**Tableof Contents**

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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-Q**

 

| **(Mark One)**                                                                                                                                                                                                                        | ** ** | ** **                                                                                               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                 | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
| ** **                                                                                                                                                                                                                            | ** ** | ** **                                                                                               |
| **For the quarterly period ended  March 31, 2009**                                                                                                                                                                               |
| ** **                                                                                                                                                                                                                            | ** ** | ** **                                                                                               |
| **Or**                                                                                                                                                                                                                                |
| ** **                                                                                                                                                                                                                            | ** ** | ** **                                                                                               |
| o                                                                                                                                                                                                                                     |       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                                                  |       |                                                                                                     |
| **For the transition period  from                to                ** |

** **

**CommissionFile Number 000-51844**

 

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**iPCS, INC.**

**(Exact name of registrant as specified in its charter)**

 

| **Delaware**                                      | ** ** | **36-4350876**                        |
|---------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or |       | (I.R.S. Employer  Identification No.) |
| organization)                                     |       |                                  |
|                                              |       |                                  |
| **1901 N. Roselle Road,  Schaumburg, Illinois**   | ** ** | **60195**                             |
| (Address of principal  executive offices)         |       | (Zip code)                            |

 

**(847)885-2833**

(Registrant’s telephone number, including zipcode)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 
|   | Yes x  No o |
|--------|---------------------------------|

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405of this chapter) during the preceding 12 months (or such shorter periodthat the registrant was required to submit and post such files).

 
|   | Yes o  No o |
|--------|---------------------------------|

 

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

 
| Large accelerated filer o                     |   | Accelerated filer x         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                        |

 

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

 
|   | Yes o  No x |
|--------|---------------------------------|

 

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

 
|   | Yes x  No o |
|--------|---------------------------------|

 

As of May 6, 2009,there were 16,983,269 shares of common stock, $0.01 par value per share,outstanding.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

** **
| PART I    | FINANCIAL INFORMATION                                                                                       | 3      |
|----------------|-------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                        |   |
| ITEM 1.        | FINANCIAL STATEMENTS                                                                                        | 3      |
|           | CONSOLIDATED  BALANCE SHEETS AS OF MARCH 31, 2009 AND DECEMBER 31, 2008 (UNAUDITED)                    | 3      |
|           | CONSOLIDATED  STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND  2008 (UNAUDITED) | 4      |
|           | CONSOLIDATED  STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND  2008 (UNAUDITED) | 5      |
|           | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS                                                        | 6      |
| ITEM  2.       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                 | 21     |
| ITEM  3.       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                 | 38     |
| ITEM  4.       | CONTROLS AND  PROCEDURES                                                                                    | 38     |
|           |                                                                                                        |   |
| PART II   | OTHER INFORMATION                                                                                           | 38     |
|           |                                                                                                        |   |
| ITEM 1.        | LEGAL PROCEEDINGS                                                                                           | 38     |
| ITEM 1A.       | RISK FACTORS                                                                                                | 38     |
| ITEM  2.       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                | 39     |
| ITEM  3.       | DEFAULTS  UPON SENIOR SECURITIES                                                                            | 39     |
| ITEM  4.       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                        | 39     |
| ITEM 5.        | OTHER INFORMATION                                                                                           | 39     |
| ITEM 6.        | EXHIBITS                                                                                                    | 40     |
|           |                                                                                                        |   |
| SIGNATURES     | 41                                                                                                          |
|           |                                                                                                        |   |
| CERTIFICATIONS |                                                                                                        |

 

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Table of Contents

 

**PART I. FINANCIALINFORMATION**

** **

**Item 1. Financial Statements.**

 

**iPCS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

**(In thousands, except share and per share amounts)**

 
| ** **                                                                                                                   | ** ** | **March 31,  2009** | ** ** | **December 31,  2008 (a)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
|                                                                                                                         |       |                     |       |                                 |       |
| **Assets**                                                                                                                   | ** ** | ** **               | ** ** | ** **                           | ** ** |
| Current Assets:                                                                                                              |       |                     |       |                                 |       |
| Cash and cash equivalents                                                                                                    |       | $                        | 70,696     |                                 | $          | 55,940 |   |
| Accounts receivable, net of allowance for doubtful accounts of $7,808  and $8,125, respectively                              |       | 38,356                   |       | 37,859                               |       |
| Receivable from Sprint (Note 3)                                                                                              |       | 27,509                   |       | 25,623                               |       |
| Inventories, net                                                                                                             |       | 5,412                    |       | 5,465                                |       |
| Assets held for sale                                                                                                         |       | 389                      |       | 389                                  |       |
| Prepaid expenses                                                                                                             |       | 6,769                    |       | 7,223                                |       |
| Other current assets                                                                                                         |       | 83                       |       | 63                                   |       |
| Total current assets                                                                                                         |       | 149,214                  |       | 132,562                              |       |
| Property and equipment, net (Note 4)                                                                                         |       | 156,418                  |       | 162,014                              |       |
| Financing costs, net                                                                                                         |       | 6,075                    |       | 6,419                                |       |
| Deferred customer activation costs                                                                                           |       | 3,554                    |       | 3,816                                |       |
| Intangible assets, net (Note 5)                                                                                         |       | 88,308                   |       | 90,602                               |       |
| Goodwill (Note 5)                                                                                                            |       | 141,783                  |       | 141,783                              |       |
| Other assets                                                                                                                 |       | 418                      |       | 416                                  |       |
| Total assets                                                                                                                 |       | $                        | 545,770    |                                 | $          | 537,612 |   |
|                                                                                                                         |       |                     |       |                                 |       |
| **Liabilities and Stockholders’  Deficiency**                                                                           | ** ** | ** **               | ** ** | ** **                           | ** ** |
| Current Liabilities:                                                                                                         |       |                     |       |                                 |       |
| Accounts payable                                                                                                             |       | $                        | 4,833      |                                 | $          | 5,051 |   |
| Accrued expenses                                                                                                             |       | 17,504                   |       | 18,337                               |       |
| Payable to Sprint (Note 3)                                                                                                   |       | 45,536                   |       | 41,067                               |       |
| Deferred revenue                                                                                                             |       | 14,129                   |       | 13,410                               |       |
| Accrued interest                                                                                                             |       | 4,856                    |       | 5,519                                |       |
| Current maturities of long-term debt and capital lease obligations  (Note 6)                                                 |       | 39                       |       | 37                                   |       |
| Total current liabilities                                                                                                    |       | 86,897                   |       | 83,421                               |       |
| Deferred customer activation fee revenue                                                                                     |       | 3,554                    |       | 3,816                                |       |
| Interest rate swap (Note 7)                                                                                                  |       | 15,459                   |       | 16,621                               |       |
| Other long-term liabilities                                                                                                  |       | 6,239                    |       | 6,551                                |       |
| Long-term debt and capital lease obligations, excluding current  maturities (Note 6)                                         |       | 475,392                  |       | 475,401                              |       |
| Total liabilities                                                                                                            |       | 587,541                  |       | 585,810                              |       |
|                                                                                                                         |       |                     |       |                                 |       |
| Commitments and contingencies (Note 15)                                                                                      |       |                     |       |                                 |       |
|                                                                                                                         |       |                     |       |                                 |       |
| Stockholders’ Deficiency:                                                                                               |       |                     |       |                                 |       |
| 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,  17,264,052 and 17,163,221 shares issued, respectively |       | 173                      |       | 172                                  |       |
| Additional paid-in-capital                                                                                                   |       | 168,645                  |       | 167,531                              |       |
| Accumulated deficiency                                                                                                       |       | (193,508                 | )          | (199,280                             | )          |
| Accumulated other comprehensive loss (Note 12)                                                                               |       | (15,459                  | )          | (16,621                              | )          |
| Treasury stock, at cost; 167,163 and 0 shares, respectively (Note 13)                                                        |       | (1,622                   | )          | —                               |       |
| Total stockholders’ deficiency                                                                                          |       | (41,771                  | )          | (48,198                              | )          |
| Total liabilities and stockholders’ deficiency                                                                          |       | $                        | 545,770    |                                 | $          | 537,612 |   |

 

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(a)             Derived from the Company’s auditedfinancial statements as of December 31, 2008.

 

See Notes to unauditedconsolidated financial statements.

 

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**iPCS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(UNAUDITED)**

(Dollars in thousands,except share data)

 
| ** **                                                      | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                      | ** ** | **March 31,  2009**                           | ** ** | **March 31,  2008** | ** ** |
| ** **                                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| **Revenue:**                                                    | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Service revenue                                                 |       | $                                                  | 103,981    |   | $ | 92,099 |   |
| Roaming revenue                                                 |       | 27,620                                             |       | 30,144 |   |
| Equipment and other                                             |       | 4,563                                              |       | 3,415 |   |
| Total revenue                                                   |       | 136,164                                            |       | 125,658 |   |
| **Operating Expense:**                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Cost of service and roaming                                     |       | 72,150                                             |       | 68,184 |   |
| Cost of equipment                                               |       | 16,212                                             |       | 11,663 |   |
| Selling and marketing                                           |       | 16,650                                             |       | 17,859 |   |
| General and administrative                                      |       | 8,881                                              |       | 7,088 |   |
| Gain on Sprint settlement (Note 3)                              |       | (4,273                                             | )          | — |   |
| Depreciation                                                    |       | 10,286                                             |       | 11,661 |   |
| Amortization of intangible assets (Note 5)                      |       | 2,294                                              |       | 2,294 |   |
| Loss on disposal of property and equipment, net                 |       | 99                                                 |       | 10 |   |
| Total operating expense                                         |       | 122,299                                            |       | 118,759 |   |
| **Operating income**                                            |       | 13,865                                             |       | 6,899 |   |
| Interest income                                                 |       | 86                                                 |       | 720 |   |
| Interest expense                                                |       | (8,034                                             | )          | (8,915 | ) |
| Other income, net                                               |       | 5                                                  |       | 15 |   |
| **Income (loss) before provision for income tax**               |       | 5,922                                              |       | (1,281 | ) |
| Provision for income tax (Note 9)                               |       | 150                                                |       | 325 |   |
| **Net income (loss)**                                           |       | $                                                  | 5,772      |   | $ | (1,606 | ) |
|                                                            |       |                                               |       |   |   |
| **Basic and diluted income (loss) per share of  common stock:** | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Income (loss) available to common stockholders                  |       | $                                                  | 0.34       |   | $ | (0.09 | ) |
|                                                            |       |                                               |       |   |   |
| Weighted average basic and diluted common shares outstanding    |       | 17,155,931                                         |       | 17,136,043 |   |

 

See Notes to unaudited consolidated financialstatements.

 

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**iPCS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(UNAUDITED)**

(In thousands)

 
| ** **                                                                                                              | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **March 31,  2009**                           | ** ** | **March 31,  2008** | ** ** |
| **Cash Flows from Operating Activities:**                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                                       |       | $                                                  | 5,772      |   | $ | (1,606 | ) |
| Adjustments to reconcile net income (loss) to net cash flows from  operating activities:                                |       |                                               |       |   |   |
| Loss on disposal of property and equipment                                                                              |       | 99                                                 |       | 10 |   |
| Depreciation and amortization                                                                                           |       | 12,580                                             |       | 13,955 |   |
| Non-cash interest expense                                                                                               |       | 344                                                |       | 344 |   |
| Stock-based compensation expense                                                                                        |       | 1,120                                              |       | 1,841 |   |
| Provision for doubtful accounts                                                                                         |       | 3,217                                              |       | 5,384 |   |
| Changes in assets and liabilities:                                                                                      |       |                                               |       |   |   |
| Accounts receivable                                                                                                     |       | (3,713                                             | )          | (4,176 | ) |
| Receivable from Sprint                                                                                                  |       | (1,887                                             | )          | 2,952 |   |
| Inventories, net                                                                                                        |       | 54                                                 |       | (2,467 | ) |
| Prepaid expenses, other current and long-term assets                                                                    |       | 693                                                |       | 451 |   |
| Accounts payable, accrued expenses and other long-term liabilities                                                      |       | (1,552                                             | )          | (4,218 | ) |
| Payable to Sprint                                                                                                       |       | 4,469                                              |       | (2,331 | ) |
| Deferred revenue                                                                                                        |       | 457                                                |       | 341 |   |
| Net cash flows provided by operating activities                                                                         |       | 21,653                                             |       | 10,480 |   |
| **Cash Flows from Investing Activities:**                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Purchases of property and equipment                                                                                     |       | (5,356                                             | )          | (14,406 | ) |
| Proceeds from disposition of property and equipment                                                                     |       | 123                                                |       | 19 |   |
| Net cash flows used in investing activities                                                                             |       | (5,233                                             | )          | (14,387 | ) |
| **Cash Flows from Financing Activities:**                                                                               | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Payments on capital lease obligations                                                                                   |       | (9                                                 | )          | (7 | ) |
| Proceeds from the exercise of stock options                                                                             |       | —                                             |       | 137 |   |
| Payment of special cash dividend                                                                                        |       | (29                                                | )          | (36 | ) |
| Repurchase of common stock                                                                                              |       | (1,626                                             | )          | — |   |
| Net cash flows (used in) provided by financing activities                                                               |       | (1,664                                             | )          | 94 |   |
| Net increase (decrease) in cash and cash equivalents                                                                    |       | 14,756                                             |       | (3,813 | ) |
| **Cash and cash equivalents at beginning of period**                                                                    |       | 55,940                                             |       | 77,599 |   |
| **Cash and cash equivalents at end of period**                                                                          |       | $                                                  | 70,696     |   | $ | 73,786 |   |
|                                                                                                                    |       |                                               |       |   |   |
| **Supplemental disclosure of cash flow information  - cash paid for interest (net of amount capitalized)**              |       | $                                                  | 8,334      |   | $ | 9,136 |   |
| **Supplemental disclosure for non-cash investing  activities:**                                                         | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Accounts payable and accrued expenses incurred for the acquisition of  property, equipment and construction in progress |       | 1,579                                              |       | 8,542 |   |

 

See Notes to unauditedconsolidated financial statements.

 

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**iPCS, INC.AND SUBSIDIARIES**

**NOTES TOUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(1)  Business and Basis of Presentation**

** **

iPCS, Inc. (the “Company” or “iPCS”) isa holding company that operates as a PCS Affiliate of Sprint through threewholly owned subsidiaries: iPCS Wireless, Inc., Horizon PersonalCommunications, Inc., and Bright Personal CommunicationsServices, LLC. Each of these subsidiaries is a party to separateaffiliation agreements with Sprint PCS, the operator of a 100% digital wirelesspersonal communications services (“PCS”) network with licenses to provide voiceand data service to the entire United States population. These affiliationagreements grant iPCS the exclusive right to sell wireless mobilitycommunications network products and services under the Sprint brand in 81markets, including markets in Illinois, Indiana, Iowa, Michigan, Pennsylvania,Ohio, Maryland, Nebraska, New York, New Jersey, Tennessee andWest Virginia.

 

The unaudited consolidated balance sheets as of March 31, 2009 andDecember 31, 2008, the unaudited consolidated statements of operations forthe three months ended March 31, 2009 and 2008, the unaudited consolidatedstatements of cash flows for the three months ended March 31, 2009 and2008 and related footnotes have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and Rule 10-01 of Regulation S-X. Accordingly, theydo not 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 in conjunctionwith the Company’s 2008 Annual Report on Form 10-K which includesinformation and disclosures not presented herein. All intercompany accounts andtransactions have been eliminated in consolidation. In the opinion ofmanagement, the unaudited consolidated financial statements contain all of theadjustments, consisting of normal recurring adjustments as well as thoserelated to the Company’s settlement of certain disputes with Sprint, necessaryto present fairly, in summarized form, the consolidated financial position,results of operations and cash flows of the Company. The results of operationsfor the three months ended March 31, 2009 are not indicative of theresults that may be expected for the full year 2009.

 

**(2)  Per Share Data**

 

Basic and diluted income (loss) per share for the Company arecalculated by dividing the net income (loss) by the weighted average number ofshares of common stock of the Company, net of shares held in treasury. Thecalculation was made in accordance with SFAS No. 128, “Earnings Per Share.”For the three months ended March 31, 2009, basic and diluted income pershare are the same because there are no dilutive incremental potential sharesas the average stock price for the period was below all outstanding stockoption exercise prices.  For the threemonths ended March 31, 2008, basic and diluted loss per share are the samebecause the inclusion of the incremental potential shares of common stock fromany assumed exercise of stock options is antidilutive. Potential shares of commonstock excluded from the income (loss) per share computations for the threemonths ended March 31, 2009 and 2008 were 1,703,234 and 1,464,919,respectively.

 

**(3)  Sprint Agreements**

 

Each of iPCS Wireless, Inc., HorizonPersonal Communications, Inc. and Bright Personal CommunicationsServices, LLC has entered into affiliation agreements with Sprint. Underthese agreements, which have been amended from time to time, most recently on March 3,2008, Sprint provides the Company significant support services such as customerservice, billing, long distance transport services, national network operationssupport, national pricing plans, inventory logistics support, use of the Sprintand Sprint PCS brand names, national advertising, national distribution, productdevelopment and the supply of financial and operational data.

 

The costs incurred by the Company for the support services provided bySprint are determined on a per average monthly cash cost per user (“CCPU”) rateand on a monthly cost per gross addition (“CPGA”) rate. For 2008 and 2009, theCCPU rate was $6.50 and $5.85, respectively, subject to adjustment as describedbelow.  The CPGA rate for each period was$19.00.

 

The CCPU rate in effect from 2008 through 2010 is to be reduced fromthe then current rate by $0.15 if the Company hits certain milestones withrespect to its voluntary deployment of EV-DO Rev. A, a recent version of thefurther evolution of code division multiple access (“CDMA”) high-speed datatechnology called Evolution Data Optimized (“EV-DO”). Specifically, the CCPUrates set forth above are reduced by $0.15 from the then current rate when theCompany’s EV-DO Rev. A deployment covers at least 6.0 million inpopulation (“POPs”); by another $0.15 from the then current rate when the Companycovers at least 7.0 million POPs; and by another $0.15 from the thencurrent rate when the Company covers at least 9.0 million POPs.  The Company’s EV-DO Rev. A deploymentexceeded 6.0 million POPs during June 2008 and exceeded 7.0 million POPsduring July 2008.  As a result, theCCPU rate was reduced to $6.35 starting July 1, 2008, was further reducedto $6.20 starting August 1, 2008 for the remainder of 2008 and

 

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has been reduced to $5.85 and $5.55 for 2009 and 2010, respectively,subject to any further adjustments related to incremental EV-DO Rev. Acoverage.

 

The Company receives roaming revenue when subscribers of Sprint andother PCS Affiliates of Sprint incur minutes of use in the Company’sterritories, and the Company incurs expense payable to Sprint and to other PCSAffiliates of Sprint when Sprint subscribers based in the Company’s territoryincur minutes of use in the territories of Sprint and other PCS Affiliates ofSprint.  Effective January 1, 2008,3G data roaming is not settled separately with Sprint; however, the Companycontinues to settle 3G data roaming separately with the other PCS Affiliates ofSprint. For 2008, reciprocal roaming rates were $0.0400 per minute for voiceand 2G data, excluding certain markets as described below, and $0.0003 perkilobyte for 3G data. For 2009, reciprocal roaming rates are $0.0400 per minutefor voice and 2G data, excluding certain markets as described below, and$0.0001 per kilobyte for 3G data.

 

With respect to certain of the Company’s markets in western and easternPennsylvania, the Company receives the benefit of a special reciprocal rate forvoice and 2G data of $0.10 per minute. This special rate will terminate, withrespect to each of these two sets of markets, on the earlier of December 31,2011 or the first day of the calendar month which follows the first calendarquarter during which the Company achieves a subscriber penetration rate of atleast 7% of the Company’s covered populations in those markets.  The Company does not anticipate reaching a 7%subscriber penetration rate in these markets in the foreseeable future.

 

The Company’s affiliation agreements with Sprint also provide theCompany with protective rights to decline to implement certain future programrequirement changes that Sprint proposes that would adversely affect theCompany’s business. The Company also has a right of first refusal to build outnew coverage within the Company’s territory. If the Company does not exercisethis right, then Sprint may build out the new coverage, or may allow anotherPCS affiliate of Sprint to do so, in which case Sprint has the right to managethe new coverage.

 

Roaming expense is recorded in cost of service and roaming within thestatements of operations. Cost of service and roaming transactions with Sprintinclude the 8% affiliation fee, long distance, roaming expense and Sprint’sCCPU charges for support services. Cost of equipment relates to inventory soldby the Company that was purchased from Sprint under the Company’s affiliationagreements with Sprint. Selling and marketing transactions relate to subsidizedcosts on wireless handsets and commissions under Sprint’s national distributionprogram.

 

For each of the three months ended March 31, 2009 and 2008,approximately 97% of the Company’s revenue was derived from informationprovided by Sprint on the basis of data within Sprint’s possession andcontrol.  For each of the three monthsended March 31, 2009 and 2008, approximately 59% of the Company’s cost ofservice and roaming was derived from information provided by Sprint on thebasis of data within Sprint’s possession and control.  The Company reviews all such amounts settledto and from Sprint and, in the event the Company believes any such amounts to beerroneous, it may dispute, and has disputed, such settlements in accordancewith the procedures set forth in the Sprint affiliation agreements.

 

On January 22, 2009, the Company reached a settlement with Sprintrelated to previously disputed 2008 items, which resulted in a Gain on Sprintsettlement of $4.3 million being recorded in the Company’s consolidatedstatement of operations for the three months ended March 31, 2009.  TheCompany has disputed additional items with Sprint which remain unresolved as ofApril 30, 2009. The final outcome of these unresolved disputed items is unknownat this time.

 

Amounts relating to the Sprint affiliation agreements for the three months ended March 31, 2009and 2008 and as of March 31, 2009 and December 31, 2008 are asfollows (in thousands):

 
| ** **                                                          | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                          | ** ** | **March 31,  2009**                           | ** ** | **March 31,  2008** | ** ** |
| **Amounts included in the Consolidated  Statements of Operations:** | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| Service revenue                                                     |       | $                                                  | 103,981    |   | $ | 92,099 |   |
| Roaming revenue                                                     |       | $                                                  | 27,620     |   | $ | 30,144 |   |
| Cost of service and roaming:                                        |       |                                               |       |   |   |
| Roaming                                                             |       | $                                                  | 19,261     |   | $ | 16,526 |   |
| Customer service                                                    |       | 13,847                                             |       | 13,280 |   |
| Affiliation fees                                                    |       | 8,581                                              |       | 6,850 |   |
| Long distance and other                                             |       | 625                                                |       | 3,309 |   |
| Total cost of service and roaming                                   |       | $                                                  | 42,314     |   | $ | 39,965 |   |
| Cost of equipment                                                   |       | $                                                  | 16,212     |   | $ | 11,663 |   |
| Selling and marketing                                               |       | $                                                  | 2,188      |   | $ | 2,525 |   |

 

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| ** **                                               | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Amounts included in the Consolidated Balance Sheets:** | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Receivable from Sprint                                   |       | $                        | 27,509     |                        | $          | 25,623 |   |
| Payable to Sprint                                        |       | 45,536                   |       | 41,067                      | ** ** |
|                                                          |            |                          |            |                             |            |  |  |

 

**(4)  Property and Equipment, Net**

 

Property and equipment consists of the following at March 31, 2009and December 31, 2008 (in thousands):

 
| ** **                                      | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Network assets                                  |       | $                        | 304,168    |                        | $          | 295,550 |   |
| Land                                            |       | 114                      |       | 114                         |       |
| Building                                        |       | 1,566                    |       | 1,566                       |       |
| Computer equipment                              |       | 7,052                    |       | 6,773                       |       |
| Furniture, fixtures, and office equipment       |       | 9,464                    |       | 9,744                       |       |
| Vehicles                                        |       | 2,633                    |       | 2,540                       |       |
| Construction in progress                        |       | 19,631                   |       | 23,980                      |       |
| Total property and equipment                    |       | 344,628                  |       | 340,267                     |       |
| Less accumulated depreciation and  amortization |       | (188,210                 | )          | (178,253                    | )          |
| Total property and equipment, net               |       | $                        | 156,418    |                        | $          | 162,014 |   |

 

**(5)  Goodwill and Intangible Assets**

 

Goodwill, totaling $141.8 million, represents the excess of purchaseprice over the fair value of the net assets acquired, including identifiableintangible assets.  Goodwill is not deductiblefor income taxes.

 

Intangible assets represent the values assigned to the Company’scustomer base, the right to provide service under the Sprint affiliationagreements and an FCC license for a small market in Ohio.

 

The intangible assets relating to the customer base were amortized overthe estimated average life of a customer of 30 months.  The intangible assets related to customerbases were fully amortized as of December 31, 2007.  The intangible assets relating to the rightto provide service under the Sprint affiliation agreements are being amortizedover the remaining term of the respective agreements. The FCC license wasdetermined to have an indefinite life as it is expected to be renewed withminimal effort and cost.  The FCC licenseis for sale, however, the Company believes the sale of this asset is unlikelywithin the next year.

 

The weighted average amortization period, gross carrying amount,accumulated amortization and net carrying amount of intangible assets at March 31,2009 and December 31, 2008 are as follows (in thousands):

 
| ** **                                                        | ** ** | **March 31, 2009**                    | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **Weighted Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** |
| **Non-amortized intangible asset:**                               | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| FCC license                                                       |       | —                                          |       | $ | 300 |   | $ | — |   | $ | 300 |   |
| **Amortized intangible assets:**                                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Right to provide service under the Sprint  affiliation agreements |       | 167 months                                      |       | 126,521 |   | (38,513 | ) | 88,008 |   |
| Customer base                                                     |       | 30 months                                       |       | 71,956 |   | (71,956 | ) | — |   |
|                                                              |       | 117 months                                      |       | $ | 198,777 |   | $ | (110,469 | ) | $ | 88,308 |   |

 

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| ** **                                                        | ** ** | **December 31, 2008**                 | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                        | ** ** | **Weighted Average  Amortization  Period** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** |
| **Non-amortized intangible asset:**                               | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| FCC license                                                       |       | —                                          |       | $ | 300 |   | $ | — |   | $ | 300 |   |
| **Amortized intangible assets:**                                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Right to provide service under the Sprint  affiliation agreements |       | 167 months                                      |       | 126,521 |   | (36,219 | ) | 90,302 |   |
| Customer base                                                     |       | 30 months                                       |       | 71,956 |   | (71,956 | ) | — |   |
|                                                              |       | 117 months                                      |       | $ | 198,777 |   | $ | (108,175 | ) | $ | 90,602 |   |

 

Amortization expense for the three months ended March 31,2009 and 2008 was $2.3 million for each period. Aggregate amortization expense relative to existing intangible assetsfor the periods shown is currently estimated to be as follows:

 
| **Year Ended December 31** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|
| 2009                                      |       | $          | 9,176      |   |
| 2010                                      |       | 9,176      |       |
| 2011                                      |       | 9,176      |       |
| 2012                                      |       | 9,176      |       |
| 2013                                      |       | 9,176      |       |
| Thereafter                                |       | 44,422     |       |
| Total                                     |       | $          | 90,302     |   |

 

**(6)  Long-Term Debt**

 

Long-term debt consists of the following at March 31, 2009 and December 31,2008 (in thousands):

 
| ** **                                                                  | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| First lien senior secured floating rate  notes                              |       | $                        | 300,000    |                        | $          | 300,000 |   |
| Second lien senior secured floating rate  notes                             |       | 175,000                  |       | 175,000                     |       |
| Capital lease obligations                                                   |       | 431                      |       | 438                         |       |
| Total long-term debt and capital lease  obligations                         |       | 475,431                  |       | 475,438                     |       |
| Less: current maturities                                                    |       | (39                      | )          | (37                         | )          |
| Long-term debt and capital lease  obligations, excluding current maturities |       | $                        | 475,392    |                        | $          | 475,401 |   |

 

***First Lien andSecond Lien Senior Secured Floating Rate Notes***

 

The Company has outstanding $475.0 million in aggregate principalamount of senior secured notes, consisting of $300.0 million in aggregateprincipal amount of First Lien Senior Secured Floating Rate Notes due 2013 (“FirstLien Notes”) and $175.0 million in aggregate principal amount of SecondLien Senior Secured Floating Rate Notes due 2014 (“Second Lien Notes” andtogether with the First Lien Notes, the “Secured Notes”).  The offering of the Secured Notes closed April 23,2007.

 

The Secured Notes are senior secured obligations of the Company and areunconditionally guaranteed on a senior secured basis by all the Company’sexisting and future domestic restricted subsidiaries. The First Lien Notes aresecured by a first priority security interest, subject to permitted liens, insubstantially all of the Company and its subsidiary guarantor assets,including, but not limited to: (1) all the capital stock of eachrestricted subsidiary owned by the Company, or any subsidiary guarantor; (2) alldeposit accounts, security accounts, accounts receivable, inventory, investmentproperty, inter-company notes, general intangible assets, equipment,instruments, contract rights, chattel paper, promissory notes and leases; (3) allfixtures; (4) patents, trademarks, copyrights and other intellectualproperty; and (5) all proceeds of, and all other amounts arising from, thecollection, sale, lease, exchange, assignment, licensing, or other dispositionor realization of the foregoing assets (collectively the “Collateral”);provided that the security documents provide that a portion of the capitalstock of any subsidiary shall automatically be deemed released from, and not tohave been a part of, the Collateral to the extent necessary so as not to requirethe preparation and filing with the SEC of separate audited financialstatements of such subsidiary pursuant to Rule 3-16 of the SEC’saccounting rules and regulations. The Second Lien Notes are secured by asecond priority security interest, subject to permitted liens, in theCollateral.

 

The indentures governing the Secured Notes contain covenants whichrestrict the Company’s and its restricted subsidiaries’ ability to incuradditional indebtedness, merge, pay dividends, dispose of its assets, and certainother matters as defined in the indentures. At March 31, 2009, the Company believes it was in compliance withthese covenants.

 

Interest on the First Lien Notes accrues at an annual rate equal tothree-month LIBOR plus 2.125% and is payable quarterly in cash on February 1,May 1, August 1 and November 1 of each year. Interest on theSecond Lien Notes accrues at an annual rate equal to three-month LIBOR plus3.25% and is payable quarterly on February 1, May 1, August 1and November 1 of each year. The Company may elect to pay interest on theSecond Lien Notes entirely in cash or entirely by increasing the principalamount of the Second Lien Notes (“PIK Interest”). PIK Interest on the SecondLien Notes accrues at an annual rate equal to three-month LIBOR plus 4.0%.Since issuance, the Company has paid all of its interest relating to the SecondLien Notes in cash. On each of

 

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March 2, 2009 and May 11, 2009, the Company elected PIKInterest in relation to its August 1, 2009 and November 1, 2009interest payments on the Second Lien Notes, respectively. The Company has madeno other decisions regarding the future election of PIK Interest. Three-monthLIBOR for the Secured Notes resets on February 1, May 1, August 1and November 1 of each year and was 1.17% on March 31, 2009. On May 1,2009, three-month LIBOR for the Secured Notes was 1.03%.

 

***Capital LeaseObligations***

 

Interest on capital lease obligations are all at fixed rates, which, ona weighted average basis, approximated 12.5% per annum at March 31, 2009.

 

**(7)  Interest Rate Swap**

 

On July 20, 2007, the Company entered into an interest rate swapto manage interest rate risks associated with a portion of its variable ratedebt.  The interest rate swap agreementis for a notional amount of $300.0 million associated with the interest onthe Company’s First Lien Notes effective August 1, 2007 for a period ofthree years. Under this agreement, the Company receives interest at a floatingrate of three-month LIBOR and pays interest at a fixed rate of 5.34%, resultingin an effective rate for the First Lien Notes of 7.47% throughout the term ofthe swap. The interest rate swap agreement qualifies and is designated as acash flow hedge under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.” As such, the swap is accounted for as an asset orliability in the consolidated balance sheets at fair value, includingadjustment for nonperformance risk in accordance with SFAS No. 157, “FairValue Measurements.” Changes in fair value of the effective portion of the swapare recorded in Accumulated other comprehensive loss (“AOCI”), net of incometaxes, until earnings are affected by the variability in cash flows of thedesignated hedged item. Any ineffective changes in the value of the swap arerecognized currently as interest expense in the consolidated statements ofoperations.  No component of the interestrate swap is excluded from the assessment of effectiveness and noineffectiveness has been recognized on the swap since inception.

 

If, in the future, the swap is determined tono longer be effective as a hedge, is sold or terminated, or is de-designatedfrom the hedge relationship, any net gain or loss remaining in Accumulatedother comprehensive loss would be reclassified into earnings in the sameperiods during which the hedged debt payments affect earnings. If the cash flowhedge is discontinued in the future because it becomes probable that thehedged debt payments will not occur, the net gain or loss would be reclassifiedinto earnings in that period.

 

SeeNote 8 for information regarding fair values of the interest rate swap as of March 31,2009 and December 31, 2008.

 

The following table presents the impact of our interest rate swap onour Consolidated Statements of Operations and Consolidated Balance Sheets forthe three months ended March 31, 2009 and 2008 (in thousands):

 
| ** **         | ** ** | **Amount of Loss Recognized  in AOCI on the Interest Rate  Swap (Effective Portion)** | ** ** | **Amount of Loss Reclassified  into Interest Expense  (Effective Portion)** | ** ** | **Amount of (Gain) Loss  Recognized in Interest  Expense on the Interest Rate  Swap (Ineffective Portion)** | ** ** |
|--------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| ** **         | ** ** | **Three months ended  March 31,**                                                | ** ** | **Three months ended  March 31,**                                      | ** ** | **Three months ended  March 31,**                                                                      | ** ** |
| **Liabilities**    | ** ** | **2009**                                                                              | ** ** | **2008**                                                                    | ** ** | **2009**                                                                                                    | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
|               |       |                                                                                  |       |                                                                        |       |                                                                                                        |       |   |   |   |   |   |   |
| Interest rate swap |       | $                                                                                     | 1,428      |                                                                        | $          | 9,082                                                                                                       |       | $ | 2,590 |   | $ | 1,163 |   | $ | — |   | $ | — |   |
|                    |            |                                                                                       |            |                                                                             |            |                                                                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theamount of loss recorded in Accumulated other comprehensive loss at March 31,2009 that is expected to be reclassified to interest expense in the next twelvemonths if interest rates underlying the Company’s fair value calculationsremain unchanged is approximately $12.6 million.

 

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**(8)  Fair Value Measurements**

 

Fair value estimates and assumptions andmethods used to estimate the fair value of the Company’s assets and liabilitiesare made in accordance with the requirements of SFAS No. 107, “Disclosureabout Fair Value of Financial Instruments” and SFAS No. 157, “Fair ValueMeasurements.”

 

SFAS 157 clarifies that fair value is anexit price, representing the amount that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between marketparticipants. As such, fair value is a market-based measurement that should bedetermined based on assumptions that market participants would use in pricingan asset or liability. As a basis for considering such assumptions,SFAS 157 establishes a three-tier value hierarchy, which prioritizes theinputs used in measuring fair value as follows: Level 1 are observableinputs such as quoted prices in active markets; Level 2 are inputs otherthan the quoted prices in active markets that are observable either directly orindirectly; and Level 3 are unobservable inputs in which there is littleor no market data, which require the Company to develop its own assumptions.This hierarchy requires the Company to use observable market data, whenavailable, and to minimize the use of unobservable inputs when determining fairvalue. On a recurring basis, the Company measures certain assets andliabilities at fair value, including the Company’s money market funds,commercial paper and its interest rate swap.

 

The following table presents the Company’sassets and liabilities measured at fair value on a recurring basis as of March 31,2009 and December 31, 2008 (in thousands):

 
| ** **                               | ** ** | **March 31, 2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **Fair Value**          | ** ** | **Level 1  Inputs**    | ** ** | **Level 2  Inputs** | ** ** | **Level 3  Inputs** | ** ** | **Fair Value** | ** ** |
| Assets:                                  |       |                    |       |                        |       |   |   |   |   |   |   |
| Money market funds(a)                    |       | $                       | 61,384     |                        | $          | — |   | $ | 61,384 |   | $ | — |   | $ | 27,194 |   |
| Commercial paper(a)                      |       | —                  |       | —                      |       | — |   | — |   | 14,117 |   |
| Total assets measured at fair value      |       | $                       | 61,384     |                        | $          | — |   | $ | 61,384 |   | $ | — |   | $ | 41,311 |   |
| Liabilities:                             |       |                    |       |                        |       |   |   |   |   |   |   |
| Interest rate swap(b)                    |       | $                       | 15,459     |                        | $          | — |   | $ | 15,549 |   | $ | — |   | $ | 16,621 |   |
| Total liabilities measured at fair value |       | $                       | 15,459     |                        | $          | — |   | $ | 15,459 |   | $ | — |   | $ | 16,621 |   |

 

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(a)           The fair values of theCompany’s money market funds and commercial paper are based on third partyestimates using recent trading activity and other relevant market information.

 

(b)           The fair values of theinterest rate swap are derived from a discounted cash flow analysis based onthe terms of the contract and observable market data, including adjustment fornonperformance risk.

 

The following table presents carrying valueand estimated fair value of the Company’s financial instruments that arecarried at historical cost (in thousands):

 
| ** **                                         | ** ** | **March 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **Carrying  amount**    | ** ** | **Estimated  fair value**  | ** ** | **Carrying  amount** | ** ** | **Estimated  fair value** | ** ** |
| First lien senior secured floating rate  notes(a)  |       | $                       | 300,000    |                       | $          | 225,000 |   | $ | 300,000 |   | $ | 211,500 |   |
| Second lien senior secured floating rate  notes(a) |       | 175,000                 |       | 110,250                    |       | 175,000 |   | 105,875 |   |
|                                                    |            |                         |            |                            |            |  |  |  |  |  |  |  |  |

 

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(a)           The fair values of theCompany’s senior secured floating rate notes are based on third party estimatesusing recent trading activity and other relevant market information.

 

**(9)  Income Taxes**

 

The Company’s effective income tax rate for the interim periodspresented is based on management’s estimate of the Company’s effective tax ratefor the applicable year and differs from the federal statutory income tax rateprimarily due to nondeductible permanent differences, state income taxes andchanges in the valuation allowance for deferred income taxes. In assessing therealizability of deferred tax assets, management considers whether it is morelikely than not that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependentupon the generation of future taxable income during the periods in which thosetemporary differences become deductible. There was no federal income taxexpense

 

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recordedfor the three months ended March 31, 2009, as income generated is offsetby the utilization of previously recorded net operating loss carryforwards andthe reversal of the related valuation allowance.  No federal or state income tax benefit hasbeen recorded for the three months ended March 31, 2008, as the net deferredincome tax asset generated, primarily from temporary differences related to thenet operating loss, was offset by a full valuation allowance because it isconsidered more likely than not that these benefits will not be realized due tothe Company’s history of net operating losses prior to January 1, 2009. Theincome tax provision for each of the three months ended March 31, 2009 and2008 relate to state income taxes which are estimated based upon the taxableincome generated in each state.

 

**(10)  Stock-Based Compensation**

 

The Company has two long-term incentiveplans. The Horizon PCS 2004 stock incentive plan, as amended (the “Horizon Plan”),was assumed by the Company in its merger with Horizon PCS, Inc. in 2005.The iPCS 2004 long-term incentive plan, as amended (the “iPCS Plan”), wasapproved by the Company’s Board of Directors as provided by the Company’s planof reorganization. Both plans have been approved by the Company’s stockholders.

 

**Horizon Plan.**  Under the Horizon Plan, the Company may grantto employees, directors and consultants of the Company or its subsidiariesincentive or non-qualified stock options or stock appreciation rights. All ofthe stock options issued to date under the Horizon Plan have a ten-year lifeand vest equally in six-month increments over three years from the respectivedate of grant. The Horizon Plan provides for the accelerated vesting of awardsin the event of a change in control (as defined in the Horizon Plan). The totalnumber of shares that may be granted under the Horizon Plan is 558,602 sharesof the Company’s common stock, which equals the number of shares underlyingawards previously made under the Horizon Plan.

 

**iPCS Plan.**  Under the iPCS Plan, the Company may grant toemployees, directors and consultants of the Company or its subsidiariesincentive and non-qualified stock options, stock appreciation rights,restricted and unrestricted stock awards and cash incentive awards. The stockoptions awarded to date under the iPCS Plan have a ten-year term with vestingon a quarterly basis over four years for employees and quarterly over one yearfor directors. Restricted stock awards granted to date to employees under theiPCS Plan vest over various periods ranging from a quarterly basis over fouryears to vesting entirely at the end of two or three years.  The iPCS Plan provides for the acceleratedvesting of awards in the event of a change in control (as defined in the iPCSPlan). Additionally, the iPCS Plan provides that a share of stock issued inconnection with any full value award shall reduce the total number of sharesthat may be awarded by 1.78. The total number of shares that may be awardedunder the iPCS Plan is 2,692,630 shares of common stock, of which amount,163,830 shares remained available for awards as of March 31, 2009.  The Company has submitted a proposal tostockholders to increase the number of shares available for grant under theiPCS Plan by 1,900,000 shares to be voted on at the annual meeting ofstockholders’ on June 16, 2009.

 

During the three months ended March 31, 2009, the Company awarded332,452 stock options to management and the Board of Directors at an exerciseprice of $8.76, which was the closing price on the date of grants.  The fair value of each grant is estimated atthe grant date using the Black-Scholes option pricing method.  The table below outlines the assumptions usedfor the options granted during the three months ended March 31, 2009:

 
| ** **              | ** ** | **For the Three Months Ended  March 31, 2009** | ** ** |
|-------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Range**                                                                    | ** ** | **Weighted Average** | ** ** |
| Risk free interest rate |       | 2.50% to 2.66%                                                               |       | 2.63 | % |
| Volatility              |       |                                                                         |       | 70.00 | % |
| Dividend yield          |       |                                                                         |       | 0.00 | % |
| Expected life in years  |       |                                                                         |       | 5.85 |   |
| Fair value price        |       |                                                                         |       | $ | 5.54 |   |
|                         |            |                                                                              |            |  |  |  |

 

The risk-free interest rate was determinedusing the then implied yield currently available for zero-coupon U.S.government issues with a remaining term equal to the expected life of the stockoptions. The expected volatility assumption used in the Black-Scholes optionpricing models was based on the historical volatility of peer companies asadjusted for the Company’s volatility since its existence as a publicly tradedcompany in 2004. The Company does not currently intend to pay cash dividendsand thus has assumed a 0% dividend yield. The Company uses the simplifiedmethod for calculating the expected life for stock options in place of usinghistorical exercise data. The Company’s stock has been publicly traded since August 2004and the Company cannot provide a reasonable basis upon which to estimate theexpected term of options granted.

 

OnMay 2, 2007, in connection with the $11.00 special cash dividend paid in2007, the Compensation Committee of the Board of Directors of the Companyresolved that each stock option that was outstanding under the iPCS Plan andthe Horizon Plan, on the trading day immediately preceding the trading daydesignated by the NASDAQ Stock Market as the ex-dividend date (the “AdjustmentDate”) would be adjusted as follows effective as of the opening of business onthe Adjustment Date:

 

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·      The number of shares of stock then subject toeach option would be adjusted by dividing the number of shares of stock thensubject to the option by the Adjustment Factor; and

 

·      The exercise price of each option would beadjusted by multiplying the exercise price by the Adjustment Factor.

 

The“Adjustment Factor” was 0.78282 which was equal to one minus the percentagereduction in the closing sale price of a share of stock on the Adjustment Datereported by the NASDAQ Stock Market at the regular hours closing price (“ClosingPrice”) as compared to the Closing Price of a share of stock on the AdjustmentDate minus $11.00. In addition, on the Adjustment Date, the number of sharesunder the iPCS Plan and the Horizon Plan was adjusted by dividing the number ofshares of stock reserved for issuance by the Adjustment Factor; therebyincreasing the number of shares reserved for issuance. The modificationresulted in an additional 184,537 shares to 72 employees anddirectors who had options outstanding on the modification date. With thismodification, the Company will record additional stock-based compensationexpense of approximately $6.5 million, of which approximately $3.2 millionwas recorded as of the date of modification and the remainder is beingrecognized over the remaining vesting period for the options, subject toreduction for forfeitures. An additional $0.1 million and $0.5 million ofcompensation expense related to the modification was recorded in the threemonths ended March 31, 2009 and 2008, respectively, with the quarterlyvesting of stock options.  As of March 31,2009, approximately $0.5 million of additional stock-based compensation expenserelated to this modification remains to be recognized over the remainingvesting period of the options.

 

The following table shows stock-based compensation expense by type ofshare-based award for the three months ended March 31, 2009 and 2008included in the consolidated statements of operations (in thousands):

 
| ** **                                                                         | ** ** | **For the Three Months Ended** | ** **  |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                                                         | ** ** | **March 31, 2009**                       | ** **  | **March 31, 2008** | ** ** |
| Restricted stock                                                                   |       | $                                                  |  255   |   | $ |  280 |   |
| Fair value of stock option awards                                                  |       | 800                                                |        | 1,099 |   |
| Fair value expense of stock option  modifications related to special cash dividend |       | 65                                                 |        | 462 |   |
| Total stock-based compensation                                                     |       | $                                                  |  1,120 |   | $ |  1,841 |   |

 

The following table shows the total remaining unrecognized compensationcost related to restricted stock grants and fair value expense of stock optionawards, as well as the weighted average remaining required service period overwhich such costs will be recognized:

 
| ** **                                | ** ** | **Total Remaining  Unrecognized  Compensation Cost** | ** ** | **Weighted Average  Remaining Required  Service Period** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **(in millions)**                                         | ** ** | **(in years)**                                                     | ** ** |
| Restricted stock                          |       | $                                                              |  2.5  |                                                                    | 2.09       |   |
| Fair value expense of stock option awards |       | 8.3                                                            |       | 2.71                                                                    |       |
|                                           |            |                                                                |            |                                                                         |            |  |

 

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

 
| ** **                     | ** ** | **For the Three Months Ended** | ** **  |
|--------------------------------|------------|----------------------------------------------------|-------------|
| ** **                     | ** ** | **March 31,  2009**                           | ** **  | **March 31,  2008** | ** ** |
| Cost of service and roaming    |       | $                                                  |  80    |   | $ |  163 |   |
| Selling and marketing          |       | 136                                                |        | 213 |   |
| General and administrative     |       | 904                                                |        | 1,465 |   |
| Total stock-based compensation |       | $                                                  |  1,120 |   | $ |  1,841 |   |

 

The following is asummary of options outstanding and exercisable at March 31, 2009:

 
| ** **                            | ** ** | **Number of Shares** | ** ** | **Weighted Average  Exercise Price** | ** **  | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------------------------------------------|-------------|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | ** **                     | ** ** | ** **                                     | ** **  | **(in years)**                                     | ** ** | **(In thousands)**             | ** ** |
| Outstanding at December 31, 2008 |       | 1,397,947                      |       | $                                              |  22.80 |                                                    |       |                                |       |   |
| Granted                               |       | 332,452                        |       | 8.76                                           |        |                                                    |       |                                |       |
| Exercised                             |       | —                         |       | —                                         |        |                                                    |       |                                |       |
| Forfeited                             |       | —                         |       | —                                         |        |                                                    |       |                                |       |
| Expired                               |       | (27,165                        | )          | 20.51                                          |        |                                                    |       |                                |       |
| Outstanding at March 31, 2009    |       | 1,703,234                      |       | $                                              |  20.10 |                                                    | 8.05       |                                | $          |  877 |   |
| Exercisable at March 31, 2009    |       | 875,740                        |       | $                                              |  19.92 |                                                    | 6.98       |                                | $          |  590 |   |

 

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The following is asummary of activity for the three months ended March 31, 2009 related tothe Company’s restricted shares granted under its long-term incentive plans:

 
| ** **                                  | ** ** | **Shares** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** **  |
|---------------------------------------------|------------|------------|------------|---------------------------------------------------|-------------|
| Restricted shares at December 31, 2008 |       | 56,534     |       | $                                                 |  36.32 |   |
| Granted                                     |       | 101,200    |       | 8.76                                              |        |
| Vested                                      |       | (4,397     | )          | 43.10                                             |        |
| Forfeited                                   |       | —     |       | —                                            |        |
| Restricted shares at March 31, 2009    |       | 153,337    |       | $                                                 |  17.94 |   |

 

The iPCS Plan permits, at the employee’soption, the surrendering of common shares to satisfy certain tax withholdingobligations in connection with vesting of restricted stock. The surrenderedshares are not available for future grant under the iPCS Plan.

 

**(11)  Special Cash Dividend**

 

OnApril 26, 2007, the Board of Directors declared a special cash dividend of$11.00 per share, approximately $187.0 million in the aggregate, payable to allholders of record of the Company’s common stock on May 8, 2007.  Of this amount, approximately $186.5 millionwas paid on May 16, 2007.  Theremaining unpaid dividends relate to restricted stock awards and are being paidout starting in July 2007 as these awards vest.  As of March 31, 2009, approximately $0.2million of this dividend remains to be paid.

 

**(12)  Comprehensive Income (Loss)**

 

Comprehensive income (loss), which includes all changes in the Company’sequity during the period except transactions with stockholders, consisted ofthe following for the three months ended March 31, 2009 and 2008 (inthousands):

 
| ** **                                                                                           | ** ** | **For the Three Months Ended  March 31,** | ** **  |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|-------------|
| ** **                                                                                           | ** ** | **2009**                                                           | ** **  | **2008** | ** ** |
| Net income (loss)                                                                                    |       | $                                                                  |  5,772 |   | $ |  (1,606 | ) |
| Other comprehensive income (loss) —  Unrealized income (loss) on interest rate swap, net of tax |       | 1,162                                                              |        | (7,919 | ) |
| Comprehensive income (loss)                                                                          |       | $                                                                  |  6,934 |   | $ |  (9,525 | ) |

 

**(13)  Stock Repurchase Plan**

** **

On January 30, 2009, the Company’s Board of Directors authorizedthe repurchase of up to $15.0 million of the Company’s common stock in astock repurchase program during the 12-month period beginning on the date ofauthorization. The Company may purchase shares from time to time in open marketor privately negotiated transactions at prices deemed appropriate bymanagement, depending on market conditions, applicable laws and other factors.The stock repurchase program does not require the Company to repurchase anyspecific number of shares and may be discontinued at any time.  Pursuant to this stock repurchaseprogram, during the three months ended March 31, 2009, the Companypurchased 167,163 shares of its common stock at an average price of $9.70 pershare for approximately $1.6 million. As of March 31, 2009,approximately $13.4 million remained available under the stock repurchaseprogram.  These repurchased shares arereflected as Treasury stock, at cost in the Consolidated Balance Sheet.

** **

**(14)  New Accounting Pronouncements**

 

In September 2006, the FASB issuedStatement No. 157, “Fair Value Measurements” (“SFAS 157”).SFAS 157 defines fair value, establishes a framework and gives guidanceregarding the methods used for measuring fair value, and expands disclosuresabout fair value measurements. In February 2008, the FASB released FASBStaff Position, (FSP) SFAS 157-2—Effective Date of FASB Statement No. 157,which delays the effective date of SFAS 157 for all non-financial assetsand non-financial liabilities, except

 

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those that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually) to fiscal years beginningafter November 15, 2008. The Company adopted SFAS 157 as it appliesto financial assets and liabilities as of January 1, 2008. The Company adoptedSFAS 157, as it relates to non-financial assets and liabilities as of January 1,2009. See Note 8 for further discussion of fair value measurements offinancial instruments.

 

In March 2008, the FASB issued Statement No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an amendment of FASBStatement No. 133” (“SFAS 161”). SFAS 161 amends and expands thedisclosure requirements of FASB Statement No. 133, requiring enhanceddisclosures about the Company’s hedging activities. The Company is required toprovide enhanced disclosures about (a) how and why it uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under FASB Statement No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect the Company’s financial position, results of operations, and cashflows. SFAS No. 161 is effective for fiscal years and interim periodsbeginning after December 15, 2008, with comparative disclosures of earlierperiods encouraged upon initial adoption. The Company adopted theprovisions of SFAS 161 effective January 1, 2009.  See Note 7 for the Company’s disclosuresabout its derivative instruments and hedging activities.

 

InApril 2009, the FASB issued Staff Position SFAS 107-1 and AccountingPrinciples Board (APB) Opinion No. 28-1, “Interim Disclosures about FairValue of Financial Instruments” (SFAS 107-1).  SFAS 107-1 amends FASBStatement No. 107, “Disclosures about Fair Values of FinancialInstruments,” and APB Opinion No. 28 to require disclosures about fairvalue of financial instruments in interim financial statements as well as inannual financial statements.  SFAS 107-1 is effective for interimperiods ending after June 15, 2009, but early adoption is permitted forinterim periods ending after March 15, 2009.  The Companyadopted the provisions of SFAS 107-1 effective for the interim period ended March 31,2009.  See Note 8 for the Company’sdisclosures about its fair values of financial instruments.

 

InApril 2009, the FASB issued Staff Position SFAS 157-4, “Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Indentifying Transactions That Are Not Orderly”(SFAS 157-4).  SFAS 157-4 provides additional guidance in determiningwhether a market for a financial asset is not active and a transaction is notdistressed for fair value measurement purposes as defined in SFAS 157. SFAS 157-4 is effective for interim periods ending after June 15, 2009,but early adoption is permitted for interim periods ending after March 15,2009.  The Company adopted the provisions of SFAS 157-4 effective forthe interim period ended March 31, 2009.

 

InApril 2009, the FASB issued Staff Position SFAS 115-2 and Staff PositionSFAS 124.2, “Recognition and Presentation of Other-Than-Temporary Impairments.”  ThisStaff Position provides guidance in determining whether impairments in debtsecurities are other than temporary, and modifies the presentation and disclosuressurrounding such instruments.  This Staff Position is effective forinterim and annual periods ending after June 15, 2009, but early adoptionis permitted for interim periods ending after March 15,2009.  The Company adopted the provisions of this Staff Positioneffective for the interim period ended March 31, 2009.

 

**(15)  Commitments and Contingencies**

 

*(a) Commitments*

* *

On March 13, 2009, the Company signed a letter of agreement withNortel Networks to purchase EV-DO Rev. A equipment and services totalingapproximately $19.7 million in aggregate. The $19.7 million consists of a non-cancelable purchase of approximately$14.8 million of equipment and services and an option to purchase up to anadditional approximately $4.9 million of equipment and services.  As of March 31, 2009, the Companysubmitted non-cancelable purchase orders for approximately $9.8 million andtherefore has a remaining commitment under this letter of agreement to submit$5.0 million non-cancelable purchase orders by June 30, 2009.  Additionally, under this letter of agreement,the Company has agreed to return to Nortel Networks certain equipment replacedby the purchased equipment by March 1, 2010.  As of March 31, 2009, the Company hasmade no payments related to the submitted purchase orders.

* *

*(b)  FCCLicenses*

 

Sprint PCS holds the licenses necessary to provide wireless services inthe Company’s territory. The FCC requires that licensees like Sprint PCSmaintain control of their licensed spectrums and not delegate control to third-partyoperators or managers without FCC consent and are subject to renewal andrevocation by the FCC.  The FCC hasadopted specific standards that apply to wireless personal communicationsservices license renewals. Any failure by Sprint PCS or the Company to complywith these standards could result in the non-renewal of the Sprint PCS licensesfor the Company’s territory. Additionally, if Sprint PCS does not demonstrateto the FCC that Sprint PCS has met the construction requirements for each ofits wireless personal communications services licenses, it can lose thoselicenses. If Sprint PCS loses its licenses in the Company’s territory for anyof these reasons, or any other reason, the Company would not be able to providewireless services without obtaining rights to other licenses.

 

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If Sprint PCS loses its licenses in another territory, Sprint PCS orthe applicable PCS Affiliate of Sprint would not be able to provide wirelessservices without obtaining rights to other licenses and the Company’s abilityto offer nationwide calling plans would be diminished and potentially morecostly.

 

*(c)  Other*

 

The State of Michigan is currently auditing the Company’s sales and usetax returns for the years 2003 through 2006. The outcome of this audit cannot be determined at this time.

* *

*(d)  Litigationand Arbitration*

 

*Sprint/Nextel Merger Litigation.*  On July 15, 2005, the Company’s whollyowned subsidiary, iPCS Wireless, Inc. (“iPCS Wireless”), filed a complaintagainst Sprint and Sprint PCS in the Circuit Court of Cook County, Illinois(the “Circuit Court”). The complaint alleged, among other things, that Sprint’sconduct following the consummation of the merger between Sprint and Nextelwould breach Sprint’s exclusivity obligations to iPCS Wireless under itsaffiliation agreements with Sprint PCS. On August 14, 2006, the CircuitCourt issued its decision and on September 20, 2006, the Circuit Courtissued a final order effecting its decision. The final order provided that:

 

·      Within180 days of the date of the final order, Sprint and those acting inconcert with it must cease owning, operating and managing the Nextel wirelessnetwork in iPCS Wireless’s territory.

 

·      Sprintshall continue to comply with all terms and conditions of the ForbearanceAgreement between iPCS Wireless and Sprint setting forth certain limitations onSprint’s operations post-merger with Nextel.

 

On September 28, 2006, Sprint appealedthe Circuit Court’s ruling to the Appellate Court of Illinois, First JudicialDistrict (the “Appellate Court”), and, at Sprint’s request, the Circuit Court’sruling was stayed by the Appellate Court pending the appeal. On March 31,2008, the Appellate Court unanimously affirmed the 2006 Circuit Court decision.On May 5, 2008, Sprint filed a petition for leave to appeal with theSupreme Court of Illinois. On September 24, 2008, the Supreme Court ofIllinois (the “Supreme Court”) denied Sprint’s petition for leave to appeal theAppellate Court’s decision.

 

On Sprint’s motion for reconsideration, theSupreme Court again denied Sprint’s petition for leave to appeal on November 12,2008. The Supreme Court at that time directed the Circuit Court to modify itsorder of September 20, 2006, in the following manner:

 

·      Togrant Sprint 360 days (rather than 180 days) to comply with the CircuitCourt’s order to cease owning, operating and managing the Nextel wirelessnetwork in iPCS Wireless’s territory.

 

·      Topermit Sprint to seek an extension of the 360-day period upon a showing of goodcause, with due consideration given to the hardship(s) imposed on iPCSWireless by the requested extension.

 

On January 30, 2009, the Circuit Courtentered its final order, as directed by the Supreme Court, providing that:

 

·      Sprint,and those acting in concert with it, must cease owning, operating and managingthe Nextel wireless network in iPCS Wireless, Inc.’s service area.

 

·      Sprinthas until January 25, 2010 (360 days from the date of the CircuitCourt’s order) to comply with the order. Sprint may seek an extension of suchdeadline upon a showing of good cause, giving due consideration to thehardships that would be imposed on iPCS Wireless if such extension weregranted.

 

·      Sprintmust continue to comply with all terms and conditions of the ForbearanceAgreement between iPCS Wireless and Sprint.

 

On September 22, 2008, Sprint also fileda petition with the Circuit Court seeking to vacate that Court’s originalorder. On January 20, 2009, the Circuit Court denied Sprint’s petitionwith prejudice. On February 18, 2009, Sprint appealed the decision of theCircuit Court denying Sprint’s petition to vacate to the Illinois AppellateCourt. The appeal process is ongoing.

 

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*Sprint/Clearwire Transaction Litigation.*  On May 7, 2008, Sprint announced aproposed transaction among itself, Clearwire Corporation, and certain otherparties (the “Sprint-Clearwire Transaction”) to form a new competingnetwork (“New Clearwire”), pursuant to which transaction Sprint transferred itsnext generation of wireless technology (“4G”) to the New Clearwire. The sameday, Sprint filed a complaint for declaratory judgment against iPCS and certainof its subsidiaries, iPCS Wireless, Horizon Personal Communications, Inc.and Bright Personal Communications Services, LLC (collectively, the “iPCSSubsidiaries”) in the Court of Chancery of the State of Delaware (the “DelawareChancery Court”). In that lawsuit, Sprint sought a declaration that theSprint-Clearwire Transaction would not constitute a breach of the Sprintaffiliation agreements it has with the iPCS Subsidiaries.

 

On May 12, 2008, the iPCS Subsidiariesfiled a lawsuit against Sprint and certain of its affiliates in the CircuitCourt, seeking declaratory and injunctive relief with respect to theSprint-Clearwire Transaction. In that case, the iPCS Subsidiaries are seeking adeclaration that the Sprint-Clearwire Transaction constitutes a breach ofSprint’s affiliation agreements it has with those subsidiaries, and also soughtan injunction barring Sprint from closing the Sprint-Clearwire Transactionuntil it complied with the affiliation agreements.

 

On July 14, 2008, the Delaware ChanceryCourt granted the motion to dismiss filed by our Bright and Horizonsubsidiaries and dismissed them from the Delaware litigation. Pursuant to amotion filed by iPCS and iPCS Wireless, on October 8, 2008, the DelawareChancery Court stayed all remaining Delaware litigation in favor of the lawsuitbrought in Illinois by the iPCS Subsidiaries.

 

On November 3, 2008, the iPCSSubsidiaries filed a motion for preliminary injunction in the Circuit Courtseeking to prevent Sprint from consummating the Sprint-Clearwire Transactionuntil such time that the Circuit Court could rule on the merits of theunderlying litigation brought by the iPCS Subsidiaries against Sprint. On November 17,2008, the iPCS Subsidiaries, Sprint, and New Clearwire reached a stipulationpursuant to which the iPCS Subsidiaries withdrew their motion for preliminaryinjunction without prejudice, and the Sprint-Clearwire Transaction closed on November 28,2008. In connection with the withdrawal of the preliminary injunction motion bythe iPCS Subsidiaries: (i) New Clearwire stipulated that it did notpresently intend to commercially launch its 4G network, sell products orservices, or promote products or services that are available for sale in anypart of the iPCS Subsidiaries’ territories prior to July 1, 2009, (ii) NewClearwire stipulated that it would give the iPCS Subsidiaries at least60 days advance written notice before any commercial launch of its 4Gnetwork, any sale of products or services or any promotion of products or servicesthat are offered for sale in any part of the iPCS Subsidiaries service areas ifit plans to do so before entry of a final and non-appealable judgment by theCircuit Court in the underlying action brought by the iPCS Subsidiaries againstSprint, and (iii) New Clearwire and Sprint stipulated that neither of themnor any of their controlled affiliates would raise the fact that theSprint-Clearwire Transaction had closed as a basis for opposing any remedyproposed by the iPCS Subsidiaries or granted by the Circuit Court.

 

On December 30, 2008, the Circuit Courtissued a decision on a motion for partial summary judgment filed by iPCSWireless based on the 2006 decision in the Illinois Sprint/Nextel MergerLitigation. The Circuit Court specifically recognized that pursuant to the 2006decision, Sprint and those acting in concert with it cannot compete againstiPCS Wireless in its exclusive service area, regardless of the radio frequencythat they use to compete. The Circuit Court held that Sprint cannot relitigatethe issue of whether Sprint and those acting in concert with it may competewith iPCS Wireless in its service area by using a frequency other than 1900MHz. The Circuit Court granted in part iPCS Wireless’s motion for partialsummary judgment with respect to these two issues and entered judgment thereonbut stayed enforcement of the judgment pending a ruling on Sprint’s petition tovacate the original judgment in the Illinois Sprint/Nextel Merger Litigation,which petition to vacate was then dismissed with prejudice on January 20,2009. The Circuit Court also found in its December 30, 2008 ruling thatsome material issues of fact remained and would be decided at trial including,but not limited to, whether New Clearwire is a “related party,” whether Sprintcontrols New Clearwire, whether the protections of exclusivity extend beyondthe situation in which Sprint acts through a related party, and the question ofwho constitutes “those acting in concert” with Sprint.

 

On January 9, 2009, the Circuit Court deniedSprint’s motion for partial summary judgment against Bright and Horizon. Inthat motion, Sprint had sought to bar Bright and Horizon from litigating theissue of whether Sprint could compete with Horizon and Bright outside the 1900MHz spectrum range, based on a 2006 decision by the Delaware Chancery Court.The Circuit Court denied Sprint’s motion for partial summary judgment againstBright and Horizon and found that the Delaware Chancery Court did not actuallydecide that issue.

 

On January 30, 2009, the iPCSSubsidiaries amended their original complaint against Sprint. Under the amendedcomplaint, the iPCS Subsidiaries included, among other things, a claim thatSprint is improperly withholding advanced technologies from the iPCSSubsidiaries and diverting those technologies to their competitor in violationof the iPCS Subsidiaries’ affiliation agreements with Sprint. The amendedcomplaint also seeks monetary relief. On February 27, 2009, Sprint, in itsresponse to the amended complaint, asserted several counterclaims thatessentially seek declaratory relief that the Clearwire transaction does notviolate the affiliation agreements.

 

On April 29,2009, the Circuit Court denied a motion brought by Sprint that sought todismiss the iPCS Subsidiaries’ claims as to whether Sprint improperly withheldadvanced technology from them in connection with the Clearwiretransaction.  The Circuit Court alsoruled that the iPCS Subsidiaries’ claims for relief could not include certaintypes of monetary relief but that, in addition to their existing claims forinjunctive relief, the iPCS Subsidiaries would not be prevented from making “aclaim for any actual or direct damages.” Discovery is ongoing.

 

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The Company presently cannot determine theultimate resolution of the matters described above. The results of litigationare inherently uncertain and, while the Company believes that it hasmeritorious claims in the matters described above, material adverse outcomesare possible.

 

In addition to the foregoing, from time totime, the Company is involved in various legal proceedings relating to claimsarising in the ordinary course of business. The Company is not currently aparty to any such legal proceedings, the adverse outcome to which, individuallyor in the aggregate, is expected to have a material adverse effect on ourbusiness, financial condition or results of operations.

 

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**(16) Consolidating Financial Information**

 

The Secured Notes are fully, unconditionally and joint and severallyguaranteed by the Company’s domestic restricted subsidiaries, including iPCSWireless, Inc., iPCS Equipment, Inc., Horizon Personal Communications, Inc.,Bright PCS Holdings, Inc. and Bright Personal CommunicationsServices, LLC, which are 100% owned subsidiaries of iPCS, Inc (seeNote 6). The following consolidating financial information for iPCS, Inc.as of March 31, 2009 and December 31, 2008 and for the three monthsended March 31, 2009 and 2008 is presented for iPCS, Inc. and theCompany’s guarantor subsidiaries (in thousands):

 

**Condensed Consolidating Balance Sheet**

**As of March 31, 2009**

 
| ** **                                                    | ** ** | **iPCS Inc.** | ** **    | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** **     |
|---------------------------------------------------------------|------------|--------------------|---------------|-----------------------------|------------|------------------|------------|----------------------------|----------------|
| Cash and cash equivalents                                     |       | $                  |  —  |                        | $          |  70,696     |       | $                          |  —   |   | $ |  70,696 |   |
| Intercompany receivables                                      |       | 535,786            |          | 273,560                     |       | (809,346         | )          | —                     |           |
| Other current assets                                          |       | 536                |          | 77,982                      |       | —           |       | 78,518                     |           |
| Total current assets                                          |       | 536,322            |          | 422,238                     |       | (809,346         | )          | 149,214                    |           |
| Property and equipment, net                                   |       | —             |          | 156,418                     |       | —           |       | 156,418                    |           |
| Intangible assets, net                                        |       | —             |          | 230,091                     |       | —           |       | 230,091                    |           |
| Other noncurrent assets                                       |       | 6,075              |          | 3,972                       |       | —           |       | 10,047                     |           |
| Investment in subsidiaries                                    |       | 185,196            |          | —                      |       | (185,196         | )          | —                     |           |
| Total assets                                                  |       | $                  |  727,593 |                        | $          |  812,719    |       | $                          |  (994,542 | ) | $ |  545,770 |   |
| Intercompany payable                                          |       | $                  | 273,560       |                        | $          | 535,786          |       | $                          | (809,346       | ) | $ | — |   |
| Other current liabilities                                     |       | 5,227              |          | 81,670                      |       | —           |       | 86,897                     |           |
| Total current liabilities                                     |       | 278,787            |          | 617,456                     |       | (809,346         | )          | 86,897                     |           |
| Long-term debt                                                |       | 475,000            |          | 392                         |       | —           |       | 475,392                    |           |
| Other long-term liabilities                                   |       | 15,577             |          | 9,675                       |       | —           |       | 25,252                     |           |
| Total liabilities                                             |       | 769,364            |          | 627,523                     |       | (809,346         | )          | 587,541                    |           |
| Stockholders’ equity (deficiency)                        |       | (41,771            | )             | 185,196                     |       | (185,196         | )          | (41,771                    | )              |
| Total liabilities and stockholders’ equity  (deficiency) |       | $                  |  727,593 |                        | $          |  812,719    |       | $                          |  (994,542 | ) | $ |  545,770 |   |

 

**Condensed Consolidating Balance Sheet**

**As of December 31, 2008**

 
| ** **                                                    | ** ** | **iPCS Inc.** | ** **    | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** **     |
|---------------------------------------------------------------|------------|--------------------|---------------|-----------------------------|------------|------------------|------------|----------------------------|----------------|
| Cash and cash equivalents                                     |       | $                  |  —  |                        | $          |  55,940     |       | $                          |  —   |   | $ |  55,940 |   |
| Intercompany receivable                                       |       | 526,494            |          | 263,002                     |       | (789,496         | )          | —                     |           |
| Other current assets                                          |       | 615                |          | 76,007                      |       | —           |       | 76,622                     |           |
| Total current assets                                          |       | 527,109            |          | 394,949                     |       | (789,496         | )          | 132,562                    |           |
| Property and equipment, net                                   |       | —             |          | 162,014                     |       | —           |       | 162,014                    |           |
| Intangible assets, net                                        |       | —             |          | 232,385                     |       | —           |       | 232,385                    |           |
| Other noncurrent assets                                       |       | 6,419              |          | 4,232                       |       | —           |       | 10,651                     |           |
| Investment in subsidiaries                                    |       | 178,803            |          | —                      |       | (178,803         | )          | —                     |           |
| Total assets                                                  |       | $                  |  712,331 |                        | $          |  793,580    |       | $                          |  (968,299 | ) | $ |  537,612 |   |
| Intercompany payable                                          |       | $                  | 263,001       |                        | $          | 526,495          |       | $                          | (789,496       | ) | $ | — |   |
| Other current liabilities                                     |       | 5,790              |          | 77,631                      |       | —           |       | 83,421                     |           |
| Total current liabilities                                     |       | 268,791            |          | 604,126                     |       | (789,496         | )          | 83,421                     |           |
| Long-term debt                                                |       | 475,000            |          | 401                         |       | —           |       | 475,401                    |           |
| Other long-term liabilities                                   |       | 16,738             |          | 10,250                      |       | —           |       | 26,988                     |           |
| Total liabilities                                             |       | 760,529            |          | 614,777                     |       | (789,496         | )          | 585,810                    |           |
| Stockholders’ equity (deficiency)                        |       | (48,198            | )             | 178,803                     |       | (178,803         | )          | (48,198                    | )              |
| Total liabilities and stockholders’ equity  (deficiency) |       | $                  |  712,331 |                        | $          |  793,580    |       | $                          |  (968,299 | ) | $ |  537,612 |   |

 

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**Condensed Consolidating Statement ofOperations**

**For the Three Months Ended March 31,2009**

 
| ** **                                       | ** ** | **iPCS Inc.** | ** **   | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** **   |
|--------------------------------------------------|------------|--------------------|--------------|-----------------------------|------------|------------------|------------|----------------------------|--------------|
| Total revenue                                    |       | $                  |  — |                        | $          |  136,164    |       | $                          |  — |   | $ |  136,164 |   |
| Cost of revenue                                  |       | —             |         | 88,362                      |       | —           |       | 88,362                     |         |
| Selling and marketing                            |       | —             |         | 16,650                      |       | —           |       | 16,650                     |         |
| General and administrative                       |       | 621                |         | 8,260                       |       | —           |       | 8,881                      |         |
| Gain on Sprint settlement                        |       | —             |         | (4,273                      | )          | —           |       | (4,273                     | )            |
| Depreciation and amortization                    |       | —             |         | 12,580                      |       | —           |       | 12,580                     |         |
| Loss on disposal of property and equipment,  net |       | —             |         | 99                          |       | —           |       | 99                         |         |
| Total operating expense                          |       | 621                |         | 121,678                     |       | —           |       | 122,299                    |         |
| Other, net                                       |       | —             |         | (7,943                      | )          | —           |       | (7,943                     | )            |
| Income in subsidiaries                           |       | 6,393              |         | —                      |       | (6,393           | )          | —                     |         |
| Income before provision for income tax           |       | 5,772              |         | 6,543                       |       | (6,393           | )          | 5,922                      |         |
| Provision for income tax                         |       | —             |         | 150                         |       | —           |       | 150                        |         |
| Net income                                       |       | $                  |  5,772  |                        | $          |  6,393      |       | $                          |  (6,393 | ) | $ |  5,772 |   |

 

**Condensed Consolidating Statement ofOperations**

**For the Three Months Ended March 31,2008**

** **
| ** **                                              | ** ** | **iPCS Inc.** | ** **   | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** **   |
|---------------------------------------------------------|------------|--------------------|--------------|-----------------------------|------------|------------------|------------|----------------------------|--------------|
| Total revenue                                           |       | $                  |  — |                        | $          |  125,658    |       | $                          |  — |   | $ |  125,658 |   |
| Cost of revenue                                         |       | —             |         | 79,847                      |       | —           |       | 79,847                     |         |
| Selling and marketing                                   |       | —             |         | 17,859                      |       | —           |       | 17,859                     |         |
| General and administrative                              |       | 712                |         | 6,376                       |       | —           |       | 7,088                      |         |
| Depreciation and amortization                           |       | —             |         | 13,955                      |       | —           |       | 13,955                     |         |
| Gain (loss) on disposal of property and  equipment, net |       | —             |         | 10                          |       | —           |       | 10                         |         |
| Total operating expense                                 |       | 712                |         | 118,047                     |       | —           |       | 118,759                    |         |
| Other, net                                              |       | 2,211              |         | (10,391                     | )          | —           |       | (8,180                     | )            |
| Loss in subsidiaries                                    |       | (3,105             | )            | —                      |       | 3,105            |       | —                     |         |
| Loss before provision for income tax                    |       | (1,606             | )            | (2,780                      | )          | 3,105            |       | (1,281                     | )            |
| Provision for income tax                                |       | —             |         | 325                         |       | —           |       | 325                        |         |
| Net loss                                                |       | $                  |  (1,606 | )                           | $          |  (3,105     | )          | $                          |  3,105  |   | $ |  (1,606 | ) |

 

**Condensed Consolidating Statement of CashFlows**

**For the Three Months Ended March 31,2009**

 
| ** **                                        | ** ** | **iPCS Inc.** | ** **   | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** **   |
|---------------------------------------------------|------------|--------------------|--------------|-----------------------------|------------|------------------|------------|----------------------------|--------------|
| Operating activities                              |       | $                  |  1,655  |                        | $          |  19,998     |       | $                          |  — |   | $ |  21,653 |   |
| Investing activities                              |       | —             |         | (5,233                      | )          | —           |       | (5,233                     | )            |
| Financing activities                              |       | (1,655             | )            | (9                          | )          | —           |       | (1,664                     | )            |
| Net increase in cash and cash equivalents         |       | —             |         | 14,756                      |       | —           |       | 14,756                     |         |
| Cash and cash equivalents at beginning of  period |       | —             |         | 55,940                      |       | —           |       | 55,940                     |         |
| Cash and cash equivalents at end of period        |       | $                  |  — |                        | $          |  70,696     |       | $                          |  — |   | $ |  70,696 |   |

 

**Condensed Consolidating Statement of CashFlows**

**For the Three Months Ended March 31,2008**

 
| ** **                                        | ** ** | **iPCS Inc.** | ** **   | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **iPCS Consolidated** | ** **   |
|---------------------------------------------------|------------|--------------------|--------------|-----------------------------|------------|------------------|------------|----------------------------|--------------|
| Operating activities                              |       | $                  |  (101   | )                           | $          |  10,581     |       | $                          |  — |   | $ |  10,480 |   |
| Investing activities                              |       | —             |         | (14,387                     | )          | —           |       | (14,387                    | )            |
| Financing activities                              |       | 101                |         | (7                          | )          | —           |       | 94                         |         |
| Net decrease in cash and cash equivalents         |       | —             |         | (3,813                      | )          | —           |       | (3,813                     | )            |
| Cash and cash equivalents at beginning of  period |       | —             |         | 77,599                      |       | —           |       | 77,599                     |         |
| Cash and cash equivalents at end of period        |       | $                  |  — |                        | $          |  73,786     |       | $                          |  — |   | $ |  73,786 |   |

 

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**Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

As used in this Quarterly Report on Form 10-Q, unless the context otherwiserequires: (i) “Sprint PCS” refers to the affiliated entities of SprintNextel Corporation that are covered by our affiliation agreements; (ii) “Sprint”refers to Sprint Nextel Corporation and its affiliates; (iii) a “PCSAffiliate of Sprint” is an entity that operates (directly or through one ormore subsidiaries) a personal communications services business pursuant toaffiliation agreements with Sprint PCS and/or its affiliates or theirsuccessors; (iv) “Sprint PCS products and services” refers to digitalwireless personal communications services, including wireless voice and dataservices, and related retail products, including handsets, in any case, offeredunder the Sprint brand name; and (v) “our subscribers” refers to SprintPCS subscribers who reside in our territory, excluding reseller subscribers.

 

Statements in this Quarterly Report on Form 10-Q regarding Sprintor Sprint PCS are derived from information contained in our affiliationagreements with Sprint PCS, periodic reports and other documents filed bySprint with the SEC or press releases or other statements issued or made bySprint or Sprint PCS. This Quarterly Report on Form 10-Q containstrademarks, service marks and trade names of companies and organizations otherthan us. Other than with respect to Sprint PCS, our use or display of otherparties’ trade names, trademarks or products is not intended to and does notimply a relationship with, or endorsement or sponsorship of us by, the tradename or trademark owners.

 

The following is an analysis of our results of operations, liquidityand capital resources and should be read in conjunction with the unauditedConsolidated Financial Statements and notes related thereto included in thisQuarterly Report on Form 10-Q. To the extent that the following Management’sDiscussion and Analysis contains statements which are not of a historicalnature, such statements are forward-looking statements which involve risks anduncertainties. These risks include, but are not limited to the risk and uncertaintieslisted in the next section entitled “Forward-Looking Statements” and otherfactors discussed elsewhere herein and in our other filings with the SEC.

 

**Forward-Looking Statements**

 

This Quarterly Report on Form 10-Qcontains statements about future events and expectations that are “forward-lookingstatements.” These statements relate to future events or our future financialperformance, and involve known and unknown risks, uncertainties and otherfactors that may cause our actual results, levels of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by theseforward-looking statements. In some cases, you can identify forward-lookingstatements by terminology such as “may,” “will,” “should,” “expects,” “intends,”“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” orthe negative use of these terms or other comparable terminology. Any statementin this report that is not a statement of historical fact may be deemed to be aforward-looking statement and subject to the safe harbor created by the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statementsinclude:

 

·      statementsregarding our anticipated revenue, expense levels, capital expenditures,security repurchases, liquidity and capital resources, operating losses andoperating cash flows and litigation results and prospects; and

 

·      statementsregarding expectations or projections about developments in our industry andmarkets in our territory.

 

Although we believe that the expectationsreflected in such forward-looking statements are reasonable, we can give noassurance that such expectations will prove to be correct. Important factorswith respect to any such forward-looking statements, including certain risksand uncertainties that could cause actual results to differ materially from ourexpectations, include, but are not limited to:

 

·      ourdependence on our affiliation with Sprint, as well as its reputation andperformance in the marketplace;

 

·      thecompliance by Sprint with the judgment and orders of the Circuit Court of CookCounty, Illinois requiring Sprint Nextel to cease owning and operating theNextel network in iPCS Wireless, Inc.’s territory, including Sprint’splans for the Nextel business going forward in light of that outcome;

 

·      theimpact and final outcome of our litigation with Sprint regarding Sprint’s WiMaxtransaction with Clearwire, including Sprint’s plans for the Sprint-Clearwiretransaction going forward in light of any future outcome;

 

·      theimpact and final outcome of our disputes with Sprint under the affiliationagreements;

 

·      changesin Sprint’s affiliation strategy;

 

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·      theability of Sprint PCS to alter the terms of our affiliation agreements with it,including program requirements;

 

·      ourdependence on back office services, such as billing and customer care, as wellas certain marketing and operational services provided by Sprint PCS, and thecosts we incur to obtain such services, and the effect on us of Sprint PCSnot performing these services adequately or of Sprint PCS devoting fewerresources to the provisioning of these services;

 

·      changesor advances in technology in general, or specifically related to Sprint and itsaffiliates, that may render our technology less desirable to our customers, orany failure by Sprint to share with us the benefits of any improvedtechnologies;

 

·      competitionin the industry and markets in which we operate;

 

·      ourability to 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;

 

·      changesin government regulation;

 

·      changesin the relative attractiveness of Sprint PCS’s phones, pricing plans, customerservice and coverage as well as the market’s overall perception of the SprintPCS brand;

 

·      oursubscriber credit quality;

 

·      thepotential for us to experience a continued high rate of subscriber turnover ascompared to the industry;

 

·      changesin the amounts of, and the relationship between, roaming revenue we receive androaming expenses we pay;

 

·      inaccuraciesor delays in our financial and other information provided to us by Sprint,particularly in light of our 2008 migration to Sprint’s “Ensemble” billing andcustomer care platform;

 

·      anyfailure to maintain effective internal controls to satisfy the requirements of Section 404of the Sarbanes-Oxley Act, which requires annual management assessments of theeffectiveness of internal control over financial reporting;

 

·      ourrates of penetration in the wireless industry and in our territories;

 

·      oursignificant level of indebtedness;

 

·      theadequacy of our allowance for bad debt and other reserves;

 

·      oursubscriber purchasing patterns;

 

·      subscribersatisfaction with our network and operations, including with services providedto us by Sprint, such as billing and customer care;

 

·      availabilityof an adequate supply of subscriber equipment to Sprint PCS and to us and ourdistributors specifically;

 

·      ourdependence on independent third parties for a sizable percentage of ourdistribution;

 

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

 

·      therisk of our workforce becoming unionized, particularly in light of thepotential adoption of the Employee Free Choice Act;

 

·      depthand duration of the economic downturn in the United States and its effect onour vendors, distribution partners and existing and potential subscribers;

 

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·      riskof terrorist attack or other macro economic and political events and theirimpact on our current and potential subscribers;

 

·      effectsof mergers, consolidations and joint ventures within the wirelesstelecommunications industry, including business combinations involving Sprintor affiliates of Sprint, and unexpected announcements or developments fromothers in the wireless telecommunications industry;

 

·      ourdependency on key vendors such as Nortel for expansion or maintenance of ournetwork, including the continued viability of these vendors; and

 

·      otherfactors discussed under “ Recent Trends, Risks and Uncertainties That May Affect OperatingResults, Liquidity and Capital Resources” below, elsewhere herein,and Item 1A, “Risk Factors,” in our 2008 Annual Report on Form 10-K.

 

**New Accounting Pronouncements**

 

See Note 14, New Accounting Pronouncements, of the “Notes to UnauditedConsolidated Financial Statements” in this Quarterly Report on Form 10-Qfor a discussion of new accounting pronouncements.

 

**Definitions of Operating Metrics**

 

In this “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” section, we provide certain financial measures thatare calculated in accordance with accounting principles generally accepted inthe United 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 “grosssubscriber additions”, “net subscriber additions” and “churn” are terms used inthe wireless telecommunications industry. The non-GAAP financial measures ofaverage revenue per user (“ARPU”) and cost per gross addition (“CPGA”) reflectstandard measures of performance commonly used in the wirelesstelecommunications industry. The non-financial terms and the non-GAAP measuresreflect wireless telecommunications industry conventions and are commonly usedby the investment community for comparability purposes. The non-GAAP financialmeasures included in this “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” are reconciled below in “Reconciliation ofNon-GAAP Financial Measures” and, together with the non-financial terms, aresummarized as follows:

 

·      Grosssubscriber additions for the period represent the number of new activationsduring the period (excluding transfers into our territory).

 

·      Netsubscriber additions for the period represented is calculated as the grosssubscriber additions in the period less the number of subscribers deactivated plusthe net subscribers transferred in or out of our markets during the period.

 

·      Churnis a measure of the average monthly rate at which subscribers based in ourterritory deactivate service on a voluntary or involuntary (credit-related)basis. We calculate average monthly churn based on the number of subscribersdeactivated during the period (net of those who deactivated within 30 daysof activation and excluding transfers out of our territory) as a percentage ofour average monthly subscriber base during the period divided by the number ofmonths during the period.

 

·      ARPU,or average revenue per user, is a measure of the average monthly servicerevenue earned from subscribers based in our territory. This measure iscalculated by dividing subscriber revenue in our consolidated statement ofoperations by the number of our average monthly subscribers during the perioddivided by the number of months in the period.

 

·      CPGA,or cost per gross addition, is a measure of the average cost we incur to add anew subscriber 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 soldless product sales revenue associated with transactions with new subscribers,and selling and marketing expense, net of stock-based compensation expense,during the measurement period, by (b) the total number of subscribersactivated in our territory during the period.

 

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·      Licensedpopulation represents the number of residents in the markets in our territoryfor which we have an exclusive right to provide wireless mobilitycommunications services under the Sprint brand name. The number of residentslocated in our territory does not represent the number of wireless subscribersthat we serve or expect to serve in our territory.

 

·      Coveredpopulation represents the number of residents covered by our portion of the wirelessnetwork of Sprint. The number of residents covered by our network does notrepresent the number of wireless subscribers that we serve or expect to servein our territory.

 

In this “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” unless the context indicates otherwise, allreferences to “subscribers” or “customers” and other operating metrics meansubscribers or customers excluding subscribers of resellers known as MobileVirtual Network Operators, or MVNOs, that use our network and resell wirelessservice under private brands.

 

**Business Overview**

 

As a PCS Affiliate of Sprint, we have theexclusive right to provide digital wireless personal communications services,or PCS, under the Sprint brand name in 81 markets including markets inIllinois, Michigan, Pennsylvania, New York, Indiana, Iowa, Ohio and Tennessee.The territory includes key markets such as Grand Rapids (MI), Fort Wayne (IN),the Tri-Cities region of Tennessee (Johnson City, Kingsport and Bristol), Scranton(PA), Saginaw-Bay City (MI), Central Illinois (Peoria, IL,Springfield, IL, Decatur, IL and Champaign, IL), and the Quad Citiesregion of Illinois and Iowa (Bettendorf and Davenport, IA, and Moline and RockIsland, IL). We own and are responsible for building, operating and managingthe portion of the 100% digital, 100% PCS wireless network of Sprint PCSlocated in our territory. We offer national calling plans designed by SprintPCS as well as local plans tailored to our markets. Our PCS network is designedto offer a seamless connection with the wireless network of Sprint PCS. Wemarket Sprint PCS products and services through a number of distributionoutlets located in our territory, including our company-owned retail stores,co-branded dealers, major national retailers and local third partydistributors. As of March 31, 2009, our licensed territory had a totalpopulation of approximately 15.1 million residents, of which our wirelessnetwork covered approximately 12.5 million residents, and we hadapproximately 700,100 subscribers.

 

***Relationship with Sprint***

 

Our relationship with Sprint is the mostsignificant relationship we have and is essential to the operation of ourbusiness. The terms of our relationship are set forth in the affiliation agreementsbetween certain of our subsidiaries and Sprint. Pursuant to these affiliationagreements, we agreed to offer CDMA services using Sprint’s spectrum under theSprint brand name on a wireless network built and operated at our own expense.We believe that our strategic relationship with Sprint provides significantcompetitive advantages. In particular, we believe that our affiliationagreements with Sprint allow us to offer high quality, nationally brandedwireless voice and data services for lower cost and lower capital requirementsthan would otherwise be possible.

 

We have been, and continue to be, engaged in litigation with Sprintregarding its 2005 merger with Nextel and, more recently, its Sprint-Clearwiretransaction through which Sprint and Clearwire are developing a nationwidemobile 4G WiMax network. Sprint’s operation of the legacy Nextel business inour Horizon and Bright territories must comply with the August 2006 rulingof the Delaware Court of Chancery. The Circuit Court of Cook County, Illinoishas required Sprint to cease owning, operating and managing the Nextel wirelessnetwork in iPCS Wireless’s territory on or before January 25, 2010,subject to Sprint being able to request an extension under certaincircumstances. We do not know Sprint’s intentions for complying with theCircuit Court’s order, or any future ruling related to the Sprint-Clearwiretransaction, or the impact of Sprint’s actions or inactions in either case onour business. We intend to continue to vigorously protect and enforce ourrights, but there is no assurance that we will prevail. For a detaileddiscussion of our litigation with Sprint, see “—Commitments and Contingencies”below.

 

Under our affiliation agreements with SprintPCS, the costs we incur for the support services provided by Sprint aredetermined on a per average monthly cash cost per user (“CCPU”) rate and on amonthly cost per gross addition (“CPGA”) rate. Pursuant to our affiliationagreements with Sprint PCS, the rates through 2010, adjusted for achieved milestonereductions as described below, are as follows:

 
| **Year**                 | ** ** | **CCPU** | ** ** | **CPGA** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| 2008 January – June |       | $        | 6.50       |     | $          | 19.00 |   |
| July                     |       | $        | 6.35       |     | $          | 19.00 |   |
| August – December   |       | $        | 6.20       |     | $          | 19.00 |   |
| 2009                     |       | $        | 5.85       | *        | $          | 19.00 |   |
| 2010                     |       | $        | 5.55       | *        | $          | 19.00 |   |

 

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*              Subject to furtherdownward adjustment as described below.

 

Beginning on January 1, 2011, the rates will be reset each yearbased on the amount necessary to recover Sprint PCS’s reasonable costs forproviding these services to us and the other PCS Affiliates of Sprint.

 

The CCPU rate in effect from 2008 through2010 is to be reduced from the then current rate by $0.15 if we hit certain milestoneswith respect to our voluntary deployment of EV-DO Rev. A, a version of thefurther evolution of code division multiple access (“CDMA”) high-speed datatechnology called Evolution Data Optimized (“EV-DO”). Specifically, the CCPUrates set forth above are reduced by $0.15 from the then-current rate when ourEV-DO Rev. A deployment covers at least 6.0 million in population (“POPs”),by another $0.15 from the then-current rate when we cover at least7.0 million POPs; and by another $0.15 from the then-current rate when wecover at least 9.0 million POPs. Our EV-DO Rev. A deployment coverageexceeded 6.0 million POPs during June 2008 and exceeded7.0 million POPs during July 2008. As a result, our CCPU rate wasreduced to $6.35 starting July 1, 2008, was further reduced to $6.20starting August 1, 2008 for the remainder of 2008 and has been reduced to$5.85 and $5.55 in 2009 and 2010, respectively, subject to any further downwardadjustments related to incremental EV-DO Rev. A coverage. As of March 31,2009, our EV-DO Rev. A deployment covered approximately 7.2 million POPs.

 

We receive roaming revenue when subscribersof Sprint and other PCS Affiliates of Sprint incur minutes of use in ourterritories, and we incur expense to Sprint and to other PCS Affiliates ofSprint when our subscribers incur minutes of use in the territories of Sprintand other PCS Affiliates of Sprint. Effective January 1, 2008 through December 31,2010, subject to adjustment as described below, 3G data roaming is not settledseparately with Sprint, however, we do settle 3G data roaming separately withthe other PCS Affiliates of Sprint. Pursuant to our affiliation agreements withSprint PCS, the reciprocal roaming rates through 2010 are as follows:

 
| **Year** | ** ** | **Voice & 2G Data  Per Minute of Use** | ** ** | **3G Data  Per Kilobyte of Use** | ** ** |
|----------|------------|-------------------------------------------------|------------|----------------------------------|------------|
| 2008     |       | $                                               | 0.0400     | *                                | $          | 0.0003 |   |
| 2009     |       | $                                               | 0.0400     | *                                | $          | 0.0001 |   |
| 2010     |       | $                                               | 0.0380     | *                                | $          | 0.0001 |   |

 

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*              Excluding certainmarkets as described below.

 

Beginning on January 1, 2011, the rates will be reset each year toan amount equal to 90% of Sprint’s average monthly retail yield for the firstnine months of the immediately preceding calendar year; provided, however, thatsuch amount for any period will not be less than our network costs.

 

With respect to certain of our markets inwestern and eastern Pennsylvania, we receive the benefit of a specialreciprocal rate for voice and 2G data of $0.10 per minute. This special ratewill terminate, with respect to each of these two sets of markets, on theearlier of December 31, 2011 or the first day of the calendar month whichfollows the first calendar quarter during which we achieve a subscriberpenetration rate of at least 7% of our covered POPs in those markets. We do notanticipate reaching a 7% subscriber penetration rate in these markets in theforeseeable future.

 

Commencing on January 1, 2010, eitherSprint or we may initiate a review to determine whether the 3G data roamingratio between us has changed by more than 20% from the calendar year that istwo years prior. If the ratio has changed by more than 20%, then the partieswill commence discussions as to whether an appropriate adjustment in other feescan be made to compensate for such change. If the parties cannot agree, thenthe parties will revert to settling 3G data roaming separately effective January 1of the year in which such review was initiated.

 

On January 22,2009, we reached a settlement with Sprint related to previously disputed 2008items, which resulted in a Gain on Sprint settlement of $4.3 million beingrecorded in our consolidated statement of operations for the three months endedMarch 31, 2009.  We have disputed additional items with Sprint which remainunresolved as of April 30, 2009. The final outcome of these unresolved disputeditems is unknown at this time.

 

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**Consolidated Results of Operations**

 

***Summary***

 

For the three months ended March 31, 2009 our net income was $5.8million compared to a net loss of $1.6 million for the three months ended March 31,2008.  Net income for the 2009 periodincludes a $4.3 million gain related to a Sprint settlement. The three monthsended March 31, 2009 reflected higher subscriber revenue, primarilyattributable to our larger subscriber base, as compared to the same period in2008. Bad debt expense decreased in the three months ended March 31, 2009,reflecting a decrease in uncollectable accounts compared to the 2008 period.Offsetting the increased subscriber revenue and reduced bad debt expense forthe three months ended March 31, 2009 were higher costs related toservicing a larger network and larger subscriber base, higher Sprint litigationrelated expenses and a decrease in our roaming margin as compared to 2008.  Acquisition costs for new activationsincreased in the three months ended March 31, 2009, reflecting highercommissions related to the sale of more expensive rate plans and a shift in mixtoward higher commission structure distribution channels as compared to the2008 period, offset by lower fixed costs related to company-owned retailstores.

 

Presented below is a more detailed comparative data and discussionregarding our consolidated results of operations for the three months ended March 31,2009 compared to the three months ended March 31, 2008.

 

***For the Three MonthsEnded March 31, 2009 compared to the Three Months Ended March 31,2008***

 

Results of operations for any period less than one year are notnecessarily indicative of results of operations for a full year.

 

***Key Performance Metrics.***

 

Management uses several key performance metrics to analyze theoperations of our business. Below is a table setting forth the metrics that weuse for the relevant time periods:

 
| ** **                 | ** ** | **As of and for the Three Months   Ended March 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|----------------------------|------------|---------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                 | ** ** | **2009**                                                                                          | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Total Subscribers          |       | 700,100                                                                                           |       | 640,600       |       | 59,500         |       | 9.3 | % |
| Gross Subscriber Additions |       | 60,600                                                                                            |       | 59,200        |       | 1,400          |       | 2.4 |   |
| Net Subscriber Additions   |       | 9,000                                                                                             |       | 10,700        |       | (1,700         | )          | (15.9 | ) |
| Churn                      |       | 2.3                                                                                               | %          | 2.3           | %          | 0.0            | pts        | 0.0 |   |
| ARPU                       |       | $                                                                                                 | 49.84      |          | $          | 48.44          |       | $ | 1.40 |   | 2.9 |   |
| CPGA                       |       | $                                                                                                 | 402        |          | $          | 399            |       | $ | 3 |   | 0.8 |   |

 

***SubscriberAdditions.***     Grosssubscriber additions increased slightly in the three months ended March 31,2009 as compared to the three months ended March 31, 2008, reflectingincreased popularity of Sprint’s Simply Everything pricing plan.  Net subscriber additions were negativelyimpacted by higher deactivations reflecting an equivalent overall churnpercentage on our larger average subscriber base in the three months ended March 31,2009 as compared to the three months ended March 31, 2008.

 

***Churn.***     Churnfor the three months ended March 31, 2009 was flat as compared to thethree months ended March 31, 2008, as improvements in churn from credit-relateddeactivations were offset by increased voluntary churn.  At March 31, 2009, approximately 84% ofour subscribers were under contract compared to 88% at March 31, 2008.

 

***Average Revenue PerUser.***  ARPUwas positively affected by an increase in monthly recurring revenue persubscriber for the three months ended March 31, 2009 quarter as comparedto the three months ended March 31, 2008. This increase reflects thegrowing popularity of Sprint’s “Simply Everything,” “Everything” and “Talk/Message”Plans.  Additionally, ARPU was positivelyimpacted in the three months ended March 31, 2009 by moderating customercare related credits provided to Sprint customers in our territory. Averagemonthly credits per subscriber, including promotional credits, were $5.92 forthe three months ended March 31, 2009 as compared to $6.43 for the threemonths ended March 31, 2008. Partially offsetting these positive trends, ARPU was negatively affectedby decreases in customer plan overage charges and roaming charges for the threemonths ended March 31, 2009 as compared to the three months ended March 31,2008. These decreases also reflect the growing popularity of Sprint’s allinclusive plans.  Additionally, ARPU wasnegatively impacted in 2009 by a reduction in late fees Sprint charges tocustomers on delinquent accounts that are being passed on to us. Averagemonthly late fee revenue per subscriber was $0.68 for the three months ended March 31,2009 as compared to $1.34 for the three months ended March 31, 2008.  We are currently disputing late fees andother items.  See “—Relationship withSprint” above for a further discussion of our disputes with Sprint.

 

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***Cost Per GrossAddition.*** Variable costs per gross addition increased by $18 in the three monthsended March 31, 2009 compared to the three months ended March 31,2008, reflecting higher commission costs related to the sale of more expensiverate plans and a shift in mix toward higher commission structure distributionchannels. Offsetting this increase, fixed costs per gross addition decreased$15 in the three months ended March 31, 2009 compared to the three monthsended March 31, 2008, reflecting a reduction in our company-owned retailpresence in favor of more exclusive Sprint co-branded dealers, reducedadvertising and an increase in gross subscriber additions of 2%.  At March 31, 2009, we owned and operated37 retail stores and managed 124 exclusive Sprint co-branded dealers comparedto 43 retail stores and 100 exclusive Sprint co-branded dealers at March 31,2008.

 

***Revenue.***

 

The following tables set forth a breakdown of revenue by type:

 
| ** **                                                                         | ** ** | **For the Three Months Ended   March 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                                                         | ** ** | **2009**                                                                 | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Service revenue                                                                    |       | $                                                                        | 103,981    |          | $          | 92,099         |       | $ | 11,882 |   | 12.9 | % |
| Roaming revenue from subscribers of Sprint  PCS and other PCS Affiliates of Sprint |       | 19,611                                                                   |       | 22,622        |       | (3,011         | )          | (13.3 | ) |
| Roaming revenue from other wireless  carriers                                      |       | 4,770                                                                    |       | 3,540         |       | 1,230          |       | 34.7 |   |
| Reseller revenue                                                                   |       | 3,239                                                                    |       | 3,982         |       | (743           | )          | (18.7 | ) |
| Equipment and other revenue                                                        |       | 4,563                                                                    |       | 3,415         |       | 1,148          |       | 33.6 |   |
| Total revenue                                                                      |       | $                                                                        | 136,164    |          | $          | 125,658        |       | $ | 10,506 |   | 8.4 |   |

 

·       ***Service revenue.*** Service revenue is comprised of themonthly recurring charges for voice and data usage and the monthlynon-recurring charges for voice and data minutes and data kilobytes over plan,long distance, roaming usage charges, other feature revenue and late paymentfee and early cancellation fee revenues. Deductions for billing adjustments,promotional credits and certain customer care credits are recorded as areduction to service revenue. Our service revenue growth over the prior yearconsists of $9.0 million from a higher average subscriber base and $2.9million from an increase in ARPU.

 

·       ***Roaming revenue from subscribers of Sprint PCS and other PCS Affiliatesof Sprint.*** We receive revenue on a per minute basis for voicetraffic when subscribers of Sprint PCS and other PCS Affiliates of Sprint useour network. We similarly receive revenue on a per kilobyte basis for datatraffic when subscribers of other PCS Affiliates of Sprint use our network. Inaddition, we receive toll revenue for any long distance calls made by thesesubscribers while roaming on our network.

 

For 2008 and 2009, the reciprocal roamingrate is $0.0400 per minute for voice traffic ($0.10 per minute in certainmarkets in eastern and western Pennsylvania). For the three months ended March 31, 2009 compared to the threemonths ended March 31, 2008, voice roaming revenue from subscribers ofSprint and other PCS Affiliates of Sprint, including toll revenue, decreased by$2.9 million, reflecting decreases in roaming minutes and roaming toll minutes,as derived from information provided by Sprint. We have requested additional informationfrom Sprint, under the dispute provisions of our affiliation agreements, to helpus determine the cause of this decrease.

 

·       ***Roaming revenue from other wireless carriers.*** We receiveroaming revenue from wireless carriers other than Sprint PCS 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 the roaming arrangements Sprint PCS has negotiated withthese carriers and are unable to set terms and prices or otherwise monitorthese relationships. We are paid on a per minute basis for voice and 2G dataand on a per kilobyte basis for 3G traffic pursuant to these agreements. Forthe three months ended March 31, 2009, roaming minutes were75.6 million compared to 70.1 million for the three months ended March 31,2008, an increase of 8%. The average per minute rate, including toll, decreasedfrom $0.049 per minute for the three months ended March 31, 2008 to $0.044per minute for the three months ended March 31, 2009. Data roaming revenuefrom other wireless carriers totaled $1.5 million for the three monthsended March 31, 2009 compared with $0.1 million for the three monthsended March 31, 2008, reflecting increased proliferation and usage of 3Gdevices. The majority of our roaming revenue from other wireless carriers isderived from customers of Alltel, which was recently acquired by VerizonWireless. As a result, we expect a decrease in our roaming revenue from Alltelover time.

 

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·       ***Reseller revenue.***Through Sprint PCS we allow resellers, known as MVNOs, such as Virgin Mobile,to use our network. Pursuant to these arrangements, we are paid on a per minuteand per kilobyte basis. The decrease in reseller revenue for the three months endedMarch 31, 2009 compared to the three months ended March 31, 2008reflects decreased ARPU, partially offset by an increase in the averagereseller subscribers between the respective periods. For the three months endedMarch 31, 2009, reseller ARPU was $3.96 compared to $5.32 for the threemonths ended March 31, 2008. Average reseller subscribers wereapproximately 272,400 for the three months ended March 31, 2009 comparedto approximately 249,500 for the three months ended March 31, 2008. At March 31,2009, we had approximately 275,100 reseller subscribers based in our territory.

 

·       ***Equipment and other revenue.*** Equipment and other revenueis derived primarily from the sale of handsets and accessories to new customersand from current customers who upgrade their handsets through our retail andlocal distribution channels, in each case, net of sales incentives, rebates andan allowance for returns. The increase in the three months ended March 31,2009, as compared to the three months ended March 31, 2008, reflectshigher revenue per new and upgraded handset and a larger number of upgrades.These increasing factors are offset by lower activations from our retail andlocal distribution channels.

 

***Operating Expense.***

 

The following tables set forth a breakdown of operating expense by type(dollars in thousands):

 
| ** **                                       | ** ** | **For the Three Months  Ended March 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                                       | ** ** | **2009**                                                           | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Cost of service and roaming                      |       | $                                                                  | 72,150     |          | $          | 68,184         |       | $ | 3,966 |   | 5.8 | % |
| Cost of equipment                                |       | 16,212                                                             |       | 11,663        |       | 4,549          |       | 39.0 |   |
| Selling and marketing                            |       | 16,650                                                             |       | 17,859        |       | (1,209         | )          | (6.8 | ) |
| General and administrative                       |       | 8,881                                                              |       | 7,088         |       | 1,793          |       | 25.3 |   |
| Gain on Sprint settlement                        |       | (4,273                                                             | )          | —        |       | (4,273         | )          | — |   |
| Depreciation and amortization                    |       | 12,580                                                             |       | 13,955        |       | (1,375         | )          | (9.9 | ) |
| Loss on disposal of property and equipment,  net |       | 99                                                                 |       | 10            |       | 89             |       | 890.0 |   |
| Total operating expense                          |       | $                                                                  | 122,299    |          | $          | 118,759        |       | $ | 3,540 |   | 3.0 |   |

 

***Cost of service androaming.*** Cost of service and roaming includes network operations expense, roamingexpense relating to when our subscribers roam either on other Sprint PCSnetworks or other wireless carriers’ networks, back-office customer servicesprovided by Sprint PCS, the provision for doubtful accounts, long distanceexpense, the 8% affiliation fee due to Sprint PCS for collected revenue andstock-based compensation expense. Network operations expense includes salariesand benefits for network personnel, cell site rent, utilities and maintenanceexpenses, fees relating to the connection of our cell sites to our switches andother transport and facility expenses. Roaming expense is our cost of oursubscribers using Sprint PCS and other wireless carriers’ networks. Roamingexpense on the Sprint PCS network is at the reciprocal rates as described aboveunder “—Roaming revenue from subscribers of Sprint PCS and other PCS Affiliatesof Sprint.” Roaming expense when our subscribers use other wireless carriersnetworks is at rates as determined by the roaming agreements signed by SprintPCS with these other wireless carriers. Effective January 1, 2008 through December 31,2010, data roaming with Sprint is not settled separately, however, we continueto settle separately 3G data roaming with the other PCS Affiliates of Sprint.

 

The increase in cost of service and roamingfor the three months ended March 31, 2009 reflects the related costs ofservicing a larger network and larger subscriber base, such as higher cell siterent and interconnect costs due to more cell sites. Additionally reflected inthis increase in cost of service and roaming, roaming expense with wirelesscarriers other than Sprint increased $2.1 million, from $1.9 millionin the three months ended March 31, 2008 to $4.0 million in the threemonths ended March 31, 2009, due to significantly higher minutes andkilobytes of use on Sprint’s roaming partners’ networks.  Offsetting these increases, bad debt expensedecreased $2.2 million from $5.4 million in the three months ended March 31,2008 to $3.2 million in the three months ended March 31, 2009. Thisdecrease in bad debt expense reflects an improvement in uncollectable accountsin the three months ended March 31, 2009 as compared to the 2008 period.Additionally, due to decreases in our monthly cash cost per user fee, our costof service and roaming was lower by $1.3 million for the three months ended March 31,2009 as compared to the three months ended March 31, 2008.

 

At March 31, 2009, our network consisted of 1,912 leased cellsites and five switches.  At March 31,2008, our network consisted of 1,696 leased cell sites and five switches.

 

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***Cost of equipment.***  Cost of equipment includes the cost ofhandsets and accessories sold or upgraded from our retail and localdistribution channels. Cost of equipment related to upgrades increased$2.3 million, or 84%, in the three months ended March 31, 2009 ascompared to the three months ended March 31, 2008, reflecting an increasein the number of subscribers receiving handset upgrades from our retail andlocal distribution channels and an increase in the average handset cost perupgrade. Cost of equipment for new activations increased $2.2 million, or25%, in the three months ended March 31, 2009, as compared to the threemonths ended March 31, 2008, reflecting an increase in the average costper activated phone, partially offset by a decrease in new activations from ourretail and local distribution channels. Handset costs have been increasing as demand has shifted toward moreexpensive smart phones.

 

***Selling andmarketing.*** Selling and marketing expense includes the costs to operate our ownedretail stores, advertising and promotional expenses, commissions, equipmentsubsidies and rebate expenses relating to new subscriber additions fromnational third parties and other Sprint-controlled channels and stock-basedcompensation expense. The decrease in the three months ended March 31,2009 was due to lower costs related to promotional credits, lower costs associatedwith a smaller company owned retail work force and lower advertising expense,offset by higher commissions related to the sale of more expensive rate plansand a shift in mix toward higher commission structure distribution channels.

 

***General and administrative.***  General and administrative expenses includeadministrative salaries and benefits, legal fees, insurance expense, otherprofessional expenses and stock-based compensation expense. For the threemonths ended March 31, 2009, general and administrative expense includedapproximately $3.7 million of Sprint litigation related expenses. Thiscompares to $0.3 million for the three months ended March 31, 2008.Stock-based compensation expense included in general and administrative expensetotaled approximately $0.9 million for the three months ended March 31,2009 compared to $1.5 million for the three months ended March 31,2008.

 

***Gain on Sprintsettlement.***** On January 22,2009, we reached a settlement with Sprint related to previously disputed 2008items, which resulted in a $4.3 million gain being recorded in ourconsolidated statement of operations for the three months ended March 31,2009.  We have disputed additional items with Sprint which remain unresolvedas of April 30, 2009. The final outcome of these unresolved disputed items isunknown at this time.

 

***Depreciation andamortization.*** Amortization of intangible assets totaled $2.3 million for both thethree months ended March 31, 2009 and 2008.  Depreciation expense totaled$10.3 million for the three months ended March 31, 2009 compared to$11.7 million for the three months ended March 31, 2008, a decreaseof $1.4 million for the three month period, reflecting the fulldepreciation of certain assets during the second half of 2008. During the threemonths ended March 31, 2008, we recognized an impairment charge of$0.3 million included in depreciation, related to our assets held for saleto reduce their carrying value in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.”  The reduction in carrying value records theseassets at fair value less costs to sell in anticipation of their future sale.

 

***Non-OperatingIncome and Expense.***

 

The following tables set forth a breakdown of non-operating income andexpense by type (dollars in thousands):

 
| ** **        | ** ** | **For the Three Months Ended  March 31,** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-------------------|------------|--------------------------------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **        | ** ** | **2009**                                                           | ** ** | **2008**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| Interest income   |       | $                                                                  | 86         |          | $          | 720            |       | $ | (634 | ) | (88.1 | )% |
| Interest expense  |       | 8,034                                                              |       | 8,915         |       | (881           | )          | (9.9 | ) |
| Other income, net |       | 5                                                                  |       | 15            |       | (10            | )          | (66.7 | ) |
|                   |            |                                                                    |            |               |            |                |            |  |  |  |  |  |

 

***Interest Income.*** The decrease in interest income in the threemonths ended March 31, 2009 as compared to the three months ended March 31,2008 reflects a lower interest rate environment during the three months ended March 31,2009 as compared to the three months ended March 31, 2008 and, to a lesserextent, lower average cash and cash equivalents during the 2009 three monthperiod as compared to the same 2008 period.

 

***Interest Expense.*** Interest expense consists of interest on ouroutstanding long-term debt (see Note 6, Long-Term Debt, of the “Notes toUnaudited Consolidated Financial Statements” in this Quarterly Report on Form 10-Q),including amortization of

 

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financing costs and net of capitalized interest and the effect of ourinterest rate swap (see Note 7, Interest Rate Swap, of the “Notes to UnauditedConsolidated Financial Statements” in this Quarterly Report on Form 10-Q).  The decrease in interest expense in the threemonths ended March 31, 2009 reflects a lower weighted average interestrate, net of our interest rate swap, of 6.61% on our outstanding long-term debtduring the three months ended March 31, 2009 as compared to the weightedaverage interest rate of 7.32% on our outstanding long-term debt during thethree months ended March 31, 2008.

 

In connection with our capital expenditures,we capitalized interest of approximately $0.2 million for both the threemonths ended March 31, 2009 and 2008.

 

***Reconciliation ofNon-GAAP Financial Measures (All Revenues and Expenses in Thousands)***

 

We utilize certain financial measures that are not calculated inaccordance with GAAP to assess our financial performance. A non-GAAP financialmeasure is defined 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   March 31,** | ** **   |
|--------------------------------|--------------|-------------------------------------------------|--------------|
| ** **                     | ** **   | **2009**                                        | ** **   | **2008** | ** ** |
| ***ARPU***                     | *** *** | *** ***                                    | *** *** | *** *** | *** *** |
| Service revenue (in thousands) |         | $                                               | 103,981      |   | $ | 92,099 |   |
| Average subscribers            |         | 695,400                                         |         | 633,800 |   |
| ARPU                           |         | $                                               | 49.84        |   | $ | 48.44 |   |

 

ARPU, which is utilized by most wireless companies to determinerecurring monthly revenue on a per subscriber basis, is used by analysts andinvestors to compare relative subscriber revenue across the wireless industry.We use ARPU to assist in evaluating past selling performance and the success ofspecific rate plan promotions.

 
| ** **                                       | ** **   | **For the Three Months Ended   March 31,** | ** **   |
|--------------------------------------------------|--------------|--------------------------------------------------------------------------|--------------|
| ** **                                       | ** **   | **2009**                                                                 | ** **   | **2008** | ** ** |
| ***CPGA***                                       | *** *** | *** ***                                                             | *** *** | *** *** | *** *** |
| Selling and Marketing (in thousands):            |         | $                                                                        | 16,650       |   | $ | 17,859 |   |
| plus: Equipment costs, net of cost of  upgrades  |         | 11,121                                                                   |         | 8,893 |   |
| less: Equipment revenue, net of upgrade  revenue |         | (3,275                                                                   | )            | (2,900 | ) |
| less: Stock-based compensation expense           |         | (136                                                                     | )            | (213 | ) |
| CPGA costs                                       |         | 24,360                                                                   |         | 23,639 |   |
| Gross additions                                  |         | 60,600                                                                   |         | 59,200 |   |
| CPGA                                             |         | $                                                                        | 402          |   | $ | 399 |   |

 

CPGA is utilized by most wireless companies to determine their cost toacquire a new subscriber. CPGA is used by analysts and investors to compare usto other wireless companies. We use CPGA to evaluate past selling performance,the success of specific promotions and as a basis to determine the amount oftime we must retain a new subscriber before we recover this cost.

 

***Inflation***

 

We believe that inflation has not had asignificant impact on our revenues or our results of operations in the threemonths ended March 31, 2009 and 2008, respectively.

 

**Liquidity and Capital Resources**

 

We believe our cash and cash equivalents andoperating cash flow will be sufficient to operate our business and fund ourcapital needs for at least the next twelve months. Although we have certainlimited additional borrowings allowed under our current debt agreements,including but not limited to PIK Interest (see Note 6, Long-Term Debt, of the “Notesto Unaudited Consolidated Financial Statements” in this Quarterly Report on Form 10-Q),we are dependent on cash and cash equivalents and operating cash

 

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flow to operate our business and fund our capital needs. However, ourfuture liquidity is dependent on a number of factors influencing our expectedearnings and operating cash flows, including those discussed below in “—RecentTrends, Risks and Uncertainties That May Affect Operating Results,Liquidity and Capital Resources.”

 

***Significant Sourcesof Cash***

 

We generated $21.7 million in net cash flows from operatingactivities for the three months ended March 31, 2009, compared to$10.5 million for the three months ended March 31, 2008, an increaseof $11.2 million. Excluding changes in working capital, operating activitiesprovided $23.1 million of cash for the three months ended March 31, 2009,compared to $19.9 million of cash for the three months ended March 31,2008, generally reflecting increased earnings from our larger subscriber base, cashreceived related to the settlement of 2008 Sprint disputes and lower bad debtexpense, offset by a decrease in our roaming margin, increased Sprint relatedlitigation expenses and higher customer acquisition costs.  Sprint related working capital, whichincludes fees and charges payable and receivable between us and Sprint, was asource of cash of $2.6 million for the three months ended March 31, 2009compared to a source of cash of $0.6 million for the three months ended March 31,2008, primarily due to the timing of cash payments both to and fromSprint.  For the three months ended March 31,2009, non-Sprint related working capital used cash of $4.0 million, reflectingincreased accounts receivable related to a higher subscriber base during theperiod.  For the three months ended March 31,2008, non-Sprint related working capital used cash of $10.0 million reflectingcustomer account write-offs and an increased investment in inventory.

 

We received approximately $0.1 millionprimarily from the sale of equipment during the three months ended March 31,2009. We currently expect to sell approximately $0.4 million of equipmentin 2009, classified as Assets held for sale at March 31, 2009, which wasreplaced with equipment we purchased from Nortel Networks in 2005 and 2006.

 

For the three months ended March 31,2008, we received $0.1 million from the exercise of options representingapproximately 13,100 shares.  As of March 31,2009, there were 875,740 exercisable stock options outstanding with a weightedaverage exercise price of $19.92. We cannot predict at what level, if any, cashwill be generated from stock option exercises in the future. At March 31,2009, the intrinsic value of all of our outstanding stock options wasapproximately $0.6 million.

 

***Significant Uses ofCash***

 

Cash flows used for investing activities for the three months ended March 31,2009 included $5.4 million for capital expenditures.  Included inthis total was $4.6 million for new cell site construction and othernetwork-related capital expenditures, of which $0.2 million was for EV-DO Rev.A equipment, and $0.8 million was for store improvements, IT and othercorporate-related capital expenditures.

 

Cash flows used for investing activities for the three months ended March 31,2008 included $14.4 million for capital expenditures.  Included inthis total was $13.8 million for new cell site construction and othernetwork-related capital expenditures, of which $0.2 million was for EV-DO Rev.A equipment, and $0.6 million was for new stores, store improvements, ITand other corporate-related capital expenditures.

 

On January 30, 2009, our Board of Directors authorized therepurchase of up to $15.0 million of our common stock in a stockrepurchase program during the 12-month period beginning on the date ofauthorization. We may purchase shares from time to time in open market orprivately negotiated transactions at prices deemed appropriate by management,depending on market conditions, applicable laws and other factors. The stockrepurchase program does not require us to repurchase any specific number ofshares and may be discontinued at any time. Pursuant to this stock repurchase program, during the threemonths ended March 31, 2009, we purchased 167,163 shares of our commonstock at an average price of $9.70 per share for approximately$1.6 million.  As of March 31,2009, approximately $13.4 million remained available under the stockrepurchase program. These repurchased shares are reflected as Treasury stock,at cost in the Consolidated Balance Sheet.

 

Our uses of cash typically include providingfor operating expenditures, debt service requirements and capital expenditures.We anticipate that total capital expenditures for 2009 will be between$35.0 million and $45.0 million. This includes cash uses for new

 

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cell sites, information technology, and other network-relatedexpenditures, including EV-DO Rev. A. Because our long-term debt does not beginto mature until 2013, we do not believe the current tightening of the creditmarkets, unless prolonged, should have a significant impact on our ability torefinance our debt.

 

In addition to building excess cash, wecontinually evaluate our capital and debt capacity and how to prioritize theuse of any excess cash, including for any or a combination of the followingstrategic options: increase capital expenditures, pursue strategicacquisitions, pay cash dividends or distributions, repurchase of our stock, orretire or repurchase of our debt.  Todate, we have elected to pay our August 1, 2009 and November 1, 2009interest payments in relation to our Second Lien Notes entirely by increasingthe principal amount of the outstanding Second Lien Notes (see Note 6,Long-Term Debt, of the “Notes to Unaudited Consolidated Financial Statements”in this Quarterly Report on Form 10-Q). We have made no other decisionsregarding the future election of PIK Interest.

 

***Recent Trends, Risksand Uncertainties That May Affect Operating Results, Liquidity and CapitalResources***

 

We have identified the following important trends and factors (as wellas risks and uncertainties associated with such items) that could impact ourfuture financial performance.  This section should be read inconjunction with the “Risks Related to Our Business, Strategy and Operations”section found in Item 1A of Part I of our annual report on Form 10-K,filed with the SEC on March 3, 2009.

 

·      Despitecontinued sizable gross additions coming from Nextel subscribers switching toSprint in our territory, overall gross additions were lower than the last threequarters in 2008 and only slightly higher than the first quarter of 2008,reflecting tightened credit standards and increased overall wirelesspenetration in our markets. Additionally, gross additions were negativelyimpacted by the weakening economic environment, increased competitiveadvertising, increased competition (including the recent introduction ofMetroPCS and Nextel’s prepaid product, Boost, in our territory), the relativeattractiveness of competitors’ phones, pricing plans, coverage and customerservice, as well as continuing concerns about the strength of the “Sprint”brand. We believe that these factors will continue to negatively affect grossadditions in remainder of 2009. To the extent we are unable to maintain, orchoose to slow, our subscriber growth, it may make it more difficult for us toobtain sufficient revenue to achieve and sustain profitability.

 

·      Whileour churn in 2009 remained relatively consistent with 2008 levels, it continuesto be significantly higher than the national industry average. Our churn mayincrease in the future or remain high due to the weakening economicenvironment, increased competition or other factors. We have and may continueto tighten our credit policies. However, if churn continues to remain high orincreases over the long-term, we would lose the cash flows attributable tothese subscribers and may incur higher net losses.

 

·      Competitionin the wireless industry remains intense and continues to put downward pressureon our per subscriber revenue.  Theintroduction of more advanced handheld devices and new technologies anddelivery channels, such as the WiMax offerings of Sprint through theSprint-Clearwire transaction, further complicate the competitive environment.In addition, prepaid plans (such as those offered by new entrants into ourmarkets like MetroPCS and existing competitors like Nextel through its Boostproduct), which we do not currently offer, and unlimited plans, including thoseoffered by us, also continue to increase in popularity, which may potentiallyput more downward pressure on wireless service pricing as well as potentially,in the case of unlimited plans, increase our cost of providing service.Incumbent carriers, including Sprint, have offered and may continue to offermore aggressive rate plans in order to maintain or achieve subscribergrowth.  While customer care creditsmoderated in the first quarter of 2009 as compared to 2008 levels, customercare credits remain high and the future trend of these credits is unknown. Inaddition, the FCC and several state courts are currently reviewing theindustry’s practice related to early cancellation fees. Any negative outcomefrom one or more of these reviews, as well as the effect of Sprint’s change inits business practice related to early cancellation fees, is expected tonegatively impact our future results. As a result of these and other factors,we expect to see continued pressure on subscriber revenue which will have anegative effect on our cash flow and our operating results.

 

·      Ourcost per gross addition, or CPGA, continues to remain high as compared tohistorical levels. We may continue to experience higher costs to acquiresubscribers in the future. To the extent that we increase our distributioninfrastructure, we will increase the fixed costs in our sales and marketingorganization. Also, more aggressive promotional efforts may lead in the future,to higher handset subsidies and rebates, especially as we increase the sale ofmore expensive handsets and smart phones. In addition, we may increase ourmarketing expenses and pay higher commissions in an effort to attract andacquire new subscribers. With a higher CPGA, subscribers must remain oursubscribers for a longer period of time at a stable ARPU for us to recoverthose acquisition costs.

 

·      Certainportions of our operating expense continue to increase or remain high and mayincrease in the future due to, among other reasons:

 

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·      Bad debt expense could potentiallyincrease again due to higher write-offs, lower bad debt recoveries as apercentage of write-offs and a deteriorating economic environment;

 

·      Higherroaming expense with wireless carriers other than Sprint as customersincreasingly choose roam inclusive rate plans and increase their use of theirhandset and data devices off the Sprint network;

 

·      Higherhandset subsidies, rebates, commissions and other retention expenses forexisting subscribers who upgrade to a new handset as part of promotionalefforts to reduce churn;

 

·      Higherback office and administrative expenses due to the larger number of subscribersserved;

 

·      Highernetwork costs as we process increasing voice and data traffic on our network,including traffic from Sprint customers roaming in our territories, and as aresult of expanding our network infrastructure and increasing our deployment ofEV-DO Rev. A.; and

 

·      HigherSprint litigation related expenses, as a result of our ongoing defense of ourrights under our affiliation agreements, in particular relating to theSprint-Clearwire transaction announced in May of 2008.

 

·      A substantial portion of our revenue is derivedfrom roaming revenue, the majority of which comes when subscribers of Sprintincur minutes of use in our territories. We believe our markets have certaincharacteristics that have historically had a favorable effect on the level ofroaming revenue from subscribers of Sprint traveling in our markets.  These characteristics include being locatednear or around several large U.S. urban centers and having significantdistances of major and secondary highways comprising principal travel corridorsbetween these large urban centers.  Inthe first quarter of 2009, we have seen a decrease in roaming revenue thatSprint reports to us for their subscribers’ activity in our territory and haverequested additional information from Sprint, under the dispute provisions ofour affiliation agreements, to help us determine the cause of this decrease.  While it is unclear what role reduced travelin our territory by Sprint subscribers has played in this first quarterdecrease, a continued downturn in economic conditions could result in decreasedtravel activity and have a negative impact on our roaming revenue.  Additionally, Sprint’s reciprocal roamingagreements with other carriers, such as its roaming agreement with Alltel, andour participation in those agreements, can change over time, potentiallyreducing the reciprocal rate or negatively affecting the level of roamingactivity related to those roaming partners. While still greater than one, ourroaming ratio with other carriers continued to decline in the first quarter of2009. For the three months ended March 31, 2009, approximately$3.1 million, or 79%, of our roaming revenue from other wireless carrierswas derived from customers of Alltel, which was recently acquired by VerizonWireless. As a result, we expect a decrease in our roaming revenue from Alltelduring 2009. Moreover, since the ratio of inbound to outbound roamingfluctuates from period to period and year to year, the margin we earn from thedifference between roaming revenue and roaming expense is difficult to predict.If this roaming margin with Sprint PCS or with other carriers declines due toless roaming revenue, more roaming expense, or both, our results of operationswill be negatively affected.

 

·      Aswe have added to the capacity, coverage and quality of our PCS network, we haveincurred significant capital expenditures. We incurred approximately$5.4 million in capital expenditures in the three months ended March 31,2009, including approximately $0.2 million for EV-DO Rev. A deployment. Weanticipate that total capital expenditures for 2009 will be between$35.0 million and $45.0 million. These expenditures include continuednew cell sites, as well as continued expansion of our EV-DO Rev. A deployment.Our CCPU rates are reduced by $0.15 when we reach certain EV-DO Rev. A coveragelevels. Specifically, our CCPU rate will be reduced from the then current rateif and when our EV-DO Rev. A coverage reaches at least 9.0 millionresidents. In the future we may decide to further increase our cell site expansionor EV-DO Rev. A coverage, either or both of which may increase our anticipatedcapital expenditures and operating expense beyond our current plans.Furthermore, unforeseen changes in technology and changes in our plans toupgrade or expand our network may require us to spend more money than weexpected and have a negative effect on our cash flow.

 

·      Webelieve that Sprint’s integration of the Sprint and Nextel businesses has had,and will continue to have, a negative impact on our business and prospects.With the integration of the marketing and sales of Sprint products and serviceswith legacy Nextel products and services, conflicts and disputes continue toarise with how Sprint and we conduct business in our territory as well as toSprint’s commitment and level of service provided to the PCS Affiliate programand to us specifically, including the timeliness, completeness and level ofinsight into prospective and historical information provided to us to run ourbusiness. Additionally, we believe that changes in Sprint’s billing platform,Ensemble, and related reporting systems during 2008 resulted in a number ofissues which have had an adverse impact on our subscriber activity andfinancial results, some of which we have formally disputed and continue todispute. As of March 31, 2009,

 

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we have also not yet achieved the same levelof visibility to our subscriber information we previously had prior to themigration. Any further delays in reestablishing this level of visibility intoour subscriber information could make it more difficult for us to effectivelymanage our business. If continuing or future problems with Ensemble are notresolved in a timely manner for any reason, including Sprint’s inability orunwillingness to commit resources to such issues, our business would continueto be negatively impacted. There can be no assurances that we will not have continueddisputes with Sprint relating to these or other items pertaining to Sprint’sperformance obligations under the affiliation agreements.

 

·      Ourprimary subscriber base is composed of individual consumers. The currentoverall weakness in the United States economy, particularly the turmoil in thecredit markets, weakness in the housing market, rising unemployment andvolatile energy and commodity costs, have resulted in considerable negativepressure on consumer confidence and spending. As a result, we believe thatthese events have impacted consumers in our territories in ways that havenegatively affected our business. In the event the current economic downturn inthe United States continues or worsens, our current and potential wirelesssubscribers, especially our sub-prime subscribers, may be unable or unwillingto purchase wireless services or pay their wireless bills, which may continueto negatively impact our business, particularly as we do not yet offer awireless prepaid plan.

 

·      Recentturmoil in the credit markets and the financial services industry maynegatively impact Sprint’s or our business, results of operations, financialcondition or liquidity. The credit markets and the financial services industryhave been experiencing a period of unprecedented turmoil characterized by thebankruptcy, failure, collapse or sale of various financial institutions and anunprecedented level of intervention from the United States federal government.While the ultimate outcome of these events cannot be predicted, such events mayhave a material adverse effect on Sprint’s or our liquidity and financialcondition.

 

·      On or before January 25,2010, pursuant to a final order of the Circuit Court of Cook County, Illinois,Sprint and those acting in concert with it must cease owning, operating andmanaging the Nextel wireless network in iPCS Wireless’s territory. We do notknow Sprint’s intentions for complying with the Circuit Court’s order or theimpact of Sprint’s manner of compliance on our business. In addition, as withany litigation, it is possible that the parties may settle the dispute. In thatevent, we cannot speculate as to the terms and conditions of any suchsettlement, which could include a material economic change in our relationshipwith Sprint. See “—Commitments and Contingencies – Sprint/Nextel MergerLitigation” below for further discussion.

 

·      Thefinal outcome of our litigation with Sprint regarding the Sprint-ClearwireWiMax transaction is unknown. As discussed more fully below in “—Commitments andContingencies – Sprint/Clearwire Transaction Litigation,” on May 7, 2008,Sprint announced a transaction among itself, Clearwire Corporation, and certainother parties (the “Sprint-Clearwire Transaction”) to form a new competingnetwork (“New Clearwire”).

 

On May 12, 2008, the iPCS Subsidiariesfiled a lawsuit against Sprint and certain of its affiliates in the CircuitCourt of Cook County, Illinois, seeking declaratory and injunctive relief withrespect to the Sprint-Clearwire Transaction. In that case, the iPCSSubsidiaries are seeking a declaration that the Sprint-Clearwire Transactionconstitutes a breach of Sprint’s affiliation agreements it has with thosesubsidiaries.

 

We cannot predict the outcome of these legalproceedings. If we do not prevail, Sprint may be permitted to operate, throughits Sprint-Clearwire venture, a mobile WiMax network that could adverselyaffect our business and operations by introducing a competitive product thatcan be expected to reduce demand for our products and services. If we doprevail, we do not know Sprint’s intentions for complying with any ruling andits impact on our business. In addition, as with any litigation, it is possiblethat the parties may settle the dispute. In that event, we cannot speculate asto the terms and conditions of any such settlement, which could include amaterial economic change in our relationship with Sprint. See “—Commitments andContingencies – Sprint/Clearwire Transaction Litigation” below for furtherdiscussion.

 

·      Our PCS network equipment issupplied solely by Nortel Networks. If additional equipment or support isneeded for expansion or repair of our network, it generally must come fromNortel Networks in order to be compatible with our existing network equipment.Nortel Networks filed for Chapter 11 bankruptcy protection in January 2009.If Nortel Networks were to cease or delay supplying equipment or suspendswarranty coverage, we could be prevented or delayed in expanding, repairing orsupporting our network. Any inability to expand or repair our network couldhave a material adverse effect on us. In addition, Nortel Networks, or anypotential successor, potentially could exert significant bargaining power overprice, quality, warranty claims or other terms relating to its equipment.Additionally, if Nortel Networks has a significant disruption in its business,or liquidates, our business and results of operations would likely benegatively impacted.

 

·      As a PCS Affiliate ofSprint, we are dependent upon Sprint for many aspects of our business,including the brand name under which we operate, the spectrum that we use,technological advances and the nationwide wireless network outside of our

 

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territory. From the subscribers’ point ofview, we are “Sprint” in our markets and they use our wireless network and therest of the Sprint PCS network as a unified network. Sprint’s performance andbrand reputation nationwide—over which we have no control—impacts ourperformance. Many of Sprint’s operating metrics, including net subscriberadditions and churn, have underperformed relative to industry averages over thelast few years, reflecting deterioration in the relative strength of the Sprintbrand. If Sprint is unable to improve its operating metrics and brand image inthe future, particularly in the face of an economic downturn and anincreasingly maturing industry, our business would likely suffer materialadverse consequences.

 

***Commitments andContingencies***

 

*Sprint/Nextel Merger Litigation.*  On July 15, 2005, our wholly ownedsubsidiary, iPCS Wireless, Inc. (iPCS Wireless”), filed a complaintagainst Sprint and Sprint PCS in the Circuit Court of Cook County, Illinois(the “Circuit Court”). The complaint alleged, among other things, that Sprint’sconduct following the consummation of the merger between Sprint and Nextelwould breach Sprint’s exclusivity obligations to iPCS Wireless under itsaffiliation agreements with Sprint PCS. On August 14, 2006, the CircuitCourt issued its decision and on September 20, 2006, the Circuit Courtissued a final order effecting its decision. The final order provided that:

 

·      Within180 days of the date of the final order, Sprint and those acting inconcert with it must cease owning, operating and managing the Nextel wirelessnetwork in iPCS Wireless’s territory.

 

·      Sprintshall continue to comply with all terms and conditions of the Forbearance Agreementbetween iPCS Wireless and Sprint setting forth certain limitations on Sprint’soperations post-merger with Nextel.

 

On September 28, 2006, Sprint appealedthe Circuit Court’s ruling to the Appellate Court of Illinois, First JudicialDistrict (the “Appellate Court”), and, at Sprint’s request, the Circuit Court’sruling was stayed by the Appellate Court pending the appeal. On March 31,2008, the Appellate Court unanimously affirmed the 2006 Circuit Court decision.On May 5, 2008, Sprint filed a petition for leave to appeal with theSupreme Court of Illinois. On September 24, 2008, the Supreme Court ofIllinois (the “Supreme Court”) denied Sprint’s petition for leave to appeal theAppellate Court’s decision.

 

On Sprint’s motion for reconsideration, the SupremeCourt again denied Sprint’s petition for leave to appeal on November 12,2008. The Supreme Court at that time directed the Circuit Court to modify itsorder of September 20, 2006, in the following manner:

 

·      Togrant Sprint 360 days (rather than 180 days) to comply with the CircuitCourt’s order to cease owning, operating and managing the Nextel wirelessnetwork in iPCS Wireless’s territory.

 

·      Topermit Sprint to seek an extension of the 360-day period upon a showing of goodcause, with due consideration given to the hardship(s) imposed on iPCSWireless by the requested extension.

 

On January 30, 2009, the Circuit Courtentered its final order, as directed by the Supreme Court, providing that:

 

·      Sprint,and those acting in concert with it, must cease owning, operating and managingthe Nextel wireless network in iPCS Wireless, Inc.’s service area.

 

·      Sprinthas until January 25, 2010 (360 days from the date of the CircuitCourt’s order) to comply with the order. Sprint may seek an extension of suchdeadline upon a showing of good cause, giving due consideration to thehardships that would be imposed on iPCS Wireless if such extension weregranted.

 

·      Sprintmust continue to comply with all terms and conditions of the ForbearanceAgreement between iPCS Wireless and Sprint.

 

On September 22, 2008, Sprint also fileda petition with the Circuit Court seeking to vacate that Court’s originalorder. On January 20, 2009, the Circuit Court denied Sprint’s petitionwith prejudice. On February 18, 2009, Sprint appealed the decision of theCircuit Court denying Sprint’s petition to vacate to the Illinois AppellateCourt. The appeal process is ongoing.

 

*Sprint/Clearwire Transaction Litigation.*  On May 7, 2008, Sprint announced aproposed transaction among itself, Clearwire Corporation, and certain otherparties (the “Sprint-Clearwire Transaction”) to form a new competingnetwork (“New Clearwire”), pursuant to which transaction Sprint transferred its4G technology to the New Clearwire. The same day, Sprint filed a complaint fordeclaratory judgment against iPCS and certain of its subsidiaries, iPCSWireless, Horizon Personal Communications, Inc. and Bright

 

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Personal Communications Services, LLC (collectively, the “iPCSSubsidiaries”) in the Court of Chancery of the State of Delaware (the “DelawareChancery Court”). In that lawsuit, Sprint sought a declaration that theSprint-Clearwire Transaction would not constitute a breach of the Sprintaffiliation agreements it has with the iPCS Subsidiaries.

 

On May 12, 2008, the iPCS Subsidiariesfiled a lawsuit against Sprint and certain of its affiliates in the CircuitCourt, seeking declaratory and injunctive relief with respect to theSprint-Clearwire Transaction. In that case, the iPCS Subsidiaries sought adeclaration that the Sprint-Clearwire Transaction constitutes a breach ofSprint’s affiliation agreements it has with those subsidiaries, and also soughtan injunction barring Sprint from closing the Sprint-Clearwire Transactionuntil it complied with the affiliation agreements.

 

On July 14, 2008, the Delaware ChanceryCourt granted the motion to dismiss filed by our Bright and Horizonsubsidiaries and dismissed them from the Delaware litigation. Pursuant to amotion filed by iPCS and iPCS Wireless, on October 8, 2008, the DelawareChancery Court stayed all remaining Delaware litigation in favor of the lawsuitbrought in Illinois by the iPCS Subsidiaries.

 

On November 3, 2008, the iPCSSubsidiaries filed a motion for preliminary injunction in the Circuit Courtseeking to prevent Sprint from consummating the Sprint-Clearwire Transactionuntil such time that the Circuit Court could rule on the merits of theunderlying litigation brought by the iPCS Subsidiaries against Sprint. On November 17,2008, the iPCS Subsidiaries, Sprint, and New Clearwire, reached a stipulationpursuant to which the iPCS Subsidiaries withdrew their motion for preliminaryinjunction without prejudice, and the Sprint-Clearwire Transaction closed on November 28,2008. In connection with the withdrawal of the preliminary injunction motion bythe iPCS Subsidiaries: (i) New Clearwire stipulated that it did notpresently intend to commercially launch its 4G network, sell products orservices, or promote products or services that are available for sale in anypart of the iPCS Subsidiaries’ territories prior to July 1, 2009, (ii) NewClearwire stipulated that it would give the iPCS Subsidiaries at least60 days advance written notice before any commercial launch of its 4Gnetwork, any sale of products or services or any promotion of products orservices that are offered for sale in any part of the iPCS Subsidiaries serviceareas if it plans to do so before entry of a final and non-appealable judgmentby the Circuit Court in the underlying action brought by the iPCS Subsidiariesagainst Sprint, and (iii) New Clearwire and Sprint stipulated that neitherof them nor any of their controlled affiliates would raise the fact that theSprint-Clearwire Transaction had closed as a basis for opposing any remedyproposed by the iPCS Subsidiaries or granted by the Circuit Court.

 

On December 30, 2008, the Circuit Courtissued a decision on a motion for partial summary judgment filed by iPCSWireless that sought partial summary judgment based on the 2006 decision in theIllinois Sprint/Nextel Merger Litigation. The Circuit Court specificallyrecognized that pursuant to the 2006 decision, Sprint and those acting inconcert with it cannot compete against iPCS Wireless in its exclusive serviceareas, regardless of the radio frequency that they use to compete. The CircuitCourt held that Sprint cannot relitigate the issue of whether Sprint and thoseacting in concert with it may compete with iPCS Wireless in its service area byusing a frequency other than 1900 MHz. The Circuit Court granted in part iPCSWireless’s motion for partial summary judgment with respect to these two issuesand entered judgment thereon but stayed enforcement of the judgment pending aruling on Sprint’s petition to vacate the original judgment in the IllinoisSprint/Nextel Merger Litigation, which petition to vacate was then dismissedwith prejudice on January 20, 2009. The Circuit Court also found in its December 30,2008 ruling that some material issues of fact remained and would be decided attrial including, but not limited to, whether New Clearwire is a “related party,”whether Sprint controls New Clearwire, whether the protections of exclusivityextend beyond the situation in which Sprint acts through a related party, andthe question of who constitutes “those acting in concert” with Sprint.

 

On January 9, 2009, the Circuit Courtdenied Sprint’s motion for partial summary judgment against Bright and Horizon.In that motion, Sprint had sought to bar Bright and Horizon from litigating theissue of whether Sprint could compete with Horizon and Bright outside the 1900MHz spectrum range, based on a 2006 decision by the Delaware Chancery Court.The Circuit Court denied Sprint’s motion for partial summary judgment againstBright and Horizon and found that the Delaware Chancery Court did not actuallydecide that issue.

 

On January 30, 2009, the iPCSSubsidiaries amended their original complaint against Sprint. Under the amendedcomplaint, the iPCS Subsidiaries included, among other things, a claim thatSprint is improperly withholding advanced technologies from the iPCSSubsidiaries and diverting those technologies to their competitor in violationof the iPCS Subsidiaries’ affiliation agreements with Sprint. The amendedcomplaint also seeks monetary relief. On February 27, 2009, Sprint, in itsresponse to the amended complaint, asserted several counterclaims thatessentially seek declaratory relief that the Clearwire transaction does notviolate the affiliation agreements.

 

On April 29,2009, the Circuit Court denied a motion brought by Sprint that sought todismiss the iPCS Subsidiaries’ claims as to whether Sprint improperly withheldadvanced technology from them in connection with the Clearwiretransaction.  The Circuit Court alsoruled that the iPCS Subsidiaries’ claims for relief could not include certaintypes of monetary relief but that, in addition to their existing claims forinjunctive relief, the iPCS Subsidiaries would not be prevented from making “aclaim for any actual or direct damages.” Discovery is ongoing.

 

We presently cannot determine the ultimateresolution of the matters described above. The results of litigation areinherently uncertain and, while we believe that we have meritorious claims inthe matters described above, material adverse outcomes are possible.

 

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In addition to the foregoing, from time totime, we are involved in various legal proceedings relating to claims arisingin the ordinary course of business. We are not currently a party to any suchlegal proceedings, the adverse outcome to which, individually or in theaggregate, is expected to have a material adverse effect on our business,financial condition or results of operations.

 

***Nortel Networks Equipment Agreement***

*** ***

On March 13, 2009, we signed a letter of agreement with NortelNetworks to purchase EV-DO Rev. A equipment and services totaling approximately$19.7 million in aggregate.  The $19.7million consists of a non-cancelable purchase of approximately $14.8 million ofequipment and services and an option to purchase up to an additionalapproximately $4.9 million of equipment and services.  As of March 31, 2009, we submittednon-cancelable purchase orders for approximately $9.8 million and thereforehave a remaining commitment under this letter of agreement to submit $5.0million non-cancelable purchase orders by June 30, 2009.  Additionally, under this letter of agreement,we have agreed to return to Nortel Networks certain equipment replaced by thepurchased equipment.  As of March 31,2009, we have made no payments related to the submitted purchase orders.

 

***State of Michigan Sales and Use Tax Audit***

 

The State of Michigan iscurrently auditing our sales and use tax returns for the years 2003 through2006. The outcome of this audit can not be determined at this time.

 

**Contractual Obligations and Off-Balance SheetArrangements**

 

For information regarding contractual obligations and off-balance sheetarrangements, see the captions “Contractual Obligations” and “Off-Balance SheetArrangements” in “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008. At March 31, 2009, there had not been a material change to thecontractual obligations or off-balance sheet arrangements disclosed in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008, except as follows:

 

·      At March 31, 2009, we have an off balancesheet obligation of approximately $14.8 million.  See “—Nortel Networks Equipment Agreement”above for further discussion regarding this obligation.

 

**Seasonality**

 

Our business is subject to seasonality because the wirelesstelecommunications industry historically has been dependent on fourth calendarquarter results. Among other things, the industry relies on moderately highersubscriber additions and handset sales in the fourth calendar quarter ascompared to the other three calendar quarters. A number of factors contributeto this trend, including: the use of retail distribution, which is heavilydependent upon the year-end holiday shopping season; the timing of new productand service announcements and introductions; competitive pricing pressures; andaggressive marketing and promotions. In addition, our roaming revenue androaming expense is subject to seasonality because of decreased travel ofwireless subscribers into our territory during the winter months.

 

**Critical AccountingPolicies**

 

Our financial statements are prepared in conformity with accountingprinciples generally accepted in the United States and require us to selectappropriate 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 believethat the assumptions and judgments used in our estimates are reasonable, actualresults may differ from these estimates under different assumptions orconditions.

 

We have identified the most critical accounting policies upon which ourfinancial status depends.  The critical policies were determined byconsidering accounting policies that involve the most complex or subjectivedecisions or assessments. We also have other policies considered key accountingpolicies; however, these policies do not meet the definition of criticalaccounting policies because they do not generally require us to make estimatesor judgments that are complex or subjective.  Our critical accountingpolicies include the following:

 

·       Revenue recognition

 

·       Allowance for doubtful accounts

 

·       Long-lived asset recovery

 

·       Intangible assets

 

·       Interest rate swap

 

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·       Income taxes

 

·       Stock-based compensation

 

Additional information regarding thesecritical accounting policies can be found in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section of ourAnnual Report on Form 10-K for the year ended December 31, 2008,filed with the SEC on March 3, 2009.

 

**Item 3. Quantitativeand Qualitative Disclosures About Market Risk.**

 

We do not engage in commodity futures trading activities. Although weentered into a derivative financial instrument transaction for hedging purposesas discussed below, we do not enter into derivative financial instrumenttransactions for trading or other speculative purposes. We also do not engagein transactions in foreign currencies that could expose us to market risk. Ourexposure to market risk is limited primarily to the fluctuating interest ratesassociated with variable rate indebtedness.

 

In July 2007, we entered into aninterest rate swap agreement that effectively fixes the interest rate on$300.0 million of our variable rate indebtedness at 7.47% for three yearsstarting August 1, 2007. The fair value of our interest rate swap was a$15.5 million liability at March 31, 2009. A hypothetical increase of 100basis points in average market interest rates would increase the fair value ofour interest rate swap by approximately $4.3 million. A decrease of 100basis points in average market interest rates would decrease the fair value ofour interest rate swap by approximately $4.4 million. A prospectiveincrease of 100 basis points in the interest rate applicable to the remaining$175.0 million of variable rate indebtedness would result in an increaseof approximately $1.8 million in our annual interest expense. At March 31,2009, after consideration of the interest rate swap described above,approximately 37% of our debt is subject to variable interest rates.

 

**Item 4. Controls andProcedures.**

 

Each of our Chief Executive Officer and ChiefFinancial Officer has evaluated the effectiveness of our disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of the end of the period covered by this quarterly report.Based on such evaluation, such officers have concluded that, as of the end ofthe period covered by this quarterly report, our disclosure controls andprocedures are effective.

 

We place reliance on Sprint PCS to adequatelydesign its internal controls with respect to the processes established toprovide financial information and other information to us and the other PCSAffiliates of Sprint. To address this issue, Sprint engages an independentregistered public accounting firm to perform a periodic evaluation of thesecontrols and to provide a “Report on Controls Placed in Operation and Tests ofOperating Effectiveness for Affiliates” under guidance provided in Statement ofAuditing Standards No. 70. This report is provided to us annually.

 

There have been no changes in our internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended March 31,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1. LegalProceedings.**

 

See “Management’s Discussion and Analysis of Financial Condition andResults of Operations —Commitments and Contingencies” of this report.

 

In addition to the above, from time to time, we are involved in variouslegal proceedings relating to claims arising in the ordinary course ofbusiness.  We are not currently a partyto any such legal proceedings, the outcome of which, individually or in theaggregate, is expected to have a material adverse effect on our business,financial condition or results of operations.

 

**Item 1A. RiskFactors.**

 

You should carefully consider the risks and uncertainties described in Part I,Item 1A. Risk Factors in our Annual Report on Form 10-K for the year endedDecember 31, 2008 and the other information in our subsequent filings withthe SEC, including this Quarterly Report on Form 10-Q. Our business,financial condition, results of operations and stock price could be materiallyadversely affected by any of these risks. The risks described in our AnnualReport on Form 10-K are not the only ones facing us. Additional

 

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risks and uncertainties thatare currently unknown to us or that we currently consider to be immaterial mayalso impair our business or adversely affect our financial condition, resultsof operations and stock price.

 

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds.**

 

The following table provides information about shares of common stockthe Company acquired during the first quarter of 2009:

 

IssuerPurchases of Equity Securities

 
| ** **                                      | ** ** | **Total number of shares  purchased (a)** | ** ** | **Average price paid  per share** | ** ** | **Total number of shares  purchased as part of publicly  announced plans or  programs (a)** | ** ** | **Maximum number (or  approximate dollar value) of  shares that may yet be purchased  under the plans or programs (a)** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2009 to January 31, 2009   |       | —                                                        |       | —                                           |       | —                                                                                                                                        |       | —                                                                                                                                                                                             |       |
| February 1, 2009 to February 28, 2009 |       | —                                                        |       | —                                           |       | —                                                                                                                                        |       | —                                                                                                                                                                                             |       |
| March 1, 2009 to March 31, 2009 (b)   |       | 167,532                                                       |       | $                                                | 9.70       |                                                                                                                                          | 167,163    |                                                                                                                                                                                               | $          | 13,377,757 |   |
| Total                                           |       | 167,532                                                       |       | $                                                | 9.70       |                                                                                                                                          | 167,163    |                                                                                                                                                                                               | $          | 13,377,757 |   |

 

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(a)   On January 30,2009, the Company’s Board of Directors authorized the repurchase of up to$15.0 million of the Company’s common stock in a stock repurchase programduring the 12-month period beginning on the date of authorization. The Companymay purchase shares from time to time in open market or privately negotiatedtransactions at prices deemed appropriate by the management, depending onmarket conditions, applicable laws and other factors. The stock repurchaseprogram does not require the Company to repurchase any specific number ofshares and may be discontinued at any time.

 

(b)   Includes 369shares withheld to satisfy certain tax withholding obligations in connectionwith vesting of restricted stock as permitted by the iPCS Second Amended andRestated 2004 Long-Term Incentive Plan.

 

**Item 3. Defaults UponSenior Securities.**

 

None.

 

**Item 4. Submission ofMatters to a Vote of Security Holders.**

 

None.

 

**Item 5. OtherInformation.**

 

None.

 

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**Item 6.  Exhibits.**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Second Restated Certificate of  Incorporation of iPCS, Inc. (Incorporated by reference to  Exhibit 3.1 to the Form 8-K filed by iPCS, Inc. on  July 1, 2005)                                                                                                                                                                                                                                                                    |
| 3.2                 |       | Amended and Restated Bylaws of  iPCS, Inc. (Incorporated by reference to Exhibit 3.2 to the  Form 10-QT filed by iPCS, Inc. on February 14, 2006)                                                                                                                                                                                                                                                                               |
| 3.3                 |       | Amendment to the Amended and Restated  Bylaws of iPCS, Inc. (Incorporated by reference to Exhibit 99.1 to  the Form 8- K filed by iPCS, Inc. on January 4, 2008)                                                                                                                                                                                                                                                                |
| 3.4                 |       | Certificate of Incorporation of iPCS  Wireless, Inc. (Incorporated by reference to Exhibit 3.4 to the  Form S-4 filed by iPCS, Inc. on January 8, 2001)                                                                                                                                                                                                                                                                         |
| 3.5                 |       | Bylaws of iPCS Wireless, Inc.  (Incorporated by reference to Exhibit 3.5 to the Form S-4 filed by  iPCS, Inc. on January 8, 2001)                                                                                                                                                                                                                                                                                               |
| 3.6                 |       | Certificate of Incorporation of iPCS  Equipment, Inc. (Incorporated by reference to Exhibit 3.6 to the  Form S-4 filed by iPCS, Inc. on January 8, 2001)                                                                                                                                                                                                                                                                        |
| 3.7                 |       | Bylaws of iPCS Equipment, Inc.  (Incorporated by reference to Exhibit 3.7 to the Form S-4 filed by  iPCS, Inc. on January 8, 2001)                                                                                                                                                                                                                                                                                              |
| 3.8                 |       | Articles of Organization of Bright Personal  Communications Services, LLC (Incorporated by reference to  Exhibit 3.7 to the Form S-1 filed by iPCS, Inc. on  August 11, 2005)                                                                                                                                                                                                                                                   |
| 3.9                 |       | Operating Agreement of Bright Personal  Communications Services, LLC (Incorporated by reference to  Exhibit 3.8 to the Form S-1 filed by iPCS, Inc. on  August 11, 2005)                                                                                                                                                                                                                                                        |
| 3.10                |       | Articles of Incorporation of Horizon  Personal Communications, Inc. (Incorporated by reference to  Exhibit 3.9 to the Form S-1 filed by iPCS, Inc. on  August 11, 2005)                                                                                                                                                                                                                                                         |
| 3.11                |       | Regulations of Horizon Personal  Communications, Inc. (Incorporated by reference to Exhibit 3.10 to  the Form S-1 filed by iPCS, Inc. on August 11, 2005)                                                                                                                                                                                                                                                                       |
| 4.1                 |       | Amended and Restated Common Stock  Registration Rights Agreement, dated as of June 30, 2005, by and among  iPCS, Inc., affiliates of Silver Point Capital, affiliates of AIG Global  Investment Corp., the Timothy M. Yager 2001 Trust, Apollo Investment Fund IV, L.P.  and Apollo Overseas Partners IV, L.P. (Incorporated by reference to  Exhibit 99.1 to the Form 8-K filed by iPCS, Inc. on  July 1, 2005) |
| 4.2                 |       | First Lien Indenture, dated as of  April 23, 2007, by and among iPCS, Inc., the Guarantors and U.S.  Bank National Association, as trustee (Incorporated by reference to  Exhibit 99.3 to the Form 8-K filed by iPCS, Inc. on  April 25, 2007)                                                                                                                                                                             |
| 4.3                 |       | Second Lien Indenture, dated as of  April 23, 2007, by and among iPCS, Inc., the Guarantors and U.S.  Bank National Association, as trustee (Incorporated by reference to  Exhibit 99.4 to the Form 8-K filed by iPCS, Inc. on  April 25, 2007)                                                                                                                                                                            |
| 4.4                 |       | First Lien Security Agreement, dated as of  April 23, 2007, made by iPCS, Inc. and the Guarantors in favor of  U.S. Bank National Association, as collateral agent (Incorporated by  reference to Exhibit 99.7 to the Form 8-K filed by iPCS, Inc.  on April 25, 2007)                                                                                                                                                     |
| 4.5                 |       | Second Lien Security Agreement, dated as of  April 23, 2007, made by iPCS, Inc. and the Guarantors in favor of  U.S. Bank National Association, as collateral agent (Incorporated by  reference to Exhibit 99.8 to the Form 8-K filed by iPCS, Inc.  on April 25, 2007)                                                                                                                                                    |
| 4.6                 |       | Intercreditor Agreement, dated as of  April 23, 2007, between U.S. Bank National Association, as first lien  collateral agent and U.S. Bank National Association, as second lien  collateral agent. (Incorporated by reference to Exhibit 99.9 to the  Form 8-K filed by iPCS, Inc. on April 25, 2007)                                                                                                                          |
| 4.7                 |       | First Amendment to the First Lien Security  Agreement, dated as of October 10, 2007, made by iPCS, Inc. and the  Guarantors in favor of U.S. Bank National Association, as collateral agent  (Incorporated by reference to Exhibit 10.1 to the Form 10-Q filed  by iPCS, Inc. on November 8, 2007)                                                                                                                         |
| 4.8                 |       | First Amendment to the Second Lien Security  Agreement, dated as of October 10, 2007, made by iPCS, Inc. and the  Guarantors in favor of U.S. Bank National Association, as collateral agent  (Incorporated by reference to Exhibit 10.2 to the Form 10-Q filed  by iPCS, Inc. on November 8, 2007)                                                                                                                        |
| 10.1*               |       | Employment Offer Letter between James F.  Ingold and iPCS, Inc., dated as of December 28, 2007                                                                                                                                                                                                                                                                                                                                                 |
| 10.2*               |       | Letter Agreement between James F. Ingold  and iPCS Wireless, Inc., dated as of December 23, 2008                                                                                                                                                                                                                                                                                                                                               |
| 31.1*               |       | Certification of Chief Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                 |
| 31.2*               |       | Certification of Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                 |
| 32.1*               |       | Certification Pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                       |

 

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*              Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                    | iPCS, Inc. |
|-------------------------|-----------------|
|                    |            |
|                    | By:             | /s/ TIMOTHY M. YAGER |
|                    |            | Timothy M. Yager |
|                    |            | President and Chief Executive Officer  (Principal Executive Officer) |
|                    |            |   |
| Date: May 11, 2009 |            |   |
|                    | By:             | /s/ STEBBINS B. CHANDOR, JR. |
|                    |            | Stebbins B. Chandor, Jr. |
|                    |            | Executive Vice President and Chief  Financial Officer (Principal Financial Officer) |
|                    |            |   |
| Date: May 11, 2009 |            |   |

 

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