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 DECEMBER 31, 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 |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
25,944,903 shares of common stock, $0.01 par value per share, were
outstanding as of February 10, 2003.
AIRGATE PCS, INC.
THIRD QUARTER REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................... 3
Consolidated Balance Sheets at December 31, 2002 and
September 30, 2002 (unaudited).................................. 3
Consolidated Statements of Operations for the three months ended
December 31, 2002 and 2001 (unaudited).......................... 4
Consolidated Statements of Cash Flows for the three months ended
December 31, 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...................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........31
Item 4. Controls and Procedures........................................... 32
PART II OTHER INFORMATION................................................. 33
Item 1. Legal Proceedings................................................. 33
Item 2. Changes in Securities and Use of Proceeds......................... 33
Item 3. Defaults Upon Senior Securities................................... 33
Item 4. Submission of Matters to a Vote of Security Holders............... 33
Item 5. Other Information................................................. 33
Item 6. Exhibits and Reports on Form 8-K.................................. 45
PART I. FINANCIAL INFORMATION
Item 1. -- FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except share amounts)
December 31, September 30,
2002 2002
---- ----
Assets
Current assets:
Cash and cash equivalents.................................................................. $ 3,010 $ 32,475
Accounts receivable, net of allowance for doubtful accounts of $11,455
and $11,256, respectively................................................................ 37,430 38,127
Receivable from Sprint..................................................................... 42,334 44,953
Inventories................................................................................ 6,555 6,733
Prepaid expenses........................................................................... 10,647 7,159
Other current assets....................................................................... 293 326
---- ----
Total current assets................................................................... 100,269 129,773
Property and equipment, net of accumulated depreciation of $133,262 and $112,913, respectively.. 383,720 399,155
Financing costs................................................................................. 7,867 8,118
Intangible assets, net of accumulated amortization of $21,856 and $17,592, respectively......... 24,063 28,327
Direct subscriber activation costs.............................................................. 8,341 8,409
Other assets.................................................................................... 1,369 512
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Total assets............................................................................. $525,629 $574,294
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable........................................................................... $ 5,681 $ 18,152
Accrued expenses........................................................................... 18,575 20,950
Payable to Sprint.......................................................................... 82,011 88,360
Deferred revenue........................................................................... 11,923 11,775
Current maturities of long-term debt and capital lease obligations......................... 361,828 354,936
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Total current liabilities.............................................................. 480,018 494,173
Deferred subscriber activation fee revenue...................................................... 15,200 14,973
Other long-term liabilities..................................................................... 3,565 3,267
Long-term debt and capital lease obligations, excluding current maturities...................... 367,291 354,828
-------- --------
Total liabilities...................................................................... 866,074 867,241
-------- --------
Commitments and contingencies........................................................ -- --
-------- --------
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; 25,836,520 and
25,806,520 shares issued and outstanding at December 31, 2002 and September 30, 2002, 258 258
respectively............................................................................
Additional paid-in-capital................................................................. 924,030 924,008
Unearned stock compensation................................................................ (875) (1,029)
Accumulated deficit........................................................................ (1,263,858) (1,216,184)
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Total stockholders' equity (deficit)................................................... (340,445) (292,947)
----------- -----------
Total liabilities and stockholders' equity (deficit)................................... $ 525,629 $ 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
December 31,
----------------------------------
2002 2001
--------------- --------------
Revenues:
Service revenues.......................................... $ 96,328 $ 55,849
Roaming revenues.......................................... 31,991 21,303
Equipment revenues........................................ 4,782 4,545
--------- ---------
Total revenues..................................... 133,101 81,697
Operating Expenses:
Cost of services and roaming (exclusive
of depreciation, and amortization as shown separately
below)................................................... (88,006) (57,757)
Cost of equipment......................................... (12,127) (9,583)
Selling and marketing..................................... (28,903) (29,845)
General and administrative expenses....................... (7,408) (5,200)
Non-cash stock compensation expense....................... (176) (231)
Depreciation and amortization of property and equipment... (20,626) (11,266)
Amortization of intangible assets......................... (4,264) (4,539)
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Total operating expenses............................ (161,510) (118,421)
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Operating loss...................................... (28,409) (36,724)
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Interest income................................................ 40 99
Interest expense............................................... (19,305) (10,283)
Other expense.................................................. -- (95)
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Loss before income tax benefit...................... (47,674) (47,003)
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Income tax benefit.................................. -- 17,359
Net loss............................................ $ (47,674) $ (29,644)
----------- -----------
Basic and diluted net loss per share of common stock........... $ (1.85) $ (1.68)
Basic and diluted weighted-average outstanding common shares... 25,824,149 17,675,349
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Three Months Ended
December 31,
---------------------------
2002 2001
Net loss...................................................................................... $ (47,674) $(29,644)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment...................................... 20,626 11,266
Amortization of intangible assets............................................................ 4,264 4,539
Amortization of financing costs into interest expense........................................ 302 386
Provision for doubtful accounts.............................................................. 3,126 6,731
Interest expense associated with accretion of discounts...................................... 14,863 9,069
Non-cash stock compensation.................................................................. 176 231
Deferred income tax benefit.................................................................. -- (17,359)
Changes in assets and liabilities:
Accounts receivable...................................................................... (2,103) (9,540)
Receivable from Sprint................................................................... 2,619 827
Inventories.............................................................................. 1,066
178
Prepaid expenses, other current and non-current assets................................... (4,622) (2,337)
Accounts payable, accrued expenses and other long term liabilities....................... (6,597) (7,941)
Payable to Sprint........................................................................ (6,349) (1,841)
Deferred revenue......................................................................... 1,282 3,426
----------- ----------
Net cash used in operating activities......................................... (19,909) (31,121)
----------- ----------
Cash flows from investing activities:
Capital expenditures.......................................................................... (14,050) (7,126)
Cash acquired from iPCS, Inc.................................................................. -- 24,401
Purchase of business assets................................................................... -- (5,880)
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Net cash (used in) provided by investing activities........................... (14,050) 11,395
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings under senior credit facilities....................................... 5,000 30,000
Payments for credit facility borrowings....................................................... (506) --
Proceeds from exercise of employee stock options.............................................. -- 585
----------- -----------
Net cash provided by financing activities..................................... 4,494 30,585
----------- -----------
Net (decrease) increase in cash and cash equivalents.......................... (29,465) 10,859
Cash and cash equivalents at beginning of period................................................... 32,475 14,290
----------- ------------
Cash and cash equivalents at end of period......................................................... $ 3,010 $ 25,149
============ ============
Supplemental disclosure of cash flow information - cash paid for interest.......................... $ 2,702 $ 1,738
Supplemental disclosure for non-cash investing activities:
Capitalized interest.......................................................................... $ 522 $ 1,317
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(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 ended
December 31, 2002 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
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. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, intense competition and the costs associated with the
build-out of a PCS network. The Company's operations are dependent upon Sprint's
ability to perform its obligations under the agreements between the Company and
Sprint (see note 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
quarter ended December 31, 2002 and the year ended September 30, 2002, the
Company's net loss amounted to $47.7 million and $996.6 million, including
goodwill and asset impairment charges of $817.4 million. As of December 31,
2002, the Company had a working capital deficit of $379.7 million, and AirGate
had available credit of $12.0 million under its $153.5 million senior secured
credit facility (the "AirGate credit facility"). The majority of the Company's
working capital deficit is attributable to the classification of iPCS' debt
described below totaling $359.8 million as current.
iPCS has ceased making interest payments on its $130.0 million senior secured
credit facility (the "iPCS credit facility") and is not in compliance with
certain provisions of the iPCS credit facility or the indenture under which its
$300.0 million senior subordinated discount notes (the "iPCS notes") were
issued. iPCS has no remaining credit availability under its credit facility. As
a result of these defaults, substantially all of iPCS' debt is classified as a
current liability. The lenders under the iPCS credit facility and the trustee
for the iPCS notes are entitled to accelerate the iPCS debt, subject to the
forbearance agreement described in Note 10.
iPCS has also incurred significant net losses during the quarter ended December
31, 2002 and the year ended September 30, 2002, which are included in the
accompanying consolidated financial statements. Because current conditions in
the capital markets make additional financing unlikely, iPCS has undertaken
efforts to restructure its relationship with its secured lenders, its public
noteholders and Sprint. To date, iPCS has been unable to restructure its debt or
secure additional financing necessary to fund its operations and, accordingly,
iPCS expects to file for reorganization and protection from its creditors under
Chapter 11 of the United States Bankruptcy Code in early 2003 either as part of
a consensual restructuring or in an effort to effect a court administered
reorganization.
Because iPCS is an unrestricted subsidiary, under AirGate's debt agreements
AirGate is generally unable to provide capital or other financial support to
iPCS. Further, iPCS lenders, noteholders and creditors do not have a lien on or
encumbrance on assets of AirGate. We believe AirGate operations will continue
independent of the outcome of the iPCS restructuring. However, it is likely that
AirGate's ownership interest in iPCS will have no value after the restructuring
is complete.
The carrying value of iPCS' long-lived assets in these consolidated financial
statements (principally property and equipment, goodwill and intangible assets)
was written down during the year ended September 30, 2002 to reflect impairment
charges as required by Statement of Financial Accounting Standards ("SFAS") No.
144 and SFAS No. 142.
While the ultimate and long-term affect on AirGate of iPCS' proposed bankruptcy
proceedings cannot be determined, management believes that AirGate and its
restricted subsidiaries will continue to operate and that iPCS' bankruptcy
proceedings, and related outcomes, will not have a material adverse effect on
the liquidity of AirGate.
In addition to its capital needs to fund operating losses, the Company has
invested large amounts to build-out its networks and for other capital assets.
For the quarter ended December 31, 2002 and the three years ended September 30,
2002, the Company invested $14.1 million and $320.7 million respectively to
purchase property and equipment. While much of the Company's networks are now
complete, and capital expenditures are expected to decrease significantly in the
future, such expenditures will continue to be necessary.
AirGate had only $12 million remaining available under the AirGate credit
facility as of December 31, 2002. AirGate currently has no additional sources of
working capital other than EBITDA. 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 if it is unable to maintain or comply with the restrictive 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 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. Such a
restriction or termination 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:
o 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;
o the elimination of certain personnel positions;
o a significant reduction in capital expenditures; and
o a reduction in spending for advertising and promotions.
In addition to these steps, AirGate is initiating or investigating a number of
other actions that could further reduce operating expenses and capital needs.
These include additional reductions in staff; the outsourcing of certain
functions now performed by AirGate; further deferrals or reductions in capital
spending and seeking ways to lower fees and charges from services now provided
by Sprint. 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 the end of calendar year 2003.
The following reflects condensed balance sheet information and statement of
operations information of AirGate and its unrestricted subsidiary, iPCS,
separately identifying the investment in iPCS including the effects of purchase
accounting as of December 31, 2002 and September 30, 2002 and the historical
equity basis loss of iPCS, the related effects of purchase accounting, and
income tax benefit for the quarters ended December 31, 2002 and 2001.
As of
December 31, 2002 September 30, 2002
Condensed Balance Sheet Information:
Cash and cash equivalents.................................. $ 944 $ 4,887
Other current assets....................................... 63,650 62,819
------- -------
Total current assets............................... 64,594 67,706
Property and equipment, net................................ 203,644 213,777
Investment in iPCS ........................................ (169,789) (141,543)
Other noncurrent assets.................................... 14,226 13,732
--------- ---------
$ 112,675 $ 153,672
========= =========
Current liabilities........................................ $ 76,036 $ 82,175
Long-term debt............................................. 366,728 354,264
Other long-term liabilities................................ 10,356 10,180
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Total liabilities.................................... 453,120 446,619
Stockholders' deficit...................................... (340,445) (292,947)
--------- ----------
$ 112,675 $ 153,672
========= =========
For the Three Months Ended
December 31, 2002 December 31, 2001
Condensed Statement of Operations Information:
Revenues................................................... $ 81,865 $ 67,671
Costs of revenues.......................................... (58,278) (53,243)
Selling and marketing expenses............................. (16,798) (25,089)
General and administrative expenses........................ (4,077) (3,976)
Depreciation and amortization.............................. (11,619) (9,023)
Other expense, net (principally interest).................. (10,521) (8,935)
---------- ----------
Total expenses....................................... (101,293) (100,266)
---------- ----------
Loss before equity in loss of iPCS and effects of purchase
accounting, and income tax benefit..................... (19,428) (32,595)
Historical equity basis loss of iPCS....................... (25,763) (10,319)
Effects of purchase accounting............................. (2,483) (4,089)
Income tax benefit......................................... -- 17,359
----------- -----------
Net loss................................................... $ (47,674) $ (29,644)
=========== ==========
(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 41,790 for the quarter ended December 31,
2002 and 704,876 for the quarter ended December 31, 2001 have been excluded from
the computation of dilutive net loss per share for the periods presented because
their effect would have been antidilutive.
(2) New Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation from the intrinsic value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." As allowed by SFAS No. 123,
the Company has elected to continue to apply the intrinsic value-based method of
accounting, and has adopted the disclosure requirements of SFAS No. 123. The
Company currently does not anticipate adopting the provisions of SFAS No. 148.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (the "Interpretation"),
which addresses the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. The
Interpretation also requires the recognition of a liability by a guarantor at
the inception of certain guarantees.
The Interpretation 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 consolidated operating
lease disclosure commitment footnote included in the Company's Form 10-K/A.
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 sends the
handset to Sprint for repair. Sprint provides a credit to the Company equal to
the price of the refurbished handset, which is generally what is returned to the
customer. The Company will apply the recognition and measurement provisions for
all guarantees and warranties entered into or modified after December 31, 2002.
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 adoption of SFAS No. 146 by the
Company on October 1, 2002 is not expected to have a material impact on the
Company's financial position, results of operations, or cash flows as the
Company has not recorded any significant restructurings in the past periods, but
the adoption may impact the timing of charges in future periods. As discussed in
Note 6, during the three months ended December 31, 2002 the Company recorded
$0.7 million 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. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 by the Company on October 1, 2002 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 provides 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 quarters ended December 31,
2002 and 2001 are as follows (dollars in thousands):
For the Three Months
Ended December 31,
2002 2001
Amounts included in the Consolidated Statement of Operations:
AirGate roaming revenue............................................... $ 17,829 $ 16,209
AirGate cost of service and roaming:
Roaming.......................................................... $ 14,685 $ 13,157
Customer service................................................. 11,303 7,455
Affiliation fee.................................................. 4,836 3,386
Long distance.................................................... 2,785 3,310
Other............................................................ 494 498
---------- ---------
AirGate cost of service and roaming:.................................. $ 34,103 $ 27,806
AirGate purchased inventory........................................... $ 5,650 $ 6,647
AirGate selling and marketing......................................... $ 3,101 $ 8,337
iPCS roaming revenue.................................................. $ 10,663 $ 4,540
iPCS cost of service and roaming
Roaming.......................................................... $ 8,362 $ 3,647
Customer service................................................. 7,526 1,290
Affiliation fee.................................................. 3,106 717
Long distance.................................................... 2,150 898
Other............................................................ 1,696 100
---------- ----------
iPCS cost of service and roaming...................................... $ 22,840 $ 6,652
iPCS purchased inventory.............................................. $ 6,175 $ 2,297
iPCS selling and marketing............................................ $ 3,014 $ 3,534
Amounts included in the Consolidated Balance Sheet:
As of
December 31, September 30,
2002 2002
--------- ---------
Receivable from Sprint $ 42,334 $ 44,953
Payable to Sprint (82,011) (88,360)
Because approximately 96% 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 open and outstanding from time to time. These include, but are
not limited to, the following items, all of which for accounting purposes have
been reserved or otherwise provided for:
o Sprint PCS sought to recoup $4.9 million in long-distance access revenues
previously paid by Sprint PCS to the Company, of which $3.9 million related
to AirGate and $1.0 million related to iPCS. We have disputed these amounts
(see Note 5).
o Sprint charged the Company approximately $1.2 million with respect to
calendar year 2002 to reimburse Sprint for certain 3G related development
expenses. We have disputed Sprint's right to collect these fees.
o In connection with the review of accounts receivable at September 30, 2002,
the Company reclassified approximately $10.0 million of subscriber accounts
receivable allowance for the fiscal year ended September 30, 2002 to a
receivable from Sprint. We believe at least $10.0 million is payable from
Sprint, but Sprint has acknowledged and paid only $5.1 million.
o We continue to discuss with Sprint whether we owe software maintenance fees
to Sprint of approximately $3.0 million, of which $1.6 million relates to
AirGate and $1.4 million relates to iPCS through December 31, 2002.
o Sprint asserted that iPCS owed $2.2 million in various fees, charges and
revenue adjustments, which iPCS disputed. Sprint set-off $1.8 million with
respect to these charges against other amounts owed to iPCS in the quarter
ended December 31, 2002.
In addition, 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 costs 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 than the amounts paid by Sprint's network
partners, Sprint will debit the network partners for these amounts. Sprint
notified us that a credit would be issued to the Company in a net amount of $2.0
million ($1.3 million for AirGate and $0.7 million for iPCS). This amount has
been recorded as of December 31, 2002 as a reduction to the consolidated balance
for Receivable from Sprint and a reduction of operating loss.
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 December 31,
2002.
(4) Intangible Assets
The following table reflects the components of intangible assets at December 31,
2002:
Gross Net
Amortization Carrying Accumulated Carrying
Period Amount Amortization Amount
------------- ------------ ---------------- ------------
Non-compete agreements, AirGate store 24 months $ 159 $ (146) $ 13
acquisitions
Acquired subscriber base 30 months 45,760 (21,710) 24,050
-------- ---------- --------
Total $ 45,919 $ (21,856) $ 24,063
======== ========== ========
(5) Litigation
On July 3, 2002 the Federal Communications Commission (the "FCC") issued an
order in Sprint PCS v. AT&T for declaratory judgment holding that PCS wireless
carriers could not unilaterally impose terminating long distance access charges
pursuant to FCC rules. This FCC order did not preclude a finding of a
contractual basis for these charges, nor did it rule whether or not Sprint PCS
had such a contract with carriers such as AT&T. AirGate and iPCS have previously
received $3.9 and $1.0 million, respectively, from Sprint PCS. This is comprised
of $4.3 and $1.1 million, respectively, of terminating long distance access
revenues, less $0.4 and $0.1 million, respectively, of associated affiliation
fees held by Sprint PCS, and Sprint PCS has asserted its right to recover these
revenues net of the affiliation fees. As a result of this ruling, and our
assessment of this contingency under SFAS No. 5, "Accounting for Contingencies,"
the Company recorded a charge to revenues during the quarter ended June 30, 2002
to accrue for these amounts. However, we have not paid such amounts and have
disputed the ability of Sprint PCS to recover these revenues.
In May 2002, putative class action complaints were filed in the United States
District Court for the Northern District of Georgia against AirGate PCS, Inc.,
Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit Suisse
First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company, Thomas
Wiesel Partners LLC and TD Securities. The complaints do not specify an amount
or range of damages that the plaintiffs are seeking. The complaints seek class
certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former iPCS shareholders on
December 18, 2001 contained materially false and misleading statements and
omitted material information necessary to make the statements in the prospectus
not false and misleading. The alleged omissions included (i) failure to disclose
that in order to complete an effective integration of iPCS, drastic changes
would have to be made to the Company's distribution channels, (ii) failure to
disclose that the sales force in the acquired iPCS markets would require
extensive restructuring and (iii) failure to disclose that the "churn" or
"turnover" rate for subscribers would increase as a result of an increase in the
amount of sub-prime credit quality subscribers the Company added from its merger
with iPCS. On July 15, 2002, certain plaintiffs and their counsel filed a motion
seeking appointment as lead plaintiffs and lead counsel. On November 26, 2002,
the Court entered an Order requiring the Plaintiffs to provide additional
information in connection with their Motion for Appointment as Lead Plaintiff
and in December 2002, Plaintiffs submitted Declarations in Support of Motion for
Appointment of Lead Plaintiff. The Company believes the plaintiffs' claims are
without merit and intends to vigorously defend against these claims. However, no
assurance can be given as to the outcome of the litigation.
(6) Staff Reduction and Retail Store Closings
As discussed in Note 1, the Company has initiated a number of actions in an
attempt to lower its operating costs and capital needs. During the quarter ended
December 31, 2002 the Company decided to reduce its workforce and to close a
number of retail stores. Collectively, these actions, which took place in the
quarter ended December 31, 2002 and are expected to continue in the quarter that
will end on March 31, 2003, are referred to as the 2003 Plan.
During the quarter ended December 31, 2002, AirGate costs associated with
termination benefits and contract terminations were $0.5 million and $0.04
million, respectively, and were associated principally with involuntary employee
terminations and store closures. In the quarter that will end March 31, 2003,
AirGate expects additional termination benefits and contract terminations to be
at least $.05 million and $0.1 million, respectively. These charges are expected
to result from additional involuntary employee terminations and store closures.
Further charges may be necessary as AirGate services are terminated under the
services agreement with iPCS as described in Note 8.
During the quarter ended December 31, 2002, iPCS costs associated with
termination benefits were $0.1 million and were associated principally with
involuntary employee terminations. In the quarter that will end March 31, 2003,
iPCS expects additional termination benefits and contract terminations to be at
least $0.5 million and $0.7 million respectively. These charges are expected to
result from additional involuntary employee terminations and store closures (See
Note 10).
A summary of the aforementioned costs is as follows:
Contract
Termination Termination
Benefits Costs Total
-------------- -------------- -----------
Liability at October 1, 2002 $ 0 $ 0 $ 0
Total charges 610 43 653
Cash paid 379 0 379
Liability at December 31, 2002 231 43 274
The Company determined the above costs in accordance with SFAS No. 146,
"Accounting for Cost Associated with Exit or Disposal Activities."
There were no asset impairment charges associated with the 2003 Plan. However,
during the fiscal year ended September 30, 2002, the Company reported impairment
charges for iPCS' assets of $460.9 million for goodwill, $44.4 million for
property and equipment, and $312.1 million for intangible assets.
(7) Income Taxes
The Company recorded an income tax benefit of $17.4 million during the quarter
ended December 31, 2001. No such amounts were recorded in the quarter ended
December 31, 2002, nor will amounts be recognized in the future unless
management believes the recoverability of deferred tax assets is more likely
than not.
(8) 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 176
employees at December 31, 2002. Generally, the management personnel include the
corporate staff in the Company's principal corporate offices in Atlanta and the
accounting staff in Geneseo, Illinois. ServiceCo expenses are allocated between
AirGate and iPCS based on the percentage of subscribers they contribute to the
total number of Company subscribers (the "ServiceCo Allocation"), which is
currently 60% AirGate and 40% iPCS. Expenses that are related to one company are
allocated to that company. Expenses that are related to ServiceCo or both
companies are allocated in accordance with the ServiceCo Allocation. For the
quarter ended December 31, 2002, iPCS recorded a net total of $1.0 million for
ServiceCo expenses.
To facilitate the orderly transition of management services, the boards of
AirGate and iPCS have authorized an amendment to the Services Agreement that
would allow individual services to be terminated by either party upon prior
notice. This amendment requires the consent of each of the administrative agents
for the AirGate and iPCS credit facilities and a request for these consents has
been made. This could result in a significant change in the allocation of
expense to AirGate and iPCS.
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.
(9) 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. ("Service Co") is a wholly-owned restricted
subsidiary of AirGate. Service Co has fully and unconditionally guaranteed the
AirGate notes and the AirGate credit facility. Service Co was formed to provide
management services to AirGate and iPCS.
iPCS is a wholly-owned unrestricted subsidiary of AirGate and operates as a
separate business. As an unrestricted subsidiary, iPCS provides no guarantee to
either the AirGate notes or the AirGate credit facility and AirGate and its
restricted subsidiaries provide no guarantee to the iPCS notes or the iPCS
credit facility.
Unaudited Condensed Balance Sheets of AirGate and iPCS
As of December 31, 2002
iPCS
AirGate Non-
AirGate PCS, Guarantor AirGate Guarantor AirGate
Inc. Subsidiaries Eliminations Consolidated(1) Subsidiary Eliminations Consolidated
------------- -------------- ------------- --------------- ------------- ------------- ------------
Cash and cash
equivalents............ $ 954 $ (10) $ -- $ 944 $ 2,066 $ -- $ 3,010
Other current assets.... 124,078 529 (60,957) 63,650 33,924 (315) 97,259
------------- ------------ -------------- ------------ ------------- --------- ------------
Total current assets.... $ 125,032 519 (60,957) 64,594 35,990 (315) 100,269
Property and equipment,
net................... 159,941 43,703 -- 203,644 180,076 -- 383,720
Intangible assets, net.. (1,457) -- -- (1,457) 25,520 -- 24,063
Investment in
subsidiaries.......... (217,631) -- 92,656 (124,975) -- 124,975 --
Other noncurrent assets. 5,705 -- -- 5,705 11,872 -- 17,577
--------------- ------------- -------------- --------------- ------------- ----------- -----------
Total assets............ $ 71,590 $ 44,222 $ 31,699 $ 147,511 $ 253,458 $124,660 $ 525,629
=============== ============= ============== =============== ============== ============ ===========
Current liabilities..... 43,201 136,878 (60,957) 119,122 361,211 (315) 480,018
Long-term debt.......... 366,728 -- -- 366,728 563 -- 367,291
Other long-term 2,106 -- -- 2,106 16,659 -- 18,765
liabilities...........
-------------- -------------- ------------- --------------- --------------- ------------- -----------
Total liabilities....... $ 412,035 $136,878 $(60,957) $ 487,956 $ 378,433 $ (315) $ 866,074
-------------- ------------- -------------- --------------- --------------- ------------- -----------
Stockholders' equity.... (340,445) (92,656) 92,656 (340,445) (124,975) 124,975 (340,445)
-------------- -------------- ------------- --------------- --------------- ------------- ------------
Total liabilities and
stockholders' equity
(deficit)............ $ 71,590 $ 44,222 $ 31,699 $ 147,511 $ 253,458 $124,660 $ 525,629
============================== ============ =============== ============== ============ ============
Unaudited Condensed Consolidating Balance Sheet of AirGate and iPCS
As of September 30, 2002
AirGate
Guarantor iPCS
AirGate PCS, Subsidiaries Eliminations AirGate(1) Non-Guarantor AirGate
Inc. Consolidated 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
Investment in
subsidiaries.......... (183,718) -- 84,506 (99,212) 99,212 --
Other noncurrent assets. 4,924 -- -- 4,924 12,115 -- 17,039
-------------- ---------------- ------------ ------------ --------------- -------------- --------------
Total assets............ $ 118,435 $ 46,261 $ 23,927 $188,623 $ 287,573 $ 98,098 $ 574,294
============== ================ ============ ============ =============== ============== ==============
Current liabilities..... $ 55,535 $ 60,579 $(60,579) $125,723 $ 369,564 $ (1,114) $ 494,173
Long-term debt.......... 354,264 -- -- 354,264 564 -- 354,828
Other long-term
liabilities........... 1,583 -- -- 1,583 16,657 -- 18,240
-------------- ---------------- ------------ ------------ --------------- -------------- ---------------
Total liabilities....... 411,382 60,579 (60,579) 481,570 386,785 (1,114) 867,241
-------------- ---------------- ------------ ------------ --------------- -------------- ---------------
Stockholders' equity.... (292,947) (14,318) 84,506 (292,947) (99,212) 99,212 (292,947)
-------------- ---------------- ----------- ------------- --------------- -------------- ---------------
Total liabilities and
stockholders' equity
(deficit)............. $ 118,435 $ 46,261 $ 23,927 $188,623 $ 287,573 $ 98,098 $ 574,294
============== ================ =========== ============= =============== ============== ===============
(1) Amounts in the column for AirGate consolidated include the effects of
purchase accounting related to the iPCS acquisition. Balance sheet information
includes $43 million of debt and $1 million of net liabilities as of December
31, 2002, and $44 million of debt and $1 million of net assets as of September
30, 2002. The net loss of AirGate includes $2.5 million and $4.1 million of
expenses related to the effects of purchase accounting for iPCS for the quarters
ended December 31, 2002 and 2001, respectively. The quarter ended December 31,
2001 include a tax benefit of $17.4 million related to the iPCS acquisition.
Unaudited Condensed Statement of Operations of AirGate and iPCS
For the Three Months Ended December 31, 2002
AirGate AirGate iPCS
Guarantor Consolidated Non-
AirGate PCS, Subsidiaries Eliminations Guarantor AirGate
Inc. Subsidiary Consolidated
Eliminations
------------- --------------- ------------- ------------- --------------- --------------- --------------
Total revenues.......... $ 81,865 $ -- $ -- $ 81,865 $ 51,534 $ (298) $ 133,101
------ ------- -------- ----------- ----------- --------- -----------
Cost of revenues......... (53,945) (4,333) -- (58,278) (42,153) 298 (100,133)
Selling and marketing.... (16,040) (758) -- (16,798) (12,105) -- (28,903)
General and administrative. (3,347) (730) -- (4,077) (3,331) -- (7,408)
Depreciation and
amortization............ (12,041) (2,443) -- (14,484) (10,406) -- (24,890)
Other, net................ (10,253) 114 -- (10,139) (9,302) -- (19,441)
------------ ---------------- ------------- ------------- --------------- -------------- ---------------
Total expenses............ (95,626) (8,150) -- (103,776) (77,297) 298 (180,775)
Loss in subsidiaries...... (33,913) -- 8,150 (25,763) 25,763
-- --
Loss before income tax
benefit................. (47,674) (8,150) 8,150 (47,674) (25,763) 25,763 (47,674)
Income tax benefit........ -- -- -- -- -- -- --
------------ --------------- -------------- ------------- --------------- -------------- ---------------
Net loss.................. $ (47,674) $ (8,150) $8,150 $ (47,674) $ (25,763) $ 25,763 $ (47,674)
============================ ============== ============= =============== ============== ===============
Unaudited Condensed Consolidating Statement of Operations of AirGate and iPCS
For the Three Months Ended December 31, 2001
AirGate AirGate iPCS
Guarantor Consolidated Non-
AirGate PCS, Subsidiaries Eliminations Guarantor AirGate
Inc. Subsidiary Consolidated
Eliminations
------------- --------------- ------------- ------------- --------------- --------------- --------------
Total revenues.......... $ 67,671 $ -- $ -- $ 67,671 $ 14,026 $ -- $ 81,697
------------- --------------- ------------- ------------- --------------- --------------- --------------
Cost of revenues........ (49,498) (3,745) -- (53,243) (14,097) -- (67,340)
Selling and marketing... (24,621) (468) -- (25,089) (4,756) -- (29,845)
General and --
administrative........ (3,677) (299) (3,976) (1,224) -- (5,200)
Depreciation and
amortization.......... (11,941) (1,541) -- (13,482) (2,323) -- (15,805)
Other, net.............. (8,565) -- -- (8,565) (1,945) -- (10,510)
------------ --------------- -------------- ------------ --------------- -------------- --------------
Total expenses.......... (98,302) (6,053) -- (104,355) (24,345) -- (128,700)
Loss in subsidiaries...... (16,372) -- 6,053 (10,319) -- 10,319 --
Loss before income tax
benefit............... (47,003) (6,053) 6,053 (47,003) (10,319) 10,319 (47,003)
Income tax benefit...... 17,359 -- -- 17,359 -- -- 17,359
---------------- -------------- ------------ ----------- --------------- --------------- -------------
Net loss................ $ (29,644) $ (6,053) $ 6,053 $(29,644) $ (10,319) $10,319 $ (29,644)
================ ============== ============ =========== =============== =============== =============
Unaudited Condensed Statement of Cash Flow of AirGate and iPCS
For the Three Months Ended December 31, 2002
AirGate AirGate iPCS
Guarantor Consolidated Non-
AirGate PCS, Subsidiaries Eliminations Guarantor AirGate
Inc. Subsidiary Consolidated
Eliminations
------------- --------------- ------------- ------------- --------------- --------------- --------------
Operating activities,
net................... $ (2,683) $ (128) $ -- $ (2,811) $ (17,098) $ -- $ (19,909)
Investing activities,
net.................. (5,626) -- -- (5,626) (8,424) (14,050)
Financing activities,
net.................. 4,494 -- -- 4,494 -- 4,494
------------- ---------------- ------------ ------------- --------------- --------------- --------------
Decrease in cash and
cash equivalent...... $ (3,815) $ (128) $ -- $ (3,943) $ (25,522) $ -- $ (29,465)
Cash at beginning of
period............... 4,769 118 -- 4,887 27,588 -- 32,475
---------------- ------------- ----------- ------------ ---------------- ---------------- --------------
Cash at end of period... 954 (10) -- 944 2,066 -- 3,010
================ ============= =========== ============ ================ ================ ==============
Unaudited Condensed Consolidating Statement of Cash Flows
For the Three Months Ended December 31, 2001
AirGate AirGate iPCS
Guarantor Consolidated Non-
AirGate PCS, Subsidiaries Eliminations Guarantor AirGate
Inc. Subsidiary Consolidated
Eliminations
------------- --------------- ------------- ------------- --------------- --------------- --------------
Operating activities, $ (21,736) $ 1,193 $ -- $ (20,543) $ (10,578) $ -- $ (31,121)
net...................
Investing activities,
net................... 16,335 (1,061) -- 15,274 (3,879) -- 11,395
Financing activities,
net................... 30,585 -- -- 30,585 -- -- 30,585
------------- ---------------- ------------ ------------- --------------- --------------- --------------
Increase in cash and
cash equivalent....... 25,184 132 -- 25,316 (14,457) -- 10,859
Cash at beginning of
period................ 14,447 (157) -- 14,290 24,401 (24,401) 14,290
---------------- ------------- ------------ ------------- -------------- ---------------- --------------
Cash at end of period... $ 39,631 $ (25) $ -- $ 39,606 $ 9,944 $ (24,401) $ 25,149
================ ============= ============ ============= ============== ================ ==============
(10) Subsequent Events
iPCS
iPCS has continued to work with its lenders and noteholders on a restructuring
and in connection with these efforts appointed Timothy M. Yager as the Chief
Restructuring Officer of iPCS. Mr. Yager will be responsible for leading
continued restructuring efforts and managing the day-to-day affairs of iPCS. Mr.
Yager was the president and chief executive officers of iPCS prior to its
acquisition by AirGate and was formerly a director of AirGate.
Since December 31, 2002, iPCS has (i) closed 16 retail locations and 6
administrative offices, reducing the number of retail locations from 27 to 11;
(ii) reconfigured support for national third party and local distributors,
reducing the total number of employees supporting these channels and (iii)
reduced support for the business-to-business channel. These actions resulted in
the termination of approximately 160 employees. Charges associated with these
actions are expected to be at least $1.2 million. Furthermore, additional
charges for iPCS are expected as iPCS restructures its business.
To facilitate the orderly transition of management services, the boards of
AirGate and iPCS have authorized an amendment to the Services Agreement that
would allow individual services to be terminated by either party upon 60 days
prior notice. This amendment requires the consent of each of the administrative
agents for the AirGate and iPCS credit facilities, and a request for these
consents has been made. This could result in a significant change in the
allocation of expense to AirGate and iPCS.
On January 23, 2003, Sprint set-off against required weekly payments of
collected revenues to iPCS $1.8 million in unrelated disputed fees and charges.
Due to its liquidity issues, iPCS has delayed payments to many of its vendors,
including Sprint. iPCS has delayed payments to Sprint of approximately $6.0
million.
On January 30, 2003, iPCS ceased paying interest on the iPCS credit facility. As
a result, the lenders under the iPCS credit facility are entitled to accelerate
payments due under the iPCS credit facility. The failure to pay interest on the
iPCS credit facility is also a default under the iPCS notes. iPCS has entered
into a forbearance agreement with its senior lenders under the terms of which
the senior lenders have agreed not to exercise their rights under the iPCS
credit facility, including the right to accelerate, until the earlier of (i)
March 15, 2003, (ii) a subsequent default by iPCS or (iii) the election of the
administrative agent after written notice to iPCS. Based on continuing
discussions with an ad hoc committee holding in excess of 50% of the iPCS notes,
iPCS expects to enter into a forbearance agreement with such committee shortly.
AirGate
On February 10, 2003, the Board of Directors approved new forms of severance
agreements for each of our executive officers. These agreements provide two
levels of severance benefits based upon whether the termination occurs in
connection with a change of control or not. If the executive terminates
employment for good reason or is terminated by the Company other than for cause
or disability, as such terms are defined in the agreements, in connection with a
change of control or for two years following a change of control, the Company
will pay the executive his or her unpaid base salary through the date of
termination, a pro rata payment of the executive's target bonus for the year in
which the termination occurs, any compensation previously deferred by the
executive and any accrued vacation pay. In addition, the Company will make a
severance payment to the executive equal to two times his or her annual base
salary and bonus at target, or 2.5 times in the case of the Chief Executive
Officer. The Company will also continue benefits for the executive for a period
after termination and provide limited outplacement services for a period of six
months to one year.
If the executive terminates employment for good reason or is terminated by the
Company other than for cause or disability and such termination is not in
connection with a change of control or within two years following a change of
control, the Company will pay the executive his or her unpaid base salary
through the date of termination, any compensation previously deferred by the
executive and any accrued vacation pay. In addition, the Company will make a
severance payment to the executive equal to six months annual base salary, plus
one month for each year of service. The Company will also continue benefits for
the executive for a period after termination and provide limited outplacement
services for the severance period.
The agreements provide that in consideration of the payments and promises in the
agreement, the executive releases the Company from all claims, liabilities,
contracts, contractual obligations, attorney's fees, demands and causes of
action, whether known or unknown, fixed or contingent. In addition, the
executive agrees not to directly or indirectly (1) perform services for a
competitor of the Company in our territory, (2) solicit our employees to
terminate their employment with us or solicit certain of our customers to
purchase competing products or (3) disclose or use the Company's confidential
information and trade secrets, for a period of from 6 months to two years after
termination of employment.
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, CPGA and CCPU (all as defined in the Key Operating Metrics),
roaming rates, EBITDA (as defined in the Key Operating Metrics), and capital
expenditures. Words such as "anticipate," "assume," "believe," "estimate,"
"expect," "intend," "plan," "seek", "project," "target," "goal," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual future events or results may differ materially from
these statements. These risks and uncertainties include:
o the impact of an iPCS insolvency;
o the competitiveness and impact of Sprint's pricing plans and PCS products
and services;
o subscriber credit quality;
o the potential to experience a continued high rate of subscriber turnover;
o the ability of Sprint to provide back office billing, subscriber care
and other services and the quality and costs of such services;
o inaccuracies in data provided by Sprint;
o new charges and fees, or increased charges and fees, charged by Sprint;
o rates of penetration in the wireless industry;
o our significant level of indebtedness;
o adequacy of bad debt and other allowances;
o the potential need for additional sources of liquidity;
o anticipated future losses;
o subscriber purchasing patterns;
o potential fluctuations in quarterly results;
o an adequate supply of subscriber equipment;
o risks related to future growth and expansion; and
o the volatility of the market price of AirGate's common stock.
These and other applicable risks and uncertainties are summarized under the
captions "Future Trends That May Affect Operating Results, Liquidity and Capital
Resources" included in this "Item 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. Additionally, iPCS
served 149,119 subscribers as of November 30, 2001. At December 31, 2002,
AirGate and iPCS provided Sprint PCS services to 352,809 and 236,628
subscribers, respectively. At December 31, 2002, AirGate had total network
coverage of approximately 5.9 million residents and iPCS had total network
coverage of approximately 5.6 million residents, of the 7.1 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 entitled to buy network equipment and
subscriber handsets at the same discounted rates offered by vendors to Sprint
based on its large volume purchases. In exchange for these and other benefits,
AirGate and iPCS each pay an affiliation fee of 8% of collected revenues to
Sprint. We are entitled to 100% of revenues collected from the sale of handsets
and accessories and on roaming revenues received when customers of Sprint and
Sprint's other network partners make a wireless call on our PCS network.
iPCS is a wholly-owned, unrestricted subsidiary of AirGate. As required by the
terms of AirGate's and iPCS' respective outstanding indebtedness, each of
AirGate and iPCS conducts its business as a separate corporate entity from the
other. AirGate's notes require subsidiaries of AirGate to be classified as
either "restricted subsidiaries" or "unrestricted subsidiaries". A restricted
subsidiary is defined generally as any subsidiary that is not an unrestricted
subsidiary. An unrestricted subsidiary includes any subsidiary which:
o has been designated an unrestricted subsidiary by the AirGate board of
directors,
o has no indebtedness which provides recourse to AirGate or any of its
restricted subsidiaries,
o is not party to any agreement with AirGate or any of its restricted
subsidiaries, unless the terms of the agreement are no less favorable to
AirGate or such restricted subsidiary than those that might be obtained
from persons unaffiliated with AirGate,
o is a subsidiary with respect to which neither AirGate nor any of its
restricted subsidiaries has any obligation to subscribe for additional
equity interests, maintain or preserve such subsidiary's financial
condition or cause such subsidiary to achieve certain operating results,
o has not guaranteed or otherwise provided credit support for any
indebtedness of AirGate or any of its restricted subsidiaries, and
o has at least one director and one executive officer that are not directors
or executive officers of AirGate or any of its restricted subsidiaries.
AirGate's notes impose certain affirmative and restrictive covenants on AirGate
and its restricted subsidiaries and also include as events of default certain
events, circumstances or conditions involving AirGate or its restricted
subsidiaries. Because iPCS is an unrestricted subsidiary, the covenants and
events of default under AirGate's notes do not 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 three months ended December
31 was as follows:
Provision for Doubtful Accounts Combined
As % of Service Revenue AirGate iPCS Company
----------------------- ------- ---- -------
2002 3.7% 2.6% 3.3%
2001 11.9% 13.0% 12.1%
The allowance for doubtful accounts as of December 31, 2002 and September 30,
2002 was $11.5 million and $11.3 million, respectively. At December 31, 2002,
$6.8 million and $4.7 million was attributable to AirGate and iPCS,
respectively. If the allowance for doubtful accounts is not adequate, it could
have a material adverse affect on our liquidity, financial position and results
of operations.
The Company also reviews current trends in the credit quality of its subscriber
base and periodically changes its credit policies. As of December 31, 2002, 34%
of the combined Company's, 34% of AirGate's and 35% of iPCS' 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. As
described in our Annual Report on Form 10-K/A, the deposit was waived in the
iPCS markets during certain times in 2002. The Clear Pay II program and its
deposit requirements are currently in effect in most of AirGate's and iPCS'
markets, which reinstates a deposit requirement of $125 for most sub-prime
credit subscribers. In early February 2003, management began implementing a
higher deposit threshold of $250 for all sub-prime customers in our markets.
Reserve for First Payment Default Subscribers, Late Payment Fees and Early
Cancellation Fees
The Company reserves a portion of its new subscribers and provides a reduction
in revenues from those subscribers that it anticipates will never pay a bill.
Using historical information of the percentage of subscribers whose service was
cancelled for non-payment without ever making a payment, the Company estimates
the number of new subscribers activated in the current period that will never
pay a bill. For these subscribers, the Company provides a reduction of revenue
and removes them from subscriber additions and churn. As a result, these
subscribers are not included in the churn statistics or subscriber count. The
Company records reserves for late payment fees and early cancellation fees based
on information about historical collection rates. The Company records the
reserves for late payment fees and early cancellation fees as reductions of
revenue.
Revenue Recognition
The Company recognizes revenues when persuasive evidence of an arrangement
exists, services have been rendered or products have been delivered, the price
to the buyer is fixed and determinable, and collectibility is reasonably
assured. The Company's revenue recognition polices are consistent with the
guidance in Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" promulgated by the Securities and Exchange Commission.
The Company records equipment revenue from the sale of handsets and accessories
to subscribers in its retail stores and to local distributors in its territories
upon delivery. The Company does not record equipment revenue on handsets and
accessories purchased from national third-party retailers such as Radio Shack,
Best Buy and Circuit City, or directly from Sprint by subscribers in its
territories. The Company believes the equipment revenue and related cost of
equipment associated with the sale of wireless handsets and accessories is a
separate earnings process from the sale of wireless services to subscribers. For
industry competitive reasons, the Company sells wireless handsets at a loss.
Because such arrangements do not require a customer to subscribe to the
Company's wireless services and because the Company sells wireless handsets to
existing customers at a loss, the Company accounts for these transactions
separately from agreements to provide customers wireless service.
The Company's subscribers pay an activation fee to the Company when they
initiate service. The Company defers activation fee revenue over the average
life of its subscribers, which is estimated to be 30 months. The Company
recognizes service revenue from its subscribers as they use the service. The
Company provides a reduction of recorded revenue for billing adjustments, first
payment default customers, late payment fees, and early cancellation fees. The
Company also reduces recorded revenue for rebates and discounts given to
subscribers on wireless handset sales in accordance with Emerging Issues Task
Force ("EITF") Issue No. 01-9 "Accounting for Consideration Given by a Vendor to
a Subscriber (Including a Reseller of the Vendor's Products)." The Company
participates in the Sprint national and regional distribution programs in which
national retailers such as Radio Shack, Best Buy and Circuit City sell Sprint
PCS products and services. In order to facilitate the sale of Sprint PCS
products and services, national retailers purchase wireless handsets from Sprint
for resale and receive compensation from Sprint for Sprint PCS products and
services sold. For industry competitive reasons, Sprint subsidizes the price of
these handsets by selling the handsets at a price below cost. Under the
Company's Sprint agreements, when a national retailer sells a handset purchased
from Sprint to a subscriber in the Company's territories, the Company is
obligated to reimburse Sprint for the handset subsidy. The Company does not
receive any revenues from the sale of handsets and accessories by national
retailers. The Company classifies these handset subsidy charges as a selling and
marketing expense for a new subscriber handset sale and classifies these
subsidies as a cost of service and roaming for a handset upgrade to an existing
subscriber.
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 significant changes occurred since year end and thus
no additional write-offs have been made. Management will continue to monitor any
triggering events and perform re-evaluations, as necessary.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation from the intrinsic value-based
method of accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." As allowed by SFAS No. 123,
the Company has elected to continue to apply the intrinsic value-based method of
accounting, and has adopted the disclosure requirements of SFAS No. 123. The
Company currently does not anticipate adopting the provisions of SFAS No. 148.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (the "Interpretation"),
which addresses the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. The
Interpretation also requires the recognition of a liability by a guarantor at
the inception of certain guarantees.
The Interpretation 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 consolidated operating
lease disclosure commitment footnoted included in the Company's Form 10-K/A.
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 sends the
handset to Sprint for repair. Sprint provides a credit to the Company equal to
the price of the refurbished handset, which is generally what is returned to the
customer. The Company will apply the recognition and measurement provisions for
all guarantees and warranties entered into or modified after December 31, 2002.
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 adoption of SFAS No. 146 by the
Company on October 1, 2002 is not expected to have a material impact on the
Company's financial position, results of operations, or cash flows as the
Company has not recorded any significant restructurings in the past periods, but
the adoption may impact the timing of charges in future periods. As discussed in
Note 6, during the quarter ended December 31, 2002 the Company recorded $0.7
million of costs related to staff reductions and retail location 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. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 by the Company on October 1, 2002 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 and therefore iPCS' results
of operation for the quarter ended December 31, 2001 only include one month's
results.
Key Operating Metrics Defined
Terms such as subscriber net additions, average revenue per user, churn, cost
per gross addition and cash cost per user are important operating metrics used
in the wireless telecommunications industry. Terms such as EBITDA are financial
measures used by many companies. None of these terms, including EBITDA, are
measures of financial performance under accounting principles generally accepted
in the United States ("GAAP"). The Company believes that EBITDA serves as an
important financial analysis tool for measuring and comparing financial
information such as liquidity, operating performance and leverage. EBITDA should
not, however, be considered an alternative to, or more meaningful than, net
income, cash flow or operating loss as determined in accordance with GAAP.
EBITDA and these other terms as used by the Company may not be comparable to a
similarly titled measure of another company. We have included below a
reconciliation of EBITDA to operating loss.
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, which is net of an adjustment for first
payment default subscribers.
"Churn" is the monthly rate of subscriber turnover that both voluntarily and
involuntarily discontinued service during the month, expressed as a percentage
of the total subscriber base. Churn is computed by dividing the number of
subscribers that discontinued service during the month, net of 30 day returns
and an adjustment for estimated first payment default subscribers, by the
average total subscriber base for the period.
"CPGA" summarizes the average cost to acquire new subscribers during the period.
CPGA is computed by adding the income statement components of selling and
marketing, cost of equipment and activation costs (which are included as a
component of cost of service) and reducing that amount by the equipment revenue
recorded. That net amount is then divided by the total new subscribers acquired
during the period, reduced by a provision for first payment default subscribers.
"CCPU" is a measure of the cash costs to operate the business on a per user
basis consisting of subscriber support, network operations, service delivery,
roaming expense, bad debt expense, wireless handset upgrade subsidies (but not
commissions) and other general and administrative costs, divided by average
subscribers for the period, which is net of an adjustment for first payment
default subscribers.
For the three months ended December 31, 2002 compared to the three months ended
December 31, 2001:
iPCS was acquired on November 30, 2001. In accordance with purchase accounting,
iPCS' results of operations are included only for the month of December 2001.
The table below sets forth below key operating metrics for the Company for the
quarters ended December 31, 2002 and 2001.
Quarter Ended December 31,
2002 2001
------------------------------------------ --------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Subscriber Gross Additions 55,621 45,299 100,920 83,012 17,681 100,693
Subscriber Net Additions 13,670 20,934 34,604 54,820 13,892 68,712
Total Subscribers 352,809 236,628 589,437 289,844 163,514 453,358
ARPU $58 $53 $56 $60 $55 $59
Churn (with subscriber reserve) 3.78% 3.18% 3.54% 3.19% 1.99% 2.24%
Churn (without subscriber 4.09% 3.62% 3.91% 4.40% 3.92% 3.24%
reserve)
CPGA $369 $346 $359 $345 $365 $349
CCPU $54 $59 $56 $64 $77 $66
Cap Ex (from cash flow statement)$5,626,000 $8,424,000 $14,050,000 $3,246,000 $3,880,000 $7,126,000
EBITDA $2,536,000 $(6,055,000) $(3,519,000) $(14,868,000) $(6,051,000) $(20,919,000)
The reconciliation of EBITDA to our reported operating loss, as determined in
accordance with GAAP, is as follows (in thousands):
Quarter Ended December 31,
2002 2001
-------------------------------------- ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
EBITDA $2,536 $(6,055) $(3,519) $(14,868) $(6,051) $(20,919)
Depreciation (11,599) (9,027) (20,626) (9,003) (2,263) (11,266)
Amortization of intangible (4,264) (4,539)
assets (2,885) (1,379) (4,479) (60)
----------- ----------- ------------ ----------- ---------- ------------
Operating Loss $(11,948) $(16,461) $(28,409) $(28,350) $(8,374) $(36,724)
=========== =========== ============ =========== ========== ============
Subscriber Net Additions
For AirGate, net subscriber additions are down for the quarter ended December
31, 2002, compared to the same quarter in 2001. This decline is due to the
re-institution of the deposit for sub-prime credit quality customers, actions
taken to reduce acquisition costs, the increased number of subscribers who churn
and slowing wireless subscriber growth in our markets. For iPCS, net subscriber
additions increased in the quarter ended December 31, 2002 compared to the same
quarter in 2001. This increase is due to the inclusion of only one month's
results for iPCS in the quarter ended December 31, 2001.
The Company does not include in its subscriber base an estimate of first payment
default subscribers. At December 31, 2002 and 2001, the estimated first payment
default subscribers were 7,597 and 10,055, respectively. Estimated first payment
default subscribers at December 31, 2002 for AirGate and iPCS were 4,187 and
3,410, respectively.
Subscriber Gross Additions
For AirGate, gross subscriber additions were down for the quarter ended December
31, 2002 compared to the same quarter in 2001. This decline is due to the
re-institution of the deposit for sub-prime credit quality customers, actions
taken to reduce costs and slowing wireless subscriber growth in our markets. For
iPCS, gross subscriber additions increased in the quarter ended December 31,
2002 compared to the same quarter in 2001. This increase is due to the inclusion
of only one month's results for iPCS in the quarter ended December 31, 2001.
EBITDA
EBITDA losses for the quarter ended December 31, 2002 have decreased from the
same period in 2001. This reduction in total losses is a result of a
substantially larger subscriber base over the period and increased net roaming
margin. On a standalone basis, AirGate had positive EBITDA in the quarter ended
December 31, 2002. While all financial transactions and estimates affect EBITDA,
EBITDA for AirGate was favorably impacted by $1.3 million in credits provided by
Sprint as a result of the final settlement of service fees as described in Note
3. The impact of this final settlement of service fees on EBITDA for iPCS was
approximately $700,000. The EBITDA loss for iPCS was adversely impacted by a
$1.4 million charge for disputed cash adjustments with Sprint associated with
iPCS' purchase of Cedar Rapids and Iowa City subscribers.
Average Revenue Per User
The decrease in ARPU for the Company for the quarter ended December 31, 2002
compared to the same quarter for 2001 is primarily the result of the acquisition
of iPCS, cessation of recognizing terminating access revenue and declines in the
average monthly recurring revenue per user. Until March 2002, the Company
recorded terminating long-distance access revenues billed by Sprint PCS to long
distance carriers.
Churn
Churn increased for the quarter ended December 31, 2002 compared to the same
quarter in 2001 primarily as a result of increased competition among wireless
carriers in our markets and the greater number of sub-prime credit quality
subscribers in our subscriber base.
Cost Per Gross Addition
For AirGate, CPGA was higher for the quarter ended December 31, 2002 compared to
the same quarter in 2001. The increase is due to greater handset sales
incentives, rebates and marketing costs in 2002 than the prior year and fixed
costs being spread over a fewer number of gross additions. For iPCS, CPGA was
down for the quarter ended December 31, 2002, compared to the same quarter in
2001. This decrease is primarily attributable to fixed costs bei