SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No.1
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED 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.
EXPLANATORY NOTE
This Form 10-Q/A is being amended solely for the purpose of amending and
restating in its entirety Part I Item 4 of this Form 10-Q/A, to delete all
references to Cash Cost Per User (or CCPU), and to update the signature page and
Exhibits 31.1, 31.2, 32.1 and 32.2. This Form 10-Q/A does not reflect events
occurring after the filing of the original Form 10-Q, or modify or update the
disclosures therein in any way other than as required to reflect these changes.
AIRGATE PCS, INC.
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 and CPGA (all as defined in the Key Operating Metrics), roaming
rates, EBITDA (as defined in the Key Operating Metrics), and capital
expenditures. Words such as "anticipate," "assume," "believe," "estimate,"
"expect," "intend," "plan," "seek", "project," "target," "goal," variations of
such words and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual future events or results may differ materially from
these statements. These risks and uncertainties include:
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
and cost per gross addition ("CPGA") are important operating metrics used in the
wireless telecommunications industry. These metrics are important to compare us
to other wireless service providers. ARPU 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 and CPGA are
supplements to GAAP financial information and should not be considered an
alternative to, or more meaningful than, revenues, expenses or net loss as
determined in accordance with GAAP.
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 and CPGA as used by the Company may not be comparable
to a similarly titled measure of another company.
The following terms used in this report have the following meanings:
"EBITDA" means earnings before interest, taxes, depreciation and amortization.
"ARPU" summarizes the average monthly service revenue per user, excluding
roaming revenue. ARPU is computed by dividing service revenue for the period by
the average subscribers for the period.
"Churn" is the 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.
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
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)
Change in operating assets and
liabilites (180) -- (180) 17,752 (4,124) 13,628
Interest expense 10,770 -- 10,770 8,764 7,037 15,801
Accretion of interest (8,540) -- (8,540) (7,439) (6,526) (13,965)
Interest and other income (27) -- (27) (23) (291) (314)
Provision for doubtful accounts (1,569) -- (1,569) (5,163) (2,330) (7,493)
Other expense (479) -- (479) (485) (82) (567)
-------- ---- -------- -------- -------- ---------
EBITDA $ 14,084 $ -- $ 14,084 $ 2,371 $ (6,203) $ (3,832)
======== ==== ======== ======== ======== =========
The reconciliation of ARPU to service revenue, as determined in accordance with
GAAP, is as follows (dollar amounts in thousands, except per unit data):
Quarter Ended June 30,
2003 2002
----------------------------------------- -------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Average Revenue per User (ARPU):
Service revenue $64,936 -- $64,936 $57,221 $29,998 $87,219
Average subscribers 361,361 -- 361,361 331,601 187,806 519,407
ARPU $59.90 -- $59.90 $57.52 $53.24 $55.97
The reconciliation of CPGA to selling and marketing expense, as determined in
accordance with GAAP, is calculated as follows (dollar amounts in thousands,
except per unit data):
Quarter Ended June 30,
2003 2002
--------------------------------------- --------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Cost per Gross Add (CPGA):
Sales and marketing expense $12,703 $ -- $12,703 $15,850* $11,428* $ 28,131
Plus: Activation expense 333 -- 333 337 216 553
Plus: Cost of equipment 4,969 -- 4,969 6,290* 3,428* 9,718
Less: Equipment revenue (2,486) -- (2,486) (2,627)* (792)* (3,590)
Total acquisition costs $15,519 $ -- $15,519 $19,850 $ 14,280 $ 34,812
======= ==== ======= ======= ======== ========
Gross Additions 38,919 -- 38,919 47,529 32,370 79,899
CPGA $399 $-- $399 $418 $441 $436
*Amounts are reflected prior to the elimination of intercompany transactions
Subscriber Net Additions
For AirGate, subscriber net additions decreased for the quarter ended June 30,
2003, compared to the same quarter in 2002. This decrease is due to the
reduction in subscriber gross additions offset partially by improved churn.
Subscriber Gross Additions
For AirGate, subscriber gross additions decreased for the quarter ended June 30,
2003 compared to the same quarter in 2002. This decline is due to the
re-institution of and increase in the deposit for sub-prime credit quality
customers and actions taken to reduce acquisition costs.
EBITDA
For AirGate, EBITDA for the quarter ended June 30, 2003 increased from the same
period in 2002. This increase is a result of higher revenues and an overall
decrease in spending, particularly in cost of services and selling and
marketing. EBITDA for AirGate was favorably impacted by $1.8 million of special
settlements from Sprint related to E911 and other items as described in Note 3
of the consolidated financial statements.
Average Revenue Per User
The increase in ARPU for AirGate for the quarter ended June 30, 2003 compared to
the same quarter for 2002 is primarily a result of an increase in customer
monthly recurring charges, offset by a reduction in revenue from customers using
minutes in excess of their subscriber usage plans and cessation of recognizing
terminating long-distance access revenue. Until June 30, 2002, the Company
recorded terminating long-distance access revenue billed by Sprint PCS to
long-distance carriers. ARPU for AirGate was favorably impacted by $1.8 million
of special settlements from Sprint related to E911 and other items as described
in Note 3 of the consolidated financial statements.
Churn
Churn decreased for the quarter ended June 30, 2003, compared to the same
quarter for 2002. The Company has focused on improving the credit quality of the
subscriber base. In February 2003, management increased the deposit required for
a sub-prime credit customer to begin service to $250 in an effort to reduce
churn and bad debt and increase the percentage of prime credit customers in
AirGate's customer base. We believe these and other factors may have influenced
the reduction in churn for the quarter ended June 30, 2003 compared to the same
period in 2002.
Cost Per Gross Addition
For AirGate, CPGA decreased for the quarter ended June 30, 2003 compared to the
same quarter in 2002. The decrease is due primarily to reduced promotional and
advertising spending, partially offset by fewer subscriber gross additions.
Revenues
Quarter Ended June 30,
(in thousands)
2003 2002
------------------------------------------ ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ------ --------
Service Revenue $ 64,936 $-- $64,936 $ 57,221 $ 29,998 $ 87,219
Roaming Revenue 15,764 -- 15,764 21,299 10,701 32,000
Equipment Revenue 2,486 -- 2,486 2,627* 792* 3,590
------- ---- ------- -------- -------- ---------
Total $ 83,186 $-- $83,186 $ 81,147 $ 41,491 $ 122,809
======= === ======= ======= ======= =========
* Amounts are reflected prior to the elimination of intercompany transactions
We derive our revenue from the following sources:
Service. We sell wireless personal communications services. The various
types of service revenue associated with wireless communications services
include monthly recurring access and feature charges and monthly
non-recurring charges for local, wireless long distance and roaming airtime
usage in excess of the subscribed usage plan.
Roaming. The Company receives roaming revenue at a per-minute rate from
Sprint and other Sprint PCS network partners when Sprint's or its network
partner's PCS subscribers from outside of AirGate's territory use AirGate's
network. The Company pays the same reciprocal roaming rate when subscribers
from our territories use the network of Sprint or its other PCS network
partners. The Company also receives non-Sprint roaming revenue when
subscribers of other wireless service providers who have roaming agreements
with Sprint roam on the Company's network.
Equipment. We sell wireless personal communications handsets and
accessories that are used by our subscribers in connection with our
wireless services. Equipment revenue is derived from the sale of handsets
and accessories from Company owned stores, net of sales incentives, rebates
and an allowance for returns. The Company's handset return policy allows
subscribers to return their handsets for a full refund within 14 days of
purchase. When handsets are returned to the Company, the Company may be
able to reissue the handsets to subscribers at little additional cost. When
handsets are returned to Sprint for refurbishing, the Company receives a
credit from Sprint, which is approximately equal to the retail price of the
refurbished handset.
For AirGate, service revenue for the quarter ended June 30, 2003 increased over
the same period in the prior year. The increase in service revenue for AirGate
reflects the higher average number of subscribers using its network and higher
average revenue per subscriber.
For AirGate, roaming revenue for the quarter ended June 30, 2003 decreased over
the same period in the prior year. The decrease is attributable to the lower
reciprocal roaming rate charged among Sprint and its PCS network partners,
partially offset by increased volume in inbound roaming traffic. The reciprocal
roaming rate among Sprint and its PCS network partners, including the Company,
has declined since June 2001, from $0.20 per minute of use to $0.10 per minute
of use in calendar year 2002. Sprint has reduced the reciprocal roaming rate to
$0.058 per minute of use in calendar year 2003. The Company believes that this
reduction is in violation of our agreements with Sprint. For the quarter ended
June 30, 2003, AirGate roaming revenue from Sprint and its PCS network partners
was $13.0 million, or approximately 83% of the roaming revenue.
For AirGate, equipment revenue for the quarter ended June 30, 2003 decreased
over the same period in the prior year. This decrease is primarily due to the
lower number of gross additions as compared to the same period in the prior
year.
Cost of Service and Roaming
Quarter Ended June 30,
----------------------
(in thousands)
2003 2002
-------------------------------------------- ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
Roaming expense $ 12,123 $ -- $ 12,123 $ 14,822* $ 7,423* $ 21,562
Network operating costs 30,577 -- 30,577 30,169 21,369 51,538
Bad debt expense 1,570 -- 1,570 5,163 2,330 7,493
Wireless handset upgrades 1,770 -- 1,770 1,122 686 1,808
-------- ---- -------- -------- -------
Total cost of service and
roaming $ 46,040 $ -- $ 46,040 $ 51,276 $31,808 $ 82,401
======== ==== ======== ======== ======= ========
*Amounts are reflected prior to the elimination of intercompany transactions
Cost of service and roaming principally consists of costs to support the
Company's subscriber base including:
o roaming expense;
o network operating costs (including salaries, cell site lease payments, fees
related to the connection of the Company's switches to the cell sites that
they support, inter-connect fees and other expenses related to network
operations);
o back office services provided by Sprint such as customer care, billing and
activation;
o the 8% of collected service revenue representing the Sprint affiliation
fee;
o long distance expense relating to inbound roaming revenue and the Company's
own subscriber's long distance usage and roaming expense when subscribers
from the Company's territory place calls on Sprint's or its network
partners' networks;
o bad debt related to estimated uncollectible accounts receivable; and
o wireless handset subsidies on existing subscriber upgrades through national
third-party retailers.
For AirGate, roaming expense decreased for the quarter ended June 30, 2003
compared to the same period in 2002 as a result of the decrease in the
reciprocal roaming rate charged among Sprint and its network partners. 95% and
90% of the cost of roaming was attributable to Sprint and its network partners
for the quarter ended June 30, 2003 and 2002, respectively, prior to the
elimination of intercompany transactions. As discussed above, the per-minute
rate the Company pays Sprint when subscribers from the Company's territory roam
onto Sprint's or its network partners' networks has decreased over time.
For AirGate, bad debt expense decreased by $3.6 million in the quarter ended
June 30, 2003 as compared to the same period in 2002. This decrease in bad debt
expense is primarily attributable to improvements in the credit quality and
payment profile of our subscriber base since we re-imposed deposits for
sub-prime credit subscribers in early 2002 and increased them again in February
2003. This resulted in a significant improvement in accounts receivable
write-offs and corresponding bad debt expense for the quarter.
Cost of Equipment and Operating Expenses
Quarter Ended June 30,
(in thousands)
2003 2002
----------------------------------------- ------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Cost of Equipment $ 4,969 $-- $ 4,969 $ 6,290 $ 3,428 $ 9,718
Selling and Marketing 12,703 -- 12,703 15,850* 11,428* 28,131
General and Administrative 5,224 -- 5,224 4,495 1,713 6,208
Non-Cash Stock Compensation 177 -- 177 183 -- 183
Depreciation and Amortization 11,588 -- 11,588 10,129 9,371 19,500
Amortization of Intangible Assets -- -- -- 21 11,239 11,260
Interest Expense 10,770 -- 10,770 8,764 7,037 15,801
* Amounts are reflected prior to the elimination of intercompany transactions
Cost of Equipment
We are currently required to purchase handsets and accessories to resell to our
subscribers for use in connection with our services. To remain competitive in
the marketplace, we subsidize handset sales and therefore the cost of handsets
is higher than the resale price to the subscriber. For AirGate, cost of
equipment decreased for the quarter ended June 30, 2003 compared to the same
period in 2002 primarily as a result of the decrease in the number of subscriber
gross additions.
Selling and Marketing
Selling and marketing expense includes retail store costs such as salaries and
rent in addition to promotion, advertising and commission costs, and handset
subsidies on units sold by national third-party retailers for which the Company
does not record revenue. Under the management agreement with Sprint, when a
national retailer sells a handset purchased from Sprint to a subscriber from
AirGate's territory, AirGate is obligated to reimburse Sprint for the handset
subsidy and commissions that Sprint originally incurred. For AirGate, selling
and marketing expenses decreased for the quarter ended June 30, 2003 compared to
the same period in 2002 reflecting the effect of reduced subscriber gross
additions, staff reductions, store closings, and reduced advertising and
promotion expenses.
General and Administrative
For AirGate, general and administrative expense increased for the quarter ended
June 30, 2003 compared to the same period in 2002 reflecting increased spending
for outside consultants providing services to AirGate to help identify cost
saving opportunities that we believe will provide future long term savings to
the Company. The increase also reflects costs for migrating the accounting
function to Atlanta from Geneseo, Illinois and a decrease in ServiceCo charges
to iPCS.
Non-Cash Stock Compensation
For AirGate, non-cash stock compensation expense was approximately the same for
the quarter ended June 30, 2003 and 2002. The Company applies the provisions of
APB Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for
its stock option plans. Unearned stock compensation is recorded for the
difference between the exercise price and the fair market value of the Company's
common stock and restricted stock at the date of grant and is recognized as
non-cash stock compensation expense in the period for which the related services
are rendered.
Depreciation
The Company capitalizes network development costs incurred to ready our network
for use and costs to build-out our retail stores and office space. Depreciation
of these costs begins when the equipment is ready for its intended use and is
amortized over the estimated useful life of the asset. For AirGate, depreciation
expense increased for the quarter ended June 30, 2003 compared to the same
period in 2002 primarily as a result of additional network assets placed in
service in fiscal year 2002. AirGate incurred capital expenditures of $3.7
million in the quarter ended June 30, 2003, which included approximately $0.02
million of capitalized interest, compared to capital expenditures of $11.2
million and capitalized interest of $1.9 million in the quarter ended June 30,
2002.
Amortization of Intangible Assets
Amortization of intangible assets relates to the amounts recorded from the iPCS
acquisition for the acquired subscriber base, non-competition agreements, and
the right to provide service under iPCS' Sprint agreements. Amortization for the
quarter ended June 30, 2002 was approximately $11.3 million. Subsequent to
February 23, 2003 the intangible assets attributed to the AirGate purchase of
iPCS are no longer consolidated with the accounts of AirGate and amortization
expense of iPCS' intangible assets subsequent to February 23, 2003 is not
included in the results of the Company.
Interest Expense
For AirGate, interest expense increased for the quarter ended June 30, 2003
compared to the same period in 2002 as a result of increased borrowings under
the AirGate credit facility. AirGate had outstanding borrowings of $387.3
million as of June 30, 2003, compared to $343.9 million at June 30, 2002.
Income Tax Benefit
No income tax benefit was realized for the quarter ended June 30, 2003 and 2002.
Income tax benefits will be realized in the future only to the extent management
believes recoverability of deferred tax assets is more likely than not.
Net Loss
For the quarter ended June 30, 2003, AirGate's net loss was $8.2 million
compared to a net loss of $25.7 million for the quarter ended June 30, 2002. The
decrease in net loss is primarily attributable to reduced operating expenses as
a result of staffing reductions, store closures and reduced advertising and
promotional costs, as well as improved revenues from a larger subscriber base.
The AirGate net loss was also favorably impacted by $1.8 million of special
settlements from Sprint related to E911 and other items as described in Note 3
of the consolidated financial statements.
For the nine months ended June 30, 2003 compared to the nine months ended June
30, 2002:
The table below sets forth key operating metrics for the Company for the nine
months ended June 30, 2003 and 2002.
Nine Months Ended June 30,
2003 2002
------------------------------------------ ---------------------------------------------
AirGate iPCS** Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Subscriber Gross Additions 137,543 59,403 196,946 198,945 82,196 281,141
Subscriber Net Additions 25,018 14,199 39,217 102,280 45,521 147,801
Total Subscribers 364,157 228,893 593,050 337,303 195,143 532,446
ARPU $58.47 $53.40 $57.33 $63.25 $55.44 $60.95
Churn (with subscriber reserve) 3.3% 4.0% 3.7% 3.0% 2.4% 2.7%
Churn (without subscriber reserve) 3.8% 4.9% 4.4% 3.9% 3.4% 3.6%
CPGA $351 $356 $355 $354 $399 $370
Capital Expenditures (cash)
(in thousands) $10,369 $8,469 $18,838 $ 32,280 $ 45,125 $77,405
EBITDA (in thousands) $31,910 $(7,255) $24,655 $(268.990) $(23,961) $(292,951)
The reconciliation of EBITDA to our reported net loss, as determined in
accordance with GAAP, is as follows (dollar amounts in thousands):
Nine Months Ended June 30,
2003 2002
----------------------------------------------- ---------------------------------------------
AirGate iPCS** Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Net Loss $(39,958) $(36,984) $(76,942) $(321,461) $(60,172) $(381,633)
Depreciation and
amortization 41,145 14,677 55,822 55,645 21,596 77,241
Interest income (52) (42) (94) (156) (374) (530)
Interest expense 30,775 15,094 45,869 25,743 14,989 40,732
Income tax benefit -- -- -- (28,761) -- (28,761)
------------- ------------ ----------- --------- ---------- ---------
EBITDA $ 31,910 $ (7,255) $ 24,655 $(268,990) $(23,961) $(292,951)
======== ========= ======== ========= ======== =========
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):
Nine Months Ended June 30,
2003 2002
-------------------------------------- ---------------------------------------
AirGate iPCS** Combined AirGate iPCS Combined
Net cash provided by (used in)
operating activities $ 29,736 $(9,086) $20,650 $(24,294) $ (24,503) $ (48,797)
Change in operating assets and
liabilites 290 541 831 30,725 6,744 37,469
Interest expense 30,775 15,094 45,869 25,743 14,989 40,732
Accretion of interest (24,158) (11,589) (35,747) (21,323) (15,118) (36,441)
Goodwill impairment -- -- -- (261,212) -- (261,212)
Interest income (52) (42) (94) (156) (374) (530)
Provision for doubtful accounts (3,724) (1,693) (5,417) (16,968) (5,374) (22,342)
Other expense (957) (480) (1,437) (1,505) (325) (1,830)
--------- ---------- -------- --------- -------- -------
EBITDA $ 31,910 $(7,255) $24,655 $(268,990) $(23,961) $ (292,951)
======== ======== ======== ========= ========= ==========
The reconciliation of ARPU to service revenue, as determined in accordance with
GAAP, is as follows (dollar amounts in thousands, except per unit data):
Nine Months Ended June 30,
2003 2002
---------------------------------------- -------------------------------------------
AirGate iPCS** Combined AirGate IPCS Combined
Average Revenue per User (ARPU):
Service revenue $ 185,032 $57,896 $ 242,928 $ 162,886 $67,536 $ 230,422
Average subscribers 351,648 222,794 470,798 286,163 172,383 420,028
ARPU $58.47 $53.40 $57.33 $ 63.25 $ 55.44 $60.95
The reconciliation of CPGA to selling and marketing expense, as determined in
accordance with GAAP, is calculated as follows (dollar amounts in thousands,
except per unit data):
Nine Months Ended June 30,
2003 2002
--------------------------------------- ------------------------------------------
AirGate iPCS** Combined AirGate IPCS Combined
Sales and marketing expense $40,863 $16,417 $57,280 $ 59,925 $25,643 $ 85,568
Plus: Activation expense 747 194 941 1,260 596 1,856
Plus: Cost of equipment 15,271 7,129 22,400 20,129 9,853 29,982
Less: Equipment revenue (8,641)* (2,575)* (10,773) (10,934)* (3,272)* (13,523)
------ ------ ------- ------- ------ -------
Total acquisition costs $48,240 $21,165 $69,848 $ 70,380 $32,820 $ 103,883
======= ======= ======= ======== ======= =========
Gross Additions 137,543 59,403 196,946 198,945 82,196 281,141
CPGA $351 $356 $355 $354 $399 $370
*Amounts are reflected prior to the elimination of intercompany transactions.
** For 2003, iPCS amounts represent the period between October 1, 2002 and
February 23, 2003. For 2003, average subscribers for combined entity is a
weighted average. For 2002, iPCS amounts represent the period between December
1, 2002 and June 30, 2002. For 2002, average subscribers for combined entity is
a weighted average.
Subscriber Net Additions
For AirGate, subscriber net additions decreased for the nine months ended June
30, 2003, compared to the same period in 2002. This decline is due to the
decrease in subscriber gross additions and the increased number of subscribers
who churned during the period. Reported net additions during the nine months
ended June 30, 2003 for AirGate were positively impacted by the Company's
elimination of its subscriber reserve. The net impact of this change for the
nine months ending June 30, 2003 is an increase in net additions of 3,717 for
AirGate and 2,251 for iPCS.
Subscriber Gross Additions
For AirGate, subscriber gross additions decreased for the nine months ended June
30, 2003 compared to the same period in 2002. This decline is due to increases
in the deposit for sub-prime credit quality customers and actions taken to
reduce acquisition costs.
EBITDA
For AirGate, EBITDA for the nine months ended June 30, 2003 increased from the
same period in 2002. The increase is a result of an overall decrease in
spending, particularly in cost of services and selling and marketing. EBITDA for
AirGate was favorably impacted by special settlements from Sprint, including
$4.9 million in credits reflected as a reduction in cost of service and $1.8
million in E911 amounts.
Average Revenue Per User
For AirGate, the decrease in ARPU for the nine months ended June 30, 2003,
compared to the same period in 2002 is primarily the result of an overall
reduction in revenue from customers using minutes in excess of their subscriber
usage plans. The decrease also reflects the cessation of recognizing terminating
long-distance access revenue. Until June 30, 2002, the Company recorded
terminating long-distance access revenues billed by Sprint PCS to long distance
carriers.
Churn
Churn decreased for the quarter ended June 30, 2003, compared to the same
quarter for 2002. The Company has focused on improving the credit quality of the
subscriber base. In February 2003, management increased the deposit required for
a sub-prime credit customer to begin service to $250 in an effort to reduce
churn and bad debt and increase the percentage of prime credit customers in
AirGate's customer base. We believe these and other factors may have influenced
the reduction in churn for the quarter ended June 30, 2003 compared to the same
period in 2002.
Cost Per Gross Addition
For AirGate, CPGA decreased for the nine months ended June 30, 2003, compared to
the same period in 2002. The decrease is the result of reduced acquisition
costs, partially offset by fewer subscriber gross additions.
Revenues
Nine Months Ended June 30,
--------------------------
(in thousands)
2003 2002
------------------------------------------ ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Service Revenue $185,032 $57,896 $242,928 $162,886 $67,536 $230,422
Roaming Revenue 48,126 18,893 67,019 52,291 23,167 75,458
Equipment Revenue 8,641* 2,575* 10,773 10,934* 3,272* 13,523
-------- ------- -------- -------- ------- --------
Total $241,799 $79,364 $320,720 $226,111 $93,975 $319,403
======== ======= ======== ======== ======= ========
*Amounts are reflected prior to the elimination of intercompany transactions.
For AirGate, service revenue for the nine months ended June 30, 2003 increased
over the same period in the prior year. The increase in service revenue reflects
a higher average number of subscribers using its network. This increase is
partially offset by an overall reduction in average revenue per subscriber.
For AirGate, roaming revenue for the nine months ended June 30, 2003 decreased
over the same period in the prior year. The decrease is attributable to the
lower reciprocal roaming rate charged among Sprint and its PCS network partners.
For the nine months ended June 30, 2003, roaming revenue from Sprint and its PCS
network partners attributable to AirGate was $44.0 million or 92% of the roaming
revenue recorded.
For AirGate, equipment revenue for the nine months ended June 30, 2003 decreased
over the same period in the prior year. This decrease is primarily due to the
lower number of subscriber gross additions compared to the same period in the
prior year.
Cost of Service and Roaming
Nine Months Ended June 30,
-------------------------
(in thousands)
2003 2002
------------------------------------------ -----------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Roaming expense $ 39,259* $ 13,673* $ 52,489 $ 41,220* $ 18,405* $ 58,942
Network operating costs 91,136 39,036 130,172 85,019 48,491 133,510
Bad debt expense 3,724 1,694 5,418 16,821 5,617 22,438
Wireless handset upgrades 4,089 1,788 5,877 1,122 686 1,808
--------- -------- --------- --------- -------- ---------
Total cost of service and roaming $ 138,208 $ 56,191 $ 193,956 $ 144,182 $ 73,199 $216,698
========= ======== ========= ========= ======= ========
*Amounts are reflected prior to the elimination of intercompany transactions.
For AirGate, roaming expense decreased for the nine months ended June 30, 2003,
compared to the same period in 2002 primarily as a result of a decrease in the
reciprocal roaming rate charged among Sprint and its network partners, partially
offset by an increase in roaming usage. For AirGate, 94% and 93% of the cost of
roaming was attributable to Sprint and its network partners for the nine months
ended June 30, 2003 and 2002, respectively, prior to the elimination of
intercompany transactions.
For AirGate, bad debt expense decreased by $13.1 million for the nine months
ended June 30, 2003, compared to the same period in 2002. The decrease in bad
debt expense is attributable primarily to improvements in the credit quality and
payment profile of our subscriber base since we re-imposed deposits for
sub-prime credit subscribers in early 2002 and increased them again in February
2003. This resulted in a significant improvement in accounts receivable
write-offs and corresponding bad debt expense for the nine months ended June 30,
2003.
For AirGate, wireless handset upgrade expenses increased $3.0 million for the
nine months ended June 30, 2003, compared to the same period in 2002. In April
2002, Sprint began billing upgrade costs to AirGate for national third party and
certain other channels. Prior to April 2002, these charges were not passed
through to AirGate from Sprint.
Cost of Equipment and Operating Expenses
Nine Months Ended June 30,
(in thousands)
2003 2002
-------------------------------------------- ---------------------------------------------
AirGate iPCS Combined AirGate iPCS Combined
------- ---- -------- ------- ---- --------
Cost of Equipment $ 15,271 $ 7,129 $ 22,400 $ 20,129 $ 9,853 $ 29,982
Selling and Marketing 40,863 16,417 57,280 59,925 25,643 85,568
General and Administrative 15,029 6,881 21,910 9,057 9,220 18,277
Non-Cash Stock Compensation 530 -- 530 597 -- 597
Depreciation and
Amortization 34,799 14,168 48,967 28,419 19,445 47,864
Amortization of
Intangible Assets 6,346 509 6,855 27,226 2,151 29,377
Interest Expense 31,577 14,292 45,869 25,743 14,989 40,732
Cost of Equipment
For AirGate, cost of equipment decreased for the nine months ended June 30,
2003, compared to the same period in 2002 primarily as a result of the decrease
in the number of subscriber gross additions.
Selling and Marketing
For AirGate, selling and marketing expense decreased for the nine months ended
June 30, 2003, compared to the same period in 2002 reflecting the effect of
reduced subscriber gross additions, staff reductions, store closings and reduced
advertising and promotions expense.
General and Administrative
For AirGate, general and administrative expense increased for the nine months
ended June 30, 2003, compared to the same period in 2002 reflecting increased
spending for relocation costs and spending for outside consultants providing
services to AirGate as it relates to identifying cost saving opportunities that
we believe will provide future long term savings to the Company.
Non-Cash Stock Compensation
Non-cash stock compensation expense was approximately the same for the nine
months ended June 30, 2003 and 2002.
Depreciation
For AirGate, depreciation and amortization expense increased to $34.8 million
for the nine months ended June 30, 2003, compared to $28.4 million for same
period in 2002, an increase of $6.4 million. The increase in depreciation and
amortization expense primarily relates to additional network assets placed in
service in fiscal year 2002. AirGate incurred capital expenditures of $10.4
million in the nine months ended June 30, 2003, which included approximately
$0.4 million of capitalized interest as compared to capital expenditures of
$32.2 million and capitalized interest of $6.2 million in the same period in
2002.
Amortization of Intangible Assets
Amortization of intangible assets primarily related to iPCS for the nine months
ended June 30, 2003 and 2002 was approximately $6.9 million and $29.4 million,
respectively. The Company recorded an impairment charge of $261.2 million in
fiscal year 2002 to write-down intangible assets in accordance with SFAS No. 144
and 142.
Goodwill Impairment
As previously discussed, the Company recorded a goodwill impairment of $261.2
million primarily related to iPCS during the nine months ended June 30, 2002.
Interest Expense
For AirGate, interest expense for the nine months ended June 30, 2003 increased
compared to the same period in 2002 primarily as a result of increased debt
related to accreted interest on the AirGate notes and increased borrowings under
the AirGate credit facility. The increase was partially offset by lower
commitment fees on undrawn balances of the AirGate credit facility and a lower
interest rate on the variable rate for borrowings under the AirGate credit
facility.
Income Tax Benefit
No income tax benefit was realized for the nine months ended June 30, 2003.
Income tax benefit of $28.8 million was realized for the nine months ended June
30, 2002.
Net Loss
For the nine months ended June 30, 2003, the net loss for the Company was $76.9
million, compared to a net loss of $381.6 million for the same period in 2002.
For the nine months ended June 30, 2002, net loss attributable to AirGate and
iPCS was $321.5 million and $60.2 million, respectively. The nine months ended
June 30, 2002 included $261.2 million related to goodwill impairment.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, AirGate had $30.8 million in cash and cash equivalents
compared to $4.9 million in cash and cash equivalents at September 30, 2002. The
increase in cash is attributable to improvements in working capital, reduced
operating expenses and borrowings, net of repayments under the AirGate credit
facility. The improved cash position during the nine months ended June 30, 2003
for AirGate is primarily attributable to the following:
o Sprint special settlements and other items of $10.5 million that were not
previously remitted to AirGate (See Note 3 to the Consolidated Financial
Statements);
o Net borrowings of $6.5 million under the AirGate credit facility; and
o Reduced operating expenses as a result of cost containment initiatives
eliminating certain personnel positions, retail location closures and
reductions in advertising and promotion spending.
The Company's working capital balance was $2.6 million at June 30, 2003,
compared to a working capital deficit of $364.4 million at September 30, 2002.
The improvement in the Company's working capital position is primarily
attributable to the deconsolidation of iPCS' working capital components
subsequent to February 23, 2003.
Net Cash Provided By (Used In) Operating Activities
The $20.7 million of cash provided by operating activities in the nine months
ended June 30, 2003 was the result of the Company's $76.9 million net loss
offset by non-cash items including depreciation, amortization of note discounts,
financing costs, amortization of intangibles, provision for doubtful accounts,
and non-cash stock compensation totaling $98.4 million. These non-cash items
were partially offset by net cash working capital changes of $0.8 million. The
net working capital changes were driven primarily by an increase in prepaid
expenses along with decreases in payables due to Sprint, trade accounts payable
and accrued expenses. The $48.8 million of cash used in operating activities in
the nine months ended June 30, 2002 was the result of the Company's $381.6
million net loss offset by $370.4 million of goodwill impairment, depreciation,
amortization of note discounts, financing costs, amortization of intangibles,
deferred tax benefit, provision for doubtful accounts and non-cash stock option
compensation, that was partially offset by negative net cash working capital
changes of $37.6 million.
Net Cash Used in Investing Activities
The $28.9 million of cash used in investing activities during the nine months
ended June 30, 2003 represents $18.9 million for purchases of property and
equipment. Purchases of property and equipment during the nine months ended June
30, 2003 related to investments for the expansion of switch capacity and
expansion of service coverage. In addition, $10.0 million of cash was
deconsolidated subsequent to February 23, 2003 relating to the iPCS bankruptcy.
For the nine months ended June 30, 2002, cash used in investing activities of
$59.1 million represented $77.4 million for purchases of equipment and $6.1
million of acquisition costs related to the merger with iPCS offset by $24.4
million of cash acquired from iPCS. For the nine months ended June 30, 2003,
cash used in investing activities attributable to AirGate and iPCS was $10.4
million and $18.5 million, respectively.
Net Cash Provided by Financing Activities
The $6.5 million in cash provided by financing activities during the nine months
ended June 30, 2003, consisted of $8.0 million in borrowings under the AirGate
credit facility offset by $1.5 million for principal payments associated with
the AirGate credit facility. The $117.4 million of cash provided by financing
activities in the nine months ended June 30, 2002 consisted of $56.2 million
borrowed under the AirGate credit facility and $60.0 million under the iPCS
senior credit facility, and $0.7 million of proceeds received from exercise of
options and warrants and $0.5 million received from stock issued to the employee
stock purchase plan. For the nine months ended June 30, 2003, the $6.5 million
in cash provided by financing activities was attributable solely to AirGate.
Liquidity
Due to the factors described in the Company's Annual Report on Form 10-K/A for
the year ended September 30, 2002, management has made changes to the
assumptions underlying the long-range business plans for AirGate and iPCS. These
changes included fewer new subscribers, lower ARPU, higher subscriber churn,
increased service and pass through costs from Sprint in the near-term and lower
roaming margins from Sprint.
On February 23, 2003 iPCS, Inc. and its subsidiaries, iPCS Wireless, Inc. and
iPCS Equipment, Inc., filed a Chapter 11 bankruptcy petition in the United
States Bankruptcy Court for the Northern District of Georgia for the purpose of
effecting a court-administered reorganization. Immediately prior to iPCS'
bankruptcy filing, the lenders under the iPCS credit facility accelerated iPCS'
payment obligations as a result of existing defaults under the credit facility.
While AirGate has also experienced a deterioration in its liquidity, it appears
that it is in a better position to address the deterioration in anticipated
operating results. It has a larger subscriber base than iPCS and, as a
stand-alone operation, AirGate's business is more mature. Although no assurance
can be made, based upon its current business plan, which continues to be revised
and evaluated in light of evolving circumstances, we expect that AirGate will
have sufficient funds from operations to satisfy its working capital
requirements, capital expenditures and other liquidity requirements through at
least June 30, 2004. AirGate has explored, and continues to explore, options to
restructure its balance sheet and indebtedness and has had, and continues to
have, discussions with the lenders under the AirGate credit facility and holders
of the AirGate notes. AirGate has engaged Broadview International LLC and Masson
& Company as financial advisors to assist it in exploring its options with
respect to a restructuring.
AirGate Capital Resources
As of June 30, 2003, AirGate had $30.8 million of cash and cash equivalents. As
of June 30, 2003, $9.0 million remained available for borrowing under the
AirGate credit facility. On August 8, 2003, AirGate drew the remaining $9.0
million available under the AirGate credit facility, leaving no further
borrowing availability. The Company's obligations under the AirGate credit
facility are secured by all of AirGate's assets, but not the assets of iPCS and
its subsidiaries.
Future Trends That May Affect Operating Results, Liquidity and Capital Resources
Our business plan and estimated future operating results are based on estimates
of key operating metrics, including subscriber growth, subscriber churn, capital
expenditures, ARPU, losses on sales of handsets and other subscriber
acquisitions costs, and other operating costs. The unsettled nature of the
wireless market, the current economic slowdown, increased competition in the
wireless telecommunications industry, the problems in our relationship with
Sprint, new service offerings of increasingly large bundles of minutes of use at
lower prices by some major carriers, and other issues facing the wireless
telecommunications industry in general have created a level of uncertainty that
may adversely affect our ability to predict key operating metrics.
Certain other factors that may affect our operating results, liquidity and
capital resources include the following:
AirGate has limited funding options
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 our actual revenues
are less than we expect or operating or capital costs are more than we expect,
our financial condition and liquidity may be materially adversely affected. In
such event, there is substantial risk that the Company could not access the
capital or credit markets for additional capital.
AirGate's payment obligations may be accelerated if it is unable to maintain or
comply with the financial and operating covenants contained in the AirGate
credit facility. The AirGate credit facility contains covenants specifying the
maintenance of certain financial ratios, reaching defined subscriber growth and
network covered population goals, minimum service revenues, maximum capital
expenditures, and the maintenance of a ratio of total and senior debt to
annualized EBITDA, as defined in the credit facility. The definition of EBITDA
in the AirGate credit facility is not the same as EBITDA used by the Company in
this report.
If the Company is unable to operate the AirGate business within the covenants
specified in the AirGate credit facility, AirGate's ability to use its cash
could be restricted or terminated and its payment obligations may be
accelerated. Such a restriction, termination or acceleration could have a
material adverse affect on AirGate's liquidity and capital resources. There can
be no assurance that AirGate could obtain amendments to such covenants if
necessary. The Company believes that it is currently in compliance in all
material respects with all financial and operational covenants relating to the
AirGate credit facility.
Risks Related to Sprint.
Sprint has sought to collect charges that were unanticipated. Furthermore,
Sprint has increased and may seek to further increase, service fees charged to
its network partners and has imposed other requirements that adversely effect
our financial performance. Increased fees and charges from Sprint and
unanticipated fees and charges can adversely affect our operating results,
liquidity and capital resources. We have disputed all of the approximately $7.0
million of amounts Sprint has asserted we owe. Additionally, although we have
adequately reserved for disputed amounts with Sprint, if we lose all of these
disputes, payment of such amounts can adversely affect our operating results,
liquidity and capital resources.
Variable interest rates may increase substantially.
As of June 30, 2003, the Company had $143.0 million outstanding debt under the
AirGate credit facility, which was increased to $152.0 million on August 8,
2003. The rate of interest on the credit facility is based on a margin above
either the alternate bank rate (the prime lending rate in the United States) or
the London Interbank Offer Rate (LIBOR). For the quarter ended June 30, 2003,
the weighted average interest rate under variable rate borrowings was 5.14%
under the AirGate credit facility. If interest rates increase, the Company may
not have the ability to service the interest requirements on the AirGate credit
facility. Furthermore, if AirGate were to default in its payments under its
credit facility, its rate of interest would increase by 2.5% over the alternate
bank rate.
AirGate operates with little working capital because of amounts owed to Sprint.
Each month AirGate pays Sprint expenses described in greater detail in Note 3 to
the consolidated financial statements. A reduction in the amounts the Company
owes Sprint may result in a greater use of cash for working capital purposes
other than the business plans currently projected. A reduction in such amounts
may reduce cash available to the Company and decrease the amount of cash
available for working capital purposes other than the business plans currently
project.
Effect of iPCS Bankruptcy.
As an unrestricted subsidiary, iPCS is a separate corporate entity from AirGate
with its own independent financing sources, debt obligations and sources of
revenue. Furthermore, iPCS lenders, noteholders and creditors do not have a lien
or encumbrance on assets of AirGate, and AirGate cannot provide capital or other
financial support to iPCS. The Company believes AirGate operations will continue
independent of the outcome of the iPCS bankruptcy. However, it is likely that
AirGate's ownership interest in iPCS will have no value after the restructuring
is complete. On April 22, 2003, the trustee for the AirGate notes gave notice to
the AirGate noteholders of the iPCS bankruptcy filing and that in the opinion of
the Company and its outside counsel, such filing is not a default under the
AirGate notes. If the Company were determined by a court of competent
jurisdiction to be in default under the AirGate notes and the notes were
accelerated, the Company would have insufficient funds to pay the AirGate notes.
Other factors.
Other factors, which could adversely affect AirGate's liquidity and capital
resources, are described in this report as Item 5, Risk Factors, including the
following:
o our revenues may be less than we anticipate;
o our costs may be higher than we anticipate;
o ARPU may continue to decline;
o we may continue to experience a high rate of subscriber turnover;
o our efforts to reduce costs may not succeed or may have adverse affects on
our business; and
o our provision for doubtful accounts may not be sufficient to cover
uncollectible accounts. Contractual Obligations
The Company is obligated to make future payments under various contracts it has
entered into, including amounts pursuant to the AirGate credit facility, the
AirGate notes, capital leases and non-cancelable operating lease agreements for
office space, cell sites, vehicles and office equipment. Future expected minimum
contractual cash obligations for the next five years and in the aggregate at
September 30, 2002 are as follows (dollar amounts in thousands):
Payments Due By Period
Years Ending September 30,
Contractual Obligation Total 2003 2004 2005 2006 2007 Thereafter
---------------------- ----- ---- ---- ---- ---- ---- ----------
AirGate credit facility (1) $136,500 $ 2,024 $15,863 $21,150 $26,920 $35,400 $ 35,143
AirGate notes 300,000 -- -- -- -- -- 300,000
AirGate operating leases (2) 78,628 18,646 18,539 14,256 9,604 6,632 10,951
------ ------- -------- -------- ----- ----- ------
Total $515,128 $20,670 $34,402 $35,406 $36,524 $42,032 $346,094
-------- ------- ------- ------- ------- ------- --------
(1) Total repayments are based upon borrowings outstanding as of September 30,
2002, not projected borrowings under the AirGate credit facility.
(2) Does not include payments due under renewals to the original lease term.
The AirGate credit facility is comprised of two senior secured loan commitments
("tranches") totaling $153.5 million. Tranche 1 provides for a $13.5 million
senior secured term loan commitment (of which $12.0 million is outstanding as of
June 30, 2003), which matures on June 6, 2007. Tranche II provides for a $140.0
million senior secured term loan commitment (of which $131.0 million is
outstanding as of June 30, 2003), which matures on September 30, 2008. The
AirGate credit facility requires quarterly principal payments, which began on
December 31, 2002 for tranche I and begins on June 30, 2004 for tranche II,
initially in the amount of 3.75% of the loan balance then outstanding and
increasing thereafter. As of June 30, 2003, AirGate had cumulative borrowings
under the AirGate credit facility totaling $144.5 million and has made
cumulative quarterly principal repayments in the amount of $1.5 million. As of
August 8, 2003, AirGate had cumulative borrowings under the AirGate credit
facility totaling $153.5 million. The commitment fee on unused borrowings is
1.50%, payable quarterly. The AirGate notes will require cash payments of
interest beginning on April 1, 2005.
There are provisions in the agreements governing the AirGate credit facility and
the AirGate notes providing for an acceleration of repayment upon an event of
default, as defined in the respective agreements. AirGate is currently in
material compliance with its obligations under these agreements.
As of July 31, 2003, two major credit rating agencies rate AirGate's unsecured
debt. The ratings were as follows:
Type of facility Moody's S&P
---------------- ------- ---
AirGate notes Caa2 CC
The Company has no off-balance sheet arrangements and has not entered into any
transactions involving unconsolidated, limited purpose entities or commodity
contracts.
Seasonality
The Company's business is subject to seasonality because the wireless industry
historically has been heavily dependent on fourth calendar quarter results.
Among other things, the industry relies on significantly higher subscriber
additions and handset sales in the fourth calendar quarter as compared to the
other three calendar quarters. A number of factors contribute to this trend,
including: the increasing use of retail distribution, which is heavily dependent
upon the year-end holiday shopping season; the timing of new product and service
announcements and introductions; competitive pricing pressures; and aggressive
marketing and promotions. The increased level of activity requires a greater use
of available financial resources during this period. We expect, however, that
fourth quarter seasonality will have less impact in the future.
RELATED PARTY TRANSACTIONS AND TRANSACTIONS BETWEEN AIRGATE AND IPCS
Transactions with Sprint. See Note 3 to the consolidated financial statements
for a description of transactions with Sprint.
Transactions between AirGate and iPCS. See Note 7 to the consolidated financial
statements for a description of transactions between AirGate and iPCS.
Item 3. Quantitative And Qualitative Disclosure About Market Risk
In the normal course of business, the Company's operations are exposed to
interest rate risk on its credit facilities and any future financing
requirements. AirGate's fixed rate debt consists primarily of the accreted
carrying value of the 1999 AirGate notes ($244.5 million at June 30, 2003).
AirGate's variable rate debt consists of borrowings made under the AirGate
credit facility ($143.0 million outstanding at June 30, 2003). For the three
months ended June 30, 2003, the weighted average interest rate under the AirGate
credit facility was 5.14%. Our primary interest rate risk exposures relate to
(i) the interest rate on long-term borrowings; (ii) our ability to refinance the
AirGate notes at maturity at market rates; and (iii) the impact of interest rate
movements on our ability to meet interest expense requirements and financial
covenants under our debt instruments.
The following table presents the estimated future balances of outstanding
long-term debt projected at the end of each period and future required annual
principal payments for each period then ended associated with the AirGate notes
and credit facility based on projected levels of long-term indebtedness (dollar
amounts in thousands):
Years Ending September 30,
------------------------------------------------------------------------------
------------ ------------ ------------ ------------ ------------ -------------
2003 2004 2005 2006 2007 Thereafter
---- ---- ---- ---- ---- ----------
AirGate notes $ 260,630 $ 297,191 $ 297,289 $ 297,587 $ 298,115 $ --
Fixed interest rate 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Principal payments $ -- $ -- $ -- $ -- $ -- $ 300,000
AirGate credit facility $ 151,475 $ 133,700 $ 110,000 $ 79,893 $ 40,000 $ --
Variable interest rate (1) 4.88% 4.88% 4.88% 4.88% 4.88% 4.88%
Principal payments $ 2,025 $ 17,775 $ 23,700 $ 30,107 $ 39,893 $ 40,000
(1) The interest rate on the AirGate credit facility equals the London
Interbank Offered Rate ("LIBOR") +3.75%. LIBOR is assumed to equal 1.13%
for all periods presented, which is the LIBOR rate as of July 29, 2003. A
1% increase (decrease) in the variable interest rate would result in a $1.4
million increase (decrease) in the related interest expense on an annual
basis (based upon borrowings outstanding as of June 30, 2003).
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As of the end of the period covered by this report, June 30, 2003 (the
"Evaluation Date"), we carried out an evaluation, under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon this evaluation,
the President and Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
Evaluation Date.
Our Relationship with Sprint
Under our long-term (up to 50 year) agreements with Sprint, we market PCS
products and services under the Sprint brand names in our territory and our
business currently consists solely of Sprint wireless products and services.
Under our agreements, Sprint exercises extensive control over our business and
our relationship with Sprint is unique in many ways. For example:
o Our network must interface seamlessly with the national Sprint wireless
network.
o Our network must be built, maintained and upgraded to include Sprint's most
current technology in accordance with Sprint-approved plans and using
Sprint-approved equipment.
o Under our management agreement with Sprint, we are required to provide
services such as customer care, billing and collections in accordance with
program requirements established by Sprint in accordance with the
management agreement. Any third party vendor must receive Sprint approval,
comply with Sprint's program requirements with respect to these services
and interface with Sprint's systems.
o Sprint must approve our marketing and sales materials.
o Sprint develops products and services that we are required to offer in our
territory and it must approve all products and services we offer in our
territory, subject to certain limitations.
o Our stores must conform to Sprint's requirements for retail stores and are
identical to Sprint retail stores in Sprint's markets.
o Sprint develops and implements pricing and credit plans that we are
required to offer in our territory.
o We are required to absorb the cost of promotional plans developed by
Sprint, which we must offer in our territory (e.g., rebates or discounts to
customers for handset purchases).
o Our subscribers call Sprint customer care.
o Our subscribers receive bills from, and make payments to, Sprint.
Under our agreements with Sprint, Sprint provides us with billing, collections,
customer care and other back office services. As a result, approximately 95% of
our revenues are paid through Sprint. In addition, approximately 65% of cost of
service and roaming in our consolidated financial statements relate to charges
by or through Sprint for its affiliation fee, charges for services provided
under our agreements with Sprint such as billing, collections and customer care,
roaming expense, long-distance, and pass-through and other fees and expenses.
Under our agreements, Sprint is responsible to keep and maintain books and
records to support and document any fees, costs or other charges due in
connection with the agreements and to provide a monthly true-up report of
amounts required to be remitted to the Company with respect to collected
revenues. Due to this relationship, the Company necessarily relies on Sprint to
provide accurate, timely and sufficient data and information to properly record
our revenues, expenses and accounts receivable, which underlie a substantial
portion of our periodic financial statements and other financial disclosures.
Nevertheless, the Company continues to dedicate significant Company resources to
ensure its disclosure controls and procedures, as integrated with Sprint, are
effective.
Information provided by Sprint includes reports regarding our subscriber
accounts receivable. Sprint provides us monthly accounts receivable, billing and
cash receipts, expense detail and settlements information. Under our agreements
with Sprint, we are entitled to only a portion of the cash receipts, net of
items such as taxes, government surcharges and the 8% Sprint affiliation fee.
Sprint has developed and used a tool called the "revenue profile" to estimate
the payments due to us. We regularly review and reconcile these various reports
to identify discrepancies or errors and address those issues with Sprint.
Our Disclosure Controls and Procedures - Fiscal 2002
Because of our reliance on Sprint for financial information, we depend on Sprint
to design adequate internal controls with respect to the processes established
to provide this data and information to the Company and Sprint's other network
partners. As part of this control process, Sprint engages its independent
auditors to perform a periodic evaluation of these controls and to provide a
"Report on Controls Placed in Operation and Tests of Operating Effectiveness for
Affiliates" under guidance provided in Statement of Auditing Standards No. 70
("Type II SAS 70 reports"). The Type II SAS 70 report is provided to us annually
and covers our entire fiscal year.
In addition, at least annually, we review the prior year's Type II SAS 70 report
in light of events that have occurred during the year. We also provide comments
to Sprint and its independent auditors regarding issues and information the
report should address that may not have been addressed in the prior year's
report.
During the fourth quarter of fiscal 2002, it became apparent that discrepancies
between various accounts receivable reports provided by Sprint had become
significant. To address these issues, we conducted a lengthy inquiry into the
causes of the discrepancies. Among other things, we had numerous discussions and
meetings with Sprint's accounting staff, requested and received additional and
more detailed reports and demanded reconciliations with our records.
In connection with our review of the accounts receivable issue at September 30,
2002 for purposes of finalizing our financial statements, we reclassified
approximately $10.0 million of AirGate subscriber accounts receivable for the
fiscal year ended September 30, 2002 to a receivable from Sprint. We provided an
allowance to reflect the receivable at its net realizable value, which we
collected from Sprint subsequent to September 30, 2002.
At September 30, 2002, we and our independent auditors believed that the
accounts receivable issue resulted from a reportable condition in our internal
controls. Reportable conditions are significant deficiencies in the design or
operation of internal controls which could adversely affect an organization's
ability to record, process, summarize and report financial data consistent with
the assertions of management in the consolidated financial statements.
Nonetheless, we concluded that our disclosure controls and procedures were
effective as of September 30, 2002. We came to this conclusion for the following
reasons:
o The controls and procedures in place during fiscal year 2002 were effective
in detecting the accounts receivable issue.
o Even with the accounts receivable issue, we believed it was reasonable to
rely on the reports and information we received from Sprint. Sprint is a
public reporting company that certifies its financial information and its
controls and procedures. In addition, compared to any single Sprint
affiliate, Sprint has significantly greater resources and efficiencies,
both financially and with respect to personnel, with which to gather,
analyze and control its information.
o We relied on the Type II SAS 70 report discussed above and the controls
discussed in the report.
o During the entire fiscal year 2002, the Company used a program to automate
a portion of the process utilized to record the Company's revenues and
accounts receivable from the files received from Sprint. The program
summarizes the files received from Sprint to mirror the Company's general
ledger accounts. The Company performs a reasonableness check prior to
recording the amounts in the Company's general ledger. The Company relies
on the program and the inherent system controls and the reasonableness
checks to ensure the consistency of the information downloaded from Sprint
with the information reflected in the Company's general ledger.
o During the entire fiscal year 2002, Company personnel reviewed financial
information and data provided by Sprint. The Company has performed and
continues to perform reasonableness checks regarding information provided
by Sprint on a monthly basis by evaluating trends in key performance
indicators to detect trending anomalies. The Company's finance and
operations groups evaluate these trends and the Company relies on this
process as a compensating control to detect errors in the data provided by
Sprint. The Company's finance and operations groups work closely with the
Company's accounting group to reconcile differences and make necessary
corrections and follow up with Sprint as necessary.
o During the entire fiscal year 2002, the Company reviewed and reconciled
certain information provided by Sprint to detect inconsistencies in the
data.
o In July 2002, we established a disclosure control committee made up of
senior members of management and key employees. The committee assists the
Company's senior officers in fulfilling their responsibility for oversight
of the accuracy and timeliness of the disclosures made by the Company. The
committee, among other things, designs and establishes controls and
procedures regarding the accuracy and dissemination of information,
monitors the integrity and effectiveness of the Company's disclosure
controls, reviews and supervises the preparation of filings and
announcements made by the Company and evaluates the effectiveness of the
Company's disclosure controls. The committee includes members who have
information pertaining to Sprint to ensure that appropriate disclosures are
made pertaining to Sprint.
o During December 2002, prior to the issuance of our annual report, the
Company worked with Sprint to identify the sources of the discrepancies.
The Company then developed a reconciliation process of the accounts
receivable aging report provided by Sprint with the Company's accounts
receivable account. The reconciliation was developed to identify the nature
of the differences and quantify the amount of the error in the Company's
accounts receivable account. The Company continues to use and refine this
reconciliation process to detect errors on a timely basis.
Given the controls described above, and the discrete nature of the accounts
receivable issue, we concluded, at the time our certifications of disclosure
controls were made, that our disclosure controls and procedures were effective.
Our Disclosure Controls and Procedures - Fiscal 2003
Although we concluded that our disclosure controls and procedures were effective
at the end of fiscal 2002 and in each interim period of fiscal 2003, we
recognized that further improvements were necessary to better address
information provided by Sprint. During fiscal 2003, we focused additional
resources on reviewing and analyzing information provided by Sprint and worked
with Sprint to identify other information and reports that would assist us in
this review and analysis, particularly as it relates to accounts receivable and
the application of cash.
During 2003, in order to more timely and better monitor, verify and analyze
information provided by Sprint, we took the following actions to further enhance
our disclosure controls and procedures. While we believe that, in the aggregate,
these actions improved our overall internal controls, we do not believe that any
individual action was a material change to our internal controls.
o We reconcile accounts receivable aging reports from Sprint to our general
ledger on a quarterly basis.
o In January, 2003, the Company engaged a consultant with telecommunications
settlement experience to develop a plan for a Sprint settlements
department, to analyze and interface with Sprint to resolve financial
disputes with Sprint, to review the method of calculating the revenue
profile and to review the Sprint settlements processes and facilitate the
transition of Sprint settlements and review processes from the accounting
department in Geneseo, Illinois to the new settlements department in
Atlanta, Georgia. In May 2003, we internally staffed and broadened role of
the settlements department. The department has two full-time employees
(hired in May and August 2003) and one contract person (hired in June
2003). The manager of the settlements group serves as the primary interface
with Sprint regarding all issues related to the Sprint settlements process.
The settlements group reviews and analyzes financial data provided by
Sprint, including the components of the revenue profile that Sprint uses to
determine the amount of collected revenues paid to us. The settlements
group assists us in verifying amounts charged by Sprint as well as revenues
and other amounts settled with Sprint.
o During the fourth quarter of fiscal 2003, we completed an in-depth review
of the procedures undertaken in prior Type II SAS 70 reports and we
requested and Sprint agreed to provide and include additional procedures in
2003 and future Type II SAS 70 Reports.
o In September 2003, we requested additional "agreed upon procedures"
pertaining to accounts receivable from Sprint's independent accountants.
Sprint's independent accountants performed such procedures during October
2003.
o Beginning in the fourth quarter of fiscal 2003, we analyzed, documented and
implemented file audit and assurance processes for certain Sprint files
used in recording financial information.
o We obtained for the first time from Sprint an account level detail of
subscriber accounts receivable as of September 30, 2003. In September 2003,
we requested this detail on at least a quarterly basis in the future.
o In September 2003, Sprint agreed to provide semi-annual SAS 70 reports
beginning in 2004.
o In September 2003, Sprint informed us that it will request SAS 70 reports
from key service providers, including the third-party provider of its
billing systems and services.
Although we refined and improved our internal controls in 2002, we and our
independent auditors believe that a reportable condition (as defined above) in
internal controls relating to accounts receivable continued during 2003 because
most of the procedures described above were not in place until the end of the
fiscal year. As a result of the improved processes and procedures described
above, the Company believes no reportable condition in internal controls existed
by the end of the fiscal year, September 30, 2003 but our independent auditors
have not made that finding.
Because the procedures outlined under "Our Disclosure Controls and Procedures -
Fiscal 2002" continued during 2003, we believe our disclosure controls and
procedures were effective throughout 2003, including as of September 30, 2003.
In order to avoid a reportable condition in the future, the Company will need to
continue the processes described above and continue to obtain or perform the
following:
o Obtain from Sprint access to a detailed listing of subscriber receivables
at the account level on a quarterly basis and validate its integrity.
o Perform a full reconciliation of the subscriber receivables detail to the
general ledger balance, including a complete understanding of all
reconciling items.
o Perform a rollforward of the accounts receivable information to be provided
by Sprint and compare these amounts to our general ledger accounts.
The Company will continue to monitor and evaluate the effectiveness of its
improvements in controls related to information provided by Sprint and continue
to improve these processes.
In preparation for the requirements imposed under Section 404 of the Sarbanes
Oxley Act of 2002, we are retaining an outside accounting firm to assist us in
reviewing and improving our internal control processes, including the processes
to verify data provided by Sprint.
Changes in Internal Control over Financial Reporting
We refer you to the information discussed above in Evaluation of Disclosure
Controls and Procedures.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In May 2002, putative class action complaints were filed in the United States
District Court for the Northern District of Georgia against AirGate PCS, Inc.,
Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit Suisse
First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company, Thomas
Wiesel Partners LLC and TD Securities. The complaints do not specify an amount
or range of damages that the plaintiffs are seeking. The complaints seek class
certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former iPCS shareholders on
December 18, 2001 contained materially false and misleading statements and
omitted material information necessary to make the statements in the prospectus
not false and misleading. The alleged omissions included (i) failure to disclose
that in order to complete an effective integration of iPCS, drastic changes
would have to be made to the Company's distribution channels, (ii) failure to
disclose that the sales force in the acquired iPCS markets would require
extensive restructuring and (iii) failure to disclose that the "churn" or
"turnover" rate for subscribers would increase as a result of an increase in the
amount of sub-prime credit quality subscribers the Company added from its merger
with iPCS. On July 15, 2002, certain plaintiffs and their counsel filed a motion
seeking appointment as lead plaintiffs and lead counsel. Subsequently, the Court
denied that motion without prejudice and two of the plaintiffs have filed a
renewed motion. The Defendants responded to the renewed motion, but the Court
has not yet entered a ruling. The Company believes the plaintiffs' claims are
without merit and intends to vigorously defend against these claims. However, no
assurance can be given as to the outcome of the litigation.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
Subsequent Events
On June 10, 2003, Robert A. Ferchat was named Chairman of the Board.
Risk Factors
Our business and our prospects are subject to many risks. The following items
are representative of the risks, uncertainties and assumptions that could affect
our business, our future performance, our liquidity and the outcome of the
forward-looking statements we make. In addition, our business, our future
performance, our liquidity and forward-looking statements could be affected by
general industry and market conditions and growth rates, general economic and
political conditions, including the global economy and other future events,
including those described BELOW AND elsewhere in this QUARTERLY report on Form
10-Q.
Risks Related to Our Business, Strategy and Operations
The unsettled nature of the wireless market may limit the visibility of key
operating metrics
Our business plan and estimated future operating results are based on estimates
of key operating metrics, including subscriber growth, subscriber churn, average
monthly revenue per subscriber, losses on sales of handsets and other subscriber
acquisitions costs and other operating costs. The unsettled nature of the
wireless market, our relationship with Sprint, the current economic slowdown,
increased competition in the wireless telecommunications industry, new service
offerings of increasingly large bundles of minutes of use at lower prices by
some major carriers, and other issues facing the wireless telecommunications
industry in general have created a level of uncertainty that may adversely
affect our ability to predict these key operating metrics.
Our revenues may be less than we anticipate which could materially adversely
affect our liquidity, financial condition and results of operations
Revenue growth is primarily dependent on the size of our subscriber base,
average monthly revenues per user and roaming revenue. During the year ended
September 30, 2002, we experienced slower net subscriber growth rates than
planned, which we believe is due in large part to increased churn, declining
rates of wireless subscriber growth in general, the re-imposition of deposits
for most sub-prime credit subscribers during the last half of the year, the
current economic slowdown and increased competition. Other carriers also have
reported slower subscriber growth rates compared to prior periods. We have seen
a continuation of competitive pressures in the wireless telecommunications
market causing some major carriers to offer plans with increasingly large
bundles of minutes of use at lower prices which may compete with the calling
plans we offer, including the Sprint calling plans we support. While our
business plan anticipates lower subscriber growth, it assumes average monthly
revenues per user will remain relatively stable after factoring in recent
declines. Increased price competition may lead to lower average monthly revenues
per user than we anticipate. In addition, the lower reciprocal roaming rate that
Sprint has implemented will reduce our roaming revenue, which may not be offset
by the reduction in our roaming expense. If our revenues are less than we
anticipate, it could materially adversely affect our liquidity, financial
condition and results of operation.
Our costs may be higher than we anticipate which could materially adversely
affect our liquidity, financial condition and results of operations
Our business plan anticipates that we will be able to lower our operating and
capital costs, including costs per gross addition.
Increased competition may lead to higher promotional costs, losses on sales of
handset and other costs to acquire subscribers. Further, as described below
under "Risks Related to Our Relationship With Sprint," a substantial portion of
costs of service and roaming are attributable to fees and charges we pay Sprint
for billing and collections, customer care and other back-office support. Our
ability to manage costs charged by Sprint is limited. If our costs are more than
we anticipate, the actual amount of funds to implement our strategy and business
plan may exceed our estimates, which could have a material adverse affect on our
liquidity, financial condition and results of operations.
We may continue to experience a high rate of subscriber turnover, which would
adversely affect our financial performance
The wireless personal communications services industry in general, and Sprint
and its network partners in particular, have experienced a higher rate of
subscriber turnover, commonly known as churn, as compared to cellular industry
averages. This churn rate was driven higher in 2002 due to the NDASL and Clear
Pay programs required by Sprint and the removal of deposit requirements as
described elsewhere in this report. Our business plan assumes that churn will be
relatively constant over the remainder of fiscal 2003. Due to significant
competition in our industry and general economic conditions, among other things,
this decline may not occur and our future rate of subscriber turnover may be
higher than our historical rate. Factors that may contribute to higher churn
include:
o inability or unwillingness of subscribers to pay which results in
involuntary deactivations, which accounted for 63% of our deactivations in
the quarter ended June 30, 2003;
o subscriber mix and credit class, particularly sub-prime credit subscribers
which accounted for approximately 50% of our gross subscriber additions
since May 2001 and account for approximately 30% of our subscriber base as
of June 30, 2003;
o Sprint's announced billing system conversion and/or a transition to
outsource services now provided by Sprint;
o the attractiveness of our competitors' products, services and pricing;
o network performance and coverage relative to our competitors;
o quality of customer service;
o increased prices; and
o any future changes by us in the products and services we offer, especially
to the Clear Pay Program.
An additional factor that may contribute to a higher churn rate is
implementation of the Federal Communications Commission's ("FCC") wireless local
number portability ("LNP") requirement. The wireless LNP rules will enable
wireless subscribers to keep their telephone numbers when switching to another
carrier. By November 24, 2003, all covered CMRS providers, including broadband
PCS, cellular and certain SMR licensees, must allow customers to retain, subject
to certain geographical limitations, their existing telephone number when
switching from one telecommunications carrier to another. Once wireless LNP is
implemented, current rules require that covered CMRS providers would have to
provide LNP in the 100 largest metropolitan statistical areas, in compliance
with certain FCC performance criteria, upon request from another carrier (CMRS
provider or local exchange carrier). For metropolitan statistical areas outside
the largest 100, CMRS providers that receive a request to allow an end user to
port their number must be capable of doing so within six months of receiving the
request or within six months after November 24, 2003, whichever is later. The
overall impact of this mandate is uncertain. We anticipate that the wireless LNP
mandate will impose increased operating costs on all CMRS providers, including
the Company, and may result in higher subscriber churn rates and subscriber
acquisition and retention costs. If the Company is required by Sprint to provide
portability prior to its competitors in markets outside the 100 largest
metropolitan statistical areas, the Company may be especially vulnerable to
higher subscriber churn rates.
A high rate of subscriber turnover could adversely affect our competitive
position, liquidity, financial position, results of operations and our costs of,
or losses incurred in, obtaining new subscribers, especially because we
subsidize some of the costs of initial purchases of handsets by subscribers. Our
allowance for doubtful accounts may not be sufficient to cover uncollectible
accounts
On an ongoing basis, we estimate the amount of subscriber receivables that we
will not collect to reflect the expected loss on such accounts in the current
period. Our business plan assumed that bad debt, as a percentage of service
revenue would decline significantly during fiscal 2003, which is consistent with
current results. Our allowance for doubtful accounts may underestimate actual
unpaid receivables for various reasons, including:
o our churn rate may exceed our estimates;
o bad debt as a percentage of service revenues may not decline as we assume
in our business plan;
o adverse changes in the economy; or
o unanticipated changes in Sprint's PCS products and services.
If our allowance for doubtful accounts is insufficient to cover losses on our
receivables, it could materially adversely affect our liquidity, financial
condition and results of operations.
Roaming revenue could be less than anticipated, which could adversely affect our
liquidity, financial condition and results of operations
Sprint reduced the reciprocal roaming rate from $0.10 per minute to $0.058 per
minute for the calendar year 2003. Based upon 2002 historical roaming data, a
reduction in the roaming rate to $0.058 per minute would have reduced roaming
revenue by approximately $23 million for AirGate and would have reduced roaming
expense by approximately $16 million for AirGate. The ratio of roaming revenue
to expense for AirGate for the quarter ended June 30, 2003 was 1.3 to one.
The amount of roaming revenue we receive also depends on the minutes of use of
our network by PCS subscribers of Sprint and Sprint PCS network partners. If
actual usage is less than we anticipate, our roaming revenue would be less and
our liquidity, financial condition and results of operations could be materially
adversely affected.
Our efforts to reduce costs may have adverse affects on our business
As a result of the current business environment, AirGate has revised its
business plan and is seeking to manage expenses to improve its liquidity
position. AirGate has significantly reduced projected capital expenditures,
advertising and promotion costs and other operating costs. Reduced capital
expenditures could, among other things, force us to delay improvements to our
network, which could adversely affect the quality of service to our subscribers.
These actions could reduce our subscriber growth and increase churn, which could
materially adversely affect our financial condition and results of operation.
The Company may incur significantly higher wireless handset subsidy costs than
we anticipate for existing subscribers who upgrade to a new handset
As the Company's subscriber base matures, and technological innovations occur,
more existing subscribers will upgrade to new wireless handsets. The Company
subsidizes a portion of the price of wireless handsets and incurs sales
commissions, even for handset upgrades. Excluding sales commissions, the Company
experienced approximately $4.8 million associated with wireless handset upgrade
costs for the year ended September 30, 2002 and $5.9 million for the nine months
ended June 30, 2003. The Company has limited historical experience regarding the
adoption rate for wireless handset upgrades. If more subscribers upgrade to new
wireless handsets than the Company projects, our results of operations would be
adversely affected.
The loss of the officers and skilled employees who we depend upon to operate our
business could materially adversely affect our results of operations
Our business is managed by a small number of executive officers. We believe that
our future success depends in part on our continued ability to attract and
retain highly qualified technical and management personnel. We may not be
successful in retaining our key personnel or in attracting and retaining other
highly qualified technical and management personnel. Our ability to attract and
retain such persons may be negatively impacted if our liquidity position does
not improve. In addition, we grant stock options as a method of attracting and
retaining employees, to motivate performance and to align the interests of
management with those of our stockholders. Due to the decline in the trading
price of our common stock, a substantial majority of the stock options held by
employees have an exercise price that is higher than the current trading price
of our common stock, and therefore these stock options may not be effective in
helping us to retain valuable employees. We currently have "key man" life
insurance for our Chief Executive Officer. The loss of our officers and skilled
employees could materially adversely affect our results of operation.
Parts of our territories have limited amounts of licensed spectrum, which may
adversely affect the quality of our service and our results of operations
Sprint has licenses covering 10 MHz of spectrum in AirGate's territory. As the
number of subscribers in our territories increase, this limited amount of
licensed spectrum may not be able to accommodate increases in call volume, may
lead to increased dropped and blocked calls and may limit our ability to offer
enhanced services, all of which could result in increased subscriber turnover
and adversely affect our financial condition and results of operations.
Further, in January 2003, the FCC rules imposing limits on the amount of
spectrum that can be held by one provider in a specific market was lifted. The
FCC now relies on case-by-case review of transactions involving transfers of
control of CMRS spectrum in connection with its public interest review of all
license transfers. In light of this change in regulatory review, competition may
increase to the extent that licenses are transferred from smaller stand-alone
operators to larger, better capitalized, and more experienced wireless
communications operators. These larger wireless communications operators may be
able to offer customers network features not offered by AirGate. The actions of
these larger wireless communications operators could negatively affect our
churn, ability to attract new subscribers, ARPU, cost to acquire subscribers and
operating costs per subscriber.
There is a high concentration of ownership of the wireless towers we lease and
if we lose the right to install our equipment on certain wireless towers or are
unable to renew expiring leases, our financial condition and results of
operations could be adversely impacted
Many of our cell sites are co-located on leased tower facilities shared with one
or more wireless providers. A few tower companies own a large portion of these
leased tower sites. Approximately 75% of the towers leased by AirGate are owned
by four tower companies (and their affiliates). If a master co-location
agreement with one of these tower companies were to terminate, or if one of
these tower companies were unable to support our use of its tower sites, we
would have to find new sites or we may be required to rebuild that portion of
our network. In addition, because of this concentration of ownership of our cell
sites, our financial condition and results of operations could be materially and
adversely affected if we are unable to renew expiring leases with such tower
companies on favorable terms, or in the event of a disruption in any of their
business operations.
Certain wireless providers are seeking to reduce access to their networks
The Company relies on Sprint's roaming agreements with its competitors to
provide automatic roaming capabilities to the Company's subscribers in many of
the areas of the United States not covered by Sprint's PCS network. Certain
competitors may be able to offer coverage in areas not served by Sprint's PCS
network or may be able to offer roaming rates that are lower than those offered
by Sprint. Certain of these competitors are seeking to reduce access to their
networks through actions pending with the FCC. Moreover, AT&T Wireless has
sought reconsideration of an FCC ruling in order to expedite elimination of the
engineering standard (AMPS) for the dominant air interface on which Sprint's
subscribers roam. If AT&T Wireless is successful and the FCC eliminated this
standard before Sprint can transition its handsets to different standards,
customers of Sprint could be unable to roam in those markets where cellular
operators cease to offer their AMPS network for roaming. Further, on September
24, 2002, the FCC modified its rules to eliminate after a five-year transition
period, the requirement that carriers provide analog service compatible with
AMPS specifications. If this requirement is eliminated before Sprint can
transition its handsets to different standards, customers of Sprint could be
unable to roam in those markets where cellular operators cease to offer their
AMPS network for roaming.
Risks Particular to AirGate's Indebtedness
AirGate has substantial debt that it may not be able to service; a failure to
service such debt may result in the lenders under such debt controlling
AirGate's assets
The substantial debt of AirGate has a number of important consequences for our
operations and our investors, including the following:
o AirGate will have to dedicate a substantial portion of any cash flow from
its operations to the payment of interest on, and principal of, its debt,
which will reduce funds available for other purposes;
o AirGate may not be able to obtain additional financing if the assumptions
underlying the business plan are not correct and existing sources of funds,
together with cash flow, are insufficient for capital requirements, working
capital requirements and other corporate purposes;
o increased vulnerability to adverse economic conditions or increases in
prevailing interest rates, as some of AirGate's debt, including financing
under AirGate's credit facility, is at variable rates of interest, which
could result in higher interest expense in the event of increases in market
interest rates;
o AirGate may be more highly leveraged than our competitors, which could
potentially decrease our ability to compete in our industry; and
o due to the liens on substantially all of AirGate's assets and the pledges
of stock of AirGate's existing and future restricted subsidiaries that
secure AirGate's credit facility and notes, lenders or holders of such
notes may exercise remedies giving them the right to control AirGate's
assets or the assets of the subsidiaries of AirGate, other than iPCS, in
the event of a default.
The ability of AirGate to make payments on its debt will depend upon its future
operating performance which is subject to general economic and competitive
conditions and to financial, business and other factors, many of which AirGate
cannot control. If the cash flow from AirGate's operating activities is
insufficient, it may take actions, such as further delaying or reducing capital
expenditures, attempting to restructure or refinance its debt, selling assets or
operations or seeking additional equity capital. Any or all of these actions may
not be sufficient to allow AirGate to service its debt obligations. Further,
AirGate may be unable to take any of these actions on satisfactory terms, in a
timely manner or at all. The AirGate credit facility and indenture governing
AirGate's notes limit our ability to take several of these actions.
The AirGate indenture and credit facility contain provisions and requirements
that could limit AirGate's ability to pursue borrowing opportunities
The restrictions contained in the indenture governing the AirGate notes and the
restrictions contained in AirGate's credit facility, may limit AirGate's ability
to implement its business plans, finance future operations, respond to changing
business and economic conditions, secure additional financing, if needed, and
engage in opportunistic transactions. The AirGate credit facility and notes also
restricts the ability of AirGate and the ability of AirGate's subsidiaries,
other than iPCS, and its future subsidiaries to do the following:
o create liens;
o make certain payments, including payments of dividends and distributions in
respect of capital stock;
o consolidate, merge and sell assets;
o engage in certain transactions with affiliates; and
o fundamentally change its business.
If AirGate fails to pay the debt under its credit facility, Sprint has the
option of purchasing AirGate's loans, giving Sprint certain rights of a creditor
to foreclose on AirGate's assets
Sprint has contractual rights, triggered by an acceleration of the maturity of
the debt under AirGate's credit facility, pursuant to which Sprint may purchase
AirGate's obligations to its senior lenders and obtain the rights of a senior
lender. To the extent Sprint purchases these obligations, Sprint's interests as
a creditor could conflict with AirGate's interests. Sprint's rights as a senior
lender would enable it to exercise rights with respect to AirGate's assets and
continuing relationship with Sprint in a manner not otherwise permitted under
its Sprint agreements.
Risks Related to iPCS
iPCS has declared bankruptcy, which may cause the value of AirGate's ownership
interest in iPCS to be worthless
There is a substantial risk that AirGate will lose all of the value of its
investment in iPCS in connection with the bankruptcy of iPCS. Because the amount
of iPCS' obligations under its credit facility and its notes were greater than
its existing cash and other assets when its payment obligations were accelerated
by the iPCS lenders, there will likely be no assets available for distribution
to AirGate as iPCS' sole stockholder. While AirGate may request an equity
participation in a restructuring of iPCS, it is likely that AirGate will lose
all of the value of its investment in iPCS in connection with iPCS' bankruptcy.
The bankruptcy of iPCS may have adverse affects on AirGate
AirGate has agreements and relationships with third parties, including
suppliers, subscribers and vendors, which are integral to conducting its
day-to-day operations. iPCS' bankruptcy could have a material adverse affect on
the perception of AirGate and the AirGate business and its prospects in the eyes
of subscribers, employees, suppliers, creditors and vendors. These persons may
perceive that there is increased risk in doing business with AirGate as a result
of iPCS' bankruptcy. Some of these persons may terminate their relationships
with AirGate, which would make it more difficult for AirGate to conduct its
business.
As a result of iPCS' bankruptcy, AirGate may not be able to reduce its general
and administrative costs in an amount sufficient to subsidize the portion of the
combined Company's costs currently borne by iPCS
On a net basis, we budgeted that iPCS would pay approximately $4.6 million of
the combined Company's general and administrative costs in fiscal 2003. To
facilitate the orderly transition of management services, AirGate and iPCS
entered into an amendment to the Services Agreement that would allow individual
services to be terminated by either party upon 30 days prior notice, subject to
certain exceptions. iPCS has terminated most of these services and we anticipate
that the remaining services provided by AirGate will be terminated by September
30, 2003. As services are terminated, AirGate will be required to reduce its
costs and expenses to meet its business plan. A failure to reduce these expenses
in a timely manner could adversely affect AirGate's liquidity, financial
condition and results of operations.
Risks Related to Our Relationship with Sprint
The termination of AirGate's affiliation with Sprint would severely restrict our
ability to conduct our business
AirGate does not own the licenses to operate its wireless network. The ability
of AirGate to offer Sprint PCS products and services and operate a PCS network
is dependent on its Sprint agreements remaining in effect and not being
terminated. All of our subscribers have purchased Sprint PCS products and
services to date, and we do not anticipate any change in the future. The
management agreements between Sprint and AirGate are not perpetual. AirGate's
management agreement automatically renews at the expiration of the 20-year
initial term for an additional 10-year period unless AirGate is in material
default. Sprint can choose not to renew AirGate's management agreement at the
expiration of the ten-year renewal term or any subsequent ten-year renewal term.
In any event, AirGate's management agreement terminates in 50 years.
In addition, these agreements can be terminated for breach of any material term,
including, among others, failure to pay, marketing, build-out and network
operational requirements. Many of these requirements are extremely technical and
detailed in nature. In addition, many of these requirements can be changed by
Sprint with little notice. As a result, we may not always be in compliance with
all requirements of the Sprint agreements. For example, Sprint conducts periodic
audits of compliance with various aspects of its program guidelines and
identifies issues it believes needs to be addressed. There may be substantial
costs associated with remedying any non-compliance, and such costs may adversely
affect our liquidity, financial condition and results of operations.
AirGate is also dependent on Sprint's ability to perform its obligations under
the Sprint agreements. The non-renewal or termination of any of the Sprint
agreements or the failure of Sprint to perform its obligations under the Sprint
agreements would severely restrict our ability to conduct business.
Sprint may make business decisions that are not in our best interests, which may
adversely affect our relationships with subscribers in our territory, increase
our expenses and/or decrease our revenues
Sprint, under the Sprint agreements, has a substantial amount of control over
the conduct of our business. Accordingly, Sprint has made and, in the future may
make, decisions that adversely affect our business, such as the following:
o Sprint could price its national plans based on its own objectives and could
set price levels or other terms that may not be economically sufficient for
our business;
o Sprint could develop products and services, such as a one-rate plan where
subscribers are not required to pay roaming charges, or establish credit
policies, such as the NDASL program, which could adversely affect our
results of operations;
o Sprint introduced a payment method for subscribers to pay the cost of
service with us. This payment method initially may not have had adequate
controls or limitations, and fraudulent payments were made to accounts
using this payment method. If other types of fraud become widespread, it
could have a material adverse impact on our results of operations and
financial condition;
o Sprint has raised and could continue to raise the costs to perform back
office services or maintain the costs above those expected, reduce levels
of services or expenses or otherwise seek to increase expenses and other
amounts charged;
o Sprint may elect with little or no notification, to upgrade or convert its
financial reporting, billing or inventory software or change third party
service organizations that can adversely affect our ability to determine or
report our operating results, adversely affect our ability to obtain
handsets or adversely affect our subscriber relationships;
o Sprint can seek to further reduce the reciprocal roaming rate charged when
Sprint's or other Sprint network partners' PCS subscribers use our network;
o Sprint could limit our ability to develop local and other promotional plans
to enable us to attract sufficient subscribers;
o Sprint could, subject to limitations under our Sprint agreements, alter its
network and technical requirements;
o Sprint could make decisions which could adversely affect the Sprint brand
names, products or services; and o Sprint could decide not to renew the
Sprint agreements or to no longer perform its obligations, which would
severely restrict our ability to conduct business.
The occurrence of any of the foregoing could adversely affect our relationship
with subscribers in our territories, increase our expenses and/or decrease our
revenues and have a material adverse affect on our liquidity, financial
condition and results of operation.
Our dependence on Sprint for services may limit our ability to reduce costs,
which could materially adversely affect our financial condition and results of
operation
Approximately 65% of cost of service and roaming in our financial statements
relate to charges from Sprint. As a result, a substantial portion of our cost of
service and roaming is outside our control. There can be no assurance that
Sprint will lower its operating costs, or, if these costs are lowered, that
Sprint will pass along savings to its PCS network partners. If these costs are
more than we anticipate in our business plan, it could materially adversely
affect our liquidity, financial condition and results of operations and as noted
below, our ability to replace Sprint with lower cost providers may be limited.
Our dependence on Sprint may adversely affect our ability to predict our results
of operations
In 2002, our dependence on Sprint interjected a greater degree of uncertainty to
our business and financial planning. During this time:
o we agreed to a new $4 logistics fee for each 3G enabled handset to avoid a
prolonged dispute over certain charges for which Sprint sought
reimbursement;
o Sprint PCS sought to recoup $3.9 million in long-distance access revenues
previously paid by Sprint PCS to AirGate and has invoiced AirGate $1.2
million of this amount;
o Sprint has charged us $0.5 million to reimburse Sprint for certain 3G
related development expenses with respect to calendar year 2002;
o Sprint informed AirGate on December 23, 2002 that it had miscalculated
software maintenance fees for 2002 and future years, which would result in
an annualized increase from $1.0 million to $1.7 million if owed by
AirGate;
o Sprint reduced the reciprocal roaming rate charged by Sprint and its
network partners for use of our respective networks from $0.10 per minute
of use to $0.058 per minute of use in 2003.
We have questioned whether these and other charges and actions are appropriate
and authorized under our Sprint agreements. We expect that it will take time to
resolve these issues, the ultimate outcome is uncertain and litigation may be
required to resolve these issues. Unanticipated expenses and reductions in
revenue have had and, if they occur in the future, will have a negative impact
on our liquidity and make it more difficult to predict with reliability our
future performance.
Inaccuracies in data provided by Sprint could understate our expenses or
overstate our revenues and result in out-of-period adjustments that may
materially adversely affect our financial results
Approximately 65% of cost of service and roaming in our financial statements
relate to charges from Sprint. In addition, because Sprint provides billing and
collection services for AirGate, Sprint remits approximately 95% of our revenues
to us. The data provided by Sprint is the primary source for our recognition of
service revenue and a significant portion of our selling and marketing and cost
of service and operating expenses. In certain cases, the data is provided at a
level of detail that is not adequate for us to verify for accuracy back to the
originating source. As a result, we rely on Sprint to provide accurate, timely
and sufficient data and information to properly record our revenues, expenses
and accounts receivables, which underlie a substantial portion of our periodic
financial statements and other financial disclosures.
AirGate and Sprint have discovered billing and other errors or inaccuracies,
which, while not material to Sprint, could be material to AirGate. If AirGate is
required in the future to make additional adjustments or charges as a result of
errors or inaccuracies in data provided to us by Sprint, such adjustments or
charges may have a material adverse affect on our financial results in the
period that the adjustments or charges are made, on our ability to satisfy
covenants contained in AirGate's credit facility, and on our ability to make
fully informed business decisions.
The inability of Sprint to provide high quality back office services, or our
inability to use Sprint's back office services and third-party vendors' back
office systems, could lead to subscriber dissatisfaction, increased churn or
otherwise increase our costs
We currently rely on Sprint's internal support systems, including customer care,
billing and back office support. Our operations could be disrupted if Sprint is
unable to provide internal support systems in a high quality manner, or to
efficiently outsource those services and systems through third-party vendors.
Cost pressures are expected to continue to pose a significant challenge to
Sprint's internal support systems. Additionally, Sprint has made reductions in
its customer service support structure and may continue to do so in the future,
which may have an adverse effect on our churn rate. Further, Sprint has relied
on third-party vendors for a significant number of important functions and
components of its internal support systems and may continue to rely on these
vendors in the future. We depend on Sprint's willingness to continue to offer
these services and to provide these services effectively and at competitive
costs. These costs were approximately $31.0 million for AirGate for the nine
months ended June 30, 2003. Our Sprint agreements provide that, upon nine months
prior written notice, Sprint may elect to terminate any of these services. The
inability of Sprint to provide high quality back office services, or our
inability to use Sprint back office services and third-party vendors' back
office systems, could lead to subscriber dissatisfaction, increase churn or
otherwise increase our costs.
Sprint has become aware of customer dissatisfaction with its customer service
and in that regard has recently announced that it is undertaking initiatives to
improve customer service. We believe dissatisfaction in customer service leads
to higher churn.
If Sprint elects to significantly increase the amount it charges us for any of
these services, our operating expenses will increase, and our operating income
and available cash would be reduced. We are exploring ways to outsource certain
services now provided by Sprint. While the services agreement allows AirGate to
use third-party vendors to provide certain of these services instead of Sprint,
Sprint may seek to require us to pay high start-up costs to interface with
Sprint's system and may otherwise seek to delay any such outsourcing, which
could increase the costs of any such outsourcing and delay the benefits of any
outsourcing. This could limit our ability to lower our operating costs.
Changes in Sprint PCS products and services may reduce subscriber additions,
increase subscriber turnover and decrease subscriber credit quality
The competitiveness of Sprint PCS products and services is a key factor in our
ability to attract and retain subscribers.
Certain Sprint pricing plans, promotions and programs may result in higher
levels of subscriber turnover and reduce the credit quality of our subscriber
base. For example, we believe that the NDASL and Clear Pay Program resulted in
increased churn and an increase in sub-prime credit subscribers.
AirGate's disputes with Sprint may adversely affect its relationship with Sprint
AirGate's disputes with Sprint may have a material adverse affect on AirGate's
relationship with Sprint, which could materially and adversely affect AirGate's
business.
Sprint's roaming arrangements may not be competitive with other wireless service
providers, which may restrict our ability to attract and retain subscribers and
create other risks for us
We rely on Sprint's roaming arrangements with other wireless service providers
for coverage in some areas where Sprint service is not yet available. The risks
related to these arrangements include:
o the roaming arrangements are negotiated by Sprint and may not benefit us in
the same manner that they benefit Sprint;
o the quality of the service provided by another provider during a roaming
call may not approximate the quality of the service provided by the Sprint
PCS network;
o the price of a roaming call off our network may not be competitive with
prices of other wireless companies for roaming calls;
o customers may have to use a more expensive dual-band/dual mode handset with
diminished standby and talk time capacities;
o subscribers must end a call in progress and initiate a new call when
leaving the Sprint PCS network and entering another wireless network;
o Sprint customers may not be able to use Sprint's advanced features, such as
voicemail notification, while roaming; and
o Sprint or the carriers providing the service may not be able to provide us
with accurate billing information on a timely basis.
If Sprint customers are not able to roam instantaneously or efficiently onto
other wireless networks, we may lose current Sprint subscribers and our Sprint
PCS services will be less attractive to new subscribers.
Certain provisions of the Sprint agreements may diminish the value of AirGate's
common stock and restrict the sale of our business
Under limited circumstances and without further stockholder approval, Sprint may
purchase the operating assets of AirGate at a discount. In addition, Sprint must
approve any change of control of the ownership of AirGate and must consent to
any assignment of its Sprint agreements. Sprint also has a right of first
refusal if AirGate decides to sell its operating assets to a third-party.
AirGate is also subject to a number of restrictions on the transfer of its
business, including a prohibition on the sale of its operating assets to
competitors of Sprint. These restrictions and other restrictions contained in
the Sprint agreements could adversely affect the value of AirGate's common
stock, may limit our ability to sell our business, may reduce the value a buyer
would be willing to pay for our business, may reduce the "entire business
value," as described in our Sprint agreements, and may limit our ability to
obtain new investment or support from any source.
We may have difficulty in obtaining an adequate supply of certain handsets from
Sprint, which could adversely affect our results of operations
We depend on our relationship with Sprint to obtain handsets, and we have agreed
to purchase all of our 3G capable handsets from Sprint or a Sprint authorized
distributor through the earlier of December 31, 2004 or the date on which the
cumulative 3G handset fees received by Sprint from all Sprint network partners
equal $25,000,000. Sprint orders handsets from various manufacturers. We could
have difficulty obtaining specific types of handsets in a timely manner if:
o Sprint does not adequately project the need for handsets for itself, its
network partners and its other third-party distribution channels,
particularly in transition to new technologies, such as "one time radio
transmission technology," or "1XRTT;"
o Sprint gives preference to other distribution channels, which it does
periodically;
o we do not adequately project our need for handsets;
o Sprint modifies its handset logistics and delivery plan in a manner that
restricts or delays our access to handsets; or
o there is an adverse development in the relationship between Sprint and its
suppliers or vendors.
The occurrence of any of the foregoing could disrupt our subscriber service
and/or result in a decrease in our subscribers, which could adversely affect our
results of operations.
If Sprint does not complete the construction of its nationwide PCS network, we
may not be able to attract and retain subscribers
Sprint currently intends to cover a significant portion of the population of the
United States, Puerto Rico and the U.S. Virgin Islands by creating a nationwide
PCS network through its own construction efforts and those of its network
partners. Sprint is still constructing its nationwide network and does not offer
PCS services, either on its own network or through its roaming agreements, in
every city in the United States. Sprint has entered into management agreements
similar to ours with companies in other markets under its nationwide PCS
build-out strategy. Our results of operations are dependent on Sprint's national
network and, to a lesser extent, on the networks of Sprint's other network
partners. Sprint's PCS network may not provide nationwide coverage to the same
extent as its competitors, which could adversely affect our ability to attract
and retain subscribers.
If other Sprint network partners have financial difficulties, the Sprint PCS
network could be disrupted
Sprint's national network is a combination of networks. The large metropolitan
areas are owned and operated by Sprint, and the areas in between them are owned
and operated by Sprint network partners, all of which are independent companies
like we are. We believe that most, if not all, of these companies have incurred
substantial debt to pay the large cost of building out their networks.
If other network partners experience financial difficulties, Sprint's PCS
network could be disrupted. If Sprint's agreements with those network partners
were like ours, Sprint would have the right to step in and operate the network
in the affected territory, subject to the rights of their lenders. In such
event, there can be no assurance that Sprint could transition in a timely and
seamless manner or that lenders would permit Sprint to do so.
If Sprint does not succeed our business may not succeed
If Sprint has a significant disruption to its business plan or network, fails to
operate its business in an efficient manner, or suffers a weakening of its brand
name, our operations and profitability would likely be negatively impacted.
If Sprint were to file for bankruptcy, Sprint may be able to reject its
agreements with us under Section 365 of the federal bankruptcy code. The
agreements provide us remedies, including purchase and put rights, though we
cannot predict if or to what extent our remedies would be enforceable.
Non-renewal or revocation by the FCC of Sprint's PCS licenses would
significantly harm our business
PCS licenses are subject to renewal and revocation by the FCC. Sprint licenses
in our territories will begin to expire in 2007 but may be renewed for
additional ten-year terms. There may be opposition to renewal of Sprint's PCS
licenses upon their expiration, and Sprint's PCS licenses may not be renewed.
The FCC has adopted specific standards to apply to PCS license renewals. Any
failure by Sprint or us to comply with these standards could cause revocation or
forfeiture of Sprint's PCS licenses for our territories. If Sprint loses any of
its licenses in our territory, we would be severely restricted in our ability to
conduct business.
If Sprint does not maintain control over its licensed spectrum, the Sprint
agreements may be terminated, which would result in our inability to provide
service
The FCC requires that licensees like Sprint maintain control of their licensed
spectrum and not delegate control to third-party operators or managers. Although
the Sprint agreements with AirGate reflect an arrangement that the parties
believe meets the FCC requirements for licensee control of licensed spectrum, we
cannot assure you that the FCC will agree. If the FCC were to determine that the
Sprint agreements need to be modified to increase the level of licensee control,
AirGate has agreed with Sprint to use their best efforts to modify the Sprint
agreements to comply with applicable law. If we cannot agree with Sprint to
modify the Sprint agreements, they may be terminated. If the Sprint agreements
are terminated, we would no longer be a part of the Sprint PCS network and would
be severely restricted in our ability to conduct business.
If AirGate loses its right to use the Sprint brand and logo under its trademark
and service mark license agreements, AirGate would lose the advantages
associated with marketing efforts conducted by Sprint.
The Sprint brand and logo is highly recognizable. If AirGate loses the rights to
use this brand and logo or the value of the brand and logo decreases, customers
may not recognize its brand readily and AirGate may have to spend significantly
more money on advertising to create brand recognition.
Risks Particular to Our Industry
Significant competition in the wireless communications services industry may
result in our competitors offering new or better products and services or lower
prices, which could prevent us from operating profitably
Competition in the wireless communications industry is intense. According to
information it has filed with the SEC, Sprint believes that the traditional
dividing lines between long distance, local, wireless, and Internet services are
increasingly becoming blurred. Through mergers and various service integration
strategies, major providers, including Sprint, are striving to provide
integrated solutions both within and across all geographical markets. We do not
offer services other than wireless services and may not be able to effectively
compete against competitors with integrated solutions.
Competition has caused, and we anticipate that competition will continue to
cause, the market prices for two-way wireless products and services to decline
in the future. Our ability to compete will depend, in part, on our ability to
anticipate and respond to various competitive factors affecting the
telecommunications industry. Our dependence on Sprint to develop competitive
products and services and the requirement that we obtain Sprint's consent to
sell local pricing plans and non-Sprint approved equipment may limit our ability
to keep pace with competitors on the introduction of new products, services and
equipment. Many of our competitors are larger than us, possess greater financial
and technical resources and may market other services, such as landline
telephone service, cable television and Internet access, with their wireless
communications services. Some of our competitors also have well-established
infrastructures, marketing programs and brand names. In addition, some of our
competitors may be able to offer regional coverage in areas not served by the
Sprint network or, because of their calling volumes or relationships with other
wireless providers, may be able to offer regional roaming rates that are lower
than those we offer. Additionally, we expect that existing cellular providers
will continue to upgrade their systems to provide digital wireless communication
services competitive with Sprint. Our success, therefore, is, to a large extent,
dependent on Sprint's ability to distinguish itself from competitors by
marketing and anticipating and responding to various competitive factors
affecting the wireless industry, including new services that may be introduced,
changes in consumer preferences, demographic trends, economic conditions and
discount pricing strategies by competitors. To the extent that Sprint is not
able to keep pace with technological advances or fails to respond timely to
changes in competitive factors in the wireless industry, it could cause us to
lose market share or experience a decline in revenue.
There has been a recent trend in the wireless communications industry towards
consolidation of wireless service providers through joint ventures,
reorganizations and acquisitions. We expect this consolidation to lead to larger
competitors over time. We may be unable to compete successfully with larger
companies that have substantially greater resources or that offer more services
than we do. In addition, we may be at a competitive disadvantage since we may be
more highly leveraged than many of our competitors.
If the demand for wireless data services does not grow, or if Sprint or AirGate
fail to capitalize on such demand, it could have an adverse effect on our growth
potential
Sprint and its network partners, including AirGate, have committed significant
resources to wireless data services and our business plan assumes increasing
uptake in such services. That demand may not materialize. Even if such demand
does develop, AirGate's ability to deploy and deliver wireless data services
relies, in many instances, on new and unproven technology. Existing technology
may not perform as expected. We may not be able to obtain new technology to
effectively and economically deliver these services. The success of wireless
data services is substantially dependent on the ability of Sprint and others to
develop applications for wireless data devices and to develop and manufacture
devices that support wireless applications. These applications or devices may
not be developed or developed in sufficient quantities to support the deployment
of wireless data services. These services may not be widely introduced and fully
implemented at all or in a timely fashion. These services may not be successful
when they are in place, and customers may not purchase the services offered.
Consumer needs for wireless data services may be met by technologies such as
802.11, known as wi-fi, which does not rely on FCC regulated spectrum. The lack
of standardization across wireless data handsets may contribute to customer
confusion, which could slow acceptance of wireless data services, or increase
customer care costs. Either could adversely affect our ability to provide these
services profitably. If these services are not successful or costs associated
with implementation and completion of the rollout of these services materially
exceed our current estimates, our financial condition and prospects cold be
materially adversely affected.
Market saturation could limit or decrease our rate of new subscriber additions
Intense competition in the wireless communications industry could cause prices
for wireless products and services to continue to decline. If prices drop, then
our rate of net subscriber additions will take on greater significance in
improving our financial condition and results of operations. However, as our and
our competitor's penetration rates in our markets increase over time, our rate
of adding net subscribers could decrease. If this decrease were to happen, it
could materially adversely affect our liquidity, financial condition and results
of operations.
Alternative technologies and current uncertainties in the wireless market may
reduce demand for PCS
The wireless communications industry is experiencing significant technological
change, as evidenced by the increasing pace of digital upgrades in existing
analog wireless systems, evolving industry standards, ongoing improvements in
the capacity and quality of digital technology, shorter development cycles for
new products and enhancements and changes in end-user requirements and
preferences. Technological advances and industry changes could cause the
technology used on our network to become obsolete. We rely on Sprint for
research and development efforts with respect to the products and services of
Sprint and with respect to the technology used on our network. Sprint may not be
able to respond to such changes and implement new technology on a timely basis,
or at an acceptable cost.
If Sprint is unable to keep pace with these technological changes or changes in
the wireless communications market based on the effects of consolidation from
the Telecommunications Act of 1996 or from the uncertainty of future government
regulation, the technology used on our network or our business strategy may
become obsolete.
We are a consumer business and a recession in the United States involving
significantly lowered spending could negatively affect our results of operations
Our subscriber base is primarily individual consumers and our accounts
receivable represent unsecured credit. We believe the economic downturn has had
an adverse affect on our operations. In the event that the economic downturn
that the United States and our territories have recently experienced becomes
more pronounced or lasts longer than currently expected and spending by
individual consumers drops significantly, our business may be further negatively
affected.
According to Sprint, a number of its suppliers have recently experienced
financial challenges. If these suppliers cannot meet their commitments, Sprint
states that it would have to use different vendors and this could result in
delays, interruptions, or additional expenses associated with the upgrade and
expansion of Sprint's networks and the offering of its products and services.
Regulation by government and taxing agencies may increase our costs of providing
service or require us to change our services, either of which could impair our
financial performance
Our operations and those of Sprint may be subject to varying degrees of
regulation by the FCC, the Federal Trade Commission, the Federal Aviation
Administration, the Environmental Protection Agency, the Occupational Safety and
Health Administration and state and local regulatory agencies and legislative
bodies. Adverse decisions or regulation of these regulatory bodies could
negatively impact our operations and our costs of doing business. For example,
changes in tax laws or the interpretation of existing tax laws by state and
local authorities could subject us to increased income, sales, gross receipts or
other tax costs or require us to alter the structure of our current relationship
with Sprint.
Use of hand-held phones may pose health risks, which could result in the reduced
use of wireless services or liability for personal injury claims
Media reports have suggested that certain radio frequency emissions from
wireless handsets may be linked to various health problems, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. Concerns over radio frequency emissions may discourage use
of wireless handsets or expose us to potential litigation. Any resulting
decrease in demand for wireless services, or costs of litigation and damage
awards, could impair our ability to achieve and sustain profitability.
Regulation by government or potential litigation relating to the use of wireless
phones while driving could adversely affect our results of operations
Some studies have indicated that some aspects of using wireless phones while
driving may impair drivers' attention in certain circumstances, making accidents
more likely. These concerns could lead to litigation relating to accidents,
deaths or serious bodily injuries, or to new restrictions or regulations on
wireless phone use, any of which also could have material adverse effects on our
results of operations. A number of U.S. states and local governments are
considering or have recently enacted legislation that would restrict or prohibit
the use of a wireless handset while driving a vehicle or, alternatively, require
the use of a hands-free telephone. Legislation of this sort, if enacted, would
require wireless service providers to provide hands-free enhanced services, such
as voice activated dialing and hands-free speaker phones and headsets, so that
they can keep generating revenue from their subscribers, who make many of their
calls while on the road. If we are unable to provide hands-free services and
products to our subscribers in a timely and adequate fashion, the volume of
wireless phone usage would likely decrease, and our ability to generate revenues
would suffer.
Unauthorized use of, or interference with, the PCS network of Sprint could
disrupt our service and increase our costs
We may incur costs associated with the unauthorized use of the PCS network of
Sprint, including administrative and capital costs associated with detecting,
monitoring and reducing the incidence of fraud. Fraudulent use of the PCS
network of Sprint may impact interconnection costs, capacity costs,
administrative costs, fraud prevention costs and payments to other carriers for
fraudulent roaming.
Equipment failure and natural disasters or terrorist acts may adversely affect
our operations
A major equipment failure or a natural disaster or terrorist act that affects
our mobile telephone switching offices, microwave links, third-party owned local
and long distance networks on which we rely, our cell sites or other equipment
or the networks of other providers on which our subscribers roam could have a
material adverse effect on our operations. While we have insurance coverage for
some of these events, our inability to operate our wireless system even for a
limited time period may result in a loss of subscribers or impair our ability to
attract new subscribers, which would have a material adverse effect on our
business, results of operations and financial condition.
Risks Related to Our Common Stock
We may not achieve or sustain operating profitability or positive cash flows,
which may adversely affect AirGate's stock price
AirGate has limited operating histories. Our ability to achieve and sustain
operating profitability will depend upon many factors, including our ability to
market Sprint PCS products and services, manage churn, sustain monthly average
revenues per user, and reduce capital expenditures and operating expenses. We
have experienced slowing net subscriber growth, increased churn and increased
costs to acquire new subscribers and as a result, have had to revise our
business plans. If AirGate does not achieve and maintain positive cash flows
from operations when projected, AirGate's stock price may be materially
adversely affected. In addition, as a result of the bankruptcy of iPCS,
AirGate's investment in iPCS is likely to be worthless, and such bankruptcy may
materially adversely affect AirGate's stock price.
Our stock price has suffered significant declines, remains volatile and you may
not be able to sell your shares at the price you paid for them
The market price of AirGate common stock has been and may continue to be subject
to wide fluctuations in response to factors such as the following, some of which
are beyond our control:
o quarterly variations in our operating results;
o concerns about liquidity;
o the de-listing of our common stock;
o operating results that vary from the expectations of securities analysts
and investors;
o changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors;
o changes in the market perception about the prospects and results of
operations and market valuations of other companies in the
telecommunications industry in general and the wireless industry in
particular, including Sprint and its PCS network partners and our
competitors;
o changes in the Company's relationship with Sprint, including the impact of
our efforts to more closely examine Sprint charges and amounts paid by
Sprint;
o litigation between other Sprint network partners and Sprint;
o announcements by Sprint concerning developments or changes in its business,
financial condition or results of operations, or in its expectations as to
future financial performance;
o actual or potential defaults by us under any of our agreements;
o actual or potential defaults in bank covenants by Sprint or Sprint PCS
network partners, which may result in a perception that AirGate is unable
to comply with its bank covenants;
o announcements by Sprint or our competitors of technological innovations,
new products and services or changes to existing products and services;
o changes in law and regulation;
o announcements by third parties of significant claims or proceedings against
us;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments; and
o general economic and competitive conditions.
AirGate's common stock was delisted from Nasdaq. Accordingly, our stockholders'
ability to sell our common stock may be adversely effected. Additionally, the
market for so-called "penny stocks" has suffered in recent years from patterns
of fraud and abuse.
AirGate was notified by the Nasdaq Stock Market, Inc. that because it had failed
to regain compliance with the minimum $1.00 bid price per share requirement and
also failed to comply with the minimum stockholders' equity, market value of
publicly held shares and minimum bid requirements for continued listing on the
Nasdaq National Market, the Nasdaq Stock Market, Inc. was delisting AirGate's
stock from the Nasdaq National Market. This delisting occurred on April 8, 2003.
In addition, AirGate did not meet the listing requirements to be transferred to
the Nasdaq Small Cap Market. AirGate's common stock currently trades on the
OTCBB maintained by The Nasdaq Stock Market, Inc., under the symbol "PCSA.OB",
and is subject to a Securities and Exchange Commission rule that imposes special
sales practice requirements upon broker-dealers who sell such OTCBB securities
to persons other than established customers or accredited investors. For
purposes of the rule, the phrase "accredited investors" means, in general terms,
institutions with assets in excess of $5,000,000, or individuals having a net
worth in excess of $1,000,000 or having an annual income that exceeds $200,000
(or that, when combined with a spouse's income, exceeds $300,000). For
transactions covered by the rule, the broker-dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. Consequently, the rule may
affect the ability of broker-dealers to sell AirGate's common stock and also may
affect the ability of our current stockholders to sell their securities in any
market that might develop. In addition, the Securities and Exchange Commission
has adopted a number of rules to regulate "penny stocks." Such rules include
Rules 3a51-1, 15-g1, 15-g2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under
the Securities Exchange Act of 1934 as amended. AirGate's common stock may
constitute "penny stocks" within the meaning of the rules. These rules may
further affect the ability of owners of AirGate common stock to sell our
securities in any market that might develop for them.
Shareholders should also be aware that, according to Securities and Exchange
Commission, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. We are aware of the abuses that have occurred
historically in the penny stock market. Although we do not expect to be in a
position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to AirGate's securities.
Future sales of shares of our common stock, including sales of shares following
the expiration of `lock-up" arrangements, may negatively affect our stock price
As a result of the acquisition of iPCS, the former iPCS security holders
received approximately 12.4 million shares of our common stock and options and
warrants to purchase approximately 1.1 million shares of our common stock. The
shares of common stock issued in connection with the acquisition represented
approximately 47.5% of our common stock, assuming the exercise of all
outstanding warrants and options.
In connection with the merger, holders of substantially all of the outstanding
shares of iPCS common and preferred stock entered into "lock-up" agreements with
the Company. The lock-up agreements imposed restrictions on the ability of such
stockholders to sell or otherwise dispose of the shares of our common stock that
they received in the merger. As of September 26, 2002, all of such shares were
released from the lock-up.
We entered into a registration rights agreement at the effective time of the
merger with some of the former iPCS stockholders. Under the terms of the
registration rights agreement, Blackstone Communications Partners I L.P. and
certain of its affiliates ("Blackstone") has a demand registration right, which
became exercisable after November 30, 2002, subject to the requirement that the
offering exceed size requirements. In addition, the former iPCS stockholders,
including Blackstone, have incidental registration rights pursuant to which they
can, in general, include their shares of our common stock in any public
registration we initiate, whether or not for sale for our own account.
Sales of substantial amounts of shares of our common stock, or even the
potential for such sales, could lower the market price of our common stock and
impair its ability to raise capital through the sale of equity securities.
We do not intend to pay dividends in the foreseeable future
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. We intend to retain any future earnings to fund our growth,
debt service requirements and other corporate needs. Accordingly, you will not
receive a return on your investment in our common stock through the payment of
dividends in the foreseeable future and may not realize a return on your
investment even if you sell your shares. Any future payment of dividends to our
stockholders will depend on decisions that will be made by our board of
directors and will depend on then existing conditions, including our financial
condition, contractual restrictions, capital requirements and business
prospects.
Our certificate of incorporation and bylaws include provisions that may
discourage a change of control transaction or make removal of members of the
board of directors more difficult
Some provisions of our certificate of incorporation and bylaws could have the
effect of delaying, discouraging or preventing a change in control of us or
making removal of members of the board of directors more difficult. These
provisions include the following:
o a classified board, with each board member serving a three-year term;
o no authorization for stockholders to call a special meeting;
o no ability of stockholders to remove directors without cause;
o prohibition of action by written consent of stockholders; and
o advance notice for nomination of directors and for stockholder proposals.
These provisions, among others, may have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
us, even though a change in ownership might be economically beneficial to us and
our stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Thomas M. Dougherty pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of William H. Seippel pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Thomas M. Dougherty pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of William H. Seippel pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by AirGate during the
quarter ended June 30, 2003:
On April 10, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 9 - Regulation FD Disclosure
relating to its delisting from the Nasdaq National Market effective at the open
of business April 8, 2003. AirGate's stock began to trade on the OTC Bulletin
Board under the same symbol "PCSA.OB" following its delisting from Nasdaq.
On April 22, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 9 - Regulation FD Disclosure
relating to the Trustee sending notice under the Indenture to the AirGate
Noteholders informing them of iPCS' bankruptcy notice and informing the AirGate
Noteholders that it is the opinion of the Company and its counsel, that no Event
of Default under Section 6.1 of the AirGate Indenture resulted from iPCS'
bankruptcy filing.
On May 21, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 9 - Regulation FD Disclosure (also
provides information required under Item 12 "Results of Operations and Financial
Condition") relating to issuance of a press release regarding financial and
operating results for the second quarter of fiscal year 2003 and other matters.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer thereunto duly authorized.
AIRGATE PCS, INC.
By: /s/ William H. Seippel
-----------------------------------------------
William H. Seippel
Title: Chief Financial Officer
(Duly Authorized Officer, Principal
Financial and Chief Accounting Officer)
Date: January 15, 2004