SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 (I.R.S. Employer
of 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 August 4, 2003.
AIRGATE PCS, INC.
THIRD QUARTER REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements...................................................3
Consolidated Balance Sheets at June 30, 2003 (unaudited)
and September 30, 2002...............................................3
Consolidated Statements of Operations for the three months and
nine months ended June 30, 2003 and 2002(unaudited)..................4
Consolidated Statements of Cash Flows for the nine months ended
June 30, 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............35
Item 4. Controls and Procedures...............................................34
PART II OTHER INFORMATION.....................................................35
Item 1. Legal Proceedings.....................................................36
Item 2. Changes in Securities and Use of Proceeds.............................36
Item 3. Defaults Upon Senior Securities.......................................36
Item 4. Submission of Matters to a Vote of Security Holders...................36
Item 5. Other Information.....................................................36
Item 6. Exhibits and Reports on Form 8-K......................................49
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)
June 30, September 30,
2003 2002
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents...................................... $ 30,793 $ 32,475
Accounts receivable, net of allowance for doubtful
accounts of $4,601 and $11,256, respectively................ 23,388 38,127
Receivable from Sprint......................................... 13,709 44,953
Inventories.................................................... 2,043 6,733
Prepaid expense................................................ 4,403 7,159
Other current assets........................................... 474 326
-------- --------
Total current assets...................................... 74,810 129,773
Property and equipment, net of accumulated depreciation
of $118,334 and $112,913, respectively........................... 184,493 399,155
Financing costs..................................................... 6,985 8,118
Intangible assets, net of accumulated amortization of $0
and $39,378, respectively........................................ -- 28,327
Direct subscriber activation costs.................................. 4,600 8,409
Other assets........................................................ 1,148 512
---------- ---------
Total assets................................................. $ 272,036 $ 574,294
========= =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable............................................... $ 2,879 $ 18,152
Accrued expense................................................ 9,784 20,950
Payable to Sprint.............................................. 40,005 88,360
Deferred revenue............................................... 7,739 11,775
Current maturities of long-term debt and capital
lease obligations........................................... 11,850 354,936
-------- ---------
Total current liabilities.................................. 72,257 494,173
Deferred subscriber activation fee revenue.......................... 7,910 14,973
Other long-term liabilities......................................... 1,656 3,267
Long-term debt and capital lease obligations, excluding
current maturities............................................... 375,400 354,828
Investment in iPCS.................................................. 184,115 --
--------- ---------
Total liabilities.......................................... 641,338 867,241
--------- ---------
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 June 30, 2003 and
September 30, 2002, respectively......................... 260 258
Additional paid-in-capital................................... 924,086 924,008
Unearned stock compensation.................................. (522) (1,029)
Accumulated deficit.......................................... (1,293,126) (1,216,184)
---------- ----------
Total stockholders' deficit.......................... (369,302) (292,947)
--------- ----------
Total liabilities and stockholders' deficit.......... $ 272,036 $ 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 Nine Months Ended
June 30, June 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
--------------- -------------- ------------- ---------------
Revenue:
Service revenue.................................. $ 64,936 $ 87,219 $ 242,928 $ 230,422
Roaming revenue.................................. 15,764 32,000 67,019 75,458
Equipment revenue................................ 2,486 3,590 10,773 13,523
-------- -------- ------- -------
Total revenue....................... 83,186 122,809 320,720 319,403
-------- -------- -------- -------
Operating Expense:
Cost of services and roaming (exclusive
of depreciation and Amortization as
shown separately below)........................... (46,040) (82,401) (193,956) (216,698)
Cost of equipment.................................. (4,969) (9,718) (22,400) (29,982)
Selling and marketing expense...................... (12,703) (28,131) (57,280) (85,568)
General and administrative expense................. (5,224) (6,208) (21,910) (18,277)
Non-cash stock compensation expense................ (177) (183) (530) (597)
Depreciation and amortization of
property and equipment............................ (11,588) (19,500) (48,967) (47,864)
Amortization of intangible assets.................. -- (11,260) (6,855) (29,377)
Goodwill impairment................................ -- -- -- (261,212)
-------- -------- --------- --------
Total operating expense...................... (80,701) (157,401) (351,898) (689,575)
------- -------- -------- --------
Operating income (loss)...................... 2,485 (34,592) (31,178) (370,172)
Interest income......................................... 27 314 94 530
Interest expense........................................ (10,770) (15,801) (45,869) (40,732)
Other................................................... 11 -- 11 (20)
-------- --------- --------- --------
Loss before income tax benefit............... (8,247) (50,079) (76,942) (410,394)
Income tax benefit........................... -- -- -- 28,761
-------- --------- --------- --------
-- -- --
Net loss..................................... $ (8,247) $ (50,079) $ (76,942) $ (381,633)
========= ========= ========= ==========
Basic and diluted net loss per share of common stock......$ (0.32) $ (1.94) $ (2.97) $ (16.55)
Basic and diluted weighted-average outstanding common shares..25,939,836 25,801,138 25,897,415 23,059,151
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
Nine Months Ended
June 30,
--------------------------
2003 2002
Cash flows from operating activities:
Net loss................................................................................... $ (76,942) $(381,633)
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................................... 48,967 47,864
Amortization of intangible assets......................................................... 6,855 29,377
Amortization of financing costs into interest expense..................................... 907 1,397
Provision for doubtful accounts........................................................... 5,417 22,342
Interest expense associated with accretion of discounts................................... 35,747 36,441
Non-cash stock compensation............................................................... 530 597
Deferred income tax benefit............................................................... -- (28,761)
Changes in assets and liabilities:
Accounts receivable................................................................... (3,076) (28,821)
Receivable from Sprint................................................................ 16,777 (4,274)
Inventories........................................................................... 3,457 3,945
Prepaid expenses, other current and non-current assets................................ (1,328) (3,978)
Accounts payable, accrued expenses and other long term liabilities.................... (4,133) (23,031)
Payable to Sprint..................................................................... (12,911) 10,780
Deferred revenue...................................................................... 383 7,746
---------- -----------
Net cash provided by (used in) operating activities........................ 20,650 (48,797)
---------- -----------
Cash flows from investing activities:
Capital expenditures....................................................................... (18,838) (77,405)
Cash acquired from iPCS.................................................................... -- 24,402
Deconsolidation of iPCS.................................................................... (10,031) --
Acquisition of iPCS........................................................................ -- (6,058)
-------- -------
Net cash used in investing activities...................................... (28,869) (59,061)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings under senior credit facilities.................................... 8,000 116,200
Payments for credit facility borrowings.................................................... (1,518) --
Payments for capital lease borrowings...................................................... (2) (4)
Stock issued to employee stock purchase plan............................................... -- 567
Proceeds from exercise of employee stock options........................................... 57 685
-------- --------
Net cash provided by financing activities.................................. 6,537 117,448
-------- --------
Net (decrease) increase in cash and cash equivalents....................... (1,682) 9,590
Cash and cash equivalents at beginning of period................................................ 32,475 14,290
-------- --------
Cash and cash equivalents at end of period...................................................... $ 30,793 $ 23,880
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest..................................................................... $ 8,661 $ 7,544
Supplemental disclosure for non-cash investing activities:
Capitalized interest....................................................................... 381 6,160
iPCS acquisition:
Stock issued......................................................................... -- (706,645)
Value of common stock options and warrants assumed................................... -- (47,727)
Liabilities assumed................................................................. -- (394,165)
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
June 30, 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
nine months ended June 30, 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 June
30, 2003 does not include the consolidated accounts of iPCS; it does however,
include the Company's investment in iPCS at cost. The accompanying consolidated
statement of operations for the nine months ended June 30, 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. 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 with
respect to its indebtedness. Changes in technology, increased competition,
economic conditions or inability to achieve sufficient positive cash flow to
meet its financial covenants with respect to its indebtedness, 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 nine
months ended June 30, 2003 and the year ended September 30, 2002, the Company's
net loss amounted to $76.9 million and $996.6 million (including goodwill and
asset impairment charges of $817.4 million), respectively. As of June 30, 2003,
AirGate had working capital of $2.6 million and available credit of $9.0 million
under its $153.5 million senior secured credit facility (the "AirGate credit
facility").
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 a
lawsuit against Sprint alleging, among other things, that Sprint had failed to
remit certain amounts owed to iPCS under its agreements with Sprint and is
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 nine months ended June 30, 2003 and since inception,
AirGate stand alone invested $10.4 million and $286.0 million respectively to
purchase property and equipment. While much of AirGate's network is now
complete, capital expenditures will continue to be necessary to increase
capacity and improve network operations.
On August 8, 2003, AirGate drew the $9.0 million remaining available under the
AirGate credit facility. 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 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 use its cash could be
restricted or terminated and its payment obligations could be accelerated. Any
such restriction, termination or acceleration could have a material adverse
affect on AirGate's liquidity and capital resources.
AirGate has initiated a number of actions to lower its operating costs and
capital needs and improve operating cash flow. The following are some of the
more significant steps:
o a plan to improve the credit quality of new subscribers and its subscriber
base by re-imposing and increasing deposits for sub-prime customers;
o the elimination of certain personnel positions;
o a significant reduction in capital expenditures; and
o a reduction in spending for advertising and promotions.
In addition to these steps, AirGate continues to review potential actions that
could further reduce AirGate operating expenses such as exploring ways to lower
fees and charges from services now provided by Sprint, including a potential
outsourcing of certain services provided by Sprint and increased examination of
Sprint fees and charges and cash receipts from Sprint. Although there can be no
assurances, AirGate management believes that existing cash, expected results of
operations and cash flow from operations will provide sufficient resources to
fund AirGate's activities through at least June 30, 2004.
The following reflects the condensed balance sheet information as of June 30,
2003 and September 30, 2002 for AirGate separately identifying iPCS as an
investment, and the AirGate statement of operations information for the three
months and nine months ended June 30, 2003 and 2002 separately identifying the
investment in iPCS and showing the effects of purchase accounting and the
historical equity basis loss of iPCS through February 23, 2003 (dollar amounts
in thousands):
As of
June 30, September 30,
2003 2002
Condensed Balance Sheet Information:
Cash and cash equivalents..................... $ 30,793 $ 4,887
Other current assets.......................... 44,017 62,819
-------- --------
Total current assets.................. 74,810 67,706
Property and equipment, net................... 184,493 213,777
Other noncurrent assets....................... 12,733 13,732
------ -------
$ 272,036 $ 295,215
========= =========
Current liabilities........................... $ 72,257 $ 82,175
Long-term debt................................ 375,400 354,264
Other long-term liabilities................... 9,566 10,180
Investment in iPCS ........................... 184,115 141,543
-------- --------
Total liabilities....................... 641,338 588,162
Stockholders' deficit......................... (369,302) (292,947)
--------- -----------
$ 272,036 $ 295,215
========= =========
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Condensed Statement of Operations Information:
Revenue.................................................... $ 83,186 $ 81,147 $241,799 $226,111
-------- -------- -------- --------
Cost of revenue............................................ (51,009) (58,248) (153,402) (166,006)
Selling and marketing expense.............................. (12,703) (15,850) (40,863) (59,925)
General and administrative expense......................... (5,224) (4,495) (15,029) (9,057)
Depreciation and amortization.............................. (11,588) (10,150) (34,832) (28,482)
Non-cash stock compensation expense........................ (177) (183) (530) (597)
--------- --------- -------- --------
Total operating expense.............................. (80,701) (88,926) (244,656) (264,067)
--------- ---------- --------- ---------
Operating income (loss) ............................. 2,485 (7,779) (2,857) (37,956)
Other, net (principally interest).................... (10,732) (8,741) (31,514) (25,683)
--------- --------- --------- ---------
Loss before equity in loss of iPCS and effects of purchase
accounting, and income tax benefit..................... (8,247) (16,520) (34,371) (63,639)
Historical equity basis loss of iPCS....................... -- (24,383) (36,984) (60,172)
Effects of purchase accounting............................. -- (9,176) (5,587) (286,583)
-- -- -- 28,761
--------- --------- --------- ---------
Net loss................................................... $ (8,247) $ (50,079) $ (76,942) $(381,633)
======== ========= ========= =========
4
(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 39,835, 40,132, 39,588 and 40,155 for the
three and nine months ended June 30, 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 a net loss and loss per share basis
as provided by SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, as 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 nine months ended June 30, 2003 and 2002 under the plans
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 June 30, Nine Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported $ (8,247) $ (50,079) $ (76,942) $ (381,633)
Add: stock based
compensation expense included
in determination of net loss 177 183 530 597
Less: stock-based
compensation expense
determined under the fair
value based method (2,426) (2,284) (7,278) (6,853)
-------- --------- --------- ---------
Pro forma net loss $(10,496) $ (52,180) $ (83,690) $ (387,889)
--------- ---------- --------- ---------
Basic and diluted loss per share:
As reported $ (0.32) $ (1.94) $ (2.97) $ (16.55)
Pro forma $ (0.40) $ (2.02) $ (3.23) $ (16.82)
(2) New Accounting Pronouncements
In February 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity," which is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS No. 150 establishes standards
for the Company's classification of liabilities in the financial statements that
have characteristics of both liabilities and equity. The application of SFAS No.
150 is not expected to have a material adverse effect on the Company's financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an 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 Interpretation is effective for interim
periods beginning after June 15, 2003 for all variable interests in variable
interest entities created prior to January 31, 2003. The application of
Interpretation No. 46 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 and 148.
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. Therefore, the warranty expense for the Company is not
deemed material. 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." The EITF 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 for quarters beginning after June 15, 2003. AirGate will
adopt EITF 00-21 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. There was no impact on adoption of this statement.
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 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 nine months
ended June 30, 2003 and 2002 are as follows (dollar amounts in thousands):
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
2003* 2002 2003* 2002
-------------------- ---------------------
Amounts included in the Consolidated Statement of Operations:
AirGate roaming revenue............................................ $ 14,595 $ 20,181 $ 45,397 $ 50,228
AirGate cost of service and roaming:
Roaming....................................................... 11,548 13,465 37,010 38,352
Customer service.............................................. 9,313 10,348 31,040 26,921
Affiliation fee............................................... 4,203 4,218 13,748 11,490
Long distance................................................. 3,309 3,883 9,353 10,943
Other......................................................... 546 473 1,536 1,555
--------- --------- --------- ---------
AirGate cost of service and roaming................................ 28,919 32,387 92,687 89,261
AirGate purchased inventory........................................ 3,971 6,398 12,192 16,969
AirGate selling and marketing...................................... 3,672 3,871 9,784 18,172
iPCS roaming revenue............................................... $ -- $9,207 $ 14,724 $ 21,074
iPCS cost of service and roaming:
Roaming....................................................... -- 6,649 12,158 16,604
Customer service.............................................. -- 5,458 11,760 11,255
Affiliation fee............................................... -- 2,352 4,911 5,292
Long distance................................................. -- 2,668 3,281 6,259
Other......................................................... -- 172 461 487
--------- --------- --------- ---------
iPCS cost of service and roaming:.................................. -- 17,299 32,571 39,897
iPCS purchased inventory........................................... -- 7,306 6,124 15,294
iPCS selling and marketing......................................... -- 2,107 3,138 8,930
* For iPCS, subsequent to February 23, 2003 the results of iPCS are no longer
consolidated with the results of AirGate.
Amounts included in the Consolidated Balance Sheets:
As of
June 30, September 30,
2003 2002
---- ----
Receivable from Sprint $ 13,709 $ 44,953
Payable to Sprint (40,005) (88,360)
Because approximately 95% of our revenue is collected by Sprint and 65% of cost
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 amount Sprint has asserted we owe is approximately $7.0 million. This
includes, but is not limited to, the following items, all of which for
accounting purposes have been reserved or otherwise provided for:
o In fiscal year 2002, 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.
o Sprint invoiced AirGate approximately $0.5 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 $1.4 million in fiscal year 2003.
o We continue to discuss with Sprint whether AirGate owes software
maintenance fees to Sprint of approximately $1.7 million for calendar 2002
and $1.7 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.
o During the nine months ended June 30, 2003, Sprint billed AirGate $1.6
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.
Sprint has invoiced approximately $7.0 million. This invoiced amount does not
include certain long distance access revenue charges, or future fees relating to
3G, software maintenance and information technology.
We intend to vigorously contest these charges and to closely examine all fees
and charges imposed by Sprint. 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,
has resulted in a shortfall in cash payments to AirGate. As a result of these
and other 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. We continue to explore the causes for this discrepancy.
During this fiscal year, Sprint has paid $10.5 million for amounts that were
previously not properly remitted to AirGate. The $10.5 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,
$0.6 million of subscriber payments resulting from a change in the method of
calculating collected revenues and $1.8 million for E911 and other items. During
the nine months ended June 30, 2003, AirGate recorded $3.6 million in credits
from Sprint as a reduction in cost of services and $1.8 million as an increase
in revenues. We are reviewing whether additional amounts are due to AirGate and
we continue to discuss with Sprint the proper method for calculating, paying and
reporting on collected revenues and other matters.
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 issues a credit for these amounts. If the costs to provide the
services are more that the amounts paid by Sprint's network partners, Sprint
charges the network partners for these amounts. Sprint credited to AirGate $1.3
million, which was 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 June 30, 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 to reduce its workforce and to close a number of retail
locations which resulted in restructuring charges of $0.8 million, $0.8 million
and $0.4 million during the quarters ended December 31, 2002, March 31, 2003 and
June 30, 2003, respectively.
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 locations ($0.2 million). During the quarter
ended March 31, 2003, the restructuring charge included provisions for severance
of approximately 154 management and operating staff ($0.6 million) as well as 16
retail locations and 10 administrative offices ($0.2 million), primarily for
iPCS. During the quarter ended June 30, 2003, the restructuring charge included
provisions for severance of approximately 76 management and operating staff
($0.2 million), as well as 3 retail locations ($0.2 million). Further charges
may be necessary as AirGate services are terminated under the services agreement
with iPCS as described in Note 7.
The following summarizes the activity and balances as of June 30, 2003 (dollar
amounts in thousands):
Facilities
Severance Closure Total
------------ ------------ ------------
Balance - October 1, 2002 $ 0 $ 0 $ 0
Restructuring charges 1,312 589 1,901
Payments (1,276) (23) (1,299)
------------ ------------ -------------
Balance - June 30, 2003 $ 36 $ 566 $ 602
============ ============ =============
(6) Income Taxes
The Company realized an income tax benefit of $28.8 million during the nine
months ended June 30, 2002. No such amounts were realized in the quarter and
nine months ended June 30, 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 are leased to ServiceCo. Historically, the
management personnel included 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 three months and nine months ended June
30, 2003, ServiceCo charged iPCS for net expenses of $0.6 million and $2.7
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.
Subsequent to the amendment, certain services have been terminated by AirGate
and iPCS. We anticipate that prior to September 30, 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 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") is a wholly-owned restricted subsidiary of
AirGate. ANS has fully and unconditionally guaranteed the AirGate notes and the
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. ServiceCo has fully and unconditionally guaranteed the AirGate notes
and the AirGate credit facility. ServiceCo 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 consolidated financial statements
for AirGate and its subsidiaries as of June 30, 2003 and September 30, 2002 and
for the three months and nine months ended June 30, 2003 and 2002 (dollar
amounts in thousands):
Unaudited Condensed Consolidating Balance Sheets
As of June 30, 2003
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
-------------- --------------- ------------- --------------
Cash and cash equivalents.. $ 30,796 $ (3) $ -- $ 30,793
Other current assets....... 104,848 529 (61,360) 44,017
-------------- --------------- ------------- --------------
Total current assets....... 135,644 526 (61,360) 74,810
Property and equipment,
net...................... 145,303 39,190 -- 184,493
Other noncurrent assets.... 12,733 -- -- 12,733
-------------- --------------- ------------- --------------
Total assets.............. $ 293,680 $ 39,716 $ (61,360) $ 272,036
============== =============== ============= ==============
Current liabilities....... $ (15,061) $ 148,678 $ (61,360) $ 72,257
Long-term debt............ 375,400 -- -- 375,400
Other long-term
liabilities............... 9,566 -- -- 9,566
Investment in
subsidiaries.............. 293,077 -- (108,962) 184,115
Total liabilities......... 662,982 148,678 (170,322) 641,338
-------------- --------------- -------------- --------------
Stockholders' equity
(deficit)............... (369,302) (108,962) 108,962 (369,302)
-------------- --------------- ------------- --------------
Total liabilities and
stockholders' equity
(deficit).............. $ 293,680 $ 39,716 $ (61,360) $ 272,036
============== =============== ============== ==============
Condensed Consolidating Balance Sheets
As of September 30, 2002
AirGate AirGate iPCS
PCS, Guarantor AirGate Non-Guarantor
Inc. Subsidiaries Eliminations Consolidated(1) Subsidiary Eliminations Consolidated
------------- ------------ ------------- -------------- ------------- -------------- -----------
Cash and cash
equivalents.............. $ 4,769 $ 118 $ -- $ 4,887 $ 27,588 $ -- $ 32,475
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
subsidiaries........... 183,718 -- (84,506) 99,212 -- (99,212) --
------------- ------------ ------------- -------------- ------------- -------------- -----------
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 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 $5.6 million and $283.7 million for the nine months ended June 30, 2003 and
2002, respectively. The nine months ended June 30, 2002 includes a tax benefit
related to the iPCS acquisition of $28.8 million. Subsequent to February 23,
2003, AirGate 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 June 30, 2003
AirGate PCS, AirGate Guarantor Eliminations
Inc. Subsidiaries Consolidated
----------------- ----------------- ----------------- --------------
Total revenue.................. $ 83,186 $ -- $ -- $ 83,186
Cost of revenue................ (46,786) (4,223) -- (51,009)
Selling and marketing.......... (11,656) (1,047) -- (12,703)
General and administrative..... (4,892) (332) -- (5,224)
Depreciation and amortization.. (10,798) (790) -- (11,588)
Non-cash stock compensation
expense...................... (177) -- -- (177)
------------------ ------------------ -------------- --------------
Total operating expense........ (74,309) (6,392) -- (80,701)
------------------ ------------------ -------------- --------------
Operating income (loss)........ 8,877 (6,392) 2,485
Other, net (principally
interest).................... (10,741) 9 -- (10,732)
Loss in subsidiaries........... (6,383) -- 6,383 --
------------------ ------------------ -------------- --------------
Loss before income tax ........ (8,247) (6,383) 6,383 (8,247)
Income tax..................... -- -- -- --
------------------ ------------------ -------------- --------------
Net loss....................... $ (8,247) $ (6,383) $ 6,383 $ (8,247)
================== ================== ================= =============
Unaudited Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2002
AirGate AirGate iPCS
PCS, Guarantor AirGate Non-Guarantor
Inc. Subsidiaries Eliminations Consolidated(1) Subsidiary Eliminations Consolidated
------------ ------------- ------------- -------------- ------------- --------------- --------------
Total revenue............... $ 81,147 $ -- $ -- $ 81,147 $ 41,491 $ 171 $ 122,809
Cost of revenue............. (53,728) (3,837) -- (57,565) (35,236) 682 (92,119)
Selling and marketing....... (15,292) (558) -- (15,850) (11,428) (853) (28,131)
General and administrative.. (4,364) (131) -- (4,495) (1,713) -- (6,208)
Depreciation and
amortization............. (17,828) (2,181) -- (20,009) (10,751) -- (30,760)
Non-cash stock compensation
expense.................. (183) -- -- (183) -- -- (183)
------------ ------------- ------------- -------------- ------------- ------------------------------
Total operating expense..... (91,395) (6,707) -- (98,102) (59,128) (171) (157,401)
------------ ------------- ------------- -------------- ------------- ------------------------------
Operating loss.............. (10,248) (6,707) (16,955) (17,637) -- (34,592)
Other, net (principally
interest)................ (9,505) 764 -- (8,741) (6,746) -- (15,487)
Loss in subsidiaries........ (30,326) -- 5,943 (24,383) -- 24,383 --
------------ ------------- ------------- -------------- ------------- ------------------------------
Loss before income tax ..... (50,079) (5,943) 5,943 (50,079) (24,383) 24,383 (50,079)
Income tax ................. -- -- -- -- -- -- --
------------ ------------- ------------- -------------- ------------- ------------------------------
Net loss.................... $ (50,079) $ (5,943) $ 5,943 $ (50,079) $ (24,383) $ 24,383 $ (50,079)
============ ============= ============= ============== ============= ==============================
Unaudited Condensed Consolidating Statement of Operations
For the Nine Months Ended June 30, 2003
AirGate AirGate Eliminations AirGate iPCS Eliminations Consolidated
Guarantor Consolidated(1) Non-Guarantor
PCS, Inc. Subsidiaries Subsidiary
------------- -------------- ------------ --------------- -------------- ------------ ---------------
Total revenue.............. $ 241,799 $ -- $ -- $ 241,799 $ 79,364 $ (443) $ 320,720
Cost of revenue............ (140,675) (12,803) -- (153,478) (63,321) 443 (216,356)
Selling and marketing...... (37,867) (2,996) -- (40,863) (16,417) -- (57,280)
General and administrative. (13,416) (1,613) -- (15,029) (6,881) -- (21,910)
Depreciation and
amortization............. (33,984) (7,161) -- (41,145) (14,677) -- (55,822)
Non-cash stock
compensation expense..... (530) -- -- (530) -- -- (530)
------------- -------------- ------------ --------------- -------------- ------------ ---------------
Total operating expense.... (226,472) (24,573) -- (251,045) (101,296) 443 (351,898)
------------- -------------- ------------ --------------- -------------- ------------ ---------------
Operating income (loss) ... 15,327 (24,573) -- (9,246) (21,932) (31,178)
Other, net (principally
interest)................ (30,829) 117 -- (30,712) (15,052) -- (45,764)
Loss in subsidiaries....... (61,440) -- 24,456 (36,984) -- 36,984 --
------------- -------------- ------------ --------------- -------------- ------------ ---------------
Loss before income tax..... (76,942) (24,456) 24,456 (76,942) (36,984) 36,984 (76,942)
Income tax................. -- -- -- -- -- -- --
------------- -------------- ------------ --------------- -------------- ------------ ---------------
Net loss................... $ (76,942) $ (24,456) $24,456 $ (76,942) $ (36,984) $ 36,984 $ (76,942)
============= ============== ============ =============== ============== ============ ===============
Unaudited Condensed Consolidating Statement of Operations
For the Nine Months Ended June 30, 2002
AirGate PCS, AirGate Eliminations AirGate iPCS Eliminations
Guarantor Consolidated(1) Non-Guarantor Consolidated
Inc. Subsidiaries Subsidiary
-------------- -------------- ------------ -------------- -------------- ------------- ---------------
Total revenue.............. $ 226,111 $ -- $ -- $ 226,111 $ 93,975 $ (683) $ 319,403
Cost of revenue............ (152,964) (11,347) -- (164,311) (83,052) 683 (246,680)
Selling and marketing...... (57,868) (2,057) -- (59,925) (25,643) -- (85,568)
General and administrative. (8,605) (452) -- (9,057) (9,220) -- (18,277)
Depreciation and
amortization............. (49,301) (6,344) -- (55,645) (21,596) -- (77,241)
Non-cash stock
compensation expense..... (597) -- -- (597) -- -- (597)
Goodwill impairment........ (261,212) -- -- (261,212) -- -- (261,212)
-------------- -------------- ------------ -------------- -------------- ------------- ---------------
Total operating expense.... (530,547) (20,200) -- (550,747) (139,511) 683 (689,575)
-------------- -------------- ------------ -------------- -------------- ------------- ---------------
Operating loss............. (304,436) (20,200) -- (324,636) (45,536) -- (370,172)
Other, net (principally
interest)................ (27,618) 2,032 -- (25,586) (14,636) -- (40,222)
Loss in subsidiaries....... (78,340) -- 18,168 (60,172) -- 60,172 --
-------------- -------------- ------------ -------------- -------------- ------------- ---------------
Loss before income tax
benefit.................. (410,394) (18,168) 18,168 (410,394) (60,172) 60,172 (410,394)
Income tax benefit......... 28,761 -- -- 28,761 -- -- 28,761
-------------- -------------- ------------ -------------- -------------- ------------- ---------------
Net loss................... $ (381,633) $ (18,168) $ 18,168 $ (381,633) $ (60,172) $ 60,172 $ (381,633)
============== ============== ============ ============== ============== ============= ===============
Unaudited Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended June 30, 2003
AirGate iPCS
AirGate PCS, Guarantor AirGate Non-Guarantor
Inc. Subsidiaries Eliminations Consolidated(1) Subsidiary Eliminations Consolidated
-------------- ------------- ------------- -------------- ------------- -------------- -------------
Operating activities,
net.................. $ 29,857 $ (121 ) $ -- $ 29,736 $ (9,086) $ -- $ 20,650
Investing activities,
net.................. (10,369) -- -- (10,369) (18,500) -- (28,869)
Financing activities,
net.................. 6,539 -- -- 6,539 (2) -- 6,537
-------------- ------------- ------------- -------------- ------------- -------------- -------------
Increase (decrease) in
cash and cash
equivalent........... 26,027 (121) -- 25,906 (27,588) -- (1,682)
Cash at beginning of
period............... 4,769 118 -- 4,887 27,588 -- 32,475
-------------- ------------- ------------- -------------- ------------- -------------- -------------
Cash at end of period.. $ 30,796 $ (3 ) $ -- $ 30,793 $ -- $ -- $ 30,793
============== ============= ============= ============== ============= ============== =============
Unaudited Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended June 30, 2002
iPCS
AirGate PCS, Guarantor AirGate Non-Guarantor
Inc. Subsidiaries Eliminations Consolidated(1) Subsidiary Eliminations Consolidated
-------------- ------------- ------------- -------------- ------------- -------------- -------------
Operating activities,
net.................. $ (33,348) $ 4,193 $ -- $ (29,15) $ (19,642) $ -- $ (48,797)
Investing activities,
net.................. (9,881 ) (4,055) -- (13,93) (45,125) -- (59,061)
Financing activities,
net.................. 57,452 -- -- 57,452 59,996 -- 117,448
------------ -------------- ------------- -------------- ------------- ------------- -------------
Increase (decrease) in
cash and cash
equivalent........... 14,223 138 -- 14,361 (4,771) -- 9,590
Cash at beginning of
period............... (9,955) (157) -- (10,11) 24,402 -- 14,290
------------ -------------- ------------- -------------- ------------- ------------- -------------
Cash at end of period.. $ 4,268 $ (19) $ -- $ 4,249 $ 19,631 $ -- $ 23,880
============ ============== ============= ============== ============= ============= =============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Results of Operations and Financial
Condition ("MD&A") contains forward looking statements that are based on current
expectations, estimates, forecasts and projections about us, our future
performance, our liquidity, the wireless industry, our beliefs and management's
assumptions. In addition, other written and oral statements that constitute
forward-looking statements may be made by us or on our behalf. Such forward
looking statements include statements regarding expected financial results and
other planned events, including but not limited to, anticipated liquidity, churn
rates, ARPU, CPGA and CCPU (all as defined in the Key Operating Metrics),
roaming rates, EBITDA (as defined in the Key Operating Metrics), and capital
expenditures. Words such as "anticipate," "assume," "believe," "estimate,"
"expect," "intend," "plan," "seek", "project," "target," "goal," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual future events or results may differ materially from
these statements. These risks and uncertainties include:
o the impact and outcome of the iPCS bankruptcy filing and related
proceedings;
o the competitiveness and impact of Sprint's pricing plans and PCS products
and services;
o subscriber credit quality;
o the potential to experience a continued high rate of subscriber turnover;
o the ability of Sprint to provide back office billing, subscriber care and
other services and the quality and costs of such services or,
alternatively, our ability to outsource all or a portion of these services;
o inaccuracies in financial information provided by Sprint;
o new charges and fees, or increased charges and fees, charged by Sprint;
o the impact and outcome of disputes with Sprint;
o rates of penetration in the wireless industry;
o our significant level of indebtedness;
o the impact and outcome of legal proceedings between other Sprint network
partners and Sprint;
o adequacy of bad debt and other allowances;
o the potential need for additional sources of liquidity;
o anticipated future losses;
o subscriber purchasing patterns;
o customer satisfaction with our network and operations;
o potential fluctuations in quarterly results;
o an adequate supply of subscriber equipment;
o risks related to future growth and expansion; and
o the volatility of the market price of AirGate's common stock.
These and other applicable risks and uncertainties are summarized under the
captions "Future Trends That May Affect Operating Results, Liquidity and Capital
Resources" included in this Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this quarterly report on Form
10-Q and "Risk Factors" included in Part II under "Item 5 - Other Information"
of this quarterly report on Form 10-Q and elsewhere in this report.
For a further list of and description of such risks and uncertainties, see the
reports filed by us with the SEC. Except as required under federal securities
law and the rules and regulations of the SEC, we do not have any intention or
obligation to update publicly any forward looking statements after distribution
of this report, whether as a result of new information, future events, changes
in assumptions or otherwise.
Overview
On July 22, 1998, AirGate entered into management and related agreements with
Sprint whereby it became the network partner of Sprint with the right to provide
100% digital PCS products and services under the Sprint brand names in AirGate's
original territory in the southeastern United States. In January 2000, AirGate
began commercial operations with the launch of four markets covering 2.2 million
residents in AirGate's territory. By September 30, 2000, AirGate had launched
commercial PCS service in all 21 of its markets, which comprise AirGate's
original territory. At June 30, 2003, AirGate had total network coverage of
approximately 6.0 million residents or 83% of the 7.2 million residents in its
territory.
Under AirGate's long-term agreements with Sprint, we manage our network on
Sprint's licensed spectrum and have the right to use the Sprint brand names
royalty-free during our 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 pays 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
revenue received when customers of Sprint and Sprint's other network partners
make a wireless call on our PCS network.
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. 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.
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:
o has been designated an unrestricted subsidiary by the AirGate board of
directors, o has no indebtedness which provides recourse to AirGate or any
of its restricted subsidiaries, o is not party to any agreement with
AirGate or any of its restricted subsidiaries, unless the terms of the
agreement are no less favorable to AirGate or such restricted subsidiary
than those that might be obtained from persons unaffiliated with AirGate,
o is a subsidiary with respect to which neither AirGate nor any of its
restricted subsidiaries has any obligation to subscribe for additional
equity interests, maintain or preserve such subsidiary's financial
condition or cause such subsidiary to achieve certain operating results,
o has not guaranteed or otherwise provided credit support for any
indebtedness of AirGate or any of its restricted subsidiaries, and
o has at least one director and one executive officer that are not directors
or executive officers of AirGate or any of its restricted subsidiaries.
AirGate's notes impose certain affirmative and restrictive covenants on AirGate
and its restricted subsidiaries and also include as events of default certain
events, circumstances or conditions involving AirGate or its restricted
subsidiaries. Because iPCS is an unrestricted subsidiary, the covenants and
events of default under AirGate's notes generally 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 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.
For AirGate, the allowance for doubtful accounts was $4.6 million as of June 30,
2003 and $6.8 million as of September 30, 2002. If the allowance for doubtful
accounts is not adequate, it could have a material adverse affect on the
Company's liquidity, financial position and results of operations.
The Company also reviews current trends in the credit quality of its subscriber
base. As of June 30, 2003, 30% 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 only the lowest credit quality subscribers. The
NDASL and Clear Pay programs and their associated lack of general deposit
requirements increased the number of the Company's sub-prime credit subscribers.
In 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 all of AirGate's markets, which
reinstated a deposit requirement of $125 for most sub-prime credit subscribers.
In early February 2003, management increased the deposit threshold to $250 for
sub-prime customers.
First Payment Default Subscribers
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 determined that the first
payment default reserve is no longer necessary. At June 30, 2003, first payment
default reserve was $0.
Revenue Recognition
The Company recognizes revenue 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 to the subscriber. 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 revenue 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 revenue from subscribers based in the
Company's markets and from non-Sprint subscribers who roam onto the Company's
network. The amount of affiliation fee retained by Sprint is recorded as cost of
service and roaming. Revenue derived from the sale of handsets and accessories
by the Company and from certain roaming services (outbound roaming and roaming
revenue 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. The Company no longer has any assets
recorded subject to SFAS 142 impairment testing. As of September 30, 2002, the
Company recorded substantial write-offs of long lived assets and goodwill
relating to its iPCS subsidiary. Management will continue to monitor any
triggering events and perform re-evaluations, as necessary.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements for a description of new
accounting pronouncements and their impact on AirGate.
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 results include the
effects of purchase accounting related to the iPCS acquisition. The
comparability of the Company's results for the quarter ended June 30, 2003
compared to the same period for 2002 are affected by the exclusion of the
results of iPCS for the quarter ended June 30, 2003. As a result and in addition
to the other factors described below for AirGate, the exclusion of the iPCS
results have the effect of reducing consolidated Company revenues and expenses
in the quarter ended June 30, 2003 compared to the same period for 2002. The
comparability of the Company's results for the nine months ended June 30, 2003
to the same period for 2002 are affected by the exclusion of the results of iPCS
for the periods prior to November 30, 2001 and after February 23, 2003. As a
result and in addition to the other factors described below for AirGate, the
exclusion of iPCS results after February 23, 2003 has the effect of lowering
revenues and expenses in the nine months ended June 30, 2003 compared to the
same period in 2002, which is partially offset by the exclusion of results for
iPCS prior to November 30, 2001.
Financial Measures and Key Operating Metrics
We use certain operating and financial measures that are not calculated in
accordance with accounting principles generally accepted in the United States,
or GAAP. A non-GAAP financial measure is defined as a numerical measure of a
company's financial performance that (i) excludes amounts, or is subject to
adjustments that have the effect of excluding amounts, that are included in the
comparable measure calculated and presented in accordance with GAAP in the
statement of income or statement of cash flows; or (ii) includes amounts, or is
subject to adjustments that have the effect of including amounts, that are
excluded from the comparable measure so calculated and presented.
Terms such as subscriber net additions, average revenue per user ("ARPU"),
churn, cost per gross addition ("CPGA") and cash cost per user ("CCPU") are
important operating metrics used in the wireless telecommunications industry.
These metrics are important to compare us to other wireless service providers.
ARPU, CCPU and CPGA also assist management in budgeting and CPGA also assists
management in quantifying the incremental costs to acquire a new subscriber.
Except for churn and net subscriber additions, we have included a reconciliation
of these metrics to the most directly comparable GAAP financial measure. Churn
and subscriber net additions are operating statistics with no comparable GAAP
financial measure. ARPU, CPGA and CCPU are supplements to GAAP financial
information and should not be considered an alternative to, or more meaningful
than, revenues, expenses or net loss as determined in accordance with GAAP.
Earnings before interest, taxes, depreciation and amortization, or "EBITDA," is
a performance metric we use and which is used by other companies. Management
believes that EBITDA is a useful adjunct to net loss and other measurements
under GAAP because it is a meaningful measure of a company's performance, as
interest, taxes, depreciation and amortization can vary significantly between
companies due in part to differences in accounting policies, tax strategies,
levels of indebtedness, capital purchasing practices and interest rates. EBITDA
also assists management in evaluating operating performance and is sometimes
used to evaluate performance for executive compensation. We have included below
a presentation of the GAAP financial measure most directly comparable to EBITDA,
which is net loss, as well as a reconciliation of EBITDA to net loss. We have
also provided a reconciliation to net cash provided by (used in) operating
activities as supplemental information. EBITDA is a supplement to GAAP financial
information and should not be considered an alternative to, or more meaningful
than, net loss, cash flow or operating loss as determined in accordance with
GAAP. EBITDA has distinct limitations as compared to GAAP information such as
net loss, cash flow or operating loss. By excluding interest and tax payments
for example, an investor may not see that both represent a reduction in cash
available to the Company. Likewise, depreciation and amortization, while
non-cash items, represent generally the devaluation of assets that produce
revenue for the Company.
EBITDA, ARPU, churn, CPGA and CCPU as used by the Company may not be comparable
to a similarly titled measure of another company.
The following terms used in this report have the following meanings:
"EBITDA" means earnings before interest, taxes, depreciation and amortization.
"ARPU" summarizes the average monthly service revenue per user, excluding
roaming revenue. ARPU is computed by dividing service revenue for the period by
the average subscribers for the period.
"Churn" is the average monthly rate of subscriber turnover that both voluntarily
and involuntarily discontinued service during the period, expressed as a
percentage of the average subscriber base. Churn is computed by dividing the
number of subscribers that discontinued service during the period, net of 30-day
returns, by the average subscribers for the period.
"CPGA" summarizes the average cost to acquire new subscribers during the period.
CPGA is computed by adding the income statement components of selling and
marketing, cost of equipment and activation costs (which are included as a
component of cost of service) and reducing that amount by the equipment revenue
recorded. That net amount is then divided by the total new subscribers acquired
during the period.
"CCPU" is a measure of the average monthly cash costs to operate the business on
a per user basis consisting of subscriber support, network operations, service
delivery, roaming expense, bad debt expense, wireless handset upgrade subsidies
(but not commissions) and other general and administrative costs, divided by
average subscribers for the period.
For the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002:
The table below sets forth key operating metrics for the Company for the
quarters ended June 30, 2003 and 2002.
Quarter Ended June 30,
2003 2002
-------------------------------------- ----------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Subscriber Gross Additions 38,919 -- 38,919 47,529 32,370 79,899
Subscriber Net Additions 5,593 -- 5,593 11,404 14,675 26,079
Total Subscribers 364,157 -- 364,157 337,303 195,143 532,446
ARPU $59.90 -- $59.90 $57.52 $53.24 $55.97
Churn (with subscriber reserve) 2.9% -- 2.9% 3.3% 2.9% 3.2%
Churn (without subscriber reserve) 2.9% -- 2.9% 3.6% 3.2% 3.4%
CPGA $399 -- $399 $418 $441 $436
CCPU $47 -- $47 $56 $59 $57
Capital Expenditures (cash)
(in thousands) $3,715 -- $3,715 $11,241 $17,641 $28,882
EBITDA (in thousands) $14,084 -- $14,084 $2,371 $(6,203) $(3,832)
The reconciliation of EBITDA to our reported net loss, as determined in
accordance with GAAP, is as follows (dollar amounts in thousands):
Quarter Ended June 30,
2003 2002
----------------------------------------------- ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Net Loss $ (8,247) $ -- $ (8,247) $(25,696) $ (24,383) $(50,079)
Depreciation and amortization 11,588 -- 11,588 19,326 11,434 30,760
Interest income (27) -- (27) (23) (291) (314)
Interest expense 10,770 -- 10,770 8,764 7,037 15,801
-------- ---- -------- ------- --------- ---------
EBITDA $ 14,084 $ -- $ 14,084 $ 2,371 $ (6,203) $ (3,832)
======== ==== ======== ======= ========= ========
The reconciliation of EBITDA to net cash provided by (used in) operating
activities, as determined in accordance with GAAP, is as follows (dollar amounts
in thousands):
Quarter Ended June 30,
2003 2002
--------------------------------------- -------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Net cash provided by (used in)
operating activities $ 14,109 $ -- $ 14,109 $(11,035) $ 113 $ (10,922)
Chang