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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 027455
AIRGATE PCS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2422929
--------- ----------
(STATE 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 |_|
25,806,520 shares of common stock, $0.01 par value per share, were
outstanding as of August 12, 2002.
AIRGATE PCS, INC.
THIRD QUARTER REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 3
Condensed Consolidated Balance Sheets at June 30, 2002
and September 30, 2001 (unaudited)........................ 3
Condensed Consolidated Statements of Operations for the
three months and nine months ended June 30, 2002
and 2001(unaudited)....................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2002 and 2001 (unaudited)...... 5
Notes to the Consolidated Financial Statements (unaudited)..... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 34
PART II OTHER INFORMATION.............................................. 36
Item 1. Legal Proceedings.............................................. 36
Item 2. Changes in Securities and Use of Proceeds...................... 36
Item 3. Defaults Upon Senior Securities................................ 36
Item 4. Submission of Matters to a Vote of Security Holders............ 36
Item 5. Other Information.............................................. 36
Item 6. Exhibits and Reports on Form 8-K............................... 46
PART I. FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, SEPTEMBER 30,
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents....................................................... $ 23,880 $ 14,290
Accounts receivable, net of allowance for doubtful accounts of $13,259 42,196 23,798
and $2,758, respectively....................................................
Receivable from Sprint, net of allowance for access fee of $4,650
and $ - respectively........................................................ 19,619 10,200
Inventories, net of reserves for excess/obsolescence of $540
and $ -, respectively....................................................... 5,773 4,639
Prepaid expenses................................................................ 6,717 3,428
Direct customer activation costs................................................ 7,269 3,693
Other current assets............................................................ 1,547 1,291
------ ------
Total current assets................................................... 107,001 61,339
Property and equipment, net of accumulated depreciation of $117,161 and
$43,621, respectively....................................................... 454,011 209,326
Financing costs................................................................. 16,009 7,888
Intangible assets, net of accumulated amortization of $29,419 and
$45, respectively (note 8).................................................. 350,329 1,889
Goodwill (note 8)............................................................... 201,623 --
Other assets.................................................................... 3,751 568
--------- --------
$1,132,724 $ 281,010
========== ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses........................................ $ 46,553 $ 24,050
Payable to Sprint............................................................ 56,200 32,564
Deferred revenue............................................................. 20,901 10,485
Current maturities of long-term debt and capital lease obligations (note 3).. 1,522 -
----------- -----------
Total current liabilities.............................................. 125,176 67,099
Other long-term liabilities..................................................... 16,669 309
Long-term debt and capital lease obligations, excluding current maturities
(note 3)..................................................................... 669,014 266,326
----------- -----------
Total liabilities...................................................... 810,859 333,734
---------- -----------
- -
Commitments and contingencies (note 9)............................... ---------- -----------
Stockholders' equity (deficit):
Preferred stock, par value, $.01 per share;
5,000,000 shares authorized; no shares issued and outstanding............ -- --
Common stock, par value, $.01 per share; 150,000,000 shares authorized;
25,801,720 and 13,364,980 shares issued and outstanding at June 30,
2002 and September 30, 2001, respectively................................ 258 134
Additional paid-in-capital................................................... 24,002 168,255
Unearned stock compensation.................................................. (1,195) (1,546)
Accumulated deficit.......................................................... (601,200) (219,567)
----------- ------------
Total stockholders' equity (deficit)................................... 321,865 (52,724)
----------- ------------
$1,132,724 $ 281,010
========== ============
See accompanying notes to the unaudited condensed consolidated financial
statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------
2002 2001 2002 2001
--------------- ---------------- ------------ -------------
Revenues:
Service revenues.......................................... $87,219 $ 30,173 $ 230,422 $66,920
Roaming revenues.......................................... 32,000 17,131 75,458 35,516
Equipment revenues........................................ 3,590 2,435 13,523 7,400
--------------- ---------------- ------------ -------------
Total revenues...................................... 122,809 49,739 319,403 109,836
--------------- ---------------- ------------ -------------
Operating Expenses:
Cost of services and roaming (exclusive
of depreciation, as shown separately below)............ (82,401) (32,991) (216,698) (76,458)
Cost of equipment......................................... (9,718) (4,744) (29,982) (14,408)
Selling and marketing..................................... (28,131) (16,431) (85,568) (49,170)
General and administrative expenses....................... (6,208) (3,868) (18,277) (12,149)
Non-cash stock compensation expense....................... (183) (299) (597) (1,225)
Depreciation.............................................. (19,500) (7,701) (47,864) (21,463)
Amortization of intangible assets......................... (11,260) -- (29,377) --
Goodwill impairment (note 8).............................. -- -- (261,212) --
--------------- ---------------- ------------ -------------
Total operating expenses............................ (157,401) (66,034) (689,575) (174,873)
--------------- ---------------- ------------ -------------
Operating loss...................................... (34,592) (16,295) (370,172) (65,037)
--------------- ---------------- ------------ -------------
Interest income................................................ 314 337 530 2,350
Interest expense............................................... (15,801) (7,785) (40,732) (23,291)
Other income (expense), net.................................... -- -- (20) --
--------------- ---------------- ------------ -------------
Loss before income tax benefit...................... (50,079) (23,743) (410,394) (85,978)
--------------- ---------------- ------------ -------------
Income tax benefit.................................. -- -- 28,761 --
--------------- ---------------- ------------ -------------
Net loss............................................ $ (50,079) $ (23,743) $ (381,633) (85,978)
============== ================ ============ =============
Basic and diluted net loss per share of common stock........... $ (1.94) $ (1.80) $ (16.55) $ (6.61)
Basic and diluted weighted-average outstanding common shares... 25,801,138 13,179,506 23,059,151 13,007,119
See accompanying notes to the unaudited condensed consolidated financial
statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
JUNE 30,
---------------------------
2002 2001
Cash flows from operating activities:
Net loss................................................................... $ (381,633) $(85,978)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill impairment....................................................... 261,212 --
Depreciation.............................................................. 47,864 21,463
Amortization of intangible assets......................................... 29,377 --
Amortization of financing costs........................................... 1,397 908
Provision for doubtful accounts........................................... 22,342 5,037
Interest expense associated with accretion of discount.................... 36,441 19,395
Non-cash stock compensation............................................... 597 1,225
Deferred income tax benefit............................................... (28,761) --
Changes in assets and liabilities:
Accounts receivable................................................... (28,821) (24,799)
Receivable from Sprint................................................ (4,274) --
Inventories, net...................................................... 3,945 1,446
Prepaid expenses, other current and long term assets.................. (3,978) (2,171)
Accounts payable, accrued expenses and other long term liabilities.... (23,031) (1,838)
Payable to Sprint..................................................... 10,780 14,799
Deferred revenue...................................................... 7,746 8,783
------------ -----------
Net cash used in operating activities...................... (48,797) (41,730)
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment........................................ (77,405) (55,920)
Cash acquired from iPCS, Inc............................................... 24,402 --
Acquisition of iPCS, Inc................................................... (6,058) --
Purchase of business assets................................................ -- (502)
------------ -----------
Net cash used in investing activities...................... (59,061) (56,422)
------------ -----------
Cash flows from financing activities:
Proceeds from borrowings under senior credit facilities.................... 116,200 42,000
Payments made under capital lease obligations.............................. (4) --
Stock issued to employee stock purchase plan............................... 567 --
Proceeds from exercise of employee stock options........................... 685 5,614
------------ -----------
Net cash provided by financing activities.................. 117,448 47,614
------------ -----------
Net increase (decrease) in cash and cash equivalents....... 9,590 (50,538)
Cash and cash equivalents at beginning of period................................ 14,290 58,384
------------ -----------
Cash and cash equivalents at end of period...................................... $ 23,880 $ 7,846
============ ===========
Supplemental disclosure of cash flow information - cash paid for interest....... $ 7,544 $ 4,015
============ ===========
Supplemental disclosure for non-cash investing activities:
Capitalized interest....................................................... $ 6,160 $ 2,199
iPCS acquisition:
Stock issued............................................................ (706,645) --
Value of common stock options and warrants assumed...................... (47,727) --
Liabilities assumed..................................................... (394,165) --
Assets acquired......................................................... 315,029 --
Purchases of property and equipment under capital lease................. 191 --
See accompanying notes to the unaudited condensed consolidated financial
statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(1) BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(A) BUSINESS AND BASIS OF PRESENTATION
AirGate PCS, Inc. and subsidiaries (collectively, the "Company" or
"AirGate") were created for the purpose of becoming a leading provider of
wireless Personal Communication Services ("PCS"). AirGate PCS, Inc., formed in
October 1998, is an affiliate of Sprint PCS with the exclusive right to market
and provide Sprint PCS products and services in its territory and is licensed to
use the Sprint and Sprint PCS brand names in its original 21 markets located in
the southeastern United States. On November 30, 2001, AirGate PCS, Inc. acquired
iPCS, Inc. (together with its subsidiaries "iPCS"), a PCS affiliate of Sprint
with 37 markets in the midwestern United States. The unaudited consolidated
financial statements included herein include the accounts of AirGate PCS, Inc.
and its wholly-owned subsidiaries, AGW Leasing Company, Inc., AirGate Service
Company, Inc., and AirGate Network Services, LLC for all periods presented. The
accounts of iPCS, Inc. and subsidiaries, a wholly-owned unrestricted subsidiary
of AirGate PCS, Inc., (see note 7), are included as of June 30, 2002, and the
results of operations subsequent to November 30, 2001. In the opinion of
management, these consolidated financial statements contain all of the
adjustments, consisting of normal recurring adjustments, necessary to present
fairly, in summarized form, the financial position and the results of operations
of the Company. The unaudited balance sheet as of June 30, 2002, the unaudited
statements of operations for the three and nine months ended June 30, 2002 and
2001, the unaudited statements of cash flows for the nine months ended June 30,
2002 and 2001 and related footnotes have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The results of operations for the three months and nine months ended
June 30, 2002, are not indicative of the results that may be expected for the
full fiscal year of 2002. The financial information presented herein should be
read in conjunction with the Company's Form 10-K for the year ended September
30, 2001 which includes information and disclosures not included herein. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior year balances
to conform to the current year presentation.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, increasing competition and the costs associated with the
build-out of a PCS network. The Company's continuing operations are dependent
upon Sprint's ability to perform its obligations under the various agreements
between the Company and Sprint under which the Company has agreed to construct
and manage its Sprint PCS networks (the "Sprint Agreements"). Additionally, the
Company's ability to attract and maintain a sufficient customer base is critical
to achieving breakeven cash flow. Changes in technology, increased competition,
economic conditions or inability to achieve breakeven cash flow, among other
factors, could have an adverse effect on the Company's financial position and
results of operations.
(B) REVENUE RECOGNITION
The Company recognizes revenues when persuasive evidence of an arrangement
exists, services have been rendered, the price to the buyer is fixed or
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," as
amended by SAB No. 101A and 101B. The Company records equipment revenue for the
sale of handsets and accessories to customers in its retail stores and to local
distributors in its territories. The Company does not record equipment revenue
on handsets and accessories purchased by its customers from national third party
retailers such as Radio Shack, Best Buy and Circuit City, or directly from
Sprint. 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 customers. The Company's
customers pay an activation fee when they initiate service. The Company defers
activation fee revenue over the average life of its customers, which is
estimated to be 30 months. The Company recognizes service revenue from its
customers as they use the service. The Company provides a reduction of recorded
revenue for billing adjustments and billing corrections. The Company provides a
reduction of recorded revenue for rebates and discounts given to customers on
wireless handset sales in accordance with the Emerging Issues Task Force
("EITF"), EITF 01-9 "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)". The Company
participates in the Sprint national and regional distribution program in which
national retailers such as Radio Shack 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 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 management agreement
with Sprint, when a national retailer sells a handset purchased from Sprint to a
subscriber in the Company's territory, the Company is obligated to reimburse
Sprint for the handset subsidy that Sprint originally incurred. The national
retailers sell Sprint wireless services under the Sprint and Sprint PCS brands
and marks. The Company does not receive any revenues from the sale of wireless
handsets by national retailers. The Company classifies these Sprint wireless
handset subsidy charges as a selling and marketing expense for a wireless
handset sale to a new customer and classifies these subsidies as a cost of
service for a wireless handset upgrade to an existing customer.
Sprint retains the Company 8% of collected service revenues from Sprint
customers based in the Company's markets and from non-Sprint customers who roam
onto the Company's network. The amount retained by Sprint is recorded as cost of
service and roaming. Revenues generated from the sale of handsets and
accessories and from roaming services provided to Sprint and other Sprint
affiliate customers who are not based in the Company's markets are not subject
to the 8% affiliation fee from Sprint.
The Company defers activation fee revenue and recognizes it using the
straight-line method over 30 months, which is the average life of a customer.
The Company does not recognize revenue from customers for which the likelihood
of collecting such revenue is not reasonably assured. The accounting policy for
the recognition of direct customer activation costs is to defer such costs when
incurred and recognize it using the straight-line method over 30 months, which
is the average life of a customer. The components of direct customer activation
costs are customer service activation fees, credit check fees, loyalty call fees
and welcome call fees charged to the Company by Sprint.
For the three months ended June 30, 2002 and 2001, the Company recognized
approximately $1.7 million and $0.9 million, respectively of activation fee
revenue. For the nine months ended June 30, 2002 and 2001, the Company
recognized approximately $4.0 million and $1.7 million, respectively of
activation fee revenue. For the three months ended June 30, 2002 and 2001, the
Company recognized approximately $1.0 million and $0.6 million, respectively of
direct customer activation costs. For the nine months ended June 30, 2002 and
2001, the Company recognized approximately $2.5 million and $1.3 million,
respectively of direct customer activation costs. As of June 30, 2002, the
Company has deferred $14.5 million of activation fee revenue and $10.9 million
of direct customer activation costs to future periods.
(C) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." EITF 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.
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 Accounting Principles Board ("APB") 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 is not expected to have a material impact on the
Company's results of operations, financial position or cash flows.
In November 2001, the EITF issued 01-9 "Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products)". EITF
01-9 provides guidance on when a sales incentive or other consideration given
should be a reduction of revenue or an expense and the timing of such
recognition. The guidance provided in EITF 01-9 is effective for financial
statements for interim or annual periods beginning after December 15, 2001. The
Company occasionally offers rebates to customers that purchase wireless handsets
in its stores. The Company's historical policy regarding the recognition of
these rebates in the statement of operations is a reduction in the revenue
recognized on the sale of the wireless handset by the amount of the rebate
given. The Company's policy is in accordance with the guidance set forth in EITF
01-9. Therefore, the adoption of EITF 01-9 did not have a material impact on the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance
on the recognition of impairment losses on long-lived assets with definite lives
to be held and used or to be disposed of and also broadens the definition of
what constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS 144 is effective for fiscal
years beginning after December 15, 2001. Early adoption of this statement is
permitted. The Company elected early adoption as of the beginning of its fiscal
year on October 1, 2001. The adoption by the Company did not materially change
the methods used by the Company to measure impairment losses on long-lived
assets.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which
is effective for all business combinations initiated after June 30, 2001. SFAS
No. 141 requires companies to account for all business combinations using the
purchase method of accounting, recognize intangible assets if certain criteria
are met, as well as provide additional disclosures regarding business
combinations and allocation of purchase price. The Company adopted SFAS No. 141
as of July 1, 2001, and the impact of such adoption did not have a material
adverse impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which provides for non-amortization of goodwill and intangible assets
that have indefinite useful lives, annual tests of impairments of those assets
and interim tests of impairment when an event occurs that more likely than not
has reduced the fair value of such assets. The statement also provides specific
guidance about how to determine and measure goodwill impairments, and requires
additional disclosure of information about goodwill and other intangible assets.
The provisions of this statement are required to be applied starting with fiscal
years beginning after December 15, 2001, and applied to all goodwill and other
intangible assets recognized in its financial statements at that date. Goodwill
and intangible assets acquired after June 30, 2001 will be subject to the
non-amortization provisions of the statement. Early application is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements had not been issued previously. The Company
met the criteria for early application and therefore adopted SFAS No. 142 as of
the beginning of its fiscal year on October 1, 2001. Upon application, the
provisions of SFAS No. 142 did not have a material adverse effect on the
Company's financial statements as of December 31, 2001 and for the three months
ended December 31, 2001. The Company acquired iPCS, see note 7, on November 30,
2001 and performed a preliminary allocation of the purchase price under the
provisions of SFAS No. 141. As a result of this allocation, the Company recorded
goodwill, which is the only indefinite life intangible the Company has recorded
in its financial statements. During the following quarter after the initial
valuation, the Company experienced a significant decline in its market
capitalization as did many other wireless telecommunications providers.
Additionally, the Company observed that recent wireless industry acquisitions
subsequent to the acquisition of iPCS were valued lower on a price per
population and price per customer basis. The Company considered these recent
acquisition values and industry trends as an event that more likely than not had
reduced the fair value of iPCS and the related carrying value of goodwill under
the provisions of SFAS No. 142. Accordingly the Company performed an annual test
for goodwill impairment as of March 31, 2002. The Company recorded approximately
$261.2 million of goodwill impairment for the three months ended March 31, 2002,
as a result of this annual test. The goodwill associated with the acquisition of
iPCS was recorded after the adoption of SFAS No. 142 and, therefore, was not
considered transitional goodwill. Transitional goodwill is considered goodwill
recorded on the Company's financial statements prior to adoption of SFAS No.
142. Transitional goodwill is required to be tested for impairment within six
months of adoption of SFAS No. 142, with any resulting impairment recorded as a
cumulative effect of a change in accounting principle. See note 8 for a further
discussion of the goodwill impairment.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires the fair value of a liability for
an asset retirement obligation to be recognized in the period that it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material
impact on the Company's results of operations, financial position or cash flows.
(D) NET LOSS PER SHARE
The Company computes net loss per common share in accordance with SFAS No.
128 "Earnings per Share." Basic and diluted net loss per share of common stock
is computed by dividing net loss for each period by the weighted-average
outstanding common shares. No conversion of common stock equivalents has been
assumed in the calculations since the effect would be antidilutive. As a result,
the number of weighted-average outstanding common shares as well as the amount
of net loss per share are the same for both the basic and diluted net loss per
share calculations for all periods presented.
The reconciliation of weighted-average outstanding common shares to
weighted-average outstanding shares including potentially dilutive common stock
equivalents is set forth below:
THREE
MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
------------ ----------- ----------- ----------
Weighted-average outstanding common shares......................... 25,801,138 13,179,506 23,059,151 13,007,119
Weighted -average potentially dilutive.............................
Common stock equivalents:
Common stock options......................................... -- 433,035 -- 382,696
Stock purchase warrants...................................... 40,132 94,078 40,155 93,613
------------ ----------- ----------- ----------
Weighted-average outstanding shares
including potentially dilutive common
stock equivalents............................................. 25,841,270 13,706,619 23,099,306 13,483,428
============ =========== =========== ==========
(2) SPRINT AGREEMENTS
Under the Sprint agreements, Sprint provides the Company significant
support services such as customer service, billing, long distance transport
services, national network operations support, inventory logistics support, use
of the Sprint and Sprint PCS brand names, national advertising, national
distribution and product development. Additionally, the Company derives
substantial roaming revenue and expenses when Sprint and other Sprint
affiliates' PCS wireless customers incur minutes of use in the Company's
territories and when the Company's customers incur minutes of use in Sprint and
other Sprint affiliates' PCS territories. These transactions are recorded in the
cost of service and roaming and selling and marketing captions in the statements
of operations. Cost of service and roaming transactions relate to the 8%
affiliation fee, long distance, roaming expenses, billing support and customer
care support. Purchased inventory transactions relate to inventory purchased by
the Company from Sprint under the Sprint agreements. Selling and marketing
transactions relate to subsidized costs on wireless handsets and commissions
under Sprint's national distribution program. Amounts relating to the Sprint
agreements for the three and nine months ended June 30, 2002 and 2001, are as
follows (dollars in thousands):
THREE MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
2002 2001
---- ----
Amounts incurred:
Cost of service and roaming................................................ $49,262 $19,082
Purchased inventory........................................................ 11,744 4,034
Selling and marketing...................................................... 5,979 4,268
NINE MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
2002 2001
---- ----
Amounts incurred:
Cost of service and roaming................................................ $128,226 $39,940
Purchased inventory........................................................ 30,829 11,029
Selling and marketing...................................................... 22,367 13,337
(3) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt reflects the assumption of the iPCS long term debt on
November 30, 2001 and consists of the following at June 30, 2002 and September
30, 2001 (dollars in thousands):
JUNE 30, SEPTEMBER 30,
2002 2001
---- ----
AirGate senior credit facility:
Outstanding borrowing..................................................... $131,500 $75,300
Unaccreted original issue discount........................................ (425) (574)
----------- -----------
Net AirGate senior credit facility.............................................. 131,075 74,726
iPCS senior credit facility..................................................... 110,000 --
1999 AirGate senior subordinated discount notes:
Outstanding borrowing..................................................... 221,650 201,124
Unaccreted original issue discount........................................ (8,875) (9,524)
----------- -----------
Net 1999 AirGate Senior Subordinated Discount Notes............................. 212,775 191,600
2000 iPCS senior subordinated discount notes.................................... 216,116 --
iPCS capital lease obligations.................................................. 570 --
----------- -----------
Total long-term debt and capital lease obligations........................ 670,536 266,326
Current maturities of long-term debt and capital lease obligations........ 1,522 --
----------- -----------
Long-term debt and capital lease obligations, excluding current maturities $669,014 $266,326
=========== ===========
As of June 30, 2002, $22.0 million and $30.0 million remained available for
borrowing under the AirGate senior credit facility and the iPCS senior credit
facility, respectively. At June 30, 2002 the AirGate senior credit facility
carried an interest rate of 5.9% and the iPCS senior credit facility carried an
interest rate of 5.6%. The interest rate for both senior credit facilities is
determined on a margin above either the prime lending rate in the United States
or the London Interbank Offer Rate.
Following the merger with iPCS, the Company proposed a new business plan
for fiscal year 2002 which would have violated the EBITDA loss covenants of the
iPCS senior credit facility in the second half of the fiscal year 2002. On
February 14, 2002, the Company entered into an amendment, which provided relief
under the EBITDA loss covenant and modified certain other requirements. At June
30, 2002, the Company was in compliance in all material respects with all
operational and financial covenants for both the AirGate senior credit facility
and the iPCS senior credit facility.
(4) COMMON STOCK PURCHASE WARRANTS
(A) SENIOR CREDIT FACILITY
On June 1, 2000, the Company issued stock purchase warrants to Lucent
Technologies in consideration of the AirGate senior credit facility. The
exercise price of the warrants equals $20.40 per share, and the warrants are
exercisable for an aggregate of 10,175 shares of the Company's common stock at
any time. The warrants expire on August 15, 2004. All of these warrants remain
outstanding at June 30, 2002.
(B) 1999 AIRGATE SENIOR SUBORDINATED DISCOUNT NOTES
On September 30, 1999, the Company received gross proceeds of $156.1
million from the issuance of 300,000 units, each unit consisting of a $1,000
principal amount at maturity 13.5% senior subordinated discount note due 2009
and one warrant to purchase 2.148 shares of common stock at a price of $0.01 per
share. The warrants were exercisable for an aggregate of 644,400 shares of
common stock. The warrants expire October 1, 2009. As of June 30, 2002, warrants
representing 604,230 shares of common stock had been exercised, and warrants
representing 40,170 shares of common stock remain outstanding.
(C) WARRANTS ASSUMED IN IPCS ACQUISITION
On November 30, 2001, AirGate assumed warrants to issue 475,351 shares of
common stock at $34.51 per share. Such warrants are held by the holders of the
2000 iPCS senior subordinated discount notes. The warrants expire July 16, 2010.
As of June 30, 2002, warrants representing all 475,351 shares of common stock
remain outstanding.
On November 30, 2001, AirGate assumed warrants to issue 183,584 shares of
common stock at $31.06 per share. Such warrants are held by Sprint and were
originally issued in consideration for iPCS receiving the right to provide
Sprint PCS service in the expansion territory of Michigan, Iowa and Nebraska.
The warrants expire July 15, 2007. As of June 30, 2002, warrants representing
183,584 shares of common stock remain outstanding.
(5) INCOME TAXES
The Company's effective income tax rate for the interim periods presented
is based on management's estimate of the Company's effective tax rate for the
applicable year and differs from the federal statutory income tax rate primarily
due to nondeductible permanent differences, state income taxes and changes in
the valuation allowance for deferred income tax assets. Deferred income tax
assets and liabilities are recognized for differences between the financial
statement carrying amounts and the tax basis of assets and liabilities which
result in future deductible or taxable amounts and for net operating loss and
tax credit carry forwards. In assessing the valuation of deferred income tax
assets, management considers whether it is more likely than not that some
portion of the deferred income tax assets will be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Prior to the acquisition of iPCS, management provided a
valuation allowance against all of its deferred income tax assets because the
realization of those deferred tax assets was uncertain. As part of the iPCS
acquisition on November 30, 2001, a deferred income tax liability was
established related to non-goodwill intangible assets acquired. The previously
recorded valuation allowance of $81.5 million against deferred tax assets was
subsequently eliminated as a result of the acquisition. As a result of
finalizing the preliminary purchase price allocation of the iPCS acquisition on
March 31 2002, a reduction to non-goodwill intangible assets of approximately
$118.3 million was incurred. This reduction to non-goodwill intangible assets
had an effect of reducing the deferred income tax liability associated with
these intangible assets by approximately $42.5 million. During the three and
nine months ended June 30, 2002, the Company has recorded deferred income tax
benefits of $0.0 million and $28.8 million, respectively. As of June 30, 2002,
the Company's deferred tax assets were equal to its deferred income tax
liability. As a result, the Company expects to provide a valuation allowance
against future tax benefits generated.
(6) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
AGW Leasing Company, Inc. ("AGW") is a wholly-owned restricted subsidiary
of AirGate PCS, Inc. AGW has fully and unconditionally guaranteed the 1999
AirGate senior subordinated discount notes and the AirGate senior credit
facility. AGW was formed to hold the real estate interests for the Company's PCS
network and retail operations. AGW also was a registrant under the Company's
registration statement declared effective by the Securities and Exchange
Commission on September 27, 1999. AGW jointly and severably guarantees the
Company's long-term debt.
AirGate Network Services LLC ("ANS") was created as a wholly-owned
restricted subsidiary of AirGate PCS, Inc. ANS has fully and unconditionally
guaranteed the 1999 AirGate senior subordinated discount notes and AirGate
senior credit facility. ANS was formed to provide construction management
services for the Company's PCS network. ANS jointly and severably guarantees
AirGate's long-term debt.
AirGate Service Company, Inc. ("Service Co") is a wholly-owned restricted
subsidiary of AirGate PCS, Inc. Service Co has fully and unconditionally
guaranteed the 1999 AirGate senior subordinated discount notes and the AirGate
senior credit facility. Service Co was formed to provide management services to
AirGate and iPCS. Service Co jointly and severably guarantees AirGate's
long-term debt.
iPCS is a wholly-owned unrestricted subsidiary of AirGate PCS, Inc. As an
unrestricted subsidiary, iPCS provides no guarantee to either the 1999 AirGate
senior subordinated discount notes or the AirGate senior credit facility and
AirGate and its restricted subsidiaries provide no guarantee to the 2000 iPCS
senior subordinated discount notes or the iPCS senior credit facility.
AGW, ANS, Service Co and iPCS are 100% owned by AirGate PCS, Inc. and no
other persons have equity or other interest in such entities.
The unaudited condensed consolidating financial information for AGW, ANS,
Service Co and iPCS as of June 30, 2002 and for the nine months then ended is as
follows (dollars in thousands):
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2002
AIRGATE
AGW LEASING NETWORK AIRGATE IPCS
AIRGATE PCS, COMPANY, SERVICES, SERVICE AIRGATE NON-GUARANTOR
INC. INC. LLC COMPANY, INC. ELIMINATIONS CONSOLIDATED SUBSIDIARY
Cash and cash $ 4,268 $ -- $ (19) $ -- $ -- $ 4,249 $ 19,631
equivalents.........
Property and equipment, 172,277 -- 46,748 -- -- 219,025 234,986
net...................
Intangible assets, net 270,087 -- -- -- 51,964 322,051 28,278
Other assets........ 321,698 -- 529 -- 59,065) 263,162 42,065
------------ ----------- ----------- ------------ ---------- ----------- ------------
Total assets..... $ 768,330 $ -- $ 47,258 $ -- $ (7,101) $808,487 $ 324,960
============ =========== =========== ============ ========== =========== ============
Current liabilities. $ 34,898 $ 40,157 $ 59,065 $ -- $(59,065) $ 75,055 $ 50,844
Other Long-term..... 3,158 -- -- -- -- 3,158 13,511
Long-term debt...... 385,441 -- -- -- -- 385,441 283,573
------------ ----------- ----------- ------------ ---------- ----------- ------------
Total liabilities 423,497 40,157 59,065 -- (59,065) 463,654 347,928
Common stock........ 258 -- -- -- -- 258 --
Additional paid-in
capital............. 731,152 731,152 192,850
Accumulated deficit. (385,382) (40,157) (11,807) -- 51,964 (385,382) (215,818)
Unearned stock option
Compensation........ (1,195) -- -- -- -- (1,195)
------------ ----------- ----------- ------------ ---------- ----------- ------------
Total liabilities and
stockholders'
equity(deficit) $ 768,330 $ -- $47,258 $ -- $ (7,101) $ 808,487 $324,960
============ =========== =========== ============ ========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED, JUNE 30, 2002
AIRGATE
AGW LEASING NETWORK AIRGATE IPCS
AIRGATE PCS, COMPANY, SERVICES, SERVICE AIRGATE NON-GUARANTOR
INC. INC. LLC COMPANY, INC. ELIMINATIONS CONSOLIDATED SUBSIDIARY
Total revenues...... $ 225,201 $ -- $ -- $ -- $ -- $ 225,201 $93,975
Cost of revenues.... (152,964) (11,347) (164,311) (83,052)
-- -- --
Selling and marketing (56,958) (2,057) (59,015) (25,577)
-- -- --
General and (8,605) (452) (9,057) (9,220)
administrative...... -- -- --
Other............... (28,216) 2,032 (26,184) (14,635)
-- -- --
Depreciation and (49,301) (6,344) (55,645) (21,596)
amortization........ -- -- --
Goodwill impairment. (261,212) -- -- -- -- (261,212) (2,894)
------------ ----------- ----------- ------------ ---------- ----------- ------------
Total expenses...... (557,256) (13,856) (4,312) (575,424) (156,974)
-- --
------------ ----------- ----------- ------------ ---------- ----------- ------------
Loss before income tax
benefit............. (332,055) (13,856) (4,312) (350,223) (62,999)
-- --
Income tax benefit.. 28,761 -- -- -- -- 28,761 --
------------ ----------- ----------- ------------ ---------- ----------- ------------
Net loss......... $ (303,294) $ (13,856) $ (4,312) -- -- $ (321,462) $(62,999)
============ =========== =========== ============ ========== =========== ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED, JUNE 30, 2002
AIRGATE
AGW LEASING NETWORK AIRGATE IPCS
AIRGATE PCS, COMPANY, SERVICES, SERVICE AIRGATE NON-GUARANTOR
INC. INC. LLC COMPANY, INC. ELIMINATIONS CONSOLIDATED SUBSIDIARY
Operating activities,
net................. $(33,348) $ -- $ 4,193 $ -- $ -- $(29,155) (19,642)
Investing activities,
net................. (9,881) -- (4,055) -- -- (13,936) (45,125)
Financing activities,
net................. 57,452 -- -- -- -- 57,452 59,996
------------ ----------- ----------- ------------ ---------- ----------- ------------
(Decrease) increase in
cash
and cash equivalents 14,223 138 14,361 (4,771)
-- -- --
Cash and cash
equivalents at
Beginning of period (9,955) (157) (10,112) 24,402
-- -- --
------------ ----------- ----------- ------------ ---------- ----------- ------------
Cash and cash
equivalents at
end of period....... $ 4,268 $ -- $ (19) $ -- $ -- $ 4,249 $ 19,631
============ =========== =========== ============ ========== =========== ============
AIRGATE PCS, INC.
ELIMINATIONS CONSOLIDATED
Cash and cash equivalents.................................... $ - $ 23,880
Property and equipment, net.................................. - 454,011
Intangible assets, net....................................... - 350,329
Other assets................................................. (723) 304,504
----- -----------
Total assets........................................... $ (723) $ 1,132,724
======== -----------
Current liabilities.......................................... $ (723) $ 125,176
Other Long-term.............................................. - 16,669
Long-term debt............................................... - 669,014
----- -------
(723) 810,859
===== =======
Common stock................................................. - 258
Additional paid-in capital................................... - 924,002
Accumulated deficit.......................................... - (601,200)
Unearned stock option compensation........................... - (1,195)
----- ------------
Total liabilities and stockholders' equity (deficit)... (723) 1,132,724
===== =========
Total revenues............................................... $ 227 $ 319,403
Cost of revenues............................................. 683 (246,680)
Selling and marketing........................................ (976) (85,568)
General and administrative................................... - (18,277)
Other........................................................ - (40,819)
Depreciation and amortization................................ - (77,241)
Goodwill impairment.......................................... 2,894 (261,212)
----- ---------
Total expenses............................................... 2,601 (729,797)
----- ---------
Loss before income tax benefit............................... 2,828 (410,394)
Income tax benefit........................................... - 28,761
------ ---------
Net loss..................................................... $ 2,828 $ (381,633)
======= =========
Operating activities, net.................................... - (48,797)
Investing activities, net.................................... - (59,061)
Financing activities, net.................................... - 117,448
------- -------
(Decrease) increase in cash and cash equivalents............. - 9,590
Cash and cash equivalents at Beginning of period............. - 14,290
------ -------
Cash and cash equivalents at end of period................... $ - $ 23,880
===== =========
The unaudited condensed consolidating financial information for AGW and ANS
as of September 30, 2001 and for the nine months ended June 30, 2001 is as
follows (dollars in thousands):
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2001
AIRGATE
AGW LEASING NETWORK AIRGATE PCS,
INC.
AIRGATE PCS, INC. COMPANY, INC. SERVICES LLC ELIMINATIONS CONSOLIDATED
Cash and cash equivalents................... $ 14,447 $ - $ (157) $ - $ 14,290
Property and equipment, net................. 160,203 - 49,123 - 209,326
Investment in subsidiaries.................. 37,540 - - (37,540) -
Other assets................................ 142,738 - 501 (85,845) 57,394
--------- ------------- ---------- ------------ -------------
Total assets.......................... $ 354,928 $ - $49,467 (123,385) $ 281,010
========= ====== ======= ========= =========
Current liabilities......................... $ 68,402 $26,301 $58,241 $(85,845) $ 67,099
Long-term deferred revenue.................. 309 - - - 309
Long-term debt.............................. 266,326 - - - 266,326
---------- ------------- ------------- --------------- -------------
Total liabilities..................... 335,037 26,301 58,241 (85,845) 333,734
---------- ----------- ---------- ------------ -------------
Common stock................................ 134 - - - 134
Additional paid-in-capital.................. 205,795 - - (37,540) 168,255
Accumulated deficit......................... (184,492) (26,301) (8,774) - (219,567)
Unearned stock option compensation.......... (1,546) - - - (1,546)
----------- ------------ ------------ ------------ -------------
Total liabilities and stockholders'
equity............................. $354,928 $ - $49,467 $(123,385) $ 281,010
======== ====== ======= ========== =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 2001
AIRGATE
AGW LEASING NETWORK AIRGATE PCS, INC.
AIRGATE PCS, INC. COMPANY, INC. SERVICES LLC ELIMINATIONS CONSOLIDATED
Total revenues.............................. $ 109,836 $ - $ - $ - $ 109,836
Total expenses.............................. (180,926) (10,943) (3,945) - (195,814)
--------- ----------- ---------- ------- ---------
Net loss.................................... $(71,090) $(10,943) $ (3,945) $ - $ (85,978)
========= ========= ========== ====== ==========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2001
AIRGATE
AGW LEASING NETWORK AIRGATE PCS, INC.
AIRGATE PCS, INC. COMPANY, INC. SERVICES LLC ELIMINATIONS CONSOLIDATED
Operating activities, net................... $(50,511) $ - $ 8,781 $ - $ (41,730)
Investing activities, net................... (47,893 - (8,529) - (56,422)
Financing activities, net................... 47,614 - - - 47,614
------ ------------- ------------ --------- -------------
(Decrease) increase in cash.................
and cash equivalents........................ (50,790) - 252 - (50,538)
Cash and cash equivalents at
beginning of period......................... 58,636 - (252) - 58,384
------ ----- ------ ----- --------
Cash and cash equivalents at end of
period...................................... $ 7,846 $ - $ - $ - $ 7,846
======= ====== ===== ====== ========
The unaudited condensed consolidating statement of operations for AGW,
Service Co, ANS and iPCS for the three months ended June 30, 2002 is as follows
(dollars in thousands):
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
AGW LEASING AIRGATE AIRGATE
AIRGATE PCS, COMPANY, SERVICE NETWORK
INC. INC. COMPANY, INC. SERVICES, LLC ELIMINATIONS
Total revenues.............................. $ 81,147 $ - $ - $ - $ -
Cost of revenues............................ (53,728) (3,837) - - -
Selling and marketing....................... (15,292) (558) - - -
General and administrative.................. (4,364) (131) - - -
Other....................................... (9,688) - - 764 -
Depreciation and amortization............... (17,828) - - (2,181) -
Goodwill impairment......................... - - - - -
------------ ------------- ------- ------------ --------
Total expenses.............................. (100,900) (4,526) - (1,417) -
------------ ------------- ------- ------------- --------
Loss before income tax benefit.............. (19,753) (4,526) - (1,417) -
Income tax benefit.......................... - - - - -
-------------- ------------- ------------ --------------- --------
Net loss............................... $ (19,753) $ (4,526) $ - $ (1,417) $ -
========== ========= ===== ========= =====
IPCS
AIRGATE NON-GUARANTOR AIRGATE
PCS, INC PCS, INC.
CONSOLIDATED SUBSIDIARY ELIMINATIONS CONSOLIDATED
Total revenues.............................. $ 81,147 $ 41,491 $ 171 $122,809
Cost of revenues............................ (57,565) (35,236) 682 (92,119)
Selling and marketing....................... (15,850) (11,428) (853) (28,131)
General and administrative.................. (4,495) (1,713) - (6,208)
Other....................................... (8,924) (6,746) - (15,670)
Depreciation and amortization............... (20,009) (10,751) - (30,760)
Goodwill impairment......................... - - - -
---------- ---------- ------------- -----------
Total expenses.............................. (106,843) (65,874) (171) (172,888)
--------- --------- ------------- -----------
Loss before income tax benefit.............. (25,696) (24,383) - (50,079)
Income tax benefit.......................... - - - -
------------- -------------- ------------- -----------
Net loss..... $ (25,696) $ (24,383) $ - $(50,079)
========== ========== ======= =========
The unaudited condensed consolidating statement of operations for AGW and
ANS for the three months ended June 30, 2001 is as follows (dollars in
thousands):
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001
AGW LEASING AIRGATE NETWORK AIRGATE PCS, INC.
AIRGATE PCS, INC. COMPANY, INC. SERVICES LLC ELIMINATIONS CONSOLIDATED
Total revenues...... $ 49,739 $ - $ - $ - $ 49,739
Total expenses...... (66,000) (3,940) (3,542) - (73,482)
-------- ------- ------- --- --------
Net loss............ $ (16,261) $ (3,940) $ (3,542) $ - $ (23,743)
========== ========- ========= === ==========
(7) MERGER WITH IPCS, INC.
On November 30, 2001, the Company completed the acquisition of iPCS. In
connection with the iPCS acquisition, AirGate issued 12.4 million shares of
AirGate common stock valued at $57.16 per share on November 30, 2001, which
totaled $706.6 million. The Company assumed an additional 1.1 million shares
related to outstanding iPCS options and warrants valued at $47.7 million using a
Black-Scholes option pricing model. The transaction was accounted for under the
purchase method of accounting. Accordingly, the Company engaged a nationally
recognized valuation expert to assist in the allocation of purchase price to the
fair value of identifiable assets and liabilities. AirGate owns 100 percent of
the capital stock of iPCS. Subsequently, certain former shareholders of iPCS
sold 4.0 million shares of AirGate common stock in an underwritten offering on
December 18, 2001. The accounts of iPCS, Inc. are included in the Company's
results of operations subsequent to November 30, 2001.
The Company considers AirGate PCS, Inc. the acquiring entity for the
following reasons. AirGate PCS, Inc. was the issuer of the equity shares in the
merger, AirGate PCS, Inc. stockholders, subsequent to the merger, held 53
percent of the combined entity, senior management of the combined entity
subsequent to the merger is comprised of former senior management of AirGate
PCS, Inc., AirGate PCS, Inc. stockholders, subsequent to the merger, have the
majority voting rights to elect the governing body of the combined company, and
AirGate PCS, Inc. was the larger of the two entities prior to the merger.
The acquisition of iPCS represented a strategic opportunity to
significantly expand the size and scope of the Company's operations. The
acquisition increases the total resident population in the Company's territory
from 7.1 million to approximately 14.6 million, in markets adjacent to Chicago,
Illinois, Detroit, Michigan, Des Moines, Iowa, Indianapolis, Indiana and St.
Louis, Missouri. The Company believes the acquisition of iPCS and its proximity
to these markets increases AirGate's strategic importance to Sprint. The Company
believes the iPCS territory has attractive market characteristics, and that it
will be able to leverage the best operating practices of both companies to more
effectively penetrate these markets.
The acquisition activity is summarized as follows:
The fair values of identifiable assets and liabilities as of November 30,
2001 (dollars in thousands).
Stock issued....................................................... $ 706,645
Value of options and warrants converted............................ 47,727
Costs associated with acquisition.................................. 7,730
Liabilities assumed................................................ 394,165
----------
Total purchase price............................................... $1,156,267
============
As a result of the acquisition of iPCS, the Company recorded goodwill of
$462,835 and intangible assets of $379,589, which will be amortized over the
following periods (dollars in thousands):
VALUE AMORTIZATION
ASSIGNED PERIOD
Acquired customer base.................................. $52,400 30 months
Non-competition agreements.............................. 3,900 6 months
Right to provide service under the Sprint Agreements.... 323,289 205 months
-------
$379,589
The unaudited pro forma condensed consolidated statements of operations for
the three and nine months ended June 30, 2001 and the nine months ended June 30,
2002, set forth below, present the results of operations as if the acquisition
had occurred at the beginning of each period and are not necessarily indicative
of future results or actual results that would have been achieved had the
acquisition occurred as of the beginning of each period (dollars in thousands).
THREE MONTHS
ENDED
JUNE 30, 2001
Total revenues................................................ $ 75,308
Net loss...................................................... $ (54,147)
----------
Basic and diluted net loss per share.......................... $ (2.12)
========
NINE MONTHS
ENDED
JUNE 30, 2001
Total revenues................................................ $ 161,462
Net loss...................................................... $ (180,616)
-----------
Basic and diluted net loss per share.......................... $ (7.12)
=========
NINE MONTHS
ENDED
JUNE 30, 2002
Total revenues................................................ $ 346,210
Net loss...................................................... $ (430,377)
-----------
Basic and diluted net loss per share.......................... $ (16.70)
=========
(8) GOODWILL AND INTANGIBLE ASSETS
During the three months ended March 31, 2002, the wireless
telecommunications industry 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. In
addition, recent wireless industry acquisitions subsequent to the acquisition of
iPCS were valued 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, Inc. 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 head of 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 implied purchase price allocation of
the fair value at March 31, 2002, the Company recorded a goodwill impairment of
$261.2 million. The testing performed at March 31, 2002 is the Company's first
annual test for goodwill impairment under SFAS No. 142.
The changes in the carrying amount of goodwill between September 30, 2001
and June 30, 2002 are as follows (dollars in thousands):
Balance as of September 30, 2001 $ -
Goodwill acquired on November 30, 2001 (preliminary purchase
price allocation)................................................ 387,392
Adjustment to preliminary purchase price allocation................. 117,925
Deferred income tax impact on goodwill from preliminary
purchase price allocation........................................ (42,482)
Goodwill impairment (261,212)
---------
Balance as of June 30, 2002 $ 201,623
=========
The adjustment to the preliminary purchase price allocation represents the
final purchase price allocation between goodwill and the right to provide
service under the Sprint agreements. This final allocation was made at March 31,
2002. Additionally, adjustments to the fair market value of certain property and
equipment of iPCS, Inc. of $6.4 million were made. These adjustments relate to
business plans prior to the acquisition of iPCS associated with the Company's
network build-out and selling and marketing organizational structure.
The carrying amount, accumulated amortization and estimated future
amortization expense of acquired definite life intangibles at June 30, 2002, are
as follows (dollars in thousands):
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION
Amortized intangible assets:
Non-competition agreements, iPCS acquisition.............................. $ 3,900 $(3,900)
Non-competition agreements - store acquisitions........................... 159 (107)
Acquired customer base - iPCS acquisition................................. 52,400 (12,227)
Right to provide service under the Sprint agreements 323,289 (13,185)
- iPCS acquisition....................................................... ------- --------
Total............................................................... $379,748 $(29,419)
======== ---------
The weighted average lives of amortized intangible assets is approximately
178.7 months or 14.9 years.
Estimated amortization expense for the fiscal years ended
September 30,
2002.................................................. $ 39,253
2003.................................................. $ 39,754
2004.................................................. $ 32,767
2005.................................................. $ 18,794
2006.................................................. $ 18,794
(9) COMMITMENTS AND CONTINGENCIES
On July 3, the Federal Communications Commission (the "FCC") issued an
order in Sprint PCS v. AT&T for declaratory judgment holding that PCS wireless
carriers could not unilaterally impose terminating long distance access charges
pursuant to FCC rules. This FCC order did not preclude a finding of a
contractual basis for these charges, nor did it rule whether or not Sprint PCS
had such a contract with carriers such as AT&T. AirGate and iPCS have previously
received $3.9 and $1.0 million, respectively. This is comprised of $4.3 and $1.1
million, respectively, of terminating long distance access revenues, less $0.4
and $0.1 million, respectively, of associated affiliation fees from Sprint PCS
prior to the current quarter, and Sprint PCS has asserted its right to recover
these revenues net of the affiliation fees. As a result of this ruling, and our
assessment of this contingency under SFAS No. 5, "Accounting for Contingencies",
we have taken a charge to current period revenue. However, we will continue to
assess the ability of Sprint, Sprint PCS or other carriers to recover these
charges and the Company is continuing to review the availability of defenses it
may have against Sprint PCS' claim to recover these revenues.
In May, 2002, putative class action complaints were filed in the United
States District Court for the Northern District of Georgia against AirGate PCS,
Inc., Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit
Suisse First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company,
Thomas Wiesel Partners LLC and TD Securities. The complaints do not specify an
amount or range of damages that the plaintiffs are seeking. The complaints seek
class certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former iPCS shareholders on
December 18, 2001 contained materially false and misleading statements and
omitted material information necessary to make the statements in the prospectus
not false and misleading. The alleged omissions included (i) failure to disclose
that in order to complete an effective integration of iPCS, drastic changes
would have to be made to the Company's distribution channels, (ii) failure to
disclose that the sales force in the acquired iPCS markets would require
extensive restructuring and (iii) failure to disclose that the "churn" or
"turnover" rate for customers would increase as a result of an increase in the
amount of sub-prime credit quality customers 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. 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. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Statements contained herein regarding expected financial results and other
planned events, including but not limited to, anticipated liquidity, churn
rates, ARPU, CPGA and CCPU (all as defined in the Results of Operations),
decreases in roaming rates, EBITDA (as defined in the Critical Accounting
Policies), capital expenditures and other statements that include words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan," "seek",
"project" and similar expressions are forward-looking statements that involve
risk and uncertainties. Actual future events or results may differ materially
from these statements. Readers are referred to the documents filed by AirGate
and iPCS with the Securities and Exchange Commission, specifically the most
recent filings which identify important risk factors that could cause actual
results to differ from those contained in the forward-looking statements,
including:
o the ability to successfully integrate the businesses of AirGate and iPCS;
o the competitiveness and impact of Sprint PCS pricing plans, products and
services;
o customer credit quality;
o the ability of Sprint to provide back office, billing, customer care and
other services and the costs of such services;
o rates of penetration in the wireless industry;
o our significant level of indebtedness;
o adequacy of bad debt and other reserves;
o the potential to experience a continued high rate of customer turnover;
o the potential need for additional sources of liquidity;
o anticipated future losses;
o customer purchasing patterns;
o potential fluctuations in quarterly results;
o an adequate supply of subscriber equipment;
o risks related to future growth and expansion; and
o the volatility of the market price of our common stock.
These and other applicable risks are summarized under the captions "Future
Trends That May Affect Operating Results and Liquidity" included in this Item 2
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Form 10-Q and "Investment Considerations" included under
Item 5 - Other Information of this Form 10-Q and elsewhere in this report.
OVERVIEW
On July 22, 1998, the Company entered into a management and related
agreements with Sprint whereby it became an affiliate of Sprint with the
exclusive right to provide 100% digital PCS products and services under the
Sprint and Sprint PCS brand names in the Company's original Sprint PCS territory
in the southeastern United States. In January 2000, the Company began commercial
operations with the launch of four markets covering 2.2 million residents in the
Company's southeastern territory. By September 30, 2000, the Company had
launched commercial PCS service in all of the 21 basic trading areas, referred
to as markets, which comprise the Company's original southeastern territory. On
November 30, 2001, AirGate acquired iPCS, Inc., a PCS affiliate 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 7.1 million to approximately 14.6 million. Additionally, iPCS
served 149,119 subscribers as of November 30, 2001. At June 30, 2002, the
Company provided Sprint PCS services to 532,446 subscribers.
iPCS is a wholly-owned unrestricted subsidiary of AirGate. As required by
the terms of AirGate's and iPCS' respective outstanding indebtedness, each of
AirGate and iPCS conducts its business as a separate entity from the other.
Under the Company's long-term agreements with Sprint, the Company manages
the network on Sprint's licensed spectrum and has the right to use the Sprint
and Sprint PCS brand names royalty-free during the Company's PCS affiliation
with Sprint. The Company also has access to Sprint's national marketing support
and distribution programs and is generally entitled to buy network and equipment
and subscriber handsets at the same discounted rates offered by vendors to
Sprint based on its large volume purchases. In exchange for these and other
benefits, the Company pays an affiliation fee of 8% of collected revenues to
Sprint. The Company is entitled to 100% of revenues collected from the sale of
handsets and accessories and on roaming revenues received when Sprint and other
Sprint PCS affiliate customers from a different territory make a wireless call
on the Company's PCS network.
At June 30, 2002, the Company's Sprint PCS network covered 11.6 million of
the 14.6 million residents in the Company's Sprint PCS territory based on
current estimates compiled by Equifax, Inc.
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. Some of the most critical accounting
policies that might materially impact the Company's results include:
Allowance for Doubtful Accounts
Estimates are used in determining the allowance for doubtful accounts and
are based both on historical collection experience, current trends, credit
policy and on a percentage of accounts receivable by aging category. In
determining these percentages, the Company looks at historical write-offs in
relation to the 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 allowances to the aging categories. The Company
provides an allowance for substantially all receivables over 90 days old based
on knowledge of Sprint collection policies and procedures. Bad debt expense as a
percentage of service revenues for the three and nine months ended June 30, 2002
was 8.5% and 9.6%, respectively. Bad debt expense as a percentage of service
revenues for the three and nine months ended June 30, 2001, was 7.0% and 7.5%,
respectively. The allowance for doubtful accounts as of June 30, 2002 and
September 30, 2001 was $13.3 million and $2.8 million, respectively. If the
allowance for doubtful accounts is not adequate, it would have a negative effect
on operating income, EBITDA and available cash.
The Company also reviews current trends in the credit quality of its
customer base and changes in its credit policies. For the nine months ended June
30, 2002, 53% of the Company's customer additions consisted of sub-prime credit
quality customers. Under the Sprint service plans, customers who do not meet
certain credit criteria can nevertheless select any plan offered subject to an
account-spending limit, referred to as ASL, to control credit exposure. Account
spending limits range from $125 to $200 depending on the credit quality of the
customer. Prior to May 2001, all of these customers were required to make a
deposit of $125 that could be credited against future billings. In May 2001, the
deposit requirement was eliminated on all credit classes ("NDASL"). On November
15, 2001, the NDASL program was replaced by the "Clear Pay program" which
require a $125 deposit requirement for the lowest credit class and featured
increased back-office controls with respect to credit collection efforts. On
February 24, 2002, the Clear Pay program was superceded in the Company's
territories by the "Clear Pay II program", which re-instituted the deposit
requirement across all new sub-prime credit quality customers and not just the
lowest credit class. The Company has removed the deposit requirement in its
midwestern markets from all but the lowest sub-prime credit quality customers.
The removal of the deposit requirement for the midwestern region could increase
the number of sub-prime credit quality customers, and such increases could, in
turn, increase bad debts and uncollectible accounts. The Clear Pay II deposit
program remains in effect for the Company's southeastern markets.
Reserve for First Payment Default Customers
The Company reserves a portion of its new customers and related revenues
from those customers that it anticipates will never pay a bill. Using historical
information of the percentage of customers whose service was cancelled for
non-payment without ever making a payment, the Company estimates the number of
customers activated in the current period that will never pay a bill. For these
customers, the Company does not recognize revenue and does not consider them as
customer additions. As a result these customers are not included in the churn
statistics or subscriber count. At June 30, 2002 and September 30, 2001, the
Company had in reserve approximately 6,102 and 7,803 customers, respectively.
Reserve for Obsolete Excess Inventory
The Company currently records a reserve for obsolete or excess handset
inventory for models that remain in inventory after 60 days of being
discontinued by Sprint PCS. With the migration to 1XRTT network, the Company
will need to continue to monitor the depletion of its current inventory levels.
If the Company does not deplete the inventory that is not capable of providing
1XRTT services prior to the complete rollout of 1XRTT, it may have to record a
reserve for any remaining obsolete inventory due to lower realizable retail
prices on those handsets. If the estimate of obsolete or excess inventory is
understated, inventory, operating income and EBITDA would be reduced.
Revenue Recognition
The Company recognizes revenues when persuasive evidence of an arrangement
exists, services have been rendered, the price to the buyer is fixed or
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," as
amended by SAB No. 101A and 101B. The Company records equipment revenue for the
sale of handsets and accessories to customers in its retail stores and to local
distributors in its territories. The Company does not record equipment revenue
on handsets and accessories purchased by its customers from national third party
retailers such as Radio Shack, Best Buy and Circuit City, or directly from
Sprint. 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 customers. The Company's
customers pay an activation fee when they initiate service. The Company defers
activation fee revenue over the average life of its customers, which is
estimated to be 30 months. The Company recognizes service revenue from its
customers as they use the service. The Company provides a reduction of recorded
revenue for billing adjustments and billing corrections. The Company provides a
reduction of recorded revenue for rebates and discounts given to customers on
wireless handset sales in accordance with the Emerging Issues Task Force
("EITF") 01-9 "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)". The Company participates in
the Sprint national and regional distribution program in which national
retailers such as Radio Shack sell Sprint products and services. In order to
facilitate the sale of Sprint products and services, national retailers purchase
wireless handsets from Sprint for resale and receive compensation from Sprint
for 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 management agreement with Sprint, when a national
retailer sells a handset purchased from Sprint to a subscriber in the Company's
territory, the Company is obligated to reimburse Sprint for the handset subsidy
that Sprint originally incurred. The national retailers sell Sprint wireless
services under the Sprint brands and marks. The Company does not receive any
revenues from the sale of wireless handsets by national retailers. The Company
classifies these Sprint wireless handset subsidy charges as a selling and
marketing expense for a wireless handset sale to a new customer and classifies
these subsidies as a cost of service for a wireless handset upgrade to an
existing customer.
Goodwill and Intangible Assets
Purchase price accounting requires extensive use of accounting estimates
and judgments to allocate the purchase price to the fair market value of the
assets and liabilities purchased. In the recording of the purchase of iPCS, the
Company engaged a nationally recognized valuation expert to assist in
determining the fair value of these assets and liabilities. Included in the
asset valuation for this purchase was the valuation of three intangible assets:
the iPCS customer base, non-compete agreements for certain former iPCS
employees, and the right to be the exclusive provider of Sprint services in the
37 markets in which iPCS operates. For the customer base, the non-compete
agreement, and the right to provide service under the Sprint Agreements, finite
useful lives of thirty months, six months and 205 months, respectively, have
been assigned to these intangible assets and they will each be amortized over
these respective useful lives. The Company evaluates acquired businesses for
potential impairment indicators whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors that management
considers important which could trigger an impairment review include the
following:
o Significant decrease in the market value of an asset;
o Significant changes in the manner of use of the acquired assets or the
strategy for the overall business;
o Significant adverse change in legal factors or negative industry or
economic trends;
o Significant underperformance relative to current period and/or projected
future operating profits or cash flows associated with an asset; or
o Significant decline in the Company's stock price for a sustained period.
The wireless telecommunications industry experienced significant declines
in market capitalization over the past year. 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 subsequent to its
acquisition of iPCS. In addition, 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, Inc. 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 Company recorded a goodwill
impairment of approximately $261.2 million at March 31, 2002.
The Company continually monitors the fair value of its goodwill and
intangible assets. The Company is currently revising its long-range business
plan for both AirGate PCS and iPCS. The Company expects to complete its
long-range business plans before the end of the Company's fiscal year-end. Upon
completion of the long-range business plan, the Company will assess the
enterprise value of iPCS and the carrying value of its goodwill. The results of
the long-range business plan could cause the Company to conclude that impairment
indicators exist and that goodwill or intangibles associated with iPCS may be
impaired. Any resulting impairment loss could have a material adverse impact on
the Company's financial condition and results of operations.
Income Taxes
As part of the process of preparing the Company's consolidated financial
statements the Company is required to estimate its taxes in each of the
jurisdictions of operation. This process involves management estimating the
actual current tax expense together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the consolidated balance sheets. The Company must then assess
the likelihood that the deferred tax assets will be recovered from future
taxable income and to the extent recovery is not likely, the Company must
establish a valuation allowance. Future taxable income depends on the ability to
generate income in excess of allowable deductions. To the extent the Company
establishes a valuation allowance or increases this allowance in a period, an
expense is recorded within the tax provision in the consolidated statement of
operations. Significant management judgment is required in determining the
Company's provision for income taxes, its deferred tax assets and liabilities
and any valuation allowance recorded against net deferred tax assets. In the
event that actual results differ from these estimates or the Company adjusts
these estimates in future periods, the Company may need to establish an
additional valuation allowance that could materially impact the Company's
financial condition and results of operations.
Reliance on the Timeliness and Accuracy of Data Received from Sprint
The Company places significant reliance on the timeliness and accuracy of
revenue and cost data related to its customer base that it receives on a monthly
basis from Sprint. The Company makes significant revenue, allowance for doubtful
accounts, cost of service and sales and marketing cost estimates based on data
it receives from Sprint. The Company obtains assurance to the accuracy of this
data through reliance on the "Statement of Attestation Services" (SAS) 70 report
on Sprint's internal control processes. Errors that are not reconciled on a
timely basis by Sprint could have a material adverse effect on the results of
operations and cash flows of the Company.
EBITDA
The Company defines EBITDA as earnings before interest, taxes, non-cash
stock compensation expense, depreciation, amortization of intangibles and
goodwill impairment losses. EBITDA as defined by the Company may not be
comparable to similarly titled measures by other companies.
NEW ACCOUNTING PRONOUNCEMENTS
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 EITF 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." EITF 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.
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 Accounting Principles Board ("APB") 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 is not expected to have a material impact on the
Company's results of operations, financial position or cash flows.
In November 2001, the EITF of the FASB issued EITF 01-9 "Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor's Products)". EITF 01-9 provides guidance on when a sales incentive or
other consideration given should be a reduction of revenue or an expense and the
timing of such recognition. The guidance provided in EITF 01-9 is effective for
financial statements for interim or annual periods beginning after December 15,
2001. The Company occasionally offers rebates to customers that purchase
wireless handsets in its stores. The Company's historical policy regarding the
recognition of these rebates in the statement of operations is a reduction in
the revenue recognized on the sale of the wireless handset by the amount of the
rebate given. The Company's policy is in accordance with the guidance set forth
in EITF 01-9. Therefore, the adoption of EITF 01-9 did not have a material
impact on the Company's financial statements.
In August 2001, the FASB SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 provides new guidance on the
recognition of impairment losses on long-lived assets with definite lives to be
held and used or to be disposed of and also broadens the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS 144 is effective for fiscal
years beginning after December 15, 2001. Early adoption of this statement is
permitted. The Company elected early adoption as of the beginning of its fiscal
year on October 1, 2001. The adoption by the Company did not materially change
the methods used by the Company to measure impairment losses on long-lived
assets.
In June, 2001, the FASB issued SFAS No. 141, "Business Combinations", which
is effective for all business combinations initiated after June 30, 2001. SFAS
No. 141 requires companies to account for all business combinations using the
purchase method of accounting, recognize intangible assets if certain criteria
are met, as well as provide additional disclosures regarding business
combinations and allocation of purchase price. The Company has adopted SFAS No.
141 as of July 1, 2001, and the impact of such adoption did not have a material
adverse impact on the Company's financial statements.
In June, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which provides for non-amortization of goodwill and intangible assets
that have indefinite useful lives, annual tests of impairments of those assets
and interim tests of impairment when an event occurs that more likely than not
has reduced the fair value of such assets. The statement also provides specific
guidance about how to determine and measure goodwill impairments, and requires
additional disclosure of information about goodwill and other intangible assets.
The provisions of this statement are required to be applied starting with fiscal
years beginning after December 15, 2001, and applied to all goodwill and other
intangible assets recognized in its financial statements at that date. Goodwill
and intangible assets acquired after June 30, 2001 will be subject to the
non-amortization provisions of the statement. Early application is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements had not been issued previously. The Company
met the criteria for early application and therefore adopted SFAS No. 142 as of
the beginning of its fiscal year on October 1, 2001. Upon application, the
provisions of SFAS No. 142 did not have a material adverse effect on the
Company's financial statements as of December 31, 2001 and for the three months
ended December 31, 2001. The Company acquired iPCS, (see note 7) in item 1, on
November 30, 2001 and performed a preliminary allocation of the purchase price
under the provisions of SFAS No. 141. As a result of this allocation, the
Company recorded goodwill, which is the only