<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>3
<FILENAME>ex99_1.txt
<DESCRIPTION>CONSOLIDATED FINANCIAL STATEMENTS OF AIRGATE
<TEXT>
INDEX TO CONSOLIDATED FINACIAL STATEMENTS
OF AIRGATE PCS, INC. AND SUBSIDIARIES
Page
Audited Consolidated Financial Statements
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets as of
September 30, 2003 and September 30, 2002........................... F-3
Consolidated Statements of Operations for
the Years Ended September 30, 2003, 2002 and 2001................... F-4
Consolidated Statements of Stockholders' Deficit
for the Years Ended September 30, 2003, 2002 and 2001............... F-5
Consolidated Statements of Cash Flows for
the Years Ended September 30, 2003, 2002 and 2001................... F-6
Notes to the Consolidated Financial Statements....................... F-7
Financial Statement Schedule
Independent Auditors' Report......................................... F-33
Consolidated Schedule of Valuation and
Qualifying Accounts................................................. F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AirGate PCS, Inc.:
We have audited the accompanying consolidated balance sheets of AirGate
PCS, Inc. and subsidiaries as of September 30, 2003 and 2002, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the years in the three-year period ended September 30, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
AirGate PCS, Inc. and subsidiaries as of September 30, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2003, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has suffered significant
recurring losses since inception and has an accumulated deficit of $1.3 billion
and a stockholders' deficit of $377.0 million at September 30, 2003. The
Company's continuation as a going concern is dependent on its ability to
restructure or otherwise amend the terms of its debt; and if unsuccessful, the
Company may seek bankruptcy court or other protection from its creditors within
the next year. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/S/ KPMG LLP
Atlanta, Georgia
December 5, 2003,
except as to note 14(a) and (b),
which are as of February 17, 2004
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
(Shares reflect reverse stock split. See note 14(b).)
<TABLE>
<CAPTION>
September 30,
-------------------------
2003 2002
---- ----
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents...................................... $ 54,078 $ 4,887
Accounts receivable, net of allowance for
doubtful accounts of $4,635 and $6,759........................ 26,994 24,245
Receivable from Sprint......................................... 15,809 28,977
Inventories.................................................... 2,132 4,136
Prepaid expenses............................................... 2,107 4,130
Other current assets........................................... 145 1,331
----------- -----------
Total current assets....................................... 101,265 67,706
Property and equipment, net of accumulated
depreciation and amortization of $129,986 and $83,820............... 178,070 213,777
Financing costs...................................................... 6,682 7,892
Direct subscriber activation costs................................... 3,907 5,298
Other assets......................................................... 992 542
Net assets of discontinued operations............................... -- 279,079
----------- -----------
Total assets..................................................... $ 290,916 $ 574,294
=========== ===========
Liabilities and Stockholders' Deficit:
Current liabilities:
Accounts payable............................................... $ 5,945 $ 9,803
Accrued expenses............................................... 12,104 9,827
Payable to Sprint.............................................. 45,069 53,381
Deferred revenue............................................... 7,854 7,140
Current maturities of long-term debt .......................... 17,775 2,024
----------- -----------
Total current liabilities.................................. 88,747 82,175
Deferred subscriber activation fee revenue........................... 6,701 9,222
Other long-term liabilities.......................................... 1,841 958
Long-term debt, excluding current maturities......................... 386,509 354,264
Investment in iPCS................................................... 184,115 --
Net liabilities of discontinued operations........................ -- 420,622
----------- -----------
Total liabilities.......................................... 667,913 867,241
----------- -----------
Commitments and contingencies ........................... -- --
Stockholders' deficit:
Preferred stock, par value, $.01 per share;
1,000,000 shares authorized; no shares
issued and outstanding..................................... -- --
Common stock, par value, $.01 per share;
30,000,000 shares authorized; 5,192,238 and
5,161,304 shares issued and outstanding at
September 30, 2003 and 2002................................ 52 52
Additional paid-in-capital..................................... 924,095 924,214
Accumulated deficit............................................ (1,300,941) (1,216,184)
Unearned stock compensation.................................... (203) (1,029)
----------- -----------
Total stockholders' deficit.............................. (376,997) (292,947)
----------- -----------
Total liabilities and stockholders' deficit.............. $290,916 $574,294
=========== ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Shares reflect reverse stock split. See note 14(b).)
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Revenues:
Service revenue........................................................... $ 251,481 $ 226,504 $ 105,976
Roaming revenue........................................................... 68,222 74,013 55,329
Equipment revenue......................................................... 11,645 13,027 10,782
--------- ---------- ---------
Total revenues............................................ 331,348 313,544 172,087
--------- ---------- ---------
Operating expenses:
Cost of service and roaming (exclusive of depreciation
and amortization, as shown separately below)............................ 187,365 204,153 116,909
Cost of equipment........................................................ 21,522 27,778 20,218
Selling and marketing.................................................... 51,769 79,099 71,706
General and administrative............................................... 23,347 18,143 17,141
Depreciation and amortization of property and equipment ................. 46,494 40,764 30,667
Loss on disposal of property and equipment.............................. 518 1,074 --
--------- ---------- ---------
Total operating expense.............................................. 331,015 371,011 256,641
--------- ---------- ---------
Operating income (loss).............................................. 333 (57,467) (84,554)
Interest income.......................................................... 187 161 2,463
Interest expense......................................................... (42,706) (35,474) (28,899)
--------- ---------- ---------
Loss from continuing operations before income tax.................... (42,186) (92,780) (110,990)
Income tax .............................................................. -- -- --
--------- ---------- ---------
Loss from continuing operations...................................... (42,186) (92,780) (110,990)
Discontinued Operations:
Loss from discontinued operations net of $0 and
$28,761 income tax benefit............................................ (42,571) (903,837) --
--------- ---------- ---------
Net loss ............................................................ $ (84,757) $ (996,617) $ (110,990)
========= ========== =========
Basic and diluted weighted-average number of shares
outstanding.............................................................. 5,181,683 4,750,301 2,617,857
========= ========== =========
Basic and diluted loss per share:
Loss from continuing operations........................................ $ (8.14) $ (19.53) $ (42.40)
Loss from discontinued operations...................................... (8.22) (190.27) --
--------- ---------- ---------
Net loss............................................................. $ (16.36) $ (209.80) $ (42.40)
========= ========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Dollars in thousands, except share amounts)
(Shares reflect reverse stock split. See note 14(b).)
Years ended September 30, 2003, 2002, and 2001
<TABLE>
<CAPTION>
Common Stock Additional Unearned Total
-------------------- paid-in Accumulated stock stockholders'
Shares Amount capital deficit compensation deficit
------ ------ ------------ -------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 2000................. 2,563,357 $ 26 $ 161,677 $ (108,577) $ (3,253) $ 49,873
Exercise of common stock purchase warrants.. 16,128 1 -- -- -- 1
Exercise of stock options................... 93,511 -- 6,727 -- -- 6,727
Forfeiture of compensatory stock options.... -- -- (81) -- 81 --
Stock compensation expense.................. -- -- 39 -- 1,626 1,665
Net loss.................................... -- -- -- (110,990) -- (110,990)
----------- -------- ---------- ------------ ------------- ---------------
Balance at September 30, 2001................. 2,672,996 27 168,362 (219,567) (1,546) (52,724)
----------- -------- ---------- ------------ ------------- ---------------
Issuance of common stock in merger with
iPCS....................................... 2,472,514 25 706,620 -- -- 706,645
Stock options and warrants assumed in
merger with iPCS........................... -- -- 47,727 -- -- 47,727
Exercise of stock options................... 6,712 -- 685 -- -- 685
Issuance of restricted common stock......... 2,413 -- 252 -- (252) --
Exercise of common stock purchase warrants.. 3,000 -- -- -- -- --
Issuance of common stock to employee
stock purchase plan........................ 3,669 -- 568 -- -- 568
Stock compensation expense.................. -- -- -- -- 769 769
Net loss.................................... -- -- -- (996,617) -- (996,617)
----------- -------- ---------- ------------ ------------- ---------------
Balance at September 30, 2002................. 5,161,304 52 924,214 (1,216,184) (1,029) (292,947)
----------- -------- ---------- ------------ ------------- ---------------
Issuance of restricted common stock........ 6,000 -- 21 -- (21) --
Exercise of common stock purchase warrants. 4,295 -- -- -- -- --
Issuance of common stock to employee stock
purchase plan............................. 21,677 -- 57 -- -- 57
Forfeiture of compensatory stock option.... -- -- (195) -- 195 --
Forfeiture of restricted common stock...... (1,038) -- (2) -- 2 --
Stock compensation expense................. -- -- -- -- 650 650
Net loss................................... -- -- -- (84,757) -- (84,757)
----------- -------- ---------- ------------ ------------- ---------------
Balance at September 30, 2003................. 5,192,238 $ 52 $ 924,095 $ (1,300,941) $ (203) $ (376,997)
=========== ======== ========== ============ ============= ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (84,757) $ (996,617) $ (110,990)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Loss from discontinued operations...................................... 42,571 903,837 --
Loss on disposal of property and equipment............................. 518 1,074 --
Depreciation and amortization of property and equipment................ 46,494 40,764 30,667
Amortization of financing costs into interest expense.................. 1,210 1,210 1,210
Provision for doubtful accounts........................................ 5,220 21,343 8,125
Interest expense associated with accretion of discounts................ 33,020 28,762 23,799
Non-cash stock compensation............................................ 650 769 1,665
Changes in assets and liabilities:
Accounts receivable................................................ (7,969) (21,790) (26,995)
Receivable from Sprint............................................. 13,168 (18,777) (6,432)
Inventories........................................................ 2,004 503 (1,737)
Prepaid expenses, other current and non-current
assets........................................................... 4,150 (1,745) (4,470)
Accounts payable, accrued expenses and other
long term liabilities............................................ 1,500 (7,440) 8,741
Payable to Sprint.................................................. (8,312) 20,817 27,272
Deferred revenue................................................... 714 1,756 8,295
-------------- ------------- -----------
Net cash provided by (used in)
operating activities................................ 50,181 (25,534) (40,850)
-------------- ------------- -----------
Cash flows from investing activities:
Property and equipment, net............................................. (16,023) (40,263) (71,270)
Acquisition of iPCS..................................................... -- (6,058) --
Purchase of business assets............................................. -- -- (502)
-------------- ------------- -----------
Net cash used in investing activities................. (16,023) (46,321) (71,772)
-------------- ------------- -----------
Cash flows from financing activities:
Proceeds from borrowings under senior credit facilities................. 17,000 61,200 61,800
Payment for credit facility............................................. (2,024) -- --
Proceeds from stock issued to employee stock purchase plan.............. 57 567 --
Proceeds from exercise of common stock purchase warrants................ -- -- 1
Proceeds from exercise of employee stock options........................ -- 685 6,727
-------------- ------------- -----------
Net cash provided by financing activities............ 15,033 62,452 68,528
-------------- ------------- -----------
Net increase (decrease) in cash and
cash equivalents................................... 49,191 (9,403) (44,094)
Cash and cash equivalents at beginning of period.............................. 4,887 14,290 58,384
-------------- --------- -----------
Cash and cash equivalents at end of period.................................... $ 54,078 $ 4,887 $ 14,290
============== ========= ===========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................................. $ 7,807 $ 6,806 $ 3,846
Supplemental disclosure of non-cash investing and
financing activities:
Capitalized interest.................................................... $ 444 $ 2,137 $ 2,917
Grant of restricted common stock and compensatory
stock options......................................................... 21 252 --
Forfeiture of compensatory stock options................................ (195) -- (81)
Forfeiture of restricted stock.......................................... (2) -- --
Modification of stock options........................................... -- -- 39
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE>
(1) Business, Basis of Presentation and Liquidity
(a) Basis of Presentation
AirGate PCS, Inc. and its restricted and unrestricted subsidiaries (the
"Company") were created for the purpose of providing wireless Personal
Communication Services ("PCS"). AirGate PCS, Inc. and its restricted
subsidiaries ("AirGate") are 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.
On November 30, 2001, AirGate acquired an unrestricted subsidiary, iPCS, Inc.
(together with its subsidiaries, "iPCS"), a network partner of Sprint with 37
markets in the Midwestern United States. Subsequent to November 30, 2001, the
results of operations and accounts of iPCS were consolidated with the Company in
accordance with generally accepted accounting principles. On February 23, 2003,
iPCS filed a Chapter 11 bankruptcy case 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. On October 17, 2003, AirGate irrevocably transferred all of its
shares of iPCS common stock to a trust organized under Delaware law. The
beneficial owners of AirGate common stock on the date of transfer are the
beneficiaries of the trust. No distributions will be made from the trust to the
beneficiaries unless directed by the iPCS board of directors and/or an order of
the iPCS bankruptcy court. AirGate has no interest in the trust. As a result,
iPCS has been shown as a discontinued operation (see note 14(a)) and the iPCS
investment (approximately $184 million credit balance carrying amount) will be
eliminated and recorded as a non-monetary gain from disposition of discontinuing
operations (see notes 2 and 14).
Because iPCS is an unrestricted subsidiary, AirGate is generally unable to
provide capital or other financial support to iPCS. Further, iPCS lenders,
noteholders and creditors do not have a lien on or encumbrance on assets of
AirGate. Management believes that iPCS' bankruptcy proceedings and related
outcomes will not have a material adverse effect on the results of operations,
financial condition or the liquidity of AirGate.
These consolidated financial statements and related footnotes have been prepared
in accordance with accounting principles generally accepted in the United States
of America. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(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.
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 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 $1.3
billion and stockholders' deficit of $377.0 million at September 30, 2003. For
the year ended September 30, 2003, the Company's net loss amounted to $84.8
million, $42.2 million of which was attributable to continuing operations. As of
September 30, 2003, AirGate had working capital of $12.5 million and cash and
cash equivalents of $54.1 million, and no remaining availability under its
credit facility. As a result, AirGate 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, AirGate has invested
large amounts to build-out its networks and for other capital assets. Since
inception, AirGate has invested $302 million to purchase property and equipment.
While much of AirGate's networks are 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 our dependence on Sprint and Sprint's changes to various programs and fees,
have had an adverse affect on AirGate's business and have led the Company to
revise its business strategy and take actions to cut costs. These actions
included the following:
o Restructuring the AirGate organization and eliminating more
than 150 positions;
o Reducing capital expenditures;
<PAGE>
o Reducing spending for sales and marketing activities; and
o Reducing network operating costs by more closely managing
connectivity costs.
In November 2003, AirGate entered into an amendment to the AirGate credit
facility. Some of the changes effected by the amendment clarify certain
ambiguities and modify the definition and period for calculating EBITDA for
purposes of complying with financial covenants under the credit facility.
Management expects these changes to generally assist AirGate in complying with
these financial covenants for the next twelve months.
Under our current business plan, the Company's compliance with the financial
covenants under the AirGate credit facility is not assured and the Company's
ability to generate sufficient cash flow to meet its financial covenants and
payment obligations in 2005 and beyond is substantially uncertain. In addition,
there is substantial risk that under its current business plan, the Company
would not have sufficient liquidity to meet its cash interest obligations under
the Old AirGate Notes (defined below) in 2006. As a result, the Company has
currently proposed a financial restructuring (the "Recapitalization Plan") which
includes, but is not limited to the following:
o An offer to exchange all of the outstanding 13.5% senior
subordinated discount notes due 2009 (the "Old AirGate Notes")
for (i) newly issued share 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 A consent solicitation to remove substantially all of the
restrictive covenants in the indenture governing the Old
AirGate Notes, release collateral that secures the Company's
obligations thereunder and obtain waivers of any defaults or
events of default that occur in connection with the
restructuring.
o A 1:5 reverse stock split.
In the event that the conditions for the consummation of the Recapitalization
Plan are not satisfied, including, for example, the failure to meet the minimum
tender condition, the Company's board of directors may elect, assuming that it
receives sufficient acceptances from the holders of the Old AirGate Notes, to
seek as an alternative to the Recapitalization Plan, the confirmation of a
prepackaged plan of reorganization within the next year. It is anticipated that
any prepackaged plan of reorganization would effect the same transactions
contemplated by the Recapitalization Plan. If a prepackaged plan of
reorganization or bankruptcy case of any kind is commenced with regard to the
Company, it would constitute a default under the AirGate senior credit facility
and the indenture governing the Old AirGate Notes. Such a default could result
in an acceleration of the debt represented by the senior credit facility and the
Old AirGate Notes.
The completion of the financial restructuring will improve AirGate's cash flow
by significantly reducing debt service payments in 2005 and beyond.
(2) Discontinued Operations
(a) Merger with iPCS, Inc.
On November 30, 2001, the Company completed the acquisition of iPCS. In light of
the consolidation in the wireless communications industry in general and among
Sprint PCS network partners in particular, the Company's Board of Directors
believed that the merger represented a strategic opportunity to significantly
expand the size and scope of the Company's operations. The Company's Board of
Directors believed that, following the merger, the Company would have greater
financial flexibility, operational efficiencies and growth potential than the
Company would have solely on its own. In connection with the iPCS acquisition,
the Company issued 12.4 million shares pre-split of Company common stock valued
at $57.16 per share on November 30, 2001, which totaled $706.6 million. The
Company reserved an additional 1.1 million shares pre-split for issuance upon
exercise of outstanding iPCS options and warrants valued at $47.7 million using
a Black-Scholes option pricing model. The transaction was accounted for under
the purchase method of accounting. Accordingly, the Company allocated the
purchase price to the fair value of identifiable assets and liabilities.
Subsequently, certain former shareholders of iPCS sold 4.0 million shares
pre-split of Company common stock in an underwritten offering on December 18,
2001.
The Company considered itself the acquiring entity for the following reasons:
the Company was the issuer of the equity shares in the merger; Company
stockholders, subsequent to the merger, held 53 percent of the combined entity;
senior management of the combined entity subsequent to the merger was comprised
of former senior management of the Company; Company stockholders, subsequent to
the merger, held the majority voting right to elect the governing body of the
combined company; and the Company prior to the merger was the larger of the two
entities.
<PAGE>
The total purchase price and the fair values assigned to identifiable assets and
liabilities as of November 30, 2001 are summarized below (dollars in thousands).
<TABLE>
<CAPTION>
As of November 30,
2001
------------------
<S> <C>
Stock issued...................................................................... $ 706,645
Value of options and warrants converted........................................... 47,727
Costs associated with acquisition................................................. 7,730
Liabilities assumed............................................................... 394,165
----------
Total purchase price.................................................... $1,156,267
==========
Tangible assets (including $213,101 of property and equipment).................... $ 313,843
Intangible assets................................................................. 379,589
Goodwill.......................................................................... 462,835
----------
Total................................................................... $1,156,267
==========
</TABLE>
As a result of the acquisition of iPCS, the Company recorded goodwill of $462.8
million and intangible assets of $379.6 million (dollars in thousands):
<TABLE>
<CAPTION>
Value Amortization
Assigned Period
-------- ------------
<S> <C> <C>
Acquired subscriber base............................................. $52,400 30 months
Non-competition agreements........................................... 3,900 6 months
Right to provide service under the Sprint Agreements................. 323,289 205 months
--------
$379,589
========
</TABLE>
The unaudited pro forma condensed consolidated statements of operations for the
years ended September 30, 2002 and 2001, set forth below, present the results of
operations as if the acquisition had occurred at the beginning of each period
and are not necessarily indicative of future results or actual results that
would have been achieved had the acquisition occurred as of the beginning of
each period (dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------
2002 2001
---- ----
<S> <C> <C>
Total revenues................................................. $ 483,612 $ 259,214
============= ===========
Net loss....................................................... $ (1,045,361) $ (246,032)
============= ===========
Basic and diluted net loss per share........................... $ (202.85) $ (48.35)
============= ===========
</TABLE>
(b) Purchase Accounting, Goodwill and intangible assets (see note 14(a))
The changes in the carrying amount of goodwill as of September 30, 2002 are as
follows. There is no goodwill remaining after September 30, 2002 (dollars in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance of goodwill as of September 30, 2001 $ -
Goodwill acquired on November 30, 2001 (preliminary purchase price allocation) 387,392
Adjustments to preliminary purchase price allocation recorded during period ended March 31, 2002 73,528
Goodwill impairments (460,920)
---------
Balance as of September 30, 2002 $ -
=========
</TABLE>
The adjustment to the preliminary purchase price resulted from the receipt of
the final purchase price allocation. These adjustments reduced the intangible
amount assigned to the right to provide service under the Sprint Agreements by
$94 million, increased goodwill by $73.5 million, adjusted other assets and
liabilities by $6.9 million, and reduced the deferred income tax liability by
$27.4 million.
<PAGE>
The carrying amount for the intangible assets are shown below and include the
amortization period and the gross carrying amount, impairment loss, amortization
expense and the deconsolidation of iPCS as of September 30, 2003, 2002 and 2001
(dollars in thousands):
<TABLE>
<CAPTION>
Amortization
period
------------
<S> <C>
Non-competition agreements - iPCS acquisition....................................... 6 months
Non-competition agreements - AirGate store acquisition.............................. 24 months
Acquired subscriber base - iPCS acquisition......................................... 30 months
Right to provide service under the Sprint agreements - iPCS acquisition............. 205 months
</TABLE>
<TABLE>
<CAPTION>
Non-competition Acquired Right to provide
Non-competition agreements - subscriber base service under the
agreements - iPCS AirGate store - iPCS Sprint agreements -
acquisition acquisition acquisition iPCS acquisition Total
----------------- --------------- --------------- ------------------ -----
<S> <C> <C> <C> <C> <C>
Balance as of November 30, 2001........... $ 3,900 $ 159 $ 52,400 $ 323,289 $379,748
Amortization expense................ (3,900) (127) (17,465) (17,886) (39,378)
Impairment.......................... -- -- (6,640) (305,403) (312,043)
-------- ------ --------- ---------- ---------
Balance as of September 30, 2002.......... -- 32 28,295 -- 28,327
Amortization expense................ -- (32) (6,789) -- (6,821)
Deconsolidation of iPCS............. -- -- (21,506) -- (21,506)
-------- ------ --------- ---------- ---------
Balance as of September 30, 2003.......... $ -- $ -- $ -- $ -- $ --
======== ====== ========= ========== =========
</TABLE>
(c) Goodwill and Asset Impairments (see note 14(a))
The wireless telecommunications industry experienced significant declines in
market capitalization throughout most of 2002. These significant declines in
market capitalization resulted from concerns regarding anticipated weakness in
future subscriber growth, increased subscriber churn, anticipated future lower
average revenue per user ("ARPU") and liquidity concerns. As a result of these
industry trends, the Company experienced significant declines in its market
capitalization subsequent to its acquisition of iPCS. Additionally, there were
significant adverse changes to the business plan for iPCS. These changes
included lower new subscribers, lower ARPU, increased service and pass through
costs from Sprint and lower roaming margins from Sprint. Wireless industry
acquisitions subsequent to the Company's acquisition of iPCS have been valued
substantially lower on a price per population and a price per subscriber basis.
As a result of these transactions and industry trends, the Company believed that
the fair value of iPCS and its assets had been reduced. Accordingly, the Company
on two occasions during 2002 performed fair value assessments of iPCS and its
assets. In determining the March 31, 2002 fair value assessment, the Company
utilized a combination of a market approach along with a discounted cash flow
approach. As there were no comparable transactions during the later half of
2002, the Company utilized a discounted cash flow approach to determine the
valuation at September 30, 2002. The Company recorded goodwill impairments of
approximately $261.2 million and $199.7 million during the quarters ended March
31, 2002 and September 30, 2002, respectively, as a result of these fair value
assessments.
During the quarter ended September 30, 2002, the Company recorded an impairment
for intangible assets of $312.0 million reflecting an impairment of iPCS' right
to provide service under the Sprint Agreements and the acquired subscriber base.
The right to provide service under iPCS' Sprint Agreements and its acquired
subscriber base were recorded as a result of the iPCS acquisition. The value and
lives assigned to these intangibles were $323.3 million and 205 months and $52.4
million and 30 months, respectively. As discussed above, the impairment arose
from significant adverse changes to the iPCS business plan. As a result, the
Company adjusted the carrying value of the right iPCS had to provide service
under the Sprint Agreements and the value of the acquired subscriber base to
their fair values at September 30, 2002.
During the quarter ended September 30, 2002, the Company recorded an asset
impairment for the property and equipment (principally network assets) of iPCS
of $44.5 million. As discussed above, the impairment arose from significant
adverse changes to the business plan for iPCS as well as a generally weak
secondary market for telecommunications related equipment.
<PAGE>
(d) iPCS Deconsolidation
Subsequent to the acquisition of iPCS, the results of operations and accounts of
iPCS were consolidated with the Company in accordance with generally accepted
accounting principles. On February 23, 2003, iPCS filed a Chapter 11 bankruptcy
case 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.
The following reflects the condensed balance sheet information for iPCS,
summarizing the deconsolidation adjustment to record the investment in iPCS on
the cost basis as of February 23, 2003 (dollars in thousands):
<TABLE>
<CAPTION>
As of February 23,
Condensed iPCS Balance Sheet Information: 2003
------------------
<S> <C>
Cash and cash equivalents............................................... $ 10,031
Other current assets.................................................... 32,084
---------
Total current assets............................................. 42,115
Property and equipment, net............................................. 174,103
Other noncurrent assets................................................. 24,807
---------
Total assets..................................................... $ 241,025
=========
Current liabilities..................................................... $ 416,564
Long-term debt ......................................................... 409
Other long-term liabilities............................................. 8,167
---------
Total liabilities................................................ 425,140
=========
Investment in iPCS............................................... $ 184,115
=========
</TABLE>
(e) 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 (see note 14(a)).
The following reflects the accounts and loss from discontinued operations of
iPCS as of September 30, 2002 and for the years ended September 30, 2003 and
2002 (dollars in thousands):
As of September
30, 2002
---------------
Cash and cash equivalents $ 27,588
Other current assets 34,479
------------
Total current assets 62,067
Property and equipment, net 185,378
Intangible assets, net 28,294
Other noncurrent assets 3,340
------------
Net assets of discontinued operations $ 279,079
============
Current liabilities $ 411,998
Long-term debt 564
Other long-term liabilities 8,060
------------
Net liabilities of discontinued operations $ 420,622
============
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended
September 30,
2003 2002
---- ----
<S> <C> <C>
Revenue $ 79,364 $ 144,080
Cost of revenue 63,398 124,031
Selling and marketing 16,417 37,511
General and administrative 6,881 7,708
Depreciation and amortization 20,989 68,765
Loss on disposal 1,451 --
Impairments -- 817,413
--------- -----------
Operating expense 109,136 1,055,428
--------- -----------
Operating loss (29,772) (911,348)
Interest expense, net (12,799) (21,250)
Income tax benefit -- 28,761
--------- -----------
Loss from discontinued operations $ (42,571) $ (903,837)
========= ===========
</TABLE>
(3) Summary of Significant Accounting Policies
(a) 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 Emerging Issues Task Force
("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 as the Company does not generate revenues
from the sale of wireless handsets to the subscriber. The impact of adoption
EITF 00-21 had the affect of increasing equipment revenue by $0.4 million and
increasing costs of equipment by $0.3 million, which otherwise would have been
deferred and amortized.
For activations not recognized under the scope of EITF 00-21, the Company defers
activation fee revenue over the average life of its subscribers, which is
estimated to be 30 months. The Company recognizes service revenue from its
subscribers as they use the service. The Company provides a reduction of
recorded revenue for billing adjustments 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 Subscriber (Including a Reseller of the Vendor's Products)." For
industry competitive reasons, the Company sells wireless handsets at a loss. The
Company participates in the Sprint national and regional distribution programs
in which national retailers such as Radio Shack 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.
Handset subsidy charges included in selling and marketing for the years ended
September 30, 2003, 2002, and 2001 were $5.5 million, $11.7 million, and $12.8
million, respectively. Excluding sales commissions, handset subsidy upgrade
charges in cost of service and roaming for the year ended September 30, 2003 and
2002 were $6.0 million and $3.1 million, respectively. The Company did not incur
handset subsidy upgrade charges for the year ended September 30, 2001.
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.
<PAGE>
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.
(b) Allowance for Doubtful Accounts
Estimates are used in determining the allowance for doubtful accounts and are
based on historical collection and write-off experience, current trends, credit
policies and accounts receivable by aging category, including 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
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 collectible. The reserve 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.
(c) Reserve for 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 increased the deposit
amount in February 2003. The Company believes that the re-imposition of and
increase in deposit requirements as well as the continuation of spending limits
for the 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 September 30, 2002, there was approximately $0.7
million reserved for 3,717 first payment default subscribers.
(d) Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, demand deposits and money
market accounts with original maturities of three months or less.
(e) Inventories
Inventories consist of wireless handsets and related accessories held for
resale. Inventories are carried at the lower of cost or market determined by
using replacement costs.
(f) Property and Equipment
Property and equipment are stated at original cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives of the assets.
Estimated useful lives are as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
-----------
<S> <C>
Network assets............................................................................ 5 to 7 years
Computer equipment........................................................................ 3 to 5 years
Furniture, fixtures, and office equipment................................................. 5 years
Towers (included in network assets)....................................................... 15 years
</TABLE>
Assets held under capital lease obligations are amortized over their estimated
useful life or the lease term, whichever is shorter. Amortization of assets held
under capital lease obligations are included in depreciation and amortization of
property and equipment.
Construction in progress includes expenditures for the purchase of network
assets. The Company capitalizes interest on its construction in progress
activities. When network assets are placed in service, the related assets are
transferred from construction in progress to network assets and the Company
depreciates those assets over their estimated useful life.
<PAGE>
(g) Investment in iPCS
Prior to the treatment of iPCS as a discontinued operation, the accounts and
results of iPCS are consolidated with AirGate and are included in the Company's
consolidated financial statements subsequent to November 30, 2001 and prior to
February 23, 2003.
Subsequent to February 23, 2003, the date iPCS filed for bankruptcy the Company
no longer consolidates the accounts and results of iPCS. The Company follows the
accounting literature of Statement of Financial Accounting Standards ("SFAS")
No. 94 "Consolidation of All Majority-Owned Subsidiaries" and Accounting
Research Bulletin ("ARB") No. 51 "Consolidated Financial Statements," when
control of a majority-owned subsidiary did not rest with the majority owners
(as, for instance, where the subsidiary is in legal reorganization or in
bankruptcy), ARB No. 51 precludes consolidation of the majority-owned
subsidiary.
The Company records the accounts of iPCS using the cost method of accounting
subsequent to February 23, 2003. After iPCS filed for bankruptcy, the Company
does not have the ability to exercise significant influence over the operations
of iPCS. The carrying value of the iPCS investment is reported in long term
liabilities on the balance sheet.
On October 17, 2003, AirGate irrevocably transferred all of its shares of iPCS
common stock to a trust for the benefit of AirGate shareholders. As of the date
of the transfer to the trust, the iPCS investment (approximately $184 million
credit balance carrying amount) will be eliminated and recorded as a
non-monetary gain from disposition of discontinuing operations.
(h) Financing Costs
Costs incurred for the AirGate credit facilities and AirGate notes that were
deferred and are being amortized as interest expense over the term of the
respective financing arrangements using the straight-line method.
(i) 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 carryforwards. 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.
(j) Basic and Diluted Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding during the period. For the
years ended September 30, 2003, 2002, and 2001, all outstanding stock options
and common stock underlying stock purchase warrants as detailed in Note 8 have
been excluded from the computation of dilutive net loss per share for all
periods presented because their effect would have been antidilutive. The
following table shows those potentially dilutive securities with exercise prices
less than market prices of common stock in the respective periods using the
treasury stock method (see note 14(b)):
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Common stock options......................................... 4,439 44,534 102,124
Common stock underlying stock purchase warrants.............. 8,087 8,199 18,122
------ ------ -------
Total............................................. 12,526 52,733 120,246
====== ====== =======
</TABLE>
(k) Impairment of Long-Lived Assets and Goodwill
The Company accounts for long-lived assets and goodwill in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 144 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell the asset. SFAS No. 142
requires annual tests for impairment of goodwill and intangible assets that have
indefinite useful lives and interim tests when an event has occurred that more
likely than not has reduced the fair value of such assets. The Company no longer
has any assets recorded subject to SFAS 142 impairment testing.
(l) New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of
Liabilities and Equity," which is effective at the beginning of the first
interim period beginning after June 15, 2003. 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 Company will continue to
review SFAS No. 150; however, the Company does not expect SFAS 150 to have a
material impact on the Company's financial position, results of operations, or
cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement of 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for hedging of contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003 and did not have a material impact on the Company's results of
operations, financial position, or cash flows.
<PAGE>
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. This interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The Interpretation is generally effective for
interim periods ending after December 15, 2003 for all variable interests in
variable interest entities created prior to January 31, 2003. The adoption of
Interpretation No. 46 is not anticipated to have a material impact on the
Company's financial position, results of operations, or cash flows.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation from the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." As allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting, and has adopted the
disclosure requirements of SFAS No. 123 and 148.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," which addresses the disclosure to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees. This interpretation also requires the recognition of a
liability by a guarantor at the inception of certain guarantees. Interpretation
No. 45 requires the guarantor to recognize a liability for the non-contingent
component of the guarantee, which is the obligation to stand ready to perform in
the event that specified triggering events or conditions occur. The initial
measurement of this liability is the fair value of the guarantee at inception.
The recognition of the liability is required even if it is not probable that
payments will be required under the guarantee or if the guarantee was issued
with a premium payment or as part of a transaction with multiple elements. The
Company guarantees certain lease commitments of its restricted subsidiaries. The
maximum amount of these guarantees is included in note 13. Also, the handsets
sold by the Company are under a one-year warranty from Sprint. If a customer
returns a handset for warranty, the Company generally provides the customer with
a refurbished handset and sends the warranty handset to Sprint for repair.
Sprint provides a credit to the Company equal to the retail price of the
refurbished handset. Therefore, the warranty expense for the Company is not
deemed material.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 provides new guidance on the
recognition of costs associated with exit or disposal activities. The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of commitment to an
exit or disposal plan. SFAS No. 146 supercedes previous accounting guidance
provided by the EITF Issue No. 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." EITF Issue No. 94-3 required recognition of
costs at the date of commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company adopted SFAS No. 146 on October 1, 2002. There was no
material impact on adoption of this statement.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," will now be used to
classify those gains and losses. The adoption of SFAS No. 145 by the Company on
October 1, 2002 did not have a material impact on the Company's financial
position, results of operations, or cash flows.
(m) Use of Estimates
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.
(n) Concentration of Risk
The Company's cell sites are located on towers which are leased from a limited
number of tower companies, with one company owning approximately 34% of the
Company's leased towers. Additionally, the Company derives substantial revenues
and expenses from Sprint and Sprint PCS (see note 4).
The Company maintains cash and cash equivalents in accounts with financial
institutions in excess of the amount insured by the Federal Deposit Insurance
Corporation. Management does not believe there is significant credit risk
associated with deposits in excess of federally insured amounts. Further, the
Company maintains accounts with nationally recognized investment managers. Such
deposits are not insured by the Federal Deposit Insurance Corporation.
Management does not believe there is significant credit risk associated with
these uninsured deposits.
<PAGE>
A significant amount of the Company's financial transactions result from the
Company's relationship with Sprint. Additionally, Sprint holds approximately
four to eleven days of the Company's subscriber lockbox receipts prior to
remitting those receipts to the Company weekly. Refer to note 4 for information
on the Company's transactions with Sprint.
Concentrations of credit risk with respect to accounts receivables are limited
due to a large subscriber base. Initial credit evaluations of subscribers'
financial condition are performed and security deposits are generally obtained
for subscribers with a high credit risk profile. The Company maintains an
allowance for doubtful accounts for potential credit losses.
(o) Comprehensive Income (Loss)
No statements of comprehensive income (loss) have been included in the
accompanying consolidated financial statements since the Company does not have
any elements of other comprehensive income (loss) to report.
(p) Advertising Expenses
The Company expenses advertising costs when the advertisement occurs. Total
advertising expenses amounted to approximately $6.7 million in 2003, $12.2
million in 2002 and $13.0 million in 2001 and are included in selling and
marketing expenses in the accompanying consolidated statements of operations.
(q) Segments
The Company and its subsidiaries have been operated and are evaluated by
management as a single operating segment in accordance with the provisions of
SFAS No. 131 - "Disclosures about Segments of an Enterprise and Related
Information."
(r) Stock-based Compensation Plans
We have elected to continue to account for our stock-based compensation plans
under APB Opinion No. 25, "Accounting for Stock Issued to Employees", and
disclose pro forma effects of the plans on a net loss and loss per share basis
as provided by SFAS No. 123, "Accounting for Stock-Based Compensation." We did
not recognize compensation expense with respect to options that had an exercise
price equal to the fair market value of the Company's common stock on the date
of grant. Had compensation cost for these options been recognized based on fair
value at the grant dates under the related provisions of SFAS No. 123, the pro
forma loss from continuing operations and net loss and loss per share during the
fiscal years ended September 30, 2003, 2002 and 2001would have been as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Loss from continuing operations, as reported $ (42,186) $ (92,780) $ (110,990)
Add: stock based compensation expense included in
determination of loss from continuing operations 650 769 1,665
Less: stock-based compensation expense determined
under the fair value based (9,698) (9,138) (5,585)
----------- ---------- ------------
Pro forma loss from continuing operations $ (51,234) $ (101,149) $ (114,910)
=========== ========== ============
Basic and diluted weighted-average outstanding common shares 5,181,683 4,750,301 2,617,857
Basic and diluted loss from continuing operations per share:
As reported ($8.14) ($19.53) ($42.40)
Pro forma ($9.89) ($21.29) ($43.89)
<PAGE>
<CAPTION>
Years ended September 30,
---------------------------------------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Net loss, as reported $ (84,757) $ (996,617) $ (110,990)
Add: stock based compensation expense included in
determination of net loss 650 769 1,665
Less: stock-based compensation expense determined
under the fair value based method (9,698) (9,138) (5,585)
----------- ---------- ------------
Pro forma net loss $ (93,805) $ (1,004,986) $ (114,910)
=========== ========== ============
Basic and diluted weighted-average outstanding common shares 5,181,683 4,750,301 2,617,857
Basic and diluted loss per share:
As reported ($16.36) ($209.80) ($42.40)
Pro forma ($18.10) ($211.56) ($43.89)
</TABLE>
(s) Asset Retirement Obligations
The Company's network is primarily located on leased property and the Company
has certain legal obligations, principally related to its tower leases, which
fall within the scope of SFAS No. 143 "Accounting for Asset Retirement
Obligations". These legal obligations upon lease termination primarily include
certain obligations to remediate leased tower space and land on which the
Company's network equipment is located. In addition, the Company has leases
related to switch site, retail and administrative locations subject to the
provisions of SFAS No. 143. During the fiscal year ended September 30, 2003, the
Company recorded an initial asset retirement obligation of approximately $0.2
million, and capitalized the same amount by increasing the carrying cost of the
related asset. For the year ended September 30, 2003, the Company recorded
approximately $0.2 million of depreciation and accretion expense.
(t) Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
(4) Sprint Agreements
Under the Sprint Agreements, Sprint is obligated to provide the Company with
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
expense when Sprint's and Sprint's network partners' wireless subscribers incur
minutes of use in the Company's territories and when the Company's subscribers
incur minutes of use in Sprint and other Sprint network partners' PCS
territories. These transactions are recorded as roaming revenue, cost of service
and roaming, cost of equipment, and selling and marketing expense 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 service 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 years ended September 30,
2003, 2002 and 2001 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
---------------------------------------------
Years Ended September 30,
---------------------------------------------
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Amounts included in the Consolidated Statement of Operations:
AirGate roaming revenue............................................ $ 63,798 $ 70,002 $ 53,863
======== ========== =========
AirGate cost of service and roaming:
Roaming...................................................... $ 50,383 $ 52,746 $ 40,472
Customer service............................................. 40,014 40,454 15,526
Affiliation fees............................................. 18,358 15,815 7,603
Long distance................................................ 12,485 13,846 6,556
Other........................................................ 1,902 2,115 1,252
-------- ---------- ---------
Total cost of service and roaming.................................. $123,142 $ 124,976 $ 71,409
======== ========== =========
AirGate cost of equipment.......................................... $ 18,051 $ 23,662 $ 19,405
======== ========== =========
AirGate selling and marketing...................................... $ 12,440 $ 21,728 $ 20,827
======== ========== =========
</TABLE>
<PAGE>
Amounts included in the Consolidated Balance Sheet:
As of
September 30,
-------------
2003 2002
---- ----
Receivable from Sprint $15,809 $ 28,977
Payable to Sprint (45,069) (53,381)
The Company reclassified approximately $10.0 million of subscriber accounts
receivable for the fiscal year ended September 30, 2002 to a receivable from
Sprint. The Company believes at least $10.0 million was payable from Sprint, but
Sprint acknowledged that only $5.8 million was owed to AirGate. The Company
provided an allowance to reflect the receivable at its net realizable value at
September 30, 2002. The Company collected this amount subsequent to September
30, 2002.
Because approximately 96% of our revenue is collected by Sprint and 66% 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 AirGate approximately $0.4 million with
respect to fiscal year 2002 and $1.3 million for fiscal year
2003 to reimburse Sprint for certain 3G related development
expenses. We are disputing Sprint's right to charge 3G fees in
2002 and beyond.
o Sprint invoiced AirGate software maintenance fees of
approximately $1.7 million for each of fiscal years 2002 and
2003. We are disputing Sprint's right to charge software
maintenance fees.
o During the fiscal year 2003, Sprint invoiced AirGate $2.6
million for information technology (IT) expenses including
reimbursement for the amortization of IT projects completed by
Sprint. The Company has disputed Sprint's right to collect
these fees.
For purposes of cash flow and liquidity, the payable to Sprint includes disputed
amounts for which Sprint has invoiced AirGate approximately $8.9 million. The
invoiced amount does not include $2.7 million for long-distance access revenues
claimed but not invoiced by Sprint, or fees relating to disputed 3G, software
maintenance and information technology after September 30, 2003.
We intend to vigorously contest these charges and to closely examine all fees
and charges imposed by Sprint. In addition to these disputes, we have other
outstanding issues with Sprint which could result in set-offs to the items
described above or in payments due from Sprint. For example, we believe Sprint
has failed to calculate, pay and report on collected revenues in accordance with
our agreements with Sprint, which, together with other cash remittance issues,
has resulted in a shortfall in cash payments to AirGate. 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 year ended September 30, 2003, AirGate recorded $3.6 million (not
including $1.3 million for monthly service charges as described below) in
credits from Sprint as a reduction of cost of services and $3.7 million as an
increase in revenues. We are reviewing whether additional amounts are due
AirGate and we continue to discuss with Sprint the proper method for
calculating, paying and reporting on collected revenues and other matters.
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 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
that the amounts paid by Sprint's network partners, Sprint charges the network
partners for these amounts. During the fiscal year ended September 30, 2003,
Sprint credited AirGate $1.3 million, which was recorded as a reduction to cost
of service.
The Sprint Agreements require the Company to maintain certain minimum network
performance standards and to meet other performance requirements. AirGate was in
compliance in all material respects with these requirements as of September 30,
2003.
(5) Property and Equipment
Property and equipment as of September 30, 2003 and 2002 consists of the
following (dollars in thousands):
2003 2002
---- ----
Network assets..................................... $288,399 $270,024
Computer equipment................................. 6,712 6,484
Furniture, fixtures, and office equipment.......... 12,069 11,828
Construction in progress........................... 876 9,261
-------- --------
Total property and equipment................. 308,056 297,597
Less accumulated depreciation and amortization..... (129,986) (83,820)
-------- --------
Total property and equipment, net............ $178,070 $213,777
======== ========
Interest capitalized for the years ended September 30, 2003, 2002 and 2001
totaled $0.4 million, $2.1million and $2.9 million, respectively.
(6) Long-Term Debt
Long-term debt consists of the following at September 30, 2003 and 2002
(dollars in thousands):
<TABLE>
<CAPTION>
2003 2002
---- ----
<S> <C> <C>
AirGate credit facility, net of unaccreted discount of $178 and $376, respectively... $ 151,297 $ 136,124
AirGate notes, $300,000 due at maturity, at accreted carrying value, net of
unamortized premium of $7,644 and $8,649, respectively........................... 252,987 220,164
------- -------
Total long-term debt .......................................................... 404,284 356,288
Current maturities of long-term debt .......................................... 17,775 2,024
------- --------
Long-term debt, excluding current maturities................................... $ 386,509 $354,264
========= ========
</TABLE>
As of September 30, 2003, future scheduled principal payments under indebtedness
for the next five years and thereafter are as follows (dollars in thousands):
AirGate
Credit AirGate
Years Ending September 30, Facility Notes Total
-------- ----- -----
2004.................................... $ 17,775 $ - $ 17,775
2005.................................... 23,700 - 23,700
2006.................................... 30,107 - 30,107
2007.................................... 39,893 - 39,893
2008 and Thereafter..................... 40,000 300,000 340,000
------- ------- -------
Total future principal payments on
long-term debt.................... 151,475 300,000 451,475
Less amount representing unaccreted
discounts........................... (178) (47,013) (47,191)
---------- ---------- ----------
Total future principal payments on
long-term debt, net of unaccreted
discounts............................. 151,297 252,987 404,284
Less current maturities................. (17,775) - (17,775)
--------- --------- ----------
Long-term debt, excluding current
maturities............................ $133,522 $252,987 $386,509
========= ========== =========
AirGate Credit Facility
On August 16, 1999, AirGate entered into a $153.5 million senior credit
facility. The AirGate credit facility provides for (i) a $13.5 million senior
secured term loan (the "Tranche I Term Loan") which matures on June 6, 2007, and
(ii) a $140.0 million senior secured term loan (the "Tranche II Term Loan")
which matures on September 30, 2008. Mandatory quarterly payments of principal
are required beginning December 31, 2002 for the Tranche I Term Loan and March
31, 2004 for the Tranche II Term Loan payments initially in the amount of 3.75%
of the loan balance then outstanding and increasing thereafter. A commitment fee
of 1.50% on unused borrowings under the AirGate credit facility is payable
quarterly and included in interest expense. For the years ended September 30,
2003, 2002 and 2001, commitment fees totaled $0.1 million, $0.6 million and $1.5
million, respectively. No amounts remain available for borrowing under the
AirGate credit facility as of September 30, 2003. The AirGate credit facility is
secured by all the assets of AirGate and its restricted subsidiaries. In
connection with this financing, AirGate issued Lucent Technologies, in its
capacity as administrative agent and manager, warrants to purchase 27,807 shares
of common stock that were exercisable upon issuance. Additionally, AirGate
incurred origination fees and expenses of $5.0 million, which have been recorded
as financing costs and are amortized to interest expense using the straight-line
method over the life of the agreement. The interest rate for the AirGate credit
facility is determined on a margin above either the prime lending rate in the
United States or the London Interbank Offer Rate. At September 30, 2003 and
2002, the weighted average interest rate on outstanding borrowings was 5.05% and
5.6%, respectively.
The AirGate 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 AirGate credit facility restricts the ability of AirGate 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
September 30, 2003, AirGate was in compliance in all material respects with
covenants contained in the AirGate credit facility, as amended.
In contemplation of the restructuring, AirGate entered into an amendment to the
AirGate 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. In addition, the amendment provides for a waiver, effective as of
September 30, 2003, of the requirement that the Company deliver an opinion of
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 AirGate Notes
having been exchanged in the restructuring. These changes include: (i) deleting
the minimum subscriber covenant, (ii) revising the threshold requirements for
minimum revenues and most of the ratios that we are required to maintain; (iii)
providing AirGate the ability to incur certain other limited indebtedness and
related lien; make certain limited investments and form subsidiaries under
limited circumstances that are not subject to certain restrictive covenants
contained in the credit facility or required to guarantee the credit facility
and (iv) permitting AirGate 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 AirGate credit
facility, including those which restrict AirGate'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
2004 and 2005 in the amount of $7.5 million and $2.5 million, respectively. The
amendment will not otherwise affect AirGate's obligation to pay interest,
premium, if any, or principal on the AirGate credit facility, when due.
Old AirGate Notes
On September 30, 1999, the Company received proceeds of $156.1 million from the
issuance of the Old AirGate Notes, which consisted of 300,000 units, each unit
consisting of $1,000 principal amount at maturity of 13.5% senior subordinated
discount notes due 2009 and one warrant to purchase 0.43 shares of common stock
at a price of $0.05 per share. The accreted value outstanding as of September
30, 2003 of the AirGate notes was $253.0 million. The Company incurred expenses,
underwriting discounts and commissions of $6.6 million related to the old notes,
which have been recorded as financing costs and are amortized to interest
expense using the straight-line method, over the life of the agreement. The old
notes contain certain covenants relating to limitations on AirGate's ability to,
among other acts, sell assets, incur additional indebtedness, and make certain
payments. The AirGate notes restrict the ability of AirGate 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 September 30, 2003,
AirGate was in compliance in all material respects with all covenants governing
the AirGate notes.
<PAGE>
(7) Fair Value of Financial Instruments
Fair value estimates and assumptions and methods used to estimate the fair value
of the Company's financial instruments are made in accordance with the
requirements of SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments." The Company has used available information to derive its
estimates. However, because these estimates are made as of a specific point in
time, they are not necessarily indicative of amounts the Company could realize
currently. The use of different assumptions or estimating methods may have a
material effect on the estimated fair value amounts (dollars in thousands).
<TABLE>
<CAPTION>
September 30, 2003 September 30, 2002
------------------ ------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................................... $ 54,078 $ 54,078 $ 4,887 $ 4,887
Accounts receivable, net..................................... 26,994 26,994 24,245 24,245
Receivable from Sprint....................................... 15,809 15,809 28,977 28,977
Accounts payable............................................. 5,945 5,945 9,803 9,803
Accrued expenses............................................. 12,104 12,104 9,827 9,827
Payable to Sprint............................................ 45,069 45,069 53,381 53,381
AirGate credit facility...................................... 151,297 147,688 136,124 112,302
AirGate notes................................................ 252,987 227,813 220,164 25,125
</TABLE>
(a) Cash and cash equivalents, accounts receivable net, receivable from Sprint,
accounts payable, accrued expenses and payable to Sprint.
Management believes that the carrying amounts of these items are reasonable
estimates of their fair value due to the short-term nature of the instruments.
(b) Long-term debt
Long-term debt is comprised of the AirGate credit facility and AirGate notes.
The fair value of the AirGate notes are stated at quoted market price. As there
is no active market for the AirGate credit facility, management has estimated
the fair values of the AirGate credit facility based upon the Company's analysis
and discussions with individuals knowledgeable about such matters.
(8) Stockholders' Deficit
(a) Common Stock Purchase Warrants
On August 16, 1999, AirGate issued stock purchase warrants to Lucent
Technologies in consideration of the AirGate credit facility. The exercise price
of the warrants equals 120% of the price of one share of common stock at the
closing of the initial public offering, or $102.00 per share, and the warrants
were exercisable for an aggregate of 25,772 shares of AirGate's common stock.
AirGate allocated $0.7 million of the proceeds from the AirGate credit facility
to the fair value of the warrants calculated using the Black-Scholes option
pricing model and recorded an original issue discount on the AirGate credit
facility, which is recognized as interest expense over the period from the date
of issuance to the maturity date using the effective interest method. In
September 2000, all of such warrants were exercised.
In June 2000, AirGate issued stock purchase warrants to Lucent Technologies to
acquire 2,035 shares of common stock on terms identical to those discussed in
the previous paragraph, all of which were outstanding as of September 30, 2003.
These warrants expire on August 15, 2004. The Company recorded a discount on the
AirGate credit facility of $0.3 million, which represents the fair value of the
warrants on the date of grant using a Black-Scholes option pricing model. The
discount is recognized as interest expense over the period from the date of
issuance to maturity using the effective interest method.
On September 30, 1999, as part of offering the AirGate notes, the Company issued
warrants to purchase 0.43 shares of common stock for each unit at a price of
$0.05 per share. In January 2000, the Company's registration statement on Form
S-1 relating to warrants to purchase 128,880 shares of common stock issued
together, as units, with AirGate's $300 million of 13.5% senior subordinated
discount notes due 2009, was declared effective by the Securities and Exchange
Commission. The Company allocated $10.9 million of the proceeds from the units
offering to the fair value of the warrants and recorded an original issue
discount on the notes, which is recognized as interest expense over the period
from issuance to the maturity date using the effective interest method. For the
years ended September 30, 2003, 2002 and 2001, accretion of the discount from
the warrants totaling $1.0 million, $0.9 million and $0.8 million, respectively,
was recorded as interest expense. The warrants became exercisable beginning upon
the effective date of the registration statement registering such warrants, for
an aggregate of 128,880 shares of common stock, and expire October 1, 2009. As
of September 30, 2003, warrants representing 3,738 shares of common stock were
outstanding. These warrants require liability classification measured at fair
value. The fair value of the warrants at September 30, 2003 and 2002 were $0.1
million and $0.1 million, respectively.
As part of the acquisition of iPCS by AirGate, AirGate assumed warrants
previously issued by iPCS in connection with the iPCS notes. The warrant holders
may purchase 95,070 shares of Company common stock with an exercise price of
$172.55 per share all of which were outstanding as of September 30, 2003.
Additionally, the Company assumed warrants on 36,717 shares of the Company's
common stock previously issued by iPCS in connection with iPCS' amendment of its
management agreement with Sprint with an exercise price of $155.30 per share all
of which were outstanding as of September 30, 2003. The warrants related to the
iPCS notes became exercisable on July 15, 2001 for a period of ten years after
the date of issuance. The warrants related to the Sprint Agreements were issued
as a part of an amendment to the management agreement iPCS had with Sprint in
connection with iPCS' purchase of Sprint owned PCS territories in Michigan, Iowa
and Nebraska and became exercisable by Sprint on July 15, 2001 and expire on
July 15, 2007. These warrants require liability classification measured at fair
value. The fair value of the iPCS note warrants at September 30, 2003 and 2002
was approximately $0.8 million and $0.1 million, respectively.
The following is a summary of the aggregate common stock share activity for the
Company's warrants for the three years ended September 30, 2003:
<TABLE>
<CAPTION>
AirGate Lucent AirGate Note iPCS Note iPCS Sprint
Warrants - June Warrants - September Warrants - Warrants - July
2000 1999 July 2000 2000 Total
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Balance September 30, 2000 2,035 27,162 - - 29,197
Shares issued upon exercise of
warrants - (16,128) - - (16,128)
------ -------- -------- ------- --------
Balance September 30, 2001 2,035 11,034 - - 13,069
Warrants assumed upon acquisition of
iPCS - - 95,070 36,717 131,787
Shares issued upon exercise of - (3,000) - - (3,000)
warrants ------ -------- ------- ------ -------
Balance September 30, 2002 2,035 8,034 95,070 36,717 141,856
Shares issued upon exercise of - (4,296) - - (4,296)
------ ------- ------- ------ --------
Balance September 30, 2003 2,035 3,738 95,070 36,717 137,560
===== ===== ====== ====== =======
</TABLE>
(b) Stock Compensation Plans
In July 1999, the Board of Directors approved the 1999 Stock Option Plan, a
stock option plan whereby 400,000 shares of common stock were reserved for
issuance to employees. Options granted under the plan vest at various terms up
to a five-year period beginning at the grant date and expire ten years from the
date of grant. During the year ended September 30, 2000, unearned stock
compensation of $2.2 million was recorded for option grants made during that
period representing the difference between the exercise price at the date of
grant and the fair value at the date of grant. Non-cash stock compensation is
recognized over the period in which the related services are rendered.
On January 31, 2001, the Board of Directors approved the 2001 Non-Executive
Stock Option Plan, under which 30,000 shares of common stock were reserved for
issuance to employees. Options granted under the plan vest ratably over a
four-year period beginning at the grant date and expire ten years from the date
of grant.
On July 31, 2001, the Board of Directors approved the AirGate PCS, Inc. 2001
Non-Employee Director Compensation Plan. Pursuant to the plan, non-employee
directors receive an annual retainer, which may be comprised of cash, restricted
stock or options to purchase shares of Company common stock. Each non-employee
director that joins the Company's board of directors also receives an initial
grant of options to acquire 2,000 shares of Company common stock. The options
vest in three equal annual installments beginning on the first day of the plan
year following the year of grant. In addition, each participant receives an
annual grant of options to acquire 1,500 shares of Company common stock. In lieu
of this annual grant, the recipient may elect to receive three year's worth of
annual option grants in a single upfront grant to acquire 4,500 shares of
Company common stock that vest in three equal annual installments. All options
are granted at an exercise price equal to the fair market value of the Company's
common stock on the date of grant and expire ten years after the date of grant.
On January 31, 2001, the board of directors approved the 2001 Employee Stock
Purchase Plan (the "ESPP"), under which 40,000 shares of common stock were
reserved for purchase. The ESPP was approved by shareholders and became
effective
January 31, 2001. The ESPP allows employees to make voluntary payroll
contributions towards the purchase of Company common stock. At the end of each
offering period, participating employees are able to purchase company common
stock at a 15% discount to the market price of the Company's common stock at the
beginning or end of the offering period, whichever is lower. As of December 31,
2002, the end of the most recent offering period, 25,345 shares of common stock
had been issued under the ESPP, and 14,655 shares remain reserved for future
issuance.
On December 18, 2001, the board of directors approved the AirGate PCS, Inc. 2002
Long-Term Incentive Plan (the "2002 Plan"), under which 300,000 shares of
Company common stock were reserved for issuance to select employees and
officers, directors and consultants of the Company. Options granted under the
2002 Plan vest on such terms as determined by the Company's compensation
committee (generally ratably over four years), and expire ten years after the
date of grant. The 2002 Plan was approved by shareholders and became effective
on February 26, 2002. Upon approval of the 2002 Plan by the Company's
shareholders, the right to grant awards under the 1999 Stock Option Plan and the
2001 Non-Executive Stock Option Plan were terminated, and shares granted under
the 2001 Non-Employee Director Plan are reserved under the authority of the 2002
Plan.
The Company issued 6,000 and 2,413 shares of restricted stock to employees
during the fiscal year ended September 30, 2003 and 2002, respectively. The
restrictions on the stock lapse over a period of time of up to 4 years. The
Company has recorded the fair value of the shares issued of $0.02 million and
$0.3 million for fiscal years 2003 and 2002, respectively, as unearned stock
compensation and is amortizing such amounts to non-cash stock compensation over
the vesting period.
The weighted-average grant date fair value of stock option grants for the years
ended September 30, 2003, 2002, and 2001 was $2.65, $131.50, and $155.50,
respectively. The fair value of stock options granted was estimated as of the
date of the grant using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
Years Ended September 30,
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Risk-free interest return............................................ 3.5% 2.3% 3.5%
Volatility........................................................... 112.0 % 180.0% 100.0%
Dividend yield....................................................... 0 % 0% 0%
Expected life in years............................................... 4 4 4
</TABLE>
The following table summarizes activity under the Company's stock option plans:
<TABLE>
<CAPTION>
Number of Weighted-average
options exercise price
<S> <C> <C>
Options outstanding as of September 30, 2000................................................. 300,929 $ 143.60
Granted................................................................................... 100,517 206.75
Exercised................................................................................. (93,511) 71.95
Forfeited................................................................................. (16,548) 183.30
-------- ------
Options outstanding as of September 30, 2001................................................. 291,387 186.15
Options assumed in acquisition of iPCS................................................... 95,613 159.95
Granted................................................................................. 127,537 137.25
Exercised................................................................................ (6,711) 134.30
Forfeited................................................................................ (55,874) 176.50
-------- ------
Options outstanding as of September 30, 2002................................................. 451,952 169.75
Granted................................................................................... 94,300 3.60
Forfeited................................................................................. (290,838) 182.35
--------- ------
Options outstanding as of September 30, 2003................................................. 255,414 $ 91.60
========= ======
</TABLE>
As previously discussed, the Company maintains several stock option plans with
total reserved shares of approximately 431,941. The number of shares of the
Company's common stock available for future grant under the Company's stock
option plans was 176,527 as of September 30, 2003.
The following table summarizes information for stock options outstanding and
exercisable at September 30, 2003:
Options outstanding Options exercisable
------------------- -------------------
Weighted average Weighted Weighted
average remaining average average
Range of Number contractual life exercise Number exercise
exercise prices outstanding (in years) price exercisable price
---------------- ----------- -------------- -------- ----------- -----
$1.30-$3.20 27,460 8.72 $2.35 -- --
$4.10-$4.10 54,800 9.21 $4.10 -- --
$4.35-$61.60 40,758 8.65 $34.75 10,891 $37.15
$62.50-$145.90 57,578 6.13 $109.75 47,855 $111.80
$172.60-$183.75 32,986 5.97 $173.80 28,268 $173.55
$196.10-$233.30 29,994 7.12 $214.15 18,318 $213.45
$234.40-$286.05 10,838 7.29 $250.60 6,159 $248.15
$492.50-$492.50 1,000 6.44 $492.50 800 $492.50
----- ---- ------- --- -------
$1.30-$492.50 255,414 7.62 $91.60 112,291 $146.90
======= ==== ====== ======= =======
As of September 30, 2002, 170,969 options were exercisable with a weighted
average exercise price of $172.95. As of September 30, 2001, 81,289 options were
exercisable with a weighted average exercise price of $150.25.
(c) Preferred Stock
The Company's articles of incorporation authorize the Company's board of
directors to issue up to 1 million shares of preferred stock without stockholder
approval. The Company has not issued any preferred stock as of September 30,
2003.
(d) Non-Cash Stock Compensation
The Company's non-cash stock compensation expense has been recorded to reflect
the difference between the exercise price and the fair market value of the
Company's common stock and restricted stock at the date of grant. The expense is
recognized over the period in which the related services are rendered. The
amounts below have been reflected and are included in the respective categories
shown below in the Consolidated Statements of Operations for the years ending
September 30, 2003, 2002 and 2001(dollars in thousands):
2003 2002 2001
---- ---- ----
Cost of service and roaming $ 154 $168 $ 177
Selling and marketing 89 89 89
General and administrative 407 512 1,399
--- --- -----
Total $ 650 $ 769 $ 1,665
===== ===== =======
(9) Income Taxes
The provision for income taxes includes income taxes currently payable and those
deferred because of temporary differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future and any increase or decrease in the valuation allowance
for deferred income tax assets.
Income tax benefit from continuing operations for the years ended September 30,
2003, 2002 and 2001, differed from the amounts computed by applying the
statutory U.S. Federal income tax rate of 34% to loss before income tax benefit
as a result of the following (dollars in thousands):
<TABLE>
<CAPTION>
Years ended September 30,
2003 2002 2001
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax benefit from continuing operations......... $ (14,343) $ (31,545) $ (37,737)
(Increase) decrease in income tax benefit resulting from:
State income tax benefits, net of Federal effect.......................... (1,687) (3,711) (6,120)
Stock option deductions................................................... -- 230 (2,224)
Increase in the valuation allowance for deferred income tax assets........ 13,467 32,609 44,697
Nondeductible interest expense............................................ 1,929 1,502 1,308
Other, net................................................................ 634 915 76
----------- --------- ----------
Total income tax benefit...................................... $ -- $ -- $ --
=========== ========= ==========
</TABLE>
Differences between financial accounting and tax bases of assets and liabilities
giving rise to deferred income tax assets and liabilities are as follows at
September 30, 2003 and 2002 (dollars in thousands):
<TABLE>
<CAPTION>
2003 2002
---- ----
Deferred income tax assets:
<S> <C> <C>
Net operating loss carryforwards................................................ $109,379 $100,511
Capitalized start-up costs...................................................... 1,341 2,576
Accrued expenses................................................................ 2,580 5,333
Deferred interest expense....................................................... 34,107 25,400
------- -------
Gross deferred income tax assets................................................ 147,407 133,820
Less valuation allowance for deferred income tax assets......................... (127,535) (114,068)
-------- --------
Net deferred income tax assets.................................................. 19,872 19,752
Deferred income tax liabilities, principally due to differences in depreciation and
amortization....................................................................... (19,872) (19,752)
------- -------
Net deferred income tax assets.................................................. $ -- $ --
======== ==========
</TABLE>
Deferred income tax assets and liabilities are recognized for differences
between the financial statement carrying amounts and the tax basis of assets and
liabilities that result in future deductible or taxable amounts and for net
operating loss and tax credit carryforwards. In assessing the realizability of
deferred income tax assets, management considers whether it is more likely than
not that some portion of the deferred income tax assets will be realized. The
ultimate realization of deferred income tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management has provided a valuation allowance
against all of its deferred income tax assets because the realization of those
deferred tax assets is not more likely than not.
The valuation allowance for deferred income tax assets as of September 30, 2003
and 2002 was $127.5 million and $114.1 million, respectively. The net change in
the total valuation allowance for the years ended September 30, 2003, 2002, and
2001 was an increase of $13.5 million, $32.6 million, and $44.7 million,
respectively.
At September 30, 2003 the Company has net operating loss carryforwards for
federal income tax purposes of approximately $290.0 million and an additional
approximate $210.0 million in net operating losses of iPCS through the date of
deconsolidation. These net operating losses will expire in various amounts
beginning in the year 2019. Effective October 17, 2003, iPCS is no longer
considered a subsidiary for federal income tax purposes (see Note 2) and the
carryforward net operating losses of iPCS will continue to remain with iPCS.
The net operating loss carryforwards that the Company may use to offset taxable
income in future years is limited as a result of an ownership change, as defined
under Internal Revenue Code Section 382, which occurred effective with the
Company's acquisition of iPCS on November 30, 2001. The amount of this annual
limitation is approximately $73.7 million per year, including the iPCS
limitation of $37.2 million.
The net operating loss carryforwards include deductions of approximately $11.2
million related to the exercise of stock options, which will be credited to
additional paid in capital if recognized.
(10) Commitments and Contingencies
(a) Operating Leases
The Company is obligated under non-cancelable operating lease agreements for
office space, cell sites, vehicles and office equipment. Future minimum annual
lease payments under non-cancelable operating lease agreements with remaining
terms greater than one year for the next five years and in the aggregate as of
September 30, 2003, are as follows (dollars in thousands):
Years ending
September 30,
2004........................................................... 18,899
2005........................................................... 14,396
2006........................................................... 9,485
2007........................................................... 6,632
2008........................................................... 5,159
Thereafter..................................................... 5,691
--------
Total future minimum annual lease payments............... $ 60,262
========
Rent expense for operating leases was $19.4 million, $19.1 million and $15.2
million for the years ended September 30, 2003, 2002 and 2001, respectively.
(b) 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.
While there is no pending litigation with Sprint, we have a variety of disputes
with Sprint which are described in Note 4.
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 operation for the period in which the effect becomes
reasonably estimable.
(c) 401(k) Plan
Employer contributions under the Company's 401(k) plans for the years ended
September 30, 2003, 2002 and 2001 were $0.6 million, $0.5 million, and $0.6
million, respectively.
(d) Other
The Company is committed to make expenditures for certain outdoor advertising
and marketing sponsorships subsequent to September 30, 2003 totaling $0.5
million and $0.2 million, respectively.
During the fourth quarter of 2003, the Company incurred expenses of $3.0 million
in connection with its recapitalization plan. The Company has commitments of
$4.3 million that is contingent on closing of the recapitalization transaction.
(11) Related Party Transactions and Transactions Between AirGate and iPCS
See Note 4 for a discussion of transactions with Sprint.
Transactions between AirGate and iPCS
The Company formed AirGate Service Company, Inc. ("ServiceCo") to provide
management services to both AirGate and iPCS. ServiceCo is a wholly-owned
restricted subsidiary of AirGate. ServiceCo expenses were allocated between
AirGate and iPCS based on the percentage of subscribers (the "ServiceCo
Allocation"), which was approximately 60% for AirGate and 40% for iPCS.
Personnel who provided general management services to AirGate and iPCS were
leased to ServiceCo. Generally, the management personnel included the corporate
staff in the Company's principal corporate offices in Atlanta and the accounting
staff in Geneseo, Illinois. Expenses related primarily to one company are
allocated to that company. Expenses that are related to ServiceCo or both
companies, such as rents associated with the Atlanta and Geneseo offices,
consulting costs incurred for ServiceCo and other expenses related to ServiceCo
management services, were allocated in accordance with the ServiceCo Allocation.
On January 27, 2003, iPCS retained a chief restructuring officer to oversee the
restructuring of iPCS and manage the day-to-day operations of iPCS. To
facilitate the orderly transition of management services to the chief
restructuring officer, AirGate and iPCS executed an amendment to the Services
Agreement that generally would allow individual services to be terminated by
either party upon 30 days prior notice. iPCS began terminating services provided
by ServiceCo in March, 2003. All remaining services were terminated by iPCS by
September 30, 2003. For the years ended September 30, 2003 and 2002, iPCS paid a
net total of $2.9 million and $1.7 million, respectively for ServiceCo expenses,
which had the effect of reducing AirGate expenses by that amount.
AirGate has completed all transactions in the normal course of business with its
unrestricted subsidiary iPCS. These transactions are comprised of roaming
revenue and expenses, inventory sales and purchases and sales of network
operating equipment as described further below.
In the normal course of business under AirGate's and iPCS' respective Sprint
agreements, AirGate's subscribers incur minutes of use in iPCS' territory
causing AirGate to incur roaming expense to Sprint. In addition, iPCS'
subscribers incur minutes of use in AirGate's territory for which AirGate
receives roaming revenue from Sprint. AirGate received $0.2 million of roaming
revenue with respect to use by iPCS subscribers of AirGate's network and
incurred $0.3 million of roaming expense with respect to use by AirGate
subscribers of iPCS' network for the year ended September 30, 2003, compared to
$0.4 million of roaming revenue and $0.4 million of roaming expense for the year
ended September 30, 2002. The reciprocal roaming rate charged and other terms
are established by Sprint under AirGate's and iPCS' respective Sprint
agreements.
In order to optimize the most efficient use of certain models of handset
inventories in relation to regional demand for the year ended September 30,
2003, AirGate purchased approximately $0.3 million of wireless handset
inventories from iPCS at cost. At September 30, 2003, AirGate was not carrying
any wireless handset inventory purchased from iPCS.
During the year ended September 30, 2002, AirGate sold approximately $0.1
million of wireless handset inventories to iPCS. Additionally, AirGate purchased
approximately $0.2 million of wireless handset inventory from iPCS. At September
30, 2002, neither AirGate nor iPCS were carrying any wireless handset inventory
purchased from each other.
During the year ended September 30, 2002, AirGate sold approximately $0.2
million of network operating equipment to iPCS. Additionally, iPCS sold AirGate
approximately $0.7 million of network operating equipment.
All of the transactions prior to February 23, 2003 have been eliminated in
consolidation.
The terms and conditions of each of the transactions described above are
comparable to those that could have been obtained in transactions with
unaffiliated entities.
Transactions Involving Board Members
Timothy M. Yager was a member of the AirGate board of directors until December
16, 2002. Prior to joining the AirGate board, Mr. Yager was the chief executive
officer of iPCS. Pursuant to his employment agreement with iPCS, iPCS purchased
consulting services from Mr. Yager during the year ended September 30, 2003. On
January 27, 2003, Mr. Yager was appointed chief restructuring officer to oversee
the restructuring of iPCS and his company, YMS Management, LLC, entered into a
management services agreement to manage the day-to-day operations of iPCS. In
connection with his appointment as chief restructuring officer, Mr. Yager and
iPCS agreed to terminate the provisions of his employment agreement providing
for consulting services to iPCS and payments thereunder to Mr. Yager.
(12) Selected Quarterly Financial Data (Unaudited)
(dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended September 30, 2003: First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total revenue ................................... $ 81,865 $ 76,980 $ 83,186 $ 89,317 $ 331,348
Loss from continuing operations ................. (19,427) (6,698) (8,247) (7,814) (42,186)
Loss from discontinued operations ............... (28,247) (14,324) -- -- (42,571)
Net loss ........................................ (47,674) (21,022) (8,247) (7,814) (84,757)
Loss per share--basic and diluted
Loss from continuing operations ................. (3.77) (1.29) (1.60) (1.45) (8.14)
Loss from discontinued operations ............... (5.48) (2.76) - - (8.22)
Net loss ........................................ (9.25) (4.05) (1.60) (1.45) (16.36)
Year ended September 30, 2002:
Total revenue ................................... $ 67,757 $ 76,541 $ 81,750 $ 87,496 $ 313,544
Loss from continuing operations ................. (33,379) (26,033) (16,557) (16,811) (92,780)
Income (loss) from discontinued operations ...... 3,735 (275,877) (33,522) (598,173) (903,837)
Net loss ........................................ (29,644) (301,910) (50,079) (614,984) (996,617)
Income (loss) per share--basic and diluted
Loss from continuing operations ................. (9.46) (5.05) (3.21) (3.26) (19.53)
Income (loss) from discontinued operations ...... 1.06 (53.50) (6.49) (115.89) (190.27)
Net loss ........................................ (8.40) (58.55) (9.70) (119.15) (209.80)
</TABLE>
<PAGE>
(13) Condensed Consolidating Financial Information
AGW Leasing Company, Inc. ("AGW") is a wholly-owned restricted subsidiary of
AirGate. AGW has fully and unconditionally guaranteed the AirGate notes and the
AirGate credit facility. AGW was formed to hold the real estate interests for
the Company's PCS network and retail operations. AGW also was a registrant under
the Company's registration statement declared effective by the Securities and
Exchange Commission on September 27, 1999. AGW jointly and severably guarantees
the Company's long-term debt.
AirGate Network Services LLC ("ANS") was created as a wholly-owned restricted
subsidiary of AirGate. ANS has fully and unconditionally guaranteed the AirGate
notes and AirGate credit facility. ANS was formed to provide construction
management services for the Company's PCS network. ANS jointly and severably
guarantees AirGate's long-term debt.
AirGate Service Company, Inc. ("Service Co") is a wholly-owned restricted
subsidiary of AirGate. Service Co has fully and unconditionally guaranteed the
AirGate notes and the AirGate credit facility. Service Co was formed to provide
management services to AirGate and iPCS. Service Co jointly and severably
guarantees AirGate's long-term debt.
AGW, ANS and Service Co are 100% owned by AirGate and no other persons have
equity interests in such entities.
The condensed consolidating financial information for the Company as of
September 30, 2003 and for the year ended September 30, 2003 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
AGW AirGate AirGate
Leasing Network Service
AirGate Company, Services, Company,
PCS, Inc. Inc. LLC Inc. Eliminations Consolidated
----------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash $ 54,078 $ -- $ -- $ -- $ -- $ 54,078
equivalents.........
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 11,581 -- -- -- -- 11,581
assets..............
----------- ----- ------- ----- --------- ----------
Total assets.......... $ 314,924 $ -- $37,470 $ -- $(61,478) $ 290,916
=========== ====== ======= ===== ========= ==========
Current liabilities... $ 89,036 $ -- $61,189 $ -- $(61,478) $ 88,747
Intercompany.......... (108,890) 64,639 -- 44,251 -- --
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 64,639 61,189 44,251 (194,087) 667,913
----------- ------- ------- ------- -------- -----------
Stockholders' equity
(deficit)........... (376,997) (64,639) (23,719) (44,251) 132,609 (376,997)
---------- ------- ------- -------- -------- -----------
Total liabilities and $ 314,924 $ -- $37,470 $ -- $(61,478) $290,916
stockholders' equity
(deficit)........... ========== ======= ======= ===== ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGW AirGate AirGate
Leasing Network Service
AirGate Company, Services, Company,
PCS, Inc. Inc. LLC Inc. Eliminations Consolidated
--------- -------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue............... $ 331,348 $ -- $ -- $ -- $ -- $ 331,348
Cost of revenue....... 189,819 16,640 24 3,428 (1,024) 208,887
Selling and marketing. 44,446 2,591 1 5,539 (808) 51,769
General and
administrative...... 13,955 549 1 9,955 (1,113) 23,347
Depreciation and
amortization........ 36,940 -- 9,554 -- -- 46,494
Loss on property and
equipment........... 518 -- -- -- -- 518
----------- ------- -------- ------- ------- ---------
Total operating
expense............. 285,678 19,780 9,580 18,922 (2,945) 331,015
----------- ------- -------- ------- ------- ---------
Operating income
(loss).............. 45,670 (19,780) (9,580) (18,922) 2,945 333
----------- ------- -------- ------- ------- ---------
Loss in subsidiaries.. (45,158) -- -- -- 45,158 --
Interest expense, net. (42,698) -- 179 -- -- (42,519)
------------ ------- -------- ------- ------- ---------
Income (loss) from
continuing
operations before
income tax.......... (42,186) (19,780) (9,401) (18,922) 48,103 (42,186)
Income tax............ -- -- -- -- -- --
----------- ------- -------- ------- ------- ---------
Income (loss) from
continuing
operations.......... (42,186) (19,780) (9,401) (18,922) 48,103 (42,186)
Loss from
discontinued
operations.......... (42,571) -- -- -- -- (42,571)
----------- ------- -------- ------- ------- ---------
Net income (loss)... $ (84,757) (19,780) (9,401) (18,922) 48,103 (84,757)
=========== ======= ======== ======= ======= ==========
Operating activities.. $ 50,299 $ -- $ (118) $ -- $ -- $ 50,181
Investing activities.. (16,023) -- -- -- -- (16,023)
Financing activities.. 15,033 -- -- -- -- 15,033
----------- ------ -------- ------ ------- ---------
Increase (decrease)
cash equivalents.... 49,309 -- (118) -- -- 49,191
Cash and cash
equivalents at
beginning of year... 4,769 -- 118 -- -- 4,887
----------- ------ ------ ------ -------- ---------
Cash and cash
equivalents at end
of year............. $ 54,078 $ -- $ -- $ -- $ -- $ 54,078
============ ====== ======= ====== ======== =========
</TABLE>
<PAGE>
The condensed consolidating financial information for the Company as of
September 30, 2002 and for the year ended September 30, 2002 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
AGW AirGate AirGate
Leasing Network Service
AirGate Company, Services, Company,
PCS, Inc. Inc. LLC Inc. Eliminations Consolidated
--------- -------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents......... $ 4,769 $ -- $ 118 $ -- $ -- $ 4,887
Other current assets.. 122,869 -- 529 -- (60,579) 62,819
----------- ------ ------ ------ -------- ---------
Total current assets.. 127,638 -- 647 -- (60,579) 67,706
Property and
equipment, net...... 168,163 -- 45,614 -- -- 213,777
Other noncurrent
assets.............. 13,732 -- -- -- -- 13,732
Net assets held for
disposal............ 279,079 -- -- -- -- 279,079
----------- ------ ------ ------ ---------- ---------
Total assets.......... $ 588,612 $ -- $ 46,261 $ -- $ 60,579) $ 574,294
========== ======= ========== ======= =========== =========
Current liabilities... $ 82,175 $ -- $ 60,579 $ -- $ (60,579) $ 82,175
Intercompany.......... (70,188) 44,859 -- 25,329 -- --
Long-term debt........ 354,264 -- -- -- -- 354,264
Other long-term
liabilities......... 10,180 -- -- -- -- 10,180
Investment in
subsidiaries........ 84,506 -- -- (84,506) --
Net liabilities held
for disposal........ 420,622 -- -- -- -- 420,622
----------- ------ ------ ------ ---------- ---------
Total liabilities..... 881,559 44,859 60,579 25,329 (145,085) 867,241
----------- ------ ------ ------ ---------- ---------
Stockholders' equity
(deficit)........... (292,947) (44,859) (14,318) (25,329) 84,506 (292,947)
----------- ------ ------ ------- ---------- ---------
Total liabilities
and stockholders'
equity
(deficit)........... $ 588,612 $ -- $ 46,261 $ -- $ (60,579) $ 574,294
============ ======= ========== ======= ========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGW AirGate AirGate
Leasing Network Service
AirGate Company, Services, Company,
PCS, Inc. Inc. LLC Inc. Eliminations Consolidated
--------- -------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue............... $ 313,544 $ -- $ -- $ -- $ -- $ 313,544
Cost of revenue....... 214,714 15,219 -- 3,140 (1,142) 231,931
Selling and marketing. 73,692 2,754 -- 4,169 (1,516) 79,099
General and
administrative...... 6,092 585 -- 18,020 (6,554) 18,143
Depreciation and
amortization........ 32,407 -- 8,357 -- -- 40,764
Loss on disposal
of property and
equipment........... 717 -- 357 -- -- 1,074
--------- -------- --------- ------- ------- ---------
Total operating
expenses............ 327,622 18,558 8,714 25,329 (9,212) 371,011
--------- -------- --------- ------- ------- ---------
Operating loss........ (14,078) (18,558) (8,714) (25,329) 9,212 (57,467)
Loss in subsidiaries.. (41,498) -- -- -- 41,498 --
Interest expense, net. (37,204) -- 1,891 -- -- (35,313)
--------- -------- --------- ------- ------- ---------
Loss from continuing
operations before
income tax.......... (92,780) (18,558) (6,823) (25,329) 50,710 (92,780)
Income tax............ -- -- -- -- -- --
--------- -------- --------- ------- ------- ---------
Loss from
continuing
operations......... (92,780) (18,558) (6,823) (25,329) 50,710 (92,780)
discontinued
operations......... (903,837) -- -- -- -- (903,837)
--------- -------- --------- ------- ------- ---------
Net loss........... $ (996,617) $ (18,558) $ (6,823) $ (25,329) $ 50,710 $ (996,617)
=========== ========== =========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGW AirGate AirGate
Leasing Network Service
AirGate Company, Services, Company,
PCS, Inc. Inc. LLC Inc. Eliminations Consolidated
--------- -------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Operating activities.. $ (25,809) $ -- $ 275 $ -- $ -- $ (25,534)
Investing activities.. (46,321) -- -- -- -- (46,321)
Financing activities.. 62,452 -- -- -- -- 62,452
---------- -------- --------- -------- ------- ----------
(Decrease) Increase
in cash or cash
equivalents......... (9,678) -- 275 -- -- (9,403)
Cash and cash
equivalents at
beginning of year... 14,447 -- (157) -- -- 14,290
---------- -------- --------- -------- ------- ----------
Cash and cash
equivalents at end
of year............. $ 4,769 $ -- $ 118 $ -- $ -- $ 4,887
========== ======== ========== ========= ======= =========
</TABLE>
The condensed consolidating financial information for the Company for the year
ended September 30, 2001 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
AGW AirGate
Leasing Network
AirGate Company, Services,
PCS, Inc. Inc. LLC Eliminations Consolidated
--------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue....................................... $ 172,087 $ -- $ -- $ -- $ 172,087
Cost of revenue............................... 124,199 12,928 -- -- 137,127
Selling and marketing......................... 69,922 1,784 -- -- 71,706
General and administrative.................... 15,962 866 313 -- 17,141
Depreciation and amortization................. 23,354 -- 7,313 -- 30,667
------------ ---------- ----------- ------------ -----------
Total operating expenses...................... 233,437 15,578 7,626 -- 256,641
------------ ---------- ----------- ------------ -----------
Operating loss................................ (61,350) (15,578) (7,626) -- (84,554)
Loss in subsidiaries.......................... (21,213) -- -- 21,213 --
Interest expense, net......................... (28,427) -- 1,991 -- (26,436)
------------ ---------- ----------- ------------ -----------
Loss before income taxes...................... (110,990) (15,578) (5,635) 21,213 (110,990)
------------ ---------- ----------- ------------ -----------
Income taxes.................................. -- -- -- -- --
Net loss...................................... $ (110,990) $ (15,578) $ (5,635) $ 21,213 $ (110,990)
============ ========== =========== ============ ===========
Operating activities.......................... $ (53,024) $ -- $ 12,174 $ -- $ (40,850)
Investing activities.......................... (59,693) -- (12,079) -- (71,772)
Financing activities.......................... 68,528 -- -- -- 68,528
------------ ---------- ----------- ----------- -----------
Increase (decrease) in cash or cash equivalents (44,189) -- 95 -- (44,094)
Cash and cash equivalents at beginning of year 58,636 -- (252) -- 58,384
------------ ---------- ----------- ----------- -----------
Cash and cash equivalents at end of year...... $ 14,447 $ -- $ (157) $ -- $ 14,290
============ ========== =========== =========== ===========
</TABLE>
<PAGE>
(14) Subsequent Events
(a) 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. Due to the release of
the Company's financial statements subsequent to the period iPCS was accounted
for as discontinued operations, the financial statements for all periods
presented have been restated to reflect the assets and operations of iPCS as
discontinued operations.
(b) Reverse Stock Split
On February 17, 2004, our stock began trading on a post split basis. Our
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 share and per share
amounts have been restated in these financial statements to give retroactive
effect to this 1-for-5 reverse stock split.
(c) Recapitalization Plan (unaudited)
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 $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.
<PAGE>
Independent Auditors' Report
The Board of Directors
AirGate PCS, Inc.:
Under date of December 5, 2003, except as to note 14 (a) and (b) which are as of
February 17, 2004, we reported on the consolidated balance sheets of AirGate
PCS, Inc. and subsidiaries as of September 30, 2003 and 2002, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the years in the three-year period ended September 30, 2003. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements and financial statement
schedule have been prepared assuming the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered significant recurring losses since inception and has an
accumulated deficit of $1.3 billion and a stockholders' deficit of $377.0
million at September 30, 2003. The Company's continuation as a going concern is
dependent on its ability to restructure or otherwise amend the terms of its
debt; and if unsuccessful, the Company may seek bankruptcy court or other
protection from its creditors within the next year. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
consolidated financial statements and financial statement schedule do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Atlanta, Georgia
December 5, 2003, except as to note 14
(a) and (b), which are as of February 17, 2004
<PAGE>
AIRGATE PCS, INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended September 30, 2003, 2002 and 2001
(dollars in thousands)
<TABLE>
<CAPTION>
Additions
------------------
Balance at Charges to Balance at
Beginning of Costs and End of
Classification Period Expenses Other Deductions Period
---------------- ------------ ---------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C>
September 30, 2003
Allowance for Doubtful Accounts................... $ 6,759 5,220(1) 13,511(2) (20,855) (3) $ 4,635
Income Tax Valuation Allowance.................... $114,068 13,467(4) -- -- $ 127,535
September 30, 2002
Allowance for Doubtful Accounts................... $ 2,759 21,343(1) 14,053(2) (31,396)(3) $ 6,759
Income Tax Valuation Allowance.................... $ 81,459 32,609(4) -- -- $ 114,068
September 30, 2001
Allowance for Doubtful Accounts................... $ 563 8,125(1) 2,874(2) (8,803)(3) $ 2,759
Income Tax Valuation Allowance.................... $ 36,762 44,697(4) -- -- $ 81,459
</TABLE>
(1) Amounts represent provisions for doubtful accounts charged to cost of
service and roaming.
(2) Amounts represent provisions for late payment fees, early cancellation
fees, first payment default customers, and other billing adjustments
charged to subscriber revenues.
(3) Amounts represent write-offs of uncollectible customer accounts.
(4) Amounts represent increases in the valuation allowance for deferred income
tax assets to reduce them to the amount believed to be realizable.
</TEXT>
</DOCUMENT>