sale of equity securities.
We do not intend to pay dividends in the foreseeable future
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain any future earnings to fund our growth,
debt service requirements and other corporate needs. Accordingly, you will not
receive a return on your investment in our common stock through the payment of
dividends in the foreseeable future and may not realize a return on your
investment even if you sell your shares. Any future payment of dividends to our
stockholders will depend on decisions that will be made by our board of
directors and will depend on then existing conditions, including our financial
condition, contractual restrictions, capital requirements and business
prospects.
Our certificate of incorporation and bylaws include provisions that may
discourage a change of control transaction or make removal of members of the
board of directors more difficult
Some provisions of our certificate of incorporation and bylaws could have the
effect of delaying, discouraging or preventing a change in control of us or
making removal of members of the board of directors more difficult. These
provisions include the following:
* a classified board, with each board member serving a three-year term;
* no authorization for stockholders to call a special meeting;
* no ability of stockholders to remove directors without cause;
* prohibition of action by written consent of stockholders; and
* advance notice for nomination of directors and for stockholder proposals.
These provisions, among others, may have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
us, even though a change in ownership might be economically beneficial to us and
our stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 * First Amendment to Services Agreement dated February 21, 2003 by and
among AirGate Service Company, Inc., AirGate PCS, Inc., iPCS Wireless, Inc.
and iPCS, Inc.
10.2 * AirGate PCS, Inc. Amended and Restated Non-Employee Director Compensation
Plan dated January 22, 2003.
99.1 Certification of Thomas M. Dougherty pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C.ss.1350.
99.2 Certification of William H. Seippel pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C.ss.1350.
___________
*Previously Filed.
(b) Reports on 8-K
The following Current Reports on 8-K were filed by AirGate during the quarter
ended March 31, 2003:
On January 17, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 9 - Regulation FD Disclosure
relating to its financial and operating results for its fourth quarter and
fiscal year ended September 30, 2002, and the filing of its Annual Report on
Form 10-K.
On February 5, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 9 - Regulation FD Disclosure
relating to a Nasdaq Staff Determination letter indicating that because of the
Company's failure to regain compliance with the minimum $1.00 bid price per
share, its securities were subject to delisting from the Nasdaq National Market.
On February 21, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 9 - Regulation FD Disclosure
relating to the scheduling of its first quarter fiscal 2003 conference call and
its financial and operating results for the first quarter of fiscal year 2003.
On February 26, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 9 - Regulation FD Disclosure
relating to the filing of a Chapter 11 bankruptcy petition in the United States
Bankruptcy Court for the Northern District of Georgia for the purpose of
effecting a court-administered reorganization by its wholly-owned unrestricted
subsidiary, iPCS, Inc. and its subsidiaries, iPCS Wireless, Inc. and iPCS
Equipment, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer thereunto duly authorized.
AIRGATE PCS, INC.
By: /s/ William H. Seippel
__________________________________________
William H. Seippel
Title: Chief Financial Officer
(Duly Authorized Officer, Principal Financial
and Chief Accounting Officer)
Date: January 15, 2004
CERTIFICATION
I, Thomas M. Dougherty, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of AirGate PCS, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 15, 2004
/s/ Thomas M. Dougherty
------------------------
Thomas M. Dougherty
Chief Executive Officer
CERTIFICATION
I, William H. Seippel, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of AirGate PCS, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 15, 2004
/s/ William H. Seippel
------------------------
William H. Seippel
Chief Financial Officer