**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                    |
|---------------------------------------------------------------------------------------------------|
| ** **                                                                                        | **o** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT  OF 1934** |
| ** **                                                                                        |
| **For the quarterly period ended**                                                                |
| ** **                                                                                        |
| **Or**                                                                                            |
| ** **                                                                                        |
| ** **                                                                                        | **ý** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT  OF 1934** |
| ** **                                                                                        |
| **For the transition period  from October 1, 2005 to December 31, 2005** |

 

**Commission File Numbers 333-32064**

 

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**iPCS, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 
| **Delaware**                                                     | ** ** | **36-4350876**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **1901 N. Roselle Road,  Schaumburg, Illinois**                  | ** ** | **60195**                             |
| (Address of principal  executive offices)                        |       | (Zip code)                            |
|                                                             |       |                                  |
| **(847) 885-2833**                                               |
| (Registrant’s telephone  number, including zip code)        |

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 Yes ý  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  (See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act).
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer ý |
|---------------------------|--------|---------------------|--------|------------------------------|

 

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

 Yes o  No ý

 

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Securities Exchange Act of 1934 subsequent to the distributionof securities under a plan confirmed by a court.

Yes ý  No o

 

As of February 3, 2006, there were 16,694,497 sharesof common stock, $0.01 par value per share, outstanding.

 

 

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**TABLE OF CONTENTS**

 
| PART I    |                                                                                                                             | 3  |
|----------------|----------------------------------------------------------------------------------------------------------------------------------|----|
| ITEM 1.        | FINANCIAL INFORMATION                                                                                                            | 3  |
|           | FINANCIAL STATEMENTS                                                                                                             | 3  |
|           | CONSOLIDATED BALANCE  SHEETS AS OF DECEMBER 31, 2005 AND SEPTEMBER 30, 2005 (UNAUDITED)                                | 3  |
|           | CONSOLIDATED  STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005  AND DECEMBER 31, 2004 (UNAUDITED) | 4  |
|           | CONSOLIDATED  STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005  AND DECEMBER 31, 2004 (UNAUDITED) | 5  |
|           | NOTES TO  UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS                                                                            | 6  |
| ITEM 2.        | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                      | 18 |
| ITEM 3.        | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                      | 33 |
| ITEM 4.        | CONTROLS  AND PROCEDURES                                                                                                         | 33 |
| PART II   | OTHER  INFORMATION                                                                                                               | 34 |
| ITEM 1.        | LEGAL  PROCEEDINGS                                                                                                               | 34 |
| ITEM 2.        | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                                     | 34 |
| ITEM 3.        | DEFAULTS  UPON SENIOR SECURITIES                                                                                                 | 34 |
| ITEM 4.        | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                             | 35 |
| ITEM 5.        | OTHER  INFORMATION                                                                                                               | 35 |
| ITEM 6.        | EXHIBITS                                                                                                                         | 35 |
| SIGNATURES     | 35                                                                                                                               |
| CERTIFICATIONS |                                                                                                                             |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**iPCS, INC.AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

** (Dollars in thousands, except share and pershare amounts)**

 
| ** **                                                                                                                                    | ** ** | **December 31,  2005** | ** ** | **September 30,  2005 (a)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
|                                                                                                                                          |       |                        |       |                             |       |
| **Assets**                                                                                                                                    |       |                        |       |                             |       |
| Current  Assets:                                                                                                                              |       |                        |       |                             |       |
| Cash and  cash equivalents                                                                                                                    |       | $                           | 110,837    |                             | $          | 98,107 |   |
| Investments                                                                                                                                   |       | —                      |       | 16,700                           |       |
| Accounts  receivable, net of allowance for doubtful accounts of $3,650 and $3,653,  respectively                                              |       | 31,115                      |       | 25,601                           |       |
| Receivable  from Sprint (Note 4)                                                                                                              |       | 44,193                      |       | 30,837                           |       |
| Inventories,  net of reserves for excess/obsolescence of $380 and $338, respectively (Note  4)                                                |       | 3,583                       |       | 3,179                            |       |
| Prepaid  expenses                                                                                                                             |       | 6,387                       |       | 5,717                            |       |
| Other  current assets                                                                                                                         |       | 3,125                       |       | 4,092                            |       |
| Total  current assets                                                                                                                         |       | 199,240                     |       | 184,233                          |       |
| Property and  equipment, net (Note 5)                                                                                                         |       | 147,254                     |       | 153,504                          |       |
| Financing  costs                                                                                                                              |       | 9,147                       |       | 9,590                            |       |
| Customer  activation costs                                                                                                                    |       | 1,435                       |       | 1,003                            |       |
| Intangible  assets, net (Note 6)                                                                                                         |       | 169,311                     |       | 178,800                          |       |
| Goodwill  (Note 6)                                                                                                                            |       | 146,391                     |       | 146,391                          |       |
| Other assets                                                                                                                                  |       | 435                         |       | 469                              |       |
| Total assets                                                                                                                                  |       | $                           | 673,213    |                             | $          | 673,990 |   |
|                                                                                                                                          |       |                        |       |                             |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                |       |                        |       |                             |       |
| Current  Liabilities:                                                                                                                         |       |                        |       |                             |       |
| Accounts  payable                                                                                                                             |       | $                           | 6,751      |                             | $          | 4,322 |   |
| Accrued  expenses                                                                                                                             |       | 26,109                      |       | 33,275                           |       |
| Payable to  Sprint (Note 4)                                                                                                                   |       | 60,204                      |       | 41,135                           |       |
| Deferred  revenue                                                                                                                             |       | 10,557                      |       | 10,486                           |       |
| Current  maturities of long-term debt and capital lease obligations (Note 7)                                                                  |       | 11                          |       | 17                               |       |
| Total  current liabilities                                                                                                                    |       | 103,632                     |       | 89,235                           |       |
| Customer  activation fee revenue                                                                                                              |       | 1,435                       |       | 1,003                            |       |
| Other  long-term liabilities                                                                                                                  |       | 9,104                       |       | 9,112                            |       |
| Long-term  debt and capital lease obligations, excluding current maturities (Note 7)                                                          |       | 304,037                     |       | 304,558                          |       |
| Total  liabilities                                                                                                                            |       | 418,208                     |       | 403,908                          |       |
| Commitments  and contingencies (Note 11)                                                                                                      |       | —                      |       | —                           |       |
|                                                                                                                                          |       |                        |       |                             |       |
| 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, 16,656,352 and  16,635,482 shares issued and outstanding, respectively |       | 167                         |       | 166                              |       |
| Additional  paid-in-capital                                                                                                                   |       | 329,877                     |       | 328,202                          |       |
| Unearned  compensation                                                                                                                        |       | (939                        | )          | (1,372                           | )          |
| Accumulated  deficiency                                                                                                                       |       | (74,100                     | )          | (56,914                          | )          |
| Total  stockholders’ equity                                                                                                              |       | 255,005                     |       | 270,082                          |       |
| Total  liabilities and stockholders’ equity                                                                                              |       | $                           | 673,213    |                             | $          | 673,990 |   |

 

See Notes to unaudited consolidated financialstatements.

 

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

 

3

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**iPCS, INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

** (Dollars in thousands, except per share data)**

 
| ** **                                                                          | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                          | ** ** | **December 31, 2005**     | ** ** | **December 31, 2004** | ** ** |
| ** **                                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Revenues:**                                                                       |       |                           |       |   |   |
| Service  revenue                                                                    |       | $                              | 70,996     |   | $ | 38,585 |   |
| Roaming  revenue                                                                    |       | 36,071                         |       | 15,748 |   |
| Equipment  and other                                                                |       | 2,485                          |       | 1,664 |   |
| Total  revenues                                                                     |       | 109,552                        |       | 55,997 |   |
| **Operating  Expenses:**                                                            |       |                           |       |   |   |
| Cost of  service and roaming (exclusive of depreciation, as shown separately below) |       | (62,766                        | )          | (29,699 | ) |
| Cost of  equipment                                                                  |       | (9,150                         | )          | (5,720 | ) |
| Selling and  marketing                                                              |       | (18,216                        | )          | (9,854 | ) |
| General and  administrative                                                         |       | (7,907                         | )          | (2,091 | ) |
| Depreciation  (Note 5)                                                              |       | (12,039                        | )          | (8,459 | ) |
| Amortization  of intangible assets (Note 6)                                         |       | (9,489                         | )          | (3,048 | ) |
| Loss on  disposal of property and equipment                                         |       | (182                           | )          | (13 | ) |
| Total  operating expenses                                                           |       | (119,749                       | )          | (58,884 | ) |
| **Operating  loss**                                                                 |       | (10,197                        | )          | (2,887 | ) |
| Interest  income                                                                    |       | 1,104                          |       | 137 |   |
| Interest  expense                                                                   |       | (8,108                         | )          | (4,974 | ) |
| Other income  (expense), net                                                        |       | 15                             |       | 8 |   |
| **Loss  before benefit from income taxes**                                          |       | (17,186                        | )          | (7,716 | ) |
| Benefit from  income taxes                                                          |       | —                         |       | — |   |
| **Net loss**                                                                        |       | $                              | (17,186    | ) | $ | (7,716 | ) |
| Basic and  diluted loss per share of common stock                                   |       |                           |       |   |   |
| Loss  available to common stockholders                                              |       | $                              | (1.03      | ) | $ | (0.83 | ) |
| Weighted  average common shares outstanding                                         |       | 16,645,467                     |       | 9,269,166 |   |

 

See Notes to unaudited consolidated financialstatements.

 

4

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**iPCS, INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(Dollars inthousands)**

 
| ** **                                                                                                               | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                               | ** ** | **December 31, 2005**     | ** ** | **December 31, 2004** | ** ** |
| **Cash  Flows from Operating Activities:**                                                                               |       |                           |       |   |   |
| Net loss                                                                                                                 |       | $                              | (17,186    | ) | $ | (7,716 | ) |
| Adjustments  to reconcile net loss to net cash flows from operating activities:                                          |       |                           |       |   |   |
| Loss on  disposal of property and equipment                                                                              |       | 182                            |       | 13 |   |
| Depreciation  and amortization                                                                                           |       | 21,528                         |       | 11,507 |   |
| Non-cash  interest expense net of amortization of debt fair value adjustment                                             |       | (162                           | )          | 217 |   |
| Stock-based  compensation expense                                                                                        |       | 1,659                          |       | 23 |   |
| Provision  for doubtful accounts                                                                                         |       | 1,660                          |       | 820 |   |
| Sales of  investments                                                                                                    |       | 16,700                         |       | — |   |
| Changes in  assets and liabilities:                                                                                      |       |                           |       |   |   |
| Accounts  receivable                                                                                                     |       | (7,174                         | )          | (232 | ) |
| Receivable  from Sprint                                                                                                  |       | (13,357                        | )          | 624 |   |
| Inventories,  net                                                                                                        |       | (404                           | )          | (347 | ) |
| Prepaid  expenses, other current and long term assets                                                                    |       | (414                           | )          | (469 | ) |
| Accounts  payable, accrued expenses and other long term liabilities                                                      |       | (1,743                         | )          | (6,875 | ) |
| Payable to  Sprint                                                                                                       |       | 19,069                         |       | (1,779 | ) |
| Deferred  revenue                                                                                                        |       | 503                            |       | 299 |   |
| Net cash  flows from operating activities                                                                                |       | 20,861                         |       | (3,915 | ) |
| **Cash  Flows from Investing Activities:**                                                                               |       |                           |       |   |   |
| Purchases of  property and equipment                                                                                     |       | (8,904                         | )          | (5,771 | ) |
| Proceeds  from disposition of fixed assets                                                                               |       | 333                            |       | 12,139 |   |
| Net cash  flows from investing activities                                                                                |       | (8,571                         | )          | 6,368 |   |
| **Cash  Flows from Financing Activities:**                                                                               |       |                           |       |   |   |
| Proceeds  from the exercise of stock options                                                                             |       | 449                            |       | — |   |
| Payments on  capital lease obligations                                                                                   |       | (9                             | )          | (1 | ) |
| Debt  financing costs                                                                                                    |       | —                         |       | (254 | ) |
| Net cash  flows from financing activities                                                                                |       | 440                            |       | (255 | ) |
| Net increase  in cash and cash equivalents                                                                               |       | 12,730                         |       | 2,198 |   |
| **Cash and  cash equivalents at beginning of period**                                                                    |       | 98,107                         |       | 57,760 |   |
| **Cash and  cash equivalents at end of period**                                                                          |       | $                              | 110,837    |   | $ | 59,958 |   |
|                                                                                                                     |       |                           |       |   |   |
| **Supplemental  disclosure of cash flow information- cash paid for interest**                                            |       | $                              | 9,488      |   | $ | 9,540 |   |
| **Supplemental  disclosure for non-cash investing activities:**                                                          |       |                           |       |   |   |
| Capitalized  interest                                                                                                    |       | $                              | 60         |   | $ | — |   |
| Accounts  payable and accrued expenses incurred for the acquisition of property,  equipment and construction in progress |       | 2,328                          |       | 337 |   |

 

See Notes to unaudited consolidated financialstatements.

 

5

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**iPCS, INC. AND SUBSIDIARIES**

**NOTESTO 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 Affiliateof Sprint through three wholly owned subsidiaries: iPCS Wireless, Inc.,Horizon Personal Communications, Inc. and Bright Personal CommunicationsServices, LLC. Each of these subsidiaries is a party to a separate affiliationagreement with Sprint PCS, the operator of a 100% digital personalcommunications service (“PCS”) wireless network with licenses to provide voiceand data service to the entire United States population using a singlefrequency band and a single technology.

 

iPCS, Inc.was formed in March 2000 as a holding company for iPCS Wireless. iPCSWireless, as the successor to Illinois PCS, LLC, became a PCS affiliate ofSprint in 1999. Through this affiliation agreement, as amended, iPCS has theexclusive right to market and provide Sprint PCS products and services in 40markets in Illinois, Michigan, Iowa, and eastern Nebraska. On November 30,2001, the Company was acquired by AirGate PCS, Inc. (“AirGate”), anotherPCS Affiliate of Sprint. iPCS was designated as an unrestricted subsidiary ofAirGate and both companies operated as separate business entities. On February 23,2003, the Company and its subsidiaries filed for Chapter 11 bankruptcyprotection. 

 

OnOctober 17, 2003, AirGate irrevocably transferred its ownership of iPCS toa trust, the beneficial owners of which trust were AirGate’s stockholders atthe date of transfer. AirGate retained no ownership interest in the trust orthe Company. Upon the Company’s emergence from bankruptcy on July 20,2004, iPCS’s common stock held by the trust was cancelled and the trustterminated by its terms.

 

OnJuly 1, 2005, iPCS completed a merger with Horizon PCS, Inc. (“HorizonPCS”), another PCS Affiliate of Sprint, in which Horizon PCS merged with andinto iPCS, Inc., with iPCS, Inc. as the surviving corporation (seeNote 3). Through its two affiliation agreements with Sprint PCS, two whollyowned subsidiaries of Horizon PCS have the exclusive right to market andprovide Sprint PCS products and services in 40 markets in Ohio, Indiana,Tennessee, Michigan, New York, New Jersey, Maryland, Pennsylvania, and WestVirginia.

 

Theunaudited consolidated balance sheet as of December 31, 2005, theunaudited consolidated statements of operations for the three months ended December 31,2005 and 2004, the unaudited consolidated statements of cash flows for thethree months ended December 31, 2005 and 2004 and related footnotes havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial information and Rule 10-01of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. The financial information presented herein should be read inconjunction with the Company’s 2005 Annual Report on Form 10-K whichincludes information and disclosures not presented herein.  All significant intercompany accounts andtransactions have been eliminated in consolidation. In the opinion ofmanagement, the unaudited consolidated financial statements contain all of theadjustments, consisting only of normal recurring adjustments, necessary topresent fairly, in summarized form, the consolidated financial position,results of operations and cash flows of the Company.  The results of operations for the threemonths ended December 31, 2005, are not indicative of the results that maybe expected for the full fiscal 2006.

 

ThePCS market is characterized by significant risks as a result of rapid changesin technology and increasing competition. The Company’s continuing operations are dependent upon Sprint’s abilityto perform its obligations under the affiliation agreements.  In addition, the Company must be able toattract and maintain a sufficient customer base and achieve satisfactory growthwhile successfully managing operations to generate enough cash from operationsto meet future obligations.  Changes intechnology, increased competition, or the inability to obtain required financingor achieve break-even operating cash flow, among other factors, could have anadverse effect on the Company’s financial position and results of operations.

 

Certainreclassifications have been made to the Consolidated Statement of Operationsfor the three months ended December 31, 2004 to conform to the currentyear presentation.

 

**(2)  Summary of Significant Accounting Policies**

 

*Loss Per Share:*

 

Basic and diluted loss per share for the Company arecalculated by dividing the net loss available to common

 

6

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stockholdersby the weighted average number of shares of common stock of the Company. Thecalculation 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 theincremental potential common shares from any assumed exercise of stock optionsis antidilutive. Potential common shares excluded from the loss per sharecomputations for the three months ended December 31, 2005 and 2004 were773,086 and 620,500, respectively.

 

**(3)  Merger with Horizon PCS**

 

OnJuly 1, 2005, the Company completed its tax-free stock for stock mergertransaction with Horizon PCS in which Horizon PCS merged with and into iPCS, Inc.with iPCS, Inc. as the surviving corporation. Horizon PCS was a PCSAffiliate of Sprint whose territory included 40 markets in nine contiguousstates. The transaction was accounted for under the purchase method and theresults of Horizon PCS have been included in the Company’s consolidatedfinancial statements since the acquisition date.

Theunaudited pro forma condensed consolidated statement of operations for thethree months ended December 31, 2004, set forth below, present the resultsof operations as if the merger had occurred on October 1, 2004 and are notnecessarily indicative of future results or actual results that would have beenachieved had the acquisition occurred as of the beginning of such period.

 
| ** **                                        | ** ** | **For the Three Months  Ended  December 31, 2004** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | ** **                                                             | ** ** |
| Total  revenues                                   |       | $                                                                      | 100,112    |   |
| Net loss                                          |       | (19,710                                                                | )          |
| Basic and  diluted loss per share of common stock |       | $                                                                      | (1.21      | ) |
| Weighted  average shares outstanding              |       | 16,231,926                                                             |       |

 

**(4)  Sprint Agreements**

 

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

 

For the three months ended December 31, 2005and 2004, approximately 98% and 97%, respectively, of the Company’s revenue wasderived from data provided by Sprint. Of the Company’s cost of service androaming, approximately 67% and 70% for the three months ended December 31,2005, and 2004, respectively, was derived from data provided by Sprint. TheCompany reviews all charges from Sprint and disputes certain of these chargesin cases where the Company does not receive enough supporting detail tovalidate the charges or it does not believe Sprint can charge the Company forcertain expenses under the terms of the Sprint agreements.  At December 31, 2005 and September 30,2005, the Company had approximately $0.1 million in disputed charges.

 

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Amounts relating to the Sprint agreements for thethree months ended December 31, 2005 and 2004 are as follows (inthousands):

 
| ** **                                                          | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                          | ** ** | **December 31, 2005**     | ** ** | **December 31, 2004** | ** ** |
| **Amounts  included in the Consolidated Statements of Operations:** | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Service  revenue                                                    |       | $                              | 70,996     |   | $ | 38,585 |   |
| Roaming  revenue                                                    |       | $                              | 36,071     |   | $ | 15,748 |   |
| Cost of  service and roaming:                                       |       |                           |       |   |   |
| Roaming                                                             |       | $                              | 22,043     |   | $ | 9,839 |   |
| Customer  service                                                   |       | 10,655                         |       | 5,588 |   |
| Affiliation  fees                                                   |       | 5,676                          |       | 3,054 |   |
| Long  distance                                                      |       | 3,163                          |       | 1,580 |   |
| Other                                                               |       | 708                            |       | 676 |   |
| Total cost  of service and roaming                                  |       | $                              | 42,245     |   | $ | 20,737 |   |
| Cost of  equipment                                                  |       | $                              | 9,150      |   | $ | 5,720 |   |
| Selling and  marketing                                              |       | $                              | 6,028      |   | $ | 3,382 |   |

 
| ** **                                                | ** ** | **December 31, 2005** | ** ** | **September 30, 2005** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| **Amounts  included in the Consolidated Balance Sheets:** | ** ** | ** **                 | ** ** | ** **                  | ** ** |
| Receivable  from Sprint                                   |       | $                          | 44,193     |                        | $          | 30,837 |   |
| Inventories,  net                                         |       | 3,583                      |       | 3,179                       |       |
| Payable to  Sprint                                        |       | 60,204                     |       | 41,135                      |       |
|                                                           |            |                            |            |                             |            |  |  |

 

**(5)  Property and Equipment**

 

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

 
| ** **                                      | ** ** | **December 31, 2005** | ** ** | **September 30, 2005** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Network  assets                                 |       | $                          | 182,898    |                        | $          | 177,200 |   |
| Computer  equipment                             |       | 2,315                      |       | 1,603                       |       |
| Furniture,  fixtures, and office equipment      |       | 5,743                      |       | 5,105                       |       |
| Vehicles                                        |       | 396                        |       | 396                         |       |
| Construction  in progress                       |       | 8,783                      |       | 10,105                      |       |
| Total  property and equipment                   |       | 200,135                    |       | 194,409                     |       |
| Less  accumulated depreciation and amortization |       | (52,881                    | )          | (40,905                     | )          |
| Total  property and equipment, net              |       | $                          | 147,254    |                        | $          | 153,504 |   |

 

**(6)  Intangible Assets and Goodwill**

 

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

 

Inconnection with the merger with Horizon PCS (see Note 3), the Company allocatedportions of the 

 

8

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purchaseprice to identifiable intangible assets consisting of the right to provideservice under the Sprint affiliation agreements, the acquired customer base,and an FCC license for a small market in Ohio. The amount allocated to theright to provide service under the Sprint affiliation agreements, the customerbase 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 valueof the net assets acquired, including these identifiable intangible assets,which totaled $146.4 million was recorded as goodwill. The goodwill is notdeductible for income taxes.

 

The intangible assets relating to the customer baseare being amortized over the estimated average life of a customer of30 months. The intangible assets for the right to provide service underthe Sprint affiliation agreements are being amortized over the remaining termof the respective agreements.  The FCClicense has an indefinite life and is not being amortized.

 

The weighted average amortization period, grosscarrying amount, accumulated amortization and net carrying amount of intangibleassets at December 31, 2005 and September 30, 2005 are as follows (inthousands):

 
| ** **                                                        | ** ** | **December 31, 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 |   | (8,692 | ) | 117,829 |   |
| Customer  base                                                    |       | 30 months                                       |       | 71,956 |   | (21,974 | ) | 49,982 |   |
|                                                              |       | 117 months                                      |       | $ | 199,977 |   | $ | (30,666 | ) | $ | 169,311 |   |

 
| ** **                                                        | ** ** | **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 |   |

 

 

Theamortization expense for the three months ended December 31, 2005 and 2004was $9.5 million and $3.0 million, respectively.  Aggregate amortization expense relative tointangible assets for the periods shown will be as follows:

 
| **Year Ended September 30,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2006                              |       | $          | 37,958     |   |
| 2007                              |       | 32,271     |       |
| 2008                              |       | 14,476     |       |
| 2009                              |       | 9,176      |       |
| 2010                              |       | 9,176      |       |
| Thereafter                        |       | 74,243     |       |
| Total                             |       | $          | 177,300    |   |

 

9

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**(7)  Long-Term Debt**

 

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

 
| ** **                                                                  | ** ** | **December 31, 2005** | ** ** | **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                  |       | 13,651                     |       | 14,169                      |       |
| Capital  lease obligations                                                  |       | 397                        |       | 406                         |       |
| Total  long-term debt and capital lease obligations                         |       | 304,048                    |       | 304,575                     |       |
| Less:  current maturities                                                   |       | (11                        | )          | (17                         | )          |
| Long-term  debt and capital lease obligations, excluding current maturities |       | $                          | 304,037    |                        | $          | 304,558 |   |

 

In connection with the merger of Horizon PCS (see Note 3), the allocationof the purchase price resulted in an increase of the value of the 113/8% senior notes of approximately $14.7 million, whichis recorded as long-term debt in the Consolidated Balance Sheets.  This amount will be amortized over theremaining life of the 113/8% senior notes as a reduction to interest expense.  For the three months ended December 31,2005, the reduction to interest expense was approximately $0.5 million.  This amortization will not increase theprincipal 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 principalamount of 111/2% seniornotes and the $125.0 million in aggregate principal amount of 113/8% senior notes contain covenants which restrict theCompany’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 theCompany to the extent of the assets securing such indebtedness, and to anyindebtedness of subsidiaries of the Company that do not guarantee the seniornotes. For the 111/2%senior notes, interest is payable semi-annually in arrears on May 1 and November 1to the holders of record on the immediately preceding April 15 and October 15.

Forthe 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.

 

At September 30, 2005, the Company was not in compliance with theindentures governing its 113/8% senior notes and its 111/2% senior notes because cash proceeds from the 113/8% senior notes were invested in short-term AAA rated auction ratecertificates – which are not permitted investments under the indentures — therebycausing an event of default which existed as of September 30, 2005.  The investments were sold on October 26,2005 and the event of default did not continue beyond such date. 

 

**(8)  Income Taxes**

 

The Company’s effective income tax rate for theinterim periods presented is based on management’s estimate of the Company’seffective tax rate for the applicable year and differs from the federalstatutory income tax rate primarily due to nondeductible permanent differences,state income taxes and changes in the valuation allowance for deferred incometaxes.  In assessing the realizability ofdeferred tax assets, management considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible. No benefit for federal income taxes has been recorded forthe three months ended December 31, 2005 and 2004 as the net deferred taxasset generated, primarily from temporary differences related to the netoperating loss, was offset by a full valuation allowance because it is notconsidered more likely than not that these benefits will be realized due to theCompany’s losses since inception.

 

10

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**(9) Stock-Based Compensation**

 

The Company has two long-term incentive planscurrently in place.  The iPCS 2004long-term incentive plan, as amended, (the “iPCS Plan”) was approved by theCompany’s board of directors as provided by Company’s plan ofreorganization.  Under the iPCS Plan, theCompany may grant to employees, directors and consultants of the Companyincentive and non-qualified stock options, stock appreciation rights,restricted and unrestricted stock awards and cash incentive awards.  The total number of shares that may beawarded under this plan is 1.25 million shares of common stock.  Stock options issued under the iPCS plan havea ten-year life with vesting on a quarterly basis.  Vesting periods are four years for employeesand one year for directors.  The HorizonPCS long-term 

incentiveplan (the “Horizon plan”) was assumed in connection with the merger withHorizon PCS (see Note 3). Under the Horizon plan, the Company may grant toemployees and directors options that have a ten-year life and vest equally insix-month increments over three years from the date of grant.  The total number of shares that may begranted under the Horizon plan is 762,227 shares.  

 

Effective October 1, 2005, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment” utilizing the modified prospective method. Under SFAS No. 123Rcompanies are required to record compensation expense for all share basedpayment award transactions measured at fair value.  Under the modified prospective method SFAS No. 123Rrequires compensation cost to be recognized for 1) all share-based compensationexpense arrangements granted after the adoption date and 2) all remainingunvested share-based compensation arrangements granted prior to the adoptiondate.  Prior periods have not beenrestated. The Company uses the Black-Scholes model to value its stock optiongrants; however, there were no stock option grants in the three months ended December 31,2005.

 

Prior to October 1, 2005, the Company appliedAPB Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations to account for its employee and director stock options.The company did not record any stock-based compensation expense for stockoption grants prior to October 1, 2005 because all stock option awardswere granted at fair market value.  Forthe three months ended December 31, 2004, the Company recognized $23,000of stock-based compensation expense related to restricted stock grants.

 

The following table shows stock-based compensationexpense by type of share-based award for the three months ended December 31,2005 and 2004 included in the consolidated statements of operations (inthousands):

 
| ** **                                                    | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **December 31,  2005**    | ** ** | **December 31,  2004** | ** ** |
| Restricted  stock                                             |       | $                              | 27         |   | $ | 23 |   |
| Amortization  of unearned compensation of stock option awards |       | 221                            |       | — |   |
| Fair value  expense of stock option awards                    |       | 1,411                          |       | — |   |
| Total  stock-based compensation                               |       | $                              | 1,659      |   | $ | 23 |   |

 

Asof December 31, 2005, the total remaining unrecognized compensation costrelated to restricted stock grants, amortization of unearned compensation ofstock option awards and fair value expense of stock option awards was $0.3million, $0.7 million and $4.8 million, respectively, which will be amortizedover the weighted average remaining required service period of 2.8 years, 1.8years and 2.1 years, respectively.

 

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

 
| ** **                      | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **December 31,  2005**    | ** ** | **December 31,  2004** | ** ** |
| Cost of  service and roaming    |       | $                              | 225        |   | $ | 8 |   |
| Sales and  marketing            |       | 208                            |       | 5 |   |
| General and  administrative     |       | 1,226                          |       | 10 |   |
| Total  stock-based compensation |       | $                              | 1,659      |   | $ | 23 |   |

 

11

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The following is a summary of options activity underthe Company’s long-term incentive plans for the three months ended December 31,2005:

 
| ** **                                         | ** ** | **Number of Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| Options  outstanding as of September 30, 2005 |       | 837,784               |       | $                                    | 17.20      |   |
| Exercised                                          |       | (20,070               | )          | 22.37                                |       |
| Forfeited                                          |       | (44,628               | )          | 23.00                                |       |
| Options  outstanding as of December 31, 2005  |       | 773,086               |       | $                                    | 16.73      |   |

 

The following is a summary of options outstandingand exercisable at December 31, 2005:

 
| ** **                    | ** ** | **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                 |       | 8.55                                                           |       | $ | 10.27 |   |   |   | 154,688 |   | 8.55 |   | $ | 10.27 |   |   |   |
| $ 18.90-$19.00           |       | 47,000                  |       | 8.65                                                           |       | 19.00 |   |   |   | 15,750 |   | 8.65 |   | 19.00 |   |   |   |
| $ 23.00-$25.60           |       | 211,461                 |       | 7.23                                                           |       | 23.45 |   |   |   | 94,797 |   | 5.31 |   | 23.16 |   |   |   |
| $ 35.00-$40.50           |       | 67,750                  |       | 9.55                                                           |       | 36.85 |   |   |   | 25,344 |   | 9.54 |   | 35.62 |   |   |   |
|                          |       | 773,086                 |       | 8.30                                                           |       | $ | 16.73 |   | $ | 24,364 |   | 290,579 |   | 7.59 |   | $ | 17.16 |   | $ | 9,035 |   |
|                               |            |                         |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Prior to the adoption of SFAS No. 123R, theCompany provided the disclosures required under SFAS No. 123 “Accountingfor Stock-Based Compensation.”  For thethree months ended December 31, 2004, if compensation expense for thestock option grants had been determined on fair value at the grant dateconsistent with the requirements of SFAS No. 123, the Company’s net lossand net loss per common share would have been the pro forma amounts below:

 
| ** **                                                             | ** ** | **Three Months Ended  December 31, 2004** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| **Net loss  (in thousands):**                                          | ** ** | ** **                                     | ** ** |
| As reported                                                            |       | $                                              | (7,716     | ) |
| Plus non-cash  stock compensation in accordance with SFAS No. 123 |       | (351                                           | )          |
| Pro forma                                                              |       | $                                              | (8,067     | ) |
| **Basic  and diluted loss per common share:**                          | ** ** | ** **                                     | ** ** |
| As reported                                                            |       | $                                              | (0.83      | ) |
| Pro forma                                                              |       | $                                              | (0.87      | ) |

 

The Company’s calculation of fair value of theoptions granted in the three months ended December 31, 2004 was made usingthe Black-Scholes model with the following assumptions:

 
| Risk free  interest rate |   | 3.52  | %      |
|--------------------------|--------|-------|--------|
| Volatility               |   | 67.83 | %      |
| Dividend  yield          |   | 0.0   | %      |
| Expected  life in years  |   | 4     |   |

 

12

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**(10) Tower Sales**

 

**On September 4, 2004, the Companysigned an agreement with TCP Communications, LLC (“TCP”) whereby the Companyagreed to sell up to 92 of its owned towers to TCP.  The towers are priced individually, and afterthe sale, the Company leases space on the towers sold to TCP at rates and termsconsistent with that of the Company’s existing leases.  The transaction is subject to exclusion oftowers by TCP based on its due diligence and other customary closingconditions.**

 

**During the three months ended December 31,2004, the Company sold 68 towers to TCP for proceeds, net of broker’s fees,totaling approximately $12.1 million. Because the cost basis of these towers was adjusted to fair value as aresult of the Company’s reorganization in 2004, and in accordance withfresh-start accounting under SOP 90-7, no gain or loss on the sales wasrecorded.**

 

**(11)  Commitments and Contingencies**

 

*Commitments*

 

On November 22, 2004, the Company signed aletter of agreement with Nortel Networks to replace the Company’s Lucentnetwork equipment deployed in its Michigan markets with Nortel equipmentincluding one switch, 232 base stations and various additional capacity andnetwork equipment. Under the terms of the agreement, the Company has agreed topurchase equipment totaling approximately $15.2 million and will receivespecial pricing on future purchases through December 31, 2007.  As of December 31, 2005, the Company hadpurchased approximately $13.6 million of network equipment under the agreement.

 

In addition, in January 2005, Horizon PCSsigned a letter of agreement for $14.0 million with Nortel Networks to replacethe Motorola network equipment deployed in its Fort Wayne, Indiana,Chillicothe, Ohio, and Johnson City, Tennessee markets with Nortel equipmentincluding 390 base stations, various additional capacity growth and networkequipment. Under the terms of the agreement, the Company has agreed to purchaseequipment totaling $13.0 million and will receive special pricing onfuture purchases through June 30, 2007. Through December 31, 2005,the Company had purchased the $13.0 million of equipment purchases requiredunder this agreement.

 

On December 31, 2005, the Company signed aletter of agreement with Nortel Networks to replace the Company’s Motorolaequipment currently deployed in its Pennsylvania, New York, New Jersey andMaryland markets with Nortel equipment.  Under the terms of the agreement, the Companyhas agreed to purchase equipment required to replace 425 existing base stationsand related network infrastructure, plus various additional equipment to supportfuture network footprint and capacity expansion, totaling approximately $16.5million, with an option to purchase additional network capacity equipmenttotaling $0.5 million.  As of December 31,2005, the Company had not purchased any equipment under this agreement. 

 

*Litigation*

 

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

 

OnJuly 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 CookCounty, Illinois. On July 22, 2005, Horizon Personal Communications, Inc.and Bright Personal Communications Services, LLC, wholly owned subsidiaries ofiPCS, Inc., filed a complaint against Sprint and Sprint PCS and NextelCommunications, Inc. in the Court of Chancery of the State of Delaware,New Castle County. The complaints are substantially similar and allege, among

 

13

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otherthings, that following the consummation of the merger between Sprint andNextel, Sprint will breach its exclusivity obligations under its affiliationagreements, as amended, with the Company (see Note 4). The Company sought,among other things, a temporary restraining order, a preliminary injunction anda permanent injunction enjoining Sprint and those acting in concert with itfrom engaging in certain conduct post-closing that would violate the Company’saffiliation agreements with Sprint PCS.

 

On July 18, 2005, in Cook County Circuit Courtthe Company obtained a temporary restraining order prohibiting Sprint fromsharing its confidential information with Nextel in violation of iPCS Wireless’smanagement agreement and the Company continued the hearing to hear furthertestimony on its request for additional injunctive relief.

 

OnJuly 28, 2005, iPCS, Inc. and certain of its wholly ownedsubsidiaries entered into a Forbearance Agreement (the “Agreement”) with Sprintrelating to the complaints filed against Sprint. The Agreement sets forth theCompany’s agreement that the Company’s subsidiaries would not seek a temporaryrestraining order or a preliminary injunction against Sprint so long as Sprintoperates the Nextel business subject to the limitations set forth in theAgreement. The Agreement contemplates that the parties will proceed as quicklyas possible to a full trial on the merits of the complaint seeking a permanentinjunction against Sprint.

 

In addition to the foregoing, from time to time, theCompany is involved in various legal proceedings relating to claims arising inthe ordinary course of business and in connection with the Company’s bankruptcypetition. 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 amaterial adverse effect on the Company’s business, financial condition orresults of operations.

 

**(12)  Consolidating Financial Information**

 

The 111/2% senior notes and the 113/8 % senior notes are fully,unconditionally and joint and severally guaranteed by the Company’s domesticunrestricted subsidiaries, including iPCS Wireless, Inc.,iPCS Equipment, Inc., Horizon Personal Communications, Inc., andBright Personal Communications Services, LLC, which are wholly owned subsidiariesof iPCS, Inc. The following consolidating financial information as of December 31,2005 and September 30, 2005 and for the three months ended December 31,2005 and 2004 is presented for iPCS, Inc., iPCS Wireless, Inc., iPCSEquipment, Inc., Horizon Personal Communications, Inc., and BrightPersonal Communications Services, LLC (in thousands): 

 

14

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**iPCS, Inc.and Subsidiaries**

**CondensedConsolidating Balance Sheet**

**as of December 31,2005**

 
| ** **                                                         | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|---------------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Cash and cash equivalents                                          |       | $                  | —     |               | $          | 68,993              |       | $                         | —     |       | $          | 41,099           |       | $                      | 745        |   | $ | — |   | $ | 110,837 |   |
| Other current assets                                               |       | 143,586            |       | 48,917             |       | 26,945              |       | 54,199                    |       | 38,202     |       | (223,446         | )          | 88,403                 |       |
| Total current assets                                               |       | 143,586            |       | 117,910            |       | 26,945              |       | 95,298                    |       | 38,947     |       | (223,446         | )          | 199,240                |       |
| Property and equipment, net                                        |       | —             |       | 70,521             |       | 13,968              |       | 45,771                    |       | 17,082     |       | (88              | )          | 147,254                |       |
| Intangible assets, net                                             |       | —             |       | 60,946             |       | —              |       | 190,043                   |       | 64,713     |       | —           |       | 315,702                |       |
| Other non-current assets                                           |       | 5,688              |       | 1,194              |       | —              |       | 3,153                     |       | 982        |       | —           |       | 11,017                 |       |
| Investment in subsidiaries                                         |       | 276,972            |       | —             |       | —              |       | —                    |       | —     |       | (276,972         | )          | —                 |       |
| Total assets                                                       |       | $                  | 426,246    |               | $          | 250,571             |       | $                         | 40,913     |       | $          | 334,265          |       | $                      | 121,724    |   | $ | (500,506 | ) | $ | 673,213 |   |
| Current liabilities                                                |       | $                  | 6,241      |               | $          | 217,039             |       | $                         | 33         |       | $          | 69,184           |       | $                      | 34,669     |   | $ | (223,534 | ) | $ | 103,632 |   |
| Long-term debt                                                     |       | 165,000            |       | 386                |       | —              |       | 105,985                   |       | 32,666     |       | —           |       | 304,037                |       |
| Other long-term liabilities                                        |       | —             |       | 3,242              |       | —              |       | 6,943                     |       | 354        |       | —           |       | 10,539                 |       |
| Total liabilities                                                  |       | 171,241            |       | 220,667            |       | 33                  |       | 182,112                   |       | 67,689     |       | (223,534         | )          | 418,208                |       |
| Stockholders’ equity (deficiency)                             |       | 255,005            |       | 29,904             |       | 40,880              |       | 152,153                   |       | 54,035     |       | (276,972         | )          | 255,005                |       |
| Total liabilities and stockholders’  equity (deficiency) |       | $                  | 426,246    |               | $          | 250,571             |       | $                         | 40,913     |       | $          | 334,265          |       | $                      | 121,724    |   | $ | (500,506 | ) | $ | 673,213 |   |

 

**iPCS, Inc. and Subsidiaries**

**Condensed Consolidating BalanceSheet**

**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                |       |
| 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 |   |

 

 

15

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**iPCS, Inc.and Subsidiaries**

**CondensedConsolidating Statement of Operations**

**For theThree Months Ended December 31, 2005**

 
| ** **                                        | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|----------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Total revenues                                    |       | $                  | —     |               | $          | 61,739              |       | $                    | 1,321      |       | $          | 32,269           |       | $                      | 15,544     |   | $ | (1,321 | ) | $ | 109,552 |   |
| Cost of revenues                                  |       | —             |       | (40,819            | )          | —              |       | (22,801              | )          | (9,617     | )          | 1,321            |       | (71,916                | )          |
| Selling and marketing                             |       | —             |       | (10,033            | )          | —              |       | (5,506               | )          | (2,677     | )          | —           |       | (18,216                | )          |
| General and administrative                        |       | (529               | )          | (3,517             | )          | —              |       | (3,835               | )          | (26        | )          | —           |       | (7,907                 | )          |
| Depreciation and amortization                     |       | —             |       | (8,504             | )          | (1,395              | )          | (8,846               | )          | (2,783     | )          | —           |       | (21,528                | )          |
| Gain (loss) on disposal of property and equipment |       | —             |       | (58                | )          | (8                  | )          | (88                  | )          | (34        | )          | 6                |       | (182                   | )          |
| Total operating expenses                          |       | (529               | )          | (62,931            | )          | (1,403              | )          | (41,076              | )          | (15,137    | )          | 1,327            |       | (119,749               | )          |
| Other, net                                        |       | (4,968             | )          | (60                | )          | 768                 |       | (2,005               | )          | (724       | )          | —           |       | (6,989                 | )          |
| Loss in subsidiaries                              |       | (11,695            | )          | —             |       | —              |       | —               |       | —     |       | 11,695           |       | —                 |       |
| Net income (loss)                                 |       | $                  | (17,192    | )                  | $          | (1,252              | )          | $                    | 686        |       | $          | (10,812          | )          | $                      | (317       | ) | $ | 11,701 |   | $ | (17,186 | ) |

 

**iPCS, Inc. and Subsidiaries**

**Condensed Consolidating Statementof Operations**

**For the Three Months Ended December 31,2004**

 
| ** **                                         | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|------------------|------------|------------------------|------------|
| Total revenues                                     |       | $                  | —     |               | $          | 55,997              |       | $                | 2,251      |                   | $          | (2,251 | ) | $ | 55,997 |   |
| Cost of revenues                                   |       | —             |       | (36,727            | )          | (938                | )          | 2,246            |       | (35,419                | )          |
| Selling and marketing                              |       | —             |       | (9,854             | )          | —              |       | —           |       | (9,854                 | )          |
| General and administrative                         |       | (140               | )          | (1,951             | )          | —              |       | —           |       | (2,091                 | )          |
| Depreciation and  amortization                     |       | —             |       | (10,118            | )          | (1,389              | )          | —           |       | (11,507                | )          |
| Gain (loss) on disposal of  property and equipment |       | —             |       | (18                | )          | —              |       | 5                |       | (13                    | )          |
| Total operating expenses                           |       | (140               | )          | (58,668            | )          | (2,327              | )          | 2,251            |       | (58,884                | )          |
| Other, net                                         |       | (4,961             | )          | (451               | )          | 583                 |       | —           |       | (4,829                 | )          |
| Loss in subsidiaries                               |       | (2,747             | )          | —             |       | —              |       | 2,747            |       | —                 |       |
| Net income (loss)                                  |       | $                  | (7,848     | )                  | $          | (3,122              | )          | $                | 507        |                   | $          | 2,747 |   | $ | (7,716 | ) |

 

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**iPCS, Inc.and Subsidiaries**

**CondensedConsolidating Statement of Cash Flows**

**For theThree Months Ended December 31, 2005**

 
| ** **                                            | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Horizon  Per Com** | ** ** | **Bright** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|----------------------|------------|------------|------------|------------------|------------|------------------------|------------|
| Operating activities                                  |       | $                  | —     |               | $          | (1,792              | )          | $                    | 116        |       | $          | 19,572           |       | $                      | 2,965      |   | $ | — |   | $ | 20,861 |   |
| Investing activities                                  |       | —             |       | (5,467             | )          | (116                | )          | (578                 | )          | (2,410     | )          |             |       | (8,571                 | )          |
| Financing activities                                  |       | —             |       | 447                |       | —              |       | (7                   | )          | —     |       | —           |       | 440                    |       |
| Increase in cash and cash equivalents                 |       | —             |       | (6,812             | )          | —              |       | 18,987               |       | 555        |       | —           |       | 12,730                 |       |
| Cash and cash equivalents at beginning of period |       | —             |       | 75,805             |       | —              |       | 22,112               |       | 190        |       | —           |       | 98,107                 |       |
| Cash and cash equivalents at end of period)           |       | $                  | —     |               | $          | 68,993              |       | $                    | —     |       | $          | 41,099           |       | $                      | 745        |   | $ | — |   | $ | 110,837 |   |

 

**iPCS, Inc. and Subsidiaries**

**Condensed Consolidating Statementof Cash Flows**

**For the Three Months Ended December 31,2004**

 
| ** **                                             | ** ** | **iPCS Inc.** | ** ** | **iPCS  Wireless** | ** ** | **iPCS  Equipment** | ** ** | **Eliminations** | ** ** | **iPCS  Consolidated** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|------------------|------------|------------------------|------------|
| Operating  activities                                  |       | $                  | 255        |               | $          | (3,411              | )          | $                | (759       | )                      | $          | — |   | $ | (3,915 | ) |
| Investing  activities                                  |       | —             |       | 5,609              |       | 759                 |       | —           |       | 6,368                  |       |
| Financing  activities                                  |       | (255               | )          | —             |       | —              |       | —           |       | (255                   | )          |
| Decrease in  cash or cash equivalents                  |       | —             |       | 2,198              |       | —              |       | —           |       | 2,198                  |       |
| Cash and  cash equivalents at beginning of period |       | —             |       | 57,760             |       | —              |       | —           |       | 57,760                 |       |
| Cash and  cash equivalents at end of period.           |       | $                  | —     |               | $          | 59,958              |       | $                | —     |                   | $          | — |   | $ | 59,958 |   |

 

**(13)  Subsequent Events**

 

**The trial relating to the complaint filed by iPCS Wireless, Inc.against Sprint (see Note 11) in Cook County Circuit Court was originally set tocommence on December 5, 2005. However, it was continued to February 6, 2006 and then to March 7,2006.  On December 28, 2005, thejudge in Cook County Circuit Court denied the Company’s and Sprint’s requestfor summary judgment; however he agreed with the Company that iPCS Wireless’smanagement agreement with Sprint would be breached if confidential informationwere disclosed to any person or entity involved in the operation of Nextel’snetwork.  Accordingly, he entered apreliminary non-appealable order of summary judgment as to that aspect of thecomplaint.  The judge’s order is subjectto reconsideration during the trial.  TheForbearance Agreement expired on January 1, 2006 in the territory managedby iPCS Wireless, Inc.**

 

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**On January 4, 2006, thejudge in the Delaware Court of Chancery issued a memorandum opinion denying therequests for summary judgment of both Sprint and Horizon PersonalCommunications and Bright Personal Communications Services; however he agreedwith Sprint that our claim for declaratory judgment as to the G-Block was notripe for adjudication.  Accordingly, thataspect of the complaint filed by Horizon Personal Communications and BrightPersonal Communications Services was dismissed without prejudice.  The testimony in the trial began on January 9,2006, and concluded on January 23, 2006. A ruling is expected during the quarter ended June 30, 2006.**

 

**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS 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 theaffiliated entities of Sprint Nextel Corporation that are party to ouraffiliation agreements; (ii) ”Sprint” refers to Sprint Nextel Corporationand its affiliates; (iii) a “PCS Affiliate of Sprint” is an entity whosesole or predominant business is operating (directly or through one or more subsidiaries)a personal communications service business pursuant to affiliation agreementswith Sprint Spectrum L.P. and/or its affiliates or their successors; (iv) ”SprintPCS products and services” refers to digital wireless personal communicationsservices, including wireless voice and data services, and related retailproducts, including handsets, in any case, offered under the Sprint brand name;and (v) ”our subscribers” refers to Sprint PCS subscribers who reside inour territory, excluding reseller subscribers.

 

Statements in this quarterly report on Form 10-Qregarding Sprint or Sprint PCS are derived from information contained in ouraffiliation agreements with Sprint PCS, periodic reports and other documentsfiled by Sprint with the SEC or press releases issued by Sprint or Sprint PCS.

 

This quarterly report on Form 10-Qcontains trademarks, service marks and trade names of companies andorganizations other than us. Other than with respect to Sprint PCS, our use ordisplay of other parties’ trade names, trademarks or products is not intendedto and does not imply a relationship with, or endorsement or sponsorship of usby, the trade name or trademark owners.

 

The following is an analysis of our resultsof operations, liquidity and capital resources and should be read inconjunction with the unaudited Consolidated Financial Statements and notesrelated thereto included in this Form 10-Q. To the extent that thefollowing Management’s Discussion and Analysis contains statements which arenot of a historical nature, such statements are forward-looking statementswhich involve risks and uncertainties. These risks include, but are not limitedto the risk and uncertainties listed in the next section entitled “Forward-LookingStatements” and other factors discussed elsewhere herein and in our otherfilings with the SEC.

 

## ***Forward-LookingStatements***

 

Thisquarterly report on Form 10-Q contains statements about future events andexpectations that are “forward-looking statements.” These statements relate tofuture events or our future financial performance, and involve known andunknown risks, uncertainties and other factors that may cause our actualresults, levels of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by these forward-looking statements. In somecases, 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 comparableterminology. Any statement in this report that is not a statement of historicalfact may be deemed to be a forward-looking statement. These forward-looking statementsinclude:

 

•                       statementsregarding our anticipated revenues, expense levels, liquidity and capitalresources and operating losses; and

 

•                       statementsregarding expectations or projections about markets in our territory.

 

Althoughwe believe that the expectations reflected in such forward-looking statementsare reasonable, we can give no assurance that such expectations will prove tobe correct. Important factors with respect to any such forward-lookingstatements, including certain risks and uncertainties that could cause actualresults to differ materially from our expectations, include, but are notlimited to:

 

•                       ourdependence on our affiliation with Sprint;

 

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

 

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

 

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

 

•                       ourdependence on back office services, such as billing and customer care, providedby Sprint PCS;

 

•                       potentialfluctuations in our operating results;

 

•                       changes oradvances in technology in general, or specifically related to Sprint and itsaffiliates;

 

•                       competitionin the industry and markets in which we operate;

 

•                       our abilityto attract and retain skilled personnel;

 

•                       ourpotential need for additional capital or the need for refinancing any existingindebtedness;

 

•                       ourpotential inability to expand our services and related products in the event ofsubstantial increases in demand for these services and related products;

 

•                       changes ingovernment regulation;

 

•                       futureacquisitions;

 

•                       thecompetitiveness and impact of Sprint PCS’s pricing plans and PCS products andservices on us;

 

•                       oursubscriber credit quality;

 

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

 

•                       inaccuraciesin our financial information provided to us by Sprint PCS;

 

•                       our failureto establish and maintain effective internal controls to satisfy therequirements of Section 404 of the Sarbanes-Oxley Act, which requiresannual management assessments of the effectiveness of internal control overfinancial reporting;

 

•                       our rates ofpenetration in the wireless industry and in our territories;

 

•                       oursignificant level of indebtedness;

 

•                       adequacy ofbad debt and other reserves;

 

•                       ouranticipated future losses;

 

•                       oursubscriber purchasing patterns;

 

•                       subscribersatisfaction with our network and operations;

 

•                       availabilityof an adequate supply of subscriber equipment to Sprint PCS and to usspecifically;

 

•                       risksrelated to future growth and expansion, including subscriber growth;

 

•                       generaleconomic and business conditions; and

 

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

 

***New Accounting Pronouncements***

 

EffectiveOctober 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 therecognition of compensation expense for all share based payment awardtransactions measured at fair value. Under the modified prospective method,SFAS No. 123R requires compensation cost to be recognized for 1) allshare-based compensation expense arrangements granted after the adoption dateand 2) all remaining unvested share-based compensation arrangements grantedprior to the adoption date.  Results forprior periods have not been restated.

 

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Prior to October 1, 2005, we applied APBOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations to account for its employee and director stock options. We didnot record any stock-based compensation expense for stock option grants priorto October 1, 2005 because all stock option awards were granted at fairmarket value.

 

For the three months ended December 31, 2005, we recorded totalstock-based compensation expense of $1.7 million compared to only $23,000 forthe three months ended December 31, 2004. For more information regarding the impact of the adoption of SFAS No. 123Rand the comparison of results of operations for the three months ended December 31,2005 and December 31, 2004, see Note 9, “Stock-based Compensation” in thenotes to our consolidated financial statements found elsewhere in this quarterlyreport on Form 10-Q.

 

## ***Definitions ofOperating Metrics***

 

Inthis “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” section, we provide certain financial measures that arecalculated in accordance with accounting principles generally accepted in theUnited States (“GAAP”) and as adjusted to GAAP (“non-GAAP”) to assess ourfinancial performance. In addition, we use certain non-financial terms that arenot measures of financial performance under GAAP. Terms such as net subscriberadditions and churn are terms used in the wireless telecommunications industry.The non-GAAP financial measures of average revenue per user (“ARPU”) and costper gross addition (“CPGA”) reflect standard measures of performance commonlyused in the wireless telecommunications industry. The non-financial terms andthe non-GAAP measures reflect wireless telecommunications industry conventionsand are commonly used by the investment community for comparability purposes.The non-GAAP financial measures included in this “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” are reconciled belowin “Reconciliation of Non-GAAP Financial Measures” and, together with thenon-financial terms, are summarized as follows:

 

•                       Netsubscriber additions for the period represented is calculated as the gross newsubscribers acquired in the period less the number of subscribers deactivatedplus the net subscribers transferred in or out of our markets during theperiod.

 

•                       Averagemonthly churn is a measure of the rate at which subscribers based in ourterritory deactivate service on a voluntary or involuntary basis. We calculateaverage monthly churn based on the number of subscribers deactivated during theperiod (net of transfers out of our territory and those who deactivated within30 days of activation) as a percentage of our average monthly subscriberbase during the period divided by the number of months during the period.

 

•                       ARPU, oraverage revenue per user, is a measure of the average monthly service revenueearned from subscribers based in our territory. This measure is calculated bydividing subscriber revenues in our consolidated statement of operations by thenumber of our average monthly subscribers during the period divided by thenumber of months in the period.

 

•                       CPGA, orcost per gross addition, is a measure of the average cost we incur to add a newsubscriber in our territory. These costs include handset subsidies on newsubscriber activations, commissions, rebates and other selling and marketingcosts. We calculate CPGA by dividing (a) the sum of cost of products soldand selling and marketing expenses, net of stock-based compensation expense,associated with transactions with new subscribers during the measurementperiod, less product sales revenues associated with transactions with newsubscribers during the measurement period, by (b) the total number ofsubscribers activated in our territory during the period.

 

•                       Licensedpopulation represents the number of residents (usually expressed in millions)in the markets in our territory for which we have an exclusive right to providewireless mobility communications services under the Sprint brand name. Thenumber of residents located in our territory does not represent the number ofwireless subscribers that we serve or expect to serve in our territory.

 

•                       Coveredpopulation represents the number of residents (usually expressed in millions)covered by our portion of the wireless network of Sprint. The number of residentscovered by our network does not represent the number of wireless subscribersthat we serve or expect to serve in our territory.

 

Inthis “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations,” unless the context indicates otherwise, all references to “subscribers”or “customers’ and other operating metrics mean subscribers or customersexcluding subscribers of resellers known as Mobile Virtual Network Operators orMVNOs, that use our network and resell wireless service under private brands.

 

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***BusinessOverview***

 

Asa PCS Affiliate of Sprint, we have the exclusive right to provide digitalwireless personal communications services, or PCS, under the Sprint brand namein 80 markets including markets in Illinois, Michigan, Pennsylvania, New York,Indiana, Iowa, Ohio and Tennessee. The territory includes key markets such asGrand Rapids (MI), Fort Wayne (IN), the Tri-Cities region of Tennessee(Johnson City, Kingsport and Bristol), Scranton (PA), Saginaw-BayCity (MI), and the Quad Cities region of Illinois and Iowa (Bettendorf andDavenport, IA, and Moline and Rock Island, IL). We own and are responsible forbuilding, operating and managing the portion of the 100% digital, 100% PCSwireless network of Sprint PCS located in our territory. We offer nationalcalling plans designed by Sprint PCS as well as local plans tailored to ourmarkets. Our portion of the PCS network of Sprint PCS is designed to offer aseamless connection with the wireless network of Sprint PCS. We market SprintPCS products and services through a number of distribution outlets located inour territory, including our company-owned retail stores, exclusive co-brandeddealers, major national retailers and local third party distributors. Based onthe 2000 population counts compiled by the U.S. Census Bureau adjusted byestimated growth rates from third party proprietary demographic databases, asof December 31, 2005, our licensed territory had a total population ofapproximately 15.0 million residents, of which our wireless network coveredapproximately 11.4 million residents. At December 31, 2005, we hadapproximately 495,300 subscribers. We are headquartered in Schaumburg,Illinois.

 

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

 

As part of ouraffiliation agreements with Sprint PCS, we have contracted with Sprint toprovide to us back-office services such as subscriber activation, handsetlogistics, billing, customer care and network monitoring services through December 31,2006. We elected to obtain these services from Sprint to take advantage of itseconomies of scale, to accelerate our build-out and market launches and tolower our capital requirements. The cost for these services is primarily on aper subscriber or per transaction basis and is recorded as an operatingexpense. We have begun discussions with Sprint regarding the terms andconditions under which we would continue to purchase these services from Sprintafter December 31, 2006, if at all.

 

***Reorganization***

 

OnFebruary 23, 2003, while we were wholly owned by AirGate, we filed forbankruptcy under Chapter 11 of the Bankruptcy Code. The decision to file wasbased on a combination of factors, including weakness in the wirelesstelecommunications industry and the economy generally. In addition, we hadexperienced a decline in liquidity and cash flow, making it difficult for us tocomply with our debt service obligations. We believe that actions taken bySprint—specifically, decreasing our roaming rate and imposing new and higherfees on us—were the primary reason for the decline in our liquidity.Accordingly, in connection with our bankruptcy filing, we filed a complaintagainst Sprint and Sprint PCS alleging that Sprint breached its affiliationagreements with us.  As a part of ourapproved plan of reorganization, all then existing claims against Sprint,including those included in this complaint, were settled.

 

Duringour bankruptcy we operated our business and managed our assets asdebtors-in-possession,subject tothe supervision of the bankruptcy court, without obtaining debtor-in-possessionfinancing. This relief provided us the time necessary to reorganize ourbusiness, which included slowing subscriber growth to reduce our acquisitioncosts, increasing our focus on prime subscribers and aligning our operationsthrough cost reductions to compete in our marketplace and to improve ourfinancial results.

 

On July 9, 2004,the bankruptcy court confirmed our plan of reorganization and the plan ofreorganization became effective on July 20, 2004. On the effective date wepaid a portion of the net proceeds from the senior notes issued in connectionwith our emergence to satisfy in full in cash our obligations to each of thelenders under our then existing senior secured credit facility and topermanently retire the loans thereunder. The remaining net proceeds from thesenior notes was used to satisfy all other secured claims, administrative andother priority claims and unsecured convenience claims and to pay fees andexpenses related to the reorganization, as well as for general corporatepurposes. Additionally, all of our subordinated claims were discharged and allof our then existing capital stock was cancelled. As a result of theconsummation of our reorganization, our senior secured credit facility has beenrepaid in full in cash and terminated, and our senior discount notes have beencancelled and the holders have received shares of our common stock.

 

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***Merger with Horizon PCS, Inc.***

 

OnJuly 1, 2005, we completed our tax-free stock for stock merger transactionwith Horizon PCS, Inc., in which Horizon PCS, Inc. merged with andinto iPCS, Inc. with iPCS, Inc. as the surviving corporation. HorizonPCS, Inc. was a PCS Affiliate of Sprint whose territory covered 40 marketsin nine contiguous states.  Thetransaction nearly doubled the size of our operations, thereby providingsynergies in a number of operating and administrative areas.  Based on covered population and totalsubscribers, we are now the largest PCS Affiliate of Sprint. The transactionwas accounted for under the purchase method and the results of Horizon PCS, Inc.are included in our consolidated results of operations from the date ofacquisition.

 

***Relationship with Sprint***

 

Ourrelationship with Sprint is the most significant relationship we have. Theterms of our relationship are set forth in our affiliation agreements withSprint PCS. Pursuant to these affiliation agreements, we agreed to offer PCSservices using Sprint’s spectrum under the Sprint brand name on a wirelessnetwork built and operated at our own expense. We believe that our strategicrelationship with Sprint PCS provides significant competitive advantages. Inparticular, we believe that our affiliation agreements with Sprint PCS allow usto offer high quality, nationally branded wireless voice and data services forlower cost and lower capital requirements than would otherwise be possible.

 

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

 

Asdiscussed in “—Commitments and Contingencies” below, we filed lawsuits against Sprint,Sprint PCS and Nextel in July 2005 and entered into a ForbearanceAgreement with Sprint later that same month. The Forbearance Agreement expiredon January 1, 2006 in the territory managed by iPCS Wireless, andcontinues until a decision is rendered by the Delaware Court of Chancery in theterritories managed by Horizon PCS.  Toour knowledge, Sprint has not yet changed its operations in the territorymanaged by iPCS Wireless as a result of the expiration of the ForbearanceAgreement on January 1, 2006, and we do not know when they will change, ifat all.  Similarly, we do not know howSprint will operate in Horizon PCS’s territory after the date that anydecision is rendered from our trial in the Delaware Court of Chancery. Sprintmay elect to operate the legacy Nextel business in a manner that may have amaterial adverse effect on us. We do not know whether we will ultimately reachagreement with Sprint on mutually satisfactory terms for revised affiliationagreements. If we are able to modify our affiliation agreements with Sprint, itis likely that any such revised affiliation agreements would materially changeour business and operations. We do not know the outcome of our pendinglitigation against Sprint. If we do not prevail, Sprint may engage in conductthat has a material adverse effect on our business and operations. We intend tocontinue to enforce our rights to the fullest extent, but there is no assurancethat we will prevail.

 

# ***Consolidated Results of Operations***

 

Results ofoperations for any periods less than one year are not necessarily indicative ofresults of operations for a full year. In addition, results for the three months ended December 31, 2005include 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 theresults of operations for periods prior to July 1, 2005.

 

Managementuses 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 timeperiods:

 
| ** **               | ** ** | **As of and For the  Three Months Ended  December 31, 2005** | ** ** | **As of and For the  Three Months Ended  December 31, 2004** | ** ** |
|--------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| Total Subscribers        |       | 495,300                                                                |       | 249,200                                                                |       |
| Net Subscriber Additions |       | 18,900                                                                 |       | 8,600                                                                  |       |
| Churn                    |       | 2.6                                                                    | %          | 2.9                                                                    | %          |
| ARPU                     |       | $                                                                      | 48.78      |                                                                   | $          | 52.65 |   |
| CPGA                     |       | $                                                                      | 357        |                                                                   | $          | 406 |   |

 

***NetSubscriber Additions.***     Net subscriber additions increased by10,300, or 120%, in the three months ended December 31, 2005 compared tothe three months ended December 31, 2004. Of the increase, approximately13% was attributable to a continued focus on increasing our retail andexclusive co-branded dealer distribution outlets, and on sales

 

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and promotional efforts to attract newsubscribers in our iPCS markets.  Theremaining 87% increase was the result of the acquisition of Horizon PCS.

 

***Churn.***     Theimprovement in churn for the three months ended December 31, 2005 comparedto the three months ended December 31, 2004 was the result of improvementsin network quality, the increased competitiveness of our rate plans andhandsets, and increased take rates of family add-a-phone plans and Fair andFlexible plans. In addition, approximately 85% of our subscribers were undercontract at December 31, 2005, compared to approximately 76% at December 31,2004.

 

***AverageRevenue Per User.***     Thedecrease in ARPU in the three months ended December 31, 2005 compared tothe same three months in 2004 is due to lower minutes over plan revenue andlower monthly recurring charges, offset partially with higher datarevenue.  The decreases in minutes overplan revenue and monthly recurring charges can be attributed to the popularityof Fair and Flexible plans and family add-a-phone plans, which help to reduce churnbut generate much lower overage charges and have lower monthly charges for thefamily add-a-phones.  For the threemonths ended December 31, 2005 our average monthly minutes over planrevenue per user was $2.21 compared to $5.22 for the three months ended December 31,2004.   Average monthly recurring chargesdropped from $42.41 for the three months ended December 31, 2004 to $40.56for the three months ended December 31, 2005.  Offsetting these decreases was our averagemonthly data revenue which increased to $6.38 for the three months ended December 31,2005 compared to $4.91 for the three months ended December 31, 2004.  Data revenue continues to increase due to thepopularity of our various data products, including text messaging, downloadingringers, taking and receiving pictures, playing games and browsing theInternet.

 

***CostPer Gross Addition.***     CPGAdecreased by $49.00, or 12%, for the three months ended December 31, 2005compared to the three months ended December 31, 2004.Since we emerged from bankruptcy in July 2004, wehave been increasing our sales and promotional efforts to drive subscribergrowth and, as a result, our related costs have increased.  However, our merger with Horizon PCS hasenabled us to spread our fixed CPGA over a larger number of gross additions,which results in the overall decline in CPGA. At December 31, 2005, we operated 37 retail stores,including 14 stores in the legacy Horizon PCS territory, and managed 68exclusive co-branded dealers, including 17 dealers in the legacy Horizon PCSterritory. At December 31, 2004, we operated 15 retail storesand managed 16 exclusive co-branded dealers.

 

***Reconciliationof Non-GAAP Financial Measures (All Revenues and Expenses in Thousands)***

 

Weutilize certain financial measures that are not calculated in accordance withGAAP to assess our financial performance. A non-GAAP financial measure isdefined as a numerical measure of financial performance that (a) excludesamounts, or is subject to adjustments that have the effect of excludingamounts, that are included in the comparable measure calculated and presentedin 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 effectof including amounts, that are excluded from the comparable measure socalculated and presented. The non-GAAP financial measures discussed in “—Resultsof Operations” are ARPU and CPGA. A description of each of these non-GAAPfinancial measures is provided in “—Definition of Operating Metrics.” Thefollowing tables reconcile the non-GAAP financial measures with ourconsolidated financial statements presented in accordance with GAAP, excludingsubscriber data.

 
| ** **          | ** ** | **For the Three  Months Ended  December 31, 2005** | ** ** | **For the Three  Months Ended  December 31, 2004** | ** ** |
|---------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ***ARPU***          |       |                                               |       |                                               |       |
| Service revenue     |       | $                                                  | 70,996     |                                               | $          | 38,585 |   |
| Average subscribers |       | 485,172                                            |       | 244,276                                            |       |
| ARPU                |       | $                                                  | 48.78      |                                               | $          | 52.65 |   |

 

ARPU,which is utilized by most wireless companies to determine recurring monthlyrevenue on a per subscriber basis, is used by analysts and investors to comparerelative subscriber revenue across the wireless industry. We use ARPU to assistin evaluating past selling performance and the success of specific rate planpromotions. We also use ARPU as a basis to forecast future service revenues.

 

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| ** **                                       | ** ** | **For the Three  Months Ended  December 31, 2005** | ** ** | **For the Three  Months Ended  December 31, 2004** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ***CPGA***                                       |       |                                               |       |                                               |       |
| Selling and Marketing:                           |       | $                                                  | 18,216     |                                               | $          | 9,854 |   |
| plus: Equipment costs, net of cost of  upgrades  |       | 6,762                                              |       | 4,613                                              |       |
| less: Equipment revenue, net of upgrade  revenue |       | (1,857                                             | )          | (1,092                                             | )          |
| less: Stock-based compensation expense           |       | (208                                               | )          | (5                                                 | )          |
| CPGA costs                                       |       | $                                                  | 22,913     |                                               | $          | 13,370 |   |
| Gross adds                                       |       | 64,156                                             |       | 32,905                                             |       |
| CPGA                                             |       | $                                                  | 357        |                                               | $          | 406 |   |

 

CPGAis utilized by most wireless companies to determine their cost to acquire a newsubscriber. CPGA is used by analysts and investors to compare us to otherwireless companies. We use CPGA to evaluate past selling performance, thesuccess of specific promotions and as a basis to determine the amount of timewe must retain a new subscriber before we recover this cost. In addition, weuse CPGA as a basis for budgeting.

 

***Revenues***

 

Thefollowing table sets forth a breakdown of revenues by type:

 
| ** **                                                                         | ** ** | **For the Three  Months Ended  December 31, 2005** | ** ** | **For the Three  Months Ended  December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
|                                                                               |       |                                               |       |                                               |       |
| Service revenue                                                                    |       | $                                                  | 70,996     |                                               | $          | 38,585 |   |
| Roaming revenue from subscribers of Sprint  PCS and other PCS affiliates of Sprint |       | 31,379                                             |       | 14,334                                             |       |
| Roaming revenue from other wireless  carriers                                      |       | 2,403                                              |       | 1,110                                              |       |
| Reseller revenue                                                                   |       | 2,289                                              |       | 304                                                |       |
| Equipment revenue                                                                  |       | 2,439                                              |       | 1,560                                              |       |
| Other revenue                                                                      |       | 46                                                 |       | 104                                                |       |
| Total revenues                                                                     |       | $                                                  | 109,552    |                                               | $          | 55,997 |   |

 

***Service revenue.***   Service revenue is comprised of the monthly recurringcharges for voice and data usage and the monthly non-recurring charges forvoice and data minutes over plan, long distance, travel and roaming usagecharges, other feature revenues and late payment fee and early cancellation feerevenues. Deductions for billing adjustments and promotional credits arerecorded as a reduction to service revenue. For the three months ended December 31,2005 compared to the three months ended December 31, 2004, service revenueincreased by $32.4 million, or 84%, as a result of an increase of $35.2 milliondue to the increase in subscribers, primarily as a result of the subscribersacquired with the merger with Horizon PCS, offset with a decrease in servicerevenue of $2.8 million due to the drop in ARPU as described above.

 

***Roaming revenue from subscribers of Sprint PCS and other PCSAffiliates of Sprint.*******We receiverevenue on a per minute basis for voice traffic and per kilobyte basis for datatraffic when subscribers of Sprint PCS and other PCS Affiliates of Sprintuse our network.  In addition, we receivetoll revenue for any long distance calls made by these subscribers whileroaming on our network. The reciprocal roaming rate arrangement we have withSprint PCS for inbound and outbound roaming for the three months ended December 31,2005 and 2004 was $0.058 per minute for voice traffic and $0.0020 per kilobytefor data traffic. These rates are effective through December 31, 2006 andwill be reset effective January 1, 2007.

 

For the three monthsended December 31, 2005 compared to the three months ended December 31,2004, roaming revenue from subscribers of Sprint PCS and other PCS Affiliatesof Sprint increased by $17.0 million, or 119%. Of this increase, 10% was driven by increased roaming minutes andkilobyte traffic and the remaining 90% was due to the legacy Horizon PCSmarkets.  We continue to experienceincreased growth in kilobyte data usage from subscribers of Sprint PCS andother PCS Affiliates of Sprint. Roaming minutes and kilobytes from subscribersof Sprint PCS and other PCS Affiliates of Sprint for the three monthsended December 31, 2005 were 398 million and 1.8 billion,respectively, compared to 202 million and 541 million for the threemonths ended December 31, 2004, respectively.

 

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***Roaming revenue from other wireless carriers.*** We receiveroaming revenue from wireless carriers other than Sprint and other PCSAffiliates of Sprint when subscribers of such other wireless carriers roam inour 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 theseagreements.  For the three months ended December 31,2005 compared to the three months ended December 31, 2004, roaming revenuefrom other wireless carriers increased by $1.3 million, or 116%.  The increase in roaming revenue was primarilydue to the acquisition of the legacy Horizon PCS markets, which historicallyhad stronger roaming revenues than the legacy iPCS.  Roaming revenue in the legacy iPCS markets,excluding the legacy Horizon PCS markets, decreased 33% in the three monthsended December 31, 2005 compared to the three months ended December 31,2004 due to both a decrease in roaming minutes and the per minute rate.  For the three months ended December 31,2005, roaming minutes were 21.4 million compared to 9.3 million for thesame period in 2004. For these same periods, the per minute rates were $0.11 and$0.12, respectively.

 

***Reseller revenue.*** Through Sprint PCS we allow resellers, known as MVNOs, suchas Virgin Mobile, to use our network. Pursuant to these arrangements, we arepaid on a per minute basis. For the three months ended December 31, 2005compared to the three months ended December 31, 2004, reseller revenueincreased $2.0 million.  The increase inreseller revenue was due to an increase in the number of reseller subscribersin our territory, primarily as a result of our merger with Horizon PCS but alsoas a result of an increase in the number of agreements signed by Sprint PCSwith resellers. For the legacy iPCS markets alone, reseller revenue increased288% in the three months ended December 31, 2005 compared to the threemonths ended December 31, 2004.  At December 31,2005, we had 174,000 reseller subscribers, of which approximately 101,000reseller subscribers were acquired in the Horizon PCS merger on July 1,2005. At December 31, 2004, we had approximately 25,600 resellersubscribers.

 

***Equipment revenue.*******Equipment revenue is derived from the sale of handsets andaccessories to new customers and from current customers who upgrade theirhandsets through our retail and local distribution channels, in each case, netof sales incentives, rebates and an allowance for returns. Our handset returnpolicy allows customers to return their handsets for a full refund within14 days after the date of purchase. When handsets are returned to us, we aresometimes able to reissue the handsets to customers at little additional costto us.  However, if we are unable to reissuethe 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 SprintPCS 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 purchasefrom Sprint PCS at a reduced price. For the three months ended December 31,2005 compared to the three months ended December 31, 2004, equipmentrevenue increased by $0.8 million, or 56%. Nearly 20% of this increase in equipment revenue is attributable togrowth in the legacy iPCS markets due to increased gross additions.  The remaining increase is due to equipmentrevenue from the legacy Horizon PCS markets.

 

***Other revenue.*** For thethree months ended December 31, 2004, other revenue consisted of towerleasing revenue. During fiscal year 2005, we sold all of our towers in the iPCSmarkets, which eliminated this revenue stream. For the three months ended December 31, 2005 other revenueconsisted of leasing revenue for the use of one of our cell towers on wheels.

 

***For the Three Months Ended December 31,2005 and the Three Months Ended December 31, 2004***

 

***Costof Service and Roaming.***    Cost of serviceand roaming includes network operations expense, roaming expense relating towhen our subscribers roam either on other Sprint PCS networks or other wirelesscarriers’ networks, back-office customer services provided by Sprint PCS, theprovision for doubtful accounts, long distance expense and the 8% affiliationfee due to Sprint PCS for collected revenues. Network operations expensesinclude salaries and benefits for network personnel, cell site rent, utilitiesand maintenance expenses, fees relating to the connection of our cell sites toour switches and other transport and facility expenses. Roaming expense is ourcost of our subscribers using Sprint PCS and other wireless carriers’networks. Roaming expense on the Sprint PCS network is at the reciprocal ratesas described above under “—Roaming revenue from subscribers of Sprint PCSand other PCS Affiliates of Sprint.” Roaming expense when our subscribers useother wireless carriers networks is at rates as determined by the roamingagreements signed by Sprint PCS with these other wireless carriers. Forthe three months ended December 31, 2005 and the three months ended December 31,2004, cost of service and roaming was $62.8 million and$29.7 million, respectively. Of this increase, 11% was from the legacy iPCSmarkets mainly due to a larger number of subscribers served, the increased sizeof the network and increased travel and roaming expenses.   The remaining increase was due to theincreased costs associated with the acquired Horizon PCS markets. With theadoption of SFAS No. 123R, stock-based compensation expense included incost of service and roaming totaled approximately $0.2 million for the threemonths ended December 31, 2005 compared to only $8,000 for the threemonths ended December 31, 2004.

 

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AtDecember 31, 2005, our network consisted of 1,508 cell sites, including799 in the acquired Horizon PCS markets, and five switches, including threeswitches in the acquired Horizon PCS markets. At December 31, 2004, ournetwork consisted of 672 cell sites and we had two switches in operation.

 

***Costof Equipment.***    Cost of equipment includes the cost ofhandsets and accessories sold or upgraded from our retail and local distributionchannels. Cost of equipment for the three months ended December 31, 2005 andthe three months ended December 31, 2004 was $9.2 million and $5.7 million,respectively, an increase of $3.5 million. Similar to the increase in equipment revenue, 20% of the increase incost of equipment was due to increased subscriber activity in the legacy iPCSmarkets and the remaining 80% increase was the result of the acquisition of thelegacy Horizon PCS markets.

 

***Sellingand Marketing.***    Selling and marketing expense includesthe costs to operate our retail stores, advertising and promotional expenses,commissions, equipment subsidies and rebate expenses relating to new subscriberadditions from national third parties and other Sprint-controlled channels.Selling and marketing expense for the three months ended December 31, 2005was $18.2 million compared to $9.9 million for the three months ended December 31,2004, an increase of $8.3 million. Of this increase, 98% was due to the HorizonPCS merger. With the adoption of SFAS No. 123R, stock-based compensationexpense included in selling and marketing totaled approximately $0.2 millionfor the three months ended December 31, 2005 compared to only $5,000 forthe three months ended December 31, 2004.

 

***Generaland Administrative.***    General and administrative expensesinclude administrative salaries and benefits, legal fees, insurance expense andother professional expenses.  For thethree months ended December 31, 2005, general and administrative expenseswere $7.9 million compared to $2.1 million for the three months ended December 31,2004, an increase of $5.8 million. Approximately 31% of this increase, or $1.8million, is attributable to our merger with Horizon PCS. In addition, duringthe three months ended December 31, 2005, we incurred approximately $3.1million of costs related to our litigation with Sprint and approximately $0.2million of integration expenses related to the merger with Horizon PCS. Withthe adoption of SFAS No. 123R, stock-based compensation expense includedin general and administrative totaled approximately $1.2 million for the threemonths ended December 31, 2005 compared to only $10,000 for the threemonths ended December 31, 2004.

 

***Depreciationand Amortization.***    For the three months ended December 31,2005 and December 31, 2004, depreciation and amortization expense totaled$21.5 million and $11.5 million, respectively. Of these amounts,amortization of intangibles totaled $9.5 million and $3.0 million forthese same periods, respectively.

 

Depreciationand amortization in the legacy iPCS markets decreased by approximately 14% duemainly to the completion of the Nortel swap in the Michigan markets because thenew Nortel equipment has lower original costs than the original Lucent assetsthat were previously being depreciated. The remaining increase in depreciation and amortization relates to theproperty, plant, equipment and intangibles recorded as a result of the mergerwith Horizon PCS.

 

***InterestIncome.***    For the three months ended December 31,2005 and the three months ended December 31, 2004, interest income totaled$1.1 million and $0.1 million, respectively. The increase was due to our higheraverage cash balance for the three months ended December 31, 2005 comparedto the same three months ended December 31, 2004 coupled with the interestearned on the cash balance acquired in the merger with Horizon PCS on July 1,2005.

 

***InterestExpense.***    For the three months ended December 31,2005, interest expense was $8.1 million compared to $5.0 million for thethree months ended December 31, 2004. Interest expense consists of interest on our 111/2% seniornotes and 113/8% senior notes.  The increase was attributable to the interestexpense associated with the 113/8% senior notes assumed with the merger ofHorizon PCS on July 1, 2005.

 

***Net Loss.******    ******Our net loss was $17.2 million for the threemonths ended December 31, 2005 compared to a net loss of $7.7 million forthe three months ended December 31, 2004.***

 

## ***Liquidityand Capital Resources***

 

***SignificantSources of Cash***

 

Wegenerated $20.9 million in operating cash flows for the three months endedDecember 31, 2005, compared to a use of operating cash flows of$3.9 million in the three months ended December 31, 2004. Theincrease in operating cash flows was due to lower net operating losses afteradjustments for non-cash items of approximately $2.8 million.  In addition, operating cash flows in thethree months ended December 31, 2005 were increased by $16.7 millionresulting from the non-recurring sale of short-term investments that wereacquired in the merger with Horizon PCS. As discussed in Item 3 of Part IIof this quarterly report on Form 10-Q, the investments were not permittedinvestments under our 111/2% and 113/8% senior notes.

 

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With this sale, the event ofdefault under the indentures governing the 111/2% and 113/8% senior notes did notcontinue beyond such date.  Proceeds fromthe sale of the short-term investments were immediately reinvested in permittedinvestments under our indentures.

 

Duringthe three months ended December 31, 2005, we received approximately$0.3 million from the sale of used equipment which was replaced withequipment we purchased from Nortel Networks as described below in “—ContractualObligations.” During the three months ended December 31, 2004, we receivedapproximately $12.1 million for the sale of 68 towers.

 

Forthe three months ended December 31, 2005, we received a total of$0.4 million in proceeds from the exercise of options representingapproximately 20,100 shares.

 

***SignificantUses of Cash***

 

Cashflows used for investing activities for the period ended December 31, 2005totaled $8.6 million. Capital expenditures totaled $8.9 million andincluded $5.8 million for the Nortel swap in our Horizon PCS markets,$1.2 million for new cell site construction and other related networkcapital expenditures, $0.4 million for new store and store improvements and$1.5 million for IT and computer-related capital expenditures.

 

Cashflows from investing activities for the three months ended December 31,2004 totaled $6.4 million.  Capitalexpenditures of $5.8 million included $4.6 million for Nortel equipmentpurchased under the iPCS agreement with Nortel as described below in “–ContractualObligations,” $0.5 million for new store and store improvements and $0.7million for new cell site construction and other network related capitalexpenditures.

 

Inthe three months ended December 31, 2004, we incurred $0.3 million for debtfinancing costs related to the 111/2% senior notes.

 

Principalpayments on our long-term debt, other than capital leases, are not due until2012.  During each of the three monthsended December 31, 2005 and 2004, we made one semi-annual interest paymenton our 111/2% senior notes of approximately $9.5million.  The interest rates on oursenior notes are fixed and therefore the amount of our interest payments wouldnot be impacted by a change in the overall interest rate environment.

 

***Trends,Risks and Uncertainties That May Affect Operating Results, Liquidity andCapital Resources***

 

We have identified thefollowing important trends and factors (as well as risks and uncertaintiesassociated with such items) that could impact our future financial performance.  This section should be read inconjunction with the “Risks Related to Our Business, Strategy and Operations” section foundin Item 1A of Part I of our annual report on Form 10-K, filed withthe SEC on December 23, 2005.

 

•                       *Continuing focus on subscriber additions.    *We have seenimprovements in our net subscriber additions during the last year as we haveincreased our distribution and marketing efforts, including the opening of newretail stores and exclusive co-branded dealers. To the extent that we seek toaccelerate our subscriber additions, we will incur significant upfrontsubscriber acquisition expenses (including the customer handset subsidy,commissions and promotional expenses) that initially will result in increasedlosses and reduced levels of cash flows from operating activities.Alternatively, we may not be able to sustain our planned growth in subscribersor obtain sufficient revenue to achieve and sustain profitability. If we arenot able to achieve our planned subscriber growth, it will lengthen the amountof time it will take for us to reach a sufficient number of subscribers toachieve positive free cash flow, which in turn will have a negative effect oncapital resources.

 

•                       *Improving churn.    *In the three months ended December 31, 2005,we experienced a decrease in churn as we focused on improvementsin network quality, increased competitiveness of our rate plans and handsetsand increased take rates of family plans and overage protection plans (likeFair & Flexible), which we believe result in lower churn. In addition,churn for the overall wireless industry improved in 2005. We may experience a higher churnrate in the future. In addition, to the extent our subscriber growth includes ahigher percentage of sub-prime credit subscribers, our churn and bad debtexpense may increase. If churn increases over the long-term, we would lose thecash flows attributable to these subscribers and have greater than projectedlosses.

 

•                       *Declining voice revenue per subscriber.    *In the threemonths ended December 31, 2005, our ARPU declined in part as a result of decliningvoice revenue per subscriber, including declining minutes over plan revenue.The wireless industry is very competitive and continued pressure in pricing isexpected in the future as a result of, among other things, increased focus onfamily plans and overage protection plans. Although we expect that family plansand overage protection plans will improve churn, these plans tend to lowervoice

 

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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 would make it moredifficult to obtain sufficient revenue to achieve or sustain profitability.

 

•                       *Higher subscriber acquisition costs.    *We maycontinue to experience higher costs to acquire subscribers. As we continue toincrease our distribution, we will increase the fixed costs in our sales andmarketing organization. In addition, we may increase our marketing expenses inan effort to attract and acquire new subscribers. Also, more aggressivepromotional efforts may lead to higher handset subsidies. With a higher CPGA,subscribers must remain our subscribers for a longer period of time at a stableARPU for us to recover those acquisition costs.

 

•                       *Higher operating costs.    *In the three months ended December 31,2005, our operating costs increased significantly due to our largernumber of subscribers served, the increased size of our network, increases inroaming 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. Inaddition, we may incur significant wireless handset subsidy costs forexisting subscribers who upgrade to a new handset. As our subscriber basematures and technological innovations occur, more existing subscribers maybegin to upgrade to new wireless handsets for which we subsidize the cost tothe subscriber. We also expect to continue to incur costs related to ourlitigation with Sprint. At the same time, a large portion of our ongoing network and general andadministrative expenses are fixed. We believe that we need to add moresubscribers to recognize increased economies of scale in our business. If weare unable to add more subscribers to our network, achieve the desiredsynergies of the merger with Horizon PCS or continue to improve theefficiencies in our operating costs, results will be negatively effected.

 

•                       *Roaming revenue.    *Asubstantial portion of our revenue is derived from roaming revenue from SprintPCS and other PCS affiliates of Sprint. The increase in roaming revenue duringthe three months ended December 31, 2005 was due to an increase in roamingminutes and increased kilobyte traffic. Effective on April 1, 2004, ourroaming rate paid to us by Sprint PCS was set at $0.058 per minute of use andis fixed through December 31, 2006. Thereafter, the rate will change,based on an agreed-upon formula that may have an adverse effect on us. Inaddition, if we receive fewer roaming minutes or kilobyte traffic on ournetwork, our results of operations will be negatively affected.

 

•                       *Increasing capital expenditures.    *As wecontinue to add capacity and coverage to our wireless network, we will incursignificant capital expenditures. We currently anticipate that capitalexpenditures for 2006 will be between $42.0 million and $48.0 million.  We have replaced our equipment in a number ofour markets with Nortel equipment pursuant to two agreements with Nortel and wehave recently decided to expand the replacement activity into our remainingmarkets.Changes and upgrades in technology, like EV-DO, may require additionalexpenditures. Sprint PCS has begun to deploy EV-DO technology in portions ofits service area and has stated its intent to cover 150 million people by early2006. To date, we have deployed EV-DO technology in a small portion of ourservice area. We may elect to deploy EV-DO technology in additional portions ofour service area which may significantly increase our capital expenditures andoperating expenses. We have not yet determined when, and to what extent, we mayfurther deploy EV-DO. Unforeseen changes in technology and changes in our plansto upgrade or expand our network may require us to spend more money than weexpected and have a negative effect on our cash flow.

 

•                       *Ongoing Sprint Relationship and Litigation.    *We rely onSprint for a number of important functions, including but not limited to,customer service, billing, long-distance transport services, national networkoperations, support, inventory logistics support, national advertising, productdevelopment, and financial information. Failure of Sprint to provide these andother services on a timely and cost efficient manner would negatively impactour results of operations. Sprint PCS may also make decisions that could reduceour revenues, increase our expenses and/or our capital expenditure requirementsand make our affiliate relationships with Sprint less advantageous thanexpected. In addition, we filed complaints against Sprint alleging that, amongother things, Sprint will breach the exclusivity provisions of our managementagreements. An adverse outcome to our proceedings may have a negative effect onour results of operations.

 

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

 

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***Commitmentsand Contingencies***

 

Thecosts for the services provided by Sprint PCS under our service agreements withSprint PCS relative to billing, customer care and other back-office functionsfor the three months ended December 31, 2005 and 2004 were approximately$10.7 million and $5.6 million, respectively.  Because we incur the majority of these costson 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 oursubscribers increases.  Beginning in2007, the monthly rates for these services will be reset to mutually acceptableamounts based on the amount necessary to recover Sprint PCS’s reasonable costsfor providing such services.  Sprint hasproposed to us monthly rates that would begin on January 1, 2007 that arehigher than the rates we currently pay. We have begun discussions with Sprint regarding the terms and conditionsunder 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’sproposed rates until an arbitrator resolves the dispute regarding the new rates,or to self-provision or to procure those services elsewhere.

 

Inaddition, Sprint PCS may terminate any service provided under our servicesagreements upon nine months’ prior written notice, but if we would like tocontinue receiving such service, Sprint PCS has agreed that it will assist usin developing that function internally or locating a third-party vendor thatwill provide that service. Although Sprint PCS has agreed in such an event toreimburse us for expenses we incur in transitioning to any service internallyor to a third-party, if Sprint PCS terminates a service for which we have notdeveloped or are unable to develop a cost-effective alternative, our operatingcosts may increase beyond our expectations and our operations may beinterrupted or restricted. We do not currently have a contingency plan ifSprint PCS terminates a service we currently receive from it.

 

Variableinterest rates may increase substantially. At December 31, 2005 we haveonly fixed rate indebtedness under our existing capital leases and the seniornotes. To the extent that we incur any floating rate financing in the future,we would be exposed to interest rate risk on such indebtedness.

 

OnDecember 15, 2004, Sprint Corporation and Nextel Communications, Inc.announced that they had signed a merger agreement pursuant to which they wouldmerge and combine their operations. Shortly after announcing the merger, Sprintalso announced that it would pursue discussions with the PCS Affiliates ofSprint—including us—directed toward a modification of their affiliationagreements to address the implications of its merger with Nextel. Although theparties engaged in discussions with respect to such a modification, noagreement has been reached.

 

Whenit became evident to us that Sprint intended to close its merger with Nextelprior to reaching agreement with us on necessary modifications to ouraffiliation agreements, we filed two complaints against Sprint. On July 15,2005, we caused our wholly owned subsidiary, iPCS Wireless, to file acomplaint 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, tofile a complaint against Sprint, Sprint PCS and Nextel in the Court of Chanceryof the State of Delaware, New Castle County. The complaints are substantially similarand allege, among other things, that following the consummation of the mergerbetween Sprint and Nextel, Sprint will breach its exclusivity obligations to usunder our management agreements. Our complaints seek, among other things, atemporary restraining order, a preliminary injunction and a permanentinjunction enjoining Sprint and those acting in concert with it from engagingin certain conduct following the closing of their merger that would violate ouraffiliation agreements with Sprint PCS. In addition to our complaints, a numberof other PCS Affiliates of Sprint also filed complaints against Sprint, SprintPCS and Nextel, including AirGate PCS (a wholly owned subsidiary of AlamosaHoldings, Inc.), UbiquiTel, Inc., U.S. Unwired, Inc., Gulf CoastWireless, Inc. and Enterprise Communications Partnership.

 

OnJuly 18, 2005, in Cook County Circuit Court we obtained a temporaryrestraining order prohibiting Sprint from sharing our confidential informationwith Nextel in violation of iPCS Wireless’s management agreement and wecontinued our hearing to hear further testimony on our request for additionalinjunctive relief.

 

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

 

OnAugust 12, 2005, Sprint and Nextel closed their merger. In July and August 2005Sprint acquired three PCS Affiliates of Sprint, two of whom—U.S. Unwired andGulf Coast Wireless—had also filed suit against Sprint. As a result of Sprint’sacquisition of these PCS Affiliates of Sprint, their lawsuits were discontinued.In January and February 2006, Sprint acquired two more PCS Affiliatesof Sprint, Enterprise Communications and Alamosa Holdings.  With the acquisition of these PCS Affiliatesof Sprint,  the complaints filed by themor their subsidiaries were  discontinued.

 

29

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OnDecember 28, 2005, the judge in Cook County Circuit Court denied our andSprint’s requests for summary judgment; provided, however, that he agreed withus that iPCS Wireless’s management agreement with Sprint would be breached ifconfidential information were disclosed to any person or entity involved in theoperation of Nextel’s network. Accordingly, he entered a preliminary non-appealable order of summaryjudgment as to that aspect of our complaint.  The judge’s order is subject to reconsideration during the trial. Thetrial relating to the complaint filed by our wholly owned subsidiary, iPCSWireless, in Cook County Circuit Court was originally set to commence on December 5,2005. However, it was continued to February 6, 2006 and then to March 7,2006.

 

Thetrial relating to the complaint filed by our wholly owned subsidiaries, HorizonPersonal Communications and Bright Personal Communications Services, againstSprint and Nextel in the Delaware Court of Chancery was consolidated with thetrial relating to the complaint filed by UbiquiTel against Sprint and Nextel inthat same court. On January 14, 2006, the judge in the Delaware Court ofChancery issued a memorandum opinion denying our and Sprint’s request forsummary judgment; however, he agreed with Sprint that our claim for declaratoryjudgment as to the G-Block was not ripe for adjudication.  Accordingly, that aspect of our complaint wasdismissed without prejudice.  Theconsolidated trial began on January 9, 2006, and concluded on January 23,2006. We expect the judge to issue a ruling during our quarter ended June 30,2006.

 

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

 

**Contractual Obligations**

 

Weare obligated to make future payments under various contracts we have enteredinto, including amounts pursuant to the senior notes, capital leases andnon-cancelable operating lease agreements for office space, cell sites,vehicles and office equipment. Future minimum contractual cash obligations forthe next five years and in the aggregate at September 30, 2005, are asfollows (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 |   |

 

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(1)                                  Does notinclude payments due under renewals to the original lease terms.

 

(2)           Does notinclude commitments totaling $16.5 million to Nortel Networks for agreementsigned December 31, 2005, as discussed below under “Nortel NetworksEquipment Agreements”.

 

Bothof our senior notes contain covenants which restrict our ability to incur additionalindebtedness, merge, pay dividends, dispose of our assets, and certain othermatters as defined in the indentures. In addition, the senior notes:

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

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

•                       areunconditionally guaranteed by our domestic unrestricted subsidiaries, includingiPCS Wireless, Inc., iPCS Equipment, Inc., Horizon PersonalCommunications, Inc. and Bright Personal Communication Services, LLC andany new domestic restricted subsidiaries of ours.

 

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

 

Upona change of control as defined in the indentures, we will be required to makean offer to purchase the senior notes at a price equal to 101% of the aggregateprincipal amount of senior notes repurchased plus accrued and unpaid interestand liquidated damages, if any, to the date of purchase.

 

30

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*11**1/**2**% SeniorNotes:**   *Interest onour 111/2% senior notes  is payable semi-annually in arrears on May 1and November 1, commencing on November 1, 2004 to the holders ofrecord on the immediately preceding April 15 and October 15. At anytime prior to May 1, 2007, we may redeem up to 35% of the aggregateprincipal amount of the 111/2% senior notes at a redemption price of111.50% of the principal amount thereof, plus accrued and unpaid interest, andliquidated damages (as defined in the indenture), if applicable, to theredemption date with the net cash proceeds of a sale of our equity interests ora contribution to our common equity capital; provided that:

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

•                       theredemption occurs within 90 days of the date of the closing of such saleof equity interests or contribution.

Exceptpursuant to the preceding paragraph, the senior notes will not be redeemable atour option prior to May 1, 2008.

 

Onor after May 1, 2008, we may redeem all or a part of the senior notesissued 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, ifany, on the senior notes redeemed, to the applicable redemption date, ifredeemed during the twelve-month period beginning on May 1 of the yearsindicated below, subject to the rights of holders of senior notes on therelevant record date to receive interest on the relevant interest payment date:

 
| **Year**             | ** ** | **Percentage** | ** ** |
|----------------------|------------|----------------|------------|
| 2008                 |       | 105.750        | %          |
| 2009                 |       | 102.875        | %          |
| 2010 and  thereafter |       | 100.000        | %          |

 

*11**3/**8**% SeniorNotes:*   Interest on our 113/8% senior notes is payable semi-annuallyin 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 theaggregate principal amount of the 113/8% senior notes at a redemption price of111.375% of the principal amount thereof, plus accrued and unpaid interest, andliquidated damages (as defined in the indenture), if applicable, to the redemptiondate with the net cash proceeds of a sale of our equity interests or acontribution to our common equity capital; provided that:

 

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

 

•                       theredemption occurs within 90 days of the date of the closing of such saleof equity interests or contribution.

 

Exceptpursuant to the preceding paragraph, the senior notes will not be redeemable atour option prior to July 15, 2008.

 

Onor after July 15, 2008, we may redeem all or a part of the senior notesissued 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, ifany, on the senior notes redeemed, to the applicable redemption date, ifredeemed during the twelve-month period beginning on May 1 of the yearsindicated below, subject to the rights of holders of senior notes on therelevant record date to receive interest on the relevant interest payment date:

 
| **Year**             | ** ** | **Percentage** | ** ** |
|----------------------|------------|----------------|------------|
| 2008                 |       | 105.688        | %          |
| 2009                 |       | 102.844        | %          |
| 2010 and  thereafter |       | 100.000        | %          |

 

31

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***Off-BalanceSheet Arrangements***

 

***Other than the operating lease commitments included above, we have nooff-balance sheet arrangements that would have a current or future materialeffect on the financial condition, changes in financial condition, revenues,expenses, results of operations, liquidity, capital expenditures or capitalresources.***

 

***NortelNetworks Equipment Agreements***

 

OnNovember 22, 2004, we signed a letter of agreement with Nortel Networks toreplace the Lucent network equipment then deployed in our Michigan markets withNortel equipment including one switch, 232 base stations, various additionalcapacity growth and network equipment. Under the terms of the agreement, weagreed to purchase equipment totaling $15.2 million and will receivespecial pricing on future purchases through December 31, 2007. Through December 31,2005, we have purchased approximately $13.6 million of equipment underthis agreement.

 

Inaddition, in January 2005, Horizon PCS signed a $14.0 million letter ofagreement with Nortel Networks to replace the Motorola network equipmentcurrently deployed in its Fort Wayne, Indiana, Chillicothe, Ohio, and JohnsonCity, Tennessee markets with Nortel equipment including 390 base stations,various additional capacity growth and network equipment. Under the terms ofthe agreement, the Company has agreed to purchase equipment totaling$13.0 million and will receive special pricing on future purchases throughJune 30, 2007. Through December 31, 2005, the Company had met the$13.0 million of required equipment purchases under this agreement.

 

On December 31,2005, we signed a letter of agreement with Nortel Networks to replace theMotorola equipment currently deployed in our Pennsylvania, New York, New Jerseyand Maryland markets with Nortel equipment. Under the terms of the agreement, we agreed to purchase equipment requiredto replace 425 existing base stations and related network infrastructure, plusvarious additional equipment to support future network footprint and capacityexpansion, totaling approximately $16.5 million, with an option to purchaseadditional network enhancement equipment totaling $0.5 million.  As of December 31, 2005, we had notpurchased any equipment under this agreement.

 

***Seasonality***

 

Ourbusiness is subject to seasonality because the wireless telecommunicationsindustry historically has been dependent on fourth calendar quarter results.Among other things, the industry relies on moderately higher subscriberadditions and handset sales in the fourth calendar quarter as compared to theother three calendar quarters. A number of factors contribute to this trend,including: the use of retail distribution, which is heavily dependent upon theyear-end holiday shopping season; the timing of new product and serviceannouncements and introductions; competitive pricing pressures; and aggressivemarketing and promotions. The increased level of activity requires a greateruse of available financial resources during this period. We believe that ourresults for the three months ended December 31, 2005 reflect this trend.

 

***Critical Accounting Policies***

 

Our financial statementsare prepared in conformity with accounting principles generally accepted in theUnited States and require us to select appropriate accounting policies.  The assumptions and judgments we use inapplying our accounting policies have a significant impact on our reportedamounts of assets, liabilities, revenue and expenses.  While we believe that the assumptions andjudgments used in our estimates are reasonable, actual results may differ fromthese estimates under different assumptions or conditions.

 

Wehave identified the most critical accounting policies upon which our financialstatus depends.  The critical policieswere determined by considering accounting policies that involve the most complexor subjective decisions or assessments. We also have other policies consideredkey accounting policies; however, these policies do not meet the definition ofcritical accounting policies because they do not generally require us to makeestimates or judgments that are complex or subjective.  Our critical accounting policies include thefollowing:

 

•                  Revenuerecognition

 

•                  Allowancefor doubtful accounts

 

•                  Long-livedasset recovery

 

32

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•                  Intangibleassets

 

•                  Income taxes

 

In light of theadoption of SFAS No. 123R – discussed in Item 2 of Part I of thisquarterly report on Form 10-Q – we have also included our stock-basedcompensation policy as a critical accounting policy.  SFAS No. 123R requires significantjudgment and the use of estimates in the assumptions for the model used tovalue the share-based payment awards, including stock price volatility, andexpected 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 historicalexperience to use as a basis for these assumptions.  While we believe that the assumptions andjudgments used in our estimates are reasonable, actual results may differ fromthese estimates under different assumptions or conditions.

 

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

 

***Inflation***

 

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

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We do not engage incommodity futures trading activities and do not enter into derivative financialinstrument transactions for trading or other speculative purposes. We also donot engage in transactions in foreign currencies that could expose us to marketrisk.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

(a)          Evaluationof Disclosure Controls and Procedures. Each of our Chief Executive Officer andChief Financial Officer has evaluated the effectiveness of our disclosurecontrols and procedures (as such term is defined in Rules 13a-14(c) and15d-14(c) under the Exchange Act) as of the end of the period covered bythis transition report. Based on such evaluation, such officers have concludedthat, as of the end of the period covered by this transition report, ourdisclosure controls and procedures are effective in alerting them on a timelybasis to material information relating to us (including our consolidatedsubsidiaries) required to be included in our reports filed or submitted underthe Exchange Act.

 

(b)         Changes inInternal Controls over Financial Reporting. There have not been any changes inour internal control over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the three months ended December 31,2005 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

(c)          We placereliance on Sprint PCS to adequately design its internal controls with respectto the processes established to provide financial information and otherinformation to us and the other PCS Affiliates of Sprint. To address thisissue, Sprint engages an independent registered public accounting firm toperform a periodic evaluation of these controls and to provide a “Report onControls Placed in Operation and Tests of Operating Effectiveness forAffiliates” under guidance provided in Statement of Auditing Standards No. 70.This report is provided bi-annually to us.

 

33

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**PART II . OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

See  — “Management’s Discussion and Analysis ofFinancial 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 toclaims arising in the ordinary course of business and in connection with ourbankruptcy petition. We are not currently a party to any such legalproceedings, the adverse outcome to which, individually or in the aggregate, isexpected to have a material adverse effect on our business, financial conditionor results of operations.

 

**ITEM1A. RISK FACTORS**

 

***Set forth below is an update to the riskfactor set forth in our Annual Report on Form 10-K for the fiscal yearended September 30, 2005 entitled “***The merger between Sprint and Nextel and the outcome of our litigationrelating thereto may have an adverse effect on us in ways that would be beyondour control”:

 

***•***                  On December 28, 2005, the judge in Cook CountyCircuit Court denied our and Sprint’s requests for summary judgment; however heagreed with us that iPCS Wireless’s management agreement with Sprint would bebreached if confidential information were disclosed to any person or entityinvolved in the operation of Nextel’s network. Accordingly, he entered a preliminary non-appealable order of summaryjudgment as to that aspect of our complaint. The judge’s order is subject to reconsideration during the trial.

 

***•***                  The Forbearance Agreement expired on January 1,2006 in the territory managed by iPCS Wireless. We do not know if or when Sprint will change its operations in theterritory managed by iPCS Wireless as a result of the expiration of theForbearance Agreement.

 

***•***                  On January 4, 2006, the judge in the DelawareCourt of Chancery issued a memorandum opinion denying our and Sprint’s requestsfor summary judgment; however he agreed with Sprint that our claim fordeclaratory judgment as to the G-Block was not ripe for adjudication.  Accordingly, that aspect of our complaint wasdismissed without prejudice.

 

***•***                  The testimony in the trial relating to the complaintfiled by our wholly owned subsidiaries, Horizon Personal Communications andBright Personal Communications Services, against Sprint and Nextel in theDelaware Court of Chancery began on January 9, 2006 and concluded on January 23,2006.  We expect the judge to issue aruling during our quarter ended June 30, 2006.

 

***•***                  The trial relating to the complaint filed by ourwholly owned subsidiary, iPCS Wireless, against Sprint and Nextel in CookCounty Circuit Court was continued from February 6, 2006 to March 7,2006.

 

***In addition to the foregoing, you shouldconsider each of the factors set forth in our Annual Report, as well as theother information in the Annual Report and this Quarterly Report in evaluatingour business and our prospects. The factors described in our Annual Report arenot the only ones we face. Additional risks and uncertainties not presentlyknown to us or that we currently consider immaterial may also impair ourbusiness operations. If any of the risks actually occur, our business andfinancial results could be harmed. In that case the trading price of our commonstock could decline.***

 

# **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

None.

 

# **ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

At September 30, 2005, we were not in compliance with theindentures governing our 113/8% senior notes and our 111/2%senior notes because cash proceeds from the 113/8% senior notes wereinvested in short-term AAA rated

 

34

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auction rate certificates —which are not permitted investments under the indentures — thereby causing anevent of default.  The investments weresold on October 26, 2005 and the event of default did not continue beyondsuch date.

 

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

 

# **None.**

 

# **ITEM 5. OTHER INFORMATION**

 

None

 

**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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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))                                                                                                                                                                                                                                                                                                                       |

 

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| 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 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                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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                                                                                                                                                                                                                                                                                                                                                                 |

 

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| 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**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   | iPCS, Inc.               |
|--------|-------------------------------|
|   |                          |   |   |
|   | By:                           |   | /s/  TIMOTHY M. YAGER |
|   |                          |   | Timothy M.  Yager*President and Chief Executive Officer*(Principal Executive Officer) |
|   | Date: February 13, 2006  |   |   |   |
|   |                          |   |   |
|   | By:                           |   | /s/  STEBBINS B. CHANDOR, JR. |
|   |                          |   | Stebbins  B. Chandor, Jr.*Executive Vice President and  Chief Financial Officer*(Principal Financial Officer) |
|   | Date:  February 13, 2006 |   |   |   |

 

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