UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Commission File Number: 027455
AirGate PCS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-2422929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Harris Tower, 233 Peachtree St. NE, Suite 1700,
Atlanta, Georgia 30303
(Address of principal executive offices) (Zip code)
(404) 525-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
11,815,284 shares of common stock, $0.01 par value, were outstanding as of
May 12, 2004.
AIRGATE PCS, INC.
FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2004
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements..................................... 3
Condensed Consolidated Balance Sheets at
March 31, 2004 (unaudited) and September 30, 2003....... 3
Condensed Consolidated Statements of Operations
for the three months and six months ended
March 31, 2004 and 2003 (unaudited)..................... 4
Condensed Consolidated Statements of Cash Flows
for the six months ended March 31, 2004 and
2003 (unaudited)........................................ 5
Notes to Condensed Consolidated Financial
Statements (unaudited).................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk....................................... 34
Item 4. Controls and Procedures.................................. 35
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................ 37
Item 2. Changes in Securities and Use of Proceeds................ 37
Item 3. Defaults Upon Senior Securities.......................... 37
Item 4. Submission of Matters to a Vote of Security Holders...... 37
Item 5. Other Information........................................ 38
Item 6. Exhibits and Reports on Form 8-K......................... 38
PART I. FINANCIAL INFORMATION
Item 1. -- Financial Statements
AIRGATE PCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, September 30,
2004 2003
---------------- -----------------
(unaudited)
(Dollars in thousands, except share
and per share amounts)
Assets
Current assets:
Cash and cash equivalents $ 48,593 $ 54,078
Accounts receivable, net of allowance for doubtful
accounts of $3,861 and $4,635 24,477 26,994
Receivable from Sprint 11,957 15,809
Inventories 3,469 2,132
Prepaid expenses 5,699 2,107
Other current assets 316 145
----------------- -----------------
Total current assets 94,511 101,265
Property and equipment, net of accumulated depreciation and
amortization of $153,645 and $129,986 161,772 178,070
Financing costs 3,182 6,682
Direct subscriber activation costs 2,662 3,907
Other assets 1,017 992
---------------- -----------------
Total assets $ 263,144 $ 290,916
================= =================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 2,247 $ 5,945
Accrued expense 13,970 12,104
Payable to Sprint 48,761 45,069
Deferred revenue 8,621 7,854
Current maturities of long-term debt 17,113 17,775
----------------- -----------------
Total current liabilities 90,712 88,747
Deferred subscriber activation fee revenue 4,585 6,701
Other long-term liabilities 2,148 1,841
Long-term debt, excluding current maturities 257,237 386,509
Investment in iPCS - 184,115
----------------- -----------------
Total liabilities 354,682 667,913
Commitments and contingencies - -
Stockholders' deficit:
Preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued and
outstanding - -
Common stock, $.01 par value; 30,000,000
shares authorized; 11,761,951 and 5,192,238
shares issued and outstanding at March 31, 2004
and September 30, 2003 118 52
Additional paid-in-capital 1,046,193 924,095
Unearned stock compensation (37) (203)
Accumulated deficit (1,137,812) (1,300,941)
----------------- -----------------
Total stockholders' deficit (91,538) (376,997)
----------------- -----------------
Total liabilities and stockholders' deficit $ 263,144 $ 290,916
================= =================
See accompanying notes to the unaudited condensed
consolidated financial statements.
3
AIRGATE PCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------------------------ ------------------------------------
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
(Dollars in thousands, except share and per share amounts)
Revenue:
Service revenue 61,656 $ 60,163 $ 123,829 $ 120,096
Roaming revenue 13,498 13,895 29,981 32,805
Equipment revenue 2,882 2,691 5,729 5,713
----------------- ----------------- ----------------- -----------------
Total revenue 78,036 76,749 159,539 158,614
Operating Expense:
Cost of service and roaming (exclusive
of depreciation and amortization
as shown separately below) 39,422 40,747 81,911 92,170
Cost of equipment 7,202 3,455 13,788 10,302
Selling and marketing expense 11,916 11,384 26,063 28,203
General and administrative expense 6,337 5,844 12,804 10,036
Depreciation and amortization of
property and equipment 11,892 11,625 23,659 23,244
Loss (gain) on disposal of property
and equipment (3) 220 (5) 418
----------------- ----------------- ----------------- -----------------
Total operating expense 76,766 73,275 158,220 164,373
----------------- ----------------- ----------------- -----------------
Operating income (loss) 1,270 3,474 1,319 (5,759)
Interest income 165 25 322 25
Interest expense (11,311) (10,197) (22,627) (20,391)
----------------- ----------------- ----------------- -----------------
Loss from continuing operations
before income tax (9,876) (6,698) (20,986) (26,125)
Income tax - - - -
----------------- ----------------- ----------------- -----------------
Loss from continuing operations (9,876) (6,698) (20,986) (26,125)
Discontinued Operations:
Loss from discontinued operations - (14,324) - (42,571)
Gain on disposal of discontinued operations
net of $0 income tax expense - - 184,115 -
----------------- ----------------- ----------------- -----------------
Income (loss) from discontinued operations - (14,324) 184,115 (42,571)
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (9,876) $ (21,022) $ 163,129 $ (68,696)
================= ================= ================= =================
Basic and diluted weighted-average number
of shares outstanding 8,152,162 5,185,887 6,664,131 5,175,241
Basic and diluted earnings (loss) per share:
Loss from continuing operations $ (1.21) $ (1.29) $ (3.15) $ (5.05)
Income (loss) from discontinued operations - (2.76) 27.63 (8.22)
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (1.21) $ (4.05) $ 24.48 $ (13.27)
================= ================= ================= =================
See accompanying notes to the unaudited condensed
consolidated financial statements.
4
AIRGATE PCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
March 31,
------------------------------------
2004 2003
----------------- -----------------
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) $ 163,129 $ (68,696)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on disposal of discontinued operations (184,115) -
Loss from discontinued operations - 42,571
Depreciation and amortization of property and equipment 23,659 23,244
Amortization of financing costs into interest expense 629 605
Provision for doubtful accounts (718) 2,155
Interest expense associated with accretion of discounts 14,366 15,940
Non-cash stock compensation 302 352
Loss (gain) on disposal of property and equipment (5) 418
Changes in assets and liabilities:
Accounts receivable 3,235 364
Receivable from Sprint 3,852 17,362
Inventories (1,337) 1,974
Prepaid expenses, other current and non-current assets (2,528) (3,021)
Accounts payable, accrued expenses and other
long-term liabilities (3,654) (6,131)
Payable to Sprint 3,692 (12,811)
Deferred revenue 767 1,301
----------------- -----------------
Net cash provided by operating activities 21,274 15,627
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (7,361) (6,654)
----------------- -----------------
Net cash used in investing activities (7,361) (6,654)
----------------- -----------------
Cash flows from financing activities:
Borrowings under credit facility - 8,000
Repayments of credit facility (13,761) (1,012)
Financing cost on credit facility (884) -
Equity issue costs (4,758) -
Stock issued to employee stock purchase plan - 57
Proceeds from stock option exercises 5 -
----------------- -----------------
Net cash (used in) provided by financing activities (19,398) 7,045
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (5,485) 16,018
Cash and cash equivalents at beginning of period 54,078 4,887
----------------- -----------------
Cash and cash equivalents at end of period $ 48,593 $ 20,905
================= =================
Supplemental disclosure of cash flow information:
Interest paid $ 3,777 $ 3,947
Supplemental disclosure for non-cash investing activities:
Capitalized interest 71 158
Supplemental disclosure of non-cash financing activities for debt recapitalization:
Net carrying value of Old Notes (264,888) -
Unamortized financing cost of Old Notes 3,755 -
Issuance of New Notes 159,035 -
Carrying value difference on New Notes (24,686) -
Common stock issued in exchange for Old Notes 126,784 -
See accompanying notes to the unaudited condensed
consolidated financial statements.
5
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(unaudited)
(1) Business, Basis of Presentation and Liquidity
(a) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
AirGate PCS, Inc. and subsidiaries (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 condensed
consolidated financial statements for the interim periods. The condensed
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, Amendment No. 2 to 10-K/A and in Form 8-K for
Discontinued Operations and to reflect the 1-for-5 reverse stock split
(collectively, the "Annual Report") for the fiscal year ended September 30,
2003, which are filed with the SEC and may be accessed via EDGAR on the SEC's
website at http://www.sec.gov. The results of operations for the quarter and six
months ended March 31, 2004 are not necessarily indicative of the results that
can be expected for the entire fiscal year ending September 30, 2004. 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
condensed consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ from those estimates. All significant intercompany accounts and
transactions have been eliminated in consolidation.
AirGate PCS, Inc. and its restricted subsidiaries were created for the purpose
of providing wireless Personal Communication Services ("PCS"). The Company is a
network partner of Sprint with the right to market and provide Sprint PCS
products and services using the Sprint brand name in a defined territory. The
accompanying condensed 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
for all periods presented.
On November 30, 2001, the Company acquired iPCS, Inc. and its subsidiaries
("iPCS") in a merger. The transaction was accounted for under the purchase
method of accounting. Although iPCS's growth rates initially met or exceeded
expectations, the slowdown in growth in the wireless industry, increased
competition, iPCS' dependence on Sprint and the reimposition and increase of the
deposit for sub-prime credit customers, all contributed to slower growth
subsequent to acquisition. In addition, iPCS' slow growth was compounded because
it was earlier in its life cycle when growth slowed, it had approximately
one-third fewer subscribers than the Company, and it had a less complete network
than the Company.
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. Subsequent to February 23, 2003,
the Company no longer consolidated the accounts and results of operations of
iPCS, and the accounts of iPCS were recorded as an investment using the cost
method of accounting.
In connection with the issuance of common stock in the Company's
Recapitalization Plan (described below), the Company had an ownership change for
tax purposes. In order to avoid the ownership change of iPCS that would have
resulted from the Company's ownership change, on October 17, 2003, the Company
irrevocably transferred all of its shares of iPCS common stock to a trust for
the benefit of the Company's shareholders of record as of the date of transfer.
On October 17, 2003, the iPCS investment ($184.1 million credit balance carrying
amount) was eliminated and recorded as a non-monetary gain on disposition of
discontinuing operations. The Company's condensed consolidated financial
statements reflect the results of iPCS as discontinued operations.
(b) Liquidity, Financial Restructuring and Going Concern
The financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern. In connection with their
audit of the Company's fiscal 2003 consolidated financial statements, KPMG LLP
the Company's independent auditors, included an explanatory paragraph regarding
the Company's ability to continue as a going concern in their audit opinion.
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, on-going operations and growth of a PCS network. The Company's
6
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 network (the "Sprint
Agreements"). 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. Significant changes in technology, increased competition, or adverse
economic conditions could impair the Company's ability to achieve sufficient
positive cash flow.
As shown in the condensed consolidated financial statements, the Company has
generated significant losses from continuing operations since inception and has
an accumulated deficit of $1.1 billion and stockholders' deficit of $91.5
million at March 31, 2004. For the six months ended March 31, 2004, the
Company's loss from continuing operations amounted to $21.0 million. As of March
31, 2004, the Company had working capital of $3.8 million and cash and cash
equivalents of $48.6 million, and no remaining availability under its credit
facility. As a result, the Company is completely dependent on available cash and
operating cash flow to pay debt service and meet its other capital needs. If
such sources are not sufficient, alternative funding sources may not be
available.
In addition to its capital needs to fund operating losses, the Company has
invested large amounts to build-out its networks and for other capital assets.
Since inception, the Company has invested over $300 million to purchase property
and equipment.
A number of factors, including slower subscriber growth, increased competition
and churn and our dependence on Sprint and Sprint's changes to various programs
and fees have had an adverse affect on the Company's business and led the
Company to revise its business strategy and take actions to cut costs during
fiscal year 2003. These actions included the following:
o Restructuring the Company's organization and eliminating more than 150
positions;
o Reducing capital expenditures;
o Reducing spending for sales and marketing activities; and
o Reducing per minute network operating costs by more closely managing
connectivity costs.
Despite these measures and certain amendments to its credit facility, the
Company's compliance with the financial covenants under its credit facility was
not assured and the Company's ability to generate sufficient cash flow to meet
its financial covenants and payment obligations in 2005 and beyond was
substantially uncertain. In addition, there was substantial risk that the
Company would not have had sufficient liquidity to meet its cash interest
obligations under the Old Notes (defined below) in 2006. As a result, the
Company engaged in a financial restructuring (the "Recapitalization Plan") which
closed on February 13, 2004 and settled on February 20, 2004. See Note 10 to the
condensed consolidated financial statements. As a result, the Company believes
that it will be able to meet its liquidity needs for the next 12 months.
(2) Significant New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Liabilities and Equity," which
became effective at the beginning of the first interim period beginning after
June 15, 2003. However, certain aspects of SFAS 150 have been deferred. 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 implementation of SFAS 150 is not anticipated to have a significant impact
on our results of operations, financial position or cash flows.
In 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable
Interest Entities," an interpretation of Accounting Research Bulletin ("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 entities created or
acquired after January 31, 2003 and to special purpose entities for the quarter
ended after December 15, 2003. The Interpretation is generally effective for
interim periods ending after March 15, 2004 for all variable interests entities
created or acquired prior to January 31, 2003. We do not have any variable
interest entity arrangements.
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 is applicable to agreements
entered into for quarters beginning after June 15, 2003. The Company adopted
this EITF on July 1, 2003. The adoption of EITF 00-21 did not have a material
impact on our results of operations, financial position 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
7
expenses when Sprint's and Sprint's network partners' wireless subscribers incur
minutes of use in the Company's territory and when the Company's subscribers
incur minutes of use in Sprint's 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 condensed 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 months and six months ended March 31, 2004 and 2003 are as follows:
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------------- ----------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ----------------
(Dollars in thousands)
Amounts included in the Condensed Consolidated
Statements of Operations:
Roaming revenue $ 12,905 $ 13,032 $ 28,652 $ 30,993
Cost of service and roaming:
Roaming $ 10,500 $ 10,861 $ 23,774 $ 25,713
Customer service 8,465 11,150 13,348 22,686
Affiliation fee 4,685 4,708 9,384 9,545
Long distance 3,407 3,259 6,675 6,044
Other 694 514 1,282 990
---------------- ---------------- ---------------- ----------------
Total cost of service and roaming $ 27,751 $ 30,492 $ 54,463 $ 64,978
================ ================ ================ ================
Purchased inventory $ 8,087 $ 2,695 $ 15,415 $ 8,345
================ ================ ================ ================
Selling and marketing $ 2,629 $ 2,716 $ 6,923 $ 6,112
================ ================ ================ ================
As of
----------------------------------
March 31, September 30,
2004 2003
---------------- ----------------
(Dollars in thousands)
Receivable from Sprint $ 11,957 $ 15,809
Payable to Sprint $ 48,761 $ 45,069
Because approximately 96% of our revenue is collected by Sprint and 66% of cost
of service and roaming in our financial statements for the six months ended
March 31, 2004, are derived from fees and charges by (or through) Sprint, we
have a variety of settlement issues and other contract disputes open and
outstanding from time to time. Currently, 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 the Company and we have accrued approximately $0.4 million
for fiscal year 2002 and $1.0 million for fiscal year 2003, respectively
to reimburse Sprint for certain 3G related development expenses. For the
six months ended March 31, 2004, Sprint invoiced the Company and we have
accrued approximately $1.4 million. We are disputing Sprint's right to
charge 3G fees in 2002 and beyond.
o Sprint invoiced the Company and we have accrued for software maintenance
fees of approximately $1.7 million and $1.3 million for each of the fiscal
years 2002 and 2003, respectively. For the six months ended March 31,
2004, Sprint invoiced the Company and we have accrued approximately $1.0
million. We are disputing Sprint's right to charge software maintenance
fees.
o Sprint invoiced the Company and we have accrued $1.2 million for fiscal
year 2003 and $2.5 million for the six months ended March 31, 2004 for the
cost of IT projects completed by Sprint. We are disputing Sprint's right
to collect these fees.
8
The payable to Sprint includes disputed amounts (including, but not limited to
amounts disclosed above) for which Sprint has invoiced the Company of
approximately $12.4 million. The invoiced amount does not include $2.7 million
which has accrued for long-distance access revenues claimed but not invoiced by
Sprint, or other fees not yet invoiced relating to disputed 3G, software
maintenance and information technology that Sprint would assert have accrued.
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 Sprint Agreements which, together with other cash remittance issues, has
resulted in a shortfall in cash payments to the Company. Sprint also has
unilaterally reduced the reciprocal roaming rate charged among Sprint and its
network partners, in a manner which we believe is a breach of our Sprint
agreements.
During the six months ended March 31, 2004, the Company recorded $2.4 million in
credits from Sprint as a reduction of cost of service, consisting of a $1.2
million credit resulting from Sprint's decision to discontinue their billing
system conversion and a special cash settlement of the bad debt profile for
certain subscribers, which resulted in a credit of $1.2 million. Sprint had
previously billed and passed on to us their development costs related to the
billing system conversion as part of the IT service bureau fee we were charged.
This credit positively affects the six months ended March 31, 2004 results;
however, it is a non-cash item that was previously disputed and not paid. The
settlement for the bad debt profile for certain subscribers represents a special
settlement resulting from the improvement in actual bad debt experience as
compared to the estimated bad debt expense (bad debt profile) for the periods
April 2000 through December 2003.
Sprint estimates monthly service charges at the beginning of each calendar year.
At the end of each year, Sprint calculates the actual costs to provide these
services for its network partners and requires a final settlement for the
calendar year against the charges actually paid. If the costs 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
than the amounts paid by Sprint's network partners, Sprint charges the network
partners for these amounts. During the quarters ended December 31, 2003 and 2002
the Company received a credit from Sprint for $2.6 million and $1.3 million
related to the calendar years 2003 and 2002, respectively, which were recorded
as a reduction to cost of service. The calendar year 2003 service bureau fee
credit included $0.9 million in previously disputed unpaid amounts; therefore
$1.7 million of cash proceeds from Sprint were accrued during the quarter ended
December 31, 2003 and received during the quarter ended March 31, 2004.
The Sprint Agreements require the Company to maintain certain minimum network
performance standards and to meet other performance requirements. The Company
was in compliance in all material respects with these requirements as of March
31, 2004.
(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 the Company's common 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 this motion without prejudice, and two of the plaintiffs and
their counsel filed a renewed motion seeking appointment as lead plaintiffs and
lead counsel. On September 12, 2003, the court again denied the motion without
prejudice and on December 2, 2003, certain plaintiffs and their counsel filed a
modified renewed motion.
On December 11, 2003, Stuart Tinney, an AirGate shareholder, filed suit in the
U.S. District Court for the District of Delaware against Genesco Communications,
Inc., Cambridge Telecom, Inc., The Blackstone Group, Trust Company of the West,
Cass Communications Management, Inc., Technology Group, LLC, Montrose Mutual
PCS, Inc., Gridley Enterprises, Inc., Timothy M. Yager, Peter G. Peterson and
Stephen A. Schwarzman (collectively, the "Defendants"). The lawsuit alleges that
the Defendants, as either officers, directors or 10% shareholders of the
Company, purchased and sold the Company's securities within a six-month period
ended December 15, 2001 and profited from these transactions in violation of
Section 16(b) of the Exchange Act. The lawsuit seeks disgorgement of these
"short swing" profits and payment of the profits to the Company, which is named
as a nominal defendant in the lawsuit for its failure to directly take action
against the Defendants.
While there is no pending litigation with Sprint, we have a variety of disputes
with Sprint, which are described in Note 3.
9
We are also subject to a variety of other claims and suits that arise from time
to time in the ordinary course of business.
While management currently believes that resolving all of these matters,
individually or in the aggregate, will not have a material adverse impact on our
liquidity, financial condition or results of operations, the litigation and
other claims noted above are subject to inherent uncertainties and management's
view may change in the future. If an unfavorable outcome were to occur, there
exists the possibility of a material adverse impact on our liquidity, financial
condition and results of operations for the period in which the effect becomes
reasonably estimable.
(5) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred income tax assets and liabilities
are measured using enacted tax rates applied to expected taxable income for the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities for a change
in tax rates is recognized as income in the period that includes the enactment
date. A valuation allowance is provided for deferred income tax assets based
upon the Company's assessment of whether it is more likely than not that the
deferred income tax assets will be realized. No such amounts were realized in
the quarters and six months ended March 31, 2004 and 2003, nor will amounts be
realized in the future unless management believes the recoverability of deferred
tax assets is more likely than not. The non-monetary gain on the disposition of
discontinued operations recorded during the quarter ended December 31, 2003 did
not impact the Company's net operating loss carryforwards as the disposition
resulted in a non-deductible loss for tax purposes. As a result of the Company's
restructuring, the Company's existing net operating losses ("NOLs") will be
subject to annual limitations as required by Section 382 of the Internal Revenue
Code of 1986, as amended. The Company estimates that it had NOLs of
approximately $290 million through the date of restructuring. The Company
estimates that the annual limitation associated with these NOLs is approximately
$4.5 million. Thus, should the Company generate taxable income in excess of the
annual limit, it would be exposed to a liability for current income taxes.
(6) Discontinued Operations
On October 17, 2003, the Company irrevocably transferred all of its shares of
iPCS common stock to a trust for the benefit of the Company's shareholders of
record on the date of the transfer. On that date, the iPCS investment ($184.1
million credit balance carrying amount) was eliminated and recorded as a gain on
disposal of discontinued operations. The results for iPCS for all periods
presented are shown as discontinued operations. Subsequent to February 23, 2003,
the Company accounted for iPCS under the cost method. Therefore, excluding the
gain on disposal of $184.1 million recorded October 17, 2003, there were no
losses from discontinued operations for the quarter and six months ended March
31, 2004. The following reflects the loss from discontinued operations of iPCS
for the quarter and six months ended March 31, 2003 (dollars in thousands):
For the Quarter For the Six Months
Ended Ended
March 31, March 31,
------------------ -----------------
2003 2003
------------------ -----------------
Revenue $ 27,829 $ 79,364
Cost of revenue 21,197 63,200
Selling and marketing 4,312 16,418
General and administrative 3,550 6,881
Depreciation and amortization 7,718 20,989
------------------ -----------------
Operating expense 36,777 107,488
------------------ -----------------
Operating loss (8,948) (28,124)
Interest expense, net (5,376) (14,447)
------------------ -----------------
Loss from discontinued operations $ (14,324) $ (42,571)
================== =================
(7) Condensed Consolidating Financial Statements
AGW Leasing Company, Inc. ("AGW") is a wholly-owned restricted subsidiary of
AirGate. AGW has fully and unconditionally guaranteed the New Notes (see Note
10), Old Notes and the 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
SEC on September 27, 1999.
10
AirGate Network Services LLC ("ANS") is a wholly-owned restricted subsidiary of
the Company. ANS has fully and unconditionally guaranteed the New Notes, Old
Notes and the credit facility. ANS was formed to provide construction management
services for the Company's PCS network.
AirGate Service Company, Inc. ("Service Co") is a wholly-owned restricted
subsidiary of the Company. Service Co has fully and unconditionally guaranteed
the New Notes, Old Notes and the credit facility. Service Co was formed to
provide management services to the Company and iPCS.
The following shows the unaudited condensed consolidating financial statements
for the Company and its guarantor subsidiaries, as listed above, as of March 31,
2004 and September 30, 2003 and for the three months and six months ended March
31, 2004 and 2003 (dollars in thousands):
Unaudited Condensed Consolidating Balance Sheets
As of March 31, 2004
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
------------------- ------------------- ------------------- -------------------
Cash and cash equivalents $ 48,605 $ (12) $ - $ 48,593
Other current assets 106,935 529 (61,546) 45,918
------------------- ------------------- ------------------- -------------------
Total current assets 155,540 517 (61,546) 94,511
Property and equipment, net 129,449 32,323 - 161,772
Other noncurrent assets 6,861 - - 6,861
------------------- ------------------- ------------------- -------------------
Total assets $ 291,850 $ 32,840 $ (61,546) $ 263,144
=================== =================== =================== ===================
Current liabilities $ 91,016 $ 61,242 $ (61,546) $ 90,712
Intercompany (118,644) 118,644 - -
Long-term debt 257,237 - - 257,237
Other long-term liabilities 6,733 - - 6,733
Investment in subsidiaries 147,046 - (147,046) -
------------------- ------------------- ------------------- -------------------
Total liabilities 383,388 179,886 (208,592) 354,682
------------------- ------------------- ------------------- -------------------
Stockholders' deficit (91,538) (147,046) 147,046 (91,538)
------------------- ------------------- ------------------- -------------------
Total liabilities and
stockholders' deficit $ 291,850 $ 32,840 $ (61,546) $ 263,144
=================== =================== =================== ===================
Unaudited Condensed Consolidating Balance Sheets
As of September 30, 2003
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
------------------- ------------------- ------------------- -------------------
Cash and cash equivalents $ 54,078 $ - $ - $ 54,078
Other current assets 108,136 529 (61,478) 47,187
------------------- ------------------- ------------------- -------------------
Total current assets 162,214 529 (61,478) 101,265
Property and equipment, net 141,129 36,941 - 178,070
Other noncurrent assets 11,581 - - 11,581
------------------- ------------------- ------------------- -------------------
Total assets $ 314,924 $ 37,470 $ (61,478) $ 290,916
=================== =================== =================== ===================
Current liabilities $ 89,036 $ 61,189 $ (61,478) $ 88,747
Intercompany (108,890) 108,890 - -
Long-term debt 386,509 - - 386,509
Other long-term liabilities 8,542 - - 8,542
Investment in subsidiaries 316,724 - (132,609) 184,115
Total liabilities 691,921 170,079 (194,087) 667,913
------------------- ------------------- ------------------- -------------------
Stockholders deficit (376,997) (132,609) 132,609 (376,997)
------------------- ------------------- ------------------- -------------------
Total liabilities and
stockholders' deficit $ 314,924 $ 37,470 $ (61,478) $ 290,916
=================== =================== =================== ===================
11
Unaudited Condensed Consolidating Statement of Operations
For the Quarter Ended March 31, 2004
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
----------------- ---------------- ----------------- -----------------
Revenue $ 78,036 $ - $ - $ 78,036
Cost of revenue 42,426 4,198 - 46,624
Selling and marketing 11,347 569 - 11,916
General and administrative 6,180 157 - 6,337
Depreciation and amortization of property
and equipment 9,508 2,384 - 11,892
Gain on disposal of property and equipment (3) - - (3)
----------------- ---------------- ----------------- -----------------
Total operating expense 69,458 7,308 - 76,766
----------------- ---------------- ----------------- -----------------
Operating income (loss) 8,578 (7,308) - 1,270
Loss in subsidiaries (7,267) - 7,267 -
Interest income 165 - - 165
Interest expense (11,352) 41 - (11,311)
----------------- ---------------- ----------------- -----------------
Loss from continuing operations before
income tax (9,876) (7,267) 7,267 (9,876)
Income tax - - - -
----------------- ---------------- ----------------- -----------------
Loss from continuing operations (9,876) (7,267) 7,267 (9,876)
Income from discontinued operations - - - -
----------------- ---------------- ----------------- -----------------
Net loss $ (9,876) $ (7,267) $ 7,267 $ (9,876)
================= ================ ================= =================
Unaudited Condensed Consolidating Statement of Operations
For the Quarter Ended March 31, 2003
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
----------------- ---------------- ----------------- -----------------
Revenue $ 76,749 $ - $ - $ 76,749
Cost of revenue 39,598 4,604 - 44,202
Selling and marketing 10,195 1,189 - 11,384
General and administrative 5,335 509 - 5,844
Depreciation and amortization of property
and equipment 9,272 2,353 - 11,625
Loss on disposal of property and equipment 220 - - 220
----------------- ---------------- ----------------- -----------------
Total operating expense 64,620 8,655 - 73,275
----------------- ---------------- ----------------- -----------------
Operating income (loss) 12,129 (8,655) - 3,474
Loss in subsidiaries (8,616) - 8,616 -
Interest income (14) 39 - 25
Interest expense (10,197) - - (10,197)
----------------- ---------------- ----------------- -----------------
Loss from continuing operations before
income tax (6,698) (8,616) 8,616 (6,698)
Income tax - - - -
----------------- ---------------- ----------------- -----------------
Loss from continuing operations (6,698) (8,616) 8,616 (6,698)
Loss from discontinued operations (14,324) - - (14,324)
----------------- ---------------- ----------------- -----------------
Net loss $ (21,022) $ (8,616) $ 8,616 $ (21,022)
================= ================ ================= =================
12
Unaudited Condensed Consolidating Statement of Operations
For the Six Months Ended March 31, 2004
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
----------------- ---------------- ----------------- -----------------
Revenue $ 159,539 $ - $ - $ 159,539
Cost of revenue 87,300 8,399 - 95,699
Selling and marketing 24,984 1,079 - 26,063
General and administrative 12,527 277 - 12,804
Depreciation and amortization of property
and equipment 18,906 4,753 - 23,659
Gain on disposal of property and equipment (5) - - (5)
----------------- ---------------- ----------------- -----------------
Total operating expense 143,712 14,508 - 158,220
----------------- ---------------- ----------------- -----------------
Operating income (loss) 15,827 (14,508) - 1,319
Loss in subsidiaries (14,437) - 14,437 -
Interest income 322 - - 322
Interest expense (22,698) 71 - (22,627)
----------------- ---------------- ----------------- -----------------
Loss from continuing operations before
income tax (20,986) (14,437) 14,437 (20,986)
Income tax - - - -
----------------- ---------------- ----------------- -----------------
Loss from continuing operations (20,986) (14,437) 14,437 (20,986)
Income from discontinued operations 184,115 - - 184,115
----------------- ---------------- ----------------- -----------------
Net income (loss) $ 163,129 $ (14,437) $ 14,437 $ 163,129
================= ================ ================= =================
Unaudited Condensed Consolidating Statement of Operations
For the Six Months Ended March 31, 2003
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
----------------- ---------------- ----------------- -----------------
Revenue $ 158,614 $ - $ - $ 158,614
Cost of revenue 93,535 8,937 - 102,472
Selling and marketing 26,256 1,947 - 28,203
General and administrative 8,797 1,239 - 10,036
Depreciation and amortization of property
and equipment 18,448 4,796 - 23,244
Loss on disposal of property and equipment 418 - - 418
----------------- ---------------- ----------------- -----------------
Total operating expense 147,454 16,919 - 164,373
----------------- ---------------- ----------------- -----------------
Operating income (loss) 11,160 (16,919) - (5,759)
Loss in subsidiaries (16,766) - 16,766 -
Interest income (128) 153 - 25
Interest expense (20,391) - - (20,391)
----------------- ---------------- ----------------- -----------------
Loss from continuing operations
before income tax (26,125) (16,766) 16,766 (26,125)
Income tax - - - -
----------------- ---------------- ----------------- -----------------
Loss from continuing operations (26,125) (16,766) 16,766 (26,125)
Loss from discontinued operations (42,571) - - (42,571)
----------------- ---------------- ----------------- -----------------
Net loss $ (68,696) $ (16,766) $ 16,766 $ (68,696)
================= ================ ================= =================
13
Unaudited Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2004
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
-------------------- ------------------- -------------------- -------------------
Operating activities, net $ 21,151 $ 123 $ - $ 21,274
Investing activities, net (7,226) (135) - (7,361)
Financing activities, net (19,398) - - (19,398)
-------------------- ------------------- -------------------- -------------------
Change in cash and cash equivalents (5,473) (12) - (5,485)
Cash and cash equivalents at
beginning of period 54,078 - - 54,078
-------------------- ------------------- -------------------- -------------------
Cash and cash equivalents at end of period $ 48,605 $ (12) $ - $ 48,593
==================== =================== ==================== ===================
Unaudited Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2003
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
-------------------- ------------------- -------------------- -------------------
Operating activities, net $ 15,101 $ 526 $ - $ 15,627
Investing activities, net (6,000) (654) - (6,654)
Financing activities, net 7,045 - - 7,045
-------------------- ------------------- -------------------- -------------------
Change in cash and cash equivalents 16,146 (128) - 16,018
Cash and cash equivalents at
beginning of period 4,769 118 - 4,887
-------------------- ------------------- -------------------- -------------------
Cash and cash equivalents at end of period $ 20,915 $ (10) $ - $ 20,905
==================== =================== ==================== ===================
(8) Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period. Common
stock equivalent securities of 24,106, 11,465, 24,133, and 9,191 for the
quarters and six months ended March 31, 2004 and 2003 respectively, have been
excluded from the computation of dilutive earnings (loss) per share for the
periods because the Company has a loss from continuing operations and their
effect would have been antidilutive. All share and per share amounts have been
restated to give retroactive effect to the 1-for-5 reverse stock split.
(9) 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 income (loss) and earnings
(loss) per share basis as provided by SFAS No. 123, "Accounting for Stock-Based
Compensation." Consistent with the provisions of SFAS No. 123, had compensation
expense for these plans been determined based on the fair value at the grant
date during the three months and six months ended March 31, 2004 and 2003, the
pro forma net income (loss) and earnings (loss) per share would have been as
follows:
14
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------- -----------------------------------
2004 2003 2004 2003
---------------- ----------------- ---------------- -----------------
(Dollars in thousands, except per share data)
Net income (loss), as reported $ (9,876) $ (21,022) $ 163,129 $ (68,696)
Add: stock based compensation expense included in
determination of net income (loss) 197 177 302 353
Less: stock based compensation expense determined
under the fair value based method (1,398) (2,426) (2,797) (4,852)
---------------- ----------------- ---------------- -----------------
Pro forma, net income (loss) $ (11,077) $ (23,271) $ 160,634 $ (73,195)
================ ================= ================ =================
Basic and diluted earnings (loss) per share:
As reported $ (1.21) $ (4.05) $ 24.48 $ (13.27)
Pro forma $ (1.36) $ (4.49) $ 24.10 $ (14.14)
(10) Recapitalization Plan
The Recapitalization Plan included the following public and private exchange
offers and consent solicitations:
o The Company offered to exchange all of the outstanding 13.5% senior
subordinated discount notes due 2009 (the "Old Notes") for (i) newly issued
shares of common stock representing 56% of the shares of common stock to be
issued and outstanding immediately after the Recapitalization Plan and (ii)
$160.0 million aggregate principal amount of newly issued 9 3/8% senior
subordinated notes due 2009 (the "New Notes");
o The consent solicitations requested the consents of holders of the Old
Notes to remove substantially all of the restrictive covenants in the
indenture governing the Old Notes, release collateral that secured the
Company's obligations thereunder and waive any defaults or events of
default that occur in connection with the restructuring;
o The Company also solicited acceptances from holders of the Old Notes of a
prepackaged plan of reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Prepackaged Plan"). The Prepackaged Plan would have
effected the same transactions as the Recapitalization Plan, only under the
governance of a bankruptcy court.
In addition, the Company held a Special Meeting of Shareholders ("Special
Meeting") on February 12, 2004 at which its shareholders:
o Approved the issuance in the restructuring of an additional 56% of the
Company's common stock immediately after the restructuring;
o Approved the amendment and restatement of the Company's certificate of
incorporation to implement a 1-for-5 reverse stock split; and
o Approved the amendment and restatement of the 2002 AirGate PCS, Inc. Long
Term Incentive Plan to increase the number of shares available and reserved
for issuance thereunder, and to make certain other changes, and approved
the grant of certain performance-vested restricted stock units and stock
options to certain executives of the Company.
On the same date, the exchange offers expired, and the Company accepted
$298,205,000 of Old Notes (or 99.4% of the Old Notes outstanding) that were
validly tendered and not withdrawn in the exchange offers. Under the offers,
each holder of the Company's Old Notes received, for each $1,000 of aggregate
principal amount due at maturity tendered, 22.0277 shares of the Company's post
reverse stock split common stock, $533.33 in principal amount of the Company's
New Notes and cash resulting from the elimination of any fractional shares and
fractional notes.
On February 13, 2004, the Company effected the 1-for-5 reverse stock split and
shareholders received one share of common stock, and cash resulting from the
elimination of any fractional shares, in exchange for each five shares of common
stock then outstanding. Unless otherwise indicated, all share and per share
amounts have been restated to give retroactive effect to this 1-for-5 reverse
stock split.
On February 17, 2004, our stock began trading on a post split basis. We settled
the exchange offers on February 20, 2004.
Debt Restructuring
The following summarizes the accounting related to certain key provisions of the
Recapitalization Plan as it relates to the condensed consolidated financial
statements as of and for the six months ended March 31, 2004.
The Old Notes with a net carrying value of $264.8 million and related
unamortized financing costs of $3.8 million as of February 13, 2004 were
exchanged for New Notes with a principal balance of $159.0 million and 6,568,706
15
shares of common stock as adjusted for the 1-for-5 reverse stock split, valued
at $126.8 million as of February 13, 2004, based upon a closing common stock
market price of $19.30 on that date.
The financial restructuring was accounted for as a troubled debt restructuring
in accordance with Statement of Financial Accounting Standards No. 15
"Accounting by Debtors and Creditors for Troubled Debt Restructurings" and EITF
02-4, "Determining Whether a Debtors Modification or Exchange of Debt is within
the scope of FASB statement No. 15." Based on the terms of the Recapitalization
Plan, no gain on the transaction was recognized since total future cash
payments, including interest, exceeded the remaining carrying amount of the Old
Notes after reducing the Old Notes by the fair value of the common stock. The
difference of approximately $24.7 million between the principal value of the New
Notes and the carrying value of the Old Notes will be amortized as interest
expense over the term of the New Notes under the interest method. The New Notes
have a stated rate of 9.375% with interest due July and January of each year,
beginning July 1, 2004. As of March 31, 2004, the carrying value of the New
Notes was approximately $135.1 million, with an effective interest rate of
approximately 13.3%.
Transaction costs of $3.0 million and $3.1 million were incurred during the year
ended September 30, 2003 and during the six months ended March 31, 2004,
respectively, to raise capital related to the debt and were expensed as
incurred. Transaction costs of $4.8 million, incurred to raise capital, related
to the equity were recorded as an offset to additional paid in capital.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains "forward-looking statements." These forward-looking
statements 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 below in
"Non-GAAP Financial Measures and Key Operating Metrics"), roaming rates, EBITDA
(as defined below in "Non-GAAP Financial Measures and 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 our dependence on the success of Sprint's wireless business;
o the competitiveness and impact of Sprint's pricing plans and PCS
products and services and introduction of pricing plans and programs
that may adversely affect our business;
o intense competition in the wireless market and the unsettled nature of
the wireless market;
o the potential to experience a continued high rate of subscriber
turnover;
o the ability of Sprint (directly or through third parties) 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 at acceptable costs and
the quality of such services;
o subscriber credit quality;
o the ability to successfully leverage 3G products and services;
o inaccuracies in financial information provided by Sprint;
o new charges and fees, or increased charges and fees, imposed by
Sprint;
o the impact and outcome of disputes with Sprint;
o our ability to predict future customer growth, as well as other key
operating metrics;
o the impact of spending cuts on network quality, customer retention and
customer growth;
o rates of penetration in the wireless industry;
o our significant level of indebtedness and debt covenant requirements;
o the impact and outcome of legal proceedings between other Sprint
network partners and Sprint;
o the potential need for additional sources of capital and liquidity;
o risks related to our ability to compete with larger, more established
businesses;
o anticipated future losses;
o rapid technological and market change;
o an adequate supply of subscriber equipment;
o declines in growth of wireless subscribers;
16
o the effect of wireless local number portability; and
o the volatility of the market price of our common stock.
These forward-looking statements involve a number of risks and uncertainties
that could cause actual results to differ materially from those suggested by the
forward-looking statements. Forward-looking statements should, therefore, be
considered in light of various important factors, including those set forth in
the Company's Annual Report for the fiscal year ended September 30, 2003 and
elsewhere in this report. Moreover, we caution you not to place undue reliance
on these forward-looking statements, which speak only as of the date they were
made. Except as required under Federal Securities laws and the rule and
regulations of the SEC, we do not undertake any obligation to publicly release
any revisions to these forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events. All subsequent forward-looking statements attributable to
us or any person acting on our behalf are expressly qualified in their entirety
by the cautionary statements contained in or referred to in this report.
For a further listing and description of such risks and uncertainties, see the
Company's Annual Report for the fiscal year ended September 30, 2003 and other
reports filed by us with the SEC.
You should read this discussion in conjunction with our consolidated financial
statements and accompanying notes contained in our Annual Report for the year
ended September 30, 2003.
Overview
AirGate PCS, Inc. and its subsidiaries and predecessors were formed for the
purpose of becoming a leading regional provider of wireless Personal
Communication Services, or "PCS." We are a network partner of Sprint PCS, which
is a group of wholly-owned subsidiaries of Sprint Corporation (a diversified
telecommunications service provider), that operate and manage Sprint's PCS
products and services.
Sprint operates a 100% digital PCS wireless network in the United States and
holds the licenses to provide PCS nationwide using a single frequency band and a
single technology. Sprint, directly and indirectly through network partners such
as us, provides wireless services in more than 4,000 cities and communities
across the country. Sprint directly operates its PCS network in major
metropolitan markets throughout the United States. Sprint has also entered into
independent agreements with various network partners, such as us, under which
the network partners have agreed to construct and manage PCS networks in smaller
metropolitan areas and along major highways.
As of March 31, 2004, the Company had 367,807 subscribers and total network
coverage of approximately 6.1 million residents, representing approximately 82%
of the residents in its territory.
iPCS, Inc.
On November 30, 2001, we acquired iPCS in a merger. In light of consolidation in
the wireless communications industry in general and among Sprint PCS network
partners in particular, we believed that the merger represented a strategic
opportunity to significantly expand the size and scope of our operations, attain
access to attractive markets, and provide greater operational efficiencies and
growth potential than we would have had on our own. The transaction was
accounted for under the purchase method of accounting.
Although iPCS's growth rates initially met or exceeded expectations, the
slowdown in growth in the wireless industry, increased competition, iPCS'
dependence on Sprint and the reimposition and increase of the deposit for
sub-prime credit customers, all contributed to slower growth subsequent to
acquisition. In addition, iPCS' slow growth was compounded because it was
earlier in its life cycle when growth slowed, it had approximately one-third
fewer subscribers than the Company, and it had a less complete network than the
Company.
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. Subsequent to February 23, 2003,
the Company no longer consolidated the accounts and results of operations of
iPCS, and the accounts of iPCS were recorded as an investment using the cost
method of accounting.
In connection with the issuance of common stock in the Company's
Recapitalization Plan (as described in Note 10 to our Condensed Consolidated
Financial Statements), the Company had an ownership change for tax purposes.
Such ownership change would also have caused an ownership change of iPCS, which
could have had a detrimental effect on the use of certain net operating losses
of iPCS. In order to avoid the ownership change of iPCS that would have resulted
from the Company's ownership change, on October 17, 2003, the Company
irrevocably transferred all of its shares of iPCS common stock to a trust for
the benefit of the Company's shareholders of record as of the date of transfer.
On October 17, 2003, the iPCS investment ($184.1 million credit balance carrying
amount) was eliminated and recorded as a non-monetary gain on disposition of
discontinuing operations. The results for iPCS for all periods presented are
shown as discontinued operations. The results for AirGate only are shown as
continuing operations.
The following description of the Company's business is limited to AirGate alone,
and does not reflect the business of iPCS.
17
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. While we believe that the estimates we use are
reasonable, actual results could differ from those estimates. The Company's most
critical accounting policies that may materially impact the Company's results of
operations include:
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. Effective July 1, 2003 the Company adopted 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 bundled transaction, and the consideration will be
measured and allocated to the separate units based on their relative fair
values. The consensus guidance is applicable to agreements entered into for
quarters beginning after June 15, 2003. The adoption of EITF 00-21 has resulted
in substantially all of the activation fee revenue generated from Company-owned
retail stores and associated costs being recognized at the time the related
wireless handset is sold. Upon adoption of EITF 00-21, previously deferred
revenues and costs will continue to be amortized over the remaining estimated
life of a subscriber, not to exceed 30 months. Revenue and costs for activations
at other retail locations will continue to be deferred and amortized over their
estimated lives.
The Company recognizes service revenue from its subscribers as they use the
service. The Company provides a reduction of recorded revenue for billing
adjustments and credits, and estimated uncollectible 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 EITF
No. 01-9 "Accounting for Consideration Given by a Vendor to a Customer
(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 and Best Buy 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 territory, 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.
The Company records equipment revenue from the sale of handsets to subscribers
in its retail stores upon delivery in accordance with EITF 00-21. The Company
does not record equipment revenue on handsets and accessories purchased from
national third-party retailers such as Radio Shack and Best Buy or directly from
Sprint by subscribers in its territory.
Sprint is entitled to retain 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 fees 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 are not subject to
the 8% affiliation fee from Sprint.
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, accounts receivable by aging category and current trends in the credit
quality of its subscriber base. 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 historical and
projected 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.
Using historical information, the Company provides a reduction in revenues for
certain billing adjustments and credits, late payment fees and early
cancellation fees that it anticipates will not be collected. The reserves for
billing adjustments and credits, late payment fees and early cancellation fees
are included in the allowance for doubtful accounts balance. 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.
18
First Payment Default Subscribers
Prior to March 2003, the Company estimated the percentage of new subscribers
that would never pay a bill and reserved for the related percentage of monthly
revenue through a reduction in revenues. In 2002, the Company reinstated the
deposit requirement for sub-prime credit customers, and then increased the
deposit amounts in February 2003. These changes to our credit policy were
sufficient to mitigate the collection risk and resulted in improvements in the
credit quality of our subscriber base. Accordingly, in March 2003 the Company
ceased recording this reserve, which resulted in the addition of 4,187 net
subscriber additions.
The Company continually evaluates its credit policy and evaluates the impact the
subscriber base will have on the business and raises or lowers credit standards
periodically, as allowed by Sprint. On April 6, 2004, the Company reduced or
eliminated the deposit requirement for a segment of potential subscribers in
selected market areas. The Company will continue to review our customer
performance and modify our credit policy to meet short-term and long-term
business objectives and monitor the impact of sub-prime customers on our
allowance for doubtful accounts.
Valuation and Recoverability of Long-Lived Assets
Long-lived assets such as property and equipment represent approximately 61% of
the Company's total assets as of March 31, 2004. Property and equipment are
stated at original cost, less accumulated depreciation and amortization.
Depreciation is recorded using the straight-line method over the estimated
useful lives of 15 years for the 1 tower which we own, 3 to 5 years for computer
equipment, 5 years for furniture, fixtures and office equipment and 5 to 7 years
for network assets (other than towers). The Company reviews long-lived assets
for impairment in accordance with the provisions of SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."
We review our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
total of the expected undiscounted future cash flows is less than the carrying
amount of the asset, a loss, if any, is recognized for the difference between
the fair value and the carrying value of the asset. Impairment analysis is based
on our current business and technology strategy, our views of growth rates for
the business, anticipated future economic and regulatory conditions and expected
technological availability. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell the asset.
Significant New Accounting Pronouncements
See Note 2 to the condensed consolidated financial statements for a description
of significant new accounting pronouncements and their impact on the Company.
Results of Operations
Revenues
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 the Company's territory use the Company's network.
The Company pays the same reciprocal roaming rate when subscribers from its
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 activation. 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.
19
For the Quarters Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease)$ (Decrease)%
----------------- ---------------- -------------- ----------------
(Dollars in thousands)
Service revenue $ 61,656 $ 60,163 $ 1,493 2.5%
Roaming revenue 13,498 13,895 (397) (2.9%)
Equipment revenue 2,882 2,691 191 7.1%
----------------- ---------------- --------------
Total $ 78,036 $ 76,749 $ 1,287 1.7%
================= ================ ==============
For the quarter ended March 31, 2004 compared to the quarter ended March 31,
2003:
Service Revenue
The increase in service revenue for the quarter ended March 31, 2004 over the
same quarter of the previous year reflects a higher average number of
subscribers using our network, relatively consistent average revenue per
subscriber, higher monthly recurring revenue and feature charges and increased
data revenue, partially offset by higher credits and lower revenue from "minutes
over plan," or airtime usage in excess of the subscribed usage plans. In late
calendar year 2002, Sprint implemented a new PCS to PCS product offering under
which subscribers receive unlimited quantities of minutes for little or no
additional cost for any calls made from one Sprint PCS subscriber to another
("PCS to PCS"). Pursuant to our Sprint Agreements, we are required to support
this program in our territory. The number of minutes-over-plan charged to
subscribers for plan overages used and associated revenues decreased while the
number of minutes used for PCS to PCS calls has increased significantly.
Roaming Revenue
The decrease in roaming revenue for the quarter ended March 31, 2004 over the
same quarter of the previous year is attributable primarily 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 between Sprint and the Company declined from $0.058 per minute of
use to $0.041 in calendar years 2003 and 2004, respectively. The Company
believes that these reductions are in violation of our agreements with Sprint.
The Company's roaming revenue from Sprint and its PCS network partners was $12.9
million and $13.0 million or 96% and 94% of total roaming revenue for the
quarters ended March 31, 2004 and 2003, respectively.
Equipment Revenue
Equipment revenue for the quarter ended March 31, 2004 increased over the same
quarter of the previous year, primarily due to increased handset sales of $5.0
million or 168% prior to rebates and promotion costs, offset by a $4.8 million
increase in handset rebates and promotions. The increase in handset sales is
comprised of a $2.5 million increase in sales of new or upgraded handsets to
existing subscribers, a $2.3 million increase in sales to new subscribers and a
$0.2 million increase in accessory sales.
Cost of Service and Roaming
Cost of service and roaming principally consists of costs to support the
Company's subscriber base including:
o Cost of roaming;
o Network operating costs (including salaries, cell site lease payments,
fees related to the connection of the Company's switches to the cell
sites that they support, inter-connect fees and other expenses related
to network operations);
o Bad debt expense related to estimated uncollectible accounts
receivable;
o Wireless handset subsidies on existing subscriber upgrades through
national third-party retailers; and
o Other cost of service, which includes:
o Back office services provided by Sprint such as customer care,
billing and activation;
o The 8% of collected service revenue representing the Sprint
affiliation fee; and
20
o Long distance expense relating to inbound roaming revenue and the
Company's own subscriber's long distance usage and roaming
expense when subscribers from the Company's territory place calls
on Sprint's or its network partners' networks.
For the Quarters Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease)$ (Decrease)%
----------------- ---------------- -------------- ----------------
(Dollars in thousands)
Cost of roaming $ 11,022 $ 11,468 $ (446) (3.9%)
Network operating costs 15,416 13,971 1,445 10.3%
Bad debt expense (1,122) (32) (1,090) 3406.3%
Wireless handset subsidies 298 1,770 (1,472) (83.2%)
Other cost of service 13,808 13,570 238 1.8%
----------------- ---------------- --------------
Total cost of service and roaming $ 39,422 $ 40,747 $ (1,325) (3.3%)
================= ================ ==============
Cost of Roaming
Cost of roaming decreased for the quarter ended March 31, 2004 compared to the
same quarter of the previous year as a result of the decrease in the reciprocal
roaming rate charged among Sprint and its network partners, partially offset by
increased volume. The reciprocal roaming rate between Sprint and the Company
declined from $0.058 per minute of use to $0.041 in calendar years 2003 and
2004, respectively. The Company believes that these reductions are in violation
of our agreements with Sprint. The Company's cost of roaming attributable to
Sprint and its network partners was 95% of the total cost of roaming for each of
the quarters ended March 31, 2004 and 2003.
Network Operating Costs
Network operating costs increased for the quarter ended March 31, 2004 compared
to the same quarter of the previous year as a result of increased network costs
related to increased network usage of approximately 36%, including higher long
distance costs and increased interconnect charges.
Bad Debt Expense
Bad debt expense decreased for the quarter ended March 31, 2004 compared to the
same quarter of the previous year. During the quarter ended March 31, 2004, the
Company recorded a $1.2 million special settlement received from Sprint
resulting from a change in the bad debt profile for certain subscribers. In
addition, we believe the improvements in the credit quality and payment profile
of our subscriber base since we re-imposed deposits for sub-prime credit
subscribers in early 2002 and the subsequent increases in February 2003 resulted
in significant improvements in accounts receivable write-off experience,
increased collections, and the associated decrease in bad debt expense for the
quarter.
Wireless Handset Subsidies
Despite an increase in the number of subscribers making handset upgrade
purchases, wireless handset subsidies on existing subscriber upgrades sold
through national third-party retailers decreased for the quarter ended March 31,
2004 compared to the same quarter of the previous year as a result of reduced
subsidies per handset paid to national third-party retailers. Subsidies paid to
national third-party retailers decreased as a result of increased handset
rebates and promotions offered directly to our customers through the national
third party channels. Handset rebates and promotions sold through the national
third party channels offered directly to our customers are included in selling
and marketing expense.
Other Cost of Service
Other cost of service increased for the quarter ended March 31, 2004 compared to
the same quarter of the previous year as a result of higher customer loyalty
retention costs, offset by a rate reduction in the fees paid to Sprint for back
office services provided.
21
Cost of Equipment, Other Operating Expenses and Interest
For the Quarters Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease)$ (Decrease)%
----------------- ---------------- -------------- ----------------
(Dollars in thousands)
Cost of equipment $ 7,202 $ 3,455 3,747 108.5%
Selling and marketing expense 11,916 11,384 532 4.7%
General and administrative expense 6,337 5,844 493 8.4%
Depreciation and amortization of property and equipment 11,892 11,625 267 2.3%
Loss (gain) on disposal of property
and equipment (3) 220 223 101.4%
Interest income 165 25 140 560.0%
Interest expense (11,311) (10,197) 1,114 10.9%
Cost of Equipment
We purchase handsets and accessories to resell to our subscribers for use in
connection with our services. To remain competitive in the marketplace, we
subsidize the price of the handset sales; therefore the cost of handsets is
higher than the retail price to the subscriber. Cost of equipment increased for
the quarter ended March 31, 2004 compared to the same quarter of the previous
year primarily as a result of increased retail upgrade sales for handsets to
existing subscribers, partially offset by decreased subscriber gross additions.
Selling and Marketing Expense
Selling and marketing expense includes retail store costs such as salaries and
rent, promotion, advertising and commission costs, and handset subsidies for new
activations on units sold by national third-party retailers and Sprint sales
channels for which the Company does not record revenue. Under the Company's
agreements with Sprint, when a national retailer or other Sprint distribution
channel sells a handset purchased from Sprint to a subscriber from the Company's
territory, the Company is obligated to reimburse Sprint for the handset subsidy
and related selling costs that Sprint originally incurred. Selling and marketing
expenses increased for the quarter ended March 31, 2004 compared to the same
quarter of the previous year reflecting increased advertising and promotion
expense, offset by staff reductions and store closings implemented in early
fiscal 2003.
General and Administrative Expense
General and administrative expense increased for the quarter ended March 31,
2004 compared to the same quarter of the previous year, as a result of higher
salaries and other employee costs of $0.9 million, offset by a net decrease in
outside consulting services of $0.4 million. The higher salaries and other
employee costs are the result of fully absorbing corporate overhead costs
previously shared with iPCS.
Depreciation and Amortization of Property and Equipment
The Company capitalizes network development costs incurred to ready its network
for use and costs for leasehold improvements to 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.
Depreciation expense increased slightly for the quarter ended March 31, 2004
compared to the same quarter of the previous year primarily as a result of
additional network assets placed in service in the later part of fiscal year
2003. The Company purchased $5.8 million of property and equipment in the
quarter ended March 31, 2004, compared to property and equipment purchases of
$1.0 million in the quarter ended March 31, 2003.
Interest Expense
Interest expense increased for the quarter ended March 31, 2004 to $11.3 million
compared to $10.2 million for the same quarter of the previous year as a result
of interest accruing on the New Notes beginning January 1, 2004 in conjunction
with accreted interest on the Old Notes until acceptance of the exchange offers
on February 12, 2004. This increase was partially offset by a decline in
interest rates and reduced borrowings on the credit facility. The Company had
outstanding credit facility borrowings of $137.7 million at a weighted average
interest rate of 4.96% at March 31, 2004, compared to $143.5 million at a
weighted average interest rate of 5.37% at March 31, 2003.
Under Generally Accepted Accounting Principles, the difference in the carrying
value of the Old Notes and aggregate principal and interest payments of the New
Notes was recognized as a $24.7 million discount to the stated value of the New
Notes, which is amortized to interest expense over the term of the New Notes.
For the quarter ended March 31, 2004, total interest on the New Notes was $4.5
million, which reflects future cash payments of interest of $3.8 million and
22
$0.7 million resulting from amortization of the discount on the New Notes. We
believe our interest expense for the quarter ended June 30, 2004 will not exceed
$8.0 million.
Income Tax
No income tax benefit was recorded for the quarters ended March 31, 2004 and
2003, as it was more likely than not that the income tax benefit would not be
realized.
Loss from Continuing Operations
For the quarter ended March 31, 2004, loss from continuing operations increased
to $9.9 million compared to $6.7 million for the same quarter of the previous
year. The increase is the result of higher cost of equipment, selling and
marketing expense, increased spending associated with the Recapitalization Plan
of $0.8 million and higher interest expense of $1.1 million, partially offset by
the $1.2 million special settlement received from Sprint related to an improved
bad debt expense profile related to certain customers.
Income (Loss) from Discontinued Operations
Discontinued operations reflect a loss from iPCS of $14.3 million during the
quarter ended March 31, 2003.
For the six months ended March 31, 2004 compared to the six months ended March
31, 2003:
For the Six Months Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease)$ (Decrease)%
----------------- ---------------- -------------- ----------------
(Dollars in thousands)
Service revenue $ 123,829 $ 120,096 $ 3,733 3.1%
Roaming revenue 29,981 32,805 (2,824) (8.6%)
Equipment revenue 5,729 5,713 16 0.3%
----------------- ---------------- --------------
Total $ 159,539 $ 158,614 $ 925 0.6%
================= ================ ==============
Service Revenue
The increase in service revenue for the six months ended March 31, 2004 over the
same period of the previous year reflects a higher average number of subscribers
using our network, relatively consistent average revenue per subscriber, higher
monthly recurring revenue and feature charges and increased data revenue,
partially offset by higher credits and lower revenue from "minutes over plan,"
or airtime usage in excess of the subscribed usage plans. In late calendar year
2002, Sprint implemented the new PCS to PCS product offering described above.
Pursuant to our Sprint Agreements, we are required to support this program in
our territory. The number of minutes-over-plan charged to subscribers for plan
overages used and associated revenues decreased while the number of minutes used
for PCS to PCS calls has increased significantly.
Roaming Revenue
The decrease in roaming revenue for the six months ended March 31, 2004 over the
same period of the previous year is attributable primarily to the lower
reciprocal roaming rate charged among Sprint and its PCS network partners,
partially offset by increased volume in inbound roaming traffic. For the six
months ended March 31, 2004, the Company's roaming revenue from Sprint and its
PCS network partners was $28.7 million, or approximately 96% of the roaming
revenue, compared to $31.0 million or approximately 95% for the six months ended
March 31, 2003.
Equipment Revenue
Equipment revenue for the six months ended March 31, 2004 increased slightly
over the same period of the previous year, primarily due to increased handset
sales of $6.3 million or 68% prior to rebates and promotion costs, offset by a
$6.3 million increase in handset rebates and promotions and a decrease in gross
additions from our retail and local distributor channels. The increase in
handset sales is comprised of a $4.4 million increase in sales of new or
upgraded handsets to existing subscribers and a $1.9 million increase in sales
to new subscribers.
23
Cost of Service and Roaming
For the Six Months Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease)$ (Decrease)%
----------------- ---------------- -------------- ----------------
(Dollars in thousands)
Cost of roaming $ 24,736 $ 27,135 $ (2,399) (8.8%)
Network operating costs 31,158 28,846 2,312 8.0%
Bad debt expense (718) 2,155 (2,873) (133.3%)
Wireless handset subsidies 996 3,353 (2,357) (70.3%)
Other cost of service 25,739 30,681 (4,942) (16.1%)
----------------- ---------------- --------------
Total cost of service and roaming $ 81,911 $ 92,170 $ (10,259) (11.1%)
================= ================ ==============
Cost of Roaming
Cost of roaming decreased for the six months ended March 31, 2004 compared to
the same period of the previous year as a result of the decrease in the
reciprocal roaming rate charged among Sprint and its network partners partially
offset by higher volumes. Cost of roaming of $23.8 million and $25.7 million or
96% and 95% of the total cost of roaming was attributable to Sprint and its
network partners for the six months ended March 31, 2004 and 2003, respectively.
Network Operating Costs
Network operating costs increased for the six months ended March 31, 2004
compared to the same period of the previous year as a result of increased
network costs related to increased network usage of approximately 33%, including
higher long distance cost and increased interconnect charges.
Bad Debt Expense
Bad debt expense decreased for the six months ended March 31, 2004 compared to
the same period of the previous year. During the six months ended March 31,
2004, the Company recorded a $1.2 million special settlement received from
Sprint resulting from a change in the bad debt profile for certain subscribers.
In addition, we believe the 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 the subsequent increases in February 2003 resulted
in significant improvements in accounts receivable write-off experience,
increased collections, and the associated decrease in bad debt expense for the
six months ended March 31, 2004.
Wireless Handset Subsidies
Despite an increase in the number of subscribers making handset upgrade
purchases, wireless handset subsidies on existing subscriber upgrades sold
through national third-party retailers decreased for the six months ended March
31, 2004 compared to the same period of the previous year as a result of reduced
subsidies paid per handset to national third-party retailers. Subsidies paid to
national third-party retailers decreased as a result of increased handset
rebates and promotions offered directly to our customers through the national
third party channel. Handset rebates and promotions sold through the national
third party channels offered directly to our customers are included in selling
and marketing expense.
Other Cost of Service
Other cost of service decreased for the six months ended March 31, 2004 compared
to the same period of the previous year. The decrease was attributable to lower
service bureau costs and fees paid to Sprint, a $2.6 million special settlement
from Sprint for service bureau fees charged for calendar year 2003 and a $1.2
million special settlement resulting from Sprint's decision to discontinue their
billing system conversion in 2004.
24
Cost of Equipment, Other Operating Expenses and Interest
For the Six Months Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease)$ (Decrease)%
----------------- ---------------- -------------- ----------------
(Dollars in thousands)
Cost of equipment $ 13,788 $ 10,302 3,486 33.8%
Selling and marketing expense 26,063 28,203 (2,140) (7.6%)
General and administrative expense 12,804 10,036 2,768 27.6%
Depreciation and amortization of property and equipment 23,659 23,244 415 1.8%
Loss (gain) on disposal of property
and equipment (5) 418 423 101.2%
Interest income 322 25 297 1188.0%
Interest expense (22,627) (20,391) 2,236 11.0%
Cost of Equipment
Cost of equipment increased for the six months ended March 31, 2004 compared to
the same period of the previous year primarily as a result of increased retail
upgrade sales of handsets to existing subscribers, offset by decreased
subscriber gross additions.
Selling and Marketing Expense
Selling and marketing expense decreased for the six months ended March 31, 2004
compared to the same period of the previous year reflecting the effect of
reduced advertising and promotion expense and staff reductions and store
closings implemented in early fiscal 2003, partially offset by increased rebates
for handset upgrade costs through national third parties.
General and Administrative Expense
General and administrative expense increased for the six months ended March 31,
2004 compared to the same period of the previous year, as a result of an
increase in outside consulting services of $1.7 million and higher salaries and
other employee costs of $1.1 million. The higher salaries and other employee
costs are the result of fully absorbing corporate overhead costs previously
shared with iPCS.
Depreciation and Amortization of Property and Equipment
Depreciation expense increased for the six months ended March 31, 2004 compared
to the same period of the previous year primarily as a result of additional
network assets placed in service in the later part of fiscal year 2003. The
Company purchased $7.4 million of property and equipment in the six months ended
March 31, 2004, compared to property and equipment purchases of $6.7 million in
the six months ended March 31, 2003.
Interest Expense
Interest expense increased for the six months ended March 31, 2004 compared to
the same period of the previous year as a result of interest accruing on the New
Notes beginning January 1, 2004 in conjunction with accreted interest on the Old
Notes until acceptance of the exchange offers on February 12, 2004. This
increase was partially offset by a decline in interest rates and reduced
borrowings on the credit facility. The Company had outstanding credit facility
borrowings of $137.7 million at a weighted average interest rate of 4.96% at
March 31, 2004, compared to $143.5 million at a weighted average interest rate
of 5.37% at March 31, 2003.
Income Tax
No income tax benefit on continuing operations was recorded for the six months
ended March 31, 2004 and 2003 as it was more likely than not that the income tax
benefit would not be realized.
Loss from Continuing Operations
For the six months ended March 31, 2004, loss from continuing operations
improved to $21.0 million compared to $26.1 million for the same period of the
previous year. The improvement is the result of lower cost of service and
selling and marketing expense, offset by increased spending associated with the
Recapitalization Plan of $3.1 million, increased interest expense of $2.2
million and higher cost of equipment.
25
Income (Loss) from Discontinued Operations
Discontinued operations is comprised of a $184.1 million non-monetary gain from
the elimination of the investment in iPCS for the six months ended March 31,
2004 and a loss from the discontinued operations of iPCS of $42.6 million during
the six months ended March 31, 2003.
Non-GAAP 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 of
America, 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 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, loss from
continuing operations, or net income (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 loss from continuing operations 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 loss from continuing
operations, as well as a reconciliation of EBITDA to loss from continuing
operations. EBITDA is a supplement to GAAP financial information and should not
be considered an alternative to, or more meaningful than, net income (loss),
loss from continuing operations, or operating income (loss) as determined in
accordance with GAAP. EBITDA has distinct limitations as compared to GAAP
information such as net income (loss), loss from continuing operations, or
operating income (loss). By excluding interest and income taxes for example, it
may not be apparent that both represent a reduction in cash available to the
Company. Likewise, depreciation and amortization, while non-cash items,
represent generally the decreases in the value of assets that produce revenue
for the Company.
ARPU, churn, CPGA, and EBITDA 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:
o "ARPU" summarizes the average monthly service revenue per user, excluding
roaming revenue. The Company excludes roaming revenue from its ARPU
calculation because this revenue is generated from customers of Sprint and
other carriers that use our network and not directly from our subscribers.
ARPU is computed by dividing average monthly service revenue for the
period by the average number of subscribers for the period.
o "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 number of subscribers for the
period. 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.
o "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 expense (including commissions and upgrade costs),
cost of equipment and activation costs (which are included as a component
of cost of service and roaming) and reducing that amount by the equipment
revenue recorded. That net amount is then divided by the total new
subscribers acquired during the period.
o "EBITDA" means earnings before interest, taxes, depreciation and
amortization.
26
The tables, which follow present and reconcile non-GAAP financial measures and
key operating metrics for the Company for the quarters and six months ended
March 31, 2004 and 2003.
For the quarter ended March 31, 2004 compared to the quarter ended March 31,
2003:
The table below sets forth key operating metrics for the Company for the
quarters ended March 31, 2004 and 2003 (dollars in thousands, except unit and
per unit data):
For the Quarters Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) (Decrease)
----------------- ---------------- -------------- ----------------
Total subscribers, end of period 367,807 358,564 9,243 2.6%
Subscriber gross additions 41,741 43,003 (1,262) (2.9%)
Subscriber net additions 7,909 5,755 2,154 37.4%
Churn 2.92% 3.30% (0.38%) NM
ARPU $ 56.48 $ 56.38 $ 0.10 0.2%
CPGA $ 409 $ 302 $ 107 35.4%
EBITDA $ 13,162 $ 15,099 $ (1,937) (12.8%)
The reconciliation of ARPU to service revenue, as determined in accordance with
GAAP, is as follows (dollars in thousands, except per unit data):
For the Quarters Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) (Decrease)
----------------- ---------------- -------------- ----------------
Average Revenue Per User (ARPU):
Service revenue $ 61,656 $ 60,163 $ 1,493 2.5%
Average subscribers 363,853 355,687 8,166 2.3%
ARPU $ 56.48 $ 56.38 $ 0.10 0.2%
The reconciliation of CPGA to selling and marketing expense, as determined in
accordance with GAAP, is calculated as follows (dollars in thousands, except per
unit data):
27
For the Quarters Ended March 31,
------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) (Decrease)
------------- -------------- ------------- --------------
Cost Per Gross Addition (CPGA):
Selling and marketing expense $ 11,916 $ 11,384 $ 532 4.7%
Plus: activation costs 838 843 (5) (0.6%)
Plus: cost of equipment 7,202 3,455 3,747 108.5%
Less: equipment revenue (2,882) (2,691) (191) (7.1%)
------------- -------------- -------------
Total acquisition costs $ 17,074 $ 12,991 $ 4,083 31.4%
============= ============== =============
Gross additions 41,741 43,003 (1,262) (2.9%)
CPGA $ 409 $ 302 $ 107 35.4%
The reconciliation of EBITDA to our reported loss from continued operations, as
determined in accordance with GAAP, is as follows (dollars in thousands):
For the Quarters Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) (Decrease)
----------------- ---------------- -------------- ----------------
Loss from continuing operations $ (9,876) $ (6,698) $ (3,178) (47.4%)
Depreciation and amortization of property
and equipment 11,892 11,625 267 2.3%
Interest income (165) (25) (140) NM
Interest expense 11,311 10,197 1,114 10.9%
------------- -------------- -------------
EBITDA $ 13,162 $ 15,099 $ (1,937) (12.8%)
============= ============== =============
Subscriber Gross Additions
Subscriber gross additions decreased slightly for the quarter ended March 31,
2004 compared to the same quarter in 2003. This decrease is due to the increase
in the deposit for sub-prime customers and Sprint's loss of certain national
third-party distribution channels.
Subscriber Net Additions
Subscriber net additions increased for the quarter ended March 31, 2004,
compared to the same quarter in 2003. The increase is due to improved subscriber
churn, partially offset by a reduction in subscriber gross additions.
Average Revenue Per User
ARPU increased slightly for the quarter ended March 31, 2004 compared to the
same quarter for 2003 primarily as a result of an increase in subscriber monthly
recurring charges and higher data revenue offset by a reduction in revenue from
customers using minutes in excess of their subscriber usage plans and higher
customer credits.
Churn
Churn improved for the quarter ended March 31, 2004, compared to the same
quarter for 2003. The Company has focused on improving the credit quality of the
subscriber base. We believe this improvement in credit quality may have resulted
in the reduction in churn for the quarter ended March 31, 2004 compared to the
same period in 2003.
28
Cost per Gross Addition
CPGA increased for the quarter ended March 31, 2004 compared to the same quarter
in 2003. The increase reflects increased costs for marketing, selling,
advertising, handset sales incentives, handset upgrade costs through our retail
and national third party channels and rebates that were spread over a lower
number of gross additions.
EBITDA
EBITDA for the quarter ended March 31, 2004 decreased from the same quarter in
2003. This decrease is a result of higher equipment costs, and selling,
marketing, and advertising costs and $0.8 million in Restructuring Costs, offset
by slightly higher revenues, lower cost of service and roaming and a special
Sprint settlement of $1.2 million recorded related to the improvement in certain
customers bad debt profiles.
For the six months ended March 31, 2004 compared to the six months ended March
31, 2003:
The table below sets forth key operating metrics for the Company for the six
months ended March 31, 2004 and 2003 (dollars in thousands, except unit and per
unit data):
For the Six Months Ended March 31,
--------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) (Decrease)%
------------- -------------- ------------- ----------------
Total subscribers, end of period 367,807 358,564 9,243 2.6%
Subscriber gross additions 77,342 98,624 (21,282) (21.6%)
Subscriber net additions 8,347 19,425 (11,078) (57.0%)
Churn 2.99% 3.53% (0.54%) NM
ARPU $ 56.76 $ 57.38 $ (0.62) (1.1%)
CPGA $ 463 $ 354 $ 109 30.8%
EBITDA $ 24,978 $ 17,485 $ 7,493 42.9%
The reconciliation of ARPU to service revenue, as determined in accordance with
GAAP, is as follows (dollars in thousands, except per unit data):
For the Six Months Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) (Decrease)%
----------------- ---------------- -------------- ----------------
(Dollars in thousands)
Average Revenue Per User (ARPU):
Service revenue $ 123,829 $ 120,096 $ 3,733 3.1%
Average subscribers 363,634 348,852 14,728 4.2%
ARPU 56.76 57.38 (0.62) (1.1%)
29
The reconciliation of CPGA to selling and marketing expense, as determined in
accordance with GAAP, is calculated as follows (dollars in thousands, except per
unit data):
For the Six Months Ended March 31,
--------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) (Decrease)%
------------- -------------- ------------- ----------------
Cost Per Gross Addition (CPGA):
Selling and marketing expense $ 26,063 $ 28,203 $ (2,140) (7.6%)
Plus: activation costs 1,718 2,111 (393) (18.6%)
Plus: cost of equipment 13,788 10,302 3,486 33.8%
Less: equipment revenue (5,729) (5,713) (16) (0.3%)
------------- -------------- -------------
Total acquisition costs $ 35,840 $ 34,903 $ 937 2.7%
============= ============== =============
Gross additions 77,342 98,624 (21,282) (21.6%)
CPGA $ 463 $ 354 $ 109 30.8%
The reconciliation of EBITDA to our reported loss from continued operations, as
determined in accordance with GAAP, is as follows (dollars in thousands):
For the Six Months Ended March 31,
--------------------------------------------------------------
Increase Increase
2004 2003 (Decrease) (Decrease)%
------------- -------------- ------------- ----------------
Loss from continuing operations $ (20,986) $ (26,125) $ 5,139 19.7%
Depreciation and amortization of property
and equipment 23,659 23,244 415 1.8%
Interest income (322) (25) (297) NM
Interest expense 22,627 20,391 2,236 11.0%
------------- -------------- -------------
EBITDA $ 24,978 $ 17,485 $ 7,493 42.9%
============= ============== =============
Subscriber Gross Additions
Subscriber gross additions decreased for the six months ended March 31, 2004
compared to the same period in 2003. This decrease is due to the increase in the
deposit for sub-prime credit customers, the loss of distribution from closing
retail stores, and Sprint's loss of certain national third-party distribution
channels.
Subscriber Net Additions
Subscriber net additions decreased for the six months ended March 31, 2004,
compared to the same period in 2003. This decrease is due to the reduction in
subscriber gross additions, partially offset by the reduced subscriber churn
rate.
Average Revenue Per User
ARPU decreased for the six months ended March 31, 2004 compared to the same
period for 2003 primarily as a result of a reduction in revenue from customers
using minutes in excess of their subscriber usage plans and higher customer
credits, offset by an increase in subscriber monthly recurring charges.
Churn
Churn improved for the six months ended March 31, 2004, compared to the same
period for 2003. The Company has focused on improving the credit quality of the
subscriber base. We believe this improvement in credit quality may have resulted
in the reduction in churn for the six months ended March 31, 2004 compared to
the same period in 2003.
Cost per Gross Addition
CPGA increased for the six months ended March 31, 2004 compared to the same
period in 2003. The increase reflects increased costs for marketing, selling,
advertising, handset sales incentives, handset upgrade costs through our retail
and national third party channels and rebates that were spread over a lower
number of gross additions.
30
EBITDA
EBITDA for the six months ended March 31, 2004 increased from the same period in
2003. This increase is a result of an increase in revenues and decreased
spending in cost of services and selling and marketing, and a special Sprint
settlement of $1.2 million recorded for the change in certain customer bad debt
profiles and a $1.2 million special settlement resulting from Sprint's decision
to discontinue their billing system conversion, offset by $3.1 million in
Restructuring Costs.
Liquidity and Capital Resources
As of March 31, 2004, the Company had $48.6 million in cash and cash equivalents
compared to $54.1 million in cash and cash equivalents at September 30, 2003.
The Company's working capital for March 31, 2004 was $3.8 million, compared to
working capital of $12.5 million at September 30, 2003. The decrease in the
Company's cash position of $5.5 million is attributable to the following
(dollars in thousands):
For the Six Months Ended
March 31,
2004
---------------------------
Operating Activities
Cash received from Sprint $ 128,184
Cash paid to Sprint (36,822)
Cash paid to vendors and employees (65,559)
Credit facility interest payments (4,529)
---------------------------
21,274
---------------------------
Investing Activities
---------------------------
Capital expenditures (7,361)
---------------------------
Financing Activities
Credit facility principal payments (13,761)
Other financing costs (5,637)
---------------------------
(19,398)
---------------------------
$ (5,485)
===========================
For the Six Months Ended March 31,
-----------------------------------------------------------------------
Increase Increase
2004 2003 (Decrease)$ (Decrease)%
----------------- ---------------- -------------- ----------------
(Dollars in thousands)
Cash provided by operating activities $ 21,274 $ 15,627 $ 5,647 36.1%
Cash used in investing activities (7,361) (6,654) (707) (10.6%)
Cash (used in) provided by financing activities (19,398) 7,045 (26,443) (375.3%)
---------------- ---------------- ---------------- ----------------
Net (decrease) increase $ (5,485) $ 16,018 $ (21,503) (134.2%)
================ ================ ================ ================
Net Cash Provided By Operating Activities
The $21.3 million of cash provided by operating activities for the six months
ended March 31, 2004 was the result of the Company's $163.1 million net income
offset by non-cash items including gain on discontinued operations,
depreciation, amortization of note discounts, financing costs, provision for
doubtful accounts, non-cash stock compensation and loss (gain) on disposal of
property and equipment totaling $145.8 million. These non-cash items were
partially offset by favorable changes in other operating assets and liabilities
of $4.0 million. The $15.6 million of cash provided by operating activities for
the six months ended March 31, 2003 was the result of the Company's $68.7
million net loss offset by non-cash items including loss on discontinued
operations, depreciation, amortization of note discounts, financing costs,
provision for doubtful accounts and non-cash stock option compensation, loss
(gain) on disposal of property and equipment totaling $85.3 million. These
non-cash items were partially offset by a decrease in other operating assets and
liabilities of $1.0 million.
31
Net Cash Used in Investing Activities
The $7.4 million of cash used in investing activities for the six months ended
March 31, 2004 represents purchases of property and equipment. Purchases of
property and equipment for the six months ended March 31, 2004 related to
expansion of switch capacity and improvements in service quality. For the six
months ended March 31, 2003, cash used in investing activities was $6.7 million
for purchases of property and equipment.
Net Cash (Used In)Provided by Financing Activities
The $19.4 million in cash used in financing activities during the six months
ended March 31, 2004, consisted of $13.8 million for principal payments
associated with the credit facility and $4.8 million in debt restructuring costs
which were capitalized to paid in capital, and $0.9 million in fees capitalized
related to amending the credit facility. The $7.0 million of cash provided by
financing activities during the six months ended March 31, 2003 consisted of
$8.0 million borrowed under the credit facility, offset by $1.0 million of
principal payments associated with the credit facility.
Liquidity, Financial Restructuring and Going Concern
The financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
As shown in the condensed consolidated financial statements, the Company has
generated significant net losses since inception and has an accumulated deficit
of $1.1 billion and stockholders' deficit of $91.5 million at March 31, 2004.
For the six months ended March 31, 2004, the Company's loss from continuing
operations amounted to $21.0 million. In addition to its capital needs to fund
operating losses, the Company has invested large amounts to build-out its
networks and for other capital assets. Since inception, the Company has invested
over $300 million to purchase property and equipment. As of March 31, 2004, the
Company had working capital of $3.8 million and cash and cash equivalents of
$48.6 million, and no remaining availability under its credit facility. As a
result, the Company is completely dependent on available cash and operating cash
flow to pay debt service and meet its other capital needs. If such sources are
not sufficient, alternative funding sources may not be available.
Due to the factors described in the Company's Annual Report for the fiscal year
ended September 30, 2003, management made changes to the assumptions underlying
its long-range business plan. These factors included slower subscriber growth,
increased competition and churn and our dependence on Sprint and Sprint's
changes to various programs and fees. These factors led the Company to revise
its business strategy and take actions to cut costs during 2003. These actions
included the following:
o Restructuring the Company's organization and eliminating more than 150
positions;
o Reducing capital expenditures;
o Reducing spending for sales and marketing activities; and
o Reducing per minute network operating costs by more closely managing
connectivity costs.
These actions improved operating cash flow, however, under the Company's
business plan during 2003, our compliance with the financial covenants under our
credit facility was not assured and the Company's ability to generate sufficient
cash flow to meet its financial covenants and payment obligations in 2005 and
beyond was substantially uncertain. There was substantial risk that under its
business plan, the Company would not have sufficient liquidity to meet its cash
interest obligations under the Old Notes in 2006. As a result, the Company
initiated the Recapitalization Plan. In light of these circumstances and the
possibility of the Prepackaged Plan, in connection with their audit of our 2003
financial statements, KPMG LLP, the Company's independent auditors, included an
explanatory paragraph regarding the Company's ability to continue as a going
concern in their audit opinion. Such explanatory paragraph would have resulted
in a default under our credit facility; however, the Company obtained an
amendment of its credit facility to permit this explanatory paragraph and
prevent a default. The completion of the Recapitalization Plan improved the
Company's capital structure and reduced the required payments under the
Company's Old Notes and we believe we will have sufficient cash and cash
equivalents and cash flow from operations to satisfy the Company's liquidity
needs for at least the next twelve months.
Pursuant to the Recapitalization Plan, all but 0.6% of the 13.5% Old Notes
maturing in 2009 were replaced by the 9 3/8% New Notes maturing in 2009. As a
result, after 2004, the financial restructuring provides estimated cumulative
cash savings of $255 million through 2009, by reducing our principal payment by
$139.2 million and annual cash interest payment by $25.5 million per year after
2004.
Over time, Sprint has increased fees charged to the Company and other network
partners and has added fees that were not anticipated when the agreements with
Sprint were entered into. Sprint also sought to collect money from us that we
believe is not authorized under the agreements. In addition, Sprint has imposed
additional programs, requirements and conditions that have adversely affected
our financial performance. If these increases, additional charges and changes
32
continue, our operating results, liquidity and capital resources could be
adversely affected. As of March 31, 2004, we have disputed approximately $12.4
million in invoiced charges and $2.7 million claimed by Sprint but not invoiced
for such increases and additional charges, which have not been fully resolved.
While we believe that we have adequately reserved for these disputed amounts, if
they are resolved in favor of Sprint and against the Company, the payment of
this amount of money could adversely affect our liquidity and capital resources.
The resolution of all disputes in favor of Sprint and payment of disputed
amounts would reduce our cash position by approximately $15.1 million.
Capital Resources
As of March 31, 2004, the Company had $48.6 million of cash and cash
equivalents. The Company has no further borrowing available under the credit
facility.
Contractual Obligations
The Company is obligated to make future payments under various contracts it has
entered into, including amounts pursuant to the credit facility, the Old Notes,
New Notes and non-cancelable operating lease agreements for office space, cell
sites, vehicles and office equipment. Expected future minimum contractual cash
obligations for the next five years and in the aggregate at September 30, 2003,
giving effect to changes made as a result of the Recapitalization Plan, are as
follows (dollars in thousands):
Payments Due By Period for Years Ending September 30,
----------------------------------------------------------------------------------------
Total 2004 2005 2006 2007 2008 Thereafter
------------- ---------- ---------- ---------- ---------- ---------- -------------
Credit facility, principal (1) $ 151,475 $ 20,275 $ 21,200 $ 30,107 $ 39,893 $ 40,000 $ -
Credit facility, interest (2) 24,188 7,460 6,779 5,327 3,430 1,192 -
Old Notes, principal 1,795 - - - - - 1,795
Old Notes, interest (3) 1,212 - 242 242 242 243 243
New Notes, principal 159,035 - - - - - 159,035
New Notes, interest (4) 84,487 14,909 14,909 14,909 14,909 14,909 9,942
Operating leases (5) 60,262 18,899 14,396 9,485 6,632 5,159 5,691
------------- ---------- ---------- ---------- ---------- ---------- -------------
$ 482,454 $ 61,543 $ 57,526 $ 60,070 $ 65,106 $ 61,503 $ 176,706
============= ========== ========== ========== ========== ========== =============
(1) Total repayments are based upon borrowings outstanding as of September 30,
2003.
(2) Interest rate is assumed to be 5.5%. As of March 31, 2004, the
weighted-average interest rate on the credit facility was 4.96%. Due to a
$10.0 million pre-payment made on February 20,2004, offset by subsequent
credits, projected interest decreased approximately $0.5 million in FY
2004.
(3) Interest rate on Old Notes is 13.5% with payments starting in 2005.
(4) Interest rate on New Notes is 9.375% with payments starting in June 2004.
(5) Operating leases do not include payments due under renewals to the original
lease term.
On August 16, 1999, the Company entered into a $153.5 million senior credit
facility. The credit facility provides for (i) a $13.5 million senior secured
term loan ("Tranche I Term Loan") which matures on June 6, 2007 and (ii) a
$140.0 million senior secured term loan ("Tranche II Term Loan") which matures
on September 30, 2008. Under the Credit Agreement, the Company makes quarterly
payments which began on December 31, 2002 for Tranche I and March 31, 2004 for
Tranche II. The quarterly payments are predetermined based upon a percentage of
the aggregate balance and consist of (i) eight payments of 3.75%, (ii) four
payments of 5%, (iii) six payments of 7.143% and (iv) a final payment of 7.142%.
No amounts remain available for borrowing under the credit facility. The credit
facility is secured by all the assets of the Company and its restricted
subsidiaries. The interest rate for the credit facility is determined on a
margin above either the prime lending rate in the United States or the London
Interbank Offer Rate.
The credit facility contains ongoing financial covenants, including reaching
covered population targets, maximum annual spending on capital expenditures,
attaining minimum subscriber revenues, and maintaining certain leverage and
other ratios such as debt to total capitalization, debt to EBITDA (as defined in
the credit facility agreement, "Bank EBITDA") and Bank EBITDA to fixed charges.
The credit facility restricts the ability of the Company and its restricted
subsidiaries to: create liens; incur indebtedness; make certain payments,
including payments of dividends and distributions in respect of capital stock;
consolidate, merge and sell assets and engage in certain transactions with
affiliates. As of March 31, 2004, the Company was in compliance in all material
respects with covenants contained in the credit facility.
The Company entered into an amendment to the credit facility on November 30,
2003. Certain changes were effective for periods ended December 31, 2003 and are
used in determining compliance with financial covenants for periods ended
December 31, 2003 and thereafter. These changes include (i) changes to the
definition of Bank EBITDA to provide that, among other things, in determining
Bank EBITDA, certain additional items will be added back to our consolidated net
income or loss (to the extent deducted in determining such income or loss),
including any charges incurred in connection with the restructuring, up to $2.0
million per year to pursue claims against, or dispute claims by, Sprint and up
to $5.0 million in start-up costs in connection with any outsourcing of billing
and customer care services; (ii) calculating the ratio of total debt to Bank
EBITDA and senior secured debt to Bank EBITDA based on the four most recent
fiscal quarters, rather than the last two quarters annualized and (iii) deleting
the minimum subscriber covenant. In addition, the amendment provides for a
33
waiver, effective September 30, 2003, of the requirement that the Company obtain
an opinion from its independent auditors with respect to the financial
statements for the year ended September 30, 2003 that does not contain a going
concern or other similar qualification. Other changes include: (i) revising the
threshold requirements for minimum revenues and most of the ratios that we are
required to maintain; (ii) providing the ability to incur certain other limited
indebtedness and related liens; (iii) providing the ability to make certain
investments and form subsidiaries under limited circumstances that are not
subject to certain restrictive covenants contained in the credit facility or
required to guarantee the credit facility and (iv) permitting us to repurchase,
at a discount, the Old Notes or the New Notes from our cash on hand in an
aggregate amount not to exceed $25 million in value of those notes, provided
that we at the same time incur an equal amount of permitted subordinated
indebtedness.
The amendment will not affect any of the other provisions of the credit
facility, including those which restrict the Company's ability to merge,
consolidate or sell substantially all of its assets. In connection with the
amendment, the Company prepaid $10.0 million in principal under the credit
facility, which will be credited pro rata against principal payments otherwise
due in fiscal years 2004 and 2005 in the amount of $7.5 million and $2.5
million, respectively. The amendment did not otherwise affect the Company's
obligation to pay interest, premium, if any, or any other of the principal on
the credit facility, when due.
On February 20, 2004, the Company issued approximately $159.0 million in
aggregate principal amount of new senior subordinated secured notes that mature
on September 1, 2009 in exchange for Old Notes in an aggregate principal amount
of $298.5 million. The New Notes bear interest at the rate of 9 3/8% per year,
accruing from January 1, 2004, which is payable each January 1 and July 1,
beginning on July 1, 2004. The Company may redeem some or all of the New Notes
at any time on or after January 1, 2006 at specified redemption prices.
The New Notes are subordinated to up to $175.0 million of the Company's senior
debt under its credit facility and are fully and unconditionally guaranteed on a
senior subordinated basis by the Company's subsidiaries that guarantee the
Company's obligations under the credit facility. In addition, the New Notes are
secured by a second-priority lien, subject to certain exceptions and permitted
liens, on all the collateral that secures the Company's and its guarantor
subsidiaries' obligations under the Company's credit facility. If the Company
undergoes a change of control (as defined in the indenture that governs the New
Notes), then it must make an offer to repurchase the New Notes at 101% of the
principal amount of the notes then outstanding.
The New Notes contain covenants, subject to certain exceptions, that prohibit
the Company's ability to, among other things, incur more debt; create liens;
repurchase stock and make certain investments; pay dividends, make loans or
transfer property or assets; enter into sale and leaseback transactions,
transfer or dispose of substantially all of the Company's assets; or engage in
transactions with affiliates. Some exceptions to the restrictions on the
Company's ability to incur more debt include: up to $175 million of indebtedness
under the Company's credit facility; up to $5 million of capital lease
obligations; and up to $50 million of additional general indebtedness. As of
March 31, 2004, the Company was in compliance in all material respects with
covenants contained in the note indenture.
The Company has no off-balance sheet arrangements and has not entered into any
transactions involving unconsolidated, limited purpose variable interest
entities or commodity contracts.
As of March 31, 2004, two major credit rating agencies rate the Company's
unsecured debt. The ratings were as follows:
Type of facility S&P Moody's
---------------- --- -------
New Notes CCC- Caal
Credit Facility CCC+ B2
Related Party Transactions
See Note 3 to the condensed consolidated financial statements for a description
of transactions with Sprint.
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. The Company's fixed rate debt consists primarily of the carrying
value of the New Notes ($135.1 million including discounts of $23.9 million at
March 31, 2004) and the remaining accreted carrying value of the Old Notes ($1.7
million at March 31, 2004). The Company's variable rate debt consists of
borrowings made under the credit facility ($137.7 million outstanding at March
31, 2004). As of March 31, 2004, the weighted average interest rate under the
credit facility was 4.96%. Our primary interest rate risk exposures relate to
(i) the interest rate on long-term borrowings; (ii) our ability to refinance the
New 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.
34
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 New Notes, Old
Notes (net of original issue discount) and credit facility based on projected
levels of long-term indebtedness (dollars in thousands):
Years Ending September 30,
-------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter
-------------- ------------- -------------- ------------- -------------- --------------
New Notes $ 159,035 $ 159,035 $ 159,035 $ 159,035 $ 159,035 $ -
Fixed interest rate 9.375% 9.375% 9.375% 9.375% 9.375% 9.375%
Principal payments $ - $ - $ - $ - $ - $ 159,035
Credit facility $ 131,200 $ 110,000 $ 79,893 $ 40,000 $ - $ -
Variable interest rate (1) 5.5% 5.5% 5.5% 5.5% 5.5% -
Principal payments $ 20,275 $ 21,200 $ 30,107 $ 39,893 $ 40,000 $ -
Old Notes $ 1,778 $ 1,779 $ 1,781 $ 1,784 $ 1,788 $ -
Fixed interest rate 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Principal payments $ - $ - $ - $ - $ - $ 1,795
(1) The interest rate on the credit facility equals the London Interbank
Offered Rate ("LIBOR") +3.75%. LIBOR is assumed to equal 1.75% for all periods
presented. A 1% increase (decrease) in the variable interest rate would result
in a $0.8 million increase (decrease) in the related interest expense on an
average annual basis (based upon borrowings outstanding as of March 31, 2004).
Item 4. 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
Controller (our principal financial officer), as appropriate, to allow timely
decisions regarding required disclosure.
As of the end of the period covered by this report, March 31, 2004 (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 Controller (our principal financial officer), of the effectiveness
of the design and operation of our disclosure controls and procedures. Based
upon this evaluation, our Chief Executive Officer and Controller concluded that
our disclosure controls and procedures were effective as of the Evaluation Date.
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.
As was reported in our Form 10-K for our fiscal year ended September 30, 2003
and our Form 10-Q for our fiscal quarter ended December 31, 2003, we had a
reportable condition in our internal controls related to an accounts receivable
issue with Sprint. This reportable condition resulted from our reliance on
Sprint for financial information, including information relating to our revenues
and accounts receivable, which underlies a substantial portion of our periodic
financial statements and other financial disclosure.
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
35
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. Notwithstanding this reportable condition, we concluded that our
disclosure controls and procedures were effective as of September 30, 2002.
As previously disclosed, the reportable condition continued during our fiscal
year ended September 30, 2003 because most of the procedures implemented to
address the condition were not in place until the end of the fiscal year.
However, we reported in our Form 10-K for the 2003 fiscal year that, as a result
of the improved processes and procedures designed to address the reportable
condition, the Company believed no reportable condition existed by the end of
fiscal year September 30, 2003, but our independent auditors have not made that
finding. During fiscal 2004, we have continued to perform the enhanced internal
controls procedures adopted to address this reportable condition.
To avoid this reportable condition in the future, the Company will need to
continue the processes we have implemented as previously disclosed in prior
filings 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. Sprint provided this same level of detail at September
30, 2003, December 31, 2003, February 29, 2004 and March 31, 2004,
and the Company validated the report's integrity at each date. As of
February 29, 2004, Sprint agreed to provide the detailed listing of
subscriber receivables at the account level on a monthly basis.
o Perform a full reconciliation of the subscriber receivables detail to
the general ledger balance, including a complete understanding of all
reconciling items. During the six months ended March 31, 2004, the
Company performed a full reconciliation of the subscriber receivables
detail on a monthly basis.
o Perform a rollforward of the accounts receivable information to be
provided by Sprint and compare these amounts to our general ledger
accounts. During the six months ended March 31, 2004, the Company
performed a rollforward of the accounts receivable information
provided by Sprint on a monthly basis and reconciled it to the
Company's accounts receivable general ledger accounts.
Standing alone, the Company does not believe that the following issue raises a
material change in internal controls. However, because of the Company's unique
relationship with Sprint, we plan to disclose all changes in internal controls
with respect to financial information provided by Sprint which involves an item
in excess of $1,000,000 and on a select basis, those changes with respect to
financial information below this threshold.
As was reported in our Form 10-Q for the first quarter of fiscal 2004, in
January 2004, we were informed by Sprint of a table mapping error related to 3G
data settlements, which resulted in a $0.6 million reduction of roaming revenue.
Sprint's data settlement system erroneously linked IP addresses of 3G
subscribers to the wrong owners. Sprint identified the source of the problem and
solicited input from the affiliates to devise a system of detective controls to
ensure that this error would not go undetected beyond a single billing cycle in
the future. The following procedures were put in place during January 2004, to
ensure that future modifications to the table mapping are validated by Sprint
and audited and verified by the affiliates on a timely basis:
o Sprint now performs a quarterly review between Sprint and the Company's
Engineering and Settlement Departments to validate the 3G data
assignment tables used for affiliate settlements for accuracy and
completeness. This review was performed during the quarter ended March
31, 2004 and we were able to validate the tables.
o The Company's Settlement and Engineering Departments have added a
process to validate the accuracy and completeness of its 3G data IP
address assignments. For the quarter ended March 31, 2004, we validated
the accuracy and completeness of these assignments.
In preparation for the requirements imposed under Section 404 of the Sarbanes
Oxley Act of 2002, we retained an outside accounting firm to assist us in
documenting processes, identifying gaps and improving our internal control
processes, including our processes to verify data provided by Sprint. Beginning
January 2004, the outside accounting firm we retained began documenting
processes and identifying gaps in our internal controls with the Company's
management. During the quarter ended March 31, 2004, there were no changes to
internal control over financial reporting that have had, or are reasonably
likely to have, a material effect on our internal control over financial
reporting.
In light of the additional procedures adopted as described above and in our
prior periodic filings, we believe that the improvements made to our system of
internal control over financial reporting were appropriate and responsive to the
internal control over financial reporting reportable condition identified at
September 30, 2002 and 2003. We have continued to monitor the operation of our
improved internal control over financial reporting with respect to our Sprint
relationship, and have concluded that, as of March 31, 2004, such internal
control over financial reporting were effective.
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 to the condensed consolidated financial statements in this document.
Item 2. Changes in Securities and Use of Proceeds
In connection with the Recapitalization Plan described elsewhere in this Report,
the Company obtained consents of holders of 99.4% of the outstanding Old Notes
to:
o amend the Indenture governing the Old Notes to eliminate substantially
all of the restrictive covenants contained in the Old Notes Indenture,
and release all collateral securing the Company's obligations under
the Old Notes Indenture; and
o the waiver of any defaults and events of default under the Old Notes
Indenture that may have occurred in connection with the
Recapitalization Plan.
On February 20, 2004, the Company entered into a Supplemental Indenture
regarding the Old Notes. Among other things, the Supplemental Indenture deleted
the provisions of the Old Notes Indenture that relate to:
o the Company's ability to incur indebtedness;
o the Company's ability to make restricted payments;
o the Company's ability to make permitted investments;
o the Company's ability to issue and sell capital stock of subsidiaries;
o the Company's ability to enter into transactions with affiliates;
o the Company's ability to enter into sale and leaseback transactions;
o the Company's ability to create liens;
o the Company's ability to declare and pay dividends;
o the Company's and its subsidiaries' business activities;
o other payment restrictions affecting subsidiaries; and
o most events of default.
The foregoing summary of the Supplemental Indenture is qualified in its entirety
to the actual terms of the document, which is filed with the SEC on Form 8-K on
February 26, 2004.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
See Note 10 to the condensed consolidated financial statements in this document.
The proposals submitted to the shareholders at the Special Meeting received the
following votes:
Proposal For Against Abstain
-------- --- ------- -------
Approve the issuance in the restructuring of up to 56% of the
Company's issued and outstanding common stock immediately after
the restructuring 15,489,917 89,282 48,268
Approve the amendment and restatement of the Company's
certificate of incorporation to implement a 1-for-5 reverse
stock split 15,356,304 220,897 50,265
Approve the amendment and restatement of the 2002 AirGate PCS,
Inc. Long Term Incentive Plan to increase the number of shares
available and reserved for issuance thereunder, to make certain
other changes, and to approve the grant of certain
performance-vested restricted stock units and stock options to
certain executives of the Company 14,799,856 531,440 296,171
37
The consent proposals submitted to the holders of the Old Notes
received the following votes:
Proposal For Against
-------- --- -------
Removal of substantially all of the restrictive covenants in the
indenture governing the Old Notes, release collateral that secured
the Company's obligations thereunder and waive any defaults or
events of default that occur in connection with the restructuring 298,204,000 950,000
Acceptance from holders of the Old Notes of the Prepackaged Plan 259,359,200 950,000
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1) Exhibit 10.1 Employment Separation Agreement dated March 23, 2004 by and
between AirGate and William H. Seippel.
2) Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification
3) Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification
4) Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350
5) Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by the Company during the
quarter ended March 31, 2004:
On January 15, 2004, AirGate filed a Current Report on Form 8-K under Items 5
and 7 relating to a press release issued on January 14, 2004 announcing that it
had commenced an exchange offer to exchange newly-issued shares of its common
stock and newly-issued secured notes for its outstanding discount notes.
On February 2, 2004, AirGate filed a Current Report on Form 8-K under Item 12
relating to a press release announcing its financial and operating results for
the first quarter of fiscal 2004.
On February 12, 2004, AirGate filed a Current Report on Form 8-K under Items 5
and 7 relating to issued a press release announcing that its shareholders, at a
special meeting, had approved the company's recapitalization plan, that the
previously-announced exchange offers had expired, and that the company had
accepted all validly tendered and not withdrawn discount notes.
On February 17, 2004, AirGate filed a Current Report on Form 8-K under Item 9
relating to a press release announcing its financial and operating results for
its first fiscal quarter ended December 31, 2003.
On February 20, 2004, AirGate filed a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 5 and 7 relating to the
incorporation by reference of the consolidated balance sheets of AirGate PCS,
Inc. and subsidiaries as of September 30, 2003 and 2002, and the consolidated
statements of operations, stockholders' deficit and cash flow for each of the
years in the three-year period ended September 30, 2003. These financial
statements reflect a subsequent event for iPCS, Inc. becoming a discontinued
operation. In addition, the financial statements also reflect a 1-for-5 reverse
stock split of the outstanding shares of our capital stock effected on February
13, 2004.
On February 26, 2004, AirGate filed the following documents with the Securities
and Exchange Commission on Form 8-K under Items 5 and 7 : (i) Third Supplemental
Indenture, dated as of February 20, 2004, by and among AirGate PCS, Inc., AGW
Leasing Company, Inc., AirGate Network Services, LLC, AirGate Service Company,
Inc., and Deutsche Bank Trust Company Americas, and (ii) Indenture for 9-3/8%
senior subordinated secured notes due 2009, dated as of February 20, 2004, by
and among AirGate PCS, Inc., AGW Leasing Company, Inc., AirGate Network
Services, LLC, AirGate Service Company, Inc., and The Bank of New York.
On March 23, 2004, AirGate filed a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 5 relating to a press release
issued announcing that William H. Seippel, Vice President and Chief Financial
Officer, has resigned from the Company to pursue other interests.
38
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/ Louis E. Martinez
------------------------
Louis E. Martinez
Title: Corporate Controller
(Duly Authorized Officer, Principal Financial
and Chief Accounting Officer)
Date: May 14, 2004
39