Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the quarterly period ended
September 30, 2009
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Or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition period
from to
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Commission
File Number 000-51844
iPCS, INC.
(Exact name of registrant as specified in its
charter)
Delaware
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36-4350876
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(State or other
jurisdiction of incorporation or
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(I.R.S. Employer
Identification No.)
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organization)
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1901 N. Roselle Road,
Schaumburg, Illinois
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60195
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(Address of principal
executive offices)
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(Zip code)
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(847)
885-2833
(Registrants telephone number, including zip
code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (
§232.405
of this chapter) during the preceding 12 months (or such shorter period
that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller
reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
As of October 27,
2009, there were 16,539,190 shares of common stock, $0.01 par value per share,
outstanding.
Table of
Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
iPCS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share and per share amounts)
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September 30,
2009
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December 31,
2008 (a)
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Assets
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Current Assets:
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Cash and cash equivalents
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$
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77,092
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$
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55,940
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Accounts receivable, net
of allowance for doubtful accounts of $6,884 and $8,125, respectively
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44,922
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37,859
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Receivable from Sprint
(Note 3)
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29,168
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25,623
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Inventories, net
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6,346
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5,465
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Assets held for sale (Note
4)
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389
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Prepaid expenses
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7,653
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7,223
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Other current assets
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34
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63
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Total current assets
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165,215
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132,562
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Property and equipment,
net (Note 4)
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159,726
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162,014
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Financing costs, net
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5,387
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6,419
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Deferred customer
activation costs
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2,935
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3,816
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Intangible assets, net
(Note 5)
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83,720
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90,602
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Goodwill (Note 5)
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141,783
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141,783
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Other assets
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432
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416
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Total assets
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$
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559,198
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$
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537,612
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Liabilities and Stockholders Deficiency
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Current Liabilities:
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Accounts payable
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$
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5,044
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$
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5,051
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Accrued expenses
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19,848
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18,337
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Payable to Sprint (Note 3)
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49,709
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41,067
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Deferred revenue
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14,793
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13,410
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Accrued interest
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3,672
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5,519
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Current maturities of
long-term debt and capital lease obligations (Note 6)
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42
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37
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Total current liabilities
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93,108
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83,421
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Deferred customer
activation fee revenue
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2,935
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3,816
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Interest rate swap (Note
7)
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11,749
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16,621
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Other long-term
liabilities
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6,761
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6,551
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Long-term debt and capital
lease obligations, excluding current maturities (Note 6)
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477,667
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475,401
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Total liabilities
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592,220
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585,810
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Commitments and
contingencies (Note 15)
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Stockholders Deficiency:
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Preferred stock, par value
$.01 per share; 25,000,000 shares authorized, none issued
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Common stock, par value
$.01 per share; 75,000,000 shares authorized, 17,262,954 and 17,163,221
shares issued, respectively
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173
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172
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Additional paid-in-capital
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171,021
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167,531
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Accumulated deficiency
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(183,448
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)
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(199,280
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)
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Accumulated other
comprehensive loss (Note 7 and 12)
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(11,749
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)
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(16,621
|
)
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Treasury stock, at cost;
658,863 and 0 shares, respectively (Note 13)
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(9,019
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)
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Total stockholders
deficiency
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|
(33,022
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)
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(48,198
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)
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Total liabilities and
stockholders deficiency
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$
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559,198
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$
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537,612
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|
(a)
Derived from the Companys audited
financial statements as of December 31, 2008.
See Notes to unaudited
consolidated financial statements.
3
Table of Contents
iPCS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
(UNAUDITED)
(Dollars in thousands,
except share data)
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For the Three Months Ended
September 30,
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For the Nine Months Ended
September 30,
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2009
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2008
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2009
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2008
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Revenue:
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Service revenue
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$
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108,480
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$
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96,097
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$
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319,600
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$
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282,370
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Roaming revenue
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27,783
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32,282
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83,556
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94,083
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Equipment and other
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5,141
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3,678
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14,571
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10,633
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Total revenue
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141,404
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132,057
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417,727
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387,086
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Operating Expense:
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Cost of service and
roaming
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74,038
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74,520
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217,838
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213,167
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Cost of equipment
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18,497
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15,905
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50,029
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40,442
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Selling and marketing
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17,542
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18,091
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51,528
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52,394
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General and administrative
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8,948
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10,028
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25,565
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25,108
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Gain on Sprint settlement
(Note 3)
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(4,273
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)
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Depreciation
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8,986
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10,592
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29,233
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33,809
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Amortization of intangible
assets (Note 5)
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2,294
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2,295
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6,882
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6,882
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Loss on disposal of
property and equipment, net
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113
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71
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629
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329
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Total operating expense
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130,418
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131,502
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377,431
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372,131
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Operating income
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10,986
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555
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40,296
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14,955
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Interest income
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47
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|
316
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|
211
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1,420
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Interest expense
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(8,065
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)
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(8,320
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)
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(24,096
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)
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(25,456
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)
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Other income, net
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72
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63
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99
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|
93
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Income (loss) before provision
for income tax
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3,040
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(7,386
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)
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16,510
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(8,988
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)
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Provision for income tax
(Note 9)
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358
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|
108
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|
678
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|
758
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Net income (loss)
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$
|
2,682
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$
|
(7,494
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)
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$
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15,832
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$
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(9,746
|
)
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Income (loss) per share of
common stock:
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Basic
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$
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0.16
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|
$
|
(0.44
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)
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$
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0.94
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|
$
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(0.57
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)
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Diluted
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$
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0.16
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$
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(0.44
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)
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$
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0.93
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$
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(0.57
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)
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Weighted average shares of
common stock outstanding:
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Basic
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16,595,364
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17,159,794
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16,828,193
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17,150,061
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Diluted
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16,917,497
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17,159,794
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16,994,820
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17,150,061
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See Notes to unaudited consolidated financial
statements.
4
Table of Contents
iPCS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
(In thousands)
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|
For the Nine Months Ended
September 30,
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|
2009
|
|
2008
|
|
Cash Flows from Operating
Activities:
|
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|
|
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|
Net income (loss)
|
|
$
|
15,832
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|
$
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(9,746
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)
|
Adjustments to reconcile
net income (loss) to net cash flows from operating activities:
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|
|
|
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Loss on disposal of
property and equipment
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|
629
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|
329
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|
Depreciation and
amortization
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|
36,115
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|
40,691
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|
Non-cash interest expense
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|
1,032
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|
1,032
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|
Payment-in-kind interest
|
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3,600
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|
|
|
Stock-based compensation
expense
|
|
3,502
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|
4,778
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|
Provision for doubtful
accounts
|
|
8,044
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|
15,791
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|
Changes in assets and
liabilities:
|
|
|
|
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|
Accounts receivable
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(15,105
|
)
|
(21,395
|
)
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Receivable from Sprint
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|
(3,546
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)
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9,885
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|
Inventories, net
|
|
(881
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)
|
(3,476
|
)
|
Prepaid expenses, other
current and long-term assets
|
|
464
|
|
206
|
|
Accounts payable, accrued
expenses and other long-term liabilities
|
|
(1,048
|
)
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5,753
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|
Payable to Sprint
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|
8,642
|
|
(815
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)
|
Deferred revenue
|
|
502
|
|
1,081
|
|
Net cash flows provided by
operating activities
|
|
57,782
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|
44,114
|
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Cash Flows from Investing
Activities:
|
|
|
|
|
|
Purchases of property and
equipment
|
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(27,910
|
)
|
(52,435
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)
|
Proceeds from disposition
of property and equipment
|
|
248
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|
156
|
|
Net cash flows used in
investing activities
|
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(27,662
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)
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(52,279
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)
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Cash Flows from Financing
Activities:
|
|
|
|
|
|
Payments on capital lease
obligations
|
|
(27
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)
|
(22
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)
|
Proceeds from the exercise
of stock options
|
|
5
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|
582
|
|
Payment of special cash
dividend
|
|
(89
|
)
|
(109
|
)
|
Repurchase of common stock
|
|
(8,857
|
)
|
(19
|
)
|
Net cash flows (used in)
provided by financing activities
|
|
(8,968
|
)
|
432
|
|
Net increase (decrease) in
cash and cash equivalents
|
|
21,152
|
|
(7,733
|
)
|
Cash and cash equivalents at
beginning of period
|
|
55,940
|
|
77,599
|
|
Cash and cash equivalents at
end of period
|
|
$
|
77,092
|
|
$
|
69,866
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information - cash paid for interest (net of amount capitalized)
|
|
$
|
21,254
|
|
$
|
24,978
|
|
Supplemental disclosure for
non-cash investing activities:
|
|
|
|
|
|
Accounts payable and
accrued expenses incurred for the acquisition of property, equipment and
construction in progress
|
|
$
|
1,552
|
|
$
|
12,070
|
|
See Notes to unaudited
consolidated financial statements.
5
Table of
Contents
iPCS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
(1) Business and Basis of Presentation
iPCS, Inc. (the Company or iPCS) is a holding company that
operates as a PCS Affiliate of Sprint through three wholly owned subsidiaries:
iPCS Wireless, Inc., Horizon Personal Communications, Inc. and Bright
Personal Communications Services, LLC. Each of these subsidiaries is a
party to separate affiliation agreements with Sprint PCS, the operator of a
100% digital wireless personal communications services (PCS) network with
licenses to provide voice and data service to the entire United States
population. These affiliation agreements grant the iPCS subsidiaries the
exclusive right to sell wireless mobility communications network products and
services under the Sprint brand in 81 markets, including markets in Illinois,
Indiana, Iowa, Michigan, Pennsylvania, Ohio, Maryland, Nebraska, New York,
New Jersey, Tennessee and West Virginia.
On October 18, 2009,
the Company, Sprint and Ireland Acquisition Corporation (the Purchaser), a
wholly owned subsidiary of Sprint, entered into an Agreement and Plan of Merger
(the Merger Agreement) pursuant to which Sprint agreed to acquire all of the
Companys outstanding common stock for a cash price of $24 per share. See Note 17 for a further discussion of the
Merger Agreement.
The
unaudited consolidated balance sheets as of September 30, 2009 and December 31,
2008, the unaudited consolidated statements of operations for the three and
nine months ended September 30, 2009 and 2008, the unaudited consolidated
statements of cash flows for the nine months ended September 30, 2009 and
2008 and related footnotes have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The financial information presented herein should be read in
conjunction with the Companys 2008 Annual Report on Form 10-K which
includes information and disclosures not presented herein. All intercompany
accounts and transactions have been eliminated in consolidation. Subsequent
events have been evaluated through November 3, 2009, the date these
financial statements were issued. In the
opinion of management, the unaudited consolidated financial statements contain
all of the adjustments, consisting of normal recurring adjustments as well as
those related to the Companys settlement of certain disputes with Sprint,
necessary to present fairly, in summarized form, the consolidated financial
position, results of operations and cash flows of the Company. The results of
operations for the three and nine months ended September 30, 2009 are not
indicative of the results that may be expected for the full year 2009.
(2) Per Share Data
Basic
income (loss) per share for the Company is calculated by dividing net income
(loss) by the weighted average number of shares of common stock of the Company,
outstanding during the period, net of shares held in treasury. Diluted income per share for the Company is
based upon the weighted average number of common and common equivalent shares
of common stock of the Company, outstanding during the period, net of shares
held in treasury.
Net
income and a reconciliation of the weighted average number of shares
outstanding, net of shares held in treasury, used in calculating diluted income
(loss) per share are as follows (in thousands, except share data):
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net
income (loss)
|
|
$
|
2,682
|
|
$
|
(7,494
|
)
|
$
|
15,832
|
|
$
|
(9,746
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - Basic
|
|
16,595,364
|
|
17,159,794
|
|
16,828,193
|
|
17,150,061
|
|
Net
effect of dilutive stock options and restricted shares
|
|
322,133
|
|
|
|
166,627
|
|
|
|
Weighted
average shares outstanding - Diluted
|
|
16,917,497
|
|
17,159,794
|
|
16,994,820
|
|
17,150,061
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.16
|
|
$
|
(0.44
|
)
|
$
|
0.94
|
|
$
|
(0.57
|
)
|
Diluted
|
|
$
|
0.16
|
|
$
|
(0.44
|
)
|
$
|
0.93
|
|
$
|
(0.57
|
)
|
For
the three and nine months ended September 30, 2008, basic and diluted loss
per share are the same because the inclusion of the incremental potential
shares of common stock from any assumed exercise of stock options is
anti-dilutive. Potential shares of common stock excluded from the income (loss)
per share computations because their inclusion would be anti-dilutive were
1,008,522 and 1,356,889 for the three and nine months ended September 30,
2009, respectively, and were 1,406,094 for both the three and nine months ended
September 30, 2008.
6
Table of
Contents
(3) Sprint Agreements
On October 18, 2009,
the Company, Sprint and Ireland Acquisition Corporation (the Purchaser), a
wholly owned subsidiary of Sprint, entered into the Merger Agreement pursuant
to which Sprint agreed to acquire all of the Companys outstanding common stock
for a cash price of $24 per share. See
Note 17 for a further discussion of the Merger Agreement.
Each of iPCS Wireless, Inc., Horizon Personal Communications, Inc.
and Bright Personal Communications Services, LLC has entered into
affiliation agreements with Sprint PCS. Under these agreements, which have been
amended from time to time, most recently on March 3, 2008, Sprint provides
the Company significant support services such as customer service, billing,
long distance transport services, national network operations support, national
pricing plans, inventory logistics support, use of the Sprint and Sprint PCS
brand names, national advertising, national distribution, product development
and the supply of financial and operational data.
The
costs incurred by the Company for the support services provided by Sprint are
determined on a per average monthly cash cost per user (CCPU) rate and on a
monthly cost per gross addition (CPGA) rate. For 2008 and 2009, the CCPU rate
was $6.50 and $5.85, respectively, as adjusted and subject to further
adjustments as described below. The CPGA
rate for each period was $19.00.
The CCPU rate in effect from 2008 through 2010 is to be reduced from
the then current rate by $0.15 if the Company hits certain milestones with
respect to its voluntary deployment of EV-DO Rev. A, a recent version of the
further evolution of code division multiple access (CDMA) high-speed data
technology called Evolution Data Optimized (EV-DO). Specifically, the CCPU
rates set forth above are to be reduced by $0.15 from the then current rate
when the Companys EV-DO Rev. A deployment covers at least 6.0 million in
population (POPs); by another $0.15 from the then current rate when the
Company covers at least 7.0 million POPs; and by another $0.15 from the
then current rate when the Company covers at least 9.0 million POPs. The Companys EV-DO Rev. A deployment
exceeded 6.0 million POPs during June 2008 and exceeded 7.0 million POPs
during July 2008. As a result, the
CCPU rate was reduced to $6.35 starting July 1, 2008, was further reduced
to $6.20 starting August 1, 2008 for the remainder of 2008 and has been
reduced to $5.85 and $5.55 for 2009 and 2010, respectively, subject to any
further adjustments related to incremental EV-DO Rev. A coverage. On October
31, 2009, in accordance with the Companys affiliation agreements with Sprint, Sprint
PCS notified the Company of proposed CCPU and CPGA rates for the three year
period from 2011 through 2013. See Note 17 for a further discussion of these
proposed rates.
The
Company receives roaming revenue when subscribers of Sprint and other PCS
Affiliates of Sprint incur minutes of use in the Companys territories, and the
Company incurs expense payable to Sprint and to other PCS Affiliates of Sprint
when Sprint subscribers based in the Companys territory incur minutes of use
in the territories of Sprint and other PCS Affiliates of Sprint. Effective January 1, 2008 through December 31,
2010, subject to adjustment as described below, 3G data roaming is not settled
separately with Sprint; however, the Company does settle 3G data roaming
separately with the other PCS Affiliates of Sprint. For 2008, reciprocal
roaming rates were $0.0400 per minute for voice and 2G data, excluding certain
markets as described below, and $0.0003 per kilobyte for 3G data. For 2009,
reciprocal roaming rates are $0.0400 per minute for voice and 2G data,
excluding certain markets as described below, and $0.0001 per kilobyte for 3G
data.
With
respect to certain of the Companys markets in western and eastern Pennsylvania,
the Company receives the benefit of a special reciprocal rate for voice and 2G
data of $0.1000 per minute. This special rate will terminate, with respect to
each of these two sets of markets, on the earlier of December 31, 2011 or
the first day of the calendar month which follows the first calendar quarter
during which the Company achieves a subscriber penetration rate of at least 7%
of the Companys covered populations in those markets. The Company does not anticipate reaching a 7%
subscriber penetration rate in these markets in the foreseeable future.
Commencing on January 1, 2010, and each January 1 thereafter,
either Sprint or the Company may initiate a review to determine whether the 3G
data roaming ratio between the two for the prior calendar year has changed by
more than 20% from the calendar year that is two years prior. If the ratio has
changed by more than 20%, then the parties will commence discussions as to
whether an appropriate adjustment in other fees can be made to compensate for such
changes. If the parties cannot agree, then the parties will revert to settling
3G data roaming separately and any CCPU reductions related to incremental EV-DO
Rev. A coverage, currently totaling $0.30, will be foregone effective January 1
of the year in which such review was initiated.
The
Companys affiliation agreements with Sprint also provide the Company with
protective rights to decline to implement certain future program requirement
changes that Sprint proposes that would adversely affect the Companys
business. The Company also has a right of first refusal to build out new
coverage within the Companys territory. If the Company does not exercise this
right, then Sprint may build out the new coverage, or may allow another PCS
Affiliate of Sprint to do so, in which case Sprint has the right to manage the
new coverage.
Roaming
expense is recorded in cost of service and roaming within the statements of
operations. Cost of service and roaming transactions with Sprint include the 8%
affiliation fee, long distance, roaming expense and Sprints CCPU charges for
support services. Cost of equipment relates to inventory sold by the Company
that was purchased from Sprint under the Companys affiliation
7
Table of
Contents
agreements
with Sprint. Selling and marketing transactions relate to subsidized costs on
wireless handsets and commissions under Sprints national distribution program.
For
the three and nine months ended September 30, 2009, approximately 96% and
97%, respectively, of the Companys revenue was derived from information
provided by Sprint on the basis of data within Sprints possession and
control. For each of the three and nine
months ended September 30, 2008, approximately 97% of the Companys
revenue was derived from information provided by Sprint on the basis of data
within Sprints possession and control.
For the three and nine months ended September 30, 2009, approximately
58% and 59%, respectively, of the Companys cost of service and roaming was
derived from information provided by Sprint on the basis of data within Sprints
possession and control. For each of the
three and nine months ended September 30, 2008, approximately 58% of the
Companys cost of service and roaming was derived from information provided by
Sprint on the basis of data within Sprints possession and control. Subject to and in accordance with the terms
of the Merger Agreement and related agreements described in Note 17, the
Company reviews all such amounts settled to and from Sprint and, in the event
the Company believes any such amounts to be erroneous, it may dispute, and has
disputed, such settlements in accordance with the procedures set forth in the
affiliation agreements with Sprint. The
Company has disputed certain items with Sprint which remain unresolved as of November 3,
2009. The final outcome of these unresolved disputed items is unknown at this
time.
On
January 22, 2009, the Company reached a settlement with Sprint related to
previously disputed 2008 items, which resulted in a Gain on Sprint settlement
of $4.3 million being recorded in the Companys consolidated statement of
operations for the nine months ended September 30, 2009.
Amounts
relating to the Sprint affiliation agreements for the
three and nine
months
ended September 30, 2009 and 2008 and as of September 30,
2009 and December 31, 2008 are as follows (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Amounts included in the Consolidated Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
Service
revenue
|
|
$
|
108,480
|
|
$
|
96,097
|
|
$
|
319,600
|
|
$
|
282,370
|
|
Roaming
revenue
|
|
$
|
27,783
|
|
$
|
32,282
|
|
$
|
83,556
|
|
$
|
94,083
|
|
Cost
of service and roaming
|
|
$
|
43,025
|
|
$
|
42,927
|
|
$
|
128,368
|
|
$
|
124,021
|
|
Cost
of equipment
|
|
$
|
18,497
|
|
$
|
15,905
|
|
$
|
50,029
|
|
$
|
40,442
|
|
Selling
and marketing
|
|
$
|
3,582
|
|
$
|
2,266
|
|
$
|
9,127
|
|
$
|
7,311
|
|
|
|
September 30,
2009
|
|
December 31,
2008
|
|
Amounts included in the
Consolidated Balance Sheets:
|
|
|
|
|
|
Receivable from Sprint
|
|
$
|
29,168
|
|
$
|
25,623
|
|
Payable to Sprint
|
|
49,709
|
|
41,067
|
|
|
|
|
|
|
|
|
|
(4) Property and Equipment, Net
Property
and equipment consists of the following at September 30, 2009 and December 31,
2008 (in thousands):
|
|
September 30,
2009
|
|
December 31,
2008
|
|
Network assets
|
|
$
|
325,696
|
|
$
|
295,550
|
|
Land
|
|
114
|
|
114
|
|
Building
|
|
1,566
|
|
1,566
|
|
Computer equipment
|
|
7,929
|
|
6,773
|
|
Furniture, fixtures, and office equipment
|
|
9,939
|
|
9,744
|
|
Vehicles
|
|
3,066
|
|
2,540
|
|
Construction in progress
|
|
14,408
|
|
23,980
|
|
Total property and equipment
|
|
362,718
|
|
340,267
|
|
Less accumulated depreciation and amortization
|
|
(202,992
|
)
|
(178,253
|
)
|
Total property and equipment, net
|
|
$
|
159,726
|
|
$
|
162,014
|
|
During
the nine months ended September 30, 2009, the Company sold its remaining
Motorola equipment, which was previously recorded as Assets held for sale,
which was replaced by Nortel equipment.
A loss of approximately $0.3 million was realized upon sale of these
assets during the nine months ended September 30, 2009.
8
Table of
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(5) Goodwill and Intangible Assets
Goodwill,
totaling $141.8 million, represents the excess of purchase price over the fair
value of the net assets acquired, including identifiable intangible
assets. Goodwill is not deductible for
income tax purposes.
Intangible
assets represent the values assigned to the Companys customer base, the right
to provide service under the Sprint affiliation agreements and an FCC license
for a small market in Ohio.
The intangible assets
relating to the customer base were amortized over the estimated average life of
a customer of 30 months. The
intangible assets relating to customer bases were fully amortized as of December 31,
2007. The intangible assets relating to
the right to provide service under the Sprint affiliation agreements are being
amortized over the remaining term of the respective agreements. The FCC license
was determined to have an indefinite life as it is expected to be renewed with
minimal effort and cost. The FCC license
is for sale, however the Company believes the sale of this asset is unlikely
within the next year. The Merger
Agreement, dated October 18, 2009, provides that the Company shall obtain
the consent of Sprint for the sale of assets in which the aggregate
consideration exceeds $200,000. On
October 26, 2009, the Company and the Purchaser filed an application with the
FCC for the transfer of control of the FCC license in connection with the
consummation of the transactions contemplated by the Merger Agreement.
The
weighted average amortization period, gross carrying amount, accumulated
amortization and net carrying amount of intangible assets at September 30,
2009 and December 31, 2008 are as follows (in thousands):
|
|
September 30, 2009
|
|
|
|
Weighted Average
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Non-amortized intangible asset:
|
|
|
|
|
|
|
|
|
|
FCC license
|
|
|
|
$
|
300
|
|
$
|
|
|
$
|
300
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Right to provide service under the Sprint
affiliation agreements
|
|
167 months
|
|
126,521
|
|
(43,101
|
)
|
83,420
|
|
Customer base
|
|
30 months
|
|
71,956
|
|
(71,956
|
)
|
|
|
|
|
117 months
|
|
$
|
198,777
|
|
$
|
(115,057
|
)
|
$
|
83,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Weighted Average
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
|
Non-amortized intangible asset:
|
|
|
|
|
|
|
|
|
|
FCC license
|
|
|
|
$
|
300
|
|
$
|
|
|
$
|
300
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
Right to provide service under the Sprint
affiliation agreements
|
|
167 months
|
|
126,521
|
|
(36,219
|
)
|
90,302
|
|
Customer base
|
|
30 months
|
|
71,956
|
|
(71,956
|
)
|
|
|
|
|
117 months
|
|
$
|
198,777
|
|
$
|
(108,175
|
)
|
$
|
90,602
|
|
Amortization expense for the three months ended September 30,
2009 and 2008 was $2.3 million for each period.
Amortization expense for the nine months ended September 30, 2009
and 2008 was $6.9 million for each period.
Aggregate amortization expense relative to existing intangible assets
for the periods shown is currently estimated to be as follows:
Year Ended December 31
|
|
|
|
2009
|
|
$
|
9,176
|
|
2010
|
|
9,176
|
|
2011
|
|
9,176
|
|
2012
|
|
9,176
|
|
2013
|
|
9,176
|
|
Thereafter
|
|
44,422
|
|
Total
|
|
$
|
90,302
|
|
9
Table of
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(6) Long-Term Debt
Long-term
debt consists of the following at September 30, 2009 and December 31,
2008 (in thousands):
|
|
September 30,
2009
|
|
December 31,
2008
|
|
First lien senior secured floating rate notes
|
|
$
|
300,000
|
|
$
|
300,000
|
|
Second lien senior secured floating rate notes
|
|
177,297
|
|
175,000
|
|
Capital lease obligations
|
|
412
|
|
438
|
|
Total long-term debt and capital lease obligations
|
|
477,709
|
|
475,438
|
|
Less: current maturities
|
|
(42
|
)
|
(37
|
)
|
Long-term debt and capital lease obligations,
excluding current maturities
|
|
$
|
477,667
|
|
$
|
475,401
|
|
First Lien and Second Lien Senior
Secured Floating Rate Notes
The
Company has outstanding $477.3 million in aggregate principal amount of
senior secured notes, consisting of $300.0 million in aggregate principal
amount of First Lien Senior Secured Floating Rate Notes due 2013 (First Lien
Notes) and $177.3 million in aggregate principal amount of Second Lien Senior
Secured Floating Rate Notes due 2014 (Second Lien Notes and together with the
First Lien Notes, the Secured Notes).
The offering of the Secured Notes closed on April 23, 2007.
The
Secured Notes are senior secured obligations of the Company and are
unconditionally guaranteed on a senior secured basis by all the Companys
existing and future domestic restricted subsidiaries. The First Lien Notes are
secured by a first priority security interest, subject to permitted liens, in
substantially all of the assets of the Company and its subsidiary guarantors,
including, but not limited to: (1) all the capital stock of each
restricted subsidiary owned by the Company, or any subsidiary guarantor; (2) all
deposit accounts, security accounts, accounts receivable, inventory, investment
property, inter-company notes, general intangible assets, equipment,
instruments, contract rights, chattel paper, promissory notes and leases; (3) all
fixtures; (4) patents, trademarks, copyrights and other intellectual
property; and (5) all proceeds of, and all other amounts arising from, the
collection, sale, lease, exchange, assignment, licensing, or other disposition
or realization of the foregoing assets (collectively the Collateral);
provided that the security documents provide that a portion of the capital
stock of any subsidiary shall automatically be deemed released from, and not to
have been a part of, the Collateral to the extent necessary so as not to
require the preparation and filing with the SEC of separate audited financial
statements of such subsidiary pursuant to Rule 3-16 of the SECs
accounting rules and regulations. The Second Lien Notes are secured by a
second priority security interest, subject to permitted liens, in the
Collateral.
The indentures governing the
Secured Notes contain covenants which restrict the Companys and its restricted
subsidiaries ability to incur additional indebtedness, merge, pay dividends,
dispose of its assets, and certain other matters as defined in the
indentures. At September 30, 2009,
the Company believes it was in compliance with these covenants.
Interest
on the First Lien Notes accrues at an annual rate equal to three-month LIBOR
plus 2.125% and is payable quarterly in cash on February 1, May 1, August 1
and November 1 of each year. Interest on the Second Lien Notes accrues at
an annual rate equal to three-month LIBOR plus 3.25% and is payable quarterly
on February 1, May 1, August 1 and November 1 of each year.
The Company may elect to pay interest on the Second Lien Notes entirely in cash
or entirely by increasing the principal amount of the Second Lien Notes (Payment-in-kind
interest or PIK Interest). PIK
Interest on the Second Lien Notes accrues at an annual rate equal to
three-month LIBOR plus 4.0%. On August 3, 2009, the Company paid its
interest payment in relation to its Second Lien Notes entirely by increasing
the principal amount of the outstanding Second Lien Notes by approximately $2.3
million. The Company has additionally
elected PIK Interest in relation to its November 1, 2009 and February 1,
2010 interest payments on the Second Lien Notes. Accrued PIK Interest of
approximately $1.3 million is reflected in Other long-term liabilities until
the interest payment date, when it will be reflected as additional principal of
the Second Lien Notes. The Company has
made no other decisions regarding the future election of PIK Interest.
Three-month LIBOR for the Secured Notes resets on February 1, May 1, August 1
and November 1 of each year and was 0.48% on September 30, 2009.
Capital Lease Obligations
Interest
on capital lease obligations is all at fixed rates, which, on a weighted
average basis, approximated 12.5% per annum at September 30, 2009.
10
Table of
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(7) Interest Rate Swap
On
July 20, 2007, the Company entered into an interest rate swap to manage
interest rate risks associated with a portion of its variable rate debt. The interest rate swap agreement is for a
notional amount of $300.0 million associated with the interest on the
Companys First Lien Notes effective August 1, 2007 for a period of three
years. Under this agreement, the Company receives interest at a floating rate
of three-month LIBOR and pays interest at a fixed rate of 5.34%, resulting in
an effective interest rate for the First Lien Notes of 7.47% throughout the
term of the swap. The interest rate swap agreement qualifies and is designated
as a cash flow hedge under the requirements of the Financial Accounting
Standards Boards (FASB) Accounting Standards Codification (ASC)
Derivatives and Hedging Topic (ASC 815).
As such, the swap is accounted for as an asset or liability in the
consolidated balance sheets at fair value, including adjustment for
nonperformance risk in accordance with ASC Topic 820, Fair Value Measurements
and Disclosures (ASC 820). Changes in fair value of the effective portion of
the swap are recorded in Accumulated other comprehensive loss (AOCL), net of
income taxes, until earnings are affected by the variability in cash flows of
the designated hedged item. Any ineffective changes in the value of the swap
are recognized currently as interest expense in the consolidated statements of
operations. No component of the interest
rate swap is excluded from the assessment of effectiveness and no
ineffectiveness has been recognized on the swap since inception.
If, in the future, the swap is determined to no longer be effective as
a hedge, is sold or terminated, or is de-designated from the hedge
relationship, any net gain or loss remaining in Accumulated other comprehensive
loss would be reclassified into earnings in the same periods during which the
hedged debt payments affect earnings. If the cash flow hedge is discontinued in
the future because
it
becomes probable that the hedged debt payments will not occur, the net gain or
loss would be reclassified into earnings in that period.
See Note 8 for
information regarding fair values of the interest rate swap as of September 30,
2009 and December 31, 2008.
The following
table presents the impact of our interest rate swap on our Consolidated
Statements of Operations and Consolidated Balance Sheets for the three and nine
months ended September 30, 2009 and 2008 (in thousands):
|
|
Amount of Loss
Recognized
in AOCL on the Interest Rate
Swap (Effective Portion)
|
|
Amount of Loss Reclassified
into Interest Expense
(Effective Portion)
|
|
Amount of (Gain) Loss
Recognized in Interest
Expense on the Interest Rate
Swap (Ineffective Portion)
|
|
|
|
Three months ended
September 30,
|
|
Three months ended
September 30,
|
|
Three months ended
September 30,
|
|
Liabilities
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
1,728
|
|
$
|
1,799
|
|
$
|
3,575
|
|
$
|
1,930
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized
in AOCL on the Interest Rate
Swap (Effective Portion)
|
|
Amount of Loss Reclassified
into Interest Expense
(Effective Portion)
|
|
Amount of (Gain) Loss
Recognized in Interest
Expense on the Interest Rate
Swap (Ineffective Portion)
|
|
|
|
Nine months ended
September 30,
|
|
Nine months ended
September 30,
|
|
Nine months ended
September 30,
|
|
Liabilities
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
$
|
4,530
|
|
$
|
4,237
|
|
$
|
9,402
|
|
$
|
4,874
|
|
$
|
|
|
$
|
|
|
The amount of loss
recorded in Accumulated other comprehensive loss at September 30, 2009
that is expected to be reclassified to interest expense in the next twelve
months if interest rates underlying the Companys fair value calculations
remain unchanged is approximately $11.7 million.
11
Table of
Contents
(8) Fair Value Measurements
Fair value estimates and assumptions and methods used to estimate the
fair value of the Companys assets and liabilities are made in accordance with
the requirements of the ASC 820, Financial Instruments and Fair Value
Measurements and Disclosures.
ASC 820 clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. As a basis for
considering such assumptions, ASC 820 establishes a three-tier value hierarchy,
which prioritizes the inputs used in measuring fair value as follows:
Level 1 are observable inputs such as quoted prices in active markets;
Level 2 are inputs other than the quoted prices in active markets that are
observable either directly or indirectly; and Level 3 are unobservable
inputs in which there is little or no market data, which require the Company to
develop its own assumptions. This hierarchy requires the Company to use
observable market data, when available, and to minimize the use of unobservable
inputs when determining fair value. On a recurring basis, the Company measures
certain assets and liabilities at fair value, including the Companys money
market funds, commercial paper and interest rate swap.
The following table presents the Companys assets and liabilities
measured at fair value on a recurring basis as of September 30, 2009 and December 31,
2008 (in thousands):
|
|
September 30, 2009
|
|
December 31,
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
2008
|
|
|
|
Fair Value
|
|
Inputs
|
|
Inputs
|
|
Inputs
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(a)
|
|
$
|
64,503
|
|
$
|
|
|
$
|
64,503
|
|
$
|
|
|
$
|
27,194
|
|
Commercial paper(a)
|
|
|
|
|
|
|
|
|
|
14,117
|
|
Total assets measured at fair value
|
|
$
|
64,503
|
|
$
|
|
|
$
|
64,503
|
|
$
|
|
|
$
|
41,311
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap(b)
|
|
$
|
11,749
|
|
$
|
|
|
$
|
11,749
|
|
$
|
|
|
$
|
16,621
|
|
Total liabilities measured at fair value
|
|
$
|
11,749
|
|
$
|
|
|
$
|
11,749
|
|
$
|
|
|
$
|
16,621
|
|
(a)
The fair values
of the Companys money market funds and commercial paper are based on third
party estimates using recent trading activity and other relevant market
information.
(b)
The fair values
of the interest rate swap are derived from a discounted cash flow analysis
based on the terms of the contract and observable market data, including
adjustment for nonperformance risk.
The
following table presents carrying value and estimated fair value of the Companys
financial instruments that are carried at historical cost (in thousands):
|
|
September 30, 2009
|
|
December 31, 2008
|
|
|
|
Carrying
amount
|
|
Estimated
fair value
|
|
Carrying
amount
|
|
Estimated
fair value
|
|
First lien senior secured floating rate notes(a)
|
|
$
|
300,000
|
|
$
|
253,500
|
|
$
|
300,000
|
|
$
|
211,500
|
|
Second lien senior secured floating rate notes(a)
|
|
177,297
|
|
134,746
|
|
175,000
|
|
105,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
The fair values
of the Companys senior secured floating rate notes are based on third party
estimates using recent trading activity and other relevant market information.
12
Table of
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(9) Income Taxes
The
Companys effective income tax rate for the interim periods presented is based
on managements estimate of the Companys effective tax rate for the applicable
year and differs from the federal statutory income tax rate primarily due to
nondeductible permanent differences, federal alternative minimum taxes, state
income taxes and changes in the valuation allowance for deferred income taxes.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation
of future taxable income during the periods in which those temporary
differences become deductible. There was no federal income tax expense recorded
for the three and nine months ended September 30, 2009, as income
generated is offset by the utilization of previously recorded net operating
loss carryforwards (NOLs) and the reversal of the related valuation
allowance. No federal income tax benefit
has been recorded for the three and nine months ended September 30, 2008,
as the net deferred income tax asset generated, primarily from temporary
differences related to the NOL, was offset by a full valuation allowance
because it is considered more likely than not that these benefits will not be
realized due to the Companys history of net operating losses prior to January 1,
2009.
The income tax provision for each of the three and nine months ended September 30,
2009 relate to federal alternative minimum tax as well as state income taxes
which are estimated based upon the taxable income generated. The income tax provision for each of the
three and nine months ended September 30, 2008 relate to state income
taxes which are estimated based upon the taxable income generated in each
state.
In July 2009, in
relation to the built-in gain provisions of Internal Revenue Code Section 382,
the five-year period subsequent to the ownership change that occurred in July 2004
upon the Companys emergence from bankruptcy lapsed; resulting in the Companys
inability to utilize NOLs beyond the annual limitation and realized built-in
gains. Consequently, approximately $111 million of NOLs, from a total of
approximately $528 million of NOLs, are no longer available to be realized by
the Company as of September 30, 2009.
This had no impact on net income as these NOLs were fully reserved with
a valuation allowance.
(10) Stock-Based Compensation
The Company has two long-term incentive plans. The Horizon PCS 2004
stock incentive plan, as amended (the Horizon Plan), was assumed by the
Company in its merger with Horizon PCS, Inc. in 2005. The iPCS 2004
long-term incentive plan, as amended (the iPCS Plan), was approved by the
Companys Board of Directors as provided by the Companys plan of
reorganization. Both plans have been approved by the Companys stockholders.
Horizon Plan.
Under the Horizon Plan, the Company may grant
to employees, directors and consultants of the Company or its subsidiaries
incentive or non-qualified stock options or stock appreciation rights. All of
the stock options issued to date under the Horizon Plan have a ten-year life
and vest equally in six-month increments over three years from the respective
date of grant. The Horizon Plan provides for the accelerated vesting of awards
in the event of a change in control (as defined in the Horizon Plan). The total
number of shares that may be granted under the Horizon Plan is 558,602 shares
of the Companys common stock, which equals the number of shares underlying
awards previously made under the Horizon Plan.
iPCS
Plan.
Under the iPCS Plan, the Company may grant to
employees, directors and consultants of the Company or its subsidiaries
incentive and non-qualified stock options, stock appreciation rights,
restricted and unrestricted stock awards and cash incentive awards. The stock
options awarded to date under the iPCS Plan have a ten-year term with vesting
on a quarterly basis over four years for employees and quarterly over one year
for directors. Restricted stock awards granted to date to employees under the
iPCS Plan vest over various periods ranging from a quarterly basis over four
years to vesting entirely at the end of two or three years. The iPCS Plan provides for the accelerated
vesting of awards in the event of a change in control (as defined in the iPCS
Plan). The total number of shares that
may be awarded under the iPCS Plan is 4,592,630 shares of common stock, of
which amount, 2,066,390 shares remained available for awards as of September 30,
2009.
13
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The
Company did not award any stock options during the three months ended September 30,
2009. During the nine months ended September 30,
2009, the Company awarded 332,452 stock options to management and the Board of
Directors at an exercise price of $8.76, which was the closing price on the
date of grants. The fair value of each
grant is estimated at the grant date using the Black-Scholes option pricing
method. The table below outlines the
assumptions used for the options granted during the nine months ended September 30, 2009:
|
|
For the Nine Months Ended
September 30, 2009
|
|
|
|
Range
|
|
Weighted Average
|
|
Risk-free interest rate
|
|
2.50% to 2.66%
|
|
2.63
|
%
|
Volatility
|
|
|
|
70.00
|
%
|
Dividend yield
|
|
|
|
0.00
|
%
|
Expected life in years
|
|
|
|
5.85
|
|
Fair value price
|
|
|
|
$
|
5.54
|
|
|
|
|
|
|
|
|
The risk-free interest rate was determined using the then implied yield
currently available for zero-coupon U.S. government issues with a remaining
term equal to the expected life of the stock options. The expected volatility
assumption used in the Black-Scholes option pricing models was based on the
historical volatility of peer companies as adjusted for the Companys
volatility since its existence as a publicly traded company in 2004. The
Company does not currently intend to pay cash dividends and thus has assumed a
0% dividend yield. The Company uses the simplified method for calculating the
expected life for stock options in place of using historical exercise data. The
Companys stock has been publicly traded since August 2004 and the Company
cannot provide a reasonable basis upon which to estimate the expected term of
options granted.
On May 2, 2007, in
connection with the $11.00 special cash dividend paid in 2007, the Compensation
Committee of the Board of Directors of the Company resolved that each stock
option that was outstanding under the iPCS Plan and the Horizon Plan, on the
trading day immediately preceding the trading day designated by the NASDAQ
Stock Market as the ex-dividend date (the Adjustment Date) would be adjusted
as follows effective as of the opening of business on the Adjustment Date:
·
The number of shares of stock then subject to each
option would be adjusted by dividing the number of shares of stock then subject
to the option by the Adjustment Factor; and
·
The exercise price of each option would be adjusted by
multiplying the exercise price by the Adjustment Factor.
The Adjustment Factor
was 0.78282 which was equal to one minus the percentage reduction in the
closing sale price of a share of stock on the Adjustment Date reported by the
NASDAQ Stock Market at the regular hours closing price (Closing Price) as
compared to the Closing Price of a share of stock on the Adjustment Date minus
$11.00. In addition, on the Adjustment Date, the number of shares under the
iPCS Plan and the Horizon Plan was adjusted by dividing the number of shares of
stock reserved for issuance by the Adjustment Factor; thereby increasing the
number of shares reserved for issuance. The modification resulted in an
additional 184,537 shares to 72 employees and directors who had
options outstanding on the modification date. With this modification, the
Company will record additional stock-based compensation expense of
approximately $6.5 million, of which approximately $3.2 million was
recorded as of the date of modification and the remainder is being recognized over
the remaining vesting period for the options, subject to reduction for
forfeitures. An additional $0.1 million and $0.2 million of compensation
expense related to the modification was recorded in the three and nine months
ended September 30, 2009, respectively, and an additional $0.1 million and
$1.0 million was recorded in the three and nine months ended September 30,
2008, respectively, with the quarterly vesting of stock options. As of September 30, 2009, approximately
$0.3 million of additional stock-based compensation expense related to this
modification remains to be recognized over the remaining vesting period of the
options.
The
following table shows stock-based compensation expense by type of share-based
award for the three and nine months ended September 30, 2009 and 2008
included in the consolidated statements of operations (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Restricted
stock
|
|
$
|
322
|
|
$
|
254
|
|
$
|
906
|
|
$
|
808
|
|
Fair
value expense of stock option awards
|
|
800
|
|
793
|
|
2,400
|
|
2,979
|
|
Fair
value expense of stock option modifications related to special cash dividend
(Note 11)
|
|
66
|
|
71
|
|
196
|
|
991
|
|
Total
stock-based compensation
|
|
$
|
1,188
|
|
$
|
1,118
|
|
$
|
3,502
|
|
$
|
4,778
|
|
14
Table of
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The
following table shows the total remaining unrecognized compensation cost
related to restricted stock grants and fair value expense of stock option
awards, as well as the weighted average remaining required service period over
which such costs will be recognized as of September 30, 2009:
|
|
Total Remaining
Unrecognized
Compensation Cost
|
|
Weighted Average
Remaining Required
Service Period
|
|
|
|
(in millions)
|
|
(in years)
|
|
Restricted stock
|
|
$
|
1.9
|
|
1.59
|
|
Fair value expense of stock option awards
|
|
6.6
|
|
2.28
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense is included in the consolidated statements of operations
as follows (in thousands):
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Cost
of service and roaming
|
|
$
|
89
|
|
$
|
116
|
|
$
|
258
|
|
$
|
442
|
|
Selling
and marketing
|
|
141
|
|
129
|
|
421
|
|
546
|
|
General
and administrative
|
|
958
|
|
873
|
|
2,823
|
|
3,790
|
|
Total
stock-based compensation
|
|
$
|
1,188
|
|
$
|
1,118
|
|
$
|
3,502
|
|
$
|
4,778
|
|
The following is a
summary of options outstanding and exercisable at September 30, 2009:
|
|
Number of Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
(in years)
|
|
(in thousands)
|
|
Outstanding at December 31, 2008
|
|
1,397,947
|
|
$
|
22.80
|
|
|
|
|
|
Granted
|
|
332,452
|
|
8.76
|
|
|
|
|
|
Exercised
|
|
(540
|
)
|
8.76
|
|
|
|
|
|
Forfeited
|
|
(420
|
)
|
39.47
|
|
|
|
|
|
Expired
|
|
(27,703
|
)
|
20.88
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
1,701,736
|
|
$
|
20.09
|
|
7.55
|
|
$
|
6,144
|
|
Exercisable at September 30, 2009
|
|
1,038,864
|
|
$
|
20.07
|
|
6.82
|
|
$
|
4,062
|
|
The following is a
summary of activity for the nine months ended September 30, 2009 related
to the Companys restricted shares granted under its long-term incentive plans:
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Restricted shares at December 31, 2008
|
|
56,534
|
|
$
|
36.32
|
|
Granted
|
|
101,200
|
|
8.76
|
|
Vested
|
|
(12,984
|
)
|
43.23
|
|
Forfeited
|
|
(900
|
)
|
8.76
|
|
Restricted shares at September 30, 2009
|
|
143,850
|
|
$
|
16.48
|
|
The iPCS Plan permits, at the employees direction, the surrendering of
common shares to satisfy certain tax withholding obligations in connection with
vesting of restricted stock.
(11) Special Cash Dividend
On April 26, 2007,
the Board of Directors declared a special cash dividend of $11.00 per share,
approximately $187.0 million in the aggregate, payable to all holders of record
of the Companys common stock on May 8, 2007. Of this amount, approximately $186.5 million
was paid on May 16, 2007. The
remaining unpaid dividends relate to restricted stock awards and are being paid
out starting in July 2007 as these awards vest. As of September 30, 2009, approximately
$0.2 million of this dividend remains to be paid.
15
Table of
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(12) Comprehensive Income (Loss)
Comprehensive
income (loss), which includes all changes in the Companys equity during the
period except transactions with stockholders, consisted of the following for
the three and nine months ended September 30, 2009 and 2008 (in
thousands):
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net income (loss)
|
|
$
|
2,682
|
|
$
|
(7,494
|
)
|
$
|
15,832
|
|
$
|
(9,746
|
)
|
Other comprehensive income Unrealized income on
interest rate swap, net of tax
|
|
1,847
|
|
131
|
|
4,872
|
|
637
|
|
Comprehensive income (loss)
|
|
$
|
4,529
|
|
$
|
(7,363
|
)
|
$
|
20,704
|
|
$
|
(9,109
|
)
|
(13) Stock Repurchase Plan
On
January 30, 2009, the Companys Board of Directors authorized the
repurchase of up to $15.0 million of the Companys common stock in a stock
repurchase program during the 12-month period beginning on the date of
authorization. The Company may purchase shares from time to time in open market
or privately negotiated transactions at prices deemed appropriate by
management, depending on market conditions, applicable laws and other factors.
The stock repurchase program does not require the Company to repurchase any specific
number of shares and may be discontinued at any time.
Pursuant to this stock repurchase program, during the
nine months ended September 30, 2009, the Company purchased 658,863 shares
of its common stock at an average price of $13.69 per share for approximately
$9.0 million, of which approximately $8.8 million had been settled in cash
as of September 30, 2009. These
repurchased shares are reflected as Treasury stock, at cost in the Consolidated
Balance Sheet as of September 30, 2009.
As of September 30, 2009, approximately $6.0 million remained
available under the stock repurchase program.
Pursuant to the terms of
the Merger Agreement discussed in Note 17, as of October 18, 2009, the
Company is not permitted to repurchase shares of its common stock on or after
such date.
(14) New Accounting Pronouncements
Effective July 1,
2009, the FASB Accounting Standards Codification (ASC) became the single
official source of authoritative, nongovernmental generally accepted accounting
principles (GAAP) in the United States. The historical GAAP
hierarchy was eliminated and the ASC became the only level of authoritative
GAAP, other than guidance issued by the Securities and Exchange
Commission. Our accounting policies were not affected by the
conversion to ASC. However, references to specific accounting
standards in the footnotes to our consolidated financial statements have been
changed to refer to the appropriate section of ASC.
In September 2006, the FASB issued guidance which defines fair
value, establishes a framework and gives guidance regarding the methods used
for measuring fair value, and expands disclosures about fair value
measurements. This guidance is contained in ASC Topic 820, Fair Value
Measurements and Disclosures (ASC 820).
In February 2008, the FASB deferred the effective date of this
guidance for all non-financial assets and non-financial liabilities, except
those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) to fiscal years beginning
after November 15, 2008. The Company adopted the new standard included in
ASC 820 as it applies to financial assets and liabilities as of January 1,
2008. The Company adopted the new standard included in ASC 820, as it relates
to non-financial assets and liabilities as of January 1, 2009. See
Note 8 for further discussion of fair value measurements of financial
instruments.
In
March 2008, the FASB issued guidance which amends and expands the
disclosure requirements of ASC Topic 815, Derivatives and Hedging (ASC 815),
requiring enhanced disclosures about the Companys hedging activities. The
Company is required to provide enhanced disclosures about (a) how and why
it uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under ASC 815, and (c) how derivative
instruments and related hedged items affect the Companys financial position,
results of operations, and cash flows. The new provisions of ASC 815 are
effective for fiscal years and interim periods beginning after December 15,
2008, with comparative disclosures of earlier periods encouraged upon initial
adoption.
The Company
adopted the new provisions of ASC 815 effective January 1, 2009. See Note 7 for the Companys disclosures
about its derivative instruments and hedging activities.
In April 2009, the
FASB issued guidance requiring disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements.
This guidance is contained in ASC Topic 825, Financial
Instruments (ASC 825). The new
disclosure standard included in ASC 825 is
effective for interim periods ending after June 15,
2009, but early adoption is permitted for interim periods ending after March 15,
2009. The Company adopted the new disclosure standard included in
ASC 825 effective for the interim period ended March 31, 2009. See Note 8 for the Companys disclosures
about its fair values of financial instruments.
16
Table of
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In April 2009, the
FASB issued additional guidance in determining whether a market for a financial
asset is not active and a transaction is not distressed for fair value
measurement purposes.
This guidance is contained in ASC 820. This new guidance included in ASC 820 i
s effective for interim periods ending
after June 15, 2009, but early adoption is permitted for interim periods
ending after March 15, 2009. The Company adopted the new
guidance included in ASC 820 effective for the interim period ended March 31,
2009.
In April 2009, the
FASB issued guidance in determining whether impairments in debt securities are
other than temporary, and modifies the presentation and disclosures surrounding
such instruments.
This guidance is contained in ASC Topic 320, Investments
Debt and Equity Securities (ASC 320).
This new
guidance included in ASC 320 is effective for interim and annual periods ending
after June 15, 2009, but early adoption is permitted for interim periods
ending after March 15, 2009. The Company adopted the provisions
of this new guidance included in ASC 320 effective for the interim period ended
March 31, 2009.
In May 2009, the
FASB issued guidance which sets forth general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This guidance is contained in ASC Topic 855, Subsequent
Events (ASC 855). This new guidance
in ASC 855 is effective for interim periods ending after June 15,
2009. The Company adopted the new
provisions of ASC 855 for the interim period ended June 30, 2009.
In June 2009, the
FASB issued guidance to address the elimination of the concept of a qualifying
special purpose entity. This guidance is
contained in ASC Topic 810, Consolidation (ASC 810). This new guidance included in ASC 810 also
replaces the quantitative-based risks and rewards calculation for determining
which enterprise has a controlling financial interest in a variable interest
entity with an approach focused on identifying which enterprise has the power
to direct the activities of a variable interest entity and the obligation to
absorb losses of the entity or the right to receive benefits from the entity.
Additionally, this new guidance included in ASC 810 provides more timely and
useful information about an enterprises involvement with a variable interest
entity. This new guidance is effective for fiscal years beginning after November 15,
2009. The Company does not anticipate
that the implementation of this new guidance included in ASC 810 will have a
material impact on its consolidated financial statements.
In September 2009,
the FASB issued guidance which modifies the way companies allocate revenue
amongst multiple deliverables in a contract.
The new guidance, included in ASC Topic 605, Revenue Recognition (ASC
605), allows companies to allocate consideration in a multiple element
arrangement in a manner that better reflects the transaction economics. When vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined,
companies will now be allowed to develop a best estimate of the selling price
to separate deliverables and allocate arrangement consideration using the
relative selling price method.
Additionally this new guidance eliminates the use of the residual
method. This new guidance in ASC 605 is
effective for fiscal years beginning after June 15, 2010. The Company is currently evaluating the
impact of this new guidance in ASC 605 on its consolidated financial
statements.
(15) Commitments and Contingencies
(a) Commitments
On
March 13, 2009, the Company signed a letter of agreement with Nortel
Networks to purchase EV-DO Rev. A equipment and services totaling approximately
$19.7 million in aggregate, consisting of a non-cancelable purchase of
approximately $14.8 million of equipment and services and an option to purchase
up to an additional approximately $4.9 million of equipment and services. Under this letter of agreement, the Company
agreed to return to Nortel Networks certain equipment replaced by the purchased
equipment by March 1, 2010. The
Company has submitted non-cancelable purchase orders for approximately $14.8
million of equipment and services and therefore has no remaining commitment
under this letter of agreement to submit additional non-cancelable purchase
orders. As of September 30, 2009,
the Company has received approximately $13.8 million and paid for approximately
$13.1 million of equipment and services and has returned approximately half of
the replaced equipment to Nortel. The remaining replaced equipment is expected
to be returned to Nortel by the end of 2009.
As discussed in Note 17,
on October 18, 2009, the Company, Sprint and the Purchaser, a wholly owned
subsidiary of Sprint, entered into the Merger Agreement pursuant to which
Sprint agreed to acquire all of the Companys outstanding common stock for a
cash price of $24 per share. The Merger Agreement provides for certain
termination rights for each of Sprint and the Company and further provides that
upon termination of the Merger Agreement under specified circumstances, the
Company will be required to pay Sprint a termination fee of $12.5 million.
(b) FCC Licenses
Sprint
PCS holds the licenses necessary to provide wireless services in the Companys
territory. The FCC requires that licensees like Sprint PCS maintain control of
their licensed spectrums and not delegate control to third-party operators or
managers without FCC consent and are subject to renewal and revocation by the
FCC. The FCC has adopted specific
standards that apply to wireless personal communications services license renewals.
Any failure by Sprint PCS or the Company to comply with these standards could
result in the non-renewal of the Sprint PCS licenses for the Companys
territory. Additionally, if Sprint PCS does not
17
Table of
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demonstrate
to the FCC that Sprint PCS has met the construction requirements for each of
its wireless personal communications services licenses, it can lose those licenses.
If Sprint PCS loses its licenses in the Companys territory for any of these
reasons, or any other reason, the Company would not be able to provide wireless
services without obtaining rights to other licenses.
If
Sprint PCS loses its licenses in another territory, Sprint PCS or the
applicable PCS Affiliate of Sprint would not be able to provide wireless
services without obtaining rights to other licenses and the Companys ability
to offer nationwide calling plans would be diminished and potentially more
costly.
(c) Other
The
State of Michigan is currently auditing the Companys sales and use tax returns
for the years 2003 through 2006. The
outcome of this audit cannot be determined at this time.
(d) Litigation and
Arbitration
As discussed in Note 17,
in connection with the Merger Agreement, Sprint Nextel Corporation, WirelessCo
L.P., Sprint Spectrum L.P., SprintCom, Inc., Sprint Communications
Company, L.P., Nextel Communications, Inc., PhillieCo L.P. and APC PCS LLC
(collectively, the Sprint Parties) and Horizon Personal Communications, Inc.,
Bright Personal Communications Services, LLC, iPCS Wireless, Inc. and the
Company (collectively, the iPCS Parties) entered into a Settlement Agreement
and Mutual Release, dated October 18, 2009 (the Settlement Agreement).
Under the terms of the Settlement Agreement, the Sprint Parties and the iPCS
Parties have agreed to stay all pending litigation between them, subject to
certain exceptions and conditions, and not to sue each other during the pendency
of the transactions contemplated by the Merger Agreement, subject to certain
exceptions.
Sprint/Nextel Merger Litigation.
On July 15, 2005, the Companys wholly
owned subsidiary, iPCS Wireless, Inc. (iPCS Wireless), filed a complaint
against Sprint and Sprint PCS in the Circuit Court of Cook County, Illinois
(the Circuit Court). The complaint alleged, among other things, that Sprints
conduct following the consummation of the merger between Sprint and Nextel
would breach Sprints exclusivity obligations to iPCS Wireless under its
affiliation agreements with Sprint PCS. On August 14, 2006, the Circuit
Court issued its decision and on September 20, 2006, the Circuit Court
issued a final order effecting its decision. The final order provided that:
·
Within 180 days of the
date of the final order, Sprint and those acting in concert with it must cease
owning, operating and managing the Nextel wireless network in iPCS Wirelesss
territory.
·
Sprint shall continue to
comply with all terms and conditions of the Forbearance Agreement between iPCS
Wireless and Sprint setting forth certain limitations on Sprints operations
post-merger with Nextel.
On September 28, 2006, Sprint appealed the Circuit Courts ruling
to the Appellate Court of Illinois, First Judicial District (the Appellate
Court), and, at Sprints request, the Circuit Courts ruling was stayed by the
Appellate Court pending the appeal. On March 31, 2008, the Appellate Court
unanimously affirmed the 2006 Circuit Court decision. On May 5, 2008,
Sprint filed a petition for leave to appeal with the Supreme Court of Illinois.
On September 24, 2008, the Supreme Court of Illinois (the Supreme Court)
denied Sprints petition for leave to appeal the Appellate Courts decision.
On Sprints motion for reconsideration, the Supreme Court again denied
Sprints petition for leave to appeal on November 12, 2008. The Supreme
Court at that time directed the Circuit Court to modify its order of September 20,
2006, in the following manner:
·
To grant Sprint
360 days (rather than 180 days) to comply with the Circuit Courts order
to cease owning, operating and managing the Nextel wireless network in iPCS
Wirelesss territory.
·
To permit Sprint to seek an
extension of the 360-day period upon a showing of good cause, with due
consideration given to the hardship(s) imposed on iPCS Wireless by the
requested extension.
On January 30, 2009, the Circuit Court entered its final order, as
directed by the Supreme Court, providing that:
·
Sprint, and those acting in
concert with it, must cease owning, operating and managing the Nextel wireless
network in iPCS Wirelesss service area.
·
Sprint has until January 25,
2010 (360 days from the date of the Circuit Courts order) to comply with
the order. Sprint may seek an extension of such deadline upon a showing of good
cause, giving due consideration to the hardships that would be imposed on iPCS
Wireless if such extension were granted.
·
Sprint must continue to
comply with all terms and conditions of the Forbearance Agreement between iPCS
Wireless and Sprint.
18
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On October 19, 2009, pursuant to the Settlement Agreement, the
Circuit Court stayed this litigation, including Sprints obligations to comply
with the Circuit Courts final order by January 25, 2010. If the stay is vacated for any reason, Sprint
shall have until 120 days after the date on which the stay is vacated to comply
with the requirements of the final order.
On September 22, 2008, Sprint also filed a petition with the
Circuit Court seeking to vacate that Courts original order. On January 20,
2009, the Circuit Court denied Sprints petition with prejudice. On February 18,
2009, Sprint appealed the decision of the Circuit Court denying Sprints
petition to vacate to the Illinois Appellate Court.
On October 20, 2009, pursuant to the Settlement Agreement, the
Illinois Appellate Court stayed Sprints appeal. The stay will be automatically vacated if the
Merger Agreement is terminated for any reason.
Sprint/Clearwire Transaction Litigation.
On May 7, 2008, Sprint announced a
proposed transaction among itself, Clearwire Corporation, and certain other parties
(the Sprint-Clearwire Transaction) to form a new competing network (New
Clearwire), pursuant to which transaction Sprint transferred its next
generation of wireless technology (4G) to the New Clearwire. The same day,
Sprint filed a complaint for declaratory judgment against iPCS and certain of
its subsidiaries, iPCS Wireless, Horizon Personal Communications, Inc. and
Bright Personal Communications Services, LLC (collectively, the iPCS
Subsidiaries) in the Court of Chancery of the State of Delaware (the Delaware
Chancery Court). In that lawsuit, Sprint sought a declaration that the
Sprint-Clearwire Transaction would not constitute a breach of the Sprint
affiliation agreements it has with the iPCS Subsidiaries.
On May 12, 2008, the iPCS Subsidiaries filed a lawsuit against
Sprint and certain of its affiliates in the Circuit Court, seeking declaratory
and injunctive relief with respect to the Sprint-Clearwire Transaction. In that
case, the iPCS Subsidiaries are seeking a declaration that the Sprint-Clearwire
Transaction constitutes a breach of Sprints affiliation agreements it has with
those subsidiaries, and also sought an injunction barring Sprint from closing
the Sprint-Clearwire Transaction until it complied with the affiliation
agreements.
On July 14, 2008, the Delaware Chancery Court granted the motion
to dismiss filed by our Bright and Horizon subsidiaries and dismissed them from
the Delaware litigation. Pursuant to a motion filed by iPCS and iPCS Wireless,
on October 8, 2008, the Delaware Chancery Court stayed all remaining
Delaware litigation in favor of the lawsuit brought in Illinois by the iPCS
Subsidiaries.
On November 3, 2008, the iPCS Subsidiaries filed a motion for
preliminary injunction in the Circuit Court seeking to prevent Sprint from
consummating the Sprint-Clearwire Transaction until such time that the Circuit
Court could rule on the merits of the underlying litigation brought by the
iPCS Subsidiaries against Sprint. On November 17, 2008, the iPCS
Subsidiaries, Sprint, and New Clearwire reached a stipulation pursuant to which
the iPCS Subsidiaries withdrew their motion for preliminary injunction without
prejudice, and the Sprint-Clearwire Transaction closed on November 28,
2008. In connection with the withdrawal of the preliminary injunction motion by
the iPCS Subsidiaries, the Circuit Court entered an Agreed Order and
Stipulation, dated November 17, 2008 (the Agreed Order) pursuant to
which: (i) New Clearwire stipulated that it did not presently intend to
commercially launch its 4G network, sell products or services, or promote
products or services that are available for sale in any part of the iPCS
Subsidiaries territories prior to July 1, 2009, (ii) New Clearwire
stipulated that it would give the iPCS Subsidiaries at least 60 days
advance written notice before any commercial launch of its 4G network, any sale
of products or services or any promotion of products or services that are
offered for sale in any part of the iPCS Subsidiaries service areas if it plans
to do so before entry of a final and non-appealable judgment by the Circuit
Court in the underlying action brought by the iPCS Subsidiaries against Sprint,
and (iii) New Clearwire and Sprint stipulated that neither of them nor any
of their controlled affiliates would raise the fact that the Sprint-Clearwire
Transaction had closed as a basis for opposing any remedy proposed by the iPCS
Subsidiaries or granted by the Circuit Court.
On December 30, 2008, the Circuit Court issued a decision on a
motion for partial summary judgment filed by iPCS Wireless based on the 2006
decision in the Illinois Sprint/Nextel Merger Litigation. The Circuit Court
specifically recognized that pursuant to the 2006 decision, Sprint and those
acting in concert with it cannot compete against iPCS Wireless in its exclusive
service area, regardless of the radio frequency that they use to compete. The
Circuit Court held that Sprint cannot relitigate the issue of whether Sprint
and those acting in concert with it may compete with iPCS Wireless in its
service area by using a frequency other than 1900 MHz. The Circuit Court
granted in part iPCS Wirelesss motion for partial summary judgment with
respect to these two issues and entered judgment thereon but stayed enforcement
of the judgment pending a ruling on Sprints petition to vacate the original
judgment in the Illinois Sprint/Nextel Merger Litigation, which petition to
vacate was then dismissed with prejudice on January 20, 2009. The Circuit
Court also found in its December 30, 2008 ruling that some material issues
of fact remained and would be decided at trial including, but not limited to,
whether New Clearwire is a related party, whether Sprint controls New
Clearwire, whether the protections of exclusivity extend beyond the situation
in which Sprint acts through a related party, and the question of who
constitutes those acting in concert with Sprint.
On January 9, 2009, the Circuit Court denied Sprints motion for
partial summary judgment against Bright and Horizon. In that motion, Sprint had
sought to bar Bright and Horizon from litigating the issue of whether Sprint
could compete with Horizon and Bright outside the 1900 MHz spectrum range,
based on a 2006 decision by the Delaware Chancery Court. The Circuit Court
denied Sprints motion for partial summary judgment against Bright and Horizon
and found that the Delaware Chancery Court did not actually decide that issue.
19
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On January 30, 2009, the iPCS Subsidiaries amended their original
complaint against Sprint. Under the amended complaint, the iPCS Subsidiaries
included, among other things, a claim that Sprint is improperly withholding
advanced technologies from the iPCS Subsidiaries and diverting those
technologies to their competitor in violation of the iPCS Subsidiaries
affiliation agreements with Sprint. The amended complaint also seeks monetary
relief. On February 27, 2009, Sprint, in its response to the amended
complaint, asserted several counterclaims that essentially seek declaratory
relief that the Clearwire transaction does not violate the affiliation
agreements.
On
April 30, 2009, the Circuit Court denied a motion brought by Sprint that
sought to dismiss the iPCS Subsidiaries claims as to whether Sprint improperly
withheld advanced technology from them in connection with the Clearwire
transaction. The Circuit Court also
ruled that the iPCS Subsidiaries claims for relief could not include certain
types of monetary relief but that, in addition to their existing claims for
injunctive relief, the iPCS Subsidiaries would not be prevented from making a
claim for any actual or direct damages.
On
October 19, 2009, pursuant to the Settlement Agreement, the Circuit Court
stayed this litigation. Under the terms
of the Settlement Agreement, the stay shall not affect any rights, duties or
obligations under the Agreed Order issued by the Circuit Court on November 17,
2008. The Settlement Agreement further provides that if New Clearwire takes any
action that does not comply with the Agreed Order or if New Clearwire provides
notice pursuant to the Agreed Order of
its intention to launch a network or to promote or sell products or services in
any part of the applicable iPCS Subsidiaries service areas, the stay
shall be automatically vacated and the iPCS Subsidiaries shall be entitled to
pursue all available remedies.
Sprint/Virgin Mobile Transaction Litigation.
On July 28, 2009,
Sprint announced it agreed to acquire Virgin Mobile USA, Inc., subject to
Virgin Mobile USA stockholders and regulatory approvals (the Sprint-Virgin
Mobile Transaction). On September 10,
2009, the iPCS Subsidiaries filed a lawsuit against Sprint and certain of its
affiliates in the Circuit Court, seeking declaratory and injunctive relief with
respect to the Sprint-Virgin Mobile Transaction. In that case, the iPCS
Subsidiaries are seeking a declaration that the Sprint-Virgin Mobile
Transaction constitutes a breach of Sprints affiliation agreements with the iPCS
Subsidiaries, and also sought an injunction barring Sprint from closing the
Sprint-Virgin Mobile Transaction until it complied with the affiliation
agreements. On the same day, the iPCS
Subsidiaries filed a motion for preliminary injunction, in which they seek to
enjoin the closing of the Sprint-Virgin Mobile Transaction. That motion is pending. On September 22, 2009, the defendants
filed a motion to dismiss the complaint.
That motion is pending. On October 19,
2009, pursuant to the Settlement Agreement, the Circuit Court stayed this
litigation. Under the terms of the
Settlement Agreement, Sprint agreed that, so long as the stay was in effect, it
would not (i) reduce, directly or indirectly, or permit to be reduced, the
reseller rates under the Virgin Mobile resale arrangement applicable to the
iPCS Subsidiaries or (ii) claim or assert in any litigation proceeding or
other action between Sprint and the Company or any of their respective
affiliates that the iPCS Subsidiaries or any of their affiliates has waived the
right to challenge the permissibility of any prior direct or indirect
reductions of such reseller rates.
The Company presently cannot determine the ultimate resolution of the
matters described above. The results of litigation are inherently uncertain
and, while the Company believes that it has meritorious claims in the matters
described above, material adverse outcomes are possible. Additionally, on October 18, 2009, the
parties to the above-described lawsuits entered into the Settlement Agreement.
Please see Note 17 for a more detailed description of the Settlement Agreement.
In addition to the foregoing, from time to time, the Company is
involved in various legal proceedings relating to claims arising in the
ordinary course of business. The Company is not currently a party to any such
legal proceedings, the adverse outcome to which, individually or in the
aggregate, is expected to have a material adverse effect on our business,
financial condition or results of operations.
20
Table of
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(16) Consolidating Financial Information
The
Secured Notes are fully, unconditionally and jointly and severally guaranteed
by the Companys domestic restricted subsidiaries, including iPCS Wireless, Inc.,
iPCS Equipment, Inc., Horizon Personal Communications, Inc., Bright
PCS Holdings, Inc. and Bright Personal Communications Services, LLC,
which are 100% owned subsidiaries of iPCS, Inc. (see Note 6). The
following consolidating financial information for iPCS, Inc. as of September 30,
2009 and December 31, 2008 and for the three and nine months ended September 30,
2009 and 2008 is presented for iPCS, Inc. and the Companys guarantor
subsidiaries (in thousands):
Condensed Consolidating Balance Sheet
As of September 30, 2009
|
|
iPCS Inc.
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
iPCS Consolidated
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
77,092
|
|
$
|
|
|
$
|
77,092
|
|
Intercompany receivable
|
|
554,594
|
|
295,601
|
|
(850,195
|
)
|
|
|
Other current assets
|
|
474
|
|
87,649
|
|
|
|
88,123
|
|
Total current assets
|
|
555,068
|
|
460,342
|
|
(850,195
|
)
|
165,215
|
|
Property and equipment, net
|
|
|
|
159,726
|
|
|
|
159,726
|
|
Intangible assets, net
|
|
|
|
225,503
|
|
|
|
225,503
|
|
Other noncurrent assets
|
|
5,387
|
|
3,367
|
|
|
|
8,754
|
|
Investment in subsidiaries
|
|
196,535
|
|
|
|
(196,535
|
)
|
|
|
Total assets
|
|
$
|
756,990
|
|
$
|
848,938
|
|
$
|
(1,046,730
|
)
|
$
|
559,198
|
|
Intercompany payable
|
|
$
|
295,601
|
|
$
|
554,594
|
|
$
|
(850,195
|
)
|
$
|
|
|
Other current liabilities
|
|
4,003
|
|
89,105
|
|
|
|
93,108
|
|
Total current liabilities
|
|
299,604
|
|
643,699
|
|
(850,195
|
)
|
93,108
|
|
Long-term debt
|
|
477,297
|
|
370
|
|
|
|
477,667
|
|
Other long-term liabilities
|
|
13,111
|
|
8,334
|
|
|
|
21,445
|
|
Total liabilities
|
|
790,012
|
|
652,403
|
|
(850,195
|
)
|
592,220
|
|
Stockholders equity (deficiency)
|
|
(33,022
|
)
|
196,535
|
|
(196,535
|
)
|
(33,022
|
)
|
Total liabilities and stockholders equity
(deficiency)
|
|
$
|
756,990
|
|
$
|
848,938
|
|
$
|
(1,046,730
|
)
|
$
|
559,198
|
|
Condensed Consolidating Balance Sheet
As of December 31, 2008
|
|
iPCS Inc.
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
iPCS Consolidated
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
55,940
|
|
$
|
|
|
$
|
55,940
|
|
Intercompany receivable
|
|
526,494
|
|
263,002
|
|
(789,496
|
)
|
|
|
Other current assets
|
|
615
|
|
76,007
|
|
|
|
76,622
|
|
Total current assets
|
|
527,109
|
|
394,949
|
|
(789,496
|
)
|
132,562
|
|
Property and equipment, net
|
|
|
|
162,014
|
|
|
|
162,014
|
|
Intangible assets, net
|
|
|
|
232,385
|
|
|
|
232,385
|
|
Other noncurrent assets
|
|
6,419
|
|
4,232
|
|
|
|
10,651
|
|
Investment in subsidiaries
|
|
178,803
|
|
|
|
(178,803
|
)
|
|
|
Total assets
|
|
$
|
712,331
|
|
$
|
793,580
|
|
$
|
(968,299
|
)
|
$
|
537,612
|
|
Intercompany payable
|
|
$
|
263,001
|
|
$
|
526,495
|
|
$
|
(789,496
|
)
|
$
|
|
|
Other current liabilities
|
|
5,790
|
|
77,631
|
|
|
|
83,421
|
|
Total current liabilities
|
|
268,791
|
|
604,126
|
|
(789,496
|
)
|
83,421
|
|
Long-term debt
|
|
475,000
|
|
401
|
|
|
|
475,401
|
|
Other long-term liabilities
|
|
16,738
|
|
10,250
|
|
|
|
26,988
|
|
Total liabilities
|
|
760,529
|
|
614,777
|
|
(789,496
|
)
|
585,810
|
|
Stockholders equity (deficiency)
|
|
(48,198
|
)
|
178,803
|
|
(178,803
|
)
|
(48,198
|
)
|
Total liabilities and stockholders equity
(deficiency)
|
|
$
|
712,331
|
|
$
|
793,580
|
|
$
|
(968,299
|
)
|
$
|
537,612
|
|
21
Table of
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Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
|
|
iPCS Inc.
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
iPCS Consolidated
|
|
Total revenue
|
|
$
|
|
|
$
|
141,404
|
|
$
|
|
|
$
|
141,404
|
|
Cost of revenue
|
|
|
|
92,535
|
|
|
|
92,535
|
|
Selling and marketing
|
|
|
|
17,542
|
|
|
|
17,542
|
|
General and administrative
|
|
581
|
|
8,367
|
|
|
|
8,948
|
|
Depreciation and amortization
|
|
|
|
11,280
|
|
|
|
11,280
|
|
Loss on disposal of property and equipment, net
|
|
|
|
113
|
|
|
|
113
|
|
Total operating expense
|
|
581
|
|
129,837
|
|
|
|
130,418
|
|
Other, net
|
|
|
|
(7,946
|
)
|
|
|
(7,946
|
)
|
Income in subsidiaries
|
|
3,357
|
|
|
|
(3,357
|
)
|
|
|
Income before provision for income tax
|
|
2,776
|
|
3,621
|
|
(3,357
|
)
|
3,040
|
|
Provision for income tax
|
|
94
|
|
264
|
|
0
|
|
358
|
|
Net income
|
|
$
|
2,682
|
|
$
|
3,357
|
|
$
|
(3,357
|
)
|
$
|
2,682
|
|
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2008
|
|
iPCS Inc.
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
iPCS Consolidated
|
|
Total revenue
|
|
$
|
|
|
$
|
132,057
|
|
$
|
|
|
$
|
132,057
|
|
Cost of revenue
|
|
|
|
90,425
|
|
|
|
90,425
|
|
Selling and marketing
|
|
|
|
18,091
|
|
|
|
18,091
|
|
General and administrative
|
|
558
|
|
9,470
|
|
|
|
10,028
|
|
Depreciation and amortization
|
|
|
|
12,887
|
|
|
|
12,887
|
|
Loss on disposal of property and equipment, net
|
|
|
|
71
|
|
|
|
71
|
|
Total operating expense
|
|
558
|
|
130,944
|
|
|
|
131,502
|
|
Other, net
|
|
(2,212
|
)
|
(5,729
|
)
|
|
|
(7,941
|
)
|
Income in subsidiaries
|
|
(4,724
|
)
|
|
|
4,724
|
|
|
|
Loss before provision for income tax
|
|
(7,494
|
)
|
(4,616
|
)
|
4,724
|
|
(7,386
|
)
|
Provision for income tax
|
|
|
|
108
|
|
|
|
108
|
|
Net loss
|
|
$
|
(7,494
|
)
|
$
|
(4,724
|
)
|
$
|
4,724
|
|
$
|
(7,494
|
)
|
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2009
|
|
iPCS Inc.
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
iPCS Consolidated
|
|
Total revenue
|
|
$
|
|
|
$
|
417,727
|
|
$
|
|
|
$
|
417,727
|
|
Cost of revenue
|
|
|
|
267,867
|
|
|
|
267,867
|
|
Selling and marketing
|
|
|
|
51,528
|
|
|
|
51,528
|
|
General and administrative
|
|
1,807
|
|
23,758
|
|
|
|
25,565
|
|
Gain on Sprint settlement
|
|
|
|
(4,273
|
)
|
|
|
(4,273
|
)
|
Depreciation and amortization
|
|
|
|
36,115
|
|
|
|
36,115
|
|
Loss on disposal of property and equipment, net
|
|
|
|
629
|
|
|
|
629
|
|
Total operating expense
|
|
1,807
|
|
375,624
|
|
|
|
377,431
|
|
Other, net
|
|
|
|
(23,786
|
)
|
|
|
(23,786
|
)
|
Income in subsidiaries
|
|
17,733
|
|
|
|
(17,733
|
)
|
|
|
Income before provision for income tax
|
|
15,926
|
|
18,317
|
|
(17,733
|
)
|
16,510
|
|
Provision for income tax
|
|
94
|
|
584
|
|
|
|
678
|
|
Net income
|
|
$
|
15,832
|
|
$
|
17,733
|
|
$
|
(17,733
|
)
|
$
|
15,832
|
|
22
Table of
Contents
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2008
|
|
iPCS Inc.
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
iPCS Consolidated
|
|
Total revenue
|
|
$
|
|
|
$
|
387,086
|
|
$
|
|
|
$
|
387,086
|
|
Cost of revenue
|
|
|
|
253,609
|
|
|
|
253,609
|
|
Selling and marketing
|
|
|
|
52,394
|
|
|
|
52,394
|
|
General and administrative
|
|
2,033
|
|
23,075
|
|
|
|
25,108
|
|
Depreciation and amortization
|
|
|
|
40,691
|
|
|
|
40,691
|
|
Loss on disposal of property and equipment, net
|
|
|
|
329
|
|
|
|
329
|
|
Total operating expense
|
|
2,033
|
|
370,098
|
|
|
|
372,131
|
|
Other, net
|
|
|
|
(23,943
|
)
|
|
|
(23,943
|
)
|
Loss in subsidiaries
|
|
(7,713
|
)
|
|
|
7,713
|
|
|
|
Loss before provision for income tax
|
|
(9,746
|
)
|
(6,955
|
)
|
7,713
|
|
(8,988
|
)
|
Provision for income tax
|
|
|
|
758
|
|
|
|
758
|
|
Net loss
|
|
$
|
(9,746
|
)
|
$
|
(7,713
|
)
|
$
|
7,713
|
|
$
|
(9,746
|
)
|
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2009
|
|
iPCS Inc.
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
iPCS Consolidated
|
|
Operating activities
|
|
$
|
8,941
|
|
$
|
48,841
|
|
$
|
|
|
$
|
57,782
|
|
Investing activities
|
|
|
|
(27,662
|
)
|
|
|
(27,662
|
)
|
Financing activities
|
|
(8,941
|
)
|
(27
|
)
|
|
|
(8,968
|
)
|
Net increase in cash and cash equivalents
|
|
|
|
21,152
|
|
|
|
21,152
|
|
Cash and cash equivalents at beginning of period
|
|
|
|
55,940
|
|
|
|
55,940
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
$
|
77,092
|
|
$
|
|
|
$
|
77,092
|
|
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2008
|
|
iPCS Inc.
|
|
Guarantor
Subsidiaries
|
|
Eliminations
|
|
iPCS Consolidated
|
|
Operating activities
|
|
$
|
(454
|
)
|
$
|
44,568
|
|
$
|
|
|
$
|
44,114
|
|
Investing activities
|
|
|
|
(52,279
|
)
|
|
|
(52,279
|
)
|
Financing activities
|
|
454
|
|
(22
|
)
|
|
|
432
|
|
Net decrease in cash and cash equivalents
|
|
|
|
(7,733
|
)
|
|
|
(7,733
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
|
77,599
|
|
|
|
77,599
|
|
Cash and cash equivalents at end of period
|
|
$
|
|
|
$
|
69,866
|
|
$
|
|
|
$
|
69,866
|
|
23
Table of
Contents
(17) Subsequent
Events
On October 18, 2009,
the Company, Sprint and Ireland Acquisition Corporation (the Purchaser), a
wholly owned subsidiary of Sprint, entered into an Agreement and Plan of Merger
(the Merger Agreement) pursuant to which, among other things, the Purchaser
commenced a tender offer (the Offer) on October 28, 2009 to acquire all
of the Companys outstanding shares of common stock, par value $0.01 per share
(the Shares), at a price of $24.00 per share in cash (the Offer Price). The
Merger Agreement also provides that following the consummation of the Offer,
the Purchaser will be merged with and into the Company (the Merger) with the
Company surviving the merger as a wholly owned subsidiary of Sprint. At the
effective time of the Merger, all remaining outstanding Shares not tendered in
the Offer (other than (1) Shares owned by Sprint, the Purchaser or the
Company and (2) Shares as to which appraisal rights have been perfected in
accordance with applicable law), will be converted into a cash amount of $24.00
per share on the terms and conditions set forth in the Merger Agreement. The Offer will expire on November 25,
2009, unless extended in accordance with the terms of the Merger Agreement. The
Merger Agreement is subject to (i) the condition that the number of Shares
validly tendered and not withdrawn represents at least a majority of the total
number of Shares outstanding on a fully diluted basis and (ii) the
satisfaction or waiver of other customary closing conditions as set forth in
the Merger Agreement, including the receipt of necessary regulatory approvals
(including the expiration or termination of the Hart-Scott-Rodino waiting
period).
In connection with the
Merger Agreement, Sprint, WirelessCo L.P., Sprint Spectrum L.P., SprintCom, Inc.,
Sprint Communications Company, L.P., Nextel Communications, Inc.,
PhillieCo L.P. and APC PCS LLC (collectively, the Sprint Parties) and Horizon
Personal Communications, Inc., Bright Personal Communications Services,
LLC, iPCS Wireless, Inc. and the Company (collectively, the iPCS Parties)
also entered into a Settlement Agreement and Mutual Release, dated October 18,
2009 (the Settlement Agreement). Under the terms of the Settlement Agreement,
the Sprint Parties and the iPCS Parties have agreed to stay all pending
litigation between them, subject to certain exceptions and conditions, and not
to sue each other during the pendency of the transactions contemplated by the
Merger Agreement, subject to certain exceptions. The stays of litigation and
covenants not to sue will terminate if the Merger Agreement is terminated or if
the Offer is not closed within the time period allowed by the Merger Agreement
and the party seeking to terminate the Merger Agreement is unable to do so due
to a court order or injunction that prevents termination. In addition, under
the terms of the Settlement Agreement, effective upon the closing of the
Merger, the Sprint Parties and the iPCS Parties will release each other from
all claims, except those arising under or relating to a breach of the Merger
Agreement or the Settlement Agreement, and will jointly file all such documents
that are necessary to effect the dismissal with prejudice of all court orders
and pending lawsuits between the Sprint Parties and the iPCS Parties.
Two putative class action
lawsuits have been filed in the Circuit Court of Cook County, Illinois.
The complaints name as defendants the Company and its directors, among others,
and generally allege that the consideration to be received by the Companys
stockholders in connection with the Merger Agreement is unfair and
inadequate. The complaints further allege that the Companys directors
breached their fiduciary duties by, among other things, approving the Merger
Agreement and the other transactions contemplated by the Merger Agreement and
that such breaches were aided and abetted by Sprint Nextel Corporation.
The lawsuits seek, among other things, preliminary injunctive relief and
monetary and attorneys fees. The Company believes that these lawsuits
are without merit and intends to vigorously defend these actions. As permitted under applicable law, each of
the Company and certain of its subsidiaries indemnifies their directors and
officers for certain events or occurrences while the officer or director is, or
was, serving the Company or its subsidiaries in such a capacity. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a director and officer
insurance policy that should enable the Company to recover a portion of any
future amounts paid.
On October 31, 2009, per
the terms of the Companys affiliation agreements with Sprint PCS, Sprint PCS
notified the Company of its proposed CCPU and CPGA rates for the three year
period from 2011 through 2013. The proposed rates for CCPU services are
$10.23, $10.04 and $10.00 for 2011, 2012 and 2013, respectively. The proposed
rates for CPGA services are $22.72, $22.58 and $23.23 for 2011, 2012 and 2013,
respectively. The Company expects to enter into discussions with Sprint
PCS regarding the proposed rates, which discussions are expected to commence in
late November and proceed in the event that the transactions contemplated by
the Merger Agreement discussed above are not consummated. These proposed rates
are significantly higher than the Companys current rates and the Company expects
to strongly oppose them in the event that the transactions contemplated by the
Merger Agreement discussed above are not consummated, including by submitting
the matter to arbitration or litigation, if necessary. If the matter is
submitted to an arbitration panel and the panel has not yet imposed different
rates, the Company is required to pay the proposed rates as of January 1, 2011
subject to retroactive adjustments if any. Per the terms of our
affiliation agreements, the Company has also been exploring the option of
self-providing or procuring these services through third party providers in
order to determine if the Company can provide or procure these services in a
more cost-effective manner than Sprint can provide to the Company.
24
Table of
Contents
Item 2. Managements Discussion and Analysis of
Financial Co
ndition and
Results of Operations.
As
used in this Quarterly Report on Form 10-Q, unless the context otherwise
requires: (i) Sprint PCS refers to the affiliated entities of Sprint
Nextel Corporation that are covered by our affiliation agreements; (ii) Sprint
refers to Sprint Nextel Corporation and its affiliates; (iii) a PCS
Affiliate of Sprint is an entity that operates (directly or through one or
more subsidiaries) a personal communications services business pursuant to
affiliation agreements with Sprint PCS and/or its affiliates or their
successors; (iv) Sprint PCS products and services refers to digital
wireless personal communications services, including wireless voice and data
services, and related retail products, including handsets, in any case, offered
under the Sprint brand name; and (v) our subscribers refers to Sprint
PCS subscribers who reside in our territory, excluding reseller subscribers.
Statements
in this Quarterly Report on Form 10-Q regarding Sprint or Sprint PCS are
derived from information contained in our affiliation agreements with Sprint
PCS, periodic reports and other documents filed by Sprint with the SEC or press
releases or other statements issued or made by Sprint or Sprint PCS. This
Quarterly Report on Form 10-Q contains trademarks, service marks and trade
names of companies and organizations other than us. Other than with respect to
Sprint PCS, our use or display of other parties trade names, trademarks or
products is not intended to and does not imply a relationship with, or
endorsement or sponsorship of us by, the trade name or trademark owners.
The
following is an analysis of our results of operations, liquidity and capital
resources and should be read in conjunction with the unaudited Consolidated
Financial Statements and notes related thereto included in this Quarterly
Report on Form 10-Q. To the extent that the following Managements
Discussion and Analysis contains statements which are not of a historical
nature, such statements are forward-looking statements which involve risks and
uncertainties. These risks include, but are not limited to, the risks and
uncertainties listed in the next section entitled Forward-Looking
Statements and other factors discussed elsewhere herein and in our other
filings with the SEC.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements about
future events and expectations that are forward-looking statements. These
statements relate to future events or our future financial performance, and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as may,
will, should, expects, intends, plans, anticipates, believes, estimates,
predicts, potential, or the negative use of these terms or other comparable
terminology. Any statement in this report that is not a statement of historical
fact may be deemed to be a forward-looking statement and subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include:
·
statements regarding our
anticipated revenue, expense levels, capital expenditures, security
repurchases, liquidity and capital resources, operating losses and operating
cash flows and litigation results and prospects; and
·
statements regarding
expectations or projections about developments in our industry and markets in
our territory.
Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. Important factors with respect to any
such forward-looking statements, including certain risks and uncertainties that
could cause actual results to differ materially from our expectations, include,
but are not limited to:
·
the ability of Sprint and us to complete the
transactions contemplated by the Merger Agreement, the risk that a condition to
the completion of such transactions may not be satisfied, and developments
regarding such transactions;
·
the impact of the pendency of the transactions
contemplated by the Merger Agreement on our business generally, including
relationships with our vendors and employees, particularly if the transactions
contemplated by the Merger Agreement are not consummated promptly;
·
our dependence on our
affiliation with Sprint, as well as its reputation and performance in the
marketplace;
·
the compliance by Sprint
with the judgment and orders of the Circuit Court of Cook County, Illinois
requiring Sprint to cease owning and operating the Nextel network in iPCS
Wireless, Inc.s territory, including Sprints plans for the Nextel
business going forward and its announcement of its intention to sell certain of
its Nextel assets in our territory in light of that judgment (and whether any
such sale would be in compliance with the Circuit Courts rulings);
·
the impact and final outcome
of our litigation with Sprint regarding Sprints WiMax transaction with
Clearwire, including Sprints plans for the Sprint-Clearwire transaction going
forward in light of any future outcome;
·
the impact and final outcome
of our litigation with Sprint regarding Sprints acquisition of Virgin Mobile
USA, including Sprints plans for the Virgin Mobile business going forward in
light of any future outcome;
25
Table
of Contents
·
the risks of staying and
then resuming our litigation with Sprint regarding Sprints Nextel Merger, the
Sprint-Clearwire transaction and Sprints proposed acquisition of Virgin Mobile
USA (which may have closed during the period of the stay) if the Merger with
Sprint is not consummated;
·
the impact and final outcome
of our current and future disputes with Sprint under the affiliation
agreements;
·
changes in Sprints
affiliation strategy;
·
the ability of Sprint PCS to
alter the terms of our affiliation agreements with it, including program
requirements;
·
the ongoing effectiveness of
Sprints network as a result of Sprints outsourcing of its network maintenance
and the effect of any network deterioration on our results of operations;
·
our dependence on back
office services, such as billing and customer care, as well as certain
marketing and operational services provided by Sprint PCS, and the costs we
incur to obtain such services, and the effect on us of Sprint PCS not
performing these services adequately or of Sprint PCS devoting fewer
resources to the provisioning of these services;
·
changes or advances in
technology in general, or specifically related to Sprint and its affiliates,
that may render our technology less desirable to our customers, or any failure
by Sprint to share with us the benefits of any improved technologies;
·
competition in the industry
and markets in which we operate;
·
our ability to attract and
retain skilled personnel, especially in light of the proposed Merger with
Sprint;
·
our potential need for
additional capital or the need for refinancing any of our existing
indebtedness;
·
our potential inability to
profitably expand existing products and services or launch new products and
services, including a prepaid offering;
·
changes in government
regulation;
·
changes in the relative
attractiveness of Sprint PCSs phones, pricing plans, customer service and
coverage as well as the markets overall perception of the Sprint brand;
·
our subscriber credit
quality;
·
the potential for us to
experience a continued high rate of subscriber turnover as compared to the
industry;
·
changes in the amounts of,
and the relationship between, roaming revenue we receive and roaming expenses
we pay;
·
inaccuracies or delays in
our financial and other information provided to us by Sprint, particularly in
light of our 2008 migration to Sprints Ensemble billing and customer care
platform;
·
any failure to maintain
effective internal controls to satisfy the requirements of Section 404 of
the Sarbanes-Oxley Act, which requires annual management assessments of the
effectiveness of internal control over financial reporting;
·
our rates of penetration in
the wireless industry and in our territories;
·
our significant level of
indebtedness;
·
the adequacy of our
allowance for bad debt and other reserves;
·
our subscriber purchasing
patterns;
·
subscriber satisfaction with
our network and operations, including with services provided to us by Sprint,
such as billing and customer care;
·
availability of an adequate
supply of subscriber equipment to Sprint PCS and to us and our distributors
specifically;
·
our dependence on
independent third parties for a sizable percentage of our distribution;
·
risks related to future
growth and expansion, including subscriber growth;
·
the risk of our workforce
becoming unionized, particularly in light of the potential adoption of the
Employee Free Choice Act;
26
Table
of Contents
·
depth and duration of the
economic downturn in the United States and its effect on our vendors, distribution
partners and existing and potential subscribers;
·
risk of terrorist attack or
other macro economic and political events and their impact on our current and
potential subscribers;
·
effects of mergers,
consolidations and joint ventures within the wireless telecommunications
industry, including business combinations involving Sprint or affiliates of
Sprint, and unexpected announcements or developments from others in the
wireless telecommunications industry;
·
our dependency on key
vendors such as Nortel for expansion or maintenance of our network, including
the continued viability of these vendors; and
·
other factors discussed
under
Recent Trends, Risks and Uncertainties That May Affect Operating Results,
Liquidity and Capital Resources below, elsewhere herein, and Item
1A, Risk Factors, in our 2008 Annual Report on Form 10-K and this
Quarterly Report on Form 10-Q.
New Accounting Pronouncements
See
Note 14, New Accounting Pronouncements, of the Notes to Unaudited Consolidated
Financial Statements in this Quarterly Report on Form 10-Q for a
discussion of new accounting pronouncements.
Definitions of Operating Metrics
In
this Managements Discussion and Analysis of Financial Condition and Results
of Operations section, we provide certain financial measures that are
calculated in accordance with accounting principles generally accepted in the
United States (GAAP) and as adjusted to GAAP (non-GAAP) to assess our
financial performance. In addition, we use certain non-financial terms that are
not measures of financial performance under GAAP. Terms such as gross
subscriber additions, net subscriber additions and churn are terms used in
the wireless telecommunications industry. The non-GAAP financial measures of
average revenue per user (ARPU) and cost per gross addition (CPGA) reflect
standard measures of performance commonly used in the wireless
telecommunications industry. The non-financial terms and the non-GAAP measures
reflect wireless telecommunications industry conventions and are commonly used
by the investment community for comparability purposes. The non-GAAP financial
measures included in this Managements Discussion and Analysis of Financial
Condition and Results of Operations are reconciled below in Reconciliation of
Non-GAAP Financial Measures and, together with the non-financial terms, are
summarized as follows:
·
Gross
subscriber additions for the period represent the number of new activations
during the period (excluding transfers into our territory).
·
Net subscriber
additions for the period represented is calculated as the gross subscriber
additions in the period less the number of subscribers deactivated plus the net
subscribers transferred in or out of our markets during the period.
·
Churn is a
measure of the average monthly rate at which subscribers based in our territory
deactivate service on a voluntary or involuntary (credit-related) basis. We
calculate average monthly churn based on the number of subscribers deactivated
during the period (net of those who deactivated within 30 days of
activation and excluding transfers out of our territory) as a percentage of our
average monthly subscriber base during the period divided by the number of
months during the period.
·
ARPU, or
average revenue per user, is a measure of the average monthly service revenue
earned from subscribers based in our territory. This measure is calculated by
dividing subscriber revenue in our consolidated statement of operations by the
number of our average monthly subscribers during the period divided by the
number of months in the period.
·
CPGA, or cost
per gross addition, is a measure of the average cost we incur to add a new
subscriber in our territory. These costs include handset subsidies on new
subscriber activations, commissions, rebates and other selling and marketing
costs. We calculate CPGA by dividing (a) the sum of cost of products sold
less product sales revenue associated with transactions with new subscribers,
and selling and marketing expense, net of stock-based compensation expense,
during the measurement period, by (b) the total number of subscribers
activated in our territory during the period.
·
Licensed
population represents the number of residents in the markets in our territory
for which we have an exclusive right to provide wireless mobility
communications services under the Sprint brand name. The number of residents
located in our territory does not represent the number of wireless subscribers
that we serve or expect to serve in our territory.
27
Table of
Contents
·
Covered
population represents the number of residents covered by our portion of the
wireless network of Sprint. The number of residents covered by our network does
not represent the number of wireless subscribers that we serve or expect to
serve in our territory.
In
this Managements Discussion and Analysis of Financial Condition and Results
of Operations, unless the context indicates otherwise, all references to subscribers
or customers and other operating metrics mean subscribers or customers
excluding subscribers of resellers known as Mobile Virtual Network Operators,
or MVNOs, that use our network and resell wireless service under private
brands.
Recent Developments Proposed Merger
On October 18, 2009,
the Company, Sprint and Ireland Acquisition Corporation (the Purchaser) and a
wholly owned subsidiary of Sprint, entered into an Agreement and Plan of Merger
(the Merger Agreement) pursuant to which, among other things, the Purchaser
commenced a tender offer (the Offer) on October 28, 2009 to acquire all
of the Companys outstanding shares of common stock, par value $0.01 per share
(the Shares), at a price of $24.00 per share in cash (the Offer Price). The
Merger Agreement also provides that following the consummation of the Offer,
the Purchaser will be merged with and into the Company (the Merger) with the
Company surviving the Merger as a wholly owned subsidiary of Sprint. At the
effective time of the Merger, all remaining outstanding Shares not tendered in
the Offer (other than (1) Shares owned by Sprint, the Purchaser or the
Company and (2) Shares as to which appraisal rights have been perfected in
accordance with applicable law), will be converted into a cash amount of $24.00
per share on the terms and conditions set forth in the Merger Agreement. The Offer will expire on November 25,
2009, unless extended in accordance with the terms of the Merger Agreement. The
Merger Agreement is subject to (i) the condition that the number of Shares
validly tendered and not withdrawn represents at least a majority of the total
number of Shares outstanding on a fully diluted basis and (ii) the
satisfaction or waiver of other customary closing conditions as set forth in
the Merger Agreement, including the receipt of necessary regulatory approvals
(including the expiration or termination of the Hart-Scott-Rodino waiting
period).
In connection with the
Merger Agreement, Sprint, WirelessCo L.P., Sprint Spectrum L.P., SprintCom, Inc.,
Sprint Communications Company, L.P., Nextel Communications, Inc., PhillieCo
L.P. and APC PCS LLC (collectively, the Sprint Parties) and Horizon Personal
Communications, Inc., Bright Personal Communications Services, LLC, iPCS
Wireless, Inc. and the Company (collectively, the iPCS Parties) also
entered into a Settlement Agreement and Mutual Release, dated October 18,
2009 (the Settlement Agreement). Under the terms of the Settlement Agreement,
the Sprint Parties and the iPCS Parties have agreed to stay all pending
litigation between them, subject to certain exceptions and conditions, and not
to sue each other during the pendency of the transactions contemplated by the
Merger Agreement, subject to certain exceptions. The stays of litigation and
covenants not to sue will terminate if the Merger Agreement is terminated or if
the Offer is not closed within the time period allowed by the Merger Agreement
and the party seeking to terminate the Merger Agreement is unable to do so due
to a court order or injunction that prevents termination. In addition, under
the terms of the Settlement Agreement, effective upon the closing of the
Merger, the Sprint Parties and the iPCS Parties will release each other from
all claims, except those arising under or relating to a breach of the Merger
Agreement or the Settlement Agreement, and will jointly file all such documents
that are necessary to effect the dismissal with prejudice of all court orders
and pending lawsuits between the Sprint Parties and the iPCS Parties.
Business Overview
As a PCS Affiliate of Sprint, we have the exclusive right to provide
digital wireless personal communications services, or PCS, under the Sprint
brand name in 81 markets including markets in Illinois, Michigan, Pennsylvania,
New York, Indiana, Iowa, Ohio and Tennessee. Our territory includes key markets
such as Grand Rapids (MI), Fort Wayne (IN), the Tri-Cities region of Tennessee
(Johnson City, Kingsport and Bristol), Scranton (PA), Saginaw-Bay City (MI),
Central Illinois (Peoria, IL, Springfield, IL, Decatur, IL and Champaign,
IL), and the Quad Cities region of Illinois and Iowa (Bettendorf and Davenport,
IA, and Moline and Rock Island, IL). We own and are responsible for building,
operating and managing the portion of the 100% digital, 100% PCS wireless
network of Sprint PCS located in our territory. We offer national calling plans
designed by Sprint PCS as well as local plans tailored to our markets. Our PCS
network is designed to offer a seamless connection with the wireless network of
Sprint PCS. We market Sprint PCS products and services through a number of distribution
outlets located in our territory, including our company-owned retail stores,
co-branded dealers, major national retailers and local third party
distributors. As of September 30, 2009, our licensed territory had a total
population of approximately 15.1 million residents, of which our wireless
network covered approximately 12.7 million residents, and we had
approximately 720,100 subscribers.
Relationship with Sprint
Our relationship with Sprint is the most significant relationship we
have and is essential to the current operation of our business. The terms of
our relationship are set forth in the affiliation agreements between certain of
our subsidiaries and Sprint PCS. Pursuant to these affiliation agreements, we
agreed to offer CDMA services using Sprints spectrum under the Sprint brand
name on a wireless network built and operated at our own expense. We believe
that our strategic relationship with Sprint provides significant competitive
advantages. In particular, we believe that our affiliation agreements with
Sprint allow us to offer high quality, nationally branded wireless voice and
data services for lower cost and lower capital requirements than would
otherwise be possible.
28
Table of
Contents
We
have been, and continue to be, engaged in litigation with Sprint regarding (i) its
2005 merger with Nextel, (ii) its Sprint-Clearwire transaction through
which Sprint and Clearwire are developing a nationwide mobile 4G WiMax network
and (iii) its proposed acquisition of Virgin Mobile. On October 18,
2009, pursuant to the Settlement Agreement, the parties agreed to stay such
litigation pending the completion of the Merger and subject to certain exceptions
and conditions. Subject to the terms of
the Settlement Agreement, we intend to continue to vigorously protect and
enforce our rights, but there is no assurance that we will prevail. For a
detailed discussion of our litigation with Sprint, see Commitments and
Contingencies below.
Under our affiliation agreements with Sprint PCS, the costs we incur
for the support services provided by Sprint are determined on a per average
monthly cash cost per user (CCPU) rate and on a monthly cost per gross
addition (CPGA) rate. Pursuant to our affiliation agreements with Sprint PCS,
the currently applicable CCPU and CPGA rates through 2010, adjusted for
achieved milestone reductions as described below, are as follows:
Year
|
|
CCPU
|
|
CPGA
|
|
2008 January June
|
|
$
|
6.50
|
|
$
|
19.00
|
|
July
|
|
$
|
6.35
|
|
$
|
19.00
|
|
August December
|
|
$
|
6.20
|
|
$
|
19.00
|
|
2009
|
|
$
|
5.85
|
*
|
$
|
19.00
|
|
2010
|
|
$
|
5.55
|
*
|
$
|
19.00
|
|
*
Subject to further
adjustments as described below.
Beginning
on January 1, 2011, the rates will be reset each year based on the amount
necessary to recover Sprint PCSs reasonable costs for providing these services
to us and the other PCS Affiliates of Sprint.
As discussed below, we expect that Sprint will assert that its costs are
substantially greater than those reflected in the rates currently in effect
through December 31, 2010.
The CCPU rate in effect from 2008 through 2010 is to be reduced from
the then current rate by $0.15 if we hit certain milestones with respect to our
voluntary deployment of EV-DO Rev. A, a version of the further evolution of
code division multiple access (CDMA) high-speed data technology called
Evolution Data Optimized (EV-DO). Specifically, the CCPU rates set forth
above are to be reduced by $0.15 from the then-current rate when our EV-DO Rev.
A deployment covers at least 6.0 million in population (POPs), by
another $0.15 from the then-current rate when we cover at least
7.0 million POPs; and by another $0.15 from the then-current rate when we
cover at least 9.0 million POPs. Our EV-DO Rev. A deployment coverage
exceeded 6.0 million POPs during June 2008 and exceeded
7.0 million POPs during July 2008. As a result, our CCPU rate was
reduced to $6.35 starting July 1, 2008, was further reduced to $6.20
starting August 1, 2008 for the remainder of 2008 and has been reduced to
$5.85 and $5.55 in 2009 and 2010, respectively, subject to any further
adjustments related to incremental EV-DO Rev. A coverage. As of September 30,
2009, our EV-DO Rev. A deployment covered approximately 7.9 million POPs.
On October 31, 2009, per
the terms of our affiliation agreements with Sprint PCS, Sprint PCS notified us
of its proposed CCPU and CPGA rates for the three year period from 2011 through
2013. The proposed rates for CCPU services are $10.23, $10.04 and $10.00
for 2011, 2012 and 2013, respectively. The proposed rates for CPGA
services are $22.72, $22.58 and $23.23 for 2011, 2012 and 2013, respectively.
We expect to enter into discussions with Sprint PCS regarding the proposed
rates, which discussions are expected to commence in late November and proceed
in the event that the transactions contemplated by the Merger Agreement
discussed above are not consummated. These proposed rates are significantly
higher than our current rates and we expect to strongly oppose them in the
event that the transactions contemplated by the Merger Agreement discussed
above are not consummated, including by submitting the matter to arbitration or
litigation, if necessary. If the matter is submitted to an arbitration
panel and the panel has not yet imposed different rates, we are required to pay
the proposed rates as of January 1, 2011 subject to retroactive adjustments if
any. Per the terms of our affiliation agreements, we have also been
exploring the option of self-providing or procuring these services through
third party providers in order to determine if we can provide or procure these
services in a more cost-effective manner than Sprint can provide to us.
We receive roaming revenue when subscribers of Sprint and other PCS
Affiliates of Sprint incur minutes of use in our territories, and we incur
expense to Sprint and to other PCS Affiliates of Sprint when our subscribers
incur minutes of use in the territories of Sprint and other PCS Affiliates of Sprint.
Effective January 1, 2008 through December 31, 2010, subject to
adjustment as described below, 3G data roaming is not settled separately with
Sprint; however, we do settle 3G data roaming separately with the other PCS
Affiliates of Sprint. Pursuant to our affiliation agreements with Sprint PCS,
the reciprocal roaming rates through 2010 are as follows:
Year
|
|
Voice & 2G Data
Per Minute of Use
|
|
3G Data
Per Kilobyte of Use
|
|
2008
|
|
$
|
0.0400
|
*
|
$
|
0.0003
|
|
2009
|
|
$
|
0.0400
|
*
|
$
|
0.0001
|
|
2010
|
|
$
|
0.0380
|
*
|
$
|
0.0001
|
|
*
Excluding certain markets as
described below.
Beginning
on January 1, 2011, the rates will be reset each year to an amount equal
to 90% of Sprints average monthly retail yield for the first nine months of
the immediately preceding calendar year; provided, however, that such amount
for any period will not be less than our network costs.
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With respect to certain of our markets in western and eastern
Pennsylvania, we receive the benefit of a special reciprocal rate for voice and
2G data of $0.10 per minute. This special rate will terminate, with respect to
each of these two sets of markets, on the earlier of December 31, 2011 or
the first day of the calendar month which follows the first calendar quarter
during which we achieve a subscriber penetration rate of at least 7% of our
covered POPs in those markets. We do not anticipate reaching a 7% subscriber
penetration rate in these markets in the foreseeable future.
Commencing on January 1, 2010, and each January 1 thereafter,
either Sprint or we may initiate a review to determine whether the 3G data
roaming ratio between us for the prior calendar year has changed by more than
20% from the calendar year that is two years prior. If the ratio has changed by
more than 20%, then the parties will commence discussions as to whether an
appropriate adjustment in other fees can be made to compensate for such change.
If the parties cannot agree, then the parties will revert to settling 3G data
roaming separately and any CCPU reductions related to incremental EV-DO Rev. A
coverage, currently totaling $0.30, will be foregone effective January 1
of the year in which such review was initiated.
Based on information currently available to us, we believe the 3G data
roaming ratio between us for the 2009 calendar year will have changed by more
than 20% in our favor from the 2008 calendar year ratio. We intend to commence discussions with Sprint
regarding this issue as soon as we are permitted to do so under our affiliation
agreements with Sprint. We believe that
the favorable change in the 3G data roaming ratio will allow us to negotiate
more favorable CCPU rates than the current rate for 2010 or the initially
proposed rates for 2011 and beyond. In
the absence of such agreed upon rates, our affiliation agreements provide that
the parties will begin to settle 3G data roaming separately, which we believe may
be favorable to us in 2010. Beginning in
2011, the rates used to settle 3G data roaming will be recalculated under the
terms of the agreements, the impact of which on us is uncertain at this time.
The
majority of our revenues and cost of service and roaming is derived from information
provided by Sprint on the basis of data within Sprints possession and
control. We review all such amounts
settled to and from Sprint and, in the event we believe any such amounts to be
erroneous, we may dispute, and have disputed, such settlements in accordance
with the procedures set forth in the affiliation agreements with Sprint. Subject to and in accordance with the terms
of the Merger Agreement and related agreements described above in Recent
Developments Proposed Merger, we have disputed certain items with Sprint
which remain unresolved as of November 3, 2009. The final outcome of these
unresolved disputed items is unknown at this time.
On
January 22, 2009, we reached a settlement with Sprint related to
previously disputed 2008 items, which resulted in a Gain on Sprint settlement
of $4.3 million being recorded in our consolidated statement of operations for
the nine months ended September 30, 2009.
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Consolidated Results of Operations
Summary
For
the three and nine months ended September 30, 2009 our net income was $2.7
million and $15.8 million, respectively, compared to net losses of $7.5 million
and $9.7 million for the three and nine months ended September 30,
2008. Net income for the nine months
ended September 30, 2009 includes a $4.3 million gain related to a Sprint
settlement. The three and nine months ended September 30, 2009 reflected
higher subscriber revenue, attributable to our larger subscriber base and
higher ARPU, as compared to the same periods in 2008. Bad debt expense
decreased in the three and nine months ended September 30, 2009,
reflecting an improvement in uncollectable accounts compared to the 2008
periods. Offsetting the increased subscriber revenue and reduced bad debt
expense for the three and nine months ended September 30, 2009 were higher
costs related to servicing a larger network and larger subscriber base, as well
as a decrease in our roaming margin as compared to the 2008 periods. Net income was positively affected by
decreased Sprint related litigation expenses in the three months ended September 30,
2009 and negatively affected by increased Sprint related litigation expenses in
the nine months ended September 30, 2009 as compared to the 2008
periods. Despite lower gross subscriber
additions, acquisition costs for new activations were flat for the three months
ended September 30, 2009, and increased in the nine months ended September 30,
2009, reflecting higher commissions related to the sale of more expensive rate
plans and an increase in the percentage of gross additions coming from
distribution channels with higher commission structures, as well as higher handset
subsidy costs as compared to the 2008 periods, offset by lower fixed costs
related to company-owned retail stores.
Presented
below is a more detailed comparative data and discussion regarding our
consolidated results of operations for the three and nine months ended September 30,
2009 compared to the three and nine months ended September 30, 2008.
For the Three and Nine Months Ended September 30,
2009 compared to the Three and Nine Months Ended September 30, 2008
Results
of operations for any period less than one year are not necessarily indicative
of results of operations for a full year.
Key Performance Metrics.
Management
uses several key performance metrics to analyze the operations of our business.
Below is a table setting forth the metrics that we use for the relevant time
periods:
|
|
As of and for the Three Months
Ended September 30,
|
|
Increase/
|
|
Percent
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
Total Subscribers
|
|
720,100
|
|
674,400
|
|
45,700
|
|
6.8
|
%
|
Gross Subscriber Additions
|
|
68,300
|
|
72,200
|
|
(3,900
|
)
|
(5.4
|
)
|
Net Subscriber Additions
|
|
9,900
|
|
20,400
|
|
(10,500
|
)
|
(51.5
|
)
|
Churn
|
|
2.4
|
%
|
2.3
|
%
|
0.1
|
pts
|
n/a
|
|
ARPU
|
|
$
|
50.45
|
|
$
|
48.31
|
|
$
|
2.14
|
|
4.4
|
|
CPGA
|
|
$
|
373
|
|
$
|
374
|
|
$
|
(1
|
)
|
(0.3
|
)
|
|
|
As of and for the Nine Months
Ended September 30,
|
|
Increase/
|
|
Percent
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
Total Subscribers
|
|
720,100
|
|
674,400
|
|
45,700
|
|
6.8
|
%
|
Gross Subscriber Additions
|
|
184,200
|
|
193,200
|
|
(9,000
|
)
|
(4.7
|
)
|
Net Subscriber Additions
|
|
29,000
|
|
44,500
|
|
(15,500
|
)
|
(34.8
|
)
|
Churn
|
|
2.2
|
%
|
2.3
|
%
|
(0.1
|
)pts
|
n/a
|
|
ARPU
|
|
$
|
50.33
|
|
$
|
48.39
|
|
$
|
1.94
|
|
4.0
|
|
CPGA
|
|
$
|
400
|
|
$
|
376
|
|
$
|
24
|
|
6.4
|
|
Subscriber Additions.
Gross
subscriber additions decreased in the three and nine months ended September 30,
2009 as compared to the three and nine months ended September 30, 2008,
reflecting tightened credit standards and increased overall wireless
penetration in our markets. Net
subscriber additions for the three months ended September 30, 2009 were
negatively impacted by a slightly higher overall churn percentage, reflecting
Sprints third quarter 2009 elimination of the Sprint Wireless Advantage Club (SWAC)
discount program for employee related accounts in our territories and the
related deactivations, and by the effect of churn on our larger average
subscriber base as compared to the three months ended September 30,
2008. Net subscriber additions for the
nine months ended September 30, 2009 were also negatively impacted by the
effect of churn on our larger average subscriber base, but was offset by a
lower overall churn percentage for the nine month period, as compared to the
nine months ended September 30, 2008.
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Churn.
Churn
for the three months ended September 30, 2009 was higher than for the
comparable 2008 period reflecting the effect of Sprints third quarter 2009
elimination of the SWAC discount program, offset by improvements in churn from
credit-related deactivations. Churn for
the nine months ended September 30, 2009 was lower than for the comparable
2008 period reflecting improvements in churn from credit-related deactivations,
partially offset by increased voluntary churn, including the discontinuation by
Sprint of its SWAC program. At September 30,
2009, approximately 81% of our subscribers were under contract compared to 84%
at September 30, 2008.
Average Revenue Per User.
ARPU was positively affected by an increase
in monthly recurring revenue per subscriber for the three and nine months ended
September 30, 2009 as compared to the three and nine months ended September 30,
2008. These increases reflect the growing popularity of Sprints Simply
Everything, Everything and Talk/Message plans. Additionally, ARPU was positively impacted in
the 2009 periods by moderating customer care related credits provided by Sprint
to customers in our territory. Average monthly credits per subscriber,
including promotional credits, were $5.79 for both for the three and nine
months ended September 30, 2009, as compared to $7.66 and $6.92 for the
three and nine months ended September 30, 2008, respectively. Partially offsetting these positive trends,
ARPU was negatively affected by decreases in customer plan overage charges and
roaming charges for the three and nine months ended September 30, 2009 as
compared to the three and nine months ended September 30, 2008. These
decreases also reflect the growing popularity of Sprints all inclusive plans.
Cost Per Gross Addition.
Variable costs per gross addition increased
by $6 and $27 in the three and nine months ended September 30, 2009,
respectively, as compared to the same periods in 2008, reflecting higher
commission costs, related to the sale of more expensive rate plans and an
increase in the percentage of gross additions coming from distribution channels
with higher commission structures. Fixed costs per gross addition decreased $7
and $3 in the three and nine months ended September 30, 2009 compared to
the three and nine months ended September 30, 2008, respectively,
reflecting a reduction in our company-owned retail presence in favor of more
exclusive Sprint co-branded dealers as well as lower advertising expenses,
offset by a decrease in gross subscriber additions of approximately 5% for both
comparable periods. At September 30,
2009, we owned and operated 36 retail stores and contracted with 131 exclusive
Sprint co-branded dealers compared to 41 retail stores and 105 exclusive Sprint
co-branded dealers at September 30, 2008.
Revenue.
The
following tables set forth a breakdown of revenue by type (dollars in
thousands):
|
|
For the Three Months Ended
September 30,
|
|
Increase/
|
|
Percent
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
Service
revenue
|
|
$
|
108,480
|
|
$
|
96,097
|
|
$
|
12,383
|
|
12.9
|
%
|
Roaming revenue from subscribers of Sprint PCS and
other PCS Affiliates of Sprint
|
|
22,932
|
|
23,764
|
|
(832
|
)
|
(3.5
|
)
|
Roaming revenue from other wireless carriers
|
|
1,827
|
|
4,619
|
|
(2,792
|
)
|
(60.4
|
)
|
Reseller revenue
|
|
3,024
|
|
3,899
|
|
(875
|
)
|
(22.4
|
)
|
Equipment and other revenue
|
|
5,141
|
|
3,678
|
|
1,463
|
|
39.8
|
|
Total revenue
|
|
$
|
141,404
|
|
$
|
132,057
|
|
$
|
9,347
|
|
7.1
|
|
|
|
For the Nine Months Ended
September 30,
|
|
Increase/
|
|
Percent
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
Service revenue
|
|
$
|
319,600
|
|
$
|
282,370
|
|
$
|
37,230
|
|
13.2
|
%
|
Roaming revenue from subscribers of Sprint PCS and
other PCS Affiliates of Sprint
|
|
63,808
|
|
69,916
|
|
(6,108
|
)
|
(8.7
|
)
|
Roaming revenue from other wireless carriers
|
|
10,587
|
|
12,375
|
|
(1,788
|
)
|
(14.4
|
)
|
Reseller revenue
|
|
9,161
|
|
11,792
|
|
(2,631
|
)
|
(22.3
|
)
|
Equipment and other revenue
|
|
14,571
|
|
10,633
|
|
3,938
|
|
37.0
|
|
Total revenue
|
|
$
|
417,727
|
|
$
|
387,086
|
|
$
|
30,641
|
|
7.9
|
|
·
Service revenue.
Service revenue is
comprised of the monthly recurring charges for voice and data usage and the
monthly non-recurring charges for voice and data minutes and data kilobytes
over plan, long distance, roaming usage charges, other feature revenue and late
payment fee and early cancellation fee revenues. Deductions for billing
adjustments, promotional credits and certain customer care credits are recorded
as a reduction to service revenue. Our service revenue growth in 2009 over the
prior year three and nine month periods consists of $7.8 million and $24.9
million, respectively, from a higher average subscriber base and $4.6 million
and $12.3 million, respectively, from increases in ARPU.
32
Table of
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·
Roaming revenue from subscribers of Sprint PCS and
other PCS Affiliates of Sprint.
We receive revenue on a per
minute basis for voice traffic when subscribers of Sprint PCS and other PCS
Affiliates of Sprint use our network. We similarly receive revenue on a per
kilobyte basis for data traffic when subscribers of other PCS Affiliates of
Sprint use our network. In addition, we receive toll revenue for any long
distance calls made by these subscribers while roaming on our network.
For 2008 and 2009, the reciprocal roaming rate is
$0.0400 per minute for voice traffic ($0.10 per minute in certain markets in
eastern and western Pennsylvania). For
the three and nine months ended September 30, 2009 compared to the three
and nine months ended September 30, 2008, voice roaming revenue from
subscribers of Sprint and other PCS Affiliates of Sprint, including toll
revenue, decreased by $0.9 million and $6.0 million, respectively, reflecting
decreases in roaming minutes and roaming toll minutes, as derived from
information provided by Sprint.
For 2009 and 2008, the reciprocal roaming rate for
data traffic was $0.0001 per kilobyte and $0.0003 per kilobyte,
respectively. 3G data roaming revenue
from other PCS Affiliates of Sprint decreased by $0.1 million for the nine
months ended September 30, 2009 as compared to the nine months ended September 30,
2008 reflecting the decrease in the reciprocal rate, offset by increased
kilobyte traffic from subscribers of other PCS Affiliates of Sprint on our
network.
·
Roaming revenue from other wireless carriers.
We receive
roaming revenue from wireless carriers other than Sprint PCS and other PCS
Affiliates of Sprint when subscribers of such other wireless carriers roam in
our territory. We do not have agreements with these other wireless carriers.
Instead, we rely on the roaming arrangements Sprint PCS has negotiated with
these carriers and are unable to set terms and prices or otherwise monitor
these relationships. We are paid on a per minute basis for voice and 2G data
and on a per kilobyte basis for 3G data traffic pursuant to these agreements.
For the three and nine months ended September 30, 2009, roaming minutes
were 25.7 million and 148.9 million, respectively, compared to
100.8 million and 252.8 million for the three and nine months ended September 30,
2008, decreases of 75% and 41%, respectively, reflecting the impact of the
acquisition of Alltel by Verizon. The average per minute rate, including toll,
increased from $0.039 per minute for the three months ended September 30,
2008 to $0.046 per minute for the three months ended September 30,
2009. The average per minute rate
decreased from $0.044 per minute for the nine months ended September 30,
2008 to $0.042 per minute for the nine months ended September 30, 2009.
Data roaming revenue from other wireless carriers totaled $0.6 million and
$4.4 million for the three and nine months ended September 30, 2009
compared with $0.7 million and $1.3 million for the three and nine months
ended September 30, 2008, reflecting a steep decline in data roaming
revenue from Alltel. The majority of our roaming revenue from other wireless
carriers is derived from customers of Alltel, which was acquired by Verizon
Wireless in January 2009. As a result of the acquisition of Alltel, in
2009 we have experienced and may continue to experience a decline in our
roaming revenue from Alltel.
·
Reseller revenue.
Through Sprint PCS we allow
resellers, known as MVNOs, the largest of which is Virgin Mobile, to use our
network. Pursuant to these arrangements, we are paid on a per minute and per
kilobyte basis. The decreases in reseller revenue for the three and nine months
ended September 30, 2009 compared to the three and nine months ended September 30,
2008 reflect decreased reseller ARPU, partially offset by an increase in the
average reseller subscribers between the respective periods. For the three and
nine months ended September 30, 2009, reseller ARPU was $3.61 and $3.68,
respectively, compared to $5.19 and $5.32 for the three and nine months ended September 30,
2008, respectively. Average reseller subscribers were approximately 277,100 and
275,800 for the three and nine months ended September 30, 2009 compared to
approximately 250,400 and 246,400 for the three and nine months ended September 30,
2008. At September 30, 2009, we had approximately 273,300 reseller
subscribers based in our territory.
Sprints proposed acquisition of Virgin Mobile is the subject of pending
litigation brought by us. See Commitments
and Contingencies below for further discussion.
·
Equipment and other revenue.
Equipment and
other revenue is derived primarily from the sale of handsets and accessories to
new customers and from current customers who upgrade their handsets through our
retail and local distribution channels, in each case, net of sales incentives,
rebates and an allowance for returns. The increases in the three and nine
months ended September 30, 2009, as compared to the three and nine months
ended September 30, 2008, reflect higher revenue per new and upgraded
handset and a larger number of upgrades. These increasing factors are offset by
lower activations from our retail and local distribution channels.
33
Table of
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Operating Expense.
The
following tables set forth a breakdown of operating expense by type (dollars in
thousands):
|
|
For the Three Months
Ended September 30,
|
|
Increase/
|
|
Percent
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
Cost of service and roaming
|
|
$
|
74,038
|
|
$
|
74,520
|
|
$
|
(482
|
)
|
(0.6
|
)%
|
Cost of equipment
|
|
18,497
|
|
15,905
|
|
2,592
|
|
16.3
|
|
Selling and marketing
|
|
17,542
|
|
18,091
|
|
(549
|
)
|
(3.0
|
)
|
General and administrative
|
|
8,948
|
|
10,028
|
|
(1,080
|
)
|
(10.8
|
)
|
Depreciation and amortization
|
|
11,280
|
|
12,887
|
|
(1,607
|
)
|
(12.5
|
)
|
Loss on disposal of property and equipment, net
|
|
113
|
|
71
|
|
42
|
|
59.2
|
|
Total operating expense
|
|
$
|
130,418
|
|
$
|
131,502
|
|
$
|
(1,084
|
)
|
(0.8
|
)
|
|
|
For the Nine Months
Ended September 30,
|
|
Increase/
|
|
Percent
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
Cost of service and roaming
|
|
$
|
217,838
|
|
$
|
213,167
|
|
$
|
4,671
|
|
2.2
|
%
|
Cost of equipment
|
|
50,029
|
|
40,442
|
|
9,587
|
|
23.7
|
|
Selling and marketing
|
|
51,528
|
|
52,394
|
|
(866
|
)
|
(1.7
|
)
|
General and administrative
|
|
25,565
|
|
25,108
|
|
457
|
|
1.8
|
|
Gain on Sprint settlement
|
|
(4,273
|
)
|
|
|
(4,273
|
)
|
|
|
Depreciation and amortization
|
|
36,115
|
|
40,691
|
|
(4,576
|
)
|
(11.2
|
)
|
Loss on disposal of property and equipment, net
|
|
629
|
|
329
|
|
300
|
|
91.2
|
|
Total operating expense
|
|
$
|
377,431
|
|
$
|
372,131
|
|
$
|
5,300
|
|
1.4
|
|
Cost of service and roaming.
Cost of service and roaming includes network
operations expense, roaming expense relating to when our subscribers roam
either on other Sprint PCS networks or other wireless carriers networks,
back-office customer services provided by Sprint PCS, the provision for
doubtful accounts, long distance expense, the 8% affiliation fee due to Sprint
PCS for collected revenue and stock-based compensation expense. Network
operations expense includes salaries and benefits for network personnel, cell
site rent, utilities and maintenance expenses, fees relating to the connection
of our cell sites to our switches and other transport and facility expenses.
Roaming expense is our cost of our subscribers using Sprint PCS and other
wireless carriers networks. Roaming expense on the Sprint PCS network is at
the reciprocal rates as described above under Roaming revenue from
subscribers of Sprint PCS and other PCS Affiliates of Sprint. Roaming expense
when our subscribers use other wireless carriers networks is at rates as
determined by the roaming agreements signed by Sprint PCS with these other
wireless carriers. Effective January 1, 2008, data roaming with Sprint is
not settled separately, however, we continue to settle separately 3G data
roaming with the other PCS Affiliates of Sprint.
The decrease in cost of service and roaming for the three months ended September 30,
2009 reflects lower bad debt expense and decreases in our monthly cash costs
per user fee payable to Sprint, offset by the costs of servicing a larger
network and larger subscriber base, such as higher cell site rent and
interconnect costs due to more cell sites, and by increases in roaming expense
with Sprint as well as carriers other than Sprint.
The increase in cost of service and roaming for the nine months ended September 30,
2009 reflects the costs of servicing a larger network and larger subscriber
base, such as higher cell site rent and interconnect costs due to more cell
sites, and increases in roaming expense with Sprint as well as carriers other
than Sprint, offset by lower bad debt expense and decreases in our monthly cash
costs per user fee payable to Sprint.
Roaming expense with Sprint increased $1.3 million and $2.4
million, from $14.5 million and $44.4 million in the three and nine months
ended September 30, 2008, respectively, to $15.8 million and $46.8
million in the three and nine months ended September 30, 2009,
respectively, due to higher minutes of use on Sprints networks.
Roaming expense with wireless carriers other than Sprint increased
$0.5 million and $4.2 million, from $4.8 million and $9.8 million in
the three and nine months ended September 30, 2008, respectively, to
$5.3 million and $14.0 million in the three and nine months ended September 30,
2009, respectively, due to significantly higher minutes and kilobytes of use on
Sprints roaming partners networks.
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Bad debt expense decreased $2.4 million and $7.8 million from
$5.6 million and $15.8 million in the three and nine months ended September 30,
2008, respectively, to $3.2 million and $8.0 million in the three and nine
months ended September 30, 2009, respectively. These decreases in bad debt
expense reflect tightened credit policies and increases in deposit requirements
in the three and nine months ended September 30, 2009 as compared to the
2008 periods.
Additionally, due to decreases in our monthly cash cost per user fee
payable to Sprint, our cost of service and roaming was lower by $1.4 million
and $4.1 million for the three and nine months ended September 30, 2009 as
compared to the three and nine months ended September 30, 2008,
respectively.
At
September 30, 2009, our network consisted of 1,981 leased cell sites and
five switches. At September 30,
2008, our network consisted of 1,819 leased cell sites and five switches.
Cost of equipment.
Cost of equipment includes the cost of
handsets and accessories sold or upgraded from our retail and local
distribution channels. Cost of equipment related to upgrades increased $2.9
million and $6.3 million, or 75% and 57%, in the three and nine months ended September 30,
2009 as compared to the three and nine months ended September 30, 2008,
reflecting increases in the number of subscribers receiving handset upgrades
from our retail and local distribution channels and for the nine month period,
an increase in the average handset cost per upgrade. Cost of equipment for new
activations decreased $0.4 million, or 3%, in the three months ended September 30,
2009 as compared to the three months ended September 30, 2008, reflecting
a decrease in new activations from our retail and local distribution channels,
offset by an increase in the average cost per activated phone. Cost of equipment for new activations
increased $3.2 million, or 11%, in the nine months ended September 30,
2009 as compared to the nine months ended September 30, 2008, reflecting
an increase in the average cost per activated phone, partially offset by a
decrease in new activations from our retail and local distribution
channels. Handset costs have been
increasing as demand has shifted toward more expensive smart phones.
Selling and marketing.
Selling and marketing expense includes the
costs to operate our owned retail stores, advertising and promotional expenses,
commissions to our company-owned retail and local third party distributor
channels, subscriber acquisition costs from national third parties and other
Sprint-controlled channels and stock-based compensation expense. The decreases in the three and nine months
ended September 30, 2009 were due to lower costs associated with a smaller
company employed retail work force, lower advertising costs and lower costs
related to promotional credits, offset by higher commissions and subscriber
acquisition costs from our indirect channels.
General and administrative.
General and administrative expenses include
administrative salaries and benefits, legal fees, insurance expense, other
professional expenses and stock-based compensation expense. For the three and
nine months ended September 30, 2009, general and administrative expense
included approximately $3.0 million and $9.0 million, respectively, of
Sprint litigation related expenses. This compares to $5.3 million and $7.4
million for the three and nine months ended September 30, 2008,
respectively. Stock-based compensation expense included in general and
administrative expense totaled approximately $1.0 million and $2.8 million
for the three and nine months ended September 30, 2009, respectively,
compared to $0.9 million and $3.8 million for the three and nine months
ended September 30, 2008, respectively.
Gain on Sprint settlement.
On January 22,
2009, we reached a settlement with Sprint related to previously disputed 2008
items, which resulted in a $4.3 million gain being recorded in our
consolidated statement of operations for the nine months ended September 30,
2009.
Depreciation and amortization.
Amortization of intangible assets totaled
$2.3 million and $6.9 million for both the three and nine months ended September 30,
2009 and 2008, respectively.
Depreciation expense totaled $9.0 million and $29.2 million for the
three and nine months ended September 30, 2009 compared to
$10.6 million and $33.8 million for the three and nine months ended September 30,
2008, decreases of $1.6 million and $4.6 million for the three and nine
month periods, respectively. These decreases reflect the full depreciation of
certain assets during 2008 and 2009. During the three and nine months ended September 30,
2008, we recognized impairment charges of $1.9 million and $2.2 million,
respectively, included in depreciation, related to our assets held for sale to
reduce their carrying value in accordance with the guidance included in the
Financial Accounting Standards Boards Accounting Standards Codification Topic
360, Property, Plant and Equipment.
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Non-Operating
Income and Expense.
The
following tables set forth a breakdown of non-operating income and expense by
type (dollars in thousands):
|
|
For the Three Months Ended
September 30,
|
|
Increase/
|
|
Percent
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
Interest income
|
|
$
|
47
|
|
$
|
316
|
|
$
|
(269
|
)
|
(85.1
|
)%
|
Interest expense
|
|
8,065
|
|
8,320
|
|
(255
|
)
|
(3.1
|
)
|
Other income, net
|
|
72
|
|
63
|
|
9
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30,
|
|
Increase/
|
|
Percent
|
|
|
|
2009
|
|
2008
|
|
(Decrease)
|
|
Change
|
|
Interest income
|
|
$
|
211
|
|
$
|
1,420
|
|
$
|
(1,209
|
)
|
(85.1
|
)%
|
Interest expense
|
|
24,096
|
|
25,456
|
|
(1,360
|
)
|
(5.3
|
)
|
Other income, net
|
|
99
|
|
93
|
|
6
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income.
The decrease in interest income in the three
and nine months ended September 30, 2009 as compared to the three and nine
months ended September 30, 2008 reflects lower yields on our investments
during the three and nine months ended September 30, 2009 as compared to
the three and nine months ended September 30, 2008.
Interest Expense.
Interest expense consists of interest on our
outstanding long-term debt (see Note 6, Long-Term Debt, of the Notes to
Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q),
including amortization of financing costs and net of capitalized interest and
the effect of our interest rate swap (see Note 7, Interest Rate Swap, of the Notes
to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q). The decrease in interest expense in the three
and nine months ended September 30, 2009 reflects a lower weighted average
interest rate, net of our interest rate swap, of 6.44% and 6.52% on our
outstanding long-term debt during the three and nine months ended September 30,
2009, respectively, as compared to the weighted average interest rate of 6.96%
and 7.10% on our outstanding long-term debt during the three and nine months
ended September 30, 2008, respectively.
In
connection with our capital expenditures, we capitalized interest of
approximately $0.1 million and $0.5 million in the three and nine months ended September 30,
2009, respectively. We capitalized
interest of approximately $0.5 million and $1.3 million in the three and nine
months ended September 30, 2008, respectively.
Reconciliation of Non-GAAP Financial
Measures (All Revenues and Expenses in Thousands)
We
utilize certain financial measures that are not calculated in accordance with
GAAP to assess our financial performance. A non-GAAP financial measure is
defined as a numerical measure of financial performance that (a) excludes
amounts, or is subject to adjustments that have the effect of excluding
amounts, that are included in the comparable measure calculated and presented
in accordance with GAAP in the statement of income or statement of cash flows;
or (b) includes amounts, or is subject to adjustments that have the effect
of including amounts, that are excluded from the comparable measure so
calculated and presented. The non-GAAP financial measures discussed in Results
of Operations are ARPU and CPGA. A description of each of these non-GAAP
financial measures is provided in Definition of Operating Metrics. The
following tables reconcile the non-GAAP financial measures with our
consolidated financial statements presented in accordance with GAAP, excluding
subscriber data:
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
ARPU
|
|
|
|
|
|
|
|
|
|
Service
revenue (in thousands)
|
|
$
|
108,480
|
|
$
|
96,097
|
|
$
|
319,600
|
|
$
|
282,370
|
|
Average
subscribers
|
|
716,700
|
|
663,100
|
|
705,500
|
|
648,300
|
|
ARPU
|
|
$
|
50.45
|
|
$
|
48.31
|
|
$
|
50.33
|
|
$
|
48.39
|
|
ARPU,
which is utilized by most wireless companies to determine recurring monthly
revenue on a per subscriber basis, is used by analysts and investors to compare
relative subscriber revenue across the wireless industry. We use ARPU to assist
in evaluating past selling performance and the success of specific rate plan
promotions.
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|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
CPGA
|
|
|
|
|
|
|
|
|
|
Selling
and Marketing (in thousands):
|
|
$
|
17,542
|
|
$
|
18,091
|
|
$
|
51,528
|
|
$
|
52,394
|
|
plus:
Equipment costs, net of cost of upgrades
|
|
11,658
|
|
12,008
|
|
32,617
|
|
29,369
|
|
less:
Equipment revenue, net of upgrade revenue
|
|
(3,555
|
)
|
(2,991
|
)
|
(10,123
|
)
|
(8,499
|
)
|
less:
Stock-based compensation expense
|
|
(141
|
)
|
(129
|
)
|
(421
|
)
|
(546
|
)
|
CPGA
costs
|
|
$
|
25,504
|
|
$
|
26,979
|
|
73,601
|
|
72,718
|
|
Gross
additions
|
|
68,300
|
|
72,200
|
|
184,200
|
|
193,200
|
|
CPGA
|
|
$
|
373
|
|
$
|
374
|
|
$
|
400
|
|
$
|
376
|
|
CPGA
is utilized by most wireless companies to determine their cost to acquire a new
subscriber. CPGA is used by analysts and investors to compare us to other
wireless companies. We use CPGA to evaluate past selling performance, the
success of specific promotions and as a basis to determine the amount of time
we must retain a new subscriber before we recover this cost.
Inflation
We believe that inflation has not had a significant impact on our
revenues or our results of operations in the three or nine months ended September 30,
2009 and 2008, respectively.
Liquidity and Capital Resources
While we believe the Merger should be consummated later this year or
early next year, we also believe our cash and cash equivalents and operating
cash flow will be sufficient to operate our business and fund our capital needs
for at least the next twelve months. Although we have certain limited
additional borrowings allowed under our current debt agreements, including but
not limited to PIK Interest (see Note 6, Long-Term Debt, of the Notes to
Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q),
we are dependent on cash and cash equivalents and operating cash flow to
operate our business and fund our capital needs. However, our future liquidity
is dependent on a number of factors influencing our expected earnings and
operating cash flows, including those discussed below in Recent Trends, Risks
and Uncertainties That May Affect Operating Results, Liquidity and Capital
Resources.
Significant Sources of Cash
We
generated $57.8 million in net cash flows from operating activities for
the nine months ended September 30, 2009, compared to $44.1 million
for the nine months ended September 30, 2008, an increase of $13.7
million. Excluding changes in working capital, operating activities provided
$68.8 million of cash for the nine months ended September 30, 2009,
compared to $52.9 million of cash for the nine months ended September 30,
2008, generally reflecting increased earnings from our larger subscriber base
and cash received related to the settlement of 2008 disputes with Sprint,
offset by a decrease in our roaming margin.
The nine months ended September 30, 2009 also reflected increased
Sprint related litigation expenses and higher customer acquisition costs. Sprint related working capital, which
includes fees and charges payable and receivable between us and Sprint, was a
source of cash of $5.1 million for the nine months ended September 30,
2009 compared to a source of cash of $9.0 million for the nine months ended September 30,
2008, primarily due to the timing of cash payments both to and from
Sprint. For the nine months ended September 30,
2009, non-Sprint related working capital used cash of $16.1 million, reflecting
increased accounts receivable related to a higher subscriber base during the
period. For the nine months ended September 30,
2008, non-Sprint related working capital used cash of $17.8 million reflecting
customer account write-offs and increased accounts receivable during the
period, offset by higher Sprint litigation related expense accruals.
We received approximately $0.2 million primarily from the sale of
equipment during each of the nine months ended September 30, 2009 and
2008.
For the nine months ended September 30, 2008, we received $0.6
million from the exercise of options representing approximately 37,800
shares. As of September 30, 2009,
there were 1,038,864 exercisable stock options outstanding with a weighted
average exercise price of $20.07. We
cannot predict at what level, if any, cash will be generated from stock option
exercises in the future. At September 30, 2009, the intrinsic value of all
of our outstanding stock options was approximately $6.1 million.
Significant Uses of Cash
Cash
flows used for investing activities for the nine months ended September 30,
2009 included $27.9 million for capital expenditures. Included in
this total was $24.8 million for new cell site construction and other
network-related capital expenditures, of which $11.9 million was for EV-DO Rev.
A equipment, and $3.1 million was for store improvements, IT and other
corporate-related capital expenditures.
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Cash
flows used for investing activities for the nine months ended September 30,
2008 included $52.4 million for capital expenditures. Included in
this total was $50.0 million for new cell site construction and other
network-related capital expenditures, of which $18.1 million was for EV-DO Rev.
A equipment, and $2.4 million was for new stores, store improvements, IT
and other corporate-related capital expenditures.
On
January 30, 2009, our Board of Directors authorized the repurchase of up
to $15.0 million of our common stock in a stock repurchase program during
the 12-month period beginning on the date of authorization. We may purchase
shares from time to time in open market or privately negotiated transactions at
prices deemed appropriate by management, depending on market conditions,
applicable laws and other factors. The stock repurchase program does not
require us to repurchase any specific number of shares and may be discontinued
at any time.
Pursuant to this stock repurchase program, during the
nine months ended September 30, 2009, we purchased 658,863 shares of our
common stock at an average price of $13.69 per share for approximately
$9.0 million, of which approximately $8.8 million had been settled in cash
as of September 30, 2009. These
repurchased shares are reflected as Treasury stock, at cost in the Consolidated
Balance Sheet as of September 30, 2009.
As of September 30, 2009, approximately $6.0 million remained
available under the stock repurchase program.
Pursuant to the terms of
the Merger Agreement discussed above in Recent Developments Proposed Merger,
as of October 18, 2009, we are not permitted to repurchase shares of our
common stock on or after such date.
Our uses of cash typically include providing for operating
expenditures, debt service requirements and capital expenditures. Because our
long-term debt does not begin to mature until 2013, we do not believe the
volatility of the credit markets, unless prolonged, should have a significant
impact on our ability to refinance our debt.
Pursuant to the terms of the Merger Agreement discussed above in Recent
Developments Proposed Merger, we have agreed that capital expenditures for
the remainder of 2009 will be consistent with our internal 2009 budget and
thereafter will not exceed $3.0 million per month without Sprints prior
written consent. On August 3, 2009,
we paid our interest payment in relation to our Second Lien Notes entirely by
increasing the principal amount of the outstanding Second Lien Notes. To date, we have additionally elected to pay
our November 1, 2009 and February 1, 2010 interest payments in
relation to our Second Lien Notes entirely by increasing the principal amount
of the outstanding Second Lien Notes (see Note 6, Long-Term Debt, of the Notes
to Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q).
We have made no other decisions regarding the future election of
PIK Interest.
Pursuant to the terms of the Merger Agreement, we have certain
restrictions on our ability to increase capital expenditures, pursue strategic
acquisitions or new business opportunities, pay cash dividends or
distributions, repurchase our stock, incur new debt, or retire or repurchase
our debt.
Recent Trends, Risks and
Uncertainties That May Affect Operating Results, Liquidity and Capital
Resources
We
have identified the following important trends and factors (as well as risks
and uncertainties associated with such items) that could impact our future
financial performance. This section should be read in conjunction
with the Risks Related to Our Business, Strategy and Operations
section found in Item 1A of Part I of our Annual Report on Form 10-K,
filed with the SEC on March 3, 2009.
·
The ability of Sprint and us to complete the
transactions contemplated by the Merger Agreement, including the pending tender
offer to acquire our shares, and the favorable resolution of litigation
challenging such transactions, the risk that a condition to the completion of
such transactions may not be satisfied, the terms and conditions on which such
transactions are made and developments regarding such transactions.
·
The impact of the pendency of the transactions
contemplated by the Merger Agreement on our business generally, including
relationships with our vendors and employees, particularly if such transactions
are not consummated promptly.
·
Gross additions slowed in
the first nine months of 2009, reflecting tightened credit standards and
increased overall wireless penetration in our markets. The percentage of our gross additions coming
from Nextel subscribers switching to Sprint in our territory has declined in
each of the 2009 quarters and has fallen significantly from levels we
experienced in the second half of 2008.
We expect this decline to continue.
Additionally, gross additions were negatively impacted by the weakened
economic environment, increased competitive advertising, increased competition
and the relative attractiveness of competitors phones, pricing plans, coverage
and customer service, as well as continuing concerns about the strength of the Sprint
brand. We believe that these factors will continue to negatively affect gross
additions in the remainder of 2009. To the extent we are unable to maintain, or
choose to slow, our subscriber growth, it may make it more difficult for us to
obtain sufficient revenue to achieve and sustain profitability.
·
While our churn in the first
nine months of 2009 has improved as compared to the first nine months of 2008,
it increased from the second quarter of 2009 to the third quarter of 2009 and
it continues to be higher than the national industry average.
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Our churn may increase in the future or remain high due to the
weakening economic environment, increased competition or other factors. If
churn continues to remain high or increases over the long-term, we would lose
the cash flows attributable to these subscribers and may incur higher net
losses or lower net profits.
·
Despite our
2009
increases in per subscriber revenue
as compared to 2008 levels
, competition in the wireless industry remains
intense and continues to put pressure on our per subscriber revenue. The introduction of more advanced handheld
devices and new technologies and delivery channels, such as the WiMax offerings
of Sprint through the Sprint-Clearwire transaction, further complicate the
competitive environment. In addition, prepaid plans (such as those offered by
new entrants into our markets like MetroPCS and existing competitors like
Nextel through its Boost product), which we do not currently offer, and
unlimited plans, including those offered by us, also continue to increase in
popularity, which may potentially put more downward pressure on wireless
service pricing as well as potentially, in the case of unlimited plans,
increase our cost of providing service. Incumbent carriers, including Sprint,
have offered and may continue to offer more aggressive rate plans in order to
maintain or achieve subscriber growth.
While customer care credits given to customers in our territory by
Sprint moderated in the
first nine months
of 2009 as compared to 2008 levels, customer care credits remain high
and the future trend of these credits is unknown.
As
a result of these and other factors, we expect to see continued pressure on
subscriber revenue which will have a negative effect on our cash flow and our
operating results.
·
While our third quarter cost
per gross addition, or CPGA, was comparable to our CPGA for the 2008 third
quarter, our CPGA continues to remain high as compared to historical levels. We
may continue to experience higher costs to acquire subscribers in the future.
In the event that we increase our distribution infrastructure, we will increase
the fixed costs in our sales and marketing organization. Also, more aggressive
promotional efforts in the future may lead to higher handset subsidies and
rebates, as would increased sales of more expensive handsets and smart phones.
In addition, we may increase our marketing expenses and pay higher commissions
in an effort to attract and acquire new subscribers. With a higher CPGA,
subscribers must remain our subscribers for a longer period of time at a stable
ARPU for us to recover those acquisition costs.
·
Certain portions of our
operating expense continue to increase or remain high and may increase in the
future due to, among other reasons:
·
B
ad debt expense, which increased from the
second quarter of 2009 to third quarter of 2009, could potentially continue to
increase due to higher write-offs, lower bad debt recoveries as a percentage of
write-offs and a weakened economic environment;
·
Trend toward higher roaming
expense as customers increasingly choose roam inclusive rate plans and increase
their use of their handset and data devices off our network;
·
Higher handset subsidies,
rebates, commissions and other retention expenses for existing subscribers who
upgrade to a new handset as part of promotional efforts to reduce churn;
·
Higher back office and
administrative expenses due to the larger number of subscribers served and the
increased CCPU fees proposed by Sprint for the three year period from 2011
through 2013, if not reduced or mitigated (see Business OverviewRelationship
with Sprint above for further discussion of proposed CCPU fee increases);
·
Higher network costs as we
process increasing voice and data traffic on our network, including traffic
from Sprint customers roaming in our territories, and as a result of expanding
our network infrastructure and increasing our deployment of EV-DO Rev. A.; and
·
If the litigation stays and
covenants not to sue granted pursuant to the Settlement Agreement are vacated
or terminate, higher Sprint litigation related expenses, as a result of our
ongoing defense of our rights under our affiliation agreements, in particular
relating to the Sprint-Clearwire transaction announced in May of 2008, the
Virgin Mobile transaction announced in July of 2009, and if any actions
taken by Sprint related to its announced plan to divest of the Nextel wireless
network in our territory do not comply with the Circuit Courts order.
·
A substantial
portion of our revenue is derived from roaming revenue, the majority of which
comes when subscribers of Sprint incur minutes of use in our territories. We
believe our markets have certain characteristics that have historically had a
favorable effect on the level of roaming revenue from subscribers of Sprint
traveling in our markets. These
characteristics include being located near or around several large U.S. urban
centers and having significant distances of major and secondary highways comprising
principal travel corridors between these large urban centers. In the first nine months of 2009, we have
seen a decrease in roaming revenue that Sprint reports to us for their
subscribers activity in our territory which we believe reflects reduced travel
into our markets related to Sprint having less subscribers and these
subscribers traveling less. A continued
downturn in economic conditions could result in further decreased travel
activity and have a negative impact on
39
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our
roaming revenue. Similarly, if Sprint
were to continue to lose subscribers, particularly in markets adjacent to our
territory, it could have a negative impact on our roaming revenue. Additionally, Sprints reciprocal roaming
agreements with other carriers, such as its roaming agreement with Alltel, and
our participation in those agreements, can change over time, potentially
reducing the reciprocal rate or negatively affecting the level of roaming
activity related to those roaming partners. The ratio between our roaming
revenue with wireless carriers other than Sprint and our roaming expense with
wireless carriers other than Sprint continued to decline in the first nine
months of 2009 and was significantly below one in the third quarter of 2009.
For the three and nine months ended September 30, 2009, approximately $0.8
million and $7.4 million, or 44% and 70%, respectively, of our roaming
revenue from wireless carriers other than Sprint was derived from customers of
Alltel, which was acquired by Verizon Wireless in January 2009. As a
result, in 2009, we have experienced and expect to continue to experience a
decline in our roaming revenue from Alltel. Moreover, since the ratio of
inbound to outbound roaming fluctuates from period to period and year to year,
the margin we earn from the difference between roaming revenue and roaming
expense is difficult to predict. If this roaming margin with Sprint PCS or with
other carriers declines due to less roaming revenue, more roaming expense, or
both, our results of operations will be negatively affected.
·
As we have added to the
capacity, coverage and quality of our PCS network, we have incurred significant
capital expenditures. We incurred approximately $27.9 million in capital
expenditures in the nine months ended September 30, 2009, including
approximately $11.9 million for continued expansion of our EV-DO Rev. A
deployment. In the future we may decide
to further increase our cell site expansion or EV-DO Rev. A coverage, either or
both of which may increase our anticipated capital expenditures and operating
expense beyond our current plans. Furthermore, unforeseen changes in technology
and changes in our plans to upgrade or expand our network may require us to
spend more money than we expected and have a negative effect on our cash flow.
Notwithstanding the foregoing, pursuant to the terms of the Merger Agreement,
we have certain restrictions on our ability to incur capital expenditures.
·
We believe that
Sprints integration of the Sprint and Nextel businesses has had, and will
continue to have, a negative impact on our business and prospects. With the
integration of the marketing and sales of Sprint products and services with
legacy Nextel products and services, conflicts and disputes continue to arise
with how Sprint and we conduct business in our territory as well as with regard
to Sprints commitment and level of service provided to the PCS Affiliate
program and to us specifically, including the timeliness, completeness and
level of insight into prospective and historical information provided to us to
run our business. Additionally, we believe that changes in Sprints billing
platform, Ensemble, and related reporting systems during 2008 resulted in a
number of issues which have had an adverse impact on our subscriber activity
and financial results, some of which we have formally disputed and continue to
dispute. As of September 30, 2009, we have also not yet achieved the same
level of visibility to our subscriber information we previously had prior to
the migration. Further delays in reestablishing this level of visibility into
our subscriber information could continue to make it more difficult for us to
effectively manage our business. If continuing or future problems with Ensemble
are not resolved in a timely manner for any reason, including Sprints inability
or unwillingness to commit resources to such issues, our business would
continue to be negatively impacted. There can be no assurances that we will not
have continued disputes with Sprint relating to these or other items pertaining
to Sprints performance of its obligations under the affiliation agreements.
·
Our primary subscriber base
is composed of individual consumers. The current overall weakness in the United
States economy, particularly weakness in the credit and housing markets, rising
unemployment and volatile energy and commodity costs, have resulted in
considerable negative pressure on consumer confidence and spending. As a
result, we believe that these events have impacted consumers in our territories
in ways that have negatively affected our business. In the event the current
economic downturn in the United States continues or worsens, our current and
potential wireless subscribers, especially our sub-prime subscribers, may be
unable or unwilling to purchase wireless services or pay their wireless bills,
which may continue to negatively impact our business, particularly as we do not
yet offer a wireless prepaid plan.
·
Turmoil in the credit
markets and the financial services industry may negatively impact Sprints or
our business, results of operations, financial condition or liquidity. The
credit markets and the financial services industry have recently experienced a
period of unprecedented turmoil characterized by the bankruptcy, failure,
collapse or sale of various financial institutions and an unprecedented level
of intervention from the United States federal government. While the ultimate
outcome of these events cannot be predicted, such events may have a material
adverse effect on Sprints or our liquidity and financial condition.
·
Pursuant to a final order of the Circuit
Court of Cook County, Illinois, Sprint and those acting in concert with it must
cease owning, operating and managing the Nextel wireless network in iPCS
Wirelesss territory. On October 19, 2009, pursuant to the Settlement
Agreement, the Circuit Court stayed this litigation, including Sprints
obligations to comply with the Circuit Courts final order by January 25,
2010. If the stay is vacated for any
reason, Sprint shall have until 120 days after the date on which the stay is
vacated to comply with the requirements of the final order. Sprint previously announced that it intends
to sell certain of its Nextel assets located in iPCS Wirelesss territory in an
attempt to comply with the Circuit Courts order. Such actions may or may not comply with the
Circuit Courts order. In addition, we
do not know the impact on our business of
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any such attempts by Sprint to comply.
Subject to the terms of the Settlement Agreement, we intend to
diligently monitor Sprints actions and take such steps as may be appropriate
to ensure full compliance by Sprint with the Circuit Courts order and the
Settlement Agreement. In addition, as
with any litigation, it is possible that the parties may otherwise settle the
dispute. In that event, we cannot speculate as to the terms and conditions of
any such settlement, which could include a material economic change in our
relationship with Sprint. See Commitments and Contingencies Sprint/Nextel
Merger Litigation below for further discussion.
·
The final outcome of our
litigation with Sprint regarding the Sprint-Clearwire WiMax transaction is
unknown. As discussed more fully below in Commitments and Contingencies
Sprint/Clearwire Transaction Litigation, on May 7, 2008, Sprint announced
a transaction among itself, Clearwire Corporation, and certain other parties
(the Sprint-Clearwire Transaction) to form a new competing 4G network (New
Clearwire).
On May 12, 2008, the iPCS Subsidiaries filed a lawsuit against
Sprint and certain of its affiliates in the Circuit Court of Cook County,
Illinois, seeking declaratory and injunctive relief with respect to the
Sprint-Clearwire Transaction. In that case, the iPCS Subsidiaries are seeking a
declaration that the Sprint-Clearwire Transaction constitutes a breach of
Sprints affiliation agreements it has with those subsidiaries.
We cannot predict the outcome of these legal proceedings. If we do not
prevail, Sprint may be permitted to operate, through its Sprint-Clearwire
venture, a mobile WiMax network that could adversely affect our business and
operations by introducing a competitive product that can be expected to reduce
demand for our products and services. If we do prevail, we do not know Sprints
intentions for complying with any ruling and its impact on our business. On October 19,
2009, pursuant to the Settlement Agreement, the Circuit Court stayed this
litigation. In addition, as with any litigation, it is possible that the
parties may otherwise settle the dispute. In that event, we cannot speculate as
to the terms and conditions of any such settlement, which could include a
material economic change in our relationship with Sprint. See Commitments and
Contingencies Sprint/Clearwire Transaction Litigation below for further
discussion.
·
On July 28,
2009, Sprint announced it agreed to acquire Virgin Mobile USA, Inc.,
subject to Virgin Mobile USA stockholders and regulatory approvals (the
Sprint-Virgin Mobile Transaction). On September 10,
2009, the iPCS Subsidiaries filed a lawsuit against Sprint and certain of its
affiliates in the Circuit Court of Cook County, Illinois, seeking declaratory
and injunctive relief with respect to the Sprint-Virgin Mobile Transaction. In
that case, the iPCS Subsidiaries are seeking a declaration that the
Sprint-Virgin Mobile Transaction constitutes a breach of Sprints affiliation
agreements with the iPCS Subsidiaries, and also sought an injunction barring
Sprint from closing the Sprint-Virgin Mobile Transaction until it complied with
the affiliation agreements. On the same
day, the iPCS Subsidiaries filed a motion for preliminary injunction, in which
they seek to enjoin the closing of the Sprint-Virgin Mobile Transaction. That motion is pending. On September 22, 2009, the defendants
filed a motion to dismiss the complaint.
That motion is pending. On October 19,
2009, pursuant to the Settlement Agreement, the Circuit Court stayed this
litigation.
·
Our PCS network equipment is supplied solely
by Nortel Networks. If additional equipment or support is needed for expansion
or repair of our network, it generally must come from Nortel Networks in order
to be compatible with our existing network equipment. Nortel Networks filed for
Chapter 11 bankruptcy protection in January 2009. In July 2009, Ericsson won an auction,
subject to court approval in Canada and the United States, of Nortels
carrier-network division and a wireless-research unit. If Ericsson, or Nortel or another acquirer if
this sale does not close, were to cease or delay supplying equipment or suspend
warranty coverage, we could be prevented or delayed in expanding, repairing or
supporting our network. Any inability to
expand or repair our network could have a material effect on us. In addition, Ericsson, Nortel, or any
potential successor, potentially could exert significant bargaining power over
price, quality, warranty claims or other terms relating to its equipment.
·
As a PCS Affiliate of Sprint, we are
dependent upon Sprint for many aspects of our business, including the brand
name under which we operate, the spectrum that we use, technological advances
and the nationwide wireless network outside of our territory. From the subscribers
point of view, we are Sprint in our markets and they use our wireless network
and the rest of the Sprint PCS network as a unified network. Sprints
performance and brand reputation nationwideover which we have no
controlimpacts our performance. We believe many of Sprints operating metrics,
including net subscriber additions and churn, have significantly underperformed
relative to industry averages over the last few years, reflecting deterioration
in the relative strength of the Sprint brand. If Sprint is unable to improve
its operating metrics and brand image in the future, particularly in the face
of an economic downturn and an increasingly maturing industry, our business
would likely suffer material adverse consequences.
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Commitments and Contingencies
Proposed Merger
. As discussed above in Recent
Developments Proposed Merger, on October 18, 2009, the Company, Sprint
and the Purchaser, a wholly owned subsidiary of Sprint, entered into the Merger
Agreement pursuant to which Sprint agreed to acquire all of the Companys
outstanding common stock for a cash price of $24 per share. The Merger
Agreement provides for certain termination rights for each of Sprint and the
Company and further provides that upon termination of the Merger Agreement
under specified circumstances, the Company will be required to pay Sprint a
termination fee of $12.5 million.
In connection with the
Merger Agreement, Sprint, WirelessCo L.P., Sprint Spectrum L.P., SprintCom, Inc.,
Sprint Communications Company, L.P., Nextel Communications, Inc.,
PhillieCo L.P. and APC PCS LLC (collectively, the Sprint Parties) and Horizon
Personal Communications, Inc., Bright Personal Communications Services,
LLC, iPCS Wireless, Inc. and the Company (collectively, the iPCS Parties)
also entered into a Settlement Agreement and Mutual Release, dated October 18,
2009 (the Settlement Agreement). Under the terms of the Settlement Agreement,
the Sprint Parties and the iPCS Parties have agreed to stay all pending
litigation between them, subject to certain exceptions and conditions, and not
to sue each other during the pendency of the transactions contemplated by the
Merger Agreement, subject to certain exceptions. The stays of litigation and
covenants not to sue will terminate if the Merger Agreement is terminated or if
the Offer is not closed within the time period allowed by the Merger Agreement
and the party seeking to terminate the Merger Agreement is unable to do so due
to a court order or injunction that prevents termination. In addition, under
the terms of the Settlement Agreement, effective upon the closing of the
Merger, the Sprint Parties and the iPCS Parties will release each other from
all claims, except those arising under or relating to a breach of the Merger
Agreement or the Settlement Agreement, and will jointly file all such documents
that are necessary to effect the dismissal with prejudice of all court orders
and pending lawsuits between the Sprint Parties and the iPCS Parties.
Sprint/Nextel Merger Litigation.
On July 15, 2005, our wholly owned
subsidiary, iPCS Wireless, Inc. (iPCS Wireless), filed a complaint
against Sprint and Sprint PCS in the Circuit Court of Cook County, Illinois
(the Circuit Court). The complaint alleged, among other things, that Sprints
conduct following the consummation of the merger between Sprint and Nextel
would breach Sprints exclusivity obligations to iPCS Wireless under its
affiliation agreements with Sprint PCS. On August 14, 2006, the Circuit
Court issued its decision and on September 20, 2006, the Circuit Court
issued a final order effecting its decision. The final order provided that:
·
Within 180 days of the
date of the final order, Sprint and those acting in concert with it must cease
owning, operating and managing the Nextel wireless network in iPCS Wirelesss
territory.
·
Sprint shall continue to
comply with all terms and conditions of the Forbearance Agreement between iPCS
Wireless and Sprint setting forth certain limitations on Sprints operations
post-merger with Nextel.
On September 28, 2006, Sprint appealed the Circuit Courts ruling
to the Appellate Court of Illinois, First Judicial District (the Appellate
Court), and, at Sprints request, the Circuit Courts ruling was stayed by the
Appellate Court pending the appeal. On March 31, 2008, the Appellate Court
unanimously affirmed the 2006 Circuit Court decision. On May 5, 2008,
Sprint filed a petition for leave to appeal with the Supreme Court of Illinois.
On September 24, 2008, the Supreme Court of Illinois (the Supreme Court)
denied Sprints petition for leave to appeal the Appellate Courts decision.
On Sprints motion for reconsideration, the Supreme Court again denied
Sprints petition for leave to appeal on November 12, 2008. The Supreme
Court at that time directed the Circuit Court to modify its order of September 20,
2006, in the following manner:
·
To grant Sprint
360 days (rather than 180 days) to comply with the Circuit Courts order
to cease owning, operating and managing the Nextel wireless network in iPCS
Wirelesss territory.
·
To permit Sprint to seek an
extension of the 360-day period upon a showing of good cause, with due
consideration given to the hardship(s) imposed on iPCS Wireless by the
requested extension.
On January 30, 2009, the Circuit Court entered its final order, as
directed by the Supreme Court, providing that:
·
Sprint, and those acting in
concert with it, must cease owning, operating and managing the Nextel wireless
network in iPCS Wirelesss service area.
·
Sprint has until January 25,
2010 (360 days from the date of the Circuit Courts order) to comply with
the order. Sprint may seek an extension of such deadline upon a showing of good
cause, giving due consideration to the hardships that would be imposed on iPCS
Wireless if such extension were granted.
·
Sprint must continue to
comply with all terms and conditions of the Forbearance Agreement between iPCS
Wireless and Sprint.
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On October 19, 2009, pursuant to the Settlement Agreement, the
Circuit Court stayed this litigation, including Sprints obligations to comply
with the Courts final order by January 25, 2010. If the stay is vacated for any reason, Sprint
shall have until 120 days after the date on which the stay is vacated to comply
with the requirements of the final order.
On September 22, 2008, Sprint also filed a petition with the
Circuit Court seeking to vacate that Courts original order. On January 20,
2009, the Circuit Court denied Sprints petition with prejudice. On February 18,
2009, Sprint appealed the decision of the Circuit Court denying Sprints
petition to vacate to the Illinois Appellate Court. The appeal process is
ongoing.
On October 20, 2009, pursuant to the Settlement Agreement, the
Illinois Appellate Court stayed Sprints appeal. The stay will be automatically vacated if the
Merger Agreement is terminated for any reason.
Sprint/Clearwire Transaction Litigation.
On May 7, 2008, Sprint announced a
proposed transaction among itself, Clearwire Corporation, and certain other
parties (the Sprint-Clearwire Transaction) to form a new competing
network (New Clearwire), pursuant to which transaction Sprint transferred its
4G technology to the New Clearwire. The same day, Sprint filed a complaint for
declaratory judgment against iPCS and certain of its subsidiaries, iPCS
Wireless, Horizon Personal Communications, Inc. and Bright Personal
Communications Services, LLC (collectively, the iPCS Subsidiaries) in
the Court of Chancery of the State of Delaware (the Delaware Chancery Court).
In that lawsuit, Sprint sought a declaration that the Sprint-Clearwire
Transaction would not constitute a breach of the Sprint affiliation agreements
it has with the iPCS Subsidiaries.
On May 12, 2008, the iPCS Subsidiaries filed a lawsuit against
Sprint and certain of its affiliates in the Circuit Court, seeking declaratory
and injunctive relief with respect to the Sprint-Clearwire Transaction. In that
case, the iPCS Subsidiaries sought a declaration that the Sprint-Clearwire Transaction
constitutes a breach of Sprints affiliation agreements it has with those
subsidiaries, and also sought an injunction barring Sprint from closing the
Sprint-Clearwire Transaction until it complied with the affiliation agreements.
On July 14, 2008, the Delaware Chancery Court granted the motion
to dismiss filed by our Bright and Horizon subsidiaries and dismissed them from
the Delaware litigation. Pursuant to a motion filed by iPCS and iPCS Wireless,
on October 8, 2008, the Delaware Chancery Court stayed all remaining
Delaware litigation in favor of the lawsuit brought in Illinois by the iPCS
Subsidiaries.
On November 3, 2008, the iPCS Subsidiaries filed a motion for
preliminary injunction in the Circuit Court seeking to prevent Sprint from consummating
the Sprint-Clearwire Transaction until such time that the Circuit Court could rule on
the merits of the underlying litigation brought by the iPCS Subsidiaries
against Sprint. On November 17, 2008, the iPCS Subsidiaries, Sprint, and
New Clearwire reached a stipulation pursuant to which the iPCS Subsidiaries
withdrew their motion for preliminary injunction without prejudice, and the
Sprint-Clearwire Transaction closed on November 28, 2008. In connection
with the withdrawal of the preliminary injunction motion by the iPCS
Subsidiaries, the Circuit Court entered an Agreed Order and Stipulation, dated November 17,
2008 (the Agreed Order) pursuant to which: (i) New Clearwire stipulated
that it did not presently intend to commercially launch its 4G network, sell
products or services, or promote products or services that are available for
sale in any part of the iPCS Subsidiaries territories prior to July 1,
2009, (ii) New Clearwire stipulated that it would give the iPCS
Subsidiaries at least 60 days advance written notice before any commercial
launch of its 4G network, any sale of products or services or any promotion of
products or services that are offered for sale in any part of the iPCS
Subsidiaries service areas if it plans to do so before entry of a final and
non-appealable judgment by the Circuit Court in the underlying action brought
by the iPCS Subsidiaries against Sprint, and (iii) New Clearwire and
Sprint stipulated that neither of them nor any of their controlled affiliates
would raise the fact that the Sprint-Clearwire Transaction had closed as a
basis for opposing any remedy proposed by the iPCS Subsidiaries or granted by
the Circuit Court.
On December 30, 2008, the Circuit Court issued a decision on a
motion for partial summary judgment filed by iPCS Wireless that sought partial
summary judgment based on the 2006 decision in the Illinois Sprint/Nextel
Merger Litigation. The Circuit Court specifically recognized that pursuant to
the 2006 decision, Sprint and those acting in concert with it cannot compete
against iPCS Wireless in its exclusive service areas, regardless of the radio
frequency that they use to compete. The Circuit Court held that Sprint cannot
relitigate the issue of whether Sprint and those acting in concert with it may
compete with iPCS Wireless in its service area by using a frequency other than
1900 MHz. The Circuit Court granted in part iPCS Wirelesss motion for partial
summary judgment with respect to these two issues and entered judgment thereon
but stayed enforcement of the judgment pending a ruling on Sprints petition to
vacate the original judgment in the Illinois Sprint/Nextel Merger Litigation,
which petition to vacate was then dismissed with prejudice on January 20,
2009. The Circuit Court also found in its December 30, 2008 ruling that
some material issues of fact remained and would be decided at trial including,
but not limited to, whether New Clearwire is a related party, whether Sprint
controls New Clearwire, whether the protections of exclusivity extend beyond the
situation in which Sprint acts through a related party, and the question of who
constitutes those acting in concert with Sprint.
On January 9, 2009, the Circuit Court denied Sprints motion for
partial summary judgment against Bright and Horizon. In that motion, Sprint had
sought to bar Bright and Horizon from litigating the issue of whether Sprint
could compete with Horizon and Bright outside the 1900 MHz spectrum range,
based on a 2006 decision by the Delaware Chancery Court. The Circuit Court denied
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Sprints
motion for partial summary judgment against Bright and Horizon and found that
the Delaware Chancery Court did not actually decide that issue.
On
April 30, 2009, the Circuit Court denied a motion brought by Sprint that
sought to dismiss the iPCS Subsidiaries claims as to whether Sprint improperly
withheld advanced technology from them in connection with the Clearwire
transaction. The Circuit Court also
ruled that the iPCS Subsidiaries claims for relief could not include certain
types of monetary relief but that, in addition to their existing claims for
injunctive relief, the iPCS Subsidiaries would not be prevented from making a
claim for any actual or direct damages.
On
October 19, 2009, pursuant to the Settlement Agreement, the Circuit Court
stayed this litigation. Under the terms
of the Settlement Agreement, the stay shall not affect any rights, duties or
obligations under the Agreed Order issued by the Circuit Court on November 17,
2008. The Settlement Agreement further provides that if New Clearwire takes any
action that does not comply with the Agreed Order or if New Clearwire provides
notice pursuant to the Agreed Order of
its intention to launch a network or to promote or sell products or services in
any part of the applicable iPCS Subsidiaries service areas, the stay
shall be automatically vacated and the iPCS Subsidiaries shall be entitled to
pursue all available remedies.
Sprint/Virgin Mobile Transaction Litigation.
On July 28, 2009,
Sprint announced it agreed to acquire Virgin Mobile USA, Inc., subject to
Virgin Mobile USA stockholders and regulatory approvals (the Sprint-Virgin
Mobile Transaction). On September 10,
2009, the iPCS Subsidiaries filed a lawsuit against Sprint and certain of its
affiliates in the Circuit Court, seeking declaratory and injunctive relief with
respect to the Sprint-Virgin Mobile Transaction. In that case, the iPCS
Subsidiaries are seeking a declaration that the Sprint-Virgin Mobile
Transaction constitutes a breach of Sprints affiliation agreements with the
iPCS Subsidiaries, and also sought an injunction barring Sprint from closing
the Sprint-Virgin Mobile Transaction until it complied with the affiliation
agreements. On the same day, the iPCS
Subsidiaries filed a motion for preliminary injunction, in which they seek to
enjoin the closing of the Sprint-Virgin Mobile Transaction. That motion is pending. On September 22, 2009, the defendants
filed a motion to dismiss the complaint.
That motion is pending. On October 19,
2009, pursuant to the Settlement Agreement, the Circuit Court stayed this
litigation. Under the terms of the
Settlement Agreement, Sprint agreed that, so long as the stay was in effect, it
would not (i) reduce, directly or indirectly, or permit to be reduced, the
reseller rates under the Virgin Mobile resale arrangement applicable to the
iPCS Subsidiaries or (ii) claim or assert in any litigation proceeding or
other action between Sprint and the Company or any of their respective
affiliates that the iPCS Subsidiaries or any of their affiliates has waived the
right to challenge the permissibility of any prior direct or indirect reductions
of such reseller rates.
Two putative class action
lawsuits have been filed in the Circuit Court of Cook County, Illinois.
The complaints name as defendants the Company and its directors, among others,
and generally allege that the consideration to be received by the Companys
stockholders in connection with the Merger Agreement is unfair and
inadequate. The complaints further allege that the Companys directors
breached their fiduciary duties by, among other things, approving the Merger
Agreement and the other transactions contemplated by the Merger Agreement and
that such breaches were aided and abetted by Sprint Nextel Corporation.
The lawsuits seek, among other things, preliminary injunctive relief and
monetary and attorneys fees. The Company believes that these lawsuits
are without merit and intends to vigorously defend these actions. As permitted under applicable law, each of
the Company and certain of its subsidiaries indemnifies their directors and
officers for certain events or occurrences while the officer or director is, or
was, serving the Company or its subsidiaries in such a capacity. The maximum potential amount of future
payments the Company could be required to make under these indemnification agreements
is unlimited; however, the Company has a director and officer insurance policy
that should enable the Company to recover a portion of any future amounts paid.
We presently cannot determine the ultimate resolution of the matters
described above. The results of litigation are inherently uncertain and, while
we believe that we have meritorious claims in the matters described above,
material adverse outcomes are possible. Additionally, on October 18, 2009, the
parties to the above-described lawsuits entered into the Settlement Agreement.
Please see above for a more detailed description of the Settlement.
In addition to the foregoing, from time to time, we are involved in
various legal proceedings relating to claims arising in the ordinary course of
business. We are not currently a party to any such legal proceedings, the
adverse outcome to which, individually or in the aggregate, is expected to have
a material adverse effect on our business, financial condition or results of
operations.
Nortel Networks Equipment Agreement
On
March 13, 2009, we signed a letter of agreement with Nortel Networks to
purchase EV-DO Rev. A equipment and services totaling approximately $19.7
million in aggregate, consisting of a non-cancelable purchase of approximately
$14.8 million of equipment and services and an option to purchase up to an
additional approximately $4.9 million of equipment and services. Under this letter of agreement, we agreed to
return to Nortel Networks certain equipment replaced by the purchased equipment
by March 1, 2010. We have submitted
non-cancelable purchase orders for approximately $14.8 million of equipment and
services and therefore have no remaining commitment under this letter of
agreement to submit additional non-cancelable purchase orders. As of September 30, 2009, we have received
approximately $13.8 million and paid for approximately $13.1 million of
equipment and services and have returned approximately half of the replaced
equipment to Nortel. The remaining
replaced equipment is expected to be returned to Nortel by the end of 2009.
State of Michigan Sales and Use Tax Audit
The
State of Michigan is currently auditing our sales and use tax returns for the
years 2003 through 2006. The outcome of this audit cannot be determined at this
time.
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Contractual Obligations and Off-Balance Sheet Arrangements
For
information regarding contractual obligations and off-balance sheet
arrangements, see the captions Contractual Obligations and Off-Balance Sheet
Arrangements in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
At September 30, 2009, there had not been a material change to the
contractual obligations or off-balance sheet arrangements disclosed in the
Companys Annual Report on Form 10-K for the year ended December 31,
2008, except that at September 30, 2009, we have an off balance sheet
obligation of approximately $1.0 million.
See Nortel Networks Equipment Agreement above for further discussion
regarding this obligation.
Seasonality
Our
business is subject to seasonality because the wireless telecommunications
industry historically has been dependent on fourth calendar quarter results.
Among other things, the industry relies on moderately higher subscriber
additions and handset sales in the fourth calendar quarter as compared to the
other three calendar quarters. A number of factors contribute to this trend,
including: the use of retail distribution, which is heavily dependent upon the
year-end holiday shopping season; the timing of new product and service
announcements and introductions; competitive pricing pressures; and aggressive
marketing and promotions. In addition, our roaming revenue and roaming expense
is subject to seasonality because of decreased travel of wireless subscribers
into our territory during the winter months.
Critical Accounting Policies
Our
financial statements are prepared in conformity with accounting principles
generally accepted in the United States and require us to select appropriate
accounting policies. The assumptions and judgments we use in applying our
accounting policies have a significant impact on our reported amounts of
assets, liabilities, revenue and expenses. While we believe that the
assumptions and judgments used in our estimates are reasonable, actual results
may differ from these estimates under different assumptions or conditions.
We
have identified the most critical accounting policies upon which our financial
status depends. The critical policies were determined by considering
accounting policies that involve the most complex or subjective decisions or assessments.
We also have other policies considered key accounting policies; however, these
policies do not meet the definition of critical accounting policies because
they do not generally require us to make estimates or judgments that are
complex or subjective. Our critical accounting policies include the
following:
·
Revenue
recognition
·
Allowance for
doubtful accounts
·
Long-lived
asset recovery
·
Intangible
assets
·
Interest rate
swap
·
Income taxes
·
Stock-based
compensation
Additional
information regarding these critical accounting policies can be found in the Managements
Discussion and Analysis of Financial Condition and Results of Operations
section of our Annual Report on Form 10-K for the year ended December 31,
2008, filed with the SEC on March 3, 2009.
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Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
We
do not engage in commodity futures trading activities. Although we entered into
a derivative financial instrument transaction for hedging purposes as discussed
below, we do not enter into derivative financial instrument transactions for
trading or other speculative purposes. We also do not engage in transactions in
foreign currencies that could expose us to market risk. Our exposure to market
risk is limited primarily to the fluctuating interest rates associated with
variable rate indebtedness.
In July 2007, we entered into an interest rate
swap agreement that effectively fixes the interest rate on $300.0 million
of our variable rate indebtedness at 7.47% for three years starting August 1,
2007. The fair value of our interest rate swap was a $11.7 million liability at
September 30, 2009. A hypothetical increase of 100 basis points in average
market interest rates would increase the fair value of our interest rate swap
by approximately $3.0 million. A decrease of 100 basis points in average
market interest rates would decrease the fair value of our interest rate swap
by approximately $3.0 million. A prospective increase of 100 basis points
in the interest rate applicable to the remaining $175.0 million of
variable rate indebtedness would result in an increase of approximately
$1.8 million in our annual interest expense. At September 30, 2009,
after consideration of the interest rate swap described above, approximately
37% of our debt is subject to variable interest rates.
Item 4. Controls and Procedures.
Each of our Chief Executive Officer and Chief
Financial Officer has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this quarterly report.
Based on such evaluation, such officers have concluded that, as of the end of
the period covered by this quarterly report, our disclosure controls and
procedures are effective.
We place reliance on Sprint PCS to adequately design
its internal controls with respect to the processes established to provide
financial information and other information to us and the other PCS Affiliates
of Sprint. To address this issue, Sprint engages an independent registered
public accounting firm to perform a periodic evaluation of these controls and
to provide a Report on Controls Placed in Operation and Tests of Operating
Effectiveness for Affiliates under guidance provided in Statement of Auditing
Standards No. 70. This report is provided to us annually.
There have been no changes in our internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended September 30,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
See
Managements Discussion and Analysis of Financial Condition and Results of
Operations Commitments and Contingencies of this report.
In
addition to the above, from time to time, we are involved in various legal
proceedings relating to claims arising in the ordinary course of business. We are not currently a party to any such
legal proceedings, the outcome of which, individually or in the aggregate, is
expected to have a material adverse effect on our business, financial condition
or results of operations.
Item 1A. Risk Factors.
You should
carefully consider the risks and uncertainties described in Part I, Item
1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31,
2008 and the updated risk factors below as well as the other information in our
subsequent filings with the SEC, including this Quarterly Report on Form 10-Q.
Our business, financial condition, results of operations and stock price could
be materially adversely affected by any of these risks. The risks described in
our Annual Report on Form 10-K and below are not the only ones facing us.
Additional risks and uncertainties that are currently unknown to us or that we
currently consider to be immaterial may also impair our business or adversely
affect our financial condition, results of operations and stock price.
Risks Related to the Offer and
related Merger with Sprint
The market price of
our common stock has been, and may continue to be, materially affected by the
Offer.
The current market price of our common stock reflects,
among other things, the commencement and anticipated completion of the Offer.
The current market price is higher than the price before the Offer was
announced on October 19, 2009. To the extent that the current market price
of our common stock reflects market assumptions that the Offer will be
completed, it is possible that the price of our common stock could decline if
these market assumptions are not realized. There are a number of conditions
precedent to the completion of the Offer, and legal proceedings have been
brought against the Company seeking to enjoin the closing of the Offer. However, there can be no assurance in this
regard or as to any other forward-looking statements or matters relating to our
stock price
46
Table of Contents
or otherwise, which are subject to numerous
uncertainties and matters beyond the control of the Company, including the
closing conditions set forth in the Merger Agreement. In addition, please note
that the Company has published a Solicitation/Recommendation Statement on
Schedule 14D-9 in accordance with the requirements of the Securities Exchange
Act of 1934 and filed such Schedule 14D-9 with the Securities and Exchange
Commission, which contains the recommendation of the board of directors of the
Company with respect to the Offer. The statements in this report are not a
solicitation or recommendation of the Company to its stockholders in connection
with the proposed Offer, and stockholders should carefully review the
Solicitation/Recommendation Statement before making any decision as to the
Offer.
Uncertainties
associated with the proposed Offer may cause a loss of employees and may
otherwise materially adversely affect our business operations.
Our future results of operations depend in large part
upon our ability to retain our current skilled and qualified employees and to
attract new employees. The failure to continue to attract and retain such
individuals could materially adversely affect our ability to compete. Our
executive officers have employment agreements with change in control severance
provisions. We also have a special severance
program for employees and additional retention agreements with select employees
all with change in control severance provisions. Despite this program and these agreements, it
is uncertain whether we have provided our employees with sufficient financial
incentives to continue their employment through the date of consummation of the
Merger. Employees may decide to seek
employment elsewhere on the assumption that the transactions contemplated by
the Merger Agreement will be consummated.
In addition, our retention of current employees and ability to attract
prospective employees may be adversely affected by their perception of
uncertainty about their continued roles with Sprint if the proposed Merger is
consummated. An inability to retain key personnel during the period of the
Offer could have an adverse effect on our ability to continue to operate the
business as an independent entity in the event the proposed Merger is not
consummated.
The Merger
Agreement limits our ability to pursue an alternative acquisition proposal to
the Merger and requires the payment of a termination fee of $12.5 million if we
do so.
The Merger Agreement prohibits us from soliciting,
initiating, encouraging or facilitating certain alternative acquisition
proposals with any third party, subject to exceptions set forth in the Merger
Agreement. The Merger Agreement also provides for the payment of a termination
fee of $12.5 million if the Merger Agreement is terminated in certain
circumstances in connection with a third party initiating a competing
acquisition proposal for us, or in the event that a majority of our shares of
common stock are not tendered in the Offer. These provisions limit our ability
to pursue offers from third parties that could result in greater value to our stockholders.
The obligation to pay the termination fee also may discourage a third party
from pursuing an alternative acquisition proposal. Should the Merger Agreement
be terminated in circumstances under which the termination fee is payable, the
payment could have material and adverse consequences to our financial condition
and operations after such time.
The Merger
Agreement contains restrictive covenants that may limit our ability to respond
to changes in market conditions or pursue business opportunities.
The Merger Agreement contains restrictive covenants
that limit our ability to take certain significant actions during the period
prior to the completion of the proposed Offer. Although the Merger Agreement
provides that Sprint will not unreasonably withhold its consent to us taking
otherwise prohibited actions, there can be no assurances that Sprint will grant
such consent. These restrictions may materially adversely affect our ability to
react to changes in market conditions or take advantage of business
opportunities, either of which could have a material and adverse effect on the
prospects of our business, which could be detrimental to our stockholders in
the event the proposed Merger is not completed.
Before consummation
of the Merger, Sprint may act in ways that are not in compliance with our
affiliation agreements.
Before the consummation of the Merger, Sprint may act
in ways that are not in compliance with our affiliation agreements. Although we intend to continue to seek Sprints
full compliance with these agreements through the completion of the Merger,
Sprint may nevertheless attempt to cease providing certain contractually
obligated services or otherwise cease to satisfy its responsibilities under the
affiliation agreements. We rely on
Sprint to provide numerous services in the operation of our business. In anticipation of the consummation of the
Merger, Sprint may cease to provide its obligated services under the
Affiliation Agreements, or it may reduce the level of resources it commits to the
provision of these services.
Additionally, Sprint may breach the exclusivity provisions of our
affiliation agreements in new and unforeseen ways before consummation of the
Merger. Any failure by Sprint to fully
satisfy its obligations as to services provided, exclusivity or otherwise under
our affiliation agreements would have an adverse effect on our business and
results of operations, particularly if the Merger were not to consummate.
47
Table of Contents
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
The
following table provides information about shares of common stock the Company
acquired during the third quarter of 2009:
Issuer Purchases of Equity
Securities
|
|
Total number of shares
purchased (a)
|
|
Average price paid
per share
|
|
Total number of shares
purchased as part of publicly
announced plans or
programs (a)
|
|
Maximum number (or
approximate dollar value) of
shares that may yet be purchased
under the plans or programs (a)
|
|
July 1,
2009 to July 31, 2009
|
|
87,825
|
|
$
|
15.36
|
|
87,825
|
|
$
|
8,927,173
|
|
August 1,
2009 to August 31, 2009
|
|
42,788
|
|
$
|
16.90
|
|
42,788
|
|
$
|
8,203,988
|
|
September 1,
2009 to September 30, 2009 (b)
|
|
127,720
|
|
$
|
17.45
|
|
127,351
|
|
$
|
5,981,314
|
|
Total
|
|
258,333
|
|
$
|
16.65
|
|
257,964
|
|
$
|
5,981,314
|
|
(a)
On January 30,
2009, the Companys Board of Directors authorized the repurchase of up to
$15.0 million of the Companys common stock in a stock repurchase program
during the 12-month period beginning on the date of authorization. The Company
may purchase shares from time to time in open market or privately negotiated
transactions at prices deemed appropriate by the management, depending on
market conditions, applicable laws and other factors. The stock repurchase
program does not require the Company to repurchase any specific number of
shares and may be discontinued at any time.
Pursuant to the terms of the Merger Agreement discussed in Item 2 Recent
Developments Proposed Merger, as of October 18, 2009, the Company is
not permitted to repurchase shares of its common stock on or after such date.
(b)
Includes
369 shares withheld to satisfy certain tax withholding obligations in
connection with vesting of restricted stock as permitted by the iPCS Third
Amended and Restated 2004 Long-Term Incentive Plan.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4. Submission of Matters to a
Vote of Security Holders.
None.
Item 5. Other Information.
None.
48
Table of Contents
Item 6. Exhibits.
Exhibit
Number
|
|
Description
|
2.1
|
|
Agreement and Plan of Merger, dated as of
October 18, 2009, among Sprint Nextel Corporation, Ireland Acquisition
Corporation and iPCS, Inc. (Incorporated by reference to
Exhibit 2.1 to the Form 8-K filed by iPCS, Inc. on
October 19, 2009)
|
2.2
|
|
Stockholders Agreement, dated as of October 18,
2009, among Sprint Nextel Corporation, Apollo Investment Fund IV, L.P.,
Apollo Overseas Partners IV, L.P., Timothy M. Yager, Stebbins B.
Chandor, Jr., Timothy G. Biltz and Mikal J. Thomsen (Incorporated by
reference to Exhibit 2.2 to the Form 8-K filed by iPCS, Inc.
on October 19, 2009)
|
3.1
|
|
Second Restated Certificate of Incorporation of iPCS, Inc.
(Incorporated by reference to Exhibit 3.1 to the Form 8-K filed by
iPCS, Inc. on July 1, 2005)
|
3.2
|
|
Amended and Restated Bylaws of iPCS, Inc. (Incorporated by
reference to Exhibit 3.2 to the Form 10-QT filed by iPCS, Inc.
on February 14, 2006)
|
3.3
|
|
Amendment to the Amended and Restated Bylaws of iPCS, Inc.
(Incorporated by reference to Exhibit 99.1 to the Form 8- K filed
by iPCS, Inc. on January 4, 2008)
|
3.4
|
|
Certificate of Incorporation of iPCS Wireless, Inc.
(Incorporated by reference to Exhibit 3.4 to the Form S-4 filed by
iPCS, Inc. on January 8, 2001)
|
3.5
|
|
Bylaws of iPCS Wireless, Inc. (Incorporated by reference to
Exhibit 3.5 to the Form S-4 filed by iPCS, Inc. on January 8,
2001)
|
3.6
|
|
Certificate of Incorporation of iPCS Equipment, Inc.
(Incorporated by reference to Exhibit 3.6 to the Form S-4 filed by
iPCS, Inc. on January 8, 2001)
|
3.7
|
|
Bylaws of iPCS Equipment, Inc. (Incorporated by reference to
Exhibit 3.7 to the Form S-4 filed by iPCS, Inc. on
January 8, 2001)
|
3.8
|
|
Articles of Organization of Bright Personal Communications
Services, LLC (Incorporated by reference to Exhibit 3.7 to the
Form S-1 filed by iPCS, Inc. on August 11, 2005)
|
3.9
|
|
Operating Agreement of Bright Personal Communications
Services, LLC (Incorporated by reference to Exhibit 3.8 to the
Form S-1 filed by iPCS, Inc. on August 11, 2005)
|
3.10
|
|
Articles of Incorporation of Horizon Personal
Communications, Inc. (Incorporated by reference to Exhibit 3.9 to
the Form S-1 filed by iPCS, Inc. on August 11, 2005)
|
3.11
|
|
Regulations of Horizon Personal Communications, Inc.
(Incorporated by reference to Exhibit 3.10 to the Form S-1 filed by
iPCS, Inc. on August 11, 2005)
|
4.1
|
|
Amended and Restated Common Stock Registration Rights Agreement,
dated as of June 30, 2005, by and among iPCS, Inc., affiliates of
Silver Point Capital, affiliates of AIG Global Investment Corp., the Timothy
M. Yager 2001 Trust, Apollo Investment Fund IV, L.P. and Apollo Overseas
Partners IV, L.P. (Incorporated by reference to Exhibit 99.1 to the
Form 8-K filed by iPCS, Inc. on July 1, 2005)
|
4.2
|
|
First Lien Indenture, dated as of April 23, 2007, by and among
iPCS, Inc., the Guarantors and U.S. Bank National Association, as
trustee (Incorporated by reference to Exhibit 99.3 to the Form 8-K
filed by iPCS, Inc. on April 25, 2007)
|
4.3
|
|
Second Lien Indenture, dated as of April 23, 2007, by and among
iPCS, Inc., the Guarantors and U.S. Bank National Association, as
trustee (Incorporated by reference to Exhibit 99.4 to the Form 8-K
filed by iPCS, Inc. on April 25, 2007)
|
4.4
|
|
First Lien Security Agreement, dated as of April 23, 2007, made
by iPCS, Inc. and the Guarantors in favor of U.S. Bank National
Association, as collateral agent (Incorporated by reference to
Exhibit 99.7 to the Form 8-K filed by iPCS, Inc. on
April 25, 2007)
|
4.5
|
|
Second Lien Security Agreement, dated as of April 23, 2007, made
by iPCS, Inc. and the Guarantors in favor of U.S. Bank National
Association, as collateral agent (Incorporated by reference to
Exhibit 99.8 to the Form 8-K filed by iPCS, Inc. on
April 25, 2007)
|
4.6
|
|
Intercreditor Agreement, dated as of April 23, 2007, between
U.S. Bank National Association, as first lien collateral agent and U.S. Bank
National Association, as second lien collateral agent. (Incorporated by
reference to Exhibit 99.9 to the Form 8-K filed by iPCS, Inc.
on April 25, 2007)
|
4.7
|
|
First Amendment to the First Lien Security Agreement, dated as of
October 10, 2007, made by iPCS, Inc. and the Guarantors in favor of
U.S. Bank National Association, as collateral agent (Incorporated by
reference to Exhibit 10.1 to the Form 10-Q filed by iPCS, Inc.
on November 8, 2007)
|
4.8
|
|
First Amendment to the Second Lien Security Agreement, dated as of
October 10, 2007, made by iPCS, Inc. and the Guarantors in favor of
U.S. Bank National Association, as collateral agent (Incorporated by
reference to Exhibit 10.2 to the Form 10-Q filed by iPCS, Inc.
on November 8, 2007)
|
10.1
|
|
Settlement Agreement and Mutual Release, dated as of
October 18, 2009, among Sprint Nextel Corporation, WirelessCo L.P.,
Sprint Spectrum L.P., SprintCom, Inc., Sprint Communications Company,
L.P., Nextel Communications, Inc., PhillieCo L.P., APC PCS LLC, Horizon
Personal Communications, Inc., Bright Personal Communications Services,
LLC, iPCS Wireless, Inc. and iPCS, Inc. (Incorporated by reference
to Exhibit 10.1 to the Form 8-K filed by iPCS, Inc. on
October 19, 2009)
|
31.1*
|
|
Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
31.2*
|
|
Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
49
Table of Contents
Exhibit
Number
|
|
Description
|
32.1*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
*
Filed herewith.
50
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
|
iPCS, Inc.
|
|
|
|
|
By:
|
/s/ TIMOTHY M. YAGER
|
|
|
Timothy M. Yager
|
|
|
President and Chief Executive Officer (Principal Executive Officer)
|
|
|
|
Date: November 3, 2009
|
|
|
|
By:
|
/s/ STEBBINS B. CHANDOR, JR.
|
|
|
Stebbins B. Chandor, Jr.
|
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
|
|
Date: November 3, 2009
|
|
|
51
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