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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Commission File Number: 027455
AirGate PCS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-2422929
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Harris Tower, 233 Peachtree St. NE, Suite 1700,
Atlanta, Georgia 30303
(Address of principal executive offices) (Zip code)
(404) 525-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
25,939,836 shares of common stock, $0.01 par value per share, were
outstanding as of May 7, 2003.
AIRGATE PCS, INC.
SECOND QUARTER REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Consolidated Balance Sheets at March 31, 2003 (unaudited) and
September 30, 2002............................................. 3
Consolidated Statements of Operations for the three months
and six months ended March 31, 2003 and 2002
(unaudited)....................................................... 4
Consolidated Statements of Cash Flows for the six months
ended March 31, 2003 and 2002 (unaudited)...................... 5
Notes to the Consolidated Financial Statements (unaudited)........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 38
Item 4. Controls and Procedures........................................... 38
PART II OTHER INFORMATION................................................. 40
Item 1. Legal Proceedings................................................. 40
Item 2. Changes in Securities and Use of Proceeds......................... 40
Item 3. Defaults Upon Senior Securities................................... 40
Item 4. Submission of Matters to a Vote of Security Holders............... 40
Item 5. Other Information................................................. 40
Item 6. Exhibits and Reports on Form 8-K.................................. 54
PART I. FINANCIAL INFORMATION
Item 1. -- FINANCIAL STATEMENTS
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
March 31, September 30,
2003 2002
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents.................................................................. $ 20,905 $ 32,475
Accounts receivable, net of allowance for doubtful accounts of $4,469 and $11,256, 21,943 38,127
respectively...............................................................................
Receivable from Sprint..................................................................... 11,615 44,953
Receivable from iPCS....................................................................... 336 --
Inventories................................................................................ 2,162 6,733
Prepaid expenses........................................................................... 5,769 7,159
Other current assets....................................................................... 1,582 326
-------- ------
Total current assets.................................................................. 64,312 129,773
Property and equipment, net of accumulated depreciation of $106,821 and $112,913, respectively.. 192,363 399,155
Financing costs................................................................................. 7,287 8,118
Intangible assets, net of accumulated amortization of $0 and $39,378, respectively.............. -- 28,327
Direct subscriber activation costs.............................................................. 4,941 8,409
Other assets.................................................................................... 1,444 512
-------- --------
Total assets............................................................................. $ 270,347 $ 574,294
========= ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable........................................................................... $ 1,661 $ 18,152
Accrued expenses........................................................................... 8,241 20,950
Payable to Sprint.......................................................................... 40,570 88,360
Deferred revenue........................................................................... 7,671 11,775
Current maturities of long-term debt and capital lease obligations......................... 2,024 354,936
-------- --------
Total current liabilities.............................................................. 60,167 494,173
Deferred subscriber activation fee revenue...................................................... 8,654 14,973
Other long-term liabilities..................................................................... 1,453 3,267
Long-term debt and capital lease obligations, excluding current maturities...................... 377,192 354,828
Investment in iPCS.............................................................................. 184,115 --
------- --------
Total liabilities...................................................................... 631,581 867,241
Stockholders' deficit:
Preferred stock, par value, $.01 per share;
5,000,000 shares authorized; no shares issued and outstanding.......................... -- --
Common stock, par value, $.01 per share; 150,000,000 shares authorized; 25,939,836 and
25,806,520 shares issued and outstanding at March 31, 2003 and September 30, 2002,
respectively................................................................................... 260 258
Additional paid-in-capital.................................................................. 924,086 924,008
Unearned stock compensation................................................................. (700) (1,029)
Accumulated deficit......................................................................... (1,284,880) (1,216,184)
---------- -----------
Total stockholders' deficit............................................................ (361,234) (292,947)
---------- -----------
Total liabilities and stockholders' deficit........................................ $270,347 $ 574,294
========== ===========
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except share and per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- -----------------------------
--------- ----------- ---------- -----------
2003 2002 2003 2002
--------- ----------- ---------- -----------
Revenues:
Service revenues.......................................... $ 81,664 $ 87,354 $ 177,993 $ 143,203
Roaming revenues.......................................... 19,264 21,951 51,256 43,254
Equipment revenues........................................ 3,505 5,388 8,286 9,933
----- ----------- ---------- -----------
Total revenues............................... 104,433 114,693 237,535 196,390
Operating Expenses:
Cost of services and roaming (exclusive of depreciation and
amortization as shown separately below).................. (59,910) (76,336) (147,917) (134,093)
Cost of equipment......................................... (5,304) (10,681) (17,431) (20,264)
Selling and marketing..................................... (15,674) (27,592) (44,576) (57,437)
General and administrative expenses....................... (9,278) (6,869) (16,687) (12,069)
Non-cash stock compensation expense....................... (177) (183) (353) (414)
Depreciation and amortization of property and equipment.... (16,754) (17,098) (37,380) (28,364)
Amortization of intangible assets......................... (2,591) (13,578) (18,117)
(6,855)
Goodwill impairment....................................... -- (261,212) -- (261,212)
------------ --------- ------------ ---------
Total operating expenses............................ (109,688) (413,549) (271,199) (531,970)
--------- --------- ------------ ---------
Operating loss...................................... (5,255) (298,856) (33,664) (335,580)
Interest income................................................ 27 117 67 216
Interest expense............................................... (15,794) (14,648) (35,099) (24,931)
Other.......................................................... -- 75 -- (20)
----------- --------- ------------- ----------
Loss before income tax benefit...................... (21,022) (313,312) (68,696) (360,315)
-------- --------- ------------ ----------
Income tax benefit.................................. -- 11,402 -- 28,761
Net loss............................................ $ (21,022) $(301,910) $(68,696) $ (331,554)
========== ========== ========== ===========
Basic and diluted net loss per share of common stock........... $ (0.81) $ (11.71) $ (2.65) $ (15.29)
Basic and diluted weighted-average outstanding common shares... 25,929,437 25,790,151 25,876,204 21,688,158
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Six Months Ended
March 31,
-----------------------
2003 2002
---- ----
Net loss...................................................................................... $ (68,696) $ (331,554)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Goodwill impairment.......................................................................... -- 261,212
Depreciation and amortization of property and equipment...................................... 37,380 28,364
Amortization of intangible assets............................................................ 6,855 18,117
Amortization of financing costs into interest expense........................................ 605 849
Provision for doubtful accounts.............................................................. 3,848 14,849
Interest expense associated with accretion of discounts...................................... 27,207 22,476
Non-cash stock compensation.................................................................. 353 414
Deferred income tax benefit.................................................................. -- (28,761)
Changes in assets and liabilities:
Accounts receivable...................................................................... (62) (22,490)
Receivable from Sprint................................................................... 18,871 862
Inventories.............................................................................. 3,338 3,897
Prepaid expenses, other current and non-current assets................................... (4,459) (2,919)
Accounts payable, accrued expenses and other long term liabilities....................... (7,209) (13,376)
Payable to Sprint........................................................................ (12,346) 2,956
Deferred revenue......................................................................... 856 7,229
------------ -----------
Net cash provided by (used in) operating activities........................... 6,541 (37,875)
------------ -----------
Cash flows from investing activities:
Capital expenditures.......................................................................... (15,123) (48,523)
Cash acquired from iPCS....................................................................... -- 24,402
Deconsolidation of iPCS....................................................................... (10,031) --
Acquisition of iPCS........................................................................... -- (5,955)
------------ -----------
Net cash used in investing activities......................................... (25,154) (30,076)
------------ -----------
Cash flows from financing activities:
Proceeds from borrowings under senior credit facilities....................................... 8,000 78,200
Payments for credit facility borrowings....................................................... (1,012) --
Payments for capital lease borrowings......................................................... (2) (3)
Stock issued to employee stock purchase plan.................................................. 57 567
Proceeds from exercise of employee stock options.............................................. -- 685
------------ -----------
Net cash provided by financing activities..................................... 7,043 79,449
------------ -----------
Net (decrease) increase in cash and cash equivalents.......................... (11,570) 11,498
Cash and cash equivalents at beginning of period................................................... 32,475 14,290
------------ -----------
Cash and cash equivalents at end of period......................................................... $ 20,905 $ 25,788
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for interest........................................................................ $ 5,151 $ 4,052
Supplemental disclosure for non-cash investing activities:
Capitalized interest.......................................................................... $ 366 $ 3,831
iPCS acquisition:
Stock issued............................................................................ -- (706,645)
Value of common stock options and warrants assumed...................................... -- (47,727)
Liabilities assumed.................................................................... -- (282,714)
Assets acquired........................................................................ -- 315,029
Capital lease obligation...................................................................... -- 191
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(unaudited)
(1) Business, Basis of Presentation and Liquidity
(a) Business and Basis of Presentation
The accompanying unaudited quarterly financial statements of AirGate PCS, Inc.
(the "Company") are presented in accordance with the rules and regulations of
the Securities and Exchange Commission ("SEC") and do not include all of the
disclosures normally required by accounting principles generally accepted in the
United States of America. In the opinion of management, these statements reflect
all adjustments, including recurring adjustments, which are necessary for a fair
presentation of the consolidated financial statements for the interim periods.
The consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K/A for the fiscal year ended September 30,
2002, which is filed with the SEC and may be accessed via EDGAR on the SEC's
website at http://www.sec.gov. The results of operations for the quarter and six
months ended March 31, 2003 are not necessarily indicative of the results that
can be expected for the entire fiscal year ending September 30, 2003. Certain
prior year amounts have been reclassified to conform to the current year's
presentation. Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities at the dates of the consolidated balance
sheets and revenues and expenses during the reporting periods to prepare these
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
significantly from those estimates.
AirGate PCS, Inc. and its restricted and unrestricted subsidiaries were created
for the purpose of providing wireless Personal Communication Services ("PCS").
AirGate PCS, Inc. and its restricted subsidiaries ("AirGate") collectively are a
network partner of Sprint with the exclusive right to market and provide Sprint
PCS products and services in a defined network territory. AirGate is licensed to
use the Sprint brand names in its original 21 markets located in the
southeastern United States.
On November 30, 2001, AirGate acquired iPCS, Inc. (together with its
subsidiaries, "iPCS"), a network partner of Sprint with 37 markets in the
midwestern United States. The accompanying consolidated financial statements
include the accounts of AirGate PCS, Inc. and its wholly-owned restricted
subsidiaries, AGW Leasing Company, Inc., AirGate Service Company, Inc., and
AirGate Network Services, LLC, and its unrestricted subsidiary iPCS since its
acquisition through the date it filed for bankruptcy. On February 23, 2003, iPCS
filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for
the Northern District of Georgia for the purpose of effecting a
court-administered reorganization. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 94 "Consolidation of All Majority-Owned
Subsidiaries" and Accounting Research Bulletin (ARB) No. 51 "Consolidated
Financial Statements," when control of a majority-owned subsidiary does not rest
with the majority owners (as, for instance, where the subsidiary is in legal
reorganization or in bankruptcy), ARB No. 51 precludes consolidation of the
majority-owned subsidiary. As a result, subsequent to February 23, 2003, AirGate
no longer consolidates the accounts and results of operations of iPCS and the
accounts of iPCS are recorded as an investment using the cost method of
accounting. Accordingly, the accompanying consolidated balance sheet as of March
31, 2003 does not include the consolidated accounts of iPCS; it does however,
include the Company's investment at cost in iPCS as of February 23, 2003. The
accompanying consolidated statement of operations for the period ended March 31,
2003 includes the consolidated results of operations of iPCS through February
23, 2003. When AirGate no longer has an ownership interest in iPCS, which may
occur upon emergence of iPCS from bankruptcy, the investment in iPCS will be
reduced proportionately to the remaining ownership percentage, if any, retained
by AirGate.
The PCS market is characterized by significant risks as a result of rapid
changes in technology, intense competition and the costs associated with the
build-out of a PCS network. The Company's operations are dependent upon Sprint's
ability to perform its obligations under the agreements between the Company and
Sprint (see Note 3) under which the Company has agreed to construct and manage
its Sprint PCS networks (the "Sprint Agreements"). Additionally, the Company's
ability to attract and maintain a subscriber base of sufficient size and credit
quality is critical to achieving sufficient positive cash flow to meet its
financial covenants under its credit agreements. Changes in technology,
increased competition, economic conditions or inability to achieve sufficient
positive cash flow to meet its financial covenants under its credit agreements,
among other factors, could have an adverse effect on the Company's financial
position, results of operations, and liquidity.
(b) Liquidity
The Company has generated significant net losses since inception. For the six
months ended March 31, 2003 and the year ended September 30, 2002, the Company's
net loss amounted to $68.7 million and $996.6 million (including goodwill and
asset impairment charges of $817.4 million), respectively. As of March 31, 2003,
AirGate had working capital of $4.1 million and available credit of $9.0 million
under its $153.5 million senior secured credit facility (the "AirGate credit
facility").
On February 23, 2003 iPCS, Inc. and its subsidiaries, iPCS Wireless, Inc. and
iPCS Equipment, Inc., filed a Chapter 11 bankruptcy petition in the United
States Bankruptcy Court for the Northern District of Georgia for the purpose of
effecting a court-administered reorganization. Immediately prior to iPCS'
bankruptcy filing, the lenders under the iPCS credit facility accelerated iPCS'
payment obligations as a result of existing defaults under that facility.
Concurrent with its bankruptcy filing, iPCS brought an adversarial action
against Sprint alleging, among other things, that Sprint had failed to remit
certain amounts owed to iPCS under its agreements with Sprint and seeking to
exercise its put rights under its agreements with Sprint. As an unrestricted
subsidiary, iPCS is a separate corporate entity from AirGate with its own
independent financing sources, debt obligations and sources of revenue.
Furthermore, iPCS lenders, noteholders and creditors do not have a lien or
encumbrance on assets of AirGate, and AirGate cannot provide capital or other
financial support to iPCS. The Company believes AirGate operations will continue
independent of the outcome of the iPCS bankruptcy. However, it is likely that
AirGate's ownership interest in iPCS will have no value after the restructuring
is complete.
While the ultimate and long-term effect on AirGate of iPCS' bankruptcy
proceedings cannot be determined, management believes that AirGate and its
restricted subsidiaries will continue to operate and that iPCS' bankruptcy
proceedings, and related outcomes, will not have a material adverse effect on
the liquidity of AirGate.
In addition to its capital needs to fund operating losses, AirGate has
historically invested large amounts to build-out its networks and for other
capital assets. For the six months ended March 31, 2003 and the three years
ended September 30, 2002, AirGate invested $6.7 million and $265.1 million
respectively to purchase property and equipment. While much of AirGate's network
is now complete, such expenditures will continue to be necessary.
AirGate had only $9.0 million remaining available under the AirGate credit
facility as of March 31, 2003. AirGate currently has no additional sources of
working capital other than cash on hand and operating cash flow. If AirGate's
actual revenues are less than expected or operating or capital costs are more
than expected, AirGate's financial condition and liquidity may be materially
adversely affected. In such event, there is substantial risk that the Company
could not access the credit or capital markets for additional capital.
AirGate's ability to borrow funds under the AirGate credit facility may be
terminated and its payment obligations may be accelerated if it is unable to
maintain or comply with the financial and operating covenants contained in the
AirGate credit facility. The AirGate credit facility contains covenants
specifying the maintenance of certain financial ratios, reaching defined
subscriber growth and network covered population goals, minimum service
revenues, maximum capital expenditures, and the maintenance of a ratio of total
debt and senior debt to annualized EBITDA, as defined in the AirGate credit
facility.
If the Company is unable to operate the AirGate business within the covenants
specified in the AirGate credit facility, and is unable to obtain future
amendments to such covenants, AirGate's ability to make borrowings required to
operate the AirGate business could be restricted or terminated and its payment
obligations accelerated. Such a restriction, termination or acceleration would
have a material adverse affect on AirGate's liquidity and capital resources.
AirGate has initiated a number of action steps to lower its operating costs and
capital needs. The following are some of the more significant steps:
* a plan to improve the credit quality of new subscribers and its
subscriber base and reduce churn by restricting availability of
programs for sub-prime subscribers;
* the elimination of certain personnel positions;
* a significant reduction in capital expenditures; and
* a reduction in spending for advertising and promotions.
In addition to these steps, AirGate continues to review potential actions that
could further reduce AirGate operating expenses and capital needs. These include
changes to employee benefit plans, seeking to reduce lease expenses and, over
the long-term, seeking ways to lower fees and charges from services now provided
by Sprint. Although there can be no assurances, AirGate management believes that
existing cash, expected results of operations and cash flows, and amounts
available under the AirGate credit facility will provide sufficient resources to
fund AirGate's activities through at least March 31, 2004.
The following reflects condensed balance sheet information for AirGate and
statement of operations information for AirGate and its unrestricted subsidiary,
iPCS, separately identifying the investment in iPCS including the effects of
purchase accounting as of March 31, 2003 and September 30, 2002 and the
historical equity basis loss of iPCS through February 23, 2003, the related
effects of purchase accounting, and income tax benefit for the three months and
six months ended March 31, 2003 and 2002 (dollar amounts in thousands):
As of
March 31, September 30,
2003 2002
---- ----
Condensed Balance Sheet Information:
Cash and cash equivalents.................................. $ 20,905 $ 4,887
Other current assets....................................... 43,407 62,819
------ --------
Total current assets............................... 64,312 67,706
Property and equipment, net................................ 192,363 213,777
Other noncurrent assets.................................... 13,672 13,732
------- --------
$ 270,347 $ 295,215
========= =========
Current liabilities........................................ $ 60,167 $ 82,175
Long-term debt............................................. 377,192 354,264
Other long-term liabilities................................ 10,107 10,180
Investment in iPCS ........................................ 184,115 141,543
------- --------
Total liabilities.................................... 631,581 588,162
Stockholders' deficit...................................... (361,234) (292,947)
--------- ----------
$ 270,347 $ 295,215
=========== =========
For the Three Months Ended For the Six Months Ended
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Condensed Statement of Operations Information:
Revenues................................................... $76,980 $ 76,439 $158,845 $ 144,110
Costs of revenues.......................................... (44,423) (53,502) (102,701) (106,745)
Selling and marketing expenses............................. (11,362) (18,199) (28,159) (43,288)
General and administrative expenses........................ (5,728) (3,636) (9,806) (7,612)
Depreciation and amortization.............................. (11,627) (9,308) (23,246) (18,333)
Other expense, net (principally interest).................. (10,537) (9,433) (21,058) (18,368)
----------- ---------- ----------- -----------
Total expenses....................................... (83,677) (94,078) (184,970) (194,346)
----------- ---------- ----------- -----------
Loss before equity in loss of iPCS and effects of purchase
accounting, and income tax benefit..................... (6,697) (17,639) (26,125) (50,236)
Historical equity basis loss of iPCS....................... (11,221) (22,353) (36,984) (32,672)
Effects of purchase accounting............................. (3,104) (273,320) (5,587) (277,407)
Income tax benefit......................................... -- 11,402 -- 28,761
----------- ----------- ----------- ----------
Net loss................................................... $ (21,022) $ (301,910) $ (68,696) $ (331,554)
=========== =========== =========== ===========
(c) Basic and Diluted Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period.
Potentially dilutive securities of 57,323, 56,927, 45,953 and 52,195 for the
quarters and six months ended March 31, 2003 and 2002, respectively have been
excluded from the computation of dilutive net loss per share for the periods
presented because the Company had a net loss and their effect would have been
antidilutive.
(d) Stock-based Compensation Plans
We have elected to continue to account for our stock-based compensation plans
under APB Opinion No. 25, Accounting for Stock Issued to Employees, and disclose
pro forma effects of the plans on net income and earnings per share as provided
by SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, because
the fair market value on the date of grant was equal to the exercise price, we
did not recognize any compensation cost. Had compensation cost for these plans
been determined based on the fair value at the grant dates during the three and
six months ended March 31, 2003 and 2002 under the plan consistent with the
method of SFAS No. 123, the pro forma net loss and loss per share would have
been as follows (in thousands, except per share data):
Three Months Ended March 31, Six Months Ended March 31,
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported $(21,022) $(301,910) $(68,696) $(331,554)
Add: stock based 177 183 353 414
compensation expense included
in determination of net loss
Less: stock-based (2,426) (2,284) (4,852) (4,569)
compensation expense
determined under the fair
value based method
Pro forma net loss (23,271) (304,011) (73,195) (335,709)
Basic and diluted loss per share:
As reported $(0.81) $(11.71) $(2.65) $(15.29)
Pro forma $(0.90) $(11.79) $(2.83) $(15.48)
(2) New Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity", which is effective at the beginning of the first
interim period beginning after March 15, 2003. SFAS No. 149 establishes
standards for the Company's classification of liabilities in the financial
statements that have characteristics of both liabilities and equity. We are
currently evaluating the impact of this statement on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, and interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. This interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material adverse effect on the Company's financial
statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation from the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting, and has adopted the
disclosure requirements of SFAS No. 123.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which addresses the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees. This interpretation also requires the recognition of a
liability by a guarantor at the inception of certain guarantees.
Interpretation No. 45 requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, which is the obligation to stand
ready to perform in the event that specified triggering events or conditions
occur. The initial measurement of this liability is the fair value of the
guarantee at inception. The recognition of the liability is required even if it
is not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements.
The Company guarantees certain lease commitments of its restricted subsidiaries.
The maximum amount of these guarantees is included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended September 30, 2002. Also, the
handsets sold by the Company are under a one-year warranty from Sprint. If a
customer returns a handset for warranty, the Company generally provides the
customer with a refurbished handset and sends the warranty handset to Sprint for
repair. Sprint provides a credit to the Company equal to the retail price of the
refurbished handset. The Company will apply the recognition and measurement
provisions for all guarantees entered into or modified after December 31, 2002.
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Element Deliverables". This guidance addresses how to account for arrangements
that may involve multiple revenue-generating activities, i.e., the delivery or
performance of multiple products, services, and/or rights to use assets. In
applying this guidance, separate contracts with the same party, entered into at
or near the same time, will be presumed to be a package, and the consideration
will be measured and allocated to the separate units based on their relative
fair values. This consensus guidance will be applicable to agreements entered
into in quarters beginning after June 15, 2003. AirGate will adopt this new
accounting effective July 1, 2003. The Company is currently evaluating the
impact of this change.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 provides new guidance on the
recognition of costs associated with exit or disposal activities. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. SFAS No. 146 supercedes previous accounting guidance
provided by the EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." EITF Issue No. 94-3 required recognition of
costs at the date of commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. Early application is permitted. The Company adopted SFAS No. 146 on
October 1, 2002. As discussed in Note 5, during the six months ended March 31,
2003 the Company recorded $1.1 million and $0.2 million, respectively, of costs
related to staff reductions and retail store closings.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," will now be used to
classify those gains and losses. The adoption of SFAS No. 145 by the Company on
October 1, 2002 did not have a material impact on the Company's financial
position, results of operations, or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 by the
Company on October 1, 2002 did not have a material impact on the Company's
financial position, results of operations or cash flows.
(3) Sprint Agreements
Under the Sprint Agreements, Sprint is obligated to provide the Company
significant support services such as billing, collections, long distance,
customer care, network operations support, inventory logistics support, use of
Sprint brand names, national advertising, national distribution and product
development. Additionally, the Company derives substantial roaming revenue and
expenses when Sprint's and Sprint's network partners' wireless subscribers incur
minutes of use in the Company's territories and when the Company's subscribers
incur minutes of use in Sprint and other Sprint network partners' PCS
territories. These transactions are recorded in roaming revenue, cost of service
and roaming, cost of equipment, and selling and marketing expense captions in
the accompanying consolidated statements of operations. Cost of service and
roaming transactions include the 8% affiliation fee, long distance charges,
roaming expense and the costs of services such as billing, collections, customer
service and pass-through expenses. Cost of equipment transactions relate to
inventory purchased by the Company from Sprint under the Sprint agreements.
Selling and marketing transactions relate to subsidized costs on handsets and
commissions paid by the Company under Sprint's national distribution programs.
Amounts recorded relating to the Sprint agreements for the three and six months
ended March 31, 2003 and 2002 are as follows (dollar amounts in thousands):
For the Three Months For the Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Amounts included in the Consolidated Statement of Operations:
AirGate roaming revenue............................................ $ 12,972 $ 13,838 $ 30,801 $ 30,047
AirGate cost of service and roaming:
Roaming....................................................... $ 10,777 $ 11,730 $ 25,462 $ 24,888
Customer service.............................................. 9,927 8,947 21,727 16,761
Affiliation fee............................................... 4,708 3,886 9,545 7,274
Long distance................................................. 3,259 3,750 6,044 7,059
Other......................................................... 514 720 990 1,217
--------- --------- --------- ---------
--------- --------- --------- ---------
AirGate cost of service and roaming................................ $ 29,185 $ 29,033 $ 63,768 $ 57,199
AirGate purchased inventory........................................ $ 2,695 $ 3,924 $ 8,221 $ 9,441
AirGate selling and marketing...................................... $ 2,412 $ 5,964 $ 6,111 $ 14,301
iPCS roaming revenue............................................... $ 4,061 $ 7,327 $ 14,724 $ 11,867
iPCS cost of service and roaming:
Roaming....................................................... $ 3,796 $ 6,308 $ 12,158 $ 9,955
Customer service.............................................. 3,853 4,507 11,760 6,042
Affiliation fee............................................... 1,805 2,223 4,911 2,941
Long distance................................................. 1,153 2,693 3,281 3,554
Other......................................................... 168 215 461 260
--------- --------- --------- ---------
--------- --------- --------- ---------
iPCS cost of service and roaming:.................................. $ 10,775 $ 15,946 $ 32,571 $ 22,752
iPCS purchased inventory........................................... $ 108 $ 1,813 $ 6,124 $ 4,111
iPCS selling and marketing......................................... $ 1,240 $ 3,289 $ 3,138 $ 4,645
Amounts included in the Consolidated Balance Sheets:
As of
March 31, September 30,
2003 2002
---- ----
Receivable from Sprint $ 11,615 $ 44,953
Payable to Sprint (40,570) (88,360)
Because approximately 97% of our revenues are collected by Sprint and 65% of
costs of service and roaming in our financial statements are derived from fees
and charges, including pass-through charges, from Sprint, we have a variety of
settlement issues and other contract disputes open and outstanding from time to
time. The amounts Sprint has asserted we owe is approximately $4.7 million.
These include, but are not limited to, the following items, all of which for
accounting purposes have been reserved or otherwise provided for:
* In fiscal year 2003, Sprint PCS asserted it has the right to recoup up to
$3.9 million in long-distance access revenues previously paid by Sprint PCS
to AirGate, for which Sprint PCS has invoiced $1.2 million. We have
disputed these amounts.
* Sprint invoiced AirGate approximately $0.8 million with respect to calendar
year 2002 to reimburse Sprint for certain 3G related development expenses.
We are disputing Sprint's right to charge 3G fees in 2002 and beyond, and
we estimate such fees will be $2.5 million in fiscal year 2003.
* We continue to discuss with Sprint whether AirGate owes software
maintenance fees to Sprint of approximately $1.7 million for 2002 and $1.8
million for calendar year 2003. Our position is that Sprint is not
authorized to charge these fees to AirGate under the terms of our
agreements.
* Sprint billed AirGate $0.6 million for information technology (IT) expenses
including the reimbursement of amortization of IT projects completed by
Sprint. The Company has disputed Sprint's right to collect these fees.
The approximately $4.7 million Sprint has asserted we owe does not include
ongoing 3G service fees for future periods or $2.7 million in long distance
access revenues Sprint has not invoiced.
In addition to these disputes, we have other outstanding issues with Sprint
which could result in set-offs to the items described above or in payments due
from Sprint. For example, we believe Sprint has failed to calculate, pay and
report on collected revenues in accordance with our agreements with Sprint,
which, together with other cash remittance issues, resulted in a shortfall in
cash payments to AirGate of at least $10 million. As a result of these issues
and in connection with our review of accounts receivable at September 30, 2002,
we reclassified approximately $10.0 million of AirGate subscriber accounts
receivable for the fiscal year ended September 30, 2002 to a receivable from
Sprint. During this fiscal year, Sprint has acknowledged and paid only $8.7
million of this receivable for amounts that were previously not properly
remitted to AirGate. The $8.7 million paid by Sprint included $4.1 million of
previously unapplied customer deposits, $4.0 million of revenue for AirGate
subscribers whose bills are paid through national accounts, and $0.6 million of
subscriber payments resulting from a change in the method of calculating
collected revenues. We are reviewing additional information received from Sprint
and have retained a consultant to verify the accuracy of this information to
determine whether additional amounts are due to AirGate. We continue to discuss
with Sprint the proper method for calculating, paying and reporting on collected
revenues and other matters. During the three months ended March 31, 2003,
AirGate recorded $3.6 million in credits from Sprint as a reduction in cost of
services.
On January 23, 2003, Sprint notified us that service fees, excluding historical
3G expenses, were increased from $7.27 per subscriber per month to $7.77 per
subscriber per month.
Monthly Sprint service charges are set by Sprint at the beginning of each
calendar year. Sprint takes the position that at the end of each year, it can
determine its actual costs to provide these services to its network partners and
require a final settlement against the charges actually paid. If the cost to
provide these services are less than the amounts paid by Sprint's network
partners, Sprint will issue a credit for these amounts. If the costs to provide
the services are more that the amounts paid by Sprint's network partners, Sprint
will debit the network partners for these amounts. Sprint credited to the
Company a net amount of $2.0 million ($1.3 million for AirGate and $0.7 million
for iPCS). These credits were recorded as a reduction of cost of service in the
quarter ended December 31, 2002.
The Sprint Agreements require the Company to maintain certain minimum network
performance standards and to meet other performance requirements. AirGate was in
compliance in all material respects with these requirements at March 31, 2003.
(4) Litigation
In May, 2002, putative class action complaints were filed in the United States
District Court for the Northern District of Georgia against AirGate PCS, Inc.,
Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit Suisse
First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company, Thomas
Wiesel Partners LLC and TD Securities. The complaints do not specify an amount
or range of damages that the plaintiffs are seeking. The complaints seek class
certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former iPCS shareholders on
December 18, 2001 contained materially false and misleading statements and
omitted material information necessary to make the statements in the prospectus
not false and misleading. The alleged omissions included (i) failure to disclose
that in order to complete an effective integration of iPCS, drastic changes
would have to be made to the Company's distribution channels, (ii) failure to
disclose that the sales force in the acquired iPCS markets would require
extensive restructuring and (iii) failure to disclose that the "churn" or
"turnover" rate for subscribers would increase as a result of an increase in the
amount of sub-prime credit quality subscribers the Company added from its merger
with iPCS. On July 15, 2002, certain plaintiffs and their counsel filed a motion
seeking appointment as lead plaintiffs and lead counsel. Subsequently, the Court
denied that motion without prejudice and two of the plaintiffs have filed a
renewed motion. The Defendants responded to the renewed motion, but the Court
has not yet entered a ruling. The Company believes the plaintiffs' claims are
without merit and intends to vigorously defend against these claims. However, no
assurance can be given as to the outcome of the litigation.
(5) Staff Reduction and Retail Store Closings
As discussed in Note 1, AirGate has identified additional opportunities to
reduce its cost structure and streamline its operations. The Company adopted a
restructuring plan in accordance with SFAS No. 146, "Accounting for Cost
Associated with Exit or Disposal Activities" to reduce its workforce and to
close a number of retail stores which resulted in restructuring charges of $0.7
million and $0.7 million during the three months ended December 31, 2002 and
March 31, 2003, respectively. Collectively, these actions are expected to
continue through the quarter that will end on June 30, 2003 and are referred to
as the 2003 Plan.
During the quarter ended December 31, 2002, the restructuring charge included
provisions for severance of approximately 65 management and operating staff
($0.6 million) as well as 3 retail store closures ($0.05 million). During the
quarter ended March 31, 2003, the restructuring charge included provisions for
severance of approximately 154 management and operating staff ($0.5 million) as
well as 16 retail store closures and 10 administrative offices ($0.2 million),
primarily for iPCS. In the quarter that will end June 30, 2003, AirGate expects
charges for additional severance and store closings to be at least $0.6 million
and $0.1 million, respectively. Further charges may be necessary as AirGate
services are terminated under the services agreement with iPCS described in Note
7.
The following summarizes the activity and balances through March 31, 2003
(dollar amounts in thousands):
Facilities
Severance Closure Total
-------------- -------------- ---------------
Balance - October 1, 2002 $ 0 $ 0 $ 0
Restructuring charges 1,081 229 1,310
Payments (763) (23) (786)
-------------- -------------- ---------------
Balance - March 31, 2003 $ 318 $ 206 $ 524
============== ============== ===============
(6) Income Taxes
The Company realized an income tax benefit of $11.4 million and $28.8 million
during the quarter and six months ended March 31, 2002, respectively. No such
amounts were realized in the quarter and six months ended March 31, 2003, nor
will amounts be realized in the future unless management believes the
recoverability of deferred tax assets is more likely than not.
(7) Transactions Between AirGate and iPCS
The Company formed AirGate Service Company, Inc. ("ServiceCo") to provide
management services to both AirGate and iPCS. ServiceCo is a wholly-owned
restricted subsidiary of AirGate. Personnel who provide general management
services to AirGate and iPCS have been leased to ServiceCo, which includes 148
employees at March 31, 2003. Generally, the management personnel include AirGate
staff in the Company's principal corporate offices in Atlanta and the iPCS
accounting staff in Geneseo, Illinois. ServiceCo expenses are allocated between
AirGate and iPCS based on the percentage of subscribers they contribute as
compared to the total number of Company subscribers (the "ServiceCo
Allocation"), which is currently 60% AirGate and 40% iPCS. Expenses that relate
to one company are allocated to that company. Expenses that relate to ServiceCo
or both companies are allocated in accordance with the ServiceCo Allocation. For
the quarter and six months ended March 31, 2003, iPCS recorded a net total for
ServiceCo expenses of $0.8 million and $1.8 million, respectively.
On January 27, 2003, iPCS retained Timothy M. Yager, former CEO of iPCS prior to
the merger of AirGate and a former director of AirGate following the merger, as
chief restructuring officer to oversee the restructuring of iPCS and manage the
day-to-day operations of iPCS. To facilitate the orderly transition of
management services to Mr. Yager, AirGate and iPCS have executed an amendment to
the Services Agreement that would allow individual services to be terminated by
either party upon 30 days prior notice, subject to exceptions for certain
services for which longer notice is required.
The amendment also terminated certain services provided by AirGate, and
effective May 1, 2003, iPCS terminated certain other services. As a result of
the termination of services by iPCS, AirGate received $0.3 million less payments
from iPCS for the quarter ended March 31, 2003. We anticipate that prior to
September 1, 2003, substantially all management services provided by ServiceCo
to iPCS will be terminated.
AirGate has completed transactions at arms-length in the normal course of
business with its unrestricted subsidiary iPCS. These transactions are comprised
of roaming revenue and expenses, inventory sales and purchases and sales of
network operating equipment.
(8) Condensed Consolidating Financial Statements
AGW Leasing Company, Inc. ("AGW") is a wholly-owned restricted subsidiary of
AirGate. AGW has fully and unconditionally guaranteed the AirGate notes and the
AirGate credit facility. AGW was formed to hold the real estate interests for
the Company's PCS network and retail operations. AGW also was a registrant under
the Company's registration statement declared effective by the Securities and
Exchange Commission on September 27, 1999.
AirGate Network Services LLC ("ANS") was created as a wholly-owned restricted
subsidiary of AirGate. ANS has fully and unconditionally guaranteed the AirGate
notes and AirGate credit facility. ANS was formed to provide construction
management services for AirGate's PCS network.
AirGate Service Company, Inc. is a wholly-owned restricted subsidiary of
AirGate. Service Co has fully and unconditionally guaranteed the AirGate notes
and the AirGate credit facility. Service Co was formed to provide management
services to AirGate and iPCS.
iPCS is a wholly-owned unrestricted subsidiary of AirGate and operates as a
separate business. As an unrestricted subsidiary, iPCS provides no guarantee to
either the AirGate notes or the AirGate credit facility and AirGate and its
restricted subsidiaries provide no guarantee with respect to iPCS debt
obligations. On February 23, 2003, iPCS filed a Chapter 11 bankruptcy petition
in the United States Bankruptcy Court for the Northern District of Georgia for
the purpose of effecting a court-administered reorganization. The results of
iPCS have been included in the consolidated results of AirGate through February
23, 2003. Subsequent to February 23, 2003, AirGate PCS no longer consolidates
the accounts and results of operations of its unrestricted subsidiary iPCS. The
accounts of iPCS are recorded as an investment using the cost method of
accounting.
The following shows the unaudited condensed consolidation financial statements
for AirGate and its subsidiaries as of March 31, 2003 and September 30, 2002 and
for the three months and six months ended March 31, 2003 and 2002 (dollar
amounts in thousands):
Unaudited Condensed Consolidating Balance Sheets
As of March 31, 2003
AirGate
Guarantor
AirGate PCS, Subsidiaries Eliminations AirGate
Inc. Consolidated
------------------------------------------------------------
Cash and cash $ 20,920 $ (15) $ -- $ 20,905
equivalents...........
Other current assets.... 104,126 529 (61,248) 43,407
------------------------------ ----------------------------
Total current assets.... 125,046 514 (61,248) 64,312
Property and equipment,
net................... 150,891 41,472 -- 192,363
Other noncurrent assets.. 13,672 -- -- 13,672
------------------------------ ----------------------------
Total assets............ $ 289,609 $ 41,986 $ (61,248) $ 270,347
============================== ============================
Current liabilities..... $ (21,844) $ 143,259 $ (61,248) $ 60,167
Long-term debt.......... 377,192 -- -- 377,192
Other long-term
liabilities........... 10,107 -- -- 10,107
Investment in
subsidiaries............ 285,388 -- (101,273) 184,115
------------------------------ ----------------------------
Total liabilities....... $ 650,843 $ 143,259 $ (162,521) $ 631,581
------------------------------ ----------------------------
Stockholders' equity
(deficit).............. (361,234) (101,273) 101,273 (361,234)
------------------------------ ----------------------------
Total liabilities and
stockholders' equity
(deficit).............. $ 289,609 $ 41,986 $ (61,248) $ 270,347
============================== ============================
Condensed Consolidating Balance Sheets
As of September 30, 2002
AirGate
Guarantor iPCS
AirGate PCS, Subsidiaries Eliminations AirGate Non-Guarantor AirGate
Inc. Consolidated(1) Subsidiary Eliminations Consolidated
------------------------------ -----------------------------------------------------------------------
Cash and cash $ 4,769 $ 118 $ -- $ 4,887 $ 27,588 $ -- $ 32,475
equivalents...........
Other current assets.... 122,869 529 (60,579) 62,819 35,593 (1,114) 97,298
------------------------------ -----------------------------------------------------------------------
Total current assets.... 127,638 647 (60,579) 67,706 63,181 (1,114) 129,773
Property and equipment,
net................... 168,163 45,614 -- 213,777 185,378 -- 399,155
Intangible assets, net.. 1,428 -- -- 1,428 26,899 -- 28,327
Other noncurrent assets. 4,924 -- -- 4,924 12,115 -- 17,039
------------------------------ -----------------------------------------------------------------------
Total assets............ $ 302,153 $ 46,261 $ (60,579) $ 287,835 $ 287,573 $ (1,114) $ 574,294
============================== =======================================================================
Current liabilities..... $ 55,535 $ 130,767 $ (60,579) $ 125,723 $ 369,564 $ (1,114) $ 494,173
Long-term debt.......... 354,264 -- -- 354,264 564 -- 354,828
Other long-term
liabilities........... 1,583 -- -- 1,583 16,657 -- 18,240
Investment in 183,718 -- (84,506) 99,212 -- (99,212) --
subsidiaries..........
------------------------------ -----------------------------------------------------------------------
Total liabilities....... $ 595,100 $ 130,767 $(145,085) $580,782 $ 386,785 $ (100,326) $ 867,241
------------------------------ -----------------------------------------------------------------------
Stockholders' equity
(deficit)............. (292,947) (84,506) 84,506 (292,947) (99,212) 99,212 (292,947)
------------------------------ -----------------------------------------------------------------------
Total liabilities and
stockholders' equity
(deficit)............. $ 302,153 $ 46,261 $ (60,579) $287,835 $ 287,573 $ (1,114) $ 574,294
============================== =======================================================================
(1) Amounts in the column for AirGate consolidated include the effects of
purchase accounting related to the iPCS acquisition. Balance sheet information
includes $44 million of debt and $1 million of net assets as of September 30,
2002. The net loss of AirGate includes expenses related to the effects of
purchase accounting for iPCS of $3.1 million, $273.3 million, $5.6 million and
$277.4 million for the three and six months ended March 31, 2003 and 2002,
respectively. The three months and six months ended March 31, 2002 include a tax
benefit related to the iPCS acquisition of $11.4 million and $28.8 million,
respectively. Subsequent to February 23, 2003 AirGate PCS no longer consolidates
the accounts and results of operations of its unrestricted subsidiary iPCS. The
accounts of iPCS are recorded as an investment using the cost method of
accounting.
Unaudited Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2003
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
------------------------------ -----------------------------------------------------------------------
Total revenues.......... $ 76,980 $ -- $ -- $ 76,980 $ 27,829 $ (376) $ 104,433
------------------------------ -----------------------------------------------------------------------
Cost of revenues........ (39,819) (4,604) -- (44,423) (21,167) 376 (65,214)
Selling and marketing... (10,173) (1,189) -- 11,362) (4,312) -- (15,674)
General and
administrative........ (5,219) (509) -- (5,728) (3,550) -- (9,278)
Depreciation and
amortization.......... (12,721) (2,353) -- (15,074) (4,271) -- (19,345)
Other, net (principally
interest)............. (10,233) 39 -- (10,194) (5,750) -- (15,944)
------------------------------ -----------------------------------------------------------------------
Total expenses.......... (78,165) (8,616) -- (86,781) (39,050) 376 (125,455)
Loss in subsidiaries.... (19,837) -- 8,616 (11,221) -- 11,221 --
Loss before income tax
benefit............... (21,022) (8,616) 8,616 (21,022) (11,221) 11,221 (21,022)
Income tax benefit...... -- -- -- -- -- -- --
------------------------------ -----------------------------------------------------------------------
Net loss................ $ (21,022) $ (8,616) $ 8,616 $ (21,022) $ (11,221) $ 11,221 $ (21,022)
============================== =======================================================================
Unaudited Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2002
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
---------------- -------------- ------------ -------------- -------------- ------------- -------------
Total revenues.......... $ 76,439 $ -- $ 76,439 $ 38,458 $ (204) $ 114,693
---------------- -------------- ------------ -------------- -------------- ------------- -------------
Cost of revenues........ (49,737) (3,765) -- (53,502) (33,719) 204 (87,017)
Selling and marketing... (17,168) (1,031) -- (18,199) (9,393) -- (27,592)
General and
administrative........ (3,614) (22) -- (3,636) (3,233) -- (6,869)
Depreciation and
amortization.......... (19,532) (2,622) -- (22,154) (8,522) -- (30,676)
Other, net (principally --
interest)............. (9,963) 1,268 (8,695) (5,944) -- (14,639)
Goodwill impairment..... (261,212) -- -- (261,212) -- -- (261,212)
---------------- -------------- ------------ -------------- -------------- ------------- -------------
Total expenses.......... (361,226) (6,172) -- (367,398) (60,811) 204 (428,005)
Loss in subsidiaries (28,525) -- 6,172 (22,353) -- 22,353 --
Loss before income tax
benefit............... (313,312) (6,172) 6,172 (313,312) (22,353) 22,353 (313,312)
Income tax benefit...... 11,402 -- -- 11,402 -- -- 11,402
---------------- -------------- ------------ -------------- -------------- ------------- -------------
Net loss................ $(301,910) $ (6,172) $ 6,172 $(301,910) $ (22,353) $ 22,353 $ (301,910)
================ ============== ============ ============== ============== ============= =============
Unaudited Condensed Consolidating Statement of Operations
For the Six Months Ended March 31, 2003
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
------------------------------------------- -------------- -------------- ------------- -------------
Total revenues........... $ 158,845 $ -- $ -- $ 158,845 $ 79,364 $ (674) $ 237,535
------------------------------------------- -------------- -------------- ------------- -------------
Cost of revenues......... (93,764) (8,937) -- (102,701) (63,321) 674 (165,348)
Selling and marketing.... (26,212) (1,947) -- (28,159) (16,417) -- (44,576)
General and
administrative......... (8,567) (1,239) -- (9,806) (6,881) -- (16,687)
Depreciation and
amortization........... (24,762) (4,796) -- (29,558) (14,677) -- (44,235)
Other, net (principally
interest).............. (20,486) 153 -- (20,333) (15,052) -- (35,385)
------------------------------------------- -------------- -------------- ------------- -------------
Total expenses........... (173,791) (16,766) -- (190,557) (116,348) 674 (306,231)
Loss in subsidiaries..... ( 53,750) -- 16,766 (36,984) -- 36,984 --
Loss before income tax
benefit................ (68,696) (16,766) 16,766 (68,696) 36,984 (68,696) (36,984)
Income tax benefit....... -- -- -- -- -- -- --
------------------------------------------- -------------- -------------- ------------- -------------
Net loss................. $ (68,696) $ (16,766) $ 16,766 $ (68,696) $ (36,984) $ 36,984 $ (68,696)
=========================================== ============== ============== ============= =============
Unaudited Condensed Consolidating Statement of Operations
For the Six Months Ended March 31, 2002
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
--------------- -------------- ------------ -------------- -------------- ------------- -------------
Total revenues........... $ 144,110 $ -- $ -- $ 144,110 $ 52,484 $ (204) $ 196,390
--------------- -------------- ------------ -------------- -------------- ------------- -------------
Cost of revenues......... (99,235) (7,510) -- (106,745) (47,816) 204 (154,357)
Selling and marketing.... (41,789) (1,499) -- (43,288) (14,149) -- (57,437)
General and
administrative......... (7,291) (321) -- (7,612) (4,457) -- (12,069)
Depreciation and
amortization........... (31,473) (4,163) -- (35,636) (10,845) -- (46,481)
Other, net (principally
interest).............. (18,528) 1,268 -- (17,260) (7,889) -- (25,149)
Goodwill impairment...... (261,212) -- -- (261,212) -- -- (261,212)
--------------- -------------- ------------ -------------- -------------- ------------- -------------
Total expenses........... (459,528) (12,225) -- (471,753) (85,156) -- (556,705)
Loss in subsidiaries (44,897) -- 12,225 (32,672) -- 32,672 --
Loss before income tax
benefit................ (360,315) (12,225) 12,225 (360,315) 32,672 (32,672) (360,315)
Income tax benefit....... 28,761 -- -- 28,761 -- -- 28,761
--------------- -------------- ------------ -------------- -------------- ------------- -------------
Net loss................. $(331,554) $ (12,225) $ 12,225 $ (331,554) $ (32,672) $32,672 $(331,554)
=============== ============== ============ ============== ============== ============= =============
Unaudited Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2003
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
---------------- ------------- -----------------------------------------------------------------------
Operating activities,
net................... $ 15,760 $ (133) $ -- $ 15,627 $ (9,086) $ -- $ 6,541
Investing activities,
net................... (6,654) -- -- (6,654) (18,500) -- (25,154)
Financing activities,
net................... 7,045 -- -- 7,045 (2) -- 7,043
---------------- ------------- -----------------------------------------------------------------------
---------------- ------------- -----------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalent............ 16,151 (133) -- 16,018 (27,588) -- (11,570)
Cash at beginning of
period................ 4,769 118 -- 4,887 27,588 -- 32,475
---------------- ------------- -----------------------------------------------------------------------
Cash at end of period... $ 20,920 $(15) $ -- $ 20,905 $ -- $ -- $ 20,905
================ ============= =======================================================================
Unaudited Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2002
AirGate iPCS
Guarantor AirGate Non-Guarantor AirGate
AirGate PCS, Subsidiaries Eliminations Consolidated Subsidiary Eliminations Consolidated
Inc.
---------------- ------------- -------------------------------------------------------------------------
Operating activities,
net................... $ (21,012) $ 2,891 $ -- $ (18,121) $ (19,754) $ -- $ (37,875)
Investing activities,
net................... 151 (2,743) -- (2,592) (27,484) -- (30,076)
Financing activities,
net................... 49,452 -- -- 49,452 29,997 -- 79,449
---------------- ------------- -------------------------------------------------------------------------
Increase (decrease) in
cash and cash
equivalent............ 28,591 148 -- 28,739 (17,241) -- 11,498
Cash at beginning of
period................ (9,954) (157) -- (10,111) 24,401 -- 14,290
---------------- ------------- -------------------------------------------------------------------------
Cash at end of period... $ 18,637 $ (9) $ -- $ 18,628 $ 7,160 $ -- $ 25,788
================ ============= =========================================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Results of Operations and Financial
Condition ("MD&A") contains forward looking statements that are based on current
expectations, estimates, forecasts and projections about us, our future
performance, our liquidity, the wireless industry, our beliefs and management's
assumptions. In addition, other written and oral statements that constitute
forward-looking statements may be made by us or on our behalf. Such forward
looking statements include statements regarding expected financial results and
other planned events, including but not limited to, anticipated liquidity, churn
rates, ARPU, 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:
* the impact and outcome of the iPCS bankruptcy filing and related proceedings;
* the competitiveness and impact of Sprint's pricing plans and PCS products and
services;
* subscriber credit quality;
* the potential to experience a continued high rate of subscriber turnover;
* the ability of Sprint to provide back office billing, subscriber care and
other services and the quality and costs of such services;
* inaccuracies in financial information provided by Sprint;
* new charges and fees, or increased charges and fees, charged by Sprint;
* the impact and outcome of disputes with Sprint;
* rates of penetration in the wireless industry;
* our significant level of indebtedness;
* adequacy of bad debt and other allowances;
* the potential need for additional sources of liquidity;
* anticipated future losses;
* subscriber purchasing patterns;
* potential fluctuations in quarterly results;
* an adequate supply of subscriber equipment;
* risks related to future growth and expansion; and
* the volatility of the market price of AirGate's common stock.
These and other applicable risks and uncertainties are summarized under the
captions "Future Trends That May Affect Operating Results, Liquidity and Capital
Resources" included in this "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this quarterly report on Form
10-Q and "Risk Factors" included in Part II under "Item 5 - Other Information"
of this quarterly report on Form 10-Q and elsewhere in this report.
For a further list of and description of such risks and uncertainties, see the
reports filed by us with the SEC. Except as required under federal securities
law and the rules and regulations of the SEC, we do not have any intention or
obligation to update publicly any forward looking statements after distribution
of this report, whether as a result of new information, future events, changes
in assumptions or otherwise.
Overview
On July 22, 1998, AirGate entered into management and related agreements with
Sprint whereby it became the network partner of Sprint with the right to provide
100% digital PCS products and services under the Sprint brand names in AirGate's
original territory in the southeastern United States. In January 2000, AirGate
began commercial operations with the launch of four markets covering 2.2 million
residents in AirGate's territory. By September 30, 2000, AirGate had launched
commercial PCS service in all of the 21 basic trading areas, referred to as
markets, which comprise AirGate's original territory. On November 30, 2001,
AirGate acquired iPCS, a network partner of Sprint with 37 markets in the
midwestern states of Michigan, Illinois, Iowa and Nebraska. The acquisition of
iPCS increased the total resident population in the Company's markets from
approximately 7.1 million to approximately 14.5 million. At March 31, 2003,
AirGate had total network coverage of approximately 5.9 million residents and
iPCS had total network coverage of approximately 5.7 million residents, of the
7.1 million and 7.4 million residents in its respective territory.
Under AirGate's and iPCS' long-term agreements with Sprint, we manage our
networks on Sprint's licensed spectrum and have the right to use the Sprint
brand names royalty-free during the respective company's PCS affiliation with
Sprint. We also have access to Sprint's national marketing support and
distribution programs and are generally required to buy network equipment and
subscriber handsets from vendors approved by Sprint or from Sprint directly. The
agreements with Sprint generally provide that these purchases are to be made at
the same discounted rates offered by vendors to Sprint based on its large volume
purchases. AirGate and iPCS each pay an affiliation fee of 8% of collected
revenues to Sprint. We are entitled to 100% of revenues collected from the sale
of handsets and accessories and on roaming revenues received when customers of
Sprint and Sprint's other network partners make a wireless call on our PCS
network.
iPCS is a wholly-owned, unrestricted subsidiary of AirGate. As required by the
terms of AirGate's and iPCS' respective outstanding indebtedness, AirGate and
iPCS conduct its business as separate corporate entities from the other.
AirGate's notes require subsidiaries of AirGate to be classified as either
"restricted subsidiaries" or "unrestricted subsidiaries". A restricted
subsidiary is defined generally as any subsidiary that is not an unrestricted
subsidiary. An unrestricted subsidiary includes any subsidiary which:
* has been designated an unrestricted subsidiary by the AirGate board of
directors,
* has no indebtedness which provides recourse to AirGate or any of its
restricted subsidiaries,
* is not party to any agreement with AirGate or any of its restricted
subsidiaries, unless the terms of the agreement are no less favorable to
AirGate or such restricted subsidiary than those that might be obtained
from persons unaffiliated with AirGate,
* is a subsidiary with respect to which neither AirGate nor any of its
restricted subsidiaries has any obligation to subscribe for additional
equity interests, maintain or preserve such subsidiary's financial
condition or cause such subsidiary to achieve certain operating results,
* has not guaranteed or otherwise provided credit support for any
indebtedness of AirGate or any of its restricted subsidiaries, and
* has at least one director and one executive officer that are not directors
or executive officers of AirGate or any of its restricted subsidiaries.
On February 23, 2003, iPCS filed a Chapter 11 bankruptcy petition in the United
States Bankruptcy Court for the Northern District of Georgia for the purpose of
effecting a court-administered reorganization. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 94 "Consolidation of All
Majority-Owned Subsidiaries" and Accounting Research Bulletin (ARB) No. 51
"Consolidated Financial Statements," when control of a majority-owned subsidiary
does not rest with the majority owners (as, for instance, where the subsidiary
is in legal reorganization or in bankruptcy), ARB No. 51 precludes consolidation
of the majority-owned subsidiary. As a result, subsequent to February 23, 2003,
AirGate no longer consolidates the accounts and results of operations of iPCS
and the accounts of iPCS are recorded as an investment using the cost method of
accounting.
AirGate's notes impose certain affirmative and restrictive covenants on AirGate
and its restricted subsidiaries and also include as events of default certain
events, circumstances or conditions involving AirGate or its restricted
subsidiaries. Because iPCS is an unrestricted subsidiary, the covenants and
events of default under AirGate's notes do not apply to iPCS.
AirGate's credit facility also imposes certain restrictions on, and applies
certain events of default to events, circumstances or conditions involving,
AirGate and its subsidiaries. AirGate's senior credit facility, however,
expressly excludes iPCS from the definition of "subsidiary." Therefore, these
restrictions and events of default applicable to AirGate and its subsidiaries do
not generally apply to iPCS.
CRITICAL ACCOUNTING POLICIES
The Company relies on the use of estimates and makes assumptions that impact its
financial condition and results. These estimates and assumptions are based on
historical results and trends as well as the Company's forecasts as to how these
might change in the future. Several of the most critical accounting policies
that materially impact the Company's results of operations include:
Allowance for Doubtful Accounts
Estimates are used in determining the allowance for doubtful accounts and are
based on historical collection and write-off experience, current trends, credit
policies and accounts receivable by aging category. In determining these
estimates, the Company compares historical write-offs in relation to the
estimated period in which the subscriber was originally billed. The Company also
looks at the average length of time that elapses between the original billing
date and the date of write-off in determining the adequacy of the allowance for
doubtful accounts by aging category. From this information, the Company provides
specific amounts to the aging categories. The Company provides an allowance for
substantially all receivables over 90 days old. The provision for doubtful
accounts as a percentage of service revenues for the six months ended March 31
was as follows:
Provision for Doubtful
Accounts
Year As % of Service Revenue
---- --------------------------
2003 2.2%
2002 10.4%
The allowance for doubtful accounts was $4.5 million (AirGate only) as of March
31, 2003, and $11.3 million ($6.8 million for AirGate and $4.5 million for
iPCS), respectively, as of September 30, 2002. If the allowance for doubtful
accounts is not adequate, it could have a material adverse affect on our
liquidity, financial position and results of operations.
The Company also reviews current trends in the credit quality of its subscriber
base. As of March 31, 2003, 33% of AirGate's subscriber base consisted of
sub-prime credit quality subscribers. Sprint has a program in which subscribers
with lower quality credit or limited credit history may nonetheless sign up for
service subject to certain account spending limits, if the subscriber makes a
deposit ranging from $125 to $250. In May 2001, Sprint introduced the no-deposit
account spending limit program, in which the deposit requirement was waived
except in very limited circumstances (the "NDASL program"). The NDASL program
was replaced in late 2001 with the Clear Pay program. The Clear Pay program
re-instituted the deposit for the lowest credit quality subscribers. The NDASL
and Clear Pay programs and their associated lack of deposit requirements
increased the number of the Company's sub-prime credit subscribers. At the end
of February 2002, Sprint allowed its network partners to re-institute deposits
in a program called the Clear Pay II program. The Clear Pay II program and its
deposit requirements are currently in effect in most of AirGate's markets, which
reinstates a deposit requirement of $125 for most sub-prime credit subscribers.
In early February 2003, management began implementing a higher deposit threshold
of $250 for sub-prime customers in our markets.
Reserve for Late Payment Fees, Early Cancellation Fees and First Payment Default
Subscribers
The Company provides a reduction in revenues for those subscribers that it
anticipates will not pay late payment fees and early cancellation fees using
historical information. The reserve for late payment fees and early cancellation
fees are included in the allowance for doubtful accounts balance.
The Company had previously reserved for subscribers that it anticipated would
never pay a bill. During the three months ended March 31, 2003, the Company
experienced a significant improvement in customer payment behavior for these
customers as well as a significant improvement in the credit quality of new
subscribers to the Company. As a result, the Company has determined that the
first payment default reserve was no longer necessary. At March 31, 2003, first
payment default reserve was $0. This resulted in the addition of 4,187 and 2,252
net subscriber additions for AirGate and iPCS at March 31, 2003.
Revenue Recognition
The Company recognizes revenues when persuasive evidence of an arrangement
exists, services have been rendered or products have been delivered, the price
to the buyer is fixed and determinable, and collectibility is reasonably
assured. The Company's revenue recognition polices are consistent with the
guidance in Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" promulgated by the Securities and Exchange Commission.
The Company records equipment revenue from the sale of handsets and accessories
to subscribers in its retail stores and to local distributors in its territories
upon delivery. The Company does not record equipment revenue on handsets and
accessories purchased by subscribers from national third-party retailers such as
Radio Shack, Best Buy and Circuit City, or directly from Sprint by subscribers
in its territories. The Company believes the equipment revenue and related cost
of equipment associated with the sale of wireless handsets and accessories is a
separate earnings process from the sale of wireless services to subscribers.
Because such arrangements do not require a customer to subscribe to the
Company's wireless services and because the Company sells wireless handsets to
existing customers at a loss, the Company currently accounts for these
transactions separately from agreements to provide customers wireless service.
The Company's subscribers pay an activation fee to the Company when they
initiate service. The Company defers activation fee revenue over the average
life of its subscribers, which is estimated to be 30 months. The Company
recognizes service revenue from its subscribers as they use the service. The
Company provides a reduction of recorded revenue for billing adjustments, late
payment fees, and early cancellation fees. The Company also reduces recorded
revenue for rebates and discounts given to subscribers on wireless handset sales
in accordance with Emerging Issues Task Force ("EITF") Issue No. 01-9
"Accounting for Consideration Given by a Vendor to a Subscriber (Including a
Reseller of the Vendor's Products)." For industry competitive reasons, the
Company sells wireless handsets at a loss. The Company participates in the
Sprint national and regional distribution programs in which national retailers
such as Radio Shack, Best Buy and Circuit City sell Sprint PCS products and
services. In order to facilitate the sale of Sprint PCS products and services,
national retailers purchase wireless handsets from Sprint for resale and receive
compensation from Sprint for Sprint PCS products and services sold. For industry
competitive reasons, Sprint subsidizes the price of these handsets by selling
the handsets at a price below cost. Under the Company's Sprint agreements, when
a national retailer sells a handset purchased from Sprint to a subscriber in the
Company's territories, the Company is obligated to reimburse Sprint for the
handset subsidy. The Company does not receive any revenues from the sale of
handsets and accessories by such national retailers. The Company classifies
these handset subsidy charges as a selling and marketing expense for a new
subscriber handset sale and classifies these subsidies as a cost of service and
roaming for a handset upgrade to an existing subscriber.
Sprint retains 8% of collected service revenues from subscribers based in the
Company's markets and from non-Sprint subscribers who roam onto the Company's
network. The amount of affiliation fees retained by Sprint is recorded as cost
of service and roaming. Revenues derived from the sale of handsets and
accessories by the Company and from certain roaming services (outbound roaming
and roaming revenues from Sprint PCS and its PCS network partner subscribers)
are not subject to the 8% affiliation fee from Sprint.
The Company defers direct subscriber activation costs when incurred and
amortizes these costs using the straight-line method over 30 months, which is
the estimated average life of a subscriber. Direct subscriber activation costs
also include credit check fees and loyalty welcome call fees charged to the
Company by Sprint and costs incurred by the Company to operate a subscriber
activation center.
Impairment of Long-Lived Assets and Goodwill
The Company accounts for long-lived assets and goodwill in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 144 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. SFAS No. 142 requires annual tests for
impairment of goodwill and intangible assets that have indefinite useful lives
and interim tests when an event has occurred that more likely than not has
reduced the fair value of such assets. As of September 30, 2002, the Company
recorded substantial write-offs of long lived assets and goodwill. Management
does not believe that any additional write-offs are required since year-end.
Management will continue to monitor any triggering events and perform
re-evaluations, as necessary.
NEW ACCOUNTING PRONOUNCEMENTS
In February 2003, the FASB issued SFAS No. 149, "Accounting for Certain
Financial Instruments with Characteristics of Liabilities and Equity", which is
effective at the beginning of the first interim period beginning after March 15,
2003. SFAS No. 149 establishes standards for the Company's classification of
liabilities in the financial statements that have characteristics of both
liabilities and equity. We are currently evaluating the impact of this statement
on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, and interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material adverse effect on the Company's financial
statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation from the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting, and has adopted the
disclosure requirements of SFAS No. 123.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", which addresses the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees. This interpretation also requires the recognition of a
liability by a guarantor at the inception of certain guarantees.
Interpretation No. 45 requires the guarantor to recognize a liability for the
non-contingent component of the guarantee, which is the obligation to stand
ready to perform in the event that specified triggering events or conditions
occur. The initial measurement of this liability is the fair value of the
guarantee at inception. The recognition of the liability is required even if it
is not probable that payments will be required under the guarantee or if the
guarantee was issued with a premium payment or as part of a transaction with
multiple elements.
The Company guarantees certain lease commitments of its restricted subsidiaries.
The maximum amount of these guarantees is included in the Company's Annual
Report on Form 10-K/A for the fiscal year ended September 30, 2002. Also, the
handsets sold by the Company are under a one-year warranty from Sprint. If a
customer returns a handset for warranty, the Company generally provides the
customer with a refurbished handset and sends the warranty handset to Sprint for
repair. Sprint provides a credit to the Company equal to the retail price of the
refurbished handset. The Company will apply the recognition and measurement
provisions for all guarantees entered into or modified after December 31, 2002.
In November 2002, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF No. 00-21, "Accounting for Revenue Arrangements with Multiple
Element Deliverables". This guidance addresses how to account for arrangements
that may involve multiple revenue-generating activities, i.e., the delivery or
performance of multiple products, services, and/or rights to use assets. In
applying this guidance, separate contracts with the same party, entered into at
or near the same time, will be presumed to be a package, and the consideration
will be measured and allocated to the separate units based on their relative
fair values. This consensus guidance will be applicable to agreements entered
into in quarters beginning after June 15, 2003. AirGate will adopt this new
accounting effective July 1, 2003. The Company is currently evaluating the
impact of this change.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 provides new guidance on the
recognition of costs associated with exit or disposal activities. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. SFAS No. 146 supercedes previous accounting guidance
provided by the EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." EITF Issue No. 94-3 required recognition of
costs at the date of commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. Early application is permitted. The Company adopted SFAS No. 146 on
October 1, 2002. As discussed in Note 5, during the six months ended March 31,
2003 the Company recorded $1.1 million and $0.2 million, respectively, of costs
related to staff reductions and retail store closings.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," will now be used to
classify those gains and losses. The adoption of SFAS No. 145 by the Company on
October 1, 2002 did not have a material impact on the Company's financial
position, results of operations, or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 by the
Company on October 1, 2002 did not have a material impact on the Company's
financial position, results of operations or cash flows.
RESULTS OF OPERATIONS
The following discussion of the results of operations includes the results of
operations of iPCS subsequent to November 30, 2001, its date of acquisition, but
as a result of iPCS' Chapter 11 bankruptcy filing, does not include the results
of operations of iPCS subsequent to February 23, 2003. iPCS filed for Chapter 11
bankruptcy on February 23, 2003. In accordance with SFAS No. 94 and ARB No. 51,
iPCS' results of operations are not consolidated with AirGate's results
subsequent to February 23, 2003 and the accounts of iPCS are recorded as an
investment using the cost method of accounting. AirGate stand-a-lone results
includes the effects of purchase accounting related to the iPCS acquisition and
the results do not include the historical equity basis loss of iPCS.
Financial Measures and Key Operating Metrics
We use certain operating and financial measures that are not calculated in
accordance with accounting principles generally accepted in the United States,
or GAAP. A non-GAAP financial measure is defined as a numerical measure of a
company's financial performance that (i) excludes amounts, or is subject to
adjustments that have the effect of excluding amounts, that are included in the
comparable measure calculated and presented in accordance with GAAP in the
statement of income or statement of cash flows; or (ii) includes amounts, or is