10-Q 1 a06-11622_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2006

 

Or

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period       from to 

 

Commission File Number 000-51844

 

 

iPCS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-4350876

(State or other jurisdiction of incorporation or

 

(I.R.S. Employer Identification No.)

organization)

 

 

 

 

 

1901 N. Roselle Road, Schaumburg, Illinois

 

60195

(Address of principal executive offices)

 

(Zip code)

 

(847) 885-2833

(Registrant’s 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 ý  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer ý

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No ý

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ý  No o

 

As of May 9, 2006, there were 16,700,750 shares of common stock, $0.01 par value per share, outstanding.

 

 


 

TABLE OF CONTENTS

 

PART I

 

 

   ITEM 1.

FINANCIAL INFORMATION

3

 

FINANCIAL STATEMENTS

3

 

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2006 AND SEPTEMBER 30, 2005 (UNAUDITED)

3

 

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2006 AND MARCH 31, 2005 (UNAUDITED)

4

 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2006 AND MARCH 31, 2005 (UNAUDITED)

5

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6

   ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

17

   ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

32

   ITEM 4.

CONTROLS AND PROCEDURES

32

PART II

OTHER INFORMATION

33

   ITEM 1.

LEGAL PROCEEDINGS

33

   ITEM 1A.

RISK FACTORS

33

   ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

36

   ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

36

   ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

36

   ITEM 5.

OTHER INFORMATION

36

   ITEM 6.

EXHIBITS

37

SIGNATURES

 

39

CERTIFICATIONS

 

 

 


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

iPCS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Dollars in thousands, except share and per share amounts)

 

 

 

March 31,
2006

 

September 30,
2005 (a)

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

114,910

 

$

98,107

 

Investments

 

—

 

16,700

 

Accounts receivable, net of allowance for doubtful accounts of $3,608 and $3,653, respectively

 

27,442

 

25,601

 

Receivable from Sprint (Note 4)

 

36,150

 

30,837

 

Inventories, net of reserves for excess/obsolescence of $412 and $338, respectively (Note 4)

 

3,325

 

3,179

 

Prepaid expenses

 

6,345

 

5,717

 

Other current assets

 

3,220

 

4,092

 

Total current assets

 

191,392

 

184,233

 

Property and equipment, net (Note 5)

 

138,774

 

153,504

 

Financing costs

 

8,791

 

9,590

 

Customer activation costs

 

2,045

 

1,003

 

Intangible assets, net (Note 6)

 

159,821

 

178,800

 

Goodwill (Note 6)

 

146,391

 

146,391

 

Other assets

 

432

 

469

 

Total assets

 

$

647,646

 

$

673,990

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

5,595

 

$

4,322

 

Accrued expenses

 

26,347

 

33,275

 

Payable to Sprint (Note 4)

 

50,783

 

41,135

 

Deferred revenue

 

10,882

 

10,486

 

Current maturities of long-term debt and capital lease obligations (Note 7)

 

12

 

17

 

Total current liabilities

 

93,619

 

89,235

 

Customer activation fee revenue

 

2,045

 

1,003

 

Other long-term liabilities

 

9,009

 

9,112

 

Long-term debt and capital lease obligations, excluding current maturities (Note 7)

 

303,515

 

304,558

 

Total liabilities

 

408,188

 

403,908

 

Commitments and contingencies (Note 10)

 

—

 

—

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, par value $.01 per share; 25,000,000 shares authorized; none issued

 

—

 

—

 

Common stock, par value $.01 per share; 75,000,000 shares authorized, 16,698,366 and 16,635,482 shares issued and outstanding, respectively

 

167

 

166

 

Additional paid-in-capital

 

330,391

 

328,202

 

Unearned compensation

 

—

 

(1,372

)

Accumulated deficiency

 

(91,100

)

(56,914

)

Total stockholders’ equity

 

239,458

 

270,082

 

Total liabilities and stockholders’ equity

 

$

647,646

 

$

673,990

 

 

See Notes to unaudited consolidated financial statements.

 

(a) Derived from the Company’s audited financial statements as of September 30, 2005.

 

3


 

iPCS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 (Dollars in thousands, except per share data)

 

 

 

For the Three Months Ended

 

 

 

March 31, 2006

 

March 31, 2005

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Service revenue

 

$

75,406

 

$

39,094

 

Roaming revenue

 

33,627

 

14,522

 

Equipment and other

 

3,452

 

1,838

 

Total revenues

 

112,485

 

55,454

 

Operating Expenses:

 

 

 

 

 

Cost of service and roaming (exclusive of depreciation, as shown separately below)

 

(65,021

)

(30,415

)

Cost of equipment

 

(9,529

)

(6,158

)

Selling and marketing

 

(16,760

)

(8,308

)

General and administrative

 

(7,130

)

(2,014

)

Depreciation (Note 5)

 

(14,414

)

(15,302

)

Amortization of intangible assets (Note 6)

 

(9,489

)

(3,050

)

Loss on disposal of property and equipment

 

(237

)

(32

)

Total operating expenses

 

(122,580

)

(65,279

)

Operating loss

 

(10,095

)

(9,825

)

Interest income

 

1,183

 

365

 

Interest expense

 

(8,121

)

(4,980

)

Other income

 

33

 

4

 

Loss before benefit from income taxes

 

(17,000

)

(14,436

)

Benefit from income taxes

 

—

 

—

 

Net loss

 

$

(17,000

)

$

(14,436

)

Basic and diluted loss per share of common stock

 

 

 

 

 

Loss available to common stockholders

 

$

(1.02

)

$

(1.56

)

Weighted average common shares outstanding

 

16,687,039

 

9,269,166

 

 

See Notes to unaudited consolidated financial statements.

 

4


 

iPCS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(Dollars in thousands)

 

 

 

For the Three Months Ended

 

 

 

March 31, 2006

 

March 31, 2005

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net loss

 

$

(17,000

)

$

(14,436

)

Adjustments to reconcile net loss to net cash flows from operating activities:

 

 

 

 

 

Loss on disposal of property and equipment

 

237

 

32

 

Depreciation and amortization

 

23,903

 

18,352

 

Non-cash interest expense net of amortization of debt fair value adjustment

 

(162

)

224

 

Stock-based compensation expense

 

463

 

23

 

Provision for doubtful accounts

 

1,391

 

439

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,282

 

(949

)

Receivable from Sprint

 

8,044

 

554

 

Inventories, net

 

258

 

(81

)

Prepaid expenses, other current and long term assets

 

(550

)

(620

)

Accounts payable, accrued expenses and other long term liabilities

 

894

 

5,311

 

Payable to Sprint

 

(9,421

)

(1,266

)

Deferred revenue

 

935

 

481

 

Net cash flows from operating activities

 

11,274

 

8,064

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchases of property and equipment

 

(8,382

)

(4,182

)

Proceeds from disposition of fixed assets

 

194

 

646

 

Net cash flows from investing activities

 

(8,188

)

(3,536

)

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from the exercise of stock options

 

990

 

—

 

Payments on capital lease obligations

 

(3

)

(2

)

Debt financing costs

 

—

 

(52

)

Net cash flows from financing activities

 

987

 

(54

)

Net increase in cash and cash equivalents

 

4,073

 

4,474

 

Cash and cash equivalents at beginning of period

 

110,837

 

59,958

 

Cash and cash equivalents at end of period

 

$

114,910

 

$

64,432

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information- cash paid for interest

 

$

7,109

 

$

—

 

Supplemental disclosure for non-cash investing activities:

 

 

 

 

 

Capitalized interest

 

$

47

 

$

—

 

Accounts payable and accrued expenses incurred for the acquisition of property, equipment and construction in progress

 

638

 

512

 

 

See Notes to unaudited consolidated financial statements.

 

5


 

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 a separate affiliation agreement with Sprint PCS, the operator of a 100% digital personal communications service (“PCS”) wireless network with licenses to provide voice and data service to the entire United States population using a single frequency band and a single technology.

 

iPCS, Inc. was formed in March 2000 as a holding company for iPCS Wireless. iPCS Wireless, as the successor to Illinois PCS, LLC, became a PCS affiliate of Sprint in 1999. Through this affiliation agreement, as amended, iPCS has the exclusive right to market and provide Sprint PCS products and services in 40 markets in Illinois, Michigan, Iowa, and eastern Nebraska. On November 30, 2001, the Company was acquired by AirGate PCS, Inc. (“AirGate”), another PCS Affiliate of Sprint. iPCS was designated as an unrestricted subsidiary of AirGate and both companies operated as separate business entities. On February 23, 2003, the Company and its subsidiaries filed for Chapter 11 bankruptcy protection. On October 17, 2003, AirGate irrevocably transferred its ownership of iPCS to a trust, the beneficial owners of which trust were AirGate’s stockholders at the date of transfer. AirGate retained no ownership interest in the trust or the Company. Upon the Company’s emergence from bankruptcy on July 20, 2004, iPCS’s common stock held by the trust was cancelled and the trust terminated by its terms.

 

On July 1, 2005, iPCS completed a merger with Horizon PCS, Inc. (“Horizon PCS”), another PCS Affiliate of Sprint, in which Horizon PCS merged with and into iPCS, Inc., with iPCS, Inc. as the surviving corporation (see Note 3). Through its two affiliation agreements with Sprint PCS, two wholly owned subsidiaries of Horizon PCS have the exclusive right to market and provide Sprint PCS products and services in 40 markets in Ohio, Indiana, Tennessee, Michigan, New York, New Jersey, Maryland, Pennsylvania, and West Virginia.

 

In February 2006, the Company changed its fiscal year-end from September 30 to December 31 commencing in 2006. The Company’s 2005 fiscal year ended on September 30, 2005.

 

The unaudited consolidated balance sheet as of March 31, 2006, the unaudited consolidated statements of operations for the three months ended March 31, 2006 and 2005, the unaudited consolidated statements of cash flows for the three months ended March 31, 2006 and 2005 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 Company’s 2005 Annual Report on Form 10-K which includes information and disclosures not presented herein. All significant intercompany accounts and transactions have been eliminated in consolidation. In the opinion of management, the unaudited consolidated financial statements contain all of the adjustments, consisting only of normal recurring adjustments, 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 months ended March 31, 2006, are not indicative of the results that may be expected for the full year 2006.

 

The PCS market is characterized by significant risks as a result of rapid changes in technology and increasing competition. The Company’s continuing operations are dependent upon Sprint’s ability to perform its obligations under the affiliation agreements. In addition, the Company must be able to attract and maintain a sufficient customer base and achieve satisfactory growth while successfully managing operations to generate enough cash from operations to meet future obligations. Changes in technology, increased competition, or the inability to obtain required financing or achieve break-even operating cash flow, among other factors, could have an adverse effect on the Company’s financial position and results of operations.

 

Certain reclassifications have been made to the Consolidated Statement of Operations for the three months ended March 31, 2005 to conform to the current year presentation.

 

(2)  Summary of Significant Accounting Policies

 

Loss Per Share:

 

Basic and diluted loss per share for the Company are calculated by dividing the net loss available to common stockholders by

 

6


 

the weighted average number of shares of common stock of the Company. The calculation was made in accordance with SFAS No. 128, “Earnings Per Share.” The basic and diluted loss per share are the same because the inclusion of the incremental potential common shares from any assumed exercise of stock options is antidilutive. Potential common shares excluded from the loss per share computations for the three months ended March 31, 2006 and 2005 were 727,766 and 620,500, respectively.

 

(3)  Merger with Horizon PCS

 

On July 1, 2005, the Company completed its tax-free stock for stock merger transaction with Horizon PCS in which Horizon PCS merged with and into iPCS, Inc. with iPCS, Inc. as the surviving corporation. Horizon PCS was a PCS Affiliate of Sprint whose territory included 40 markets in nine contiguous states. The transaction was accounted for under the purchase method and the results of Horizon PCS have been included in the Company’s consolidated financial statements since the acquisition date.

 

The unaudited pro forma condensed consolidated statement of operations for the three months ended March 31, 2005, set forth below, present the results of operations as if the merger had occurred on January 1, 2005 and are not necessarily indicative of future results or actual results that would have been achieved had the acquisition occurred as of the beginning of such period.

 

 

 

For the Three Months
Ended
March 31, 2005

 

 

 

 

 

Total revenues (in thousands)

 

$

98,418

 

Net loss (in thousands)

 

(26,468

)

Basic and diluted loss per share of common stock

 

$

(1.63

)

Weighted average shares outstanding

 

16,231,926

 

 

(4)  Sprint Agreements

 

Under the Sprint agreements, Sprint provides the Company significant support services such as customer service, billing, long distance transport services, national network operations support, inventory logistics support, use of the Sprint and Sprint PCS brand name, national advertising, national distribution and product development. Additionally, the Company derives substantial roaming revenue when wireless customers of Sprint and other PCS Affiliates of Sprint incur minutes of use in the Company’s territories and incurs expense to Sprint and to other PCS Affiliates of Sprint when the Company’s customers incur minutes of use in the territories of Sprint and other PCS Affiliates of Sprint. Cost of service and roaming transactions with Sprint include the 8% affiliation fee, long distance, roaming expenses, billing support and customer care support. Cost of equipment relates to inventory sold by the Company that was purchased from Sprint under the Sprint agreements. Selling and marketing transactions relate to subsidized costs on wireless handsets and commissions under Sprint’s national distribution program.

 

For both the three months ended March 31, 2006 and 2005, approximately 97% of the Company’s revenue was derived from data provided by Sprint. Of the Company’s cost of service and roaming, approximately 68% and 69% for the three months ended March 31, 2006, and 2005, respectively, was derived from data provided by Sprint. The Company reviews all charges from Sprint and disputes certain of these charges in cases where the Company does not receive enough supporting detail to validate the charges or it does not believe Sprint can charge the Company for certain expenses under the terms of the Sprint agreements. At March 31, 2006 and September 30, 2005, the Company had approximately $0.1 million in disputed charges.

 

7


 

Amounts relating to the Sprint agreements for the three months ended March 31, 2006 and 2005 are as follows (in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31, 2006

 

March 31, 2005

 

Amounts included in the Consolidated Statements of Operations:

 

 

 

 

 

Service revenue

 

$

75,406

 

$

39,094

 

Roaming revenue

 

$

33,627

 

$

14,522

 

Cost of service and roaming:

 

 

 

 

 

Roaming

 

$

23,087

 

$

10,174

 

Customer service

 

10,679

 

5,395

 

Affiliation fees

 

6,052

 

3,086

 

Long distance

 

2,962

 

1,541

 

Other

 

1,450

 

727

 

Total cost of service and roaming

 

$

44,230

 

$

20,923

 

Cost of equipment

 

$

9,529

 

$

6,158

 

Selling and marketing

 

$

5,157

 

$

2,159

 

 

 

 

March 31, 2006

 

September 30, 2005

 

Amounts included in the Consolidated Balance Sheets:

 

 

 

 

 

Receivable from Sprint

 

$

36,150

 

$

30,837

 

Inventories, net

 

3,325

 

3,179

 

Payable to Sprint

 

50,783

 

41,135

 

 

(5)  Property and Equipment

 

Property and equipment consists of the following at March 31, 2006 and September 30, 2005 (in thousands):

 

 

 

March 31, 2006

 

September 30, 2005

 

Network assets

 

$

185,585

 

$

177,200

 

Computer equipment

 

3,577

 

1,603

 

Furniture, fixtures, and office equipment

 

6,368

 

5,105

 

Vehicles

 

396

 

396

 

Construction in progress

 

10,039

 

10,105

 

Total property and equipment

 

205,965

 

194,409

 

Less accumulated depreciation and amortization

 

(67,191

)

(40,905

)

Total property and equipment, net

 

$

138,774

 

$

153,504

 

 

On March 21, 2006, the Company amended the payment terms of the letter of agreement with Nortel Networks to replace the Motorola equipment currently deployed in the Company’s Pennsylvania, New York, New Jersey and Maryland markets with Nortel equipment (see Note 10). This amendment accelerated payments for equipment totaling $4.0 million from 2007 to 2006; thereby, reducing  the original timeline to complete this project. Because of this amendment, the estimated remaining useful life of the Motorola equipment was shortened by approximately nine months, resulting in additional depreciation expense of approximately $2.1 million recorded in the three months ended March 31, 2006.

 

(6)  Intangible Assets and Goodwill

 

As a result of the Company’s reorganization in 2004 and in accordance with fresh-start accounting under SOP 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”, the Company revalued its assets to their estimated fair values and the Company recorded intangible assets of $19.8 million relating to the fair value of the customer base and $62.1 million relating to the fair value of the right to provide service under the Sprint affiliation agreements.

 

In connection with the merger with Horizon PCS (see Note 3), the Company allocated portions of the purchase price to identifiable intangible assets consisting of the right to provide service under the Sprint affiliation agreements, the acquired customer base, and an FCC license for a small market in Ohio. The amount allocated to the right to provide service under the Sprint affiliation agreements, the customer base and the FCC license was $67.0 million, $53.0 million, and $1.5 million, respectively. In addition, the excess of the purchase price over the fair value of the net assets acquired, including these identifiable intangible assets, which totaled $146.4 million was recorded as goodwill. The goodwill is not deductible for income taxes.

 

8


 

The intangible assets relating to the customer base are being amortized over the estimated average life of a customer of 30 months. The intangible assets for the right to provide service under the Sprint affiliation agreements are being amortized over the remaining term of the respective agreements. The FCC license has an indefinite life and is not being amortized.

 

The weighted average amortization period, gross carrying amount, accumulated amortization and net carrying amount of intangible assets at March 31, 2006 and September 30, 2005 are as follows (in thousands):

 

 

 

March 31, 2006

 

 

 

Weighted Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Non-amortized intangible asset:

 

 

 

 

 

 

 

 

 

FCC license

 

 

 

$

1,500

 

$

—

 

$

1,500

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

Right to provide service under the Sprint affiliation agreements

 

167 months

 

126,521

 

(10,987

)

115,534

 

Customer base

 

30 months

 

71,956

 

(29,169

)

42,787

 

 

 

117 months

 

$

199,977

 

$

(40,156

)

$

159,821

 

 

 

 

September 30, 2005

 

 

 

Weighted Average
Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Value

 

Non-amortized intangible asset:

 

 

 

 

 

 

 

 

 

FCC license

 

 

 

$

1,500

 

$

—

 

$

1,500

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

Right to provide service under the Sprint affiliation agreements

 

167 months

 

126,521

 

(6,399

)

120,122

 

Customer base

 

30 months

 

71,956

 

(14,778

)

57,178

 

 

 

117 months

 

$

199,977

 

$

(21,177

)

$

178,800

 

 

The amortization expense for the three months ended March 31, 2006 and 2005 was $9.5 million and $3.1 million, respectively. Aggregate amortization expense relative to intangible assets for the periods shown will be as follows:

 

Year Ended December 31

 

 

 

2006

 

$

37,958

 

2007

 

30,376

 

2008

 

9,176

 

2009

 

9,176

 

2010

 

9,176

 

Thereafter

 

71,949

 

Total

 

$

167,811

 

 

9


 

(7)  Long-Term Debt

 

Long-term debt consists of the following at March 31, 2006 and September 30, 2005 (in thousands):

 

 

 

March 31, 2006

 

September 30, 2005

 

Senior notes 111/2% $165 million due 2012

 

$

165,000

 

$

165,000

 

Senior notes 113/8% $125 million due 2012

 

125,000

 

125,000

 

Unamortized fair value adjustment for 113/8% senior notes

 

13,132

 

14,169

 

Capital lease obligations

 

395

 

406

 

Total long-term debt and capital lease obligations

 

303,527

 

304,575

 

Less: current maturities

 

(12

)

(17

)

Long-term debt and capital lease obligations, excluding current maturities

 

$

303,515

 

$

304,558

 

 

In connection with the merger of Horizon PCS (see Note 3), the allocation of the purchase price resulted in an increase of the value of the 113/8% senior notes of approximately $14.7 million, which is recorded as long-term debt in the Consolidated Balance Sheets. This amount will be amortized over the remaining life of the 113/8% senior notes as a reduction to interest expense. For the three months ended March 31, 2006, the reduction to interest expense was approximately $0.5 million. This amortization will not increase the principal amount due to the 113/8% senior note holders or reduce the amount of interest owed to the 113/8% senior note holders.

 

The indentures governing the $165.0 million in aggregate principal amount of 111/2% senior notes and the $125.0 million in aggregate principal amount of 113/8% senior notes contain covenants which restrict the Company’s ability to incur additional indebtedness, merge, pay dividends, dispose of its assets, and certain other matters as defined in the indentures. However, the senior notes are subordinated to all secured indebtedness of the Company to the extent of the assets securing such indebtedness, and to any indebtedness of subsidiaries of the Company that do not guarantee the senior notes. For the 111/2% senior notes, interest is payable semi-annually in arrears on May 1 and November 1 to the holders of record on the immediately preceding April 15 and October 15.

 

For the 113/8% senior notes, interest is payable semi-annually in arrears on July 15 and January 15, to the holders of record on the immediately preceding July 1 and January 1.

 

(8)  Income Taxes

 

The Company’s effective income tax rate for the interim periods presented is based on management’s estimate of the Company’s effective tax rate for the applicable year and differs from the federal statutory income tax rate primarily due to nondeductible permanent differences, 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. No benefit for federal income taxes has been recorded for the three months ended March 31, 2006 and 2005 as the net deferred tax asset generated, primarily from temporary differences related to the net operating loss, was offset by a full valuation allowance because it is not considered more likely than not that these benefits will be realized due to the Company’s losses since inception.

 

(9)  Stock-Based Compensation

 

The Company has two long-term incentive plans currently in place. The iPCS 2004 long-term incentive plan, as amended, (the “iPCS Plan”) was approved by the Company’s board of directors as provided by the Company’s plan of reorganization. Under the iPCS Plan, the Company may grant to employees, directors and consultants of the Company incentive and non-qualified stock options, stock appreciation rights, restricted and unrestricted stock awards and cash incentive awards. The total number of shares that may be awarded under this plan is 1.25 million shares of common stock. All of the stock options issued to date under the iPCS Plan have a ten-year life with vesting on a quarterly basis over four years for employees and over one year for directors. The Horizon PCS long-term incentive plan (the “Horizon Plan”) was assumed in connection with the merger with Horizon PCS (see Note 3). Under the Horizon Plan, the Company may grant options to employees and directors. All of the stock options issued under the Horizon Plan to date have a ten-year life and vest equally in six-month increments over three years from the date of grant. The total number of shares that may be granted under the Horizon Plan is 762,227 shares of common stock.

 

Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” utilizing the modified prospective method. Under SFAS No. 123R companies are required to record

 

10


 

compensation expense for all share based payment award transactions measured at fair value. Under the modified prospective method SFAS No. 123R requires compensation cost to be recognized for 1) all share-based compensation expense arrangements granted after the adoption date and 2) all remaining unvested share-based compensation arrangements granted prior to the adoption date. Prior periods have not been restated. The Company uses the Black-Scholes model to value its stock option grants; however, there have been  no stock option grants since the Company adopted SFAS No. 123R.

 

Prior to October 1, 2005, the Company applied APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for its employee and director stock options. The Company did not record any stock-based compensation expense for stock option grants prior to October 1, 2005 because all stock option awards were granted at fair market value; however, there were no stock option grants in the three months ended March 31, 2005. For the three months ended March 31, 2005, the Company recognized $23,000 of stock-based compensation expense related to prior restricted stock grants.

 

The following table shows stock-based compensation expense by type of share-based award for the three months ended March 31, 2006 and 2005 included in the consolidated statements of operations (in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,
2006

 

March 31,
2005

 

Restricted stock

 

$

25

 

$

23

 

Amortization of unearned compensation of stock option awards

 

91

 

—

 

Fair value expense of stock option awards

 

347

 

—

 

Total stock-based compensation

 

$

463

 

$

23

 

 

The following table shows the total remaining unrecognized compensation cost related to: restricted stock grants, unearned compensation of stock option awards, 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:

 

 

 

Total Remaining
Unrecognized
Compensation Cost
(in millions)

 

Weighted Average
Remaining Required
Service Period (in
years)

 

Restricted stock

 

$

0.2

 

2.4

 

Unearned compensation of stock option awards

 

0.5

 

1.5

 

Fair value expense of stock option awards

 

4.4

 

2.3

 

 

Stock-based compensation expense is included in the consolidated statements of operations as follows (in thousands):

 

 

 

For the Three Months Ended

 

 

 

March 31,
2006

 

March 31,
2005

 

Cost of service and roaming

 

$

32

 

$

8

 

Sales and marketing

 

69

 

5

 

General and administrative

 

362

 

10

 

Total stock-based compensation

 

$

463

 

$

23

 

 

The following is a summary of options activity under the Company’s long-term incentive plans for the three months ended March 31, 2006:

 

 

 

Number of Options

 

Weighted-Average
Exercise Price

 

Options outstanding as of December 31, 2005

 

773,086

 

$

16.73

 

Exercised

 

(43,056

)

23.00

 

Forfeited

 

(2,264

)

23.00

 

Options outstanding as of March 31, 2006

 

727,766

 

$

16.34

 

 

11


 

The following is a summary of options outstanding and exercisable at March  31, 2006:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of
Exercise Prices

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual Life
(in years)

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value
(in
thousands)

 

Number
Exercisable

 

Weighted
Average
Remaining
Contractual
Life
(in years)

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value
(in
thousands)

 

$10.27

 

446,875

 

8.30

 

$

10.27

 

 

 

183,908

 

8.30

 

$

10.27

 

 

 

$19.00

 

47,000

 

8.40

 

19.00

 

 

 

18,875

 

8.40

 

19.00

 

 

 

$23.00-$25.60

 

166,141

 

8.55

 

23.57

 

 

 

52,049

 

8.46

 

23.28

 

 

 

$35.00-$40.50

 

67,750

 

9.31

 

36.85

 

 

 

38,016

 

9.29

 

35.62

 

 

 

 

 

727,766

 

8.46

 

$

16.34

 

$

22,310

 

292,848

 

8.47

 

$

16.44

 

$

8,951

 

 

Prior to the adoption of SFAS No. 123R, the Company provided the disclosures required under SFAS No. 123 “Accounting for Stock-Based Compensation.”  For the three months ended March  31, 2005, if compensation expense for the stock option grants had been determined on fair value at the grant date consistent with the requirements of SFAS No. 123, the Company’s net loss and net loss per common share would have been the pro forma amounts below:

 

 

 

Three Months Ended
March 31, 2005

 

Net loss (in thousands):

 

 

 

As reported

 

$

(14,436

)

Plus non-cash stock compensation in accordance with SFAS No. 123

 

(351

)

Pro forma

 

$

(14,787

)

Basic and diluted loss per common share:

 

 

 

As reported

 

$

(1.56

)

Pro forma

 

$

(1.60

)

 

(10)  Commitments and Contingencies

 

Commitments

 

On November 22, 2004, the Company signed a letter of agreement with Nortel Networks to replace the Company’s Lucent network equipment deployed in its Michigan markets with Nortel equipment including one switch, 232 base stations and various additional capacity and network equipment. Under the terms of the agreement, the Company is required to purchase equipment and services totaling approximately $15.2 million and will receive special pricing on future purchases through December 31, 2007. As of March 31, 2006, the Company had purchased the $15.2 million of network equipment required under this agreement. Accordingly, the Company is not required to purchase additional equipment or services under this agreement.

 

In addition, in January 2005, Horizon PCS signed a letter of agreement for $14.0 million with Nortel Networks to replace the Motorola network equipment deployed in its Fort Wayne, Indiana, Chillicothe, Ohio, and Johnson City, Tennessee markets with Nortel equipment including 390 base stations, various additional capacity growth and network equipment. Under the terms of the agreement, the Company is required to purchase equipment and services totaling $13.0 million and will receive special pricing on future purchases through December 31, 2007. As of December 31, 2005, the Company had purchased the $13.0 million of equipment required under this agreement. Accordingly, the Company is not required to purchase additional equipment or services under this agreement.

 

On December 31, 2005, the Company signed a letter of agreement with Nortel Networks to replace the Company’s Motorola equipment currently deployed in its Pennsylvania, New York, New Jersey and Maryland markets with Nortel equipment. Under the terms of the agreement, the Company is required to purchase equipment necessary to replace 425 existing base stations and related network infrastructure, plus various additional equipment to support future network footprint and capacity expansion, totaling approximately $16.5 million, with an option to purchase additional network capacity equipment totaling $0.5 million. On March 21, 2006, the Company amended the terms of this agreement accelerating payments for equipment totaling $4.0 million from 2007 to 2006. As of March 31, 2006, the Company had purchased $3.0 million of the required $16.5 million of equipment under this agreement. Accordingly, the Company is required to purchase an additional $13.5 million of equipment under this agreement.

 

12


 

Litigation

 

On December 15, 2004, Sprint Corporation and Nextel Communications, Inc. announced that they had signed a merger agreement pursuant to which they would merge and combine their operations. Shortly after announcing the merger, Sprint also announced that it would pursue discussions with the PCS Affiliates of Sprint – including the Company – directed toward a modification of their affiliation agreements to address the implications of its merger with Nextel. Although the parties engaged in discussions with respect to such a modification, no agreement has been reached.

 

On July 15, 2005, iPCS Wireless, Inc., a wholly owned subsidiary of iPCS, Inc., filed a complaint against Sprint and Sprint PCS in the Circuit Court of Cook County, Illinois. On July 22, 2005, Horizon Personal Communications, Inc. and Bright Personal Communications Services, LLC, wholly owned subsidiaries of iPCS, Inc., filed a complaint against Sprint and Sprint PCS and Nextel Communications, Inc. in the Court of Chancery of the State of Delaware, New Castle County. The complaints are substantially similar and allege, among other things, that following the consummation of the merger between Sprint and Nextel, Sprint will breach its exclusivity obligations under its affiliation agreements, as amended, with the Company (see Note 4). The Company sought, among other things, a temporary restraining order, a preliminary injunction and a permanent injunction enjoining Sprint and those acting in concert with it from engaging in certain conduct post-closing that would violate the Company’s affiliation agreements with Sprint PCS.

 

On July 18, 2005, in Cook County Circuit Court the Company obtained a temporary restraining order prohibiting Sprint from sharing its confidential information with Nextel in violation of iPCS Wireless’s management agreement and the Company continued the hearing to hear further testimony on its request for additional injunctive relief.

 

On July 28, 2005, iPCS, Inc. and certain of its wholly owned subsidiaries entered into a Forbearance Agreement (the “Agreement”) with Sprint relating to the complaints filed against Sprint. The Agreement sets forth the Company’s agreement that the Company’s subsidiaries would not seek a temporary restraining order or a preliminary injunction against Sprint so long as Sprint operates the Nextel business subject to the limitations set forth in the Agreement. The Agreement contemplates that the parties will proceed as quickly as possible to a full trial on the merits of the complaint seeking a permanent injunction against Sprint. The Agreement expired on January 1, 2006 in the territory managed by iPCS Wireless, Inc., but remains in effect in the legacy Horizon PCS territory until a ruling is issued in the Delaware Court of Chancery.

 

The trial relating to the complaint filed by iPCS Wireless, Inc. against Sprint in Cook County Circuit Court was originally set to commence on December 5, 2005. However, it was continued to early February 2006 and then to early March 2006. The trial in Cook County Circuit Court began on March 9, 2006 and, as of the date of this filing, is ongoing. The Company anticipates that the testimony in the trial will conclude in late May/early June 2006 and it expects a ruling in the second half of 2006.

 

On December 28, 2005, the judge in Cook County Circuit Court denied the Company’s and Sprint’s request for summary judgment; however he agreed with the Company that iPCS Wireless’s management agreement with Sprint would be breached if confidential information were disclosed to any person or entity involved in the operation of Nextel’s network. Accordingly, the judge entered a preliminary non-appealable order of summary judgment as to that aspect of the complaint. The judge’s order is subject to reconsideration during the trial.

 

On January 4, 2006, the judge in the Delaware Court of Chancery issued a memorandum opinion denying the requests for summary judgment of both Sprint and Horizon Personal Communications and Bright Personal Communications Services; however the judge agreed with Sprint that the Company’s claim for declaratory judgment as to the G-Block was not ripe for adjudication. Accordingly, that aspect of the complaint filed by Horizon Personal Communications and Bright Personal Communications Services was dismissed without prejudice. The trial in the Delaware Court of Chancery began on January 9, 2006 and testimony concluded on January 23, 2006. Closing arguments were on April 4, 2006. The Company expects a ruling near the end of the quarter ended June 30, 2006.

 

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 and in connection with the Company’s bankruptcy petition. The Company is 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 the Company’s business, financial condition or results of operations.

 

13


 

(11)  Consolidating Financial Information

 

The 11 1/2 % senior notes and the 113/8 % senior notes are fully, unconditionally and joint and severally guaranteed by the Company’s domestic unrestricted subsidiaries, including iPCS Wireless, Inc., iPCS Equipment, Inc., Horizon Personal Communications, Inc., and Bright Personal Communications Services, LLC, which are wholly owned subsidiaries of iPCS, Inc. The following consolidating financial information as of March 31, 2006 and September 30, 2005 and for the three months ended March 31, 2006 and 2005 is presented for iPCS, Inc., iPCS Wireless, Inc., iPCS Equipment, Inc., Horizon Personal Communications, Inc., and Bright Personal Communications Services, LLC (in thousands):

 

iPCS, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

as of March 31, 2006

 

 

 

iPCS Inc.

 

iPCS
Wireless

 

iPCS
Equipment

 

Horizon
Per Com

 

Bright

 

Eliminations

 

iPCS
Consolidated

 

Cash and cash equivalents

 

$

—

 

$

76,975

 

$

—

 

$

37,464

 

$

471

 

$

—

 

$

114,910

 

Other current assets

 

144,664

 

48,506

 

29,954

 

59,366

 

48,045

 

(254,053

)

76,482

 

Total current assets

 

144,664

 

125,481

 

29,954

 

96,830

 

48,516

 

(254,053

)

191,392

 

Property and equipment, net

 

—

 

68,174

 

11,682

 

42,813

 

16,187

 

(82

)

138,774

 

Goodwill and intangible assets, net

 

—

 

58,024

 

—

 

185,029

 

63,159

 

—

 

306,212

 

Other non-current assets

 

5,463

 

1,422

 

—

 

3,292

 

1,091

 

—

 

11,268

 

Investment in subsidiaries

 

265,488

 

—

 

—

 

—

 

—

 

(265,488

)

—

 

Total assets

 

$

415,615

 

$

253,101

 

$

41,636

 

$

327,964

 

$

128,953

 

$

(519,623

)

$

647,646

 

Current liabilities

 

$

11,157

 

$

219,748

 

$

62

 

$

74,933

 

$

41,854

 

$

(254,135

)

$

93,619

 

Long-term debt

 

165,000

 

383

 

—

 

105,589

 

32,543

 

—

 

303,515

 

Other long-term liabilities

 

—

 

3,477

 

—

 

7,038

 

539

 

—

 

11,054

 

Total liabilities

 

176,157

 

223,608

 

62

 

187,560

 

74,936

 

(254,135

)

408,188

 

Stockholders’ equity (deficiency)

 

239,458

 

29,493

 

41,574

 

140,404

 

54,017

 

(265,488

)

239,458

 

Total liabilities and stockholders’ equity (deficiency)

 

$

415,615

 

$

253,101

 

$

41,636

 

$

327,964

 

$

128,953

 

$

(519,623

)

$

647,646

 

 

iPCS, Inc. and Subsidiaries

Condensed Consolidating Balance Sheet

as of September 30, 2005

 

 

 

iPCS Inc.

 

iPCS
Wireless

 

iPCS
Equipment

 

Horizon
Per Com

 

Bright

 

Eliminations

 

iPCS
Consolidated

 

Cash and cash equivalents

 

$

—

 

$

75,805

 

$

—

 

$

22,112

 

$

190

 

$

—

 

$

98,107

 

Other current assets

 

150,398

 

41,314

 

24,967

 

49,848

 

23,720

 

(204,121

)

86,126

 

Total current assets

 

150,398

 

117,119

 

24,967

 

71,960

 

23,910

 

(204,121

)

184,233

 

Property and equipment, net

 

—

 

72,503

 

15,256

 

48,476

 

17,363

 

(94

)

153,504

 

Goodwill and intangible assets, net

 

—

 

63,868

 

—

 

195,056

 

66,267

 

—

 

325,191

 

Other non-current assets

 

5,912

 

1,033

 

—

 

3,172

 

945

 

—

 

11,062

 

Investment in subsidiaries

 

288,666

 

—

 

—

 

—

 

—

 

(288,666

)

—

 

Total assets

 

$

444,976

 

$

254,523

 

$

40,223

 

$

318,664

 

$

108,485

 

$

(492,881

)

$

673,990

 

Current liabilities

 

$

9,894

 

$

220,007

 

$

29

 

$

42,372

 

$

21,148

 

$

(204,215

)

$

89,235

 

Long-term debt

 

165,000

 

389

 

—

 

106,381

 

32,788

 

—

 

304,558

 

Other long-term liabilities

 

—

 

2,970

 

—

 

6,946

 

199

 

—

 

10,115

 

Total liabilities

 

174,894

 

223,366

 

29

 

155,699

 

54,135

 

(204,215

)

403,908

 

Stockholders’ equity (deficiency)

 

270,082

 

31,157

 

40,194

 

162,965

 

54,350

 

(288,666

)

270,082

 

Total liabilities and stockholders’ equity (deficiency)

 

$

444,976

 

$

254,523

 

$

40,223

 

$

318,664

 

$

108,485

 

$

(492,881

)

$

673,990

 

 

14


 

iPCS, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2006

 

 

 

iPCS Inc.

 

iPCS
Wireless

 

iPCS
Equipment

 

Horizon
Per Com

 

Bright

 

Eliminations

 

iPCS
Consolidated

 

Total revenues

 

$

—

 

$

63,735

 

$

1,279

 

$

31,974

 

$

16,776

 

$

(1,279

)

$

112,485

 

Cost of revenues

 

—

 

(42,741

)

—

 

(22,685

)

(10,403

)

1,279

 

(74,550

)

Selling and marketing

 

—

 

(8,834

)

—

 

(5,260

)

(2,666

)

—

 

(16,760

)

General and administrative

 

(554

)

(3,729

)

(1

)

(2,673

)

(173

)

—

 

(7,130

)

Depreciation and amortization

 

—

 

(8,672

)

(1,395

)

(11,012

)

(2,824

)

—

 

(23,903

)

Gain (loss) on disposal of property and equipment

 

—

 

(205

)

17

 

(55

)

—

 

6

 

(237

)

Total operating expenses

 

(554

)

(64,181

)

(1,379

)

(41,685

)

(16,066

)

1,285

 

(122,580

)

Other, net

 

(4,968

)

33

 

794

 

(2,037

)

(727

)

—

 

(6,905

)

Loss in subsidiaries

 

(11,484

)

—

 

—

 

—

 

—

 

11,484

 

—

 

Net income (loss)

 

$

(17,006

)

$

(413

)

$

694

 

$

(11,748

)

$

(17

)

$

11,490

 

$

(17,000

)

 

iPCS, Inc. and Subsidiaries

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2005

 

 

 

iPCS Inc.

 

iPCS
Wireless

 

iPCS
Equipment

 

Eliminations

 

iPCS
Consolidated

 

Total revenues

 

$

—

 

$

55,454

 

$

1,340

 

$

(1,340

)

$

55,454

 

Cost of revenues

 

—

 

(37,913

)

—

 

1,340

 

(36,573

)

Selling and marketing

 

—

 

(8,308

)

—

 

—

 

(8,308

)

General and administrative

 

(236

)

(1,777

)

(1

)

—

 

(2,014

)

Depreciation and amortization

 

—

 

(16,943

)

(1,409

)

—

 

(18,352

)

Gain (loss) on disposal of property and equipment

 

—

 

(37

)

—

 

5

 

(32

)

Total operating expenses

 

(236

)

(64,978

)

(1,410

)

1,345

 

(65,279

)

Other, net

 

(4,968

)

(274

)

631

 

—

 

(4,611

)

Loss in subsidiaries

 

(9,237

)

—

 

—

 

9,237

 

—

 

Net income (loss)

 

$

(14,441

)

$

(9,798

)

$

561

 

$

9,242

 

$

(14,436

)

 

iPCS, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2006

 

 

 

iPCS Inc.

 

iPCS
Wireless

 

iPCS
Equipment

 

Horizon
Per Com

 

Bright

 

Eliminations

 

iPCS
Consolidated

 

Operating activities

 

$

—

 

$

10,355

 

$

150

 

$

326

 

$

443

 

$

—

 

$

11,274

 

Investing activities

 

—

 

(3,360

)

(150

)

(3,961

)

(717

)

 

 

(8,188

)

Financing activities

 

—

 

987

 

—

 

—

 

—

 

—

 

987

 

Increase (decrease) in cash and cash equivalents

 

—

 

7,982

 

—

 

(3,635

)

(274

)

—

 

4,073

 

Cash and cash equivalents at beginning of period

 

—

 

68,993

 

—

 

41,099

 

745

 

—

 

110,837

 

Cash and cash equivalents at end of period

 

$

—

 

$

76,975

 

$

—

 

$

37,464

 

$

471

 

$

—

 

$

114,910

 

 

15


 

iPCS, Inc. and Subsidiaries

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2005

 

 

 

iPCS Inc.

 

iPCS
Wireless

 

iPCS
Equipment

 

Eliminations

 

iPCS
Consolidated

 

Operating activities

 

$

51

 

$

7,893

 

$

115

 

$

5

 

$

8,064

 

Investing activities

 

—

 

(3,416

)

(115

)

(5

)

(3,536

)

Financing activities

 

(51

)

(3

)

—

 

—

 

(54

)

Increase in cash or cash equivalents

 

—

 

4,474

 

—

 

—

 

4,474

 

Cash and cash equivalents at beginning of period

 

—

 

59,958

 

—

 

—

 

59,958

 

Cash and cash equivalents at end of period

 

$

—

 

$

64,432

 

$

—

 

$

—

 

$

64,432

 

 

16


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 party to our affiliation agreements; (ii) ”Sprint” refers to Sprint Nextel Corporation and its affiliates; (iii) a “PCS Affiliate of Sprint” is an entity whose sole or predominant business is operating (directly or through one or more subsidiaries) a personal communications service business pursuant to affiliation agreements with Sprint Spectrum L.P. 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 issued 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 Form 10-Q. To the extent that the following Management’s 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 risk 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. These forward-looking statements include:

 

•      statements regarding our anticipated revenues, expense levels, liquidity and capital resources and operating losses; and

•      statements regarding expectations or projections about 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:

 

•      our dependence on our affiliation with Sprint;

•      the impact and outcome of our litigation against Sprint, Nextel and Sprint PCS, as well as the impact and outcome of the other litigation involving Sprint, Sprint PCS and various other PCS Affiliates of Sprint;

•      changes in Sprint’s affiliation strategy as a result of the Sprint/Nextel merger and Sprint’s recent acquisitions and announced acquisitions of other PCS Affiliates of Sprint;

•      the ability of Sprint PCS to alter the terms of our affiliation agreements with it, including fees paid or charged to us and other program requirements;

•      our dependence on back office services, such as billing and customer care, provided by Sprint PCS;

•      potential fluctuations in our operating results;

•      changes or advances in technology in general, or specifically related to Sprint and its affiliates;

•      competition in the industry and markets in which we operate;

 

17


 

•      our ability to attract and retain skilled personnel;

•      our potential need for additional capital or the need for refinancing any existing indebtedness;

•      our potential inability to expand our services and related products in the event of substantial increases in demand for these services and related products;

•      changes in government regulation;

•      the competitiveness and impact of Sprint PCS’s pricing plans and PCS products and services on us;

•      our subscriber credit quality;

•      the potential for us to experience a continued high rate of subscriber turnover;

•      inaccuracies in our financial information provided to us by Sprint PCS;

•      our failure to establish and 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;

•      adequacy of bad debt and other reserves;

•      our anticipated future losses;

•      our subscriber purchasing patterns;

•      subscriber satisfaction with our network and operations;

•      availability of an adequate supply of subscriber equipment to Sprint PCS and to us specifically;

•      risks related to future growth and expansion, including subscriber growth;

•      general economic and business conditions; and

•      effects of mergers and consolidations within the wireless telecommunications industry, particularly business combinations involving Sprint Nextel or affiliates of Sprint Nextel, and unexpected announcements or developments from others in the wireless telecommunications industry.

 

New Accounting Pronouncements

 

Effective October 1, 2005, we adopted Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”) using the modified prospective method. The adoption of this standard requires the recognition of compensation expense for all share based payment award transactions measured at fair value. Under the modified prospective method, SFAS No. 123R requires compensation cost to be recognized for 1) all share-based compensation expense arrangements granted after the adoption date and 2) all remaining unvested share-based compensation arrangements granted prior to the adoption date. Results for prior periods have not been restated.

 

Prior to October 1, 2005, we applied APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for our employee and director stock options. We did not record any stock-based compensation expense for stock option grants prior to October 1, 2005 because all stock option awards were granted at fair market value.

 

For the three months ended March 31, 2006, we recorded total stock-based compensation expense of approximately $0.5 million compared to approximately $23,000 for the three months ended March 31, 2005. For more information regarding the impact of the adoption of SFAS No. 123R and the comparison of results of operations for the three months ended March 31, 2006 and March 31, 2005, see Note 9, “Stock-based Compensation” in the notes to our consolidated financial statements found elsewhere in this quarterly report on Form 10-Q.

 

Definitions of Operating Metrics

 

In this “Management’s 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 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 “Management’s 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:

 

18


 

•      Net subscriber additions for the period represented is calculated as the gross new subscribers acquired in the period less the number of subscribers deactivated plus the net subscribers transferred in or out of our markets during the period.

•      Average monthly churn is a measure of the rate at which subscribers based in our territory deactivate service on a voluntary or involuntary basis. We calculate average monthly churn based on the number of subscribers deactivated during the period (net of transfers out of our territory and those who deactivated within 30 days of activation) 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 revenues 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 revenues associated with transactions with new subscribers, and selling and marketing expenses, 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 (usually expressed in millions) 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.

•      Covered population represents the number of residents (usually expressed in millions) 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 “Management’s 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.

 

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 80 markets including markets in Illinois, Michigan, Pennsylvania, New York, Indiana, Iowa, Ohio and Tennessee. The 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), 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 portion of the PCS network of Sprint PCS 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, exclusive co-branded dealers, major national retailers and local third party distributors. Based on the 2000 population counts compiled by the U.S. Census Bureau adjusted by estimated growth rates from third party proprietary demographic databases, as of March 31, 2006, our licensed territory had a total population of approximately 15.0 million residents, of which our wireless network covered approximately 11.4 million residents. At March 31, 2006, we had approximately 508,300 subscribers. We are headquartered in Schaumburg, Illinois.

 

We recognize revenues from our subscribers for the provision of wireless telecommunications services, proceeds from the sale of handsets and accessories through channels controlled by us and fees from Sprint PCS and other wireless service providers and resellers when their subscribers roam onto our network. Sprint PCS retains 8% of all service revenue collected from our subscribers (not including product sales or roaming charges billed to our subscribers) and 8% of all fees collected from other wireless service providers and resellers when their subscribers roam onto our network. We report the amount retained by Sprint PCS as an operating expense. In addition, Sprint PCS bills our subscribers for taxes, handset insurance and Universal Service Fund charges which we do not record. Sprint PCS collects these amounts from the subscribers and remits them to the appropriate entity.

 

19


 

As part of our affiliation agreements with Sprint PCS, we have contracted with Sprint to provide to us back-office services such as subscriber activation, handset logistics, billing, customer care and network monitoring services through December 31, 2006. We elected to obtain these services from Sprint to take advantage of its economies of scale, to accelerate our build-out and market launches and to lower our capital requirements. The cost for these services is primarily on a per subscriber or per transaction basis and is recorded as an operating expense. We have begun discussions with Sprint regarding the terms and conditions under which we would continue to purchase these services from Sprint after December 31, 2006, if at all.

 

Reorganization

 

On February 23, 2003, while we were wholly owned by AirGate, we filed for bankruptcy under Chapter 11 of the Bankruptcy Code. The decision to file was based on a combination of factors, including weakness in the wireless telecommunications industry and the economy generally. In addition, we had experienced a decline in liquidity and cash flow, making it difficult for us to comply with our debt service obligations. We believe that actions taken by Sprint—specifically, decreasing our roaming rate and imposing new and higher fees on us—were the primary reason for the decline in our liquidity. Accordingly, in connection with our bankruptcy filing, we filed a complaint against Sprint and Sprint PCS alleging that Sprint breached its affiliation agreements with us.  As a part of our approved plan of reorganization, all then existing claims against Sprint, including those included in this complaint, were settled.

 

During our bankruptcy we operated our business and managed our assets as debtors-in-possession, subject to the supervision of the bankruptcy court, without obtaining debtor-in-possession financing. This relief provided us the time necessary to reorganize our business, which included slowing subscriber growth to reduce our acquisition costs, increasing our focus on prime subscribers and aligning our operations through cost reductions to compete in our marketplace and to improve our financial results.

 

On July 9, 2004, the bankruptcy court confirmed our plan of reorganization and the plan of reorganization became effective on July 20, 2004. On the effective date we paid a portion of the net proceeds from the senior notes issued in connection with our emergence to satisfy in full in cash our obligations to each of the lenders under our then existing senior secured credit facility and to permanently retire the loans thereunder. The remaining net proceeds from the senior notes was used to satisfy all other secured claims, administrative and other priority claims and unsecured convenience claims and to pay fees and expenses related to the reorganization, as well as for general corporate purposes. Additionally, all of our subordinated claims were discharged and all of our then existing capital stock was cancelled. As a result of the consummation of our reorganization, our senior secured credit facility has been repaid in full in cash and terminated, and our senior discount notes have been cancelled and the holders have received shares of our common stock.

 

Merger with Horizon PCS, Inc.

 

On July 1, 2005, we completed our tax-free stock for stock merger transaction with Horizon PCS, Inc., in which Horizon PCS, Inc. merged with and into iPCS, Inc. with iPCS, Inc. as the surviving corporation. Horizon PCS, Inc. was a PCS Affiliate of Sprint whose territory covered 40 markets in nine contiguous states.  The transaction nearly doubled the size of our operations, thereby providing synergies in a number of operating and administrative areas.  Based on covered population and total subscribers, we are now the largest PCS Affiliate of Sprint. The transaction was accounted for under the purchase method and the results of Horizon PCS, Inc. are included in our consolidated results of operations from the date of acquisition.

 

Relationship with Sprint

 

Our relationship with Sprint is the most significant relationship we have. The terms of our relationship are set forth in our affiliation agreements with Sprint PCS. Pursuant to these affiliation agreements, we agreed to offer PCS services using Sprint’s 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 PCS provides significant competitive advantages. In particular, we believe that our affiliation agreements with Sprint PCS 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.

 

Sprint’s merger with Nextel, which closed in August, 2005, has thrust our relationship with Sprint into a state of uncertainty, the resolution of which may have a materially adverse effect on our business. On December 15, 2004, Sprint announced that it had signed a merger agreement with Nextel pursuant to which Sprint and Nextel would merge and combine their operations. Shortly after announcing the merger, Sprint also announced that it would pursue discussions with the PCS Affiliates of Sprint—including us—directed toward a modification of their affiliation agreements to address the implications of its merger with Nextel. Although the parties engaged in discussions with respect to such a modification, no agreement has been reached.

 

20


 

As discussed in “—Commitments and Contingencies” below, we filed lawsuits against Sprint, Sprint PCS and Nextel in July 2005 and entered into a Forbearance Agreement with Sprint later that same month. In addition to our complaints, a number of other PCS Affiliates of Sprint also filed complaints against Sprint, Sprint PCS and Nextel, including AirGate PCS (a wholly owned subsidiary of Alamosa Holdings, Inc.), UbiquiTel, Inc., U.S. Unwired, Inc., Gulf Coast Wireless, Inc., Enterprise Communications Partnership and Northern PCS Services, LLC. Sprint has acquired, or signed an agreement to acquire, each of these other PCS Affiliates of Sprint, other than Northern PCS.

 

The Forbearance Agreement expired on January 1, 2006 in the territory managed by iPCS Wireless, and continues until a decision is rendered by the Delaware Court of Chancery in the territories managed by Horizon PCS.  To our knowledge, Sprint has not yet changed its operations in the territory managed by iPCS Wireless as a result of the expiration of the Forbearance Agreement on January 1, 2006, and we do not know when they will change, if at all.  Similarly, we do not know how Sprint will operate in Horizon PCS’s territory after the date that any decision is rendered from our trial in the Delaware Court of Chancery. Sprint may elect to operate the legacy Nextel business in a manner that may have a material adverse effect on us. We do not know whether we will ultimately reach agreement with Sprint on mutually satisfactory terms for revised affiliation agreements. If we are able to modify our affiliation agreements with Sprint, it is likely that any such revised affiliation agreements would materially change our business and operations. We do not know the outcome of our pending litigation against Sprint. If we do not prevail, Sprint may engage in conduct that has a material adverse effect on our business and operations. We intend to continue to enforce our rights to the fullest extent, but there is no assurance that we will prevail.

 

Consolidated Results of Operations

 

For the Three Months Ended March 31, 2006 compared to the Three Months Ended March 31, 2005

 

Results of operations for any periods less than one year are not necessarily indicative of results of operations for a full year.  In addition, results for the three months ended March 31, 2006 include results for the markets we acquired in our merger with Horizon PCS, Inc., which closed on July 1, 2005, and accordingly are not comparable to the results of operations for periods prior to July 1, 2005.

 

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
March 31, 2006

 

As of and For the
Three Months Ended
March 31, 2005

 

Total Subscribers

 

508,300

 

259,200

 

Net Subscriber Additions

 

13,000

 

10,000

 

Churn

 

2.6

%

2.6

%

ARPU

 

$

50.10

 

$

51.42

 

CPGA

 

$

369

 

$

358

 

 

Net Subscriber Additions.     Net subscriber additions increased by 3,000, or 30%, in the three months ended March 31, 2006 compared to the three months ended March 31, 2005. The acquisition of Horizon PCS contributed net subscriber additions of approximately 8,500 for the quarter; however, in the legacy iPCS markets, net subscriber additions of approximately 4,500 for the three months ended March 31, 2006 fell from approximately 10,000 for the three months ended March 31, 2005.  We believe that, across our territory, we are experiencing both an increase in the number of subscribers deactivating service and a decrease in gross additions due to our recent effort to de-emphasize “family add-a-phone” plans, increased competitive advertising, the relative attractiveness of competitors’ phones and pricing plans and continuing brand confusion related to the Sprint Nextel merger. The decrease experienced in the legacy iPCS markets was offset by the net subscriber additions contributed by our acquisition of Horizon PCS.

 

Churn.     For the three months ended March 31, 2006 compared to the same period in 2005, churn remained the same at 2.6%.  In the legacy iPCS markets, churn was unchanged at 2.6%; however, in the legacy Horizon PCS markets — which results are not included in our results for the three months ended March 31, 2005 — churn dropped from 2.9% to 2.6%. At both March 31, 2006 and 2005, approximately 88% of our subscribers were under contract.

 

Average Revenue Per User.     The decrease in ARPU in the three months ended March 31, 2006 compared to the same three months in 2005 is due to lower minutes over plan revenue and lower monthly recurring charges, offset partially with higher data revenue.  The decreases in minutes over plan revenue and monthly recurring charges can be attributed to an expanded “PCS-to-PCS” program (now called “mobile-to-mobile”) which includes most Nextel subscribers, as well as to the popularity of “Fair and Flexible” plans and “family add-a-phone” plans, which, in each case,

 

21


 

generate lower overage charges and have lower monthly charges for the family add-a-phones.  For the three months ended March 31, 2006 our average monthly minutes over plan revenue per user was $2.03 compared to $4.06 for the three months ended March 31, 2005.   Average monthly recurring charges dropped from $42.45 for the three months ended March 31, 2005 to $40.48 for the three months ended March 31, 2006.  Offsetting these decreases was our average monthly data revenue which increased to $7.25 for the three months ended March 31, 2006 compared to $5.51 for the three months ended March 31, 2005.  Data revenue continues to increase due to the popularity of our various data products, including text messaging, downloading ringers, taking and receiving pictures, playing games and browsing the Internet.

 

Cost Per Gross Addition.     CPGA increased by $11, or 3%, for the three months ended March 31, 2006 compared to the three months ended March 31, 2005.  In the three months ended March 31, 2006 compared to the three months ended March 31, 2005, our retail store and employee related expenses increased by approximately $19 per gross addition due to the operation of significantly more retail stores and exclusive co-branded dealers which have not yet reached mature levels of sales productivity.  At March 31, 2006, we operated 38 retail stores, including 15 stores in the legacy Horizon PCS territory, and managed 65 exclusive co-branded dealers, including 18 dealers in the legacy Horizon PCS territory. At March 31, 2005, we operated 18 retail stores and managed 28 exclusive co-branded dealers.

 

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
March 31, 2006

 

For the Three
Months Ended
March 31, 2005

 

ARPU

 

 

 

 

 

Service revenue

 

$

75,406

 

$

39,094

 

Average subscribers

 

501,705

 

253,407

 

ARPU

 

$

50.10

 

$

51.42

 

 

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. We also use ARPU as a basis to forecast future service revenues.

 

 

 

For the Three
Months Ended
March 31, 2006

 

For the Three
Months Ended
March 31, 2005

 

CPGA

 

 

 

 

 

Selling and Marketing:

 

$

16,760

 

$

8,308

 

plus: Equipment costs, net of cost of upgrades

 

6,905

 

4,718

 

less: Equipment revenue, net of upgrade revenue

 

(2,421

)

(1,307

)

less: Stock-based compensation expense

 

(69

)

(5

)

CPGA costs

 

$

21,175

 

$

11,714

 

Gross adds

 

57,385

 

32,707

 

CPGA

 

$

369

 

$

358

 

 

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. In addition, we use CPGA as a basis for budgeting.

 

22


 

Revenues

 

The following table sets forth a breakdown of revenues by type:

 

 

 

For the Three
Months Ended
March 31, 2006

 

For the Three
Months Ended
March 31, 2005

 

 

 

 

 

 

 

Service revenue

 

$

75,406

 

$

39,094

 

Roaming revenue from subscribers of Sprint PCS and other PCS affiliates of Sprint

 

28,717

 

13,002

 

Roaming revenue from other wireless carriers

 

2,088

 

914

 

Reseller revenue

 

2,822

 

606

 

Equipment revenue

 

3,447

 

1,788

 

Other revenue

 

5

 

50

 

Total revenues

 

$

112,485

 

$

55,454

 

 

 

•      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 over plan, long distance, travel and roaming usage charges, other feature revenues and late payment fee and early cancellation fee revenues. Deductions for billing adjustments and promotional credits are recorded as a reduction to service revenue. For the three months ended March 31, 2006 compared to the three months ended March 31, 2005, service revenue increased by $36.3 million, or 93%, as a result of an increase of $37.3 million due to the increase in subscribers, primarily as a result of the subscribers acquired with the merger with Horizon PCS, offset with a decrease in service revenue of $1.0 million due to the drop in ARPU as described above.

 

•      Roaming revenue from subscribers of Sprint PCS and other PCS Affiliates of Sprint. We receive revenue on a per minute basis for voice traffic and per kilobyte basis for data traffic when subscribers of Sprint PCS and 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. The reciprocal roaming rate arrangement we have with Sprint PCS for inbound and outbound roaming for the three months ended March 31, 2006 and 2005 was $0.058 per minute for voice traffic ($0.10 per minute in certain markets in eastern and western Pennsylvania) and $0.0020 per kilobyte for data traffic. These rates are effective through December 31, 2006 and will be reset effective January 1, 2007; provided, however that the special rate for certain of our Pennsylvania markets will terminate on the earlier to occur of December 31, 2011 or the date that we achieve a subscriber penetration rate of at least 7% of our covered population.

 

For the three months ended March 31, 2006 compared to the three months ended March 31, 2005, roaming revenue from subscribers of Sprint PCS and other PCS Affiliates of Sprint increased by $15.7 million, or 121%.  Of this increase, 16% was driven by increased roaming minutes and kilobyte traffic in the legacy iPCS markets and the remaining 84% was due to our acquisition of the legacy Horizon PCS markets.  We continue to experience increased growth in kilobyte data usage from subscribers of Sprint PCS and other PCS Affiliates of Sprint. Roaming minutes and kilobytes from subscribers of Sprint PCS and other PCS Affiliates of Sprint for the three months ended March 31, 2006 were 362 million and 2.5 billion, respectively, compared to 184 million and 536 million for the three months ended March 31, 2005, respectively.

 

•      Roaming revenue from other wireless carriers. We receive roaming revenue from wireless carriers other than Sprint 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 roaming arrangements Sprint PCS has negotiated with them. We are paid on a per minute basis for voice traffic pursuant to these agreements.  For the three months ended March 31, 2006 compared to the three months ended March 31, 2005, roaming revenue from other wireless carriers increased by $1.2 million, or 128%.  The increase in roaming revenue was due to the acquisition of the legacy Horizon PCS markets, which historically had stronger roaming revenues than the legacy iPCS markets.  Roaming revenue in the legacy iPCS markets, excluding the legacy Horizon PCS markets, decreased 26% in the three months ended March 31, 2006 compared to the three months ended March 31, 2005 due to a 10% reduction in roaming minutes as carriers continue the build-out of their own coverage, thereby reducing the need for roaming, and a $0.02 decrease in the average per minute rate.  For the three months ended March 31, 2006, roaming minutes were 19.0 million compared to 7.1 million for the same period in 2005. For these same periods, the average per minute rates were $0.11 and $0.13, respectively.

 

•      Reseller revenue. Through Sprint PCS we allow resellers, known as MVNOs, such as Virgin Mobile, to use our network. Pursuant to these arrangements, we are paid on a per minute basis. For the three months ended March 31, 2006 compared to the three months ended March 31, 2005, reseller revenue increased $2.2 million.  The increase in reseller revenue was due to

 

23


 

an increase in the number of reseller subscribers in our territory, primarily as a result of our merger with Horizon PCS. For the legacy iPCS markets alone, reseller revenue increased 132% in the three months ended March 31, 2006 compared to the three months ended March 31, 2005.  At March 31, 2006, we had approximately 185,500 reseller subscribers, of which approximately 101,000 reseller subscribers were acquired in the Horizon PCS merger on July 1, 2005. At March 31, 2005, we had approximately 35,900 reseller subscribers.

 

•      Equipment revenue. Equipment revenue is derived 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. Our handset return policy allows customers to return their handsets for a full refund within 14 days after the date of purchase. When handsets are returned to us, we are sometimes able to reissue the handsets to customers at little additional cost to us.  However, if we are unable to reissue the handsets, we return them to Sprint PCS for refurbishing. Prior to February 1, 2005, in exchange for each returned handset, we received a credit from Sprint PCS which was less than what we originally paid for the handset. Subsequent to February 1, 2005, we receive an allocation of refurbished handsets that we can purchase from Sprint PCS at a reduced price. For the three months ended March 31, 2006 compared to the three months ended March 31, 2005, equipment revenue increased by $1.7 million, or 93%.  For the three months ended March 31, 2006 compared to the three months ended March 31, 2005, equipment revenue in the legacy iPCS markets increased approximately 17% despite lower gross adds, as mentioned previously.  This increase in revenue was due to higher phone prices, net of discounts and rebates offered during the first quarter of 2006 compared to the same period in 2005.  The remaining increase is due to equipment revenue from the legacy Horizon PCS markets.

 

•      Other revenue. For the three months ended March 31, 2005, other revenue consisted of tower leasing revenue. During fiscal year 2005, we sold all of our towers in the iPCS markets, which eliminated this revenue stream.  For the three months ended March 31, 2006, other revenue consisted of restocking fees for handsets returned by our exclusive co-branded dealers.

 

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 and the 8% affiliation fee due to Sprint PCS for collected revenues. Network operations expenses include 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. For the three months ended March 31, 2006 and the three months ended March 31, 2005, cost of service and roaming was $65.0 million and $30.4 million, respectively. Of this increase, 16% was from the legacy iPCS markets mainly due to a larger number of subscribers served, the increased size of the network and a 28% increase in travel and roaming expenses.   The remaining increase was due to the increased costs associated with the acquired Horizon PCS markets. With the adoption of SFAS No. 123R, stock-based compensation expense included in cost of service and roaming totaled approximately $32,000 for the three months ended March 31, 2006 compared to approximately $8,000 for the three months ended March 31, 2005.

 

At March 31, 2006, our network consisted of 1,515 leased cell sites, including 804 in the acquired Horizon PCS markets, and five switches, including three switches in the legacy Horizon PCS markets. At March 31, 2005, our network consisted of 679 cell sites and we had two switches in operation.

 

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 for the three months ended March 31, 2006 and the three months ended March 31, 2005 was $9.5 million and $6.2 million, respectively, an increase of $3.3 million which was the result of cost of equipment in the legacy Horizon PCS markets.  Cost of equipment in the legacy iPCS markets remained constant, despite the decrease in gross adds due mainly to higher costs associated with equipment upgrades in the three months ended March 31, 2006 compared to the three months ended March 31, 2005.

 

Selling and Marketing.    Selling and marketing expense includes the costs to operate our retail stores, advertising and promotional expenses, commissions, equipment subsidies and rebate expenses relating to new subscriber additions from national third parties and other Sprint-controlled channels. Selling and marketing expense for the three months ended March 31, 2006 was $16.8 million compared to $8.3 million for the three months ended March 31, 2005, an increase of $8.5 million. Of this increase, 94% was due to selling and marketing expenses from the legacy Horizon PCS markets. With the adoption of SFAS No. 123R, stock-based compensation expense included in selling and marketing totaled approximately $69,000 for the three months ended March 31, 2006 compared to approximately $5,000 for the three months ended March 31, 2005.

 

General and Administrative.    General and administrative expenses include administrative salaries and benefits, legal fees,

 

24


 

insurance expense and other professional expenses.  For the three months ended March 31, 2006, general and administrative expenses totaled $7.1 million compared to $2.0 million for the three months ended March 31, 2005, an increase of $5.1 million. Approximately $1.5 million of this increase is attributable to general and administrative costs related to the legacy Horizon PCS markets. During the three months ended March 31, 2006, we incurred approximately $3.1 million of costs related to our litigation with Sprint and approximately $0.1 million of integration expenses related to the merger with Horizon PCS. With the adoption of SFAS No. 123R, stock-based compensation expense included in general and administrative totaled approximately $0.4 million for the three months ended March 31, 2006 compared to approximately $10,000 for the three months ended March 31, 2005.

 

Depreciation and Amortization.    For the three months ended March 31, 2006 and March 31, 2005, depreciation and amortization expense totaled $23.9 million and $18.4 million, respectively. Of these amounts, amortization of intangibles totaled $9.5 million and $3.1 million for these same periods, respectively.

 

For the three months ended March 31, 2006 compared to the three months ended March 31, 2005, depreciation in the legacy iPCS markets decreased by approximately $8.2 million due to the completion of the Nortel swap in the Michigan markets in June 2005.  The decrease in depreciation in the three months ended March 31, 2006 compared to 2005 is due to 1) lower original costs for the new Nortel equipment compared to the replaced Lucent equipment and 2) acceleration of depreciation expense beginning January 1, 2005 for the reduced estimated useful lives of the Lucent assets.  During the three months ended March 31, 2006, we recorded additional depreciation expense of approximately $2.1 million due to a reduction in the remaining useful lives of Motorola equipment being replaced in the Pennsylvania, Maryland, New York and New Jersey markets of the legacy Horizon PCS territory.   The remaining increase in depreciation and amortization relates to the property, plant, equipment and intangibles recorded as a result of the merger with Horizon PCS.

 

Interest Income.    For the three months ended March 31, 2006 and the three months ended March 31, 2005, interest income totaled $1.2 million and $0.4 million, respectively. The increase was due to a 19% higher average cash balance from the legacy iPCS markets for the three months ended March 31, 2006 compared to the same three months ended March 31, 2005 coupled with interest earned on the cash balance acquired in the merger with Horizon PCS on July 1, 2005.

 

Interest Expense.    For the three months ended March 31, 2006, interest expense was $8.1 million compared to $5.0 million for the three months ended March 31, 2005.  Interest expense consists of interest on our 111/2% senior notes and 113/8% senior notes.  The increase was attributable to the interest expense associated with the 113/8% senior notes assumed with the merger of Horizon PCS on July 1, 2005.

 

Net Loss.    Our net loss was $17.0 million for the three months ended March 31, 2006 compared to a net loss of $14.4 million for the three months ended March 31, 2005.

 

Liquidity and Capital Resources

 

Significant Sources of Cash

 

We generated $11.3 million in operating cash flows for the three months ended March 31, 2006, compared to $8.1 million for the three months ended March 31, 2005. The increase in operating cash flows was due to lower net operating losses after adjustments for non-cash items of approximately $4.2 million offset with a decrease in net working capital owed to Sprint of approximately $0.7 million.

 

During the three months ended March 31, 2006, we received approximately $0.1 million from the sale of used equipment which was replaced with equipment we purchased from Nortel Networks as described below in “—Contractual Obligations”  and approximately $0.1 million from the sale of other equipment disposed of during the quarter.  During the three months ended March 31, 2005, we received approximately $0.6 million for remaining amounts owed for towers sold in the previous quarter.

 

For the three months ended March 31, 2006, we received a total of $1.0 million in proceeds from the exercise of options representing approximately 43,100 shares.

 

Significant Uses of Cash

 

Cash flows used for investing activities for the three months ended March 31, 2006 included $8.4 million for capital expenditures.  Included in this total was $5.1 million for the Nortel swap in our Horizon PCS markets, $1.5 million for new cell site construction and other related network capital expenditures, $0.8 million for new store and store improvements and $1.0 million for IT and other corporate-related capital expenditures.

 

25


 

Cash flows used for investing activities for the three months ended March 31, 2005 included $4.2 million for capital expenditures, of which $3.6 million related to the Nortel swap project in the legacy iPCS markets as described below in “—Contractual Obligations,”.  The remaining capital expenditures related mostly to new cell site construction and other network related capital expenditures.

 

Principal payments on our long-term debt, other than capital leases, are not due until 2012.  During the three months ended March 31, 2006, we made one semi-annual interest payment on our 11 3/8% senior notes of approximately $7.1 million.  The interest rates on our senior notes are fixed and therefore the amount of our interest payments would not be impacted by a change in the overall interest rate environment.

 

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 December 23, 2005.

 

•   Continuing focus on subscriber additions.     During the last year we increased our distribution and marketing efforts, including the opening of new retail stores and exclusive co-branded dealers, to accelerate our subscriber additions. To the extent that we continue to seek to accelerate our subscriber additions, we will incur significant upfront subscriber acquisition expenses (including the customer handset subsidy, commissions and promotional expenses) that initially will result in increased losses and reduced levels of cash flows from operating activities. At the same time, competition in the wireless industry remains intense as more competitors enter the market via MVNO relationships and as unlimited minute and pre-paid plans, neither of which we currently offer, increase in popularity.  Accordingly, we may incur higher per subscriber acquisition expenses and/or offer more aggressive rate plans in order to maintain or achieve our planned growth.  Alternatively, we may not be able to maintain or achieve our planned growth in subscribers or obtain sufficient revenue to achieve and sustain profitability. If we are not able to achieve our planned subscriber growth, it will lengthen the amount of time it will take for us to reach a sufficient number of subscribers to achieve positive free cash flow, which in turn will have a negative effect on capital resources.

 

•   Increasing churn.    We may experience a higher churn rate in the future. In addition, to the extent our subscriber growth includes a higher percentage of sub-prime credit subscribers, our churn and bad debt expense may increase. If churn increases over the long-term, we would lose the cash flows attributable to these subscribers and have greater than projected losses.

 

•   Declining voice revenue per subscriber.    In the three months ended March 31, 2006, our minutes over plan voice revenue decreased 8% over the prior quarter. The wireless industry is very competitive and continued pressure in pricing is expected in the future as a result of, among other things, increased focus on family plans and overage protection plans. Although we expect that family plans and overage protection plans will improve churn, these plans tend to lower voice revenue on a per subscriber basis. Although the data portion of ARPU is expected to continue to increase, declining voice ARPU resulting in lower overall ARPU will make it more difficult to obtain sufficient revenue to achieve or sustain profitability.

 

•   Higher subscriber acquisition costs.    We may continue to experience higher costs to acquire subscribers. As we continue to increase our distribution, we will increase the fixed costs in our sales and marketing organization. In addition, we may increase our marketing expenses in an effort to attract and acquire new subscribers. Also, more aggressive promotional efforts may lead to higher handset subsidies. 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.

 

•   Higher operating costs.    In the three months ended March 31, 2006, our operating costs increased significantly due to our larger number of subscribers served, the increased size of our network, increases in roaming expense and an increase in collected revenue, upon which our 8% affiliation fee is calculated. If our subscriber base continues to increase, our operating costs will continue to increase.  In addition, we may incur significant wireless handset subsidy costs for existing subscribers who upgrade to a new handset. As our subscriber base matures and technological innovations occur, more existing subscribers may begin to upgrade to new wireless handsets for which we subsidize the cost to the subscriber. We also expect to continue to incur costs related to our litigation with Sprint. At the same time, a large portion of our ongoing network and general and administrative expenses are fixed. We believe that we need to add more subscribers to recognize increased economies of scale in our business. If we are unable to add more subscribers to our network or continue to improve the efficiencies in our operating costs, results will be negatively affected.

 

26


 

•   Roaming revenue.    A substantial portion of our revenue is derived from roaming revenue from Sprint PCS and other PCS Affiliates of Sprint. The increase in roaming revenue during the three months ended March 31, 2006 was due to an increase in roaming minutes and increased kilobyte traffic. The roaming rate paid to us by Sprint PCS and other PCS Affiliates of Sprint for voice was set at $0.058 per minute of use for the majority of our markets, and for data was set at $0.002 per kilobyte in all of our markets. These rates are fixed through December 31, 2006. Thereafter, the rate will change, based on an agreed-upon formula that may have an adverse effect on us. In addition, if we receive fewer roaming minutes or kilobyte traffic on our network, our results of operations will be negatively affected.

 

•   Increasing capital expenditures.    As we continue to add capacity and coverage to our wireless network, we will incur significant capital expenditures. We currently anticipate that capital expenditures for 2006 will be between $42.0 million and $48.0 million.  We have replaced our equipment in a number of our markets with Nortel equipment pursuant to two agreements with Nortel and we have recently started the replacement activity in our remaining markets. Changes and upgrades in technology, like EV-DO, may require additional expenditures. Sprint PCS has begun to deploy EV-DO technology in portions of its service area and has stated its intent to cover 190 million people by the end of 2006. To date, we have deployed EV-DO technology in a small portion of our service area. We may elect to deploy EV-DO technology in additional portions of our service area which may significantly increase our capital expenditures and operating expenses. We have not yet determined when, and to what extent, we may further deploy EV-DO throughout our territory. 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.

 

•   Ongoing Sprint Relationship and Litigation.    We rely on Sprint for a number of important functions, including but not limited to, customer service, billing, long-distance transport services, national network operations, support, inventory logistics support, national advertising, product development, and financial information. Failure of Sprint to provide these and other services on a timely and cost efficient manner would negatively impact our results of operations. Sprint PCS may also make decisions that could reduce our revenues, increase our expenses and/or our capital expenditure requirements and make our affiliate relationships with Sprint less advantageous than expected. In addition, we filed complaints against Sprint alleging that, among other things, Sprint will breach the exclusivity provisions of our management agreements. An adverse outcome to our proceedings will have a negative effect on our results of operations and our stock price.

 

•   Capital Markets Availability.    We may not be able to access the credit or equity markets for additional capital if the liquidity discussed above is not sufficient for the cash needs of our business. We continually evaluate options for additional sources of capital to supplement our liquidity position and maintain maximum financial flexibility. If the need for additional capital arises due to our actual results differing significantly from our business plan or for any other reason, we may be unable to raise additional capital.

 

Commitments and Contingencies

 

The costs for the services provided by Sprint PCS under our service agreements with Sprint PCS relative to billing, customer care and other back-office functions for the three months ended March 31, 2006 and 2005 were approximately $10.7 million and $5.4 million, respectively.  Because we incur the majority of these costs on a per subscriber basis, which is fixed until the end of December 2006, we expect the aggregate cost for such services to increase as the number of our subscribers increases.  Beginning in 2007, the monthly rates for these services will be reset to mutually acceptable amounts based on the amount necessary to recover Sprint PCS’s reasonable costs for providing such services.  Sprint has proposed to us monthly rates that would begin on January 1, 2007 that are higher than the rates we currently pay.  We have begun discussions with Sprint regarding the terms and conditions under which we would continue to purchase these services from Sprint after December 31, 2006, if at all. If we cannot agree with Sprint PCS on new rates beyond 2006, we have the option to continue to purchase the Sprint services at Sprint’s proposed rates until an arbitrator resolves the dispute regarding the new rates, or to self-provision or to procure those services elsewhere.

 

In addition, Sprint PCS may terminate any service provided under our services agreements upon nine months’ prior written notice, but if we would like to continue receiving such service, Sprint PCS has agreed that it will assist us in developing that function internally or locating a third-party vendor that will provide that service. Although Sprint PCS has agreed in such an event to reimburse us for expenses we incur in transitioning to any service internally or to a third-party, if Sprint PCS terminates a service for which we have not developed or are unable to develop a cost-effective alternative, our operating costs may increase beyond our expectations and our operations may be interrupted or restricted. We do not currently have a contingency plan if Sprint PCS terminates a service we currently receive from it.

 

Variable interest rates may increase substantially. At March 31, 2006 we have only fixed rate indebtedness under our existing capital leases and the senior notes. To the extent that we incur any floating rate financing in the future, we would be exposed to interest rate risk on such indebtedness.

 

27


 

On December 15, 2004, Sprint Corporation and Nextel Communications, Inc. announced that they had signed a merger agreement pursuant to which they would merge and combine their operations. Shortly after announcing the merger, Sprint also announced that it would pursue discussions with the PCS Affiliates of Sprint—including us—directed toward a modification of their affiliation agreements to address the implications of its merger with Nextel. Although the parties engaged in discussions with respect to such a modification, no agreement has been reached.

 

When it became evident to us that Sprint intended to close its merger with Nextel prior to reaching agreement with us on necessary modifications to our affiliation agreements, we filed two complaints against Sprint. On July 15, 2005, we caused our wholly owned subsidiary, iPCS Wireless, to file a complaint against Sprint and Sprint PCS in the Circuit Court of Cook County, Illinois, and on July 22, 2005, we caused our wholly owned subsidiaries, Horizon Personal Communications and Bright Personal Communications Services, to file a complaint against Sprint, Sprint PCS and Nextel in the Court of Chancery of the State of Delaware, New Castle County. The complaints are substantially similar and allege, among other things, that following the consummation of the merger between Sprint and Nextel, Sprint will breach its exclusivity obligations to us under our management agreements. Our complaints seek, among other things, a temporary restraining order, a preliminary injunction and a permanent injunction enjoining Sprint and those acting in concert with it from engaging in certain conduct following the closing of their merger that would violate our affiliation agreements with Sprint PCS. In addition to our complaints, a number of other PCS Affiliates of Sprint also filed complaints against Sprint, Sprint PCS and Nextel, including AirGate PCS (a wholly owned subsidiary of Alamosa Holdings, Inc.), UbiquiTel, Inc., U.S. Unwired, Inc., Gulf Coast Wireless, Inc., Enterprise Communications Partnership and Northern PCS Services, LLC.

 

On July 18, 2005, in Cook County Circuit Court we obtained a temporary restraining order prohibiting Sprint from sharing our confidential information with Nextel in violation of iPCS Wireless’s management agreement and we continued our hearing to hear further testimony on our request for additional injunctive relief.

 

However, on July 28, 2005, prior to reconvening in Cook County Circuit Court, we entered into a Forbearance Agreement with Sprint. The Forbearance Agreement sets forth our agreement that we will not seek a temporary restraining order or a preliminary injunction against Sprint so long as Sprint operates the Nextel business in our territory subject to the limitations set forth in the agreement. The Forbearance Agreement contemplates that the parties will proceed as quickly as possible to a full trial on the merits of our complaint seeking a permanent injunction against Sprint.

 

On August 12, 2005, Sprint and Nextel closed their merger. In July and August 2005 Sprint acquired three PCS Affiliates of Sprint, two of whom—U.S. Unwired and Gulf Coast Wireless—had also filed suit against Sprint. In January and February 2006, Sprint acquired two more PCS Affiliates of Sprint, Enterprise Communications and Alamosa Holdings.  With the acquisition of these PCS Affiliates of Sprint,  the complaints filed by them or their subsidiaries were discontinued.

 

On December 28, 2005, the judge in Cook County Circuit Court denied our and Sprint’s requests for summary judgment; provided, however, that he agreed with us that iPCS Wireless’s management agreement with Sprint would be breached if confidential information were disclosed to any person or entity involved in the operation of Nextel’s network.  Accordingly, he entered a preliminary non-appealable order of summary judgment as to that aspect of our complaint.   The judge’s order is subject to reconsideration during the trial. The trial relating to the complaint filed by our wholly owned subsidiary, iPCS Wireless, in Cook County Circuit Court was originally set to commence on December 5, 2005. However, it was continued to early February 2006 and then to early March 2006. The trial in Cook County Circuit Court began on March 9, 2006 and, as of the date of this filing, is ongoing.  We anticipate that the testimony in the trial will conclude in late May / early June 2006 and we expect a ruling in the second half of 2006.

 

The trial relating to the complaint filed by our wholly owned subsidiaries, Horizon Personal Communications and Bright Personal Communications Services, against Sprint and Nextel in the Delaware Court of Chancery was consolidated with the trial relating to the complaint filed by UbiquiTel against Sprint and Nextel in that same court. On January 14, 2006, the judge in the Delaware Court of Chancery issued a memorandum opinion denying our and Sprint’s request for summary judgment; however, he agreed with Sprint that our claim for declaratory judgment as to the G-Block was not ripe for adjudication.  Accordingly, that aspect of our complaint was dismissed without prejudice.  The consolidated trial began on January 9, 2006, and the testimony concluded on January 23, 2006. Closing arguments were on April 4, 2006.  We expect the judge to issue a ruling near the end of our quarter ended June 30, 2006.

 

In connection with the consolidation of the trials in the Delaware Court of Chancery, Sprint agreed to extend the Forbearance Agreement in the territories managed by Horizon Personal Communications and Bright Personal Communications Services until the date that any decision after trial is rendered by the Delaware Court of Chancery in connection with the merits of the complaint, with certain limited exceptions that would require approval by the Delaware Court of Chancery. The Forbearance Agreement expired on January 1, 2006 in the territory managed by iPCS Wireless.

 

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In April 2006, Sprint agreed to acquire UbiquiTel, Inc. — another PCS Affiliate of Sprint and our co-plaintiff in the Delaware Court of Chancery — and Sprint and UbiquiTel entered into a settlement agreement and requested that the judge stay the litigation initiated by UbiquiTel in the Delaware Chancery Court.  It is our understanding that the settlement agreement would resolve the dispute between UbiquiTel and Sprint after consummation of the merger.  Sprint and UbiquiTel’s request for a stay does not apply to the proceedings in the action brought by our wholly owned subsidiaries, Horizon Personal Communications and Bright Personal Communications Services, in the Delaware Court of Chancery.  As such, we took no position regarding the request to stay the UbiquiTel action.

 

Contractual Obligations

 

We are obligated to make future payments under various contracts we have entered into, including amounts pursuant to the senior notes, capital leases and non-cancelable operating lease agreements for office space, cell sites, vehicles and office equipment. Future minimum contractual cash obligations for the next five years and in the aggregate at September 30, 2005, are as follows (dollars in thousands):

 

 

 

 

 

Payments Due by Period
Year Ended September 30,

 

 

 

Total

 

2006

 

2007

 

2008

 

2009

 

2010

 

Thereafter

 

Long-term debt

 

$

290,000

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

290,000

 

Cash interest

 

232,304

 

33,194

 

33,194

 

33,194

 

33,194

 

33,194

 

66,334

 

Operating leases(1)

 

103,121

 

28,284

 

21,428

 

19,368

 

18,271

 

11,175

 

4,595

 

Capital lease obligations

 

805

 

68

 

63

 

66

 

69

 

71

 

468

 

Purchase obligations (2)

 

8,350

 

8,350

 

—

 

—

 

—

 

—

 

—

 

Total

 

$

634,580

 

$

69,896

 

$

54,685

 

$

52,628

 

$

51,534

 

$

44,440

 

$

361,397

 

 

(1)           Does not include payments due under renewals to the original lease terms.

 

(2)           Does not include commitments totaling $16.5 million to Nortel Networks for agreement signed December 31, 2005, as discussed below under “Nortel Networks Equipment Agreements”.

 

Both of our senior notes contain covenants which restrict our ability to incur additional indebtedness, merge, pay dividends, dispose of our assets, and certain other matters as defined in the indentures. In addition, the senior notes:

•        rank pari passu in right of payment with all our existing and future unsecured senior indebtedness;

•        rank senior in right of payment to all our future subordinated indebtedness; and

•        are unconditionally guaranteed by our domestic unrestricted subsidiaries, including iPCS Wireless, Inc., iPCS Equipment, Inc., Horizon Personal Communications, Inc. and Bright Personal Communication Services, LLC and any new domestic restricted subsidiaries of ours.

 

However, the senior notes are subordinated to all our secured indebtedness to the extent of the assets securing such indebtedness, and to any indebtedness of our subsidiaries that do not guarantee the new senior notes.

 

Upon a change of control as defined in the indentures, we will be required to make an offer to purchase the senior notes at a price equal to 101% of the aggregate principal amount of senior notes repurchased plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase.

 

111/2% Senior Notes:   Interest on our 111/2% senior notes is payable semi-annually in arrears on May 1 and November 1, commencing on November 1, 2004 to the holders of record on the immediately preceding April 15 and October 15. At any time prior to May 1, 2007, we may redeem up to 35% of the aggregate principal amount of the 111/2% senior notes at a redemption price of 111.50% of the principal amount thereof, plus accrued and unpaid interest, and liquidated damages (as defined in the indenture), if applicable, to the redemption date with the net cash proceeds of a sale of our equity interests or a contribution to our common equity capital; provided that:

•        at least 65% of aggregate principal amount of senior notes originally issued remains outstanding immediately after the redemption; and

•        the redemption occurs within 90 days of the date of the closing of such sale of equity interests or contribution.

Except pursuant to the preceding paragraph, the senior notes will not be redeemable at our option prior to May 1, 2008.

 

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On or after May 1, 2008, we may redeem all or a part of the senior notes issued under the indenture upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and liquidated damages, if any, on the senior notes redeemed, to the applicable redemption date, if redeemed during the twelve-month period beginning on May 1 of the years indicated below, subject to the rights of holders of senior notes on the relevant record date to receive interest on the relevant interest payment date:

 

Year

 

Percentage

 

2008

 

105.750

%

2009

 

102.875

%

2010 and thereafter

 

100.000

%

 

113/8% Senior Notes:   Interest on our 113/8 % senior notes is payable semi-annually in arrears on July 15 and January 15, commencing on January 15, 2005 to the holders of record on the immediately preceding July 1 and January 1. At any time prior to July 15, 2007, we may redeem up to 35% of the aggregate principal amount of the 113/8% senior notes at a redemption price of 111.375% of the principal amount thereof, plus accrued and unpaid interest, and liquidated damages (as defined in the indenture), if applicable, to the redemption date with the net cash proceeds of a sale of our equity interests or a contribution to our common equity capital; provided that:

 

•   at least 65% of aggregate principal amount of senior notes originally issued remains outstanding immediately after the redemption; and

 

•   the redemption occurs within 90 days of the date of the closing of such sale of equity interests or contribution.

 

Except pursuant to the preceding paragraph, the senior notes will not be redeemable at our option prior to July 15, 2008.

 

On or after July 15, 2008, we may redeem all or a part of the senior notes issued under the indenture upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and liquidated damages, if any, on the senior notes redeemed, to the applicable redemption date, if redeemed during the twelve-month period beginning on May 1 of the years indicated below, subject to the rights of holders of senior notes on the relevant record date to receive interest on the relevant interest payment date:

 

Year

 

Percentage

 

2008

 

105.688

%

2009

 

102.844

%

2010 and thereafter

 

100.000

%

 

Nortel Networks Equipment Agreements

 

On November 22, 2004, we signed a letter of agreement with Nortel Networks to replace the Lucent network equipment then deployed in our Michigan markets with Nortel equipment including one switch, 232 base stations, various additional capacity growth and network equipment. Under the terms of the agreement, we are required to purchase equipment and services totaling $15.2 million and will receive special pricing on future purchases through December 31, 2007. As of March 31, 2005, we had purchased the $15.2 million of network equipment required under this agreement.  Accordingly, we are not required to purchase additional equipment or services under this agreement.

 

In addition, in January 2005, Horizon PCS signed a $14.0 million letter of agreement with Nortel Networks to replace the Motorola network equipment currently deployed in its Fort Wayne, Indiana, Chillicothe, Ohio, and Johnson City, Tennessee markets with Nortel equipment including 390 base stations, various additional capacity growth and network equipment. Under the terms of the agreement, we are required to purchase equipment and services totaling $13.0 million and will receive special pricing on future purchases through December 31, 2007. As of December  31, 2005, we had purchased the $13.0 million of equipment required under this agreement.  Accordingly, we are not required to purchase additional equipment or services under this agreement.

 

On December 31, 2005, we signed a letter of agreement with Nortel Networks to replace the Motorola equipment currently deployed in our Pennsylvania, New York, New Jersey and Maryland markets with Nortel equipment.  Under the terms of the agreement, we are required to purchase equipment necessary to replace 425 existing base stations and related network infrastructure, plus various additional equipment to support future network footprint and capacity expansion, totaling approximately $16.5 million, with an option to purchase additional network enhancement equipment totaling $0.5 million.  On March 21, 2006, we amended the terms of this agreement accelerating payments for equipment totaling $4.0 million from 2007 to 2006.  As of March 31, 2006, we had purchased $3.0 million of the required $16.5 of equipment under this agreement.  Accordingly, we are required to purchase an additional $13.5 million of equipment under this agreement.

 

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Off-Balance Sheet Arrangements

 

Other than the operating lease commitments included above, we have no off-balance sheet arrangements that would have a current or future material effect on the financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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.

 

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

•      Income taxes

 

In light of the adoption of SFAS No. 123R — discussed in Item 2 of Part I of this quarterly report on Form 10-Q — we have also included our stock-based compensation policy as a critical accounting policy.  SFAS No. 123R requires significant judgment and the use of estimates in the assumptions for the model used to value the share-based payment awards, including stock price volatility, and expected option terms.  In addition, expected forfeiture rates for the share-based awards must be estimated.  Because of our small number of option grants, the relatively short period of time that we have operated as a public company, and the limited trading of our stock, we are limited in our historical experience to use as a basis for these assumptions.  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.

 

Additional information regarding these critical accounting policies can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended September 30, 2005, filed with the SEC on December 23, 2005.

 

Inflation

 

We believe that inflation has not had a significant impact in the past and is not likely to have a significant impact in the foreseeable future on our results of operations.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not engage in commodity futures trading activities and 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.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a)   Evaluation of Disclosure 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-14(c) and 15d-14(c) 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 in alerting them on a timely basis to material information relating to us (including our consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act.

 

(b)   Changes in Internal Controls over Financial Reporting. There have not been any 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 three months ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

(c)   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 bi-annually to us.

 

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PART II . OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

See  — “Management’s 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 and in connection with our bankruptcy petition. 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.

 

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 fiscal year ended September 30, 2005 and 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 as set forth 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.

 

Set forth below are updates to the following three risk factors that were included in our Annual Report on Form 10-K:

 

•      “The loss of the officers and skilled employees upon whom we depend to operate our business could adversely affect our operating results.”

 

•      “Problems with Sprint PCS’s internal support systems could lead to customer dissatisfaction or increase our costs.”

 

•      “The merger between Sprint and Nextel and the outcome of our litigation relating thereto may have an adverse effect on us in ways that would be beyond our control.”

 

The loss of the officers and skilled employees upon whom we depend to operate our business could adversely affect our operating results.

 

Our business is managed by a small number of executive officers on whom we depend to operate our business. We believe that our future success will depend in part on our continued ability to retain these executive officers and to attract and retain other highly qualified technical and management personnel. Notwithstanding our employment agreements with certain of our executives, we may not be successful in retaining key personnel or in attracting and retaining other highly qualified technical and management personnel. Moreover, our past inability to meet our obligations that resulted in our bankruptcy filing, or the perception that we may not be able to meet our obligations following the reorganization, could adversely affect our ability to retain or attract high-quality personnel.  As a result of the merger between Sprint and Nextel and Sprint’s acquisition of (or agreement to acquire) six other PCS Affiliates of Sprint since August 2005, it is more difficult for us to retain our existing employees and more difficult and expensive to fill vacancies.  The loss of the officers and skilled employees upon whom we depend to operate our business could adversely affect operating results.

 

Problems with Sprint PCS’s internal support systems could lead to customer dissatisfaction or increase our costs.

 

We rely on Sprint PCS’s internal support systems, including customer care, billing and back office support. Sprint PCS has entered into business process outsourcing agreements with third parties to provide these services. Sprint PCS may not be able to successfully add system

 

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capacity, its internal support systems may not be adequate and the third parties that Sprint PCS has contracted with may not perform their obligations. Problems with Sprint PCS’ internal support systems could cause:

 

•               delays or problems in our operations or services;

 

•               delays or difficulty in gaining access to subscriber and financial information;

 

•               a loss of subscribers; and

 

•              an increase in the costs of customer care, billing and back-office services.

 

Additionally, Sprint has acquired (or agreed to acquire) six PCS Affiliates of Sprint. Giving effect to these acquisitions, there will be four remaining PCS Affiliates of Sprint. As a result of these acquisitions, Sprint may not devote as much of its personnel and resources to the remaining PCS Affiliates of Sprint, which may have a material adverse effect on our operations.

 

As a result of the merger between Sprint and Nextel, we expect that the combined company will integrate the internal support systems of Sprint and Nextel, which could include the migration of certain customers onto different systems, for example, billing.  Customer migrations or systems conversions, or any delay or problems associated with these changes, may result in difficulty in gaining access to subscriber and financial information, increased customer dissatisfaction leading to increased churn, and increased costs in providing such internal support systems; each of which could have a material adverse effect on our operations.

 

Should Sprint PCS fail to deliver timely and accurate information, this may lead to adverse short-term decisions and inaccurate assumptions in our business plan. It could also adversely affect our cash flows, because Sprint PCS collects our receivables and remits to us a net amount that is based on the financial information it produces for us.

 

The merger between Sprint and Nextel and the outcome of our litigation relating thereto may have an adverse effect on us in ways that would be beyond our control.

 

As discussed in “—Commitments and Contingencies” above, we have filed two complaints against Sprint relating to the merger between Sprint and Nextel and we have entered into a Forbearance Agreement with Sprint.

 

We do not know if, when or how Sprint will change its operations in the legacy iPCS territory as a result of the January 1, 2006 expiration of the Forbearance Agreement as it relates to that territory.  We also do not know if or how Sprint will change its operations in the legacy Horizon PCS territory when the Forbearance Agreement expires as it relates to that territory after the judge rules in our case pending in the Delaware Court of Chancery. After expiration, Sprint may operate the legacy Nextel business in a manner that would have a material adverse effect on us. For example, Sprint may:

 

•      share our confidential information with persons at Sprint outside of the group responsible for managing Sprint’s relationship with the PCS Affiliates of Sprint;

 

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•      engage in conduct designed to induce and facilitate existing customers of Sprint PCS in our territory to transition their service to Nextel (e.g., direct marketing, local advertising and waiver of early termination fees);

•      sell dual-mode handsets in our territory that are pre-programmed to travel on the legacy Nextel network as opposed to the portion of the Sprint PCS network in our territory;

•      change the branding on legacy Nextel stores in our territory;

•      co-brand legacy Nextel products and services as Sprint in national third party retailers in our territory.

 

Notwithstanding the Forbearance Agreement, Sprint’s ownership and operation of the legacy Nextel business in our territory has, among other things, caused customer confusion in our territory that is having an adverse effect on our business and operations.

 

We cannot predict the outcome of our litigation against Sprint. If we do not prevail, Sprint may be permitted to operate the legacy Nextel business in our territory in a manner that has an adverse effect on our business and operations, including by engaging in conduct expressly prohibited by the Forbearance Agreement, examples of which are set forth above. If we do not prevail, our stock price may be adversely affected.

 

We do not know whether it is possible to reach agreement on mutually satisfactory terms for revised affiliation agreements. Any such revised affiliation agreements may require us to modify our exclusivity, make significant payments to lease or acquire assets relating to the legacy Nextel network in our territory, purchase legacy Nextel subscribers in our territory and/or commit to a further build-out and expansion of our network beyond what is required under our existing affiliation agreements with Sprint PCS. There is no assurance that we will have adequate funds on hand or the ability to borrow such funds in order to acquire the network assets or subscribers or to otherwise modify our network. In addition, any borrowing would increase our existing substantial leverage.

 

We believe that our stock price has been, and continues to be, affected by market speculation involving potential changes in our relationship with Sprint as a result of the Sprint/Nextel merger and the outcome of our litigation against Sprint. We believe that the market speculation has been further fueled by changes in the relationships between Sprint and other PCS Affiliates of Sprint, including Sprint’s acquisition of (or agreement to acquire) six other PCS Affiliates of Sprint since August 2005.  Accordingly, the price of our common stock has been, and may continue to be, volatile.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None

 

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ITEM 6. EXHIBITS

 

2.1

 

Agreement and Plan of Merger, dated as of March 17, 2005, by and between iPCS, Inc. and Horizon PCS, Inc. (Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K filed by iPCS, Inc. on March 18, 2005 (SEC File No. 333-32064))

 

 

 

2.2

 

Second Amended and Restated Joint Plan of Reorganization for iPCS, Inc., iPCS Wireless, Inc. and iPCS Equipment, Inc., dated as of May 26, 2004 (Incorporated by reference to Exhibit 2.1 to the registration statement on Form S-4 filed by iPCS, Inc. on August 5, 2004 (SEC File No. 333-117942))

 

 

 

2.3

 

Technical Amendment to Second Amended and Restated Joint Plan of Reorganization for iPCS, Inc., iPCS Wireless, Inc. and iPCS Equipment, Inc., dated as of July 8, 2004 (Incorporated by reference to Exhibit 2.2 to the registration statement on Form S-4 filed by iPCS, Inc. on August 5, 2004 (SEC File No. 333-117942))

 

 

 

2.4

 

Modification to Second Amended and Restated Joint Plan of Reorganization for iPCS, Inc., iPCS Wireless Inc. and iPCS Equipment, Inc., dated as of July 8, 2004 (Incorporated by reference to Exhibit 2.3 to the registration statement on Form S-4 filed by iPCS, Inc. on August 5, 2004 (SEC File No. 333-117942))

 

 

 

2.5

 

Findings of Fact, Conclusions of Law and Order under U.S.C. Section 1129(a) and (b) and Federal Rules of Bankruptcy Procedure 3020 confirming the Second Amended Joint Plan of Reorganization of iPCS, Inc., iPCS Wireless, Inc. and iPCS Equipment, Inc., Debtors and Debtors In Possession, as modified, dated as of July 8, 2004 (Incorporated by reference to Exhibit 2.4 to the registration statement on Form S-4 filed by iPCS, Inc. on August 5, 2004 (SEC File No. 333-117942))

 

 

 

2.6

 

Joint Plan of Reorganization of Horizon PCS, Inc., Horizon Personal Communications, Inc. and Bright Personal Communications Services, LLC, dated as of September 20, 2004 (Incorporated by reference to Exhibit 2.2 to the registration statement on Form S-4 filed by Horizon PCS, Inc. on March 17, 2005 (SEC File No. 333-123383))

 

 

 

3.1

 

Second Restated Certificate of Incorporation of iPCS, Inc. (Incorporated by reference to Exhibit 3.1 to the current report on Form 8-K filed by iPCS, Inc. on July 1, 2005 (SEC File No. 333-32064))

 

 

 

3.2

 

Amended and Restated Bylaws of iPCS, Inc. (Incorporated by reference to Exhibit 3.2 to the transition report on Form 10-Q filed by iPCS, Inc. on February 14, 2006 (SEC File No. 333-32064))

 

 

 

3.3

 

Certificate of Incorporation of iPCS Wireless, Inc. (Incorporated by reference to Exhibit 3.4 to the registration statement on Form S-4 filed by iPCS, Inc. on January 8, 2001 (SEC File No. 333-47688))

 

 

 

3.4

 

Bylaws of iPCS Wireless, Inc. (Incorporated by reference to Exhibit 3.5 to the registration statement on Form S-4 filed by iPCS, Inc. on January 8, 2001 (SEC File No. 333-47688))

 

 

 

3.5

 

Certificate of Incorporation of iPCS Equipment, Inc. (Incorporated by reference to Exhibit 3.6 to the registration statement on Form S-4 filed by iPCS, Inc. on January 8, 2001 (SEC File No. 333-47688))

3.6

 

Bylaws of iPCS Equipment, Inc. (Incorporated by reference to Exhibit 3.7 to the registration statement on Form S-4 filed by iPCS, Inc. on January 8, 2001 (SEC File No. 333-47688))

 

 

 

3.7

 

Articles of Incorporation of Bright Personal Communications Services, LLC. (Incorporated by reference to Exhibit 3.7 to the registration statement on Form S-1 filed by iPCS, Inc. on August 11, 2005 (SEC File No. 333-117944))

 

 

 

3.8

 

Bylaws of Bright Personal Communications Services, LLC (Incorporated by reference to Exhibit 3.8 to the registration statement on Form S-1 filed by iPCS, Inc. on August 11, 2005 (SEC File No. 333-117944))

 

 

 

3.9

 

Articles of Incorporation of Horizon Personal Communications, Inc. (Incorporated by reference to Exhibit 3.9 to the registration statement on Form S-1 filed by iPCS, Inc. on August 11, 2005 (SEC File No. 333-117944))

 

 

 

3.10

 

Bylaws of Horizon Personal Communications, Inc. (Incorporated by reference to Exhibit 3.10 to the registration statement on Form S-1 filed by iPCS, Inc. on August 11, 2005 (SEC File No. 333-117944))

 

 

 

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

 

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Exhibit 99.1 to the current report on Form 8-K filed by iPCS, Inc. with the SEC on July 1, 2005 (SEC File No. 333-32064))

 

 

 

4.2

 

Indenture dated as of April 30, 2004, by and among, iPCS Escrow Company, iPCS, Inc., iPCS Wireless, Inc., iPCS Equipment, Inc. and U.S. Bank National Association (Incorporated by reference to Exhibit 4.1 to the registration statement on Form S-4 filed by iPCS, Inc. with the SEC on August 5, 2004 (SEC File No. 333-117942))

 

 

 

4.3

 

Indenture, dated as of July 19, 2004, by and among Horizon PCS Escrow Company, Horizon PCS, certain subsidiary guarantors and U.S. Bank National Association, as Trustee (Incorporated by reference to Exhibit 4.1 to the registration statement on Form S-4 filed by Horizon PCS, Inc. with the SEC on March 19, 2005 (SEC File No. 333-123383))

 

 

 

4.4

 

First Supplemental Indenture, dated as of June 30, 2005, by and between U.S. Bank National Association, as Trustee, and iPCS, Inc. (Incorporated by reference to Exhibit 4.2 to the current report on Form 8-K filed by iPCS, Inc. with the SEC on July 1, 2005 (SEC File No. 333-117942))

 

 

 

4.5

 

Second Supplemental Indenture, dated as of July 15, 2005, by and among iPCS, Inc., iPCS Wireless, Inc., iPCS Equipment, Inc., Bright PCS Holdings, Inc. and U.S. Bank National Association, as Trustee (Incorporated by reference to Exhibit 4.5 to the transition report on Form 10-Q filed by iPCS, Inc. on February 14, 2006 (SEC File No. 333-32064))

 

 

 

4.6

 

First Supplemental Indenture, dated as of July 15, 2005, by and among iPCS, Inc., Bright Personal Communications Services, LLC, Horizon Personal Communications, Inc., Bright PCS Holdings, Inc. and U.S. Bank National Association, as Trustee (Incorporated by reference to Exhibit 4.6 to the transition report on Form 10-Q filed by iPCS, Inc. on February 14, 2006 (SEC File No. 333-32064))

 

 

 

10.1

 

Letter Agreement, dated as of February 6, 2006, by and between iPCS Wireless, Inc. and Timothy M. Yager amending Mr. Yager’s employment agreement (Incorporated by reference to Exhibit 99.1 to the current report on Form 8-K filed by iPCS, Inc. on February 7, 2006 (SEC File No. 333-32064))

 

 

 

10.2

 

Letter Agreement, dated as of February 6, 2006, by and between iPCS Wireless, Inc. and Stebbins B. Chandor, Jr. amending Mr. Chandor’s employment agreement (Incorporated by reference to Exhibit 99.2 to the current report on Form 8-K filed by iPCS, Inc. on February 7, 2006 (SEC File No. 333-32064))

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended

 

 

 

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350

 

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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: May 12, 2006

 

 

 

 

 

 

 

 

By:

 

/s/ STEBBINS B. CHANDOR, JR.

 

 

 

Stebbins B. Chandor, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

 

Date: May 12, 2006

 

 

 

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