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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
Commission File Number: 027455
AirGate PCS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-2422929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Harris Tower, 233 Peachtree St. NE, Suite 1700,
Atlanta, Georgia 30303
(Address of principal executive offices) (Zip code)
(404) 525-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
5,192,238 shares of common stock, $0.01 par value, were outstanding as of
February 13, 2004.
AIRGATE PCS, INC.
FIRST QUARTER REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.................................................3
Consolidated Balance Sheets at December 31, 2003 (unaudited)
and September 30, 2003............................................3
Consolidated Statements of Operations for the three months
ended December 31, 2003 and 2002 (unaudited)......................4
Consolidated Statements of Cash Flows for the three months
ended December 31, 2003 and 2002 (unaudited)......................5
Notes to Consolidated Financial Statements (unaudited)...............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........29
Item 4. Controls and Procedures.............................................30
PART II OTHER INFORMATION...................................................34
Item 1. Legal Proceedings...................................................34
Item 2. Changes in Securities and Use of Proceeds...........................34
Item 3. Defaults Upon Senior Securities.....................................34
Item 4. Submission of Matters to a Vote of Security Holders.................34
Item 5. Other Information...................................................35
Item 6. Exhibits and Reports on Form 8-K....................................35
PART I. FINANCIAL INFORMATION
Item 1. -- Financial Statements
AIRGATE PCS, INC. AND SUBSIDIARIES
CONCOLIDATED BALANCE SHEETS
December 31, September 30,
2003 2003
----------------- -----------------
(unaudited)
(Dollars in thousands,
except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents $ 60,043 $ 54,078
Accounts receivable, net of allowance for doubtful
accounts of $4,203 and $4,635 20,997 26,994
Receivable from Sprint 15,728 15,809
Inventories 2,606 2,132
Prepaid expense 5,722 2,107
Other current assets 252 145
----------------- -----------------
Total current assets 105,348 101,265
Property and equipment, net of accumulated
depreciation and Amortization of $141,753 and $129,986 167,902 178,070
Financing costs 6,568 6,682
Direct subscriber activation costs 3,219 3,907
Other assets 997 992
----------------- -----------------
Total assets $ 284,034 $ 290,916
================= =================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 5,237 $ 5,945
Accrued expense 7,887 12,104
Payable to Sprint 46,056 45,069
Deferred revenue 8,291 7,854
Current maturities of long-term debt 23,194 17,775
----------------- -----------------
Total current liabilities 90,665 88,747
Deferred subscriber activation fee revenue 5,521 6,701
Other long-term liabilities 2,000 1,841
Long-term debt, excluding current maturities 389,734 386,509
Investment in iPCS - 184,115
----------------- -----------------
Total liabilities 487,920 667,913
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; 5,192,238 shares issued and
outstanding at December 31, 2003 and September 30, 2003 52 52
Additional paid-in-capital 924,095 924,095
Unearned stock compensation (97) (203)
Accumulated deficit (1,127,936) (1,300,941)
----------------- -----------------
Total stockholders' deficit (203,886) (376,997)
----------------- -----------------
Total liabilities and stockholders' deficit $ 284,034 $ 290,916
================= =================
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Quarters Ended
December 31,
----------------------------
2003 2002
------------ -------------
(Dollars in thousands, except
share and per share amounts)
Revenue:
Service revenue $ 62,173 $ 59,933
Roaming revenue 16,483 18,910
Equipment revenue 2,847 3,022
------------ -------------
Total revenue 81,503 81,865
Operating Expense:
Cost of service and roaming (exclusive of
depreciation and amortization as
shown separately below) 42,465 51,384
Cost of equipment 6,586 6,847
Selling and marketing expense 14,125 16,797
General and administrative expense 6,407 4,077
Non-cash stock compensation expense 106 176
Depreciation and amortization of property
and equipment 11,767 11,619
Loss (gain) on disposal of property and equipment (2) 198
------------ -------------
Total operating expense 81,454 91,098
------------ -------------
Operating income (loss) 49 (9,233)
Interest income 157 -
Interest expense (11,316) (10,194)
------------ -------------
Loss from continuing operations before
income tax (11,110) (19,427)
Income tax - -
------------- -------------
Loss from continuing operations (11,110) (19,427)
Discontinued Operations:
Loss from discontinued operations - (28,247)
Gain on disposal of discontinued operations
net of $0 income tax expense 184,115 -
------------- -------------
Income (loss) from discontinued operations 184,115 (28,247)
------------- -------------
Net income (loss) $ 173,005 $ (47,674)
============= =============
Basic and diluted weighted-average number of
shares outstanding 5,192,238 5,164,830
Basic and diluted earnings (loss) per share:
Loss from continuing operations $ (2.14) $ (3.76)
Income (loss) from discontinued operations 35.46 (5.47)
------------- -------------
Net income (loss) $ 33.32 $ (9.23)
============= =============
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Quarters Ended
December 31,
------------------------------------
2003 2002
----------------- -----------------
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss) $ 173,005 $ (47,674)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Gain on disposal of discontinued operations (184,115) -
Loss from discontinued operations - 28,247
Depreciation and amortization of property and equipment 11,767 11,619
Amortization of financing costs into interest expense 305 302
Provision for doubtful accounts 405 2,186
Interest expense associated with accretion of discounts 9,150 7,970
Non-cash stock compensation 106 176
Loss (gain) on disposal of property and equipment (2) 198
Changes in assets and liabilities:
Accounts receivable 5,592 (923)
Receivable from Sprint 81 (850)
Inventories (474) 758
Prepaid expenses, other current and non-current assets (3,039) (2,818)
Accounts payable, accrued expenses and other long term liabilities (5,944) (3,045)
Payable to Sprint 987 (231)
Deferred revenue 437 1,274
------------- -----------
Net cash provided by (used in) operating activities 8,261 (2,811)
------------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,599) (5,626)
------------- -----------
Net cash used in investing activities (1,599) (5,626)
------------- -----------
Cash flows from financing activities:
Borrowings under credit facility - 5,000
Repayments of credit facility (506) (506)
Financing cost on credit facility (191) -
------------- ------------
Net cash provided by (used in) financing activities (697) 4,494
------------- ------------
Net increase (decrease) in cash and cash equivalents 5,965 (3,943)
Cash and cash equivalents at beginning of period 54,078 4,887
------------- ------------
Cash and cash equivalents at end of period $ 60,043 $ 944
============= ============
Supplemental disclosure of cash flow information:
Interest paid $ 2,076 $ 1,954
Supplemental disclosure for non-cash investing activities:
Capitalized interest 30 114
See accompanying notes to the unaudited consolidated financial statements.
AIRGATE PCS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(unaudited)
(1) Business, Basis of Presentation and Liquidity
(a) Basis of Presentation
The accompanying unaudited 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 consolidated
financial statements for the interim periods. The consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K/A and Amendment No. 2 to 10-K/A (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 ended December 31, 2003 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 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 names in a defined territory. The
accompanying consolidated financial statements include the accounts of AirGate
PCS, Inc. and its wholly-owned restricted subsidiaries, AGW Leasing Company,
Inc., AirGate Service Company, Inc. and AirGate Network Services, LLC for all
periods presented.
On November 30, 2001, we acquired iPCS, Inc. and its subsidiaries ("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 through March 2002 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 than expected growth. In
addition, iPCS' problems were compounded because it was earlier in its life
cycle when growth slowed, had approximately one-third fewer subscribers than the
Company, and a less complete network.
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 will undergo 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. Consequently, 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 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 for "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
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 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 $203.9 million at December 31, 2003. For
the quarter ended December 31, 2003, the Company's loss from continuing
operations amounted to $11.1 million. As of December 31, 2003, the Company had
working capital of $14.7 million and cash and cash equivalents of $60.0 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 approximately $303.6 million to
purchase property and equipment. While much of the Company's network is now
complete and capital expenditures are expected to be lower than prior years,
such expenditures will continue to be necessary.
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, under our
current business plan, 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 under its current business plan, 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 proposed a financial
restructuring (the "Recapitalization Plan") as follows:
On January 14, 2004, the Company commenced 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, and;
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 called a Special Meeting of Shareholders ("Special
Meeting") at which it asked its shareholders to:
o Approve the issuance in the restructuring of up to 56% of the Company's
issued and outstanding common stock immediately after the restructuring;
o Approve the amendment and restatement of the Company's certificate of
incorporation to implement a 1-for-5 reverse stock split; and
o 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.
Pursuant to the Proxy Statement for the Special Meeting, the Company also
solicited acceptances to the Prepackaged Plan from its shareholders.
On February 12, 2004, the Company's shareholders approved the proposals
discussed above. On the same date, the exchange offers expired and the Company
accepted all $298,204,000 of Old Notes (or 99.4% of the Old Notes outstanding)
that were validly tendered and not withdrawn in the exchange offers. On February
13, 2004, the Company effected the 1-for-5 reverse stock split. The Company
anticipates settling the Recapitalization Plan on February 20, 2004.
(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 is
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 did not have a material impact on our results of
operations, financial position or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "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 in variable interest
entities created after January 31, 2003, and to variable interests in variable
interest entities obtained after January 31, 2003. The Interpretation is
generally effective for interim periods ending after December 15, 2003 for all
variable interests in variable interest entities created prior to January 31,
2003. We do not have any variable interest entity arrangements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation from the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting, and has adopted the
disclosure requirements of SFAS No. 123 and 148.
In November 2002, the 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
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 and other Sprint network partners' PCS
territories. These transactions are recorded in roaming revenue, cost of service
and roaming, cost of equipment, and selling and marketing expense captions in
the accompanying consolidated statements of operations. Cost of service and
roaming transactions include the 8% affiliation fee, long distance charges,
roaming expense and costs of services such as billing, collections, customer
service and pass-through expenses. Cost of equipment transactions relate to
inventory purchased by the Company from Sprint under the Sprint Agreements.
Selling and marketing transactions relate to subsidized costs on handsets and
commissions paid by the Company under Sprint's national distribution programs.
Amounts recorded relating to the Sprint Agreements for the three months ended
December 31, 2003 and 2002 are as follows:
For the Quarters Ended
December 31,
----------------------------------
2003 2002
---------------- ----------------
(Dollars in thousands)
Amounts included in the Consolidated
Statements of Operations:
Roaming revenue $ 15,747 $ 17,690
Cost of service and roaming:
Roaming $ 13,274 $ 14,852
Customer service 5,189 11,303
Affiliation fee 4,699 4,836
Long distance 3,268 2,785
Other 588 494
---------------- ----------------
Total cost of service and roaming $ 27,018 $ 34,270
================ ================
Purchased inventory $ 7,328 $ 5,650
================ ================
Selling and marketing $ 4,993 $ 3,101
================ ================
As of
----------------------------------
December 31, September 30,
2003 2003
---------------- ----------------
(Dollars in thousands)
Receivable from Sprint $ 15,728 $ 15,809
Payable to Sprint $ (46,056) $ (45,069)
Because approximately 96% of our revenue is collected by Sprint and 64% of cost
of service and roaming in our financial statements 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 approximately $0.4 million for fiscal year 2002
and $1.0 million (net of a $0.4 million credit as a result of the 2003
service bureau fee true-up) for fiscal year 2003, respectively to reimburse
Sprint for certain 3G related development expenses. For the quarter ended
December 31, 2003, Sprint invoiced the Company approximately $0.7 million.
We are disputing Sprint's right to charge 3G fees in 2002 and beyond.
o Sprint invoiced the Company 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 quarter ended December 31, 2003, Sprint invoiced the
Company approximately $0.5 million. We are disputing Sprint's right to
charge software maintenance fees.
o Sprint invoiced the Company $1.3 million (net of a $1.4 million credit
related to the service bureau fee true-up and a $1.2 million credit
resulting from Sprint's decision to discontinue their billing system
conversion) for the fiscal year 2003 and $1.2 million for the quarter ended
December 31, 2003 for the cost of IT projects completed by Sprint. We are
disputing Sprint's right to collect these fees.
The payable to Sprint includes disputed amounts for which Sprint has invoiced
the Company approximately $9.2 million. The invoiced amount does not include
$2.7 million 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 agreements with Sprint, which, together with other cash remittance issues,
has resulted in a shortfall in cash payments to the Company. Sprint 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 agreements
with Sprint.
During the quarter ended December 31, 2003, the Company recorded $0.9 million as
a reduction of roaming revenue and $1.2 million in credits from Sprint as a
reduction of cost of service. The $0.9 million reduction of roaming revenue
resulted from a correction to Sprint's billing system with respect to
data-related inbound roaming revenue, which the Company continues to examine.
The $1.2 million credit resulted from Sprint's decision to discontinue their
billing system conversion. Sprint had previously billed and passed on to us
their development costs as part of the IT service bureau fee we were charged.
This credit positively affects the quarterly results; however, it is a non-cash
item that was previously disputed and not paid.
Sprint determines monthly service charges at the beginning of each calendar
year. Sprint takes the position that at the end of each year, it calculates the
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. For the quarters ended December
31, 2003 and 2002, Sprint credited the Company $2.6 million and $1.3 million for
the calendar years 2003 and 2002, respectively, which were recorded as a
reduction to cost of service. The calendar year 2003 service bureau fee true-up
included $1.9 million in previously disputed amounts; therefore cash proceeds
from Sprint of $0.7 million will be received during the quarter ended March 31,
2003.
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
December 31, 2003.
(4) Litigation
In May 2002, putative class action complaints were filed in the United States
District Court for the Northern District of Georgia against AirGate PCS, Inc.,
Thomas M. Dougherty, Barbara L. Blackford, Alan B. Catherall, Credit Suisse
First Boston, Lehman Brothers, UBS Warburg LLC, William Blair & Company, Thomas
Wiesel Partners LLC and TD Securities. The complaints do not specify an amount
or range of damages that the plaintiffs are seeking. The complaints seek class
certification and allege that the prospectus used in connection with the
secondary offering of Company stock by certain former iPCS shareholders on
December 18, 2001 contained materially false and misleading statements and
omitted material information necessary to make the statements in the prospectus
not false and misleading. The alleged omissions included (i) failure to disclose
that in order to complete an effective integration of iPCS, drastic changes
would have to be made to the Company's distribution channels, (ii) failure to
disclose that the sales force in the acquired iPCS markets would require
extensive restructuring and (iii) failure to disclose that the "churn" or
"turnover" rate for subscribers would increase as a result of an increase in the
amount of sub-prime credit quality subscribers the Company added from its merger
with iPCS. On July 15, 2002, certain plaintiffs and their counsel filed a motion
seeking appointment as lead plaintiffs and lead counsel. Subsequently, the court
denied 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.
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 ended December 31, 2003 and 2002, 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 did not impact the Company's net operating loss
carryforwards as the disposition resulted in a non-deductible loss for tax
purposes.
(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 the date of the transfer, 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. The following
reflects the income (loss) from discontinued operations of iPCS for the quarters
ended December 31, 2003 and 2002 (dollars in thousands):
For the Quarters Ended
December 31,
--------------------------------
2003 2002
--------------- --------------
Revenue $ - $ 51,535
Cost of revenue - 42,003
Selling and marketing - 12,106
General and administrative - 3,331
Depreciation and amortization - 13,271
--------------- --------------
Operating expense - 70,711
--------------- --------------
Operating loss - (19,176)
Interest expense, net - (9,071)
--------------- --------------
Loss from discontinued operations - (28,247)
Gain on disposal of discontinued
operations net of $0 income tax expense 184,115 -
--------------- --------------
Income (loss) from discontinued
operations $ 184,115 $ (28,247)
=============== ==============
(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 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 Securities and
Exchange Commission on September 27, 1999.
AirGate Network Services LLC ("ANS") is a wholly-owned restricted subsidiary of
the Company. ANS has fully and unconditionally guaranteed the 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 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 consolidated financial statements
for the Company and its guarantor subsidiaries, as listed above, as of December
31, 2003 and September 30, 2003 and for the quarters ended December 31, 2003 and
2002 (dollars in thousands):
Unaudited Condensed Consolidating Balance Sheets
As of December 31, 2003
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
------------- -------------- ------------- -------------
Cash and cash equivalents $ 60,043 $ - $ - $ 60,043
Other current assets 106,300 529 (61,524) 45,305
------------- -------------- ------------- -------------
Total current assets 166,343 529 (61,524) 105,348
Property and equipment, net 133,264 34,638 - 167,902
Other noncurrent assets 10,784 - - 10,784
------------- -------------- ------------- -------------
Total assets $ 310,391 $ 35,167 $ (61,524) $ 284,034
============= ============== ============= =============
Current liabilities $ 90,967 $ 61,222 $ (61,524) $ 90,665
Intercompany (113,721) 113,721 - -
Long-term debt 389,734 - - 389,734
Other long-term liabilities 7,521 - - 7,521
Investment in subsidiaries 139,776 - (139,776) -
------------- -------------- ------------- -------------
Total liabilities 514,277 174,943 (201,300) 487,920
------------- -------------- ------------- -------------
Stockholders' deficit (203,886) (139,776) 139,776 (203,886)
------------- -------------- ------------- -------------
Total liabilities and stockholders' deficit $ 310,391 $ 35,167 $ (61,524) $ 284,034
============= ============== ============= =============
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
============ ============= ============= =============
Unaudited Condensed Consolidating Statement of Operations
For the Quarter Ended December 31, 2003
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
------------- ------------ ------------ -------------
Revenue $ 81,503 $ - $ - $ 81,503
Cost of revenue 44,850 4,201 - 49,051
Selling and marketing 13,615 510 - 14,125
General and administrative 6,287 120 - 6,407
Non-cash stock compensation expense 106 - - 106
Depreciation and amortization of property and equipment 9,401 2,366 - 11,767
Gain on disposal of property and equipment (2) - - (2)
------------- ------------ ----------- -------------
Total operating expense 74,257 7,197 - 81,454
------------- ------------ ----------- -------------
Operating income (loss) 7,246 (7,197) - 49
Loss in subsidiaries (7,167) - 7,167 -
Interest income 157 - - 157
Interest expense (11,346) 30 - (11,316)
------------- ------------ ----------- -------------
Loss from continuing operations before income tax (11,110) (7,167) 7,167 (11,110)
Income tax - - - -
------------- ------------ ----------- -------------
Loss from continuing operations (11,110) (7,167) 7,167 (11,110)
Income from discontinued operations 184,115 - - 184,115
------------- ------------ ----------- -------------
Net income (loss) $ 173,005 $ (7,167) $ 7,167 $ 173,005
============= ============ =========== =============
Unaudited Condensed Consolidating Statement of Operations
For the Quarter Ended December 31, 2002
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
------------- ------------- -------------- --------------
Revenue $ 81,865 $ - $ - $ 81,865
Cost of revenue 53,898 4,333 - 58,231
Selling and marketing 16,039 758 - 16,797
General and administrative 3,347 730 - 4,077
Non-cash stock compensation expense 176 - - 176
Depreciation and amortization of property and equipment 9,176 2,443 - 11,619
Loss on disposal of property and equipment 198 - - 198
------------- ------------- -------------- --------------
Total operating expense 82,834 8,264 - 91,098
------------- ------------- -------------- --------------
Operating loss (969) (8,264) - (9,233)
Loss in subsidiaries (8,150) - 8,150 -
Interest income (114) 114 - -
Interest expense (10,194) - - (10,194)
------------- ------------- -------------- --------------
Loss from continuing operations before income tax (19,427) (8,150) 8,150 (19,427)
Income tax - - - -
------------- ------------- -------------- --------------
Loss from continuing operations (19,427) (8,150) 8,150 (19,427)
Loss from discontinued operations (28,247) - - (28,247)
------------- ------------- -------------- --------------
Net loss $ (47,674) $ (8,150) $ 8,150 $ (47,674)
============= ============= ============== ==============
Unaudited Condensed Consolidating Statement of Cash Flows
For the Quarter Ended December 31, 2003
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
------------- ------------- ------------ -------------
Operating activities, net $ 8,261 $ - $ - $ 8,261
Investing activities, net (1,599) - - (1,599)
Financing activities, net (697) - - (697)
------------- ------------- ------------ -------------
Change in cash and cash equivalents 5,965 - - 5,965
Cash and cash equivalents at beginning of period 54,078 - - 54,078
------------- ------------- ------------ -------------
Cash and cash equivalents at end of period $ 60,043 $ - $ - $ 60,043
============= ============= ============ =============
Unaudited Condensed Consolidating Statement of Cash Flows
For the Quarter Ended December 31, 2002
AirGate
AirGate PCS, Guarantor
Inc. Subsidiaries Eliminations Consolidated
------------- -------------- ------------ -------------
Operating activities, net $ (2,683) $ (128) $ - $ (2,811)
Investing activities, net (5,626) - - (5,626)
Financing activities, net 4,494 - - 4,494
------------- -------------- ------------ -------------
Change in cash and cash equivalents (3,815) (128) - (3,943)
Cash and cash equivalents at beginning of period 4,769 118 - 4,887
------------- -------------- ------------ -------------
Cash and cash equivalents at end of period $ 954 $ (10) $ - $ 944
============= ============== ============ =============
(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.
Potentially dilutive securities of 17,939 and 8,358 for the quarters ended
December 31, 2003 and 2002 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.
(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." Accordingly, as the fair market value on the date of grant was
equal to the exercise price, we did not recognize any compensation expense.
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
quarters ended December 31, 2003 and 2002, the pro forma net income (loss) and
earnings (loss) per share would have been as follows:
For the Quarters Ended
December 31,
-----------------------------------
2003 2002
---------------- -----------------
(Dollars in thousands, except per share data)
Net income (loss), as reported $ 173,005 $ (47,674)
Add: stock based compensation expense included in determination of net income (loss) 106 176
Less: stock based compensation expense determined under the fair value based method (2,383) (2,426)
---------------- -----------------
Pro forma, net income (loss) $ 170,728 $ (49,924)
================ =================
Basic and diluted earnings (loss) per share:
As reported $ 33.32 $ (9.23)
Pro forma $ 32.88 $ (9.67)
(10) Subsequent Events
Recapitalization Plan
On January 14, 2004, we commenced public and private offers to exchange newly
issued shares of common stock and newly issued secured notes for all of the Old
Notes. Under the offers, each holder of the Company's Old Notes will receive,
for each $1,000 of aggregate principal amount due at maturity that is tendered,
110.1384 shares of the Company's pre-split common stock and prior to the reverse
stock-split and $533.33 in principal amount of the Company's New Notes.
On February 12, 2004, at a Special Meeting of Shareholders, our shareholders
approved (i) the issuance in the exchange offers of up to 56% of our issued and
outstanding common stock, (ii) an amendment and restatement of our certificate
of incorporation to implement a 1-for-5 reverse stock split and (iii) an
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 restricted
stock units and stock options to certain executives of the Company.
Also on February 12, 2004, the exchange offers expired and we accepted all
$298,204,000 of Old Notes (or 99.4% of the Old Notes outstanding) that were
validly tendered and not withdrawn in the exchange offers. On February 17, 2004,
our stock began trading on a post split basis. We anticipate settling the
exchange offers on February 20, 2004.
Reverse Stock Split
As a result of the reverse stock split, shareholders will receive one share of
common stock, and cash resulting from the elimination of any fractional shares,
in exchange for each five shares of common stock currently outstanding. Unless
otherwise indicated, all shares and per share amounts have been restated to give
retroactive effect to this 1-for-5 reverse stock split.
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 in the
Non-GAAP Financial Measures and Key Operating Metrics), roaming rates, EBITDA
(as defined in the 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; 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,
elsewhere in this report and the incorporated reports. Moreover, we caution you
not to place undue reliance on these forward-looking statements, which speak
only as of the date they were made. 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. Except as required under federal securities
law and the rules and regulations of the SEC, we do not have any intention or
obligation to update publicly any forward looking statements after distribution
of this report, whether as a result of new information, future events, changes
in assumptions or otherwise.
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 December 31, 2003, the Company had 359,898 subscribers and total network
coverage of approximately 6.2 million residents, representing approximately 83%
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 through March 2002 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 than expected growth. In
addition, iPCS' problems were compounded because it was earlier in its lifecycle
when growth slowed, had approximately one-third fewer subscribers than the
Company, and a less complete network.
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, the Company will undergo 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. Consequently, 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.
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 and it is classified as equipment revenue and cost of
equipment, respectively. 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 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
Issue 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 and accessories
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 retains 8% of collected service revenue from subscribers based in the
Company's markets and from non-Sprint subscribers who roam onto the Company's
network. The amount of affiliation 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 (outbound roaming
and roaming revenue from Sprint PCS and its PCS network partner subscribers) 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, late payment fees and early cancellation fees that
it anticipates will not be collected. The reserves for billing adjustments, 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.
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. The Company believes that the re-imposition of
and increase in deposit requirements and the continuation of spending limits for
sub-prime credit customers are sufficient to mitigate the collection risk.
Additionally, the Company has experienced improvements in the credit quality of
its subscriber base. Accordingly, in March 2003 the Company ceased recording
this reserve. At December 31, 2002, there was approximately $0.7 million
reserved for 4,187 first payment default subscribers.
Valuation and Recoverability of Long-Lived Assets
Long-lived assets such as property and equipment represent approximately 59% of
the Company's total assets as of December 31, 2003. 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 up to 15 years for towers, 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 analyses are
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 consolidated financial statements for a description of
significant new accounting pronouncements and their impact on the Company.
Results of Operations
For the quarter ended December 31, 2003 compared to the quarter ended December
31, 2002:
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 purchase. When handsets are
returned to the Company, the Company may be able to reissue the handsets to
subscribers at little additional cost. When handsets are returned to Sprint for
refurbishing, the Company receives a credit from Sprint.
For the Quarters Ended December 31,
------------------------------------------------------
Increase Increase
2003 2002 (Decrease) (Decrease)%
------------ ------------ ------------ ------------
(Dollars in thousands)
Service revenue $ 62,173 $ 59,933 $ 2,240 3.7%
Roaming revenue 16,483 18,910 (2,427) (12.8%)
Equipment revenue 2,847 3,022 (175) (5.8%)
------------ ------------ ------------ -----------
Total $ 81,503 $ 81,865 $ (362) (0.4%)
============ ============ ============ ===========
Service Revenue
The increase in service revenue for the quarter ended December 31, 2003 over the
same quarter in the previous year reflects a higher average number of
subscribers using our network, relatively consistent average revenue per
subscriber and higher monthly recurring revenue and feature charges, partially
offset by 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 of our subscribers has decreased while the number of minutes used for
PCS to PCS calls has increased from an average of 6 million to approximately 80
million minutes per month.
Roaming Revenue
The decrease in roaming revenue for the quarter ended December 31, 2003 over the
same quarter in 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 among Sprint and its PCS network partners, including the Company,
declined from $0.10 per minute of use to $0.058 in calendar years 2002 and 2003,
respectively. In December 2003, Sprint reduced the rate to $0.041 per minute for
calendar year 2004. The Company believes that these reductions are in violation
of our agreements with Sprint. Roaming revenue was also adversely affected for
the quarter ended December 31, 2003 as a result of the $0.9 million charge
resulting from a correction to Sprint's billing system with respect to
data-related inbound roaming revenues. For the quarter ended December 31, 2003,
the Company's roaming revenue from Sprint and its PCS network partners was $15.7
million, or approximately 96% of the roaming revenue, compared to $17.7 million
or approximately 94% for the quarter ended December 31, 2002.
Equipment Revenue
Equipment revenue for the quarter ended December 31, 2003 decreased over the
same quarter in the previous year, primarily due to lower gross additions and
higher handset rebates, partially offset by higher sales of new or upgraded
handsets to existing subscribers.
Cost of Service and Roaming
Cost of service and roaming principally consists of costs to support the
Company's subscriber base including:
* Roaming expense;
* 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);
* Bad debt expense related to estimated uncollectible accounts receivable;
* Wireless handset subsidies on existing subscriber upgrades through national
third-party retailers; and
* Other cost of service, which includes:
* Back office services provided by Sprint such as customer care, billing
and activation;
* The 8% of collected service revenue representing the Sprint
affiliation fee; and
* 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 December 31,
----------------------------------------------------
Increase Increase
2003 2002 (Decrease) (Decrease)%
------------ ------------ ------------ -----------
(Dollars in thousands)
Roaming expense $ 13,788 $ 15,667 $ (1,879) (12.0%)
Network operating costs 15,969 15,151 818 5.4%
Bad debt expense 405 2,186 (1,781) (81.5%)
Wireless handset subsidies 790 1,583 (793) (50.1%)
Other cost of service 11,513 16,797 (5,284) (31.5%)
------------ ------------ ----------- ----------
Total cost of service and roaming $ 42,465 $ 51,384 $ (8,919) (17.4%)
============ ============ =========== ==========
Roaming Expense
Roaming expense decreased for the quarter ended December 31, 2003 compared to
the same quarter in the previous year as a result of the decrease in the
reciprocal roaming rate charged among Sprint and its network partners. Cost of
roaming of 96% and 95% was attributable to Sprint and its network partners for
the quarters ended December 31, 2003 and 2002, respectively.
Network Operating Costs
Network operating costs increased for the quarter ended December 31, 2003
compared to the same quarter in the previous year as a result of higher property
taxes and increased subscriber usage including long distance service, partially
offset by decreased interconnect charges.
Bad Debt Expense
Bad debt expense decreased for the quarter ended December 31, 2003 compared to
the same quarter in the previous year. 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 have 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 through
national third-party retailers decreased for the quarter ended December 31, 2003
compared to the same quarter in the previous year as a result of reduced per
subscriber subsidies paid to national third-party retailers. The reduction in
subsidies paid to national third-party retailers for upgrades decreased as the
amounts of rebates and promotions offered directly to our customers through our
national third party channels increased.
Other Cost of Service
Other cost of service decreased for the quarter ended December 31, 2003 compared
to the same quarter in the previous year. The decrease was attributable to lower
customer service costs, a $2.6 million customer service settlement credit from
Sprint for calendar year 2003 and a $1.2 million special settlement resulting
from Sprint's decision to discontinue their billing system conversion.
Cost of Equipment, Interest and Other Operating Expenses
For the Quarters Ended December 31,
----------------------------------------------------------
2003 2002 (Decrease) (Decrease) %
-------------- ------------- ------------ -------------
(Dollars in thousands)
Cost of equipment $ 6,586 $ 6,847 $ (261) (3.8%)
Selling and marketing expense 14,125 16,797 (2,672) (15.9%)
General and administrative expense 6,407 4,077 2,330 57.1%
Non-cash stock compensation expense 106 176 (70) (39.8%)
Depreciation and amortization of property and equipment 11,767 11,619 148 1.3%
Loss (gain) on disposal of property
and equipment (2) 198 200 101.0%
Interest income 157 - 157 N/M
Interest expense 11,316 10,194 1,122 11.0%
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 decreased for
the quarter ended December 31, 2003 compared to the same quarter in the previous
year primarily as a result of decreased subscriber gross additions, partially
offset by increased retail upgrade sales for handsets to existing subscribers.
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 on
units sold by national third-party retailers, the Company's business sales
channel 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 decreased for the quarter ended
December 31, 2003 compared to the same period in 2002 reflecting the effect of
reduced subscriber gross additions, reduced advertising and promotion expense
and staff reductions and store closings implemented in fiscal 2003, partially
offset by increased expenses of approximately $1.1 million for handset upgrade
costs through our national third party channels.
General and Administrative Expense
General and administrative expense increased for the quarter ended December 31,
2003 compared to the same period in 2002 primarily reflecting increased spending
for costs associated with the proposed Recapitalization Plan of $2.3 million.
Depreciation and Amortization of Property and Equipment
The Company capitalizes network development costs incurred to ready its network
for use and costs incurred to build-out its 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 December 31, 2003 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 $1.6 million of property and equipment in the quarter ended
December 31, 2003, which included approximately $0.03 million of capitalized
interest, compared to property and equipment purchases of $5.6 million and
capitalized interest of $0.1 million in the quarter ended December 31, 2002.
Interest Expense
Interest expense increased for the quarter ended December 31, 2003 compared to
the same quarter of the previous year as a result of increased borrowings under
the credit facility and amortization of the discount on the Old Notes, partially
offset by a decline in interest rates on the credit facility. The Company had
outstanding credit facility borrowings of $151.0 million at a weighted average
interest rate of 4.99% at December 31, 2003, compared to $141.0 million at a
weighted average interest rate of 5.5% at December 31, 2002.
Income Tax
No income tax expense was realized for the quarters ended December 31, 2003 and
2002.
Loss from Continuing Operations
For the quarter ended December 31, 2003, loss from continuing operations
improved to $11.1 million compared to $19.4 million for the same quarter 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
proposed Recapitalization Plan of $2.3 million.
Income (Loss) from Discontinued Operations
Discontinued operations is comprised of a $184.1 non-monetary gain from the
elimination of the investment in iPCS for the quarter ended December 31, 2003
and a loss from iPCS of $28.3 million during the quarter ended December 31,
2002.
Net Income (Loss)
For the quarter ended December 31, 2003, net income of $173.0 million included a
non-monetary gain of $184.1 million related to the disposal of discontinued
operations of iPCS and a $11.1 million loss from continuing operations. For the
quarter ended December 31, 2002, net loss of $47.7 million included a $19.4
million loss from continuing operations and a loss of $28.3 million from
discontinued operations.
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 also assist
management in budgeting and CPGA also assists management in quantifying the
incremental costs to acquire a new subscriber. Except for churn and net
subscriber additions, we have included a reconciliation of these metrics to the
most directly comparable GAAP financial measure. Churn and subscriber net
additions are operating statistics with no comparable GAAP financial measure.
ARPU and CPGA are supplements to GAAP financial information and should not be
considered an alternative to, or more meaningful than, revenues, expenses, 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. We have also provided a reconciliation to net cash provided by (used
in) operating activities as supplemental information. EBITDA is a supplement to
GAAP financial information and should not be considered an alternative to, or
more meaningful than, net income (loss), loss from continuing operations, cash
flow 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, cash flow 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 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 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), 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.
The tables, which follow present and reconcile non-GAAP financial measures and
key operating metrics for the Company for the quarters ended December 31, 2003
and 2002.
The table below sets forth key operating metrics for the Company for the
quarters ended December 31, 2003 and 2002 (dollars in thousands, except unit and
per unit data):
For the Quarters Ended December 31,
-------------------------------------------------------
Increase Increase
2003 2002 (Decrease)$ (Decrease) %
---------- ------------- ------------ -------------
Total subscribers, end of period 359,898 352,809 7,089 2.0%
Subscriber gross additions 35,601 55,621 (20,020) (36.0%)
Subscriber net additions 438 13,670 (13,232) (96.8%)
ARPU $ 57.62 $ 57.74 $ (0.12) (0.2%)
Churn 3.10% 3.43% (0.33%) N/M
CPGA $ 508 $ 375 $ 133 35.6%
EBITDA $ 11,816 $ 2,386 $ 9,430 395.2%
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 December 31,
----------------------------------------------
Increase Increase
2003 2002 (Decrease)$ (Decrease)%
--------- --------- ----------- ---------
Average Revenue Per User (ARPU):
Service revenue $ 62,173 $ 59,933 $ 2,240 3.7%
Average subscribers 359,679 345,974 13,705 4.0%
ARPU $ 57.62 $ 57.74 $ (0.12) (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):
For the Quarters Ended December 31,
-------------------------------------------------
Increase Increase
2003 2002 (Decrease)$ (Decrease)%
----------- ---------- ---------- ----------
Cost Per Gross Addition (CPGA):
Selling and marketing expense $ 14,125 $ 16,797 $ (2,672) (15.9%)
Plus: activation costs 221 214 7 3.3%
Plus: cost of equipment 6,586 6,847 (261) (3.8%)
Less: equipment revenue (2,847) (3,022) 175 5.8%
--------- --------- --------- ---------
Total acquisition costs $ 18,085 $ 20,836 $ (2,751) (13.2%)
========= ========= ========== =========
Gross additions 35,601 55,621 (20,020) (36.0%)
CPGA $ 508 $ 375 $ 133 35.6%
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 December 31,
-----------------------------------------------
Increase Increase
2003 2002 (Decrease)$ (Decrease)%
---------- ---------- ---------- -----------
Loss from continuing operations $ (11,110) $ (19,427) $ 8,317 42.8%
Depreciation and amortization of
property and equipment 11,767 11,619 148 1.3%
Interest income (157) - (157) N/M
Interest expense 11,316 10,194 1,122 11.0%
----------- ----------- --------- ----------
EBITDA $ 11,816 $ 2,386 $ 9,430 395.2%
=========== =========== ========= ==========
The reconciliation of EBITDA to net cash provided by (used in) operating
activities, as determined in accordance with GAAP, is as follows (dollars in
thousands):
For the Quarters Ended December 31,
----------------------------------------------
Increase Increase
2003 2002 (Decrease)$ (Decreasee)%
---------- --------- ----------- -----------
Net cash provided by (used in)
operating activities $ 8,261 $ (2,811) $ 11,072 393.9%
Change in operating assets
and liabilities 2,360 5,835 (3,475) (59.6%)
Interest income (157) - (157) N/M
Interest expense 11,316 10,194 1,122 11.0%
Accretion of interest (9,150) (7,970) (1,180) (14.8%)
Provision for doubtful accounts (405) (2,186) 1,781 81.5%
Other (409) (676) 267 39.5%
---------- --------- --------- ---------
EBITDA $ 11,816 $ 2,386 $ 9,430 395.2%
========== ========= ========= =========
Subscriber Gross Additions
Subscriber gross additions decreased for the quarter ended December 31, 2003
compared to the same quarter in 2002. This decrease is due to the re-institution
of and 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 quarter ended December 31, 2003,
compared to the same quarter in 2002. This decrease is due to the reduction in
subscriber gross additions.
Average Revenue Per User
ARPU remained unchanged for the quarter ended December 31, 2003 compared to the
same quarter for 2002 primarily as a result of an increase in customer monthly
recurring charges, offset by a reduction in revenue from customers using minutes
in excess of their subscriber usage plans.
Churn
Churn decreased for the quarter ended December 31, 2003, compared to the same
quarter for 2002. The Company has focused on improving the credit quality of the
subscriber base. In February 2003, management increased the deposit requirements
for sub-prime credit customers who begin service with the company to $250 in an
effort to reduce churn and improve the percentage of prime credit customers in
the Company's customer base. We believe these and other factors may have
influenced the reduction in churn for the quarter ended December 31, 2003
compared to the same period in 2002.
Cost per Gross Addition
CPGA increased for the quarter ended December 31, 2003 compared to the same
quarter in 2002. 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 December 31, 2003 increased from the same period in
2002. This increase is a result of a slight increase in revenues and an overall
decrease in spending, particularly in cost of services and selling and
marketing.
Liquidity and Capital Resources
As of December 31, 2003, the Company had $60.0 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 December 31, 2003 was $12.1 million,
compared to working capital of $12.5 million at September 30, 2003. The improved
cash position of $6.0 million is attributable to the following (dollars in
thousands):
For the Quarter Ended
December 31,
2003
-----------------------
Operating Activities
Cash received from Sprint $ 64,908
Cash paid to Sprint (18,425)
Cash paid to vendors and employees (35,776)
Credit facility interest payments (2,446)
-----------------------
8,261
-----------------------
Investing Activities
-----------------------
Capital expenditures (1,599)
-----------------------
Financing Activities
Credit facility principal payments (506)
Other financing costs (191)
-----------------------
(697)
-----------------------
Increase in cash and cash equivalents $ 5,965
=======================
For the Quarters Ended December 31,
-----------------------------------------------
Increase Increase
2003 2002 (Decrease)$ (Decrease)%
------- ------- -------------------------
(Dollars in thousands)
Cash provided by (used in) operating activities $ 8,261 $ (2,811) $ 11,072 393.9%
Cash used in investing activities (1,599) (5,626) 4,027 71.6%
Cash provided by (used in) financing activities (697) 4,494 (5,191) (115.5%)
--------- --------- -------- ---------
Net increase (decrease) $ 5,965 $ (3,943) $ (9,908) 251.3%
========= ======== ========== =========
Net Cash Provided By (Used In) Operating Activities
The $8.3 million of cash provided by operating activities for the quarter ended
December 31, 2003 was the result of the Company's $173.0 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 $162.4 million. These non-cash items were
partially offset by working capital changes of $2.4 million. The working capital
changes were primarily impacted by an increase in prepaid expenses and a
decrease in accounts payable and accrued expenses, offset by a decrease in
accounts receivable and increase in payables due to Sprint. The $2.8 million of
cash used in operating activities for the quarter ended December 31, 2002 was
the result of the Company's $47.7 million net loss offset by $50.7 million of
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 that was
partially offset by negative net cash working capital changes of $5.8 million.
Net Cash Used in Investing Activities
The $1.6 million of cash used in investing activities for the quarter ended
December 31, 2003 represents purchases of property and equipment. Purchases of
property and equipment for the quarter ended December 31, 2003 related to
expansion of switch capacity and expansion of service coverage. For the quarter
ended December 31, 2002, cash used in investing activities was $5.6 million for
purchases of property and equipment.
Net Cash Provided by (used in) Financing Activities
The $0.7 million in cash used in financing activities during the quarter ended
December 31, 2003, consisted of $0.5 for a principal payment associated with the
credit facility offset by $0.2 in fees capitalized in association with amending
the credit facility. The $4.5 million of cash provided by financing activities
during the quarter ended December 31, 2002 consisted of $5.0 million borrowed
under the credit facility, offset by $0.5 million for 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 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 $203.9 million at December 31, 2003. For
the quarter ended December 31, 2003, the Company's loss from continuing
operations amounted to $11.1 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
$303.6 million to purchase property and equipment. While much of the Company's
network is now complete, and capital expenditures are expected to be lower than
in prior years, such expenditures will continue to be necessary. As of December
31, 2003, the Company had working capital of $14.7 million and cash and cash
equivalents of $60.0 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 include 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. 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 current business
plan, 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 current
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
proposed 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 for "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 will improve the Company's capital
structure and reduce 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.
Upon completing the Recapitalization Plan, the existing credit facility will
remain in place with a final maturity in 2008. The 13.5% Old Notes tendered and
maturing in 2009 will be replaced by the 9 3/8% New Notes maturing in 2009. The
principal amount at maturity of the Old Notes is expected to decrease by $140
million and annual cash interest payments are expected to decrease by $25.5
million per year after 2004. As a result, after 2004, the financial
restructuring would provide cumulative cash savings of $255 million through
2009.
Since our inception in 1998, we have generated significant tax net operating
losses, ("NOLs"). We expect to use these NOLs to offset the cancellation of
indebtedness income that we will realize as a result of the Recapitalization
Plan. However, if we were to experience an ownership change for tax purposes
prior to our completion of the Recapitalization Plan, such ownership change
would severely restrict our use of the NOLs to offset the cancellation of
indebtedness ("COD") income. As a result, we could have insufficient NOLs to
fully offset our realization of COD income upon completion of the
Recapitalization Plan and, therefore, could be subject to material federal
income taxes. Because we will not know if we have experienced an ownership
change for tax purposes until our 5% stockholders file their Schedules 13D or
13G, we cannot assure you that we will not be subject to tax on the COD income.
If we are required to pay tax on significant COD income, we may not have
sufficient funds to pay the tax or meet our other obligations. As of the date of
this report, and based on information available to us, we estimate that we have
experienced a 40% change in ownership.
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 also
imposed additional programs, requirements and conditions that have adversely
affected our financial performance. If these increases, additional charges and
changes continue, our operating results, liquidity and capital resources could
be adversely affected. As of December 31, 2003, we have disputed approximately
$9.2 million in invoices for such increases and additional charges, but those
issues have not been 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 will reduce our cash position by
approximately $9.2 million.
Capital Resources
As of December 31, 2003, the Company had $60.0 million of cash and cash
equivalents. During the quarter ended September 30, 2003, the Company drew the
final $9.0 million of availability on the credit facility, leaving 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,
capital leases 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, 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 $ 17,775 $ 23,700 $ 30,107 $ 39,893 $ 40,000 $ -
Credit facility, interest (2) 24,696 7,991 6,756 5,327 3,430 1,192 -
Old Notes, principal 300,000 - - - - - 300,000
Old Notes, interest (3) 202,500 - 40,500 40,500 40,500 40,500 40,500
Operating leases (4) 60,262 18,899 14,396 9,485 6,632 5,159 5,691
----------- ---------- ---------- ----------- ---------- ----------- -------------
$ 738,933 $ 44,665 $ 85,352 $ 85,419 $ 90,455 $ 86,851 $ 346,191
=========== ========== ========== =========== ========== =========== =============
(1) Total repayments are based upon borrowings outstanding as of September 30,
2003.
(2) Interest rate is assumed to be 5.5%. As of December 31, 2003, the
weighted-average interest rate on the credit facility was 4.99%.
(3) Interest rate on Old Notes is 13.5% with payments starting in 2005.
(4) 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. Mandatory quarterly payments of principal began as of
December 31, 2002 for the Tranche I Term Loan. Mandatory quarterly payments of
principal begin March 31, 2004 for the Tranche II Term Loan payments initially
in the amount of $5.3 million or 3.75% of the loan balance outstanding and
increasing thereafter. 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
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; engage in certain transactions with
affiliates; and fundamentally change its business. As of December 31, 2003, the
Company was in compliance in all material respects with covenants contained in
the credit facility.
In contemplation of the restructuring, the Company entered into an amendment to
the credit facility on November 30, 2003. Certain changes are 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; up to $5.0 million in start-up costs in connection
with any outsourcing billing and customer care services, and (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 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.
The effectiveness of other changes made by the amendment is conditioned on,
among other things, at least 90% of the face value of the Old Notes having been
exchanged in the restructuring. These 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; 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 (iii) 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 has agreed to prepay $10.0 million in principal under the
credit facility, which will be credited 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 will 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.
In connection with the consummation of the Company's Recapitalization Plan on
February 20, 2004, the Company expects to issue approximately $159.4 million in
aggregate principal amount of new senior subordinated secured notes that mature
on September 1, 2009. The New Notes will 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 will be subordinated to up to $175.0 million of the Company's
senior debt under its credit facility and will be 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 will be 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
will govern 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 will 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.
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.
Debt restructuring costs were $3.0 million for the quarter ended September 30,
2003 and $2.3 million for the quarter ended December 31, 2003. Remaining costs
to complete the restructuring are estimated to be approximately $5.8 million.
As of December 31, 2003, two major credit rating agencies rate the Company's
unsecured debt. The ratings were as follows:
Type of facility S&P Moody's
---------------- --- -------
Old Notes C Caa2
On September 25, 2003, S&P announced that upon completion of the restructuring
it would lower the Company's corporate rating to "SD" and lower the Company's
subordinated debt rating to "D." On October 15, 2003, Moody's announced that it
placed the Company's subordinated debt on review for a possible rating upgrade
to B3.
Related Party Transactions
Transactions with Sprint.
See Note 3 to the 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 accreted
carrying value of the Old Notes ($262.1 million at December 31, 2003). The
Company's variable rate debt consists of borrowings made under the credit
facility ($151.0 million outstanding at December 31, 2003). As of December 31,
2003, the weighted average interest rate under the credit facility was 4.99%.
Our primary interest rate risk exposures relate to (i) the interest rate on
long-term borrowings; (ii) our ability to refinance the Old Notes at maturity at
market rates; and (iii) the impact of interest rate movements on our ability to
meet interest expense requirements and financial covenants under our debt
instruments.
The following table presents the estimated future balances of outstanding
long-term debt projected at the end of each period and future required annual
principal payments for each period then ended associated with the Old Notes and
credit facility based on projected levels of long-term indebtedness (dollars in
thousands):
Years Ending September 30,
-----------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter
----------- ------------- -------------- ------------- -------------- --------------
Old Notes $ 297,191 $ 297,289 $ 297,587 $ 298,115 $ 298,906 $ -
Fixed interest rate 13.5% 13.5% 13.5% 13.5% 13.5% 13.5%
Principal payments $ - $ - $ - $ - $ - $ 300,000
Credit facility $ 133,700 $ 110,000 $ 79,893 $ 40,000 $ - $ -
Variable interest rate (1) 5.5% 5.5% 5.5% 5.5% 5.5%
Principal payments $ 17,775 $ 23,700 $ 30,107 $ 39,893 $ 40,000 $ -
(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, which is the LIBOR rate as of December 31, 2003. 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 December 31, 2003).
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As of the end of the period covered by this report, December 31, 2003 (the
"Evaluation Date"), we carried out an evaluation, under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon this evaluation,
the President and Chief Executive Officer and the Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
Evaluation Date.
Our Relationship with Sprint
Under our long-term (up to 50 year) agreements with Sprint, we market PCS
products and services under the Sprint brand names in our territory and our
business currently consists solely of Sprint wireless products and services.
Under our agreements, Sprint exercises extensive control over our business and
our relationship with Sprint is unique in many ways. For example:
o Our network must interface seamlessly with the national Sprint wireless
network.
o Our network must be built, maintained and upgraded to include Sprint's most
current technology in accordance with Sprint-approved plans and using
Sprint-approved equipment.
o Under our management agreement with Sprint, we are required to provide
services such as customer care, billing and collections in accordance with
program requirements established by Sprint in accordance with the
management agreement. Any third party vendor must receive Sprint approval,
comply with Sprint's program requirements with respect to these services
and interface with Sprint's systems.
o Sprint must approve our marketing and sales materials.
o Sprint develops products and services that we are required to offer in our
territory and it must approve all products and services we offer in our
territory, subject to certain limitations.
o Our stores must conform to Sprint's requirements for retail stores and are
identical to Sprint retail stores in Sprint's markets.
o Sprint develops and implements pricing and credit plans that we are
required to offer in our territory.
o We are required to absorb the cost of promotional plans developed by
Sprint, which we must offer in our territory (e.g., rebates or discounts to
customers for handset purchases).
o Our subscribers call Sprint customer care.
o Our subscribers receive bills from, and make payments to, Sprint.
Under our agreements with Sprint, Sprint provides us with billing, collections,
customer care and other back office services. As a result, approximately 95% of
our revenues are paid through Sprint. In addition, approximately 64% of cost of
service and roaming in our consolidated financial statements relate to charges
by or through Sprint for its affiliation fee, charges for services provided
under our agreements with Sprint such as billing, collections and customer care,
roaming expense, long-distance, and pass-through and other fees and expenses.
Under our agreements, Sprint is responsible to keep and maintain books and
records to support and document any fees, costs or other charges due in
connection with the agreements and to provide a monthly true-up report of
amounts required to be remitted to the Company with respect to collected
revenues. Due to this relationship, the Company necessarily relies on Sprint to
provide accurate, timely and sufficient data and information to properly record
our revenues, expenses and accounts receivable, which underlie a substantial
portion of our periodic financial statements and other financial disclosures.
Nevertheless, the Company continues to dedicate significant Company resources to
ensure its disclosure controls and procedures, as integrated with Sprint, are
effective.
Information provided by Sprint includes reports regarding our subscriber
accounts receivable. Sprint provides us monthly accounts receivable, billing and
cash receipts, expense detail and settlements information. Under our agreements
with Sprint, we are entitled to only a portion of the cash receipts, net of
items such as taxes, government surcharges and the 8% Sprint affiliation fee.
Sprint has developed and used a tool called the "revenue profile" to estimate
the payments due to us. We regularly review and reconcile these various reports
to identify discrepancies or errors and address those issues with Sprint.
Our Disclosure Controls and Procedures - Fiscal 2002
Because of our reliance on Sprint for financial information, we depend on Sprint
to design adequate internal controls with respect to the processes established
to provide this data and information to the Company and Sprint's other network
partners. As part of this control process, Sprint engages its independent
auditors to perform a periodic evaluation of these controls and to provide a
"Report on Controls Placed in Operation and Tests of Operating Effectiveness for
Affiliates" under guidance provided in Statement of Auditing Standards No. 70
("Type II SAS 70 reports"). The Type II SAS 70 report is provided to us annually
and covers our entire fiscal year.
In addition, at least annually, we review the prior year's Type II SAS 70 report
in light of events that have occurred during the year. We also provide comments
to Sprint and its independent auditors regarding issues and information the
report should address that may not have been addressed in the prior year's
report.
During the fourth quarter of fiscal 2002, it became apparent that discrepancies
between various accounts receivable reports provided by Sprint had become
significant. To address these issues, we conducted a lengthy inquiry into the
causes of the discrepancies. Among other things, we had numerous discussions and
meetings with Sprint's accounting staff, requested and received additional and
more detailed reports and demanded reconciliations with our records.
In connection with our review of the accounts receivable issue at September 30,
2002 for purposes of finalizing our financial statements, we reclassified
approximately $10.0 million of AirGate subscriber accounts receivable for the
fiscal year ended September 30, 2002 to a receivable from Sprint. We provided an
allowance to reflect the receivable at its net realizable value, which we
collected from Sprint subsequent to September 30, 2002.
At September 30, 2002, we and our independent auditors believed that the
accounts receivable issue resulted from a reportable condition in our internal
controls. Reportable conditions are significant deficiencies in the design or
operation of internal controls which could adversely affect an organization's
ability to record, process, summarize and report financial data consistent with
the assertions of management in the consolidated financial statements.
Nonetheless, we concluded that our disclosure controls and procedures were
effective as of September 30, 2002. We came to this conclusion for the following
reasons:
o The controls and procedures in place during fiscal year 2002 were effective
in detecting the accounts receivable issue.
o Even with the accounts receivable issue, we believed it was reasonable to
rely on the reports and information we received from Sprint. Sprint is a
public reporting company that certifies its financial information and its
controls and procedures. In addition, compared to any single Sprint
affiliate, Sprint has significantly greater resources and efficiencies,
both financially and with respect to personnel, with which to gather,
analyze and control its information.
o We relied on the Type II SAS 70 report discussed above and the controls
discussed in the report.
o During the entire fiscal year 2002, the Company used a program to automate
a portion of the process utilized to record the Company's revenues and
accounts receivable from the files received from Sprint. The program
summarizes the files received from Sprint to mirror the Company's general
ledger accounts. The Company performs a reasonableness check prior to
recording the amounts in the Company's general ledger. The Company relies
on the program and the inherent system controls and the reasonableness
checks to ensure the consistency of the information downloaded from Sprint
with the information reflected in the Company's general ledger.
o During the entire fiscal year 2002, Company personnel reviewed financial
information and data provided by Sprint. The Company has performed and
continues to perform reasonableness checks regarding information provided
by Sprint on a monthly basis by evaluating trends in key performance
indicators to detect trending anomalies. The Company's finance and
operations groups evaluate these trends and the Company relies on this
process as a compensating control to detect errors in the data provided by
Sprint. The Company's finance and operations groups work closely with the
Company's accounting group to reconcile differences and make necessary
corrections and follow up with Sprint as necessary.
o During the entire fiscal year 2002, the Company reviewed and reconciled
certain information provided by Sprint to detect inconsistencies in the
data.
o In July 2002, we established a disclosure control committee made up of
senior members of management and key employees. The committee assists the
Company's senior officers in fulfilling their responsibility for oversight
of the accuracy and timeliness of the disclosures made by the Company. The
committee, among other things, designs and establishes controls and
procedures regarding the accuracy and dissemination of information,
monitors the integrity and effectiveness of the Company's disclosure
controls, reviews and supervises the preparation of filings and
announcements made by the Company and evaluates the effectiveness of the
Company's disclosure controls. The committee includes members who have
information pertaining to Sprint to ensure that appropriate disclosures are
made pertaining to Sprint.
o During December 2002, prior to the issuance of our annual report, the
Company worked with Sprint to identify the sources of the discrepancies.
The Company then developed a reconciliation process of the accounts
receivable aging report provided by Sprint with the Company's accounts
receivable account. The reconciliation was developed to identify the nature
of the differences and quantify the amount of the error in the Company's
accounts receivable account. The Company continues to use and refine this
reconciliation process to detect errors on a timely basis. Given the
controls described above, and the discrete nature of the accounts
receivable issue, we concluded, at the time our certifications of
disclosure controls were made, that our disclosure controls and procedures
were effective.
Our Disclosure Controls and Procedures - Fiscal 2003 and 2004
Although we concluded that our disclosure controls and procedures were effective
at the end of fiscal 2002 and in each interim period of fiscal 2003 and 2004, we
recognized that further improvements were necessary to better address
information provided by Sprint. Beginning in fiscal 2003, we focused additional
resources on reviewing and analyzing information provided by Sprint and worked
with Sprint to identify other information and reports that would assist us with
this review and analysis, particularly as it relates to accounts receivable and
the application of cash.
During the fiscal years 2003 and 2004, in order to more timely and better
monitor, verify and analyze information provided by Sprint, we took the
following actions to further enhance our disclosure controls and procedures.
While we believe that, in the aggregate, these actions improved our overall
internal controls, we do not believe that any individual action was a material
change to our internal controls.
o During the fiscal year ended 2003, we reconciled accounts receivable aging
reports from Sprint to our general ledger on a quarterly basis. During the
quarter ended December 31, 2003, we reconciled the accounts receivable
aging reports from Sprint to our general ledger on a monthly basis.
o In January, 2003, the Company engaged a consultant with telecommunications
settlement experience to develop a plan for a Sprint settlements
department, to analyze and interface with Sprint to resolve financial
disputes with Sprint, to review the method of calculating the revenue
profile and to review the Sprint settlements processes and facilitate the
transition of Sprint settlements and review processes from the accounting
department in Geneseo, Illinois to the new settlements department in
Atlanta, Georgia. In May 2003, we internally staffed and broadened the role
of the settlements department. The department has two full-time employees
(hired in May and August 2003) and one contract person (hired in June
2003). The manager of the settlements group serves as the primary interface
with Sprint regarding all issues related to the Sprint settlements process.
The settlements group reviews and analyzes financial data provided by
Sprint, including the components of the revenue profile that Sprint uses to
determine the amount of collected revenues paid to us. The settlements
group assists us in verifying amounts charged by Sprint as well as revenues
and other amounts settled with Sprint.
o During the fourth quarter of fiscal 2003, we completed an in-depth review
of the procedures undertaken in prior Type II SAS 70 reports and we
requested and Sprint agreed to provide and include additional procedures in
2003 and future Type II SAS 70 Reports.
o In September 2003, we requested additional "agreed upon procedures"
pertaining to accounts receivable from Sprint's independent accountants.
Sprint's independent accountants performed such procedures during October
2003.
o Beginning in the fourth quarter of fiscal 2003, we analyzed, documented and
implemented file audit and assurance processes for certain Sprint files
used in recording financial information.
o We obtained for the first time from Sprint an account level detail of
subscriber accounts receivable as of September 30, 2003. In September 2003,
we requested this detail on at least a quarterly basis in the future.
Sprint provided this same level of detail at December 31, 2003.
o In September 2003, Sprint agreed to provide semi-annual SAS 70 reports
beginning in 2004.
o In September 2003, Sprint informed us that it will request SAS 70 reports
from key service providers, including the third-party provider of its
billing systems and services. In January 2004, we received an unqualified
Type II SAS 70 report from Sprint's third-party provider of its billing
system that covered the period from January to October 31, 2003.
Although we refined and improved our internal controls in 2002, we and our
independent auditors believe that a reportable condition (as defined above) in
internal controls relating to accounts receivable continued during fiscal year
2003 because most of the procedures described above were not in place until the
end of the fiscal year. As a result of the improved processes and procedures
described above, the Company believes no reportable condition in internal
controls existed by the end of the fiscal year, September 30, 2003 but our
independent auditors have not made that finding.
Because the procedures outlined under "Our Disclosure Controls and Procedures -
Fiscal 2002" continued during Fiscal 2003 and 2004, we believe our disclosure
controls and procedures were effective throughout Fiscal 2003 and 2004,
including as of December 31, 2003.
In order to avoid a reportable condition in the future, the Company will need to
continue the processes described above and continue to obtain or perform the
following:
o Obtain from Sprint access to a detailed listing of subscriber receivables
at the account level on a quarterly basis and validate its integrity.
Sprint provided this same level of detail at September 30, 2003 and
December 31, 2003 and the Company validated the report's integrity.
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 quarter ended December 31, 2003, 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 quarter ended December 31, 2003, the Company performed a rollforward of
the accounts receivable information provided by Sprint and validated the
accuracy and completeness of the Company's general ledger.
The Company will continue to monitor and evaluate the effectiveness of its
improvements in controls related to information provided by Sprint and continue
to improve these processes.
On January 9, 2004, we were informed by Sprint of a table mapping error related
to 3G data settlements, which resulted in a $0.9 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 will perform 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 and
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.
Standing alone, the Company does not believe that this 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 error
in excess of $1,000,000.
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
reviewing and improving our internal control processes, including the processes
to verify data provided by Sprint. Beginning January 2004, the outside
accounting firm we retained began reviewing our internal controls with the
Company's management.
Changes in Internal Control over Financial Reporting
We refer you to information discussed above in Evaluation of Disclosure Controls
and Procedures.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 to the 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.
Upon settlement of the Recapitalization Plan, which the Company expects to occur
on February 20, 2004, the Company will enter into a Supplemental Indenture
regarding the Old Notes. Among other things, the Supplemental Indenture will
delete 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 the Company will file with the SEC.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On February 12, 2004, a special meeting of our shareowners was called to
consider and vote upon the following proposals in connection with the
restructuring:
- ----------------------------------------------------------------- --------------------- --------------------- ---------------------
Proposal Votes FOR Votes AGAINST ABSTENTIONS
- ----------------------------------------------------------------- --------------------- --------------------- ---------------------
The issuance of an aggregate of up to 56% of our common stock 15,489,917 89,282 48,268
in the restructuring transactions.
- ----------------------------------------------------------------- --------------------- --------------------- ---------------------
The amendment and restatement of our certificate of 15,356,304 220,897 50,265
incorporation to implement the approximate 1 for 5 reverse
stock split of our capital stock.
- ----------------------------------------------------------------- --------------------- --------------------- ---------------------
A proposed amendment and restatement of our 2002 AirGate PCS, 14,799,856 531,440 296,171
Inc. Long-Term Incentive Plan to, among other things, increase
the number of shares reserved and available for issuance to
6,025,000 (pre-split) shares that may be issued thereunder and
to approve the issuance of restricted stock units and options
to certain executive officers.
In addition, shareholders were asked to accept a prepackaged plan of
reorganization to effect the same transactions contemplated by the
Recapitalization Plan. Holders of 2,355,192 shares of common stock voted to
accept and holders of 43,641 shares of common stock voted to reject.
In connection with our Recapitalization Plan, we solicited the consents of all
holders of our Old Notes to (i) amend the Old Notes indenture to eliminate
substantially all of the restrictive covenants contained in the Old Notes
indenture, and release all collateral securing our obligations under the Old
Notes indenture and (ii) the waiver of any defaults and events of default under
the Old Notes indenture that may occur in connection with the Recapitalization
Plan. We received the consents of an aggregate of $298,204,000 of Old Notes (or
99.4% of Old Notes outstanding.)
We also solicited acceptances of the prepackaged plan of reorganization from
holders of the Old Notes. Holders of $259,359,300 of Old Notes voted to accept
and holders of $950,000 of Old Notes voted to reject.
Item 5. Other Information
Subsequent Events
See Note 8 to the consolidated financial statements in this document.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Corrected Amended and Restated Certificate of Incorporation
31.1 Rule 13a-14(a) certification of Chief Executive Officer of AirGate filed in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Rule 13a-14(a) certification of Chief Financial Officer of AirGate filed in
accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Section 1350 certification of Chief Executive Officer of AirGate furnished
in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Section 1350 certification of Chief Financial Officer of AirGate furnished
in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by AirGate during the
quarter ended December 31, 2003:
On November 3, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 2 - Acquisition or Disposition of
Assets relating to its transfer of all of its shares of iPCS common stock into a
trust organized under Delaware law. On the date of the transfer, generally
accepted accounting principles require this disposition to be accounted for as a
discontinued operation.
On December 19, 2003, AirGate furnished a Current Report on Form 8-K with the
Securities and Exchange Commission under Item 9 - Regulation FD Disclosure (also
provides information required under Item 12 "Results of Operations and Financial
Condition") relating to issuance of a press release regarding its financial and
operating results for its fourth quarter and fiscal year ended September 30,
2003, and the filing of its Annual Report on Form 10-K/A.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned officer thereunto duly authorized.
AIRGATE PCS, INC.
By: /s/ William H. Seippel
___________________________________________
William H. Seippel
Title: Chief Financial Officer
(Duly Authorized Officer,
Principal Financial
and Chief Accounting Officer)
Date: February 17, 2004